UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended ~~July 1~~September 30, 2005

Commission File Number: 0-28426

ZOMAX INCORPORATED

(Exact name of registrant as specified in its charter)

Minnesota		No. 41-1833089
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
(State or Other Jurisdiction of		(IRS Employer
5353 Nathan Lane Plymouth, MN		55442
Incorporation or Organization)		Identification No.)
5353 Nathan Lane
Plymouth, MN		55442
(Address of Principal Executive Offices)		(Zip Code)

(763) 553-9300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 ~~months~~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.

YESý

NOo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YESý

NOo

~~The~~Indicate ~~number~~by ofcheck ~~shares outstanding~~mark ofwhether the registrant’s ~~common~~is ~~stock~~a shell company (as ofdefined ~~July~~in ~~29,~~Rule ~~2005~~12b-2 ~~was~~of ~~32,690,570 shares~~the Exchange Act).

YESo

NOý

The number of shares outstanding of the registrant’s common stock as of October 28, 2005 was 33,065,570 shares.

ZOMAX INCORPORATED

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations (Unaudited)
		Condensed Consolidated Balance Sheets (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Notes to Condensed Consolidated Financial Statements (Unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II – OTHER INFORMATION
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits
SIGNATURES
EXHIBIT INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZOMAX INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

	Three Months Ended						~~Six~~Nine Months Ended
	July 1, 2005			June 25, 2004 (Restated – See Note 7)			July 1, 2005			June 25, 2004 (Restated – See Note 7)
	September 30, 2005			September 24, 2004 (Restated — See Note 7)			September 30, 2005			September 24, 2004 (Restated — See Note 7)
Revenue	$	4238,~~585~~094		$	45,~~082~~718		$	84122,~~766~~860		$	95140,~~117~~835
Cost of revenue	3933,~~269~~972			3738,~~062~~496			79113,~~654~~626			80118,~~147~~643
Gross profit	34,~~316~~122			87,~~020~~222			59,~~112~~234			1422,~~970~~192
Operating costs and expenses:
Selling, general and administrative expenses	98,~~734~~695			9,~~622~~207			1928,~~961~~656			1928,~~027~~234
Restructuring costs (See Note 8)	~~2,179~~313			—			2,~~409~~722			—
Litigation reserve adjustment	~~(415~~215		)	—7,500			(2,~~245~~030		)	—7,500
Total operating costs and expenses	119,~~498~~223			916,~~622~~707			2029,~~125~~348			1935,~~027~~734
Operating loss	(85,~~182~~101		)	(19,~~602~~485		)	(1520,~~013~~114		)	(413,~~057~~542		)
Interest income	378			127			722			305
Interest expense	—			(9		)	—			(9		)
Gain on sale of available-for-sale securities	—			2,770			—			2,770
Interest income	381			236			1,103			541
Other income	43			34			49			15
Gain on sale of available-for-sale securities	—			—			—			2,770
Income (loss) before income taxes	(7,761		)	1,329			(14,242		)	(967		)
Other income	37			34			86			49
Income tax (benefit) expense	(2,082		)	795			(4,415		)	45
Loss before income taxes	(4,683		)	(9,224		)	(18,925		)	(10,191		)
Net earnings (loss)	$	(5,679	)	$	534		$	(9,827	)	$	(1,012	)
Income tax expense (benefit)	13,452			(3,187		)	9,037			(3,142		)
Earnings (loss) per share:
Net loss	$	(18,135	)	$	(6,037	)	$	(27,962	)	$	(7,049	)
Basic	$	(0.17	)	$	0.02		$	(0.30	)	$	(0.03	)
Loss per share:
Diluted	$	(0.17	)	$	0.02		$	(0.30	)	$	(0.03	)
Basic	$	(0.55	)	$	(0.19	)	$	(0.86	)	$	(0.22	)
Diluted	$	(0.55	)	$	(0.19	)	$	(0.86	)	$	(0.22	)
Weighted average common shares outstanding:
Basic	32,~~632~~687			32,~~790~~503			32,~~623~~644			32,~~753~~669
Dilutive effect of stock options	—			~~283~~—			—			—
Diluted	32,~~632~~687			3332,~~073~~503			32,~~623~~644			32,~~753~~669

See notes to condensed consolidated financial statements.

ZOMAX INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)

	July 1, 2005		December 31, 2004
	September 30, 2005		December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	5444,~~129~~161	$	41,092
Available-for-sale securities	—		19,200
Accounts receivable, net of allowances of $727 in 2005 and $868 in 2004	23,662		36,180
Accounts receivable, net of allowances of $575 in 2005 and $868 in 2004	25,632		36,180
Inventories	1415,~~943~~264		14,633
Deferred income taxes	~~1,690~~—		1,704
Other current assets	7,~~469~~526		10,410
Total current assets	~~101~~92,~~893~~583		123,219
Property and equipment held for use, net	30,~~979~~999		35,408
Available-for-sale securities	1,~~177~~146		3,624
Deferred income taxes	~~11,579~~—		5,903
	$	~~145~~124,~~628~~728	$	168,154
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1412,~~924~~174	$	20,710
Accrued expenses and other current liabilities	1614,~~297~~519		19,177
Total current liabilities	3126,~~221~~693		39,887
Deferred rent	303		155
Other long-term liabilities	696		155
Total liabilities	3127,~~524~~389		40,042
Shareholders’ equity:
Common stock, no par value, 100,000 shares authorized; 32,632 and 32,536 shares issued and outstanding in 2005 and 2004, respectively	62,423		62,134
Common stock, no par value, 100,000 shares authorized; 32,691 and 32,536 shares issued and outstanding in 2005 and 2004, respectively	62,563		62,134
Retained earnings	4728,~~034~~899		56,861
Accumulated other comprehensive income	45,~~647~~877		9,117
Total shareholders’ equity	~~114~~97,~~104~~339		128,112
	$	~~145~~124,~~628~~728	$	168,154

See notes to condensed consolidated financial statements.

ZOMAX INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Six Months Ended
	Nine Months Ended
	July 1, 2005			June 25, 2004 (Restated – See Note 7)
	September 30, 2005			September 24, 2004 (Restated — See Note 7)
Operating activities:
Net loss	$	(927,~~827~~962	)	$	(17,~~012~~049	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation	46,~~178~~249			47,~~783~~287
Change in deferred taxes	(48,~~819~~478		)	1,~~341~~311
Change in litigation reserves	(2,245		)	—
Provision for litigation reserves	(2,030		)	7,500
Non-cash restructuring charges	852			—
Gain on sale of available-for-sale securities	—			(2,770		)
Other, net	—4			42(5		)
Changes in operating assets and liabilities:
Accounts receivable	119,~~683~~928			1210,~~372~~864
Inventories	(~~597~~626		)	~~1,515~~(34		)
Other current assets	23,~~798~~180			(1,~~017~~050		)
Accounts payable and accrued expenses	(511,~~941~~341		)	(1716,~~623~~511		)
Income taxes	~~258~~582			(~~328~~3,584		)
Net cash used by operating activities	(312,~~660~~686		)	(24,~~697~~041		)
Investing activities:
Capital expenditures	(23,~~296~~342		)	(13,~~463~~054		)
Purchases of available-for-sale securities	(14,500		)	(1624,950		)
Sale of available-for-sale securities	33,700			1327,230
Net cash provided (used) by investing activities	1615,~~904~~858			(~~5,183~~774		)
Financing activities:
Stock sales	~~289~~429			~~491~~722
Net cash provided by financing activities	289			491
Repurchases of common stock	—			(1,419		)
Effect of exchange rate changes on cash and cash equivalents	(496		)	(606		)
Net cash provided (used) by financing activities	429			(697		)
Net increase (decrease) in cash and cash equivalents	13,037			(7,955		)
Effect of exchange rate changes on cash and cash equivalents	(532		)	(271		)
Net increase (decrease) in cash and cash equivalents	3,069			(5,783		)
Cash and cash equivalents, beginning of period	41,092			51,899
Cash and cash equivalents, end of period	$	5444,~~129~~161		$	4346,~~904~~116

See notes to condensed consolidated financial statements

ZOMAX INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. GENERAL

Basis of Presentation. The condensed consolidated financial ~~statements~~ statements for Zomax Incorporated (“the Company”, “we”, “us”, or “our”) have ~~been~~ been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished in the ~~condensed~~ condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of our management, are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Although we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in our 2004 Annual Report on Form 10-K. The quarterly and year-to-date results are not necessarily indicative of the actual results that may occur for the entire fiscal year.

Fiscal Quarters. Our fiscal quarters typically consist of 13-weeks ending on a Friday so that our fiscal year ends on the last Friday of the calendar year. Our fiscal quarters referenced herein refer to the periods ended ~~July~~September 130, 2005, December 31, 2004 and ~~June 25~~September 24, 2004.

Restatement. As fully discussed in Note 7 and in our 2004 Form 10-K, our quarterly 2004 consolidated financial results have been restated to correct previously disclosed misstatements in our Ireland subsidiary, Zomax Limited.

Reclassifications. Certain reclassifications have been made to the 2004 financial statements and footnotes to conform to the presentation used in 2005. These reclassifications had no effect on the consolidated amounts of total current assets, total assets, net loss or cash flow from operations.

Recently Issued Accounting Pronouncements. In November 2004 the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, ~~handling~~ handling costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, this Statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This pronouncement is effective for the Company beginning in the first quarter of 2006. The Company is in the process of evaluating whether the adoption of SFAS 151 will have a significant impact on the Company’s overall results of operations, financial position or cash flows; however, we believe that it is unlikely that impact will be material.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The ~~amendments~~ amendment made by Statement 153 is ~~are~~ based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendment ~~amendments~~eliminates ~~eliminate~~ the narrow exception for nonmonetary exchanges of similar productive assets and ~~replace~~replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement is effective for the Company relative to nonmonetary asset exchanges ~~beginning~~ beginning December 31, 2005. The provisions of this Statement shall be ~~applied~~ applied prospectively. The Company is in the process of evaluating whether the ~~adoption~~ adoption of SFAS 153 will have a significant impact on the Company’s overall results of operations or financial position; however, we believe that it is unlikely the ~~impact~~ impact will be material.

In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payment.” SFAS 123(R) requires the recognition of compensation cost relating to share-based payment transactions in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued as of the grant date, based on the ~~estimated~~ estimated number of awards that are expected to vest. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years beginning after June 15, 2005. As a result, SFAS 123(R) will be effective for the Company beginning in the first quarter of 2006. The Company is in the process of evaluating the impact of SFAS 123(R) on the Company’s overall results of operations, ~~financial~~and ~~position~~financial ~~and cash flows~~position. Refer to pro forma disclosure in Note 3 for an indication of ~~ongoing~~the expense that ~~will~~would behave been included in the income statement ~~once~~had SFAS 123(R) is been adopted.

On October 22, 2004, the FASB issued FASB Staff Position (FSP) 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004. FSP No. 109-1 clarifies how to apply SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” The staff proposal would require that the deduction be accounted for as a special deduction in the period earned,

On October 22, 2004, the FASB issued FASB Staff Position (FSP) 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004. FSP No. 109-1 clarifies how to apply SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” The staff position requires that the deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction.

FSP No. 109-2, provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is permitted time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. By electing to apply the provisions of Section 965 of the Internal Revenue Code, enacted as part of the Jobs Act, to repatriate extraordinary dividends we will therefore be eligible to claim an eighty-five percent dividends received deduction for income tax purposes on the eligible amounts. As discussed in our 2004 10-K, we have evaluated this opportunity and, based on these requirements, the Company currently has $75.0 4 million of cash held outside the U.S., which could be eligible for the special deduction in fiscal year 2005. It is anticipated that we will complete any dividend by the end of our current fiscal year. The range of possible amounts that the Company is currently considering eligible for repatriation is between zero and $3.6 million. The related ~~potential~~ range of potential income tax is between zero and $0.2 million.

In ~~May~~ March 2005, the ~~Financial~~FASB ~~Accounting~~issued ~~Standards~~FASB Interpretation ~~Board~~No. ~~(FASB)~~47, ~~issued~~“Accounting ~~Statement~~for ofConditional Asset Retirement Obligations ~~Financial~~— ~~Accounting~~an ~~Standards~~Interpretation ~~(SFAS)~~of FASB Statement No. ~~154~~143” ~~“Accounting~~(FIN ~~Changes~~47). ~~and~~This ~~Error~~Interpretation ~~Corrections~~clarifies -that Athe ~~Replacement~~term of“conditional asset ~~APB~~retirement ~~Opinion~~obligation”, as used in SFAS No.143, 20refers ~~and~~to ~~FASB~~a ~~Statement~~legal ~~No.~~obligation ~~3.”~~to ~~The new~~perform ~~standard~~an ~~changes~~asset retirement ~~the~~activity ~~requirements~~in ~~for~~which the ~~accounting~~timing ~~for~~ and/or ~~reporting~~method of asettlement are ~~change~~conditional inon ~~accounting~~a ~~principle. Among other~~future ~~changes,~~event ~~SFAS~~that ~~No.~~may ~~154~~or ~~requires~~may ~~that~~not abe ~~voluntary~~within ~~change~~the incontrol ~~accounting~~of the ~~principle~~entity. beThus, ~~applied~~the ~~retrospectively~~timing ~~with~~and/or ~~all~~method ~~prior~~of ~~period~~settlement ~~financial~~may ~~statements presented~~be ~~based~~conditional on ~~the~~a future ~~new~~event. ~~accounting~~Accordingly, ~~principle~~an ~~unless~~entity it is ~~impracticable~~required to do ~~so. SFAS~~recognize ~~No.~~a ~~154~~liability ~~also~~for the ~~provides~~fair ~~that (1)~~value of a ~~change~~conditional inasset ~~method~~retirement obligation if the fair value of ~~depreciating~~the orliability ~~amortizing~~can be reasonably estimated. The fair value of a ~~long-lived~~liability ~~nonfinancial~~for the conditional asset retirement obligation should be ~~accounted~~recognized ~~for~~when asincurred a— generally ~~change~~upon inacquisition, ~~estimate~~construction, ~~(prospectively)~~or ~~that~~development ~~was~~and/or through the ~~effected~~normal byoperation aof ~~change~~the inasset. ~~accounting~~Uncertainty ~~principle,~~about the timing and/or ~~(2)~~method ~~correction~~of settlement of ~~errors~~a ~~in previously~~conditional ~~issued~~asset ~~financial~~retirement ~~statements~~obligation should be ~~termed~~factored ainto the ~~“restatement.” The~~measurement ~~new~~of ~~standard~~the isliability ~~effective~~when ~~for~~sufficient ~~accounting changes~~information ~~and~~exists. ~~corrections~~SFAS ofNo. 143 ~~errors~~acknowledges ~~made~~that in ~~fiscal~~some ~~years~~cases, ~~beginning~~sufficient ~~after~~information ~~December~~may not be ~~15,~~available ~~2005~~to reasonably estimate the liability. ~~The~~ ~~Company~~We ~~does~~are ~~not anticipate~~currently ~~that~~reviewing and analyzing the ~~adoption~~impact ofthat ~~SFAS~~adopting ~~No.~~FIN ~~154~~47 will have ~~a material effect~~ on ~~its~~our consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154 “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented based on the new accounting principle unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the adoption of SFAS No. 154 will have a material effect on its financial statements.

In September 2005, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (EITF 04-13), which addresses the circumstances under which two or more inventory purchase and sales transactions with the same counterparty should be viewed as a single exchange transaction within the scope of APB Opinion No. 29, “Accounting for Nonmonetary Transactions” for new arrangements entered into, or modifications or renewals of existing arrangements, beginning in the first interim or annual reporting period beginning after March 15, 2006. Full adoption of EITF 04-13 is not expected to have a material effect on the Company’s financial statements.

NOTE 2. OTHER FINANCIAL STATEMENT INFORMATION

Inventories (in thousands):

	July1, 2005		December 31 2004
	September 30, 2005		December 31, 2004
Raw materials	$	8,~~630~~428	$	7,531
Work in process	23,~~872~~293		2,821
Finished goods	3,~~441~~543		4,281
	$	1415,~~943~~264	$	14,633

Accounts Receivable. As of September 30, 2005 we had two customers with receivable balances exceeding 10% of the total net receivables. These customers totaled 26% and 16%, respectively, as of September 30, 2005 and 18% and 20%, respectively, as of December 31, 2004. A third customer totaled 14% at December 31, 2004

Supplemental Cash Flow Information (in thousands):

	Six Months Ended
	Nine Months Ended
	July 1, 2005			June 25, 2004
	September 30, 2005			September 24, 2004
Cash paid for:
Interest	$	—		8896
Income taxes	~~174~~309			~~843~~857
Non-cash transactions:
Unrealized loss on available-for-sale securities, net of deferred taxes of $913 in 2005 and $236 in 2004	(1,534		)	(790	)
Unrealized loss on available-for-sale securities, net of deferred taxes of $924 in 2005 and $849 in 2004	(1,554		)	(1,664	)

Comprehensive Loss. The table below presents our comprehensive loss, defined as changes in shareholders’ equity excluding changes resulting from investments by and distributions to shareholders (in thousands):

	Three Months Ended						~~Six~~Nine Months Ended
	July 1, 2005			June 25, 2004 (Restated – See Note 7)			July 1, 2005			June 25, 2004 (Restated – See Note 7)
	September 30, 2005			September 24, 2004 (Restated — See Note 7)			September 30, 2005			September 24, 2004 (Restated — See Note 7)
Net earnings (loss)	$	(5,679	)	$	534		$	(9,827	)	(1,012	)
Net loss	$	(18,135	)	$	(6,037	)	$	(27,962	)	(7,049	)
Reclassification to net earnings (loss) of gain on available-for-sale securities previously deferred, net of tax	—			~~(1,629~~—		)	—			(1,629	)
Unrealized holding loss on available-for-sale securities, net of tax	(~~310~~20		)	(~~344~~874		)	(1,~~534~~554		)	(~~790~~1,664	)
Translation adjustments	(1,~~752~~250		)	~~(312~~1,033		)	(21,~~936~~686		)	(~~1,183~~150	)
Comprehensive loss	$	(716,~~741~~905	)	$	(15,~~751~~878	)	$	(1431,~~297~~202	)	(410,~~614~~492	)

NOTE 3. STOCK BASED COMPENSATION

We have a 1996 Stock Option Plan, a 2004 Equity Incentive Plan and an Employee Stock Purchase Plan. Options granted under these plans are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Because our stock options are granted at the market value on the date of grant, no related compensation expense is recognized. However, had the compensation expense of option grants been determined in accordance with SFAS No. 123(R), our net earnings (loss) and earnings (loss) per share, on a pro forma basis, would have been reported as follows (in thousands, except per share data):

	Three Months Ended						~~Six~~Nine Months Ended
	July 1, 2005			June 25, 2004 (Restated – See Note 7)			July 1, 2005			June 25, 2004 (Restated – See Note 7)
	September 30, 2005			September 24, 2004 (Restated — See Note 7)			September 30, 2005			September 24, 2004 (Restated — See Note 7)
Net earnings (loss):
Net loss:
As reported	$	(518,~~679~~135	)	$	~~534~~(6,037	)	$	(927,~~827~~962	)	~~(1,012~~$	)(7,049	)
Pro forma	$	(518,~~856~~361	)	$	~~230~~(6,396	)	$	(1028,~~251~~644	)	~~(1,548~~$	)(8,060	)
Basic earnings (loss) per share:
Basic loss per share:
As reported	$	(0.1755	)	$	(0.0219	)	$	(0.3086	)	~~(0.03~~$	)(0.22	)
Pro forma	$	(0.1856	)	$	(0.0120	)	$	(0.3188	)	~~(0.05~~$	)(0.25	)
Diluted earnings (loss) per share:
Diluted loss per share:
As reported	$	(0.1755	)	$	(0.0219	)	$	(0.3086	)	~~(0.03~~$	)(0.22	)
Pro forma	$	(0.1856	)	$	(0.0120	)	$	(0.3188	)	~~(0.05~~$	)(0.25	)

NOTE 4. AVAILABLE-FOR-SALE SECURITIES

Our short-term investments in available-for-sale securities consist of auction rate preferred securities and municipal auction rate notes. These investments, which have original maturities beyond one year, may be classified as short-term based on their highly liquid nature and because these securities represent the investment of cash that is available for current operations. These investments are classified as available-for-sale and recorded at fair value. The carrying value of short-term available-for-sale securities approximates fair market value due to their short maturities. As of July 1, 2005 and December 31, 2004, we had $0 and $19,200,000 in short term available-for-sale securities, respectively.

Our long-term investment in available-for-sale securities consists of 3,098,000 shares of Intraware common stock (NASDAQ symbol: ITRA). We purchased 6,000,098 shares for $0.82 per share in August 2002 in connection with the establishment of a strategic relationship with Intraware, a provider of electronic software delivery services. In May 2004, we sold 3,000,000 shares which resulted in proceeds of approximately $5,230,000 and a pre-tax gain of approximately $2,770,000. The market value of our investment in Intraware was $1,177,000 as of July 1, 2005 and $3,624,000 as of December 31, 2004.

NOTE 4. AVAILABLE-FOR-SALE SECURITIES

Our short-term investments in available-for-sale securities consist of auction rate preferred securities and municipal auction rate notes. These investments, which have original maturities beyond one year, may be classified as short-term based on their highly liquid nature and because these securities represent the investment of cash that is available for current operations. These investments are classified as available-for-sale and recorded at fair value. The carrying value of short-term available-for-sale securities approximates fair market value due to their short maturities. As of September 30, 2005 and December 31, 2004, we had $0 and $19,200,000 in short term available-for-sale securities, respectively.

Our long-term investment in available-for-sale securities consists of shares of Intraware common stock (NASDAQ symbol: ITRA). We purchased 6,098,000 shares for $0.82 per share in August 2002 in connection with the establishment of a strategic relationship with Intraware, a provider of electronic software delivery services. In May 2004, we sold 3,000,000 shares which resulted in proceeds of approximately $5,230,000 and a pre-tax gain of approximately $2,770,000. On September 26, 2005, Intraware implemented a 1 for 10 reverse split of its common stock. As a result of this split, the number of shares owned by us decreased from 3,098,000 to 309,000. The market value of our investment in Intraware was $1,146,000 as of September 30, 2005 and $3,624,000 as of December 31, 2004.

NOTE 5. COMMITMENTS AND CONTINGENCIES

“Wells Notice” and Shareholder Lawsuit. As previously disclosed in our filings with the SEC, we have been the subject of an SEC investigation and a consolidated class action lawsuit involving allegations of securities law violations. The allegations ~~relate~~related to Company disclosures and certain stock sales by two former officers during the third quarter of the year 2000.

On April 27, 2005, we announced, without admission of liability, an agreement to settle the outstanding class action lawsuit. This stipulation of settlement, ifreceived ~~ultimately~~Court ~~approved~~approval byon ~~the~~September ~~Court~~6, 2005 and will result in ~~payments~~total payments of $2,250,000 in cash and 1,500,000 shares of the Company’s common stock to the class. The entire $2,250,000 cash payment will be paid by proceeds received from our directors’ and officers’ ~~insurance~~ insurance carrier. ~~These~~The settlement payments ~~will~~ will be distributed to shareholders who incurred losses as a result of stock purchases between May 25, 2000 and October 18, 2002, inclusive, and to plaintiffs’ attorneys as fees and costs awarded by the Court. As of September 30, 2005, a total of $100,000 has been distributed. The charge against earnings associated with the issuance of the 1,500,000 shares of stock was initially recorded in the third quarter of 2004, and the charge ~~will~~continued ~~continue~~ to be adjusted based on the market price of the Company’s stock until final Court approval of the settlement, ~~currently~~was ~~expected~~granted toon ~~occur~~September in6, ~~the third quarter of~~ 2005.

On June 9, 2005, we announced that the Company ~~reached~~entered into a settlement agreement with the SEC. Under the terms of the settlement agreement, the Company ~~agreed~~paid ~~to pay~~ a civil penalty in the amount of $2,000,000 ~~which has been deposited in escrow and is recorded as other current assets on our balance sheet. We expect payment~~ to ~~be made out of~~ the ~~escrow~~SEC ~~account~~ during our third quarter of 2005.

We have established reserves for these two matters which we believe to be adequate and are based on the terms of the settlement agreements and the provisions of FASB Statement No. 5, “Accounting for Contingencies”, and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss, an interpretation of FASB Statement No. 5”. These reserves are as follows:

	July 1, 2005		December 31, 2004
	September 30, 2005		December 31, 2004
Class action lawsuit, net of expected insurance proceeds	$	6,~~463~~620	$	6,520
SEC investigation	~~2,000~~—		2,000
	$	86,~~463~~620	$	8,520

The portion of the consolidated class action lawsuit settlement payable in shares of Company stock has been valued at $4,~~275~~470,000 and $6,165,000 based on the closing market prices of $2.8598 and $4.11 on ~~July 1~~September 6, 2005 and December 31, 2004, respectively.

We are involved in certain other claims arising in the normal course of business. In our opinion, the final resolution of these claims should not have a material adverse effect on our financial position, cash flow or results from operations.

Contractual Obligations. ~~Subsequent~~ During to the ~~second~~third quarter of 2005, we entered into an agreement with our supplier of polycarbonate, a petroleum-based commodity which is the primary raw material used in the production of CD and DVD media. Beginning in the first half of 2004, supply shortages and increases in petroleum prices have placed significant upward pressure on polycarbonate pricing. Under the agreement, which runs through June 2006, we have agreed to purchase polycarbonate at set price terms. These price terms restrict monthly price increases and help us to limit our exposure to potential future price increases while also allowing us to reduce our purchase volume should the price terms increase above an agreed-upon level over the initial base price. Minimum remaining commitments under this agreement subject to purchase volume reductions, are approximately $5.8 million based on the current adjusted base price and minimum remaining quantity. We believe that this agreement will allow us to minimize our near-term exposure to continuing upward price pressures on this key raw material.

our purchase volume should the price terms increase above an agreed-upon level over the initial base price. Minimum remaining commitments under this agreement, subject to purchase volume reductions, are approximately $3,800,000 based on the current adjusted base price and minimum remaining quantity. We believe that this agreement will allow us to minimize our near-term exposure to continuing upward price pressures on this key raw material.

NOTE 6. SEGMENT AND GEOGRAPHICAL INFORMATION

We operate in one industry segment. The geographic distributions of our revenue, operating ~~income (~~loss), capital expenditures, depreciation and identifiable assets for 2005 and 2004 are summarized as follows (in thousands):

Three Months Ended

~~Six~~Nine Months Ended

July 1, 2005

June 25, 2004 (Restated – See Note 7)

July 1, 2005

June 25, 2004 (Restated – See Note 7)

September 30, 2005

September 24, 2004 (Restated — See Note 7)

September 30, 2005

September 24, 2004 (Restated — See Note 7)

Revenue:

United States

3126,~~055~~546

3335,~~811~~526

6289,~~943~~489

71106,~~303~~829

Ireland

6,~~669~~869

8,~~365~~259

1421,~~700~~569

1725,~~625~~884

Canada

119,~~770~~839

67,~~756~~412

1828,~~676~~515

1421,~~343~~755

Intergeographic sales

(65,~~909~~160

)

(35,~~850~~479

)

(1116,~~553~~713

)

(813,~~154~~633

)

4238,~~585~~094

45,~~082~~718

84122,~~766~~860

95140,~~117~~835

Operating income (loss):

Operating loss:

United States

(~~1,676~~846

)

~~1,811~~409

(34,~~806~~652

)

2,~~019~~428

Ireland

(~~2,809~~391

)

(~~531~~534

)

(45,~~751~~142

)

(~~787~~1,321

)

Canada

~~160~~153

~~715~~1,159

~~(70~~83

)

12,~~266~~425

Corporate and eliminations

(34,~~857~~017

)

(310,~~597~~519

)

(610,~~386~~403

)

(617,~~555~~074

)

(85,~~182~~101

)

(19,~~602~~485

)

(1520,~~013~~114

)

(413,~~057~~542

)

Capital expenditures:

United States

$857

~~398~~

~~422~~886

~~697~~1,554

~~758~~1,644

Ireland

—

~~289~~546

192

~~570~~1,116

Canada

~~1,349~~189

~~137~~159

1,~~407~~596

~~135~~294

1,~~747~~046

~~848~~1,591

23,~~296~~342

13,~~463~~054

Depreciation:

United States

1,~~154~~021

1,~~483~~492

23,~~332~~353

24,~~967~~459

Ireland

~~415~~410

~~287~~352

~~914~~1,324

~~702~~1,054

Canada

~~465~~640

~~547~~660

~~932~~1,572

1,~~114~~774

2,~~034~~071

2,~~317~~504

46,~~178~~249

47,~~783~~287

July 1, 2005

As of December 31, 2004

Assets:

United States

29,368

42,946

Ireland

19,001

27,646

Canada

22,324

17,384

Total identifiable assets

70,693

87,976

Corporate assets

74,935

80,178

145,628

168,154

	September 30, 2005		As of December 31, 2004
Assets:
United States	$	33,298	$	42,946
Ireland	18,333		27,646
Canada	20,147		17,384
Total identifiable assets	71,778		87,976
Corporate assets	52,950		80,178
	$	124,728	$	168,154

NOTE 7. RESTATEMENT OF 2004 QUARTERLY FINANCIAL STATEMENTS

As previously disclosed in our 2004 Form 10-K, ~~on February 24, 2005,~~ our management and the Audit Committee of the Board of Directors, on February 24, 2005, concluded that, as a result of our internal investigation into financial reporting and accounting irregularities at our Ireland Subsidiary, Zomax Limited (“Zomax Ireland”), the Company’s financial statements for the first, second and third quarters of 2004, should be restated. These irregularities resulted in the aggregate understatement of 2004 consolidated net loss by $540,000 for the three months ended September 24, 2004 and $1,823,000 for the nine months ended September 24, 2004. For further discussion of the impact of this matter on our evaluation of our internal controls over financial reporting, see Item 9A of our 2004 Form 10-K and Item 4 of this Form 10-Q.

The Company’s previously reported unaudited Condensed Consolidated Statement of Operations ~~and Condensed Consolidated Balance Sheet~~ for the ~~second~~third quarter of ~~2004~~ ~~on Form 10-Q~~ 2004 are restated as follows:

ZOMAX INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended June 25, 2004						Six Months Ended June 25, 2004
	Three Months Ended September 24, 2004						Nine Months Ended September 24, 2004
	As Reported			As Restated			As Reported			As Restated
Revenue:	$	45,~~082~~718		$	45,~~082~~718		$	95140,~~117~~835		$	95140,~~117~~835
Cost of revenue	3637,~~289~~922			3738,~~062~~496			78116,~~985~~907			80118,~~147~~643
Gross profit	87,~~793~~796			87,~~020~~222			1623,~~132~~928			1422,~~970~~192
Selling, general and administrative expenses	9,~~597~~181			9,~~622~~207			1827,~~763~~944			1928,~~027~~234
Operating loss	(804		)	(1,602		)	(2,631		)	(4,057		)
Litigation reserves	7,500			7,500			7,500			7,500
Interest income	127			127			305			305
Operating loss	(8,885		)	(9,485		)	(11,516		)	(13,542		)
Gain on sale of available-for-sale securities	2,770			2,770			2,770			2,770
Interest expense	(9		)	(9		)	(9		)	(9		)
Other expense, net	34			34			15			15
Interest income	236			236			541			541
Income (loss) before income taxes	2,127			1,329			459			(967		)
Gain on sale of available-for-sale securities	—			—			2,770			2,770
Income tax expense	875			795			188			45
Other expense, net	34			34			49			49
Net earnings (loss)	$	1,252		$	534		$	271		$	(1,012	)
Loss before income taxes	(8,624		)	(9,224		)	(8,165		)	(10,191		)
Earnings (loss) per share:
Income tax benefit	(3,127		)	(3,187		)	(2,939		)	(3,142		)
Basic	$	0.04		$	0.02		$	0.01		$	(0.03	)
Net loss	$	(5,497	)	$	(6,037	)	$	(5,226	)	$	(7,049	)
Diluted	$	0.04		$	0.02		$	0.01		$	(0.03	)
Loss per share:
Basic	$	(0.17	)	$	(0.19	)	$	(0.16	)	$	(0.22	)
Diluted	$	(0.17	)	$	(0.19	)	$	(0.16	)	$	(0.22	)
Weighted average common shares outstanding:
Basic	32,~~790~~503			32,~~790~~503			32,~~753~~669			32,~~753~~669
Dilutive effect of stock options	~~283~~—			~~283~~—			~~362~~—			—
Diluted	3332,~~073~~503			3332,~~073~~503			3332,~~115~~669			32,~~753~~669

~~ZOMAX~~NOTE ~~INCORPORATED~~8. RESTRUCTURING AND OTHER RELATED COSTS

~~CONDENSED~~At the ~~CONSOLIDATED~~end ~~BALANCE~~of ~~SHEETS~~the first quarter of 2005, we announced our intentions to begin a restructuring plan in the second quarter of 2005. The activities undertaken in this plan consist primarily of media replication equipment consolidation within our North American and Ireland asset groups and reductions in headcount in both North America and Ireland. As a part of the consolidation efforts we had assets approximating $852,000 in aggregate net book value which were either abandoned or disposed of and were accounted for as long-lived assets to be abandoned and adjusted to be fully depreciated as of the end of our second quarter (~~UNAUDITED~~the date of abandonment or disposal). Additionally, the useful lives of certain assets in North America approximating $109,000 in aggregate carrying value will be depreciated over the next six months (their approximate original remaining useful lives) and continue to be accounted for as assets held and used. In Ireland, assets approximating $310,000 in aggregate value are considered abandoned and held for disposal. No further depreciation will be recorded on these assets.

We have recorded pretax charges related to this restructuring plan of $2,722,000 thus far in 2005, including employee separation costs, accelerated depreciation on assets held and used until disposal and other costs directly related to the restructuring plan, including decommission costs. Liabilities accrued as part of the plan were $321,000 as of September 30, 2005. Details of the restructuring activity for 2005 are as follow (Inin thousands):

	As of June 25, 2004
	Employee Severance and Benefits			Accelerated Depreciation			Other			Total
	As Reported				As Restated
Total liabilities at December 31, 2004	$	—		$	—		$	—		$	—
ASSETS
Total charges	1,293			852			264			2,409
Current assets:
Non-cash	—			(852		)	—			(852		)
Cash and cash equivalents	$		69,854		$	43,904
Cash payments	(910		)	—			(6		)	(916		)
Available-for-sale securities	—				25,950
Total liabilities at July 1, 2005	$	383		$	—		$	258		$	641
Accounts receivable, net of allowances of $1,035 as reported and $1,035 restated	27,765				26,962
Total charges	61			—			252			313
Inventories	11,238				10,754
Non-cash	—			—			—			—
Deferred income taxes	2,670				2,670
Cash payments	(318		)	—			(315		)	(633		)
Other current assets	7,882				7,927
Total liabilities at September 30, 2005	$	126		$	—		$	195		$	321
Total current assets	119,409				118,167
Property and equipment, net	35,016				34,616
Deferred income taxes	33				—
Available-for-sale securities	5,390				5,390
	$	159,848			$		158,173
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,514			$		12,818
Accrued expenses and other current liabilities	12,408				12,400
Total current liabilities	24,922				25,218
Deferred income taxes	—				—
Total liabilities	24,922				25,218
Shareholders’ equity:
Common stock	62,960				62,960
Retained earnings	66,163				64,260
Accumulated other comprehensive income	5,803				5,735
Total shareholders’ equity	134,926				132,955
	$	159,848			$		158,173

12We expect to complete our previously announced restructuring activities in the fourth quarter of 2005.

NOTE 8 9. ~~RESTRUCTURING~~ DEFERRED ~~AND OTHER RELATED COSTS~~TAXES

AtWe ~~the~~account ~~end~~for ofincome ~~the~~taxes ~~first~~in accordance with ~~quarter~~Statement of ~~2005,~~Financial weAccounting ~~announced~~Standards ~~our~~No. 109, ~~intentions~~“Accounting tofor ~~begin~~Income Taxes” a(SFAS ~~restructuring~~109). ~~plan~~As ~~in the~~part ~~second quarter~~ of ~~2005. The activities~~the ~~undertaken~~process inof ~~this~~preparing ~~plan~~our ~~primarily~~consolidated financial ~~consist~~statements, ofwe ~~media~~are ~~replication equipment~~required ~~consolidation~~to ~~within~~estimate our ~~North~~income ~~American~~taxes ~~and~~in ~~Ireland~~each ~~asset groups and~~of ~~reductions~~the injurisdictions ~~headcount~~ in ~~both~~which ~~North~~we ~~America and Ireland~~operate. As aThis ~~part~~process ofinvolves ~~the~~estimating ~~consolidation efforts we had~~our ~~assets~~current ~~approximating~~tax ~~$852,000~~exposure intogether ~~aggregate~~with ~~net~~assessing ~~book~~temporary ~~value~~differences ~~which were either~~resulting ~~abandoned~~from ordiffering ~~disposed~~treatment of ~~and~~items ~~were accounted~~ for astax ~~long-lived~~and ~~assets~~accounting topurposes. beThese ~~abandoned~~temporary ~~and~~differences ~~adjusted~~result toin bedeferred ~~fully~~tax ~~depreciated~~assets asand ofliabilities, ~~the~~which ~~end~~are included ofwithin our ~~2nd quarter~~consolidated ~~(the~~balance ~~date~~sheet. ofWe ~~abandonment~~must orthen ~~disposal). Additionally,~~assess the likelihood ~~useful~~that ~~lives~~our ofdeferred ~~certain~~tax assets inwill ~~North~~be ~~America approximating~~recovered ~~$164,000~~from infuture ~~aggregate~~taxable income ~~carrying~~and ~~value~~to ~~will be depreciated over~~ the ~~next~~ 9extent ~~months~~we ~~(their~~believe ~~approximate~~that ~~original~~recovery ~~remaining~~is ~~useful~~not ~~lives)~~likely, ~~and~~we ~~continue~~must toestablish bea ~~accounted~~valuation ~~for~~allowance. asTo ~~assets~~the ~~held~~extent ~~and~~we ~~used.~~ establish a valuation Inallowance ~~Ireland,~~or ~~assets~~change ~~approximating~~this ~~$310,000~~allowance in ~~aggregate~~a ~~value~~period, ~~are considered~~we ~~abandoned~~must ~~and~~include ~~held~~an ~~for~~expense ~~disposal.~~ or a Nobenefit ~~further~~within ~~depreciation~~the ~~will~~tax beprovision ~~recorded~~in onour ~~these~~statement ~~assets~~of operations.

WeIn ~~have~~accordance ~~recorded~~with ~~pretax charges~~SFAS ~~related~~109, towe ~~this~~recorded ~~restructuring~~an additional ~~plan~~valuation allowance of approximately $215,~~409~~208,000 ~~thus~~for ~~far~~our deferred tax assets in the third quarter of 2005,. ~~including~~Based ~~employee~~upon ~~separation~~the ~~costs~~recent history of losses in United States and Ireland operations, ~~accelerated~~a ~~depreciation~~full valuation allowance was recorded in the third quarter of 2005 on the related net deferred tax assets ~~held and~~in ~~used~~these ~~until~~jurisdictions. This ~~disposal~~allowance is in addition to the previously recorded and ~~other~~disclosed ~~costs~~allowance ~~directly~~of $2,333,000 related to the ~~restructuring~~ ~~plan,~~uncertainty ~~including~~of ~~decommission~~realizing ~~costs~~the benefits of certain loss carryforwards before they expire. The ~~Liabilities~~additional ~~accrued~~valuation allowance asrecorded ~~part~~in the third quarter of 2005 was calculated in accordance with the ~~plan~~provisions of SFAS 109 which places primary importance on the most ~~were~~recent ~~$641~~operating results in each jurisdiction in which we operate. While management continues to believe our actions to restructure the cost base and strategically reposition the Company will ultimately result in profitability,~~000~~ three asyears of ~~July~~historical 1,operating ~~2005~~losses generally dictate prudence in assessing the deferred tax asset. ~~Details~~The Company intends to maintain the valuation allowance for its net deferred tax asset and loss carryforwards until sufficient positive evidence exists to support reversal of the ~~restructuring~~reserve. At ~~activity~~September ~~for~~30, 2005 and December 31, ~~are~~2004, aswe ~~follow~~had ~~(in~~a ~~thousands):~~valuation allowance of $17,541,000 and $2,333,000, respectively.

	Employee Severance and Benefits			Accelerated Depreciation			Other			Total
Total liabilities at December 31, 2004	$	—		$	—		$	—		$	—
Total charges	1,293			852			264			2,409
Non-cash	—			(852		)	—			(852		)
Cash payments	(910		)	—			(6		)	(916		)
Total liabilities at July 1, 2005	$	383		$	—		$	258		$	641

WeNOTE ~~expect to complete our~~10. ~~restructuring~~SUBSEQUENT ~~activities in the third quarter of 2005.~~EVENT

13On November 8, 2005, we announced that we plan to close our Fremont, California facility, from which we had already eliminated CD/DVD replication capacity. The site closure is expected to result in net restructuring charges of approximately $1,800,000 million for employee liabilities, retention and related facility transition activities. Closure of the facility is expected to be completed in early 2006. Assembly, fulfillment and customer care activities currently performed in Fremont will be transferred primarily to other Zomax operations. Related charges and accruals will be recorded in our fourth quarter of 2005.

Also on November 8, 2005, we announced that our Board of Directors has authorized a $10,000,000 share repurchase program. Under the share buyback program, the Company may repurchase shares from time to time and in accordance with applicable securities laws, through solicited or unsolicited transactions in the open market. December 31, 2006 was established as the time limit to executing against the authorized share buyback program. Moreover, such purchases will be at times and in amounts Zomax deems appropriate and the purchases may be discontinued at any time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fiscal Quarter-End

Our fiscal quarters typically consist of 13-weeks ending on a Friday so that our fiscal year ends on the last Friday of the calendar year. Our fiscal quarters referenced herein refer to the periods ended ~~July 1~~September 30, 2005, December 31, 2004 and ~~June 25~~September 24, 2004.

Restatement of Financial Statements

As fully discussed in more detail in Note 7 to the Condensed Consolidated Financial Statements included in Part I of this Form 10-Q, our 2003 consolidated financial statements have been restated to reflect the results of our internal investigation into financial reporting and accounting irregularities at our Ireland Subsidiary, Zomax Limited. Our discussion and analysis of financial condition and results of operations in this Item 2 reflect the effect of the restatement.

Introduction and Overview

For the ~~second~~third quarter of 2005, we recorded a loss of $0.1755 per share, inclusive of the deferred tax valuation allowance, compared to ~~earnings~~ a loss of $0.0219 per share in the ~~second~~third quarter of 2004 (as restated). Revenues declined in the ~~second~~third quarter of 2005 by 516.57% to $4238.61 million, compared to $45.1 7 million in the ~~second~~third quarter of 2004. The revenue decline reflects a decrease of approximately 2225.9% in media units sold, primarily to our Personal Computer Original Equipment Manufacturer (PC OEM) customer base. This ~~decline~~continuing decline reflects a previously disclosed trend in this customer base ~~to eliminate~~of eliminating certain recovery CD’s and printed material shipped with some of their PC’s, as well as the effects of our previously disclosed ability or willingness to provide services at prices acceptable to these customers. These trends also affected our year-to-date revenue and profitability performance as compared to 2004. Year-to-date, our revenues declined 1012.98% to $84122.89 million as compared to $95140.18 million in 2004 and our loss per share increased to ($0.~~30)~~86 per share, inclusive of the deferred tax valuation allowance, from ($0.~~03)~~22 per share in 2004. Our recent history of operating losses has resulted in the decision to establish a full valuation allowance against the net deferred tax assets related to our United States and Ireland operations during the third quarter of 2005.

The deterioration in our profitability year-to-date reflects the under utilization of capacity and resulting high fixed costs relative to current revenue levels, changes in customer and product mix, customer pricing reductions, continued losses in our Irish operations, ongoing increases in polycarbonate costs, additional legal and, inaudit work for the firstpreviously quarterdisclosed ofIreland 2005restatement, increasedthe professionaladditional servicescost associatedof withthe ourindependent 2004investigation yearof endthe auditaccounting irregularities in Ireland and related controls testing for Sarbanes- Oxley compliance activitiesand the decision to establish a valuation reserve against our deferred tax asset.

In response to the profitabilitydecline deteriorationin profitability, we began executing a set of initiatives late in the first quarter of 2005 that included a reduction in excess CD replication capacity and related costs, a reduction in headcount, the transition of some assembly and other services to lower cost facilities and the evaluation of our pricing strategies to ensure that they reflect the value we provide to our customers and the cost drivers in our business. The objective of this overall plan is to achieve profitability at or near the level of quarterly revenues we experienced in the first two quarters of 2005. As a result of these activities, our 2005 results include restructuring costs of approximately $20.23 million, or ($0.0501) per share, in the secondthird quarter, and $2.47 million, or ($0.0508) per share, on a year-to-date basis. While we are confident in our ability to complete the execution of this plan, it is not without risk or uncertainty. These risks and uncertainties include, but are not limited to, the potential negative impact on our customer relationships as we transition their production to other locations or attempt to execute pricing strategies that are not acceptable to the market place, our ability to accurately predict the amount of time and cost required to fully complete this plan, and our ability to retain key employees during and subsequent to the execution of these activities. In addition to the risks and uncertainties specific to this plan, our business faces other risks and uncertainties, a more detailed discussion of which can be found in Part I, Item 1 of our 2004 Form 10-K and later in this section under the captions “Outlook” and “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.”

During the second quarter of 2005, we announced the settlement of our outstanding SEC investigation and our consolidated class action lawsuit, both of which related to activities in the year 2000. We announced settlement offers in both of these matters in the third quarter of 2004, and the final settlements were consistent with these initial settlement offers.

WhileAdditionally, wein recognize the manypast risksfour andquarters, challengesZomax tohas returningadded our12 businesssignificant tonew consistentcustomers profitability,with weinitial believeprograms weproviding areapproximately well$10-positioned20 tomillion addressin them.projected Ourannualized corerevenue. marketIn –addition supply-chain outsourcing services – continues to showthese promisingnew growthcustomers, inwe ahave varietyalso ofcontinued marketto segments.add Wenew believeprograms weand haveservices strong relationships with ourexisting customers. andThe thatmajority ourof knowledgethese ofnew theircustomers businesses,are ourin flexibilitythe toRetail meetand theirEducational changingSoftware needs,market ourwith broadthe rangeremainder ofin serviceConsumer capabilitiesElectronics and ourMarketing financiallyServices. strongOur balancesolutions sheet continue to be important decision factors for these new customers. Weincorporate furthera believebreadth that upon completion of our planservices toranging achievefrom consistentsourcing profitabilityand atassembly lowerto levelsend-user offulfillment revenue,and therecontact arecenter, opportunitiessupporting availableour tomove ustoward toa achievehigher-value topsupply linechain growthprogram throughmanagement bothbusiness internal efforts and acquisitions activitiesmodel.

General FactorsWhile Affectingwe recognize the many risks and challenges to returning our business to consistent profitability, we believe we are well-positioned to address them. Our Financialcore Resultsmarket — supply-chain outsourcing services — continues to show promising growth in a variety of market segments. We believe we have strong relationships with our customers and that our knowledge of their businesses, our flexibility to meet their changing needs, our broad range of vertically integrated service capabilities and our solid balance sheet continue to be important decision factors for these customers. The Company’s near term plan is to achieve consistent profitability at lower levels of revenue, after which we will look to opportunities available to us to achieve revenue growth through both organic growth and acquisition activities.

~~Revenue. We~~General ~~derive~~Factors ~~our~~Affecting ~~revenues~~Our ~~from~~Financial a wide variety of supply chain services provided to our customers. The number of CD and DVD media units that we replicate for our customers, changes in pricing, changes in the composition of the products and services we provide, consumer demand for our customers’ products, seasonal consumer buying patterns, and changes in the mix of customersResults

14Revenue. We derive our revenues from a wide variety of supply chain services provided to our customers. The number of CD and DVD media units that we replicate for our customers, changes in pricing, changes in the composition of the products and services

we serve, are all factors that contribute to fluctuations in our revenues from period to period. Revenues are generally more favorably impacted when our mix of customers is weighted toward those who are using a broad range of our services. Bundled pricing, changes in the content of the products we make for our customers and other market dynamics make it difficult to precisely determine the impact each of these factors has on changes in our total revenue.14

~~Gross~~we ~~Profit Percentage. Our gross profit~~provide, ~~percentage~~consumer ~~during~~demand afor ~~period~~our iscustomers’ ~~dependent~~products, onseasonal aconsumer ~~number~~buying ofpatterns, changes ~~factors. Changes~~ in ~~raw~~customers ~~material prices~~programs, ~~particularly polycarbonate,~~changes ~~a petroleum-based plastic used~~ in the ~~manufacturing~~mix of CDcustomers ~~and DVD~~we ~~media,~~serve ~~can impact margins. Increases~~and inchanges ~~petroleum prices and supply constraints that began~~ in ~~the~~foreign ~~first~~currency ~~half~~rates ofrelative ~~2004 continue~~ to ~~put~~our ~~upward~~Ireland ~~pressure~~operations ~~on polycarbonate pricing and~~ are ~~negatively~~all ~~impacting~~factors ~~our~~that ~~gross~~contribute ~~profit margins. In addition~~ to ~~changes~~fluctuations in ~~pricing~~our ~~and~~revenues ~~raw material~~from ~~costs, the volume of business we experience in a given~~ period ~~also impacts~~to ~~our margins~~period. ARevenues ~~large portion of the costs required to deliver our products and services~~ are ~~fixed~~generally ~~in nature. Increases~~more ~~in business volume~~favorably ~~allow~~impacted uswhen toour ~~leverage these costs resulting in higher gross profit margins, while decreases in volume have the opposite effect. Our relative~~ mix of customers, asis ~~well~~weighted astoward ~~the related~~those ~~content~~who ofare ~~products~~using ~~or services we provide them, can also have~~ a ~~significant~~broad ~~impact~~range onof ~~gross~~our ~~profit margins~~services. Bundled ~~For example~~pricing, ~~the~~changes ~~relative~~in ~~mix~~the content of ~~CD/DVD media, labor, print and other material in~~ the products we ~~produce~~make for our customers ~~can affect our overall gross~~and ~~profit~~other ~~percentage. Although~~market ~~gross~~dynamics ~~profit measured~~make asit adifficult ~~percentage~~to ofprecisely ~~revenue~~determine ~~may~~the beimpact ~~lower, we believe providing~~each ~~incremental,~~of ~~value-added~~these ~~services~~factors ~~to our customers,~~ has ~~an overall positive effect~~ on ~~gross~~changes ~~margin as measured~~ in ~~dollars. Additionally,~~ our ~~ability~~total ~~to utilize automated packaging equipment versus manual labor can have a favorable effect on gross profit~~revenue.

~~Selling~~Gross ~~General~~Profit Percentage. Our gross profit percentage during a period is dependent on a number of factors. Changes in raw material prices, particularly polycarbonate, a petroleum-based plastic used in the manufacturing of CD and DVD ~~Administrative~~media, ~~(SG&A)~~can ~~Expenses~~impact margins. AIncreases ~~substantial~~in ~~portion~~petroleum prices and supply constraints that began in the first half of 2004 may continue to put upward pressure on polycarbonate pricing as well as our freight ~~SG&~~costs and are negatively impacting our gross profit margins. In addition to changes in pricing and raw material costs, the volume of business we experience in a given period also impacts our margins. A ~~expenses~~large portion of the costs required to deliver our products and services are fixed in nature. ~~However~~ Increases in business volume allow us to leverage these costs resulting in higher gross profit margins, ~~certain~~while ~~components~~decreases ~~such~~in volume have the opposite effect. Our relative mix of customers and the related content of products or services we provide them as ~~incentive~~well as ~~compensation~~market pricing pressures, ~~professional~~can ~~services~~also have a significant impact on gross profit margins. For example, ~~travel~~the relative mix of CD/DVD media, labor, print and other ~~expenses~~material in the products we produce for our customers can ~~vary~~affect ~~based~~our overall gross profit percentage. Although gross profit measured as a onpercentage ~~business~~of ~~results~~revenue may be lower, ~~individual~~we ~~events~~believe providing incremental, value-added orservices ~~initiatives~~to weour ~~may~~customers, behas ~~pursuing~~an atoverall positive effect on gross ~~various~~margin ~~times~~as ~~throughout~~measured ~~the~~in ~~year~~dollars. In Additionally, our ability to utilize automated packaging equipment versus manual labor can have a favorable effect on gross profit. In addition to these factors, some of our labor ~~SG&A~~and ~~expenses~~material costs are incurred in Ireland and Canada and changes in the respective foreign currency rates can cause our expenses reported in U.S. dollars to fluctuate.

~~Results~~Selling, General and Administrative (SG&A) Expenses. A substantial portion of ~~Operations~~our SG&A expenses are fixed in nature. However, certain components such as incentive compensation, professional services, travel and other expenses can vary based on business results, individual events, or initiatives we may be pursuing at various times throughout the year. In addition to these factors, some of our SG&A expenses are incurred in Ireland and Canada and changes in the respective foreign currency rates can cause our expenses reported in U.S. dollars to fluctuate.

~~The following~~Results ~~table summarizes certain key information to aid in the understanding~~ of ~~our discussion and analysis of results of operations.~~Operations

	Three Months Ended				Six Months Ended
	July 1, 2005		June 25, 2004 (Restated – See Note 7)		July 1, 2005		June 25, 2004 (Restated – See Note 7)
Percent of Revenue:
Gross profit	7.8	%	17.8	%	6.0	%	15.7	%
Selling, general and administrative expenses	22.9		21.3		23.5		20.0
Restructuring costs	5.1		—		2.8		—
Litigation reserve adjustment	(1.0	)	—		(2.6	)	—
Operating loss	(19.2	)	(3.6	)	(17.7	)	(4.3	)
Other income, net	1.0		0.4		0.9		0.3
Gain on sale of available-for-sale securities	—		6.1		—		2.9
Income tax expense (benefit)	(4.9	)	1.8		(5.2	)	0.0
Net earnings (loss)	(13.3	)	1.2		(11.6	)	(1.1	)
Other Operating Statistics:
Media units sold - % change from prior year	(21.8	)%	8.7	%	(20.4	)%	0.5	%
Revenue - % change from prior year	(5.5	)%	2.5	%	(10.9	)%	4.3	%
SG&A expenses - % change from prior year	0.1	%	8.4	%	4.9	%	4.5	%
Effective tax rate	26.8	%	59.8	%	31.0	%	(0.5	)%

The following table summarizes certain key information to aid in the understanding of our discussion and analysis of results of operations.

Note: As previously disclosed in our 2004 Form 10-K and our 2005 first quarter Form 10-Q, we have restated our first and second quarter 2004 condensed consolidated financial statements for misstatements in financial results discovered in our Ireland subsidiary. These restatements primarily affected cost of revenue and selling, general and administrative expenses and resulted in a decrease of our second quarter 2004 earnings per share from $0.04 to $0.02 and our year-to-date earnings (loss) per share from $0.01 to ($0.03). See Note 7 to the Condensed Consolidated Financial Statements for further discussion of this restatement.

	Three Months Ended				Nine Months Ended
	September 30, 2005		September 24, 2004 (Restated — See Note 7)		September 30, 2005		September 24, 2004 (Restated — See Note 7)
Percent of Revenue:
Gross profit	10.8	%	15.8	%	7.5	%	15.8	%
Selling, general and administrative expenses	22.8		20.1		23.3		20.0
Restructuring costs	0.8		—		2.2		—
Litigation reserve adjustment	0.6		16.4		(1.7	)	5.3
Operating loss	(13.4	)	(20.7	)	(16.4	)	(9.6	)
Other income, net	1.1		0.6		1.0		0.4
Gain on sale of available-for-sale securities	—		—		—		2.0
Income tax expense (benefit)	35.3		(7.0	)	7.4		(2.2	)
Net loss	(47.6	)	(13.2	)	(22.8	)	(5.0	)

Other Operating Statistics:
Media units sold - % change from prior year	(25.9	)%	3.9	%	(22.2	)%	1.3	%
Revenue - % change from prior year	(16.7	)%	2.7	%	(12.8	)%	3.7	%
SG&A expenses - % change from prior year	(5.6	)%	14.6	%	1.5	%	7.6	%
Effective tax rate	(287.3	)%	34.6	%	(47.8	)%	30.8	%

15Note: As previously disclosed in our 2004 Form 10-K and our 2005 first and second quarter Forms 10-Q, we have restated our first, second and third quarter 2004 condensed consolidated financial statements for misstatements in financial results discovered in our Ireland subsidiary. These restatements primarily affected cost of revenue and selling, general and administrative expenses and resulted in a decrease of our third quarter 2004 loss per share from ($0.17) to ($0.19) and our year-to-date loss per share from ($0.16) to ($0.22). See Note 7 to the Condensed Consolidated Financial Statements for further discussion of this restatement.

~~Revenue~~15

Our second quarter 2005 revenue decreased to $42.6 million, representing a 5.5% decrease from revenue of $45.1 million in the second quarter of 2004, reflecting a decrease of approximately 22% in media unit volume over the same period, primarily within our PC OEM customer base. This decline reflects a previously disclosed trend in this customer base to eliminate certain recovery CD’s and printed material shipped with some of their PC’s, as well as the effects of our previously disclosed willingness or ability to provide services at prices acceptable to these large customers.Revenue

Our ~~volumes~~third ~~with~~quarter ~~Microsoft~~2005 revenue ~~and~~decreased ~~Dell continue~~ to ~~drive significant~~$38.1 ~~amounts~~million, ofrepresenting ~~our~~a ~~overall revenue~~16. ~~Revenue~~7% decrease from ~~Dell comprised approximately 17%~~ revenue of ~~our~~$45.7 ~~total~~million ~~revenue~~ in the ~~second~~ third quarter of ~~2005~~2004, ~~down~~arising from a decrease of approximately 2126% in ~~both~~media ~~the~~unit ~~second~~volume ~~quarter~~over ~~of 2004 and~~ the ~~first~~same ~~quarter~~period, ofprimarily ~~2005.~~within ~~Second~~our PC ~~quarter~~OEM ~~business~~customer ~~with~~base. This ~~Microsoft, which~~decline ~~remains~~reflects ~~our~~the ~~largest~~continued ~~customer,~~impact ~~generated~~of ~~approximately~~a ~~26%~~previously ofdisclosed ~~our~~trend ~~total revenue~~ in ~~2005~~this ascustomer base ~~compared~~ to ~~approximately~~eliminate ~~23%~~certain inrecovery ~~both~~CD’s ~~the~~and ~~second~~printed ~~quarter~~material ofshipped ~~2004~~with ~~and~~some ~~the~~of ~~first~~their ~~quarter~~PC’s, ofas ~~2005. In~~well ~~addition, in~~as the ~~second~~effects ~~quarter~~ of ~~2005,~~our apreviously ~~third~~disclosed ~~customer exceeded 10% of total revenue~~willingness inor ~~the~~ability ~~quarter,~~to ~~but~~provide weservices doat ~~not~~prices ~~expect~~acceptable ~~this customer~~ to ~~exceed~~these ~~10% of total revenues for the full year~~customers.

OnOur avolumes with Microsoft ~~year-to-date~~and ~~basis,~~Dell ~~2005~~continue ~~revenues~~to ~~declined~~drive ~~approximately~~significant ~~11%~~amounts toof ~~$84.8~~our ~~million from~~overall ~~$95~~revenue.1 Revenue ~~million~~from inDell ~~2004. In~~comprised ~~addition~~approximately 18% toof ~~the~~our ~~factors~~total ~~discussed~~revenue ~~above~~in ~~affecting~~the ~~our~~third ~~second~~ quarter ~~revenues~~of 2005, ~~our~~up ~~2005 revenues~~from ~~were~~the ~~affected~~17% in the second ~~first~~ quarter ~~by the timing and size~~ of ~~certain~~2005 ~~customer~~but ~~product~~lower ~~launches~~than ~~and~~the ~~subscription cycles~~21% ~~versus~~in the ~~first~~third quarter of 2004,. Third aquarter ~~decrease~~business inwith ~~the~~Microsoft, ~~seasonal~~which ~~sell through~~remains ~~for one of~~ our ~~retail~~largest ~~customers~~customer, generated ~~generally~~approximately ~~softer~~27% ~~demand~~of ~~from~~ our PCtotal ~~OEM~~revenue ~~customers,~~in ~~customer~~2005 ~~pricing~~as compared to ~~reductions,~~approximately ~~and~~26% ~~content~~in ~~shifts~~the ~~from~~second CDquarter ~~media~~of to2005 ~~DVD~~and ~~media~~28% ~~made~~in bythe ~~certain~~third quarter of ~~customers~~2004.

~~Gross~~On a year-to-date basis, 2005 revenues declined ~~Profit~~approximately 13% to $122.9 million from $140.8 million in 2004. In addition to the factors discussed above affecting our third quarter revenues, our 2005 revenues were affected in the first quarter by the timing and size of certain customer product launches and subscription cycles versus the first quarter of 2004, a decrease in the seasonal sell through for one of our retail customers, generally softer demand from our PC OEM customers, customer pricing reductions, and media production decreases related to content shifts from CD media to DVD media made by certain customers.

~~Our reported~~On ~~second~~a ~~quarter gross profit percentage decreased from 17.8% in 2004~~ year-to ~~7.8%~~-date ~~in 2005. The decrease is primarily attributable to lower capacity utilization resulting in higher fixed costs as a percentage of revenue~~basis, ~~increases in~~one ~~the~~customer ~~price~~accounted ~~of polycarbonate, a petroleum-based plastic that is the~~for ~~primary~~approximately ~~raw~~25% ~~material used in the manufacturing~~ of ~~CD and DVD media, operational inefficiencies in~~ our ~~Ireland~~consolidated ~~manufacturing facility,~~revenue ~~changes~~ in ~~customer~~both ~~mix,~~2005 and ~~the effects of customer pricing reductions. Since the first quarter of~~ 2004, ~~petroleum price increases~~ and ~~supply shortages have more than doubled the~~a ~~price~~second ofcustomer ~~polycarbonate.~~accounted Wefor ~~have~~approximately ~~secured~~19% anand ~~adequate~~20%, ~~supply~~respectively, of ~~polycarbonate through a purchase agreement with~~ our ~~supplier. Although the supply agreement limits~~ ~~price~~consolidated ~~increases, the increases allowed under the agreement have had a negative impact on our gross profit~~revenue. A ~~Polycarbonate~~third ~~cost increases~~ customer accounted for ~~an estimated~~approximately ~~decline~~10% of ~~$1.2 million in~~ our ~~second quarter~~ 2005 ~~gross profit margins or 2.8% of revenues as compared~~ year-to-date ~~the~~consolidated ~~same period in 2004~~revenues. ~~This decline includes the offsetting effect of a one cent surcharge on CD and DVD media passed on to our customers beginning in the fourth quarter of 2004.~~

~~Our~~Gross reported year-to-date gross profit percentage declined from 15.7% in 2004 to 6.0% in 2005, reflecting the same factors affecting our second quarter 2005 margins as discussed above. Polycarbonate cost increases, net of the surcharge discussed above, accounted for an estimated decline of $2.1 million in our gross profit margins or 2.5% of revenues as compared to the year-to-date period in 2004.Profit

~~Selling~~Our reported third quarter gross profit percentage decreased from 15.8% in 2004 to 10.8% in 2005. As noted above, in response to continued profit deterioration, we began ~~General~~executing a set of initiatives late in the first half of 2005 that included a reduction in excess CD replication capacity and ~~Administrative~~related ~~(SG&A)~~costs, ~~Expenses~~and the transition of some assembly and other services to lower cost facilities. During this transition, we made efforts to minimize the impact felt by our customers and as a result, in the third quarter of 2005, incurred additional operational costs such as expedited freight and premiums associated with outsourcing. Additionally, continued increases in the price of polycarbonate, a petroleum-based plastic that is the primary raw material used in the manufacturing of CD and DVD media, changes in customer mix, and the effects of customer pricing reductions all contributed to lower margins. Since the first quarter of 2004, petroleum price increases and supply shortages have more than doubled the price of polycarbonate. We have secured an adequate supply of polycarbonate through a purchase agreement with our supplier. Although the supply agreement limits price increases, the increases allowed under the agreement have had a negative impact on our gross profit. Polycarbonate cost increases accounted for an estimated decline of $0.7 million in our third quarter 2005 gross profit margins or 1.7% of revenues as compared to the same period in 2004. This decline includes the offsetting effect of a one cent surcharge on CD and DVD media passed on to our customers beginning in the fourth quarter of 2004.

~~SG&A~~Our ~~expenses~~reported inyear-to-date ~~the~~gross ~~second~~profit ~~quarter~~percentage ~~were~~declined ~~comparable~~from ~~with~~15.8% in 2004 to 7.5% in 2005, reflecting the ~~same~~lower ~~period~~capacity utilization prevalent in the first ~~2004. On~~two aquarters ~~year-~~of 2005 before we began executing the plan to~~-date~~ ~~basis,~~reduce ~~SG&A~~excess CD ~~expenses~~replication ~~increased~~capacity ~~$0.9~~and ~~million,~~transition orof ~~4.9%~~some ~~due~~assembly ~~primarily~~and other services to lower ~~first~~cost facilities. Additionally, the same factors affecting our third quarter 2005 ~~professional~~margins as discussed above as ~~fees~~well as aoperational ~~result~~inefficiencies ofin ~~additional~~our ~~audit~~Ireland ~~work~~manufacturing ~~for~~facility during the ~~previously~~first ~~disclosed~~two ~~Ireland restatement,~~quarters of 2005 contributed to the ~~additional~~profit decline. Polycarbonate cost increases, net of the ~~independent~~surcharge discussed ~~investigation~~above, accounted for an estimated decline of ~~the accounting~~$2.7 ~~irregularities~~million in ~~Ireland~~our gross ~~and~~profit ~~related~~margins ~~controls~~or ~~testing~~2.2% ~~for~~of ~~Sarbanes~~revenues as compared to the year-to-date period ~~Oxley~~in ~~compliance~~2004. In Gross ~~addition,~~profit ~~our~~margins ~~first quarter~~for 2005 improved ~~SG&A~~in ~~expense~~the ~~includes~~third ~~incremental~~quarter ~~costs~~(10.8%) ~~related~~versus tothe ~~acquisition~~second (7.8%) and first (4.3%) ~~activities~~quarters ~~terminated~~primarily ~~during~~as ~~that~~a ~~period~~result of reduced operating costs driven by our restructuring activities.

~~Restructuring~~Selling, General and Administrative (SG&A) ~~Costs~~Expenses

~~As discussed~~SG&A ~~above~~expenses in the ~~“Introduction~~third ~~and~~quarter ~~Overview”~~declined in5.6% from ~~this Item~~ $9.2, wemillion ~~continued the implementation~~ in ~~the~~2004 ~~second~~to ~~quarter~~$8.7 ofmillion anin ~~operational~~2005. The ~~plan~~decrease ~~aimed~~is atprimarily ~~improving~~driven by ~~the~~reductions ~~alignment~~in ofheadcount ~~our~~and ~~fixed~~other ~~cost~~overhead ~~structure~~associated with ~~current~~our ~~revenue levels~~downsized facilities. InOn ~~conjunction~~a ~~with~~year-to-date ~~this~~basis, ~~plan we have~~SG&A ~~incurred~~expenses ~~approximately~~increased $20.24 million, ~~and~~or $21.45% ~~million~~due inprimarily ~~restructuring~~to ~~costs~~professional ~~for~~fees associated ~~the~~with ~~second~~additional ~~quarter~~legal and ~~year-to-date~~audit ~~periods~~work offor ~~2005~~the previously disclosed Ireland restatement, ~~respectively. These~~the ~~costs~~additional ~~consist~~cost ~~primarily~~of the independent investigation of ~~employee~~the ~~severance~~accounting irregularities in Ireland and ~~accelerated~~related ~~depreciation~~controls ontesting ~~assets~~for ~~which~~Sarbanes Oxley ~~have~~compliance. In ~~been~~addition, ~~abandoned~~our orfirst ~~disposed,~~quarter ~~and~~2005 SG&A expense includes incremental costs ofrelated ~~relocating~~to ~~certain~~acquisition activities ~~production~~terminated ~~equipment~~during that period.

~~Litigation Reserve Adjustment~~16

AsRestructuring previously disclosed in our filings with the SEC, we have been the subject of an SEC investigation and a consolidated class action lawsuit involving allegations of securities law violations. The allegations relate to Company disclosures and certain stock sales by two former officers during the third quarter of the year 2000. In the third quarter of 2004, we established a reserve associated with settlement offers made in relation to these matters, a portion of which represents the proposed issuance of 1.5 million shares of theCosts

16As discussed above in the “Introduction and Overview” in this Item 2, we continued the implementation in the third quarter of an operational plan aimed at improving the alignment of our fixed cost structure with current revenue levels. In conjunction with this plan we have incurred approximately $0.3 million and $2.7 million in restructuring costs for the third quarter and year-to-date periods of 2005, respectively. These costs consist primarily of employee severance and accelerated depreciation on assets which have been abandoned or disposed, and costs of relocating certain production equipment.

~~Company’s~~Litigation ~~common~~Reserve stock which is valued based on the market price of the stock as of the end of each reporting period. Accordingly, during the second quarter of 2005, we reduced the reserve by approximately $0.4 million, and on a year-to-date basis, reduced the reserve by $2.2 million. These reductions represent the decrease in the market value of these shares during these respective periods.Adjustment

OnAs ~~April~~previously ~~27,~~disclosed in ~~2005~~our filings with the SEC, we ~~announced,~~ ~~without~~have ~~admission~~been ofthe ~~liability,~~subject of an ~~agreement~~SEC toinvestigation and ~~settle~~a ~~the outstanding~~consolidated class action lawsuit involving allegations of securities law violations. The allegations relate to Company disclosures and certain stock ~~However,~~sales by two former officers during the ~~portion~~third quarter of the year 2000. In the third quarter of 2004, we established a reserve ~~related~~associated with settlement offers made in relation to these matters, a portion of which represents the proposed issuance of 1.5 million shares ~~will~~of the ~~continue~~Company’s tocommon bestock ~~adjusted~~which is valued based on the market price of the ~~Company’s~~ stock ~~until~~as ~~final~~of ~~Court~~the ~~approval~~end of ~~the~~each ~~settlement~~reporting period. On Accordingly, ~~June~~during 9,the third quarter of 2005, wethe ~~announced~~reserve ~~the~~increased ~~settlement~~by ofapproximately ~~the~~$0.2 ~~SEC~~million, ~~matter~~and ~~relating~~on a year-to-date ~~activities~~basis, in the ~~year~~reserve ~~2000. See~~was reduced ~~Note~~by 5$2.0 tomillion ~~the~~based ~~condensed~~upon ~~consolidated financial~~changes ~~statements~~in ~~for~~the ~~further~~market ~~discussion~~value of the ~~details~~Company’s shares ofduring these ~~settlements~~respective periods.

~~Income~~On April 27, 2005, we announced, without ~~Taxes~~admission of liability, an agreement to settle the outstanding class action lawsuit. This stipulation of settlement received Court approval on September 6, 2005 and will result in total payments of approximately $2.3 million in cash and 1.5 million shares of the Company’s common stock. The charge against earnings associated with the issuance of the 1.5 million shares of stock was initially recorded in the third quarter of 2004, and the charge continued to be adjusted based on the market price of the Company’s stock until final Court approval of the settlement was granted on September 6, 2005.

~~Our effective~~On ~~tax~~June ~~rate~~9, ~~for~~2005, ~~the~~we ~~second~~announced ~~quarter~~that ofthe Company ~~2005~~reached ~~was~~a ~~26.8%~~settlement asagreement ~~compared~~with ~~to 59~~the SEC.8% Under in the ~~second~~terms ~~quarter~~ of ~~2004.~~ the settlement agreement, ~~This~~the ~~decrease~~Company ~~reflects~~paid a ~~significant~~civil ~~change~~penalty in the ~~mix~~amount of ~~operating results~~$2.0 ~~from~~million ~~2004~~ to ~~2005~~the ~~between our Ireland operations, which are subject to~~SEC ~~relatively~~during ~~low tax rates, and~~ our ~~North~~third ~~American~~quarter ~~operations,~~of ~~which are subject to higher tax rates~~2005.

~~Application~~See Note 5 to the condensed consolidated financial statements for further discussion of ~~Critical~~the details ~~Accounting~~of ~~Policies~~these settlements.

~~Our~~Income discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following are our most critical accounting policies that affect significant areas and involve judgment and estimates. If these estimates differ materially from actual results, the impact to the condensed consolidated financial statements may be material.Taxes

~~Revenue~~In ~~Recognition~~accordance with Statement of Financial Accounting Standards No. We 109, ~~record~~“Accounting ~~revenue~~for atIncome ~~the~~Taxes” ~~time~~(SFAS ~~product~~109), we recorded isan ~~shipped~~additional orvaluation asallowance ~~services~~of ~~are~~approximately ~~rendered~~$15. 2 million for our ~~For~~deferred ~~certain~~tax ~~customers,~~assets ~~product~~in isthe ~~invoiced~~third quarter of 2005. Based upon ~~completion~~the recent history of ~~production~~losses in our United States and ~~assembly~~Ireland ~~services~~operations, ~~with~~a ~~final~~full ~~shipment~~valuation ~~occurring~~allowance ~~based~~was recorded in the third quarter of 2005 on ~~written~~the ~~customer~~related net deferred tax assets in ~~instructions~~these jurisdictions. InThe ~~these~~additional ~~cases, the~~valuation ~~customer~~allowance ~~accepts~~recorded ~~title~~in to the ~~goods~~third asquarter of 2005 was calculated in accordance with the ~~date~~provisions of ~~the~~SFAS ~~invoice~~109 ~~and~~which ~~revenue~~places primary importance on the most isrecent ~~recognized.~~operating results Inin each jurisdiction ~~case~~in ofwhich ~~these~~we ~~“bill~~operate. While ~~and~~management ~~hold”~~continues ~~sales,~~to webelieve ~~ensure~~our ~~that~~actions to restructure the ~~transaction~~cost ~~complies~~base ~~with~~and strategically reposition the ~~conditions~~Company will ultimately result in profitability, ~~and~~three ~~considerations~~years ~~contained~~of historical operating losses generally dictate prudence in assessing ~~Staff~~the ~~Accounting~~deferred ~~Bulletin~~tax Noasset. ~~101~~The ~~and~~Company intends to maintain the valuation ~~Accounting~~allowance for its net deferred tax asset and ~~Auditing~~loss ~~Enforcement~~carryforwards ~~Release~~until sufficient Nopositive evidence exists to support reversal of the reserve. ~~108~~Going forward this means we will not tax effect income or losses for accounting purposes, other than in Canada where we are in a tax payable position, until such time as we revisit the establishment of the ~~Securities~~reserve. Our ~~and~~effective tax rate for the third quarter ~~Exchange~~of ~~Commission~~2005 was (287.3%) as compared to 34.6% in the third quarter of 2004.

OnApplication ~~a year-to-date basis in 2005 and 2004, one customer accounted for approximately 25% and 24%, respectively,~~ of ~~our~~Critical ~~consolidated~~Accounting revenue, and a second customer accounted for approximately 19% and 20%, respectively, of our consolidated revenue. A third customer accounted for approximately 11% of our 2005 year-to-date consolidated revenues.Policies

~~Cost~~Our discussion and analysis of ~~Revenue. We~~our ~~include~~financial ~~direct~~condition ~~labor~~and results of operations are based upon our condensed consolidated financial statements, which ~~direct~~have ~~materials~~been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on ~~royalties~~historical experience and ~~production~~on ~~overhead~~various other assumptions that are believed to be reasonable under the circumstances, the results of which ~~includes~~form ~~shipping~~the ~~costs,~~basis infor making ~~cost~~judgments about the carrying values of assets and liabilities that are ~~revenue~~not onreadily apparent from other sources. Following are our most critical accounting policies that affect significant areas and involve judgment and estimates. If these estimates differ materially from actual results, the impact to the condensed consolidated financial statements ofmay ~~operations~~be material.

~~Royalties.~~ Revenue ~~We have license agreements with several companies for the use of certain CD and DVD manufacturing technology we use in our business~~Recognition. We ~~do not necessarily have agreements with~~record ~~every~~revenue ~~patent~~at ~~holder~~the ~~that~~time ~~may~~product ~~assert~~is shipped or ~~has~~as ~~asserted~~services aare ~~claim to royalties~~rendered. ~~The~~For ~~cost~~certain ofcustomers, ~~these~~product ~~royalties~~ is ~~accrued based~~invoiced ~~on units sold and charged to cost of revenue based~~ upon ~~the~~completion ~~terms~~ of ~~our royalty~~production ~~agreements~~ and, inassembly ~~accordance~~services, with ~~the~~final ~~provisions of FASB Statement No.~~shipment 5,occurring ~~“Accounting~~based ~~for~~on ~~Contingencies”~~written ~~and~~customer ~~FASB Interpretation No~~instructions. In 14these cases, ~~“Reasonable Estimation of~~ the ~~Amount~~customer ofaccepts atitle ~~Loss,~~to the angoods ~~interpretation~~as of ~~FASB~~the ~~Statement~~date ~~No. 5”, our assessment~~ of the ~~likelihood~~invoice ~~that~~and ~~other~~revenue ~~royalty~~is ~~claims may be asserted against us~~recognized. In ~~Royalty~~each ~~expense~~case ~~included in cost~~ of ~~revenue~~these ~~was~~“bill ~~$2.2 million~~ and ~~$2.6~~hold” sales, ~~million~~we inensure that the ~~first~~transaction ~~six~~complies ~~months~~with ofthe ~~2005~~conditions and ~~2004,~~considerations contained ~~respectively.~~in Staff

Income Taxes. We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we must include an expense or a benefit within the tax provision in our statement of operations.17

~~Significant~~Accounting ~~judgment~~Bulletin isNo. ~~required~~101 ~~in determining our provision for income taxes, our deferred tax assets~~ and ~~liabilities~~Accounting and ~~any~~Auditing ~~valuation~~Enforcement ~~allowance~~Release ~~recorded against our deferred tax assets~~No. At108 ~~July 1, 2005 and December 31, 2004, we had a valuation allowance~~ of ~~$2.3 million, due to~~ the ~~uncertainty of~~ ~~realizing~~Securities ~~the benefits of certain loss carryforwards before they expire. The valuation allowance was based on our historical taxable income~~ and ~~our estimates~~Exchange ~~of future taxable income in each jurisdiction in which we operate and the~~Commission.

17Cost of Revenue. We include direct labor, direct materials, royalties and production overhead, which includes shipping costs, in cost of revenue on the consolidated statements of operations.

~~period~~Royalties. We ~~over~~have ~~which~~license agreements with several companies for the use of certain CD and DVD manufacturing technologies we use in our ~~deferred~~business. We ~~tax~~do ~~assets~~not ~~will~~necessarily have beagreements ~~recoverable~~with every patent holder that may assert or has asserted a claim to royalties. The Wecost ~~will~~of these ~~continue~~royalties is accrued based on units sold and charged to ~~assess~~cost ~~the~~of ~~likelihood~~revenue ~~that~~based upon the ~~deferred~~terms ~~tax~~of ~~assets~~our ~~will~~royalty beagreements ~~realizable~~ and, in accordance with the ~~valuation~~provisions of ~~allowance~~FASB ~~will~~Statement beNo. ~~adjusted~~5, ~~accordingly~~“Accounting for Contingencies” and FASB Interpretation No. 14, ~~which~~“Reasonable ~~could~~Estimation of the Amount of a Loss, an interpretation of ~~materially~~FASB ~~impact~~Statement No. 5”, our ~~financial~~assessment ~~position~~of the likelihood that other royalty claims may be asserted against us. Royalty expense included in cost of revenue was $2.8 million and ~~results~~$3.9 million in the first nine months of ~~operations~~2005 and 2004, respectively.

~~Our effective~~Income ~~tax~~Taxes. We ~~rate~~account for ~~interim~~income ~~reporting~~taxes ~~periods~~in ~~represents our best current~~accordance ~~estimate~~with Statement of ~~our~~Financial ~~effective~~Accounting ~~tax~~Standards ~~rate~~No. 109, “Accounting for Income Taxes.” As part of the ~~full~~process ~~year,~~of ~~which~~preparing ~~requires~~our ~~estimates~~consolidated financial ofstatements, ~~full~~we ~~year~~are ~~income~~required orto ~~losses~~estimate ~~across~~our income taxes in each of the ~~tax~~ jurisdictions in which we operate. ~~These~~ ~~estimates~~This ~~may~~process ~~change throughout~~involves ~~the~~estimating ~~year~~our ~~resulting~~current tax inexposure ~~potentially~~together ~~significant~~with ~~changes~~assessing totemporary ~~our~~differences ~~overall~~resulting from ~~effective~~differing ~~tax~~treatment ~~rate due to the effect~~ of ~~differences~~items infor ~~the~~ tax ~~rates~~and inaccounting ~~each jurisdiction~~purposes. In ~~addition,~~These ~~the~~temporary ~~preparation~~differences ofresult ~~our~~in ~~income~~deferred tax ~~returns~~assets ~~requires~~and ~~the~~liabilities, ~~interpretation~~which ofare ~~the~~included ~~associated~~within ~~tax~~our ~~laws. Many~~consolidated ~~tax~~balance ~~laws~~sheet. ~~are complex,~~We ~~and~~must atthen ~~times~~assess ~~ambiguous,~~the ~~and~~likelihood that our ~~interpretations~~deferred oftax ~~these~~assets ~~laws~~will ~~may differ~~be recovered from ~~the~~future ~~interpretations~~taxable ofincome ~~the~~and ~~taxing~~to ~~authorities~~the extent ~~who~~we ~~have~~believe ~~the~~that ~~right~~recovery ~~to audit~~is ~~our~~not ~~returns~~likely, ~~within~~we ~~statutory~~must ~~time~~establish ~~periods~~a valuation allowance. ~~Where~~ weTo ~~believe~~the ~~there~~extent iswe establish a ~~quantifiable~~valuation ~~risk that~~allowance ~~our~~or ~~interpretations~~change ofthis allowance ~~these~~in ~~laws~~a ~~could~~period, ~~reasonably~~we ~~differ~~must ~~from~~include ~~those~~an ~~of the~~expense ~~taxing~~or ~~authorities,~~a webenefit ~~make~~within ~~appropriate~~the ~~provisions~~tax provision in our ~~tax~~statement ~~liabilities~~of operations.

~~Accounts~~In accordance with SFAS 109, we recorded an ~~Receivable~~additional valuation allowance of approximately $15. We2 ~~review~~million for our deferred tax assets in the third quarter of 2005. Based upon the recent history of losses in our ~~accounts~~United ~~receivable~~States ~~balances~~and onIreland operations, a ~~regular~~full ~~basis~~valuation toallowance ~~determine~~was ~~their~~recorded in the third quarter of ~~collectability~~2005 on the related net deferred tax assets in these jurisdictions. AnThis allowance ~~for~~is in addition to the ~~doubtful~~previously ~~accounts~~recorded isand disclosed allowance of $2.3 million related to the uncertainty of realizing the benefits of certain loss carryforwards before they expire. The additional valuation allowance recorded ~~based~~in the third quarter of 2005 was calculated in accordance with the provisions of SFAS 109 which places primary importance on the most recent operating results in each jurisdiction in which we operate. While management’s ~~estimate~~continues to believe our actions to restructure the cost base and strategically reposition the Company will ultimately result in profitability, three years of ~~those~~historical ~~accounts~~operating losses generally dictate prudence in ~~which~~assessing ~~may~~the ~~become~~deferred ~~uncollectible~~tax asset. The Company intends to maintain the valuation allowance for its net deferred tax asset and loss carryforwards until sufficient positive evidence exists to support reversal of the reserve. Going forward this means we will not tax effect income or losses for accounting purposes, other than in Canada where we are in a tax payable position, until such time as we revisit the establishment of the reserve. At September 30, 2005 and December 31, 2004, we had a valuation allowance of $17.5 million and $2.3 million, respectively.

~~Inventory~~Our effective tax rate for interim reporting periods represents our best current estimate of our effective tax rate for the full year, which requires estimates of full year income or losses across each of the tax jurisdictions in which we operate. We These ~~review~~estimates ~~our~~may ~~inventory~~change onthroughout athe ~~regular~~year resulting in potentially ~~basis~~significant ~~with~~changes to our overall effective tax rate due to the ~~objective~~effect of differences ~~assessing~~in ~~its~~the ~~net~~tax ~~realizable~~rates ~~value~~in each jurisdiction. WeIt ~~adjust~~is ~~the~~our ~~carrying~~expectation, ~~value~~that until there is evidence to support the reversal of ~~inventory~~our deferred tax valuation allowance, we ~~according~~will incur tax expense only related to our ~~estimates~~Canada operations. In addition, the preparation of our income tax returns requires the ~~net~~interpretation ~~realizable~~of ~~value~~the associated tax laws. Many tax laws are complex, and at times ambiguous, and our interpretations of ~~individual~~these ~~inventory~~laws may differ from the ~~components~~interpretations ~~relative~~of the taxing authorities who have the right to ~~their~~audit ~~purchase~~our returns orwithin ~~carrying~~statutory ~~value~~time periods. Where we believe there is a quantifiable risk that our interpretations of these laws could reasonably differ from those of the taxing authorities, we make appropriate provisions in our tax liabilities.

~~Recently~~Accounts Receivable. We review our accounts receivable balances on ~~Issued~~a ~~Accounting~~regular ~~Pronouncements~~basis to determine their collectability. An allowance for doubtful accounts is recorded based on management’s estimate of those accounts which may become uncollectible.

~~In November 2004 the FASB issued SFAS No. 151, “~~Inventory ~~Costs, an amendment of ARB No~~. We ~~43, Chapter 4” (SFAS 151). SFAS 151 amends the guidance in ARB No.~~review ~~43,~~our ~~Chapter~~inventory 4,on ~~“Inventory~~a ~~Pricing”,~~regular tobasis ~~clarify~~with the ~~accounting~~objective ~~for abnormal amounts~~ of ~~idle~~assessing ~~facility~~its ~~expense,~~net realizable ~~freight, handling costs, and spoilage~~value. We ~~This statement~~adjust ~~requires that those items be recognized as current period charges regardless of whether they meet~~ the ~~criterion of “so abnormal” which was the~~carrying ~~criterion~~value ~~specified in ARB No. 43. In addition, this Statement requires that allocation~~ of ~~fixed~~inventory ~~production~~according ~~overheads~~ to ~~the~~our ~~cost~~estimates of ~~production be based on normal capacity of~~ the ~~production~~net ~~facilities.~~realizable ~~This~~value ~~pronouncement is effective for the Company beginning in the first quarter~~ of ~~2006. The Company is in the~~ ~~process~~individual ofinventory ~~evaluating~~components ~~whether~~relative ~~the~~to ~~adoption~~their ofpurchase ~~SFAS 151 will have a significant impact on the Company’s overall results of operations, financial position~~ or ~~cash~~ ~~flows;~~carrying ~~however, it is unlikely that impact will be material~~value.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement is effective for the Company relative to nonmonetary asset exchanges beginning December 31, 2005. The provisions of this Statement shall be applied prospectively. The Company is in the process of evaluating whether the adoption of SFAS 153 will have a significant impact on the Company’s overall results of operations or financial position; however, it is unlikely the impact will be material.18

~~In December 2004,~~Recently ~~the~~Issued FASB issued SFAS No. 123(R) “Share-Based Payment.” SFAS 123(R) requires the recognition of compensation cost relating to share-based payment transactions in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued as of the grant date, based on the estimated number of awards that are expected to vest. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years beginning after June 15, 2005. As a result, SFAS 123(R) will be effective for the Company beginning in the first quarter of 2006. The Company is in the process of evaluating the impact of SFAS 123(R) on the Company’s overall results of operations, financial position and cash flows. Refer to pro forma disclosure in Note 3 for an indication of ongoing expense that will be included in the income statement once SFAS 123(R) is adopted.Pronouncements

~~On October 22,~~In November 2004, the FASB issued ~~FASB~~SFAS ~~Staff~~No. ~~Position (FSP) 109-1~~151, “Inventory ~~Application~~Costs, ofan ~~FASB~~amendment ~~Statement~~of ARB No. ~~109~~43, ~~Accounting~~ ~~for~~Chapter ~~Income~~4” ~~Taxes,~~(SFAS ~~for~~151). ~~the~~SFAS ~~Tax~~151 ~~Deduction~~amends ~~Provided~~the guidance toin UARB No.~~S. Based~~ ~~Manufacturers~~43, byChapter ~~the~~4, ~~American~~“Inventory ~~Job~~Pricing”, ~~Creation~~to ~~Act~~clarify the accounting for abnormal amounts of ~~2004,~~idle ~~and~~facility ~~FSP~~expense, ~~109-2~~freight, handling ~~Accounting~~costs, and ~~Disclosure~~spoilage. ~~Guidance~~This ~~for~~statement ~~the~~requires ~~Foreign~~that ~~Earnings~~those ~~Repatriation~~items be recognized as ~~Provisions~~current ~~within~~period ~~the~~charges ~~American~~regardless ~~Jobs~~of ~~Creation~~whether ~~Act~~they meet the criterion of ~~2004. FSP~~“so abnormal” ~~No.~~which ~~109-1~~was ~~clarifies~~the ~~how~~criterion tospecified ~~apply~~in ~~SFAS~~ARB No. 43. In addition, this ~~109~~Statement requires that allocation of fixed production overheads to the ~~new~~cost ~~law’s~~of production ~~tax~~be ~~deduction~~based ~~for~~on ~~income~~normal ~~attributable~~capacity toof ~~“domestic~~ the production ~~activities~~facilities.” ~~The~~This pronouncement ~~fully~~is ~~phased-in~~effective ~~deduction~~for isthe upCompany tobeginning ~~nine~~in ~~percent~~the first quarter of 2006. The Company is in the ~~lesser~~process of ~~taxable~~evaluating ~~income~~whether orthe ~~“qualified~~adoption ~~production~~of ~~activities~~SFAS 151 ~~income.”~~will ~~The staff~~have ~~proposal~~a ~~would~~significant ~~require~~impact ~~that~~on the ~~deduction~~Company’s beoverall ~~accounted~~results ~~for~~of operations, asfinancial aposition ~~special deduction~~or incash ~~the~~flows; ~~period earned~~however, ~~not~~we asbelieve athat ~~tax-rate~~it ~~reduction~~is unlikely that impact will be material.

~~FSP No.~~In ~~109-2~~December 2004, ~~provides~~the ~~guidance~~FASB ~~under~~issued SFAS No. ~~109 with respect to recording the~~153, ~~potential~~“Exchanges ~~impact~~ of ~~the~~Nonmonetary ~~repatriation~~Assets, ~~provisions~~an amendment of ~~the~~APB ~~American~~Opinion ~~Jobs~~No. ~~Creation~~29, ~~Act~~Accounting offor ~~2004~~Nonmonetary ~~(the “Jobs Act~~Transactions.”) onThe ~~enterprises’~~amendments ~~income~~made ~~tax~~by ~~expense~~Statement ~~and deferred~~153 ~~tax~~are ~~liability~~based ~~FSP~~on ~~109-2~~the ~~states~~principle that anexchanges ~~enterprise~~of isnonmonetary ~~permitted~~assets ~~time~~should ~~beyond the~~be ~~financial~~measured ~~reporting~~based ~~period~~on ofthe ~~enactment~~fair tovalue ~~evaluate~~of the ~~effect~~assets ofexchanged. Further, the amendments ~~Jobs~~eliminate ~~Act on~~the ~~its~~narrow ~~plan~~exception for ~~reinvestment~~nonmonetary orexchanges ~~repatriation~~ of ~~foreign earnings for purposes~~similar ofproductive ~~applying~~assets ~~SFAS~~and ~~No.~~replace ~~109. By~~it ~~electing~~with ~~to apply~~a ~~the~~broader ~~provisions~~exception offor ~~Section 965~~exchanges of ~~the Internal Revenue Code, enacted~~ asnonmonetary ~~part~~assets ofthat ~~the~~do ~~Jobs~~not ~~Act,~~have tocommercial ~~repatriate~~substance. ~~extraordinary~~The ~~dividends~~Statement ~~we will~~is ~~therefore~~effective ~~be eligible to claim an eighty-five percent dividends received deduction~~ for ~~income tax purposes on~~ the ~~eligible~~Company ~~amounts.~~relative Asto ~~discussed~~nonmonetary inasset ~~our 2004~~exchanges ~~10-K~~beginning December 31, we2005. ~~have~~The ~~evaluated~~provisions of this ~~opportunity~~Statement ~~and,~~shall ~~based~~be ~~on these requirements,~~applied ~~the Company currently has $7~~prospectively.0 ~~million~~The ofCompany ~~cash~~is ~~held~~in ~~outside~~ the ~~U.S.,~~process ~~which could~~of beevaluating ~~eligible~~whether ~~for~~ the ~~special deduction in fiscal year 2005. It is~~adoption ~~anticipated~~of ~~that~~SFAS we153 will ~~complete~~have ~~any~~a ~~dividend~~significant byimpact on the ~~end~~Company’s ofoverall ~~our~~results ~~current fiscal~~of ~~year. The~~operations ~~range~~or offinancial ~~possible~~position; ~~amounts~~however, ~~that~~we ~~the~~believe ~~Company~~that isit ~~currently considering eligible for repatriation~~ is ~~between~~unlikely ~~zero and $3.6 million.~~ the ~~The~~impact ~~related~~will ~~potential~~be ~~range of income tax is between zero and $0~~material.~~2 million.~~

In ~~May 2005~~December 2004, the ~~Financial~~FASB ~~Accounting~~issued ~~Standards~~SFAS ~~Board~~No. 123(~~FASB~~R) “Share-Based ~~issued~~Payment.” ~~Statement~~SFAS 123(R) requires the recognition of compensation ~~Financial~~cost ~~Accounting~~relating ~~Standards~~to ~~(SFAS)~~share-based ~~No.~~payment ~~154~~transactions ~~“Accounting~~in ~~Changes~~financial ~~and~~statements. ~~Error~~That ~~Corrections~~cost -will Abe ~~Replacement~~measured ofbased ~~APB~~on ~~Opinion~~the ~~No.~~fair 20value ~~and~~of ~~FASB~~the ~~Statement~~equity ~~No.~~or ~~3.”~~liability ~~The~~instruments ~~new~~issued ~~standard~~as ~~changes~~of the ~~requirements~~grant ~~for~~date, ~~the~~based ~~accounting~~on ~~for~~the ~~and~~estimated ~~reporting~~ number of awards athat ~~change~~are inexpected ~~accounting~~to ~~principle~~vest. ~~Among~~ ~~other changes,~~ SFAS ~~No.~~123(R) ~~154~~covers ~~requires that~~ a ~~voluntary~~wide ~~change~~range inof ~~accounting~~share-based ~~principle~~compensation bearrangements ~~applied~~including ~~retrospectively~~share ~~with~~options, ~~all~~restricted ~~prior period financial~~share ~~statements~~plans, ~~presented~~ performance-based onawards, ~~the~~share ~~new~~appreciation ~~accounting~~rights, ~~principle~~and ~~unless~~employee itshare purchase isplans. ~~impracticable to~~Statement do123(R) ~~so. SFAS~~replaces FASB Statement No. ~~154~~123, ~~also provides~~“Accounting ~~that~~for ~~(1)~~Stock-Based aCompensation,” ~~change~~and insupersedes ~~method~~APB ofOpinion ~~depreciating~~No. or25, ~~amortizing~~“Accounting for aStock ~~long-lived nonfinancial~~Issued ~~asset~~to beEmployees.” ~~accounted~~In ~~for~~April 2005, asthe aSEC ~~change~~delayed inthe effective ~~estimate~~date of SFAS 123(~~prospectively~~R) ~~that~~ ~~was~~to ~~effected~~fiscal byyears abeginning ~~change~~after inJune 15, 2005. ~~accounting~~As ~~principle~~a result, ~~and~~SFAS 123(2R) ~~correction~~will ~~of errors~~be ineffective ~~previously~~for ~~issued~~the ~~financial~~Company ~~statements~~beginning ~~should~~in the befirst ~~termed~~quarter ~~a “restatement~~of 2006.” The ~~new~~Company ~~standard~~ is ~~effective~~ ~~for~~in ~~accounting~~the ~~changes~~process ~~and~~of ~~corrections~~evaluating the impact of ~~errors~~SFAS ~~made~~123(R) inon ~~fiscal~~the ~~years beginning~~Company’s ~~after~~overall ~~December~~results 15of operations, ~~2005. The~~financial ~~Company~~position ~~does~~and ~~not~~cash ~~anticipate~~flows. ~~that~~Refer ~~the~~to ~~adoption~~pro forma disclosure in Note 3 for an indication of ~~SFAS~~the ~~No.~~expense ~~154~~that ~~will~~would have ~~a material~~been ~~effect~~included onin ~~its~~the ~~financial~~income ~~statements~~statement had SFAS 123(R) is adopted.

18On October 22, 2004, the FASB issued FASB Staff Position (FSP) 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004. FSP No. 109-1 clarifies how to apply SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” The staff position requires that the deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction.

~~Liquidity~~FSP No. 109-2, provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and ~~Capital~~deferred ~~Resources~~tax liability. FSP 109-2 states that an enterprise is permitted time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. By electing to apply the provisions of Section 965 of the Internal Revenue Code, enacted as part of the Jobs Act, to repatriate extraordinary dividends we will therefore be eligible to claim an eighty-five percent dividends received deduction for income tax purposes on the eligible amounts. As discussed in our 2004 10-K, we have evaluated this opportunity and, based on these requirements, the Company currently has $5.4 million of cash held outside the U.S., which could be eligible for the special deduction in fiscal year 2005. It is anticipated that we will complete any dividend by the end of our current fiscal year. The range of possible amounts that the Company is currently considering eligible for repatriation is between zero and $3.6 million. The related potential range of income tax is between zero and $0.2 million.

~~Cash~~In ~~and~~March ~~Cash~~2005, ~~Equivalents~~the ~~and~~FASB issued FASB ~~Short-Term~~Interpretation ~~Available-~~No. 47, “Accounting for~~-Sale~~ ~~Securities. As~~Conditional Asset Retirement Obligations — an Interpretation of ~~July 1,~~FASB ~~2005,~~Statement ~~cash~~No. ~~and~~143” ~~cash~~(FIN ~~equivalents~~47). ~~and~~This ~~short-~~Interpretation clarifies that the term “conditional ~~available-for-sale~~asset ~~securities~~retirement obligation”, as used in ~~the~~SFAS ~~aggregate~~No.143, ~~totaled~~refers ~~$54.1~~to ~~million,~~ a ~~decrease~~ oflegal ~~$6.2~~obligation ~~million~~to ~~from~~perform ~~December 31,~~an ~~2004. During~~asset retirement activity in which the ~~first~~timing ~~two~~and/or ~~quarters~~method of ~~2005,~~settlement ~~cash~~are ~~flows~~conditional ~~used~~on ina ~~operating~~future ~~activities~~event ~~totaled~~that ~~$3.7~~may ~~million~~or ~~while~~may not be within the ~~remainder~~control of the entity. Thus, the ~~overall~~timing ~~decrease~~and/or ismethod ~~primarily~~of ~~related~~settlement tomay ~~capital~~be ~~expenditures~~conditional ~~totaling~~on ~~$2.3~~a ~~million~~future event. Accordingly, an entity is required to recognize a liability for the fair value

Working Capital and Liquidity. Working capital totaled $70.7 million and $83.3 million at July 1, 2005 and December 31, 2004, respectively. This decrease primarily reflects the operating losses incurred in the first half of 2005. Our principal source of working capital continues to be cash and cash equivalents and short-term available-for-sale securities. In addition to our working capital balances, we also hold long term available-for-sale securities which represent our investment in Intraware (see Note 4 to the Consolidated Financial Statements). These securities are registered and readily tradable and had a market value at July 1, 2005 of $1.2 million.19

~~Our~~of ~~future~~a ~~liquidity~~conditional ~~needs~~asset ~~will~~retirement ~~depend~~obligation ~~on,~~if ~~among~~the ~~other~~fair ~~factors,~~value of the ~~timing~~liability can be reasonably estimated. The fair value of a liability for the conditional ~~capital~~asset ~~expenditures,~~retirement ~~expenditures~~obligation inshould ~~connection~~be ~~with~~recognized ~~possible~~when ~~acquisitions~~incurred — generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of ~~our~~settlement ~~ability~~of toa conditional ~~return~~asset retirement obligation should be factored into the ~~business~~measurement of tothe ~~profitability~~liability when sufficient information exists. WeSFAS ~~believe~~No. 143 acknowledges that ~~existing~~in ~~cash~~some ~~and~~cases, ~~investment~~sufficient ~~balances~~information ~~and~~may ~~anticipated~~not ~~cash~~be ~~flow~~available ~~from~~to reasonably ~~operations~~estimate ~~will~~the beliability. ~~sufficient~~We toare ~~fund~~currently ~~our~~reviewing ~~operations~~and ~~for~~analyzing the ~~foreseeable~~impact ~~future~~that adopting FIN 47 will have on our consolidated financial statements.

~~Contractual Obligations. Subsequent to~~In ~~the~~May ~~second quarter of~~ 2005, wethe ~~entered~~Financial ~~into~~Accounting anStandards Board ~~agreement~~(FASB) ~~with~~issued ~~our~~Statement ~~supplier~~ of ~~polycarbonate,~~Financial aAccounting ~~petroleum-based~~Standards ~~commodity~~(SFAS) ~~which~~No. is154 ~~the primary raw material~~“Accounting ~~used~~Changes ~~in the production of CD~~ and ~~DVD~~Error ~~media. Beginning~~Corrections in- ~~the~~A ~~first~~Replacement ~~half~~ of ~~2004,~~APB ~~supply~~Opinion ~~shortages~~No. 20 and ~~increases in~~FASB ~~petroleum~~Statement ~~prices~~No. ~~have~~3.” ~~placed~~The ~~significant~~new ~~upward~~standard ~~pressure~~changes ~~on polycarbonate pricing. Under~~ the ~~agreement,~~requirements ~~which~~for ~~runs~~the accounting ~~through~~for ~~June 2006,~~and wereporting ~~have~~of ~~agreed~~a tochange ~~purchase~~in ~~polycarbonate~~accounting ~~at set price terms~~principle. ~~These~~Among ~~price~~other ~~terms~~changes, ~~restrict~~SFAS ~~monthly price~~No. ~~increases~~154 ~~and~~requires that ~~help~~a usvoluntary tochange ~~limit~~in ~~our~~accounting ~~exposure~~principle tobe ~~potential~~applied ~~future~~retrospectively ~~price~~with ~~increases~~all ~~while~~prior ~~also~~period ~~allowing~~financial usstatements topresented ~~reduce~~based ~~our~~on ~~purchase volume should~~ the ~~price terms~~new ~~increase above an agreed-upon level over the initial base price. Minimum remaining~~accounting ~~commitments~~principle ~~under~~unless ~~this~~it ~~agreement,~~is ~~subject~~impracticable to ~~purchase~~do ~~volume reductions, are approximately $5~~so.~~8 million based on the current adjusted base price and minimum~~ ~~remaining~~SFAS ~~quantity~~No. We154 ~~believe~~also provides that ~~this~~(1) ~~agreement will allow us to minimize our near-term exposure to continuing upward price pressures on this key raw material.~~a

~~Outlook~~change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the adoption of SFAS No. 154 will have a material effect on its financial statements.

~~Our business~~In ~~continues~~September to2005, bethe ~~focused~~Emerging onIssues CDTask ~~and~~Force (EITF) ~~DVD~~reached ~~media~~consensus ~~replication~~on ~~services~~Issue ~~and related~~No. ~~assembly~~04-13, ~~distribution~~“Accounting for Purchases and Sales ~~contact~~of ~~center~~Inventory ~~services~~with ~~which~~the weSame ~~deliver~~Counterparty” (EITF ~~primarily~~04-13), ~~through~~which ~~Company-owned~~addresses ~~facilities.~~the Wecircumstances ~~continue~~under towhich ~~evaluate~~two ~~our~~or ~~strategy~~more inventory ofpurchase ~~delivering~~and ~~our~~sales ~~services~~transactions ~~through~~with athe ~~vertically~~same ~~integrated~~counterparty ~~model,~~should ~~with~~be ~~large~~viewed as ~~fixed~~a ~~investments~~single inexchange ~~facilities~~transaction ~~and~~within ~~equipment,~~the ~~versus~~scope aof ~~model~~APB inOpinion ~~which~~No. we29, ~~place~~“Accounting ~~more~~for ~~emphasis~~Nonmonetary onTransactions” ~~our~~for ~~program~~new ~~management~~arrangements ~~capabilities. As~~entered ~~our~~into, ~~relationships~~or modifications ~~with~~or ~~our~~renewals ~~customers~~of ~~evolve~~existing arrangements, we ~~believe~~beginning ~~many~~in ofthe ~~these~~first interim ~~customers~~or ~~place~~annual ~~greater~~reporting ~~value~~period onbeginning ~~our~~after ~~ability~~March ~~to program~~15, ~~manage~~2006. Full ~~their~~adoption ~~end~~of EITF 04-~~to-end~~13 ~~supply~~is ~~chain~~not ~~and~~expected to ~~less~~have ~~emphasis~~a onmaterial ~~our~~effect ~~ability to~~on ~~directly~~the ~~deliver~~Company’s ~~those~~financial ~~services~~statements.

19Liquidity and Capital Resources

InCash ~~the~~and ~~first~~Cash ~~half~~Equivalents and Short-Term Available-for-Sale Securities. As of ~~2005~~September we30, ~~began~~2005, cash aand ~~restructuring~~cash ~~plan~~equivalents ~~which~~and ~~eliminated~~short-term ~~approximately 20%~~available-for-sale ofsecurities, ~~our~~in CDthe aggregate, ~~replication~~totaled ~~capacity~~$44.2 ~~While~~million, ~~this~~a ~~restructuring~~decrease ~~plan~~of ~~was~~$16.1 ~~primarily~~million from ~~aimed~~December 31, at2004. During ~~reducing~~the ~~this~~first three ~~capacity~~quarters ~~and~~of ~~its~~2005, ~~related~~cash ~~costs,~~flows itused ~~also~~in ~~represents~~operating aactivities totaled $12.7 ~~move~~million, ~~toward~~including ~~less~~restructuring ~~dependency~~related onexpenditures ~~Company-owned~~of ~~assets~~$1.5 inmillion, ~~the~~and previously ~~delivery~~disclosed ofSEC ~~our services~~settlement ~~and~~payments ~~will~~totaling ~~result~~$2.0 inmillion. aThe remainder ~~greater~~of ~~dependence~~the onoverall ~~outsourcing~~decrease ~~this~~is ~~volume~~primarily inrelated to capital expenditures ~~peak~~totaling ~~demand~~$3.3 ~~periods~~million.

WeWorking ~~expect~~Capital toand ~~continue~~Liquidity. Working tocapital ~~evolve~~totaled ~~our~~$65.9 ~~strategy~~million ofand ~~increasing~~$83.3 ~~our~~million ~~emphasis~~at onSeptember ~~the~~30, ~~value~~2005 weand ~~provide~~December 31, ~~our~~2004, respectively. This ~~customers~~decrease ~~through our~~primarily ~~program~~related ~~management~~to ~~capabilities,~~capital ~~with~~expenditures ~~less~~totaling ~~dependency~~$3.3 onmillion, ~~Company-owned~~cash ~~assets~~restructuring incharges ~~delivering~~of ~~those services~~$1.5 ~~However~~million, ~~this~~the ~~value~~previously ~~proposition~~disclosed isSEC ~~not~~settlement ~~fully~~payments ~~tested~~totaling ~~and~~$2.0 wemillion, ~~can~~the ~~not~~$1.7 bemillion ~~assured~~valuation ~~that~~allowance itrecorded ~~will~~on beour current ~~accepted~~portion byof deferred tax assets and the ~~marketplace~~other oroperating losses incurred ~~that~~in wethe ~~will~~first three quarters of 2005. Our principal source of working capital continues to be ~~successful~~cash inand ~~implementing~~cash itequivalents and short-term available-for-sale securities. ~~Should~~ In weaddition ~~fully~~to ~~implement~~our ~~this~~working capital ~~model~~balances, we ~~will~~also hold long term available-for-sale securities which ~~face~~represent aour ~~number~~investment ofin ~~risks~~Intraware (see Note 4 to the Consolidated Financial Statements). These securities are registered and ~~uncertainties~~readily tradable and had a market value at September 30, ~~including~~2005 ~~the~~of $1.1 ~~following:~~million.

~~• A~~Our ~~program~~future ~~management~~liquidity needs will depend on, among ~~business~~other ~~model~~factors, isthe ~~very~~timing ~~dependent~~of oncapital ~~customer~~expenditures, ~~relationships~~potential future restructuring activities, ~~vendor~~expenditures ~~relationships~~in connection with possible ~~and~~acquisitions, the ~~ability~~potential repurchase of ~~those~~Company ~~vendors~~shares toin ~~commit~~accordance ~~and~~with ~~deliver~~the recently toauthorized ~~required~~share ~~service levels,~~buyback program and the timing of our ability to return ~~employ~~the ~~and~~business ~~retain~~to ~~qualified employees~~profitability. It ~~also~~We ~~requires~~believe ~~the~~that ~~ability~~existing tocash ~~deliver to~~and ~~service~~investment ~~levels~~balances ~~profitably~~and ~~when~~anticipated ~~the~~cash ~~delivery~~flow offrom ~~these~~operations ~~services~~will isbe sufficient ~~not~~to ~~within~~fund ~~the direct~~our ~~control~~operations offor the ~~company~~foreseeable future.

~~• The~~Contractual ~~implementation~~Obligations. In the third quarter of ~~this~~2005, we entered into ~~model~~an ~~will~~agreement ~~require~~with ~~that~~our supplier of polycarbonate, a petroleum-based commodity which is the ~~skill~~primary ~~sets~~raw material used in the production of ~~our~~CD ~~employees~~and beDVD ~~adapted~~media. Beginning orin ~~developed~~the first half of 2004, supply toshortages ~~align~~and ~~with~~increases ~~the~~in ~~emphasis~~petroleum onprices ~~program~~have ~~management~~placed ~~capabilities~~significant upward pressure on polycarbonate pricing. IfUnder the agreement, which runs through June 2006, we ~~are~~have ~~not~~agreed ~~successful~~to inpurchase polycarbonate ~~doing~~at soset price terms. These price terms restrict monthly price increases and help us to limit our exposure to potential future price increases while also allowing us to reduce our purchase volume should the price terms increase above an agreed-upon level over the initial base price. Minimum remaining commitments under this agreement, subject itto ~~will~~purchase volume reductions, are approximately $3.8 million based on ~~impact~~the current adjusted base price and minimum remaining quantity. We believe that this agreement will allow us to minimize our ~~ability~~near-term exposure to becontinuing ~~successful~~upward price pressures on this key raw material.

~~• Changes in our service offerings resulting from this shift could negatively affect our profitability;~~20

• A shift toward less dependency on Company-owned facilities and equipment will result in additional restructuring activities and the need to continue to develop and implement future cost savings initiatives to align costs with the market place. These activities may not be successful or meet the changes in the marketplace and could have a disruptive impact on our customers and employees which could significantly affect future levels of revenue and profitability.Outlook

~~As previously~~Our ~~discussed~~existing inbusiness ~~our~~continues ~~filings with the SEC, starting in the second quarter of 2004, we were informed of changes~~ to ~~certain~~be ~~programs~~focused weon ~~support for~~CD ~~several~~and ofDVD ~~our~~media ~~large~~replication ~~customers~~services ~~that~~and ~~may~~related ~~result~~assembly, indistribution ~~noticeable future declines in~~and ~~the~~contact ~~level~~center ofservices ~~business~~which we ~~currently~~deliver ~~have~~primarily ~~with~~through ~~these customers. The first of these customer~~Company-~~driven changes~~owned ~~involves the elimination of certain recovery CDs and printed materials from some of the new PCs sold by one of our PC OEM customers~~facilities. ~~This~~We ~~change~~continue ~~began~~ to ~~significantly impact~~evaluate our ~~revenues~~strategy ~~with this customer starting in the second quarter~~ of ~~2005 and~~delivering ~~we expect that this continuing initiative will negatively impact~~ our ~~revenues~~services ~~with~~through this customer for the balance of 2005. While growth in other segments of our business with this customer provides an opportunity to offset some of this decline, we are not assured of the timing or extent of those opportunities, and to date they have not been significant. Within the quarter, we were also informed by another PC OEM of their intention to replace certain recovery media with a ~~non~~vertically ~~media based~~integrated ~~solution for a certain segment of their business. We expect that this change~~model, ~~if fully implemented, will negatively affect our revenues~~ with ~~this~~large ~~customer~~fixed ~~beginning~~investments in ~~the later~~ ~~part~~facilities ofand ~~2005. We had also been informed in 2004 by one of our larger customers that~~equipment, ~~possibly~~versus ~~starting in 2005,~~ a ~~certain~~model ~~portion of their customer base supported by us will be migrated to a new service delivery system operated by one of our competitors. We expect this new delivery system to be completed~~ in ~~the~~which ~~fourth quarter of 2005, however due to the continuing uncertainties surrounding this potential change,~~ we ~~are~~place ~~unable~~more atemphasis ~~this time to accurately quantify the exact timing and its future affect~~ on our ~~business. However,~~ ~~this~~managed ~~change~~services could have a significant impact on our future revenues and profitability should it be fully and permanently implemented in a manner that excludes our participation in the delivery of this revenue streamcapabilities. ~~One~~As of our ~~customers has also recently~~ ~~announced~~relationships ~~plans~~with ~~to expand their internal capabilities for producing DVD media. We don’t anticipate that this change will have any affect on~~ our ~~business~~customers ~~over the next twelve months. At this time~~evolve, we ~~are~~believe ~~unable~~many toof ~~accurately quantify its potential affect, if any, on our business with this customer past that period. Finally, in addition to~~ these ~~and other market changes, our~~ customers ~~continue to demand general~~ ~~pricing~~will ~~decreases~~place ingreater ~~the~~value ~~services~~on ~~we provide. We continue to evaluate~~ our ~~response~~ability to ~~these~~program ~~pricing~~manage ~~pressures~~their ~~and in some instances have implemented strategies designed~~ end-to-end ~~properly align our~~supply ~~pricing~~chain ~~with the value of products~~ and ~~services~~less weemphasis ~~provide. These~~on ~~pricing strategies may result in losses of significant portions of business if not accepted by~~ our ~~customers and affect our~~ ability to ~~grow~~directly ordeliver ~~achieve~~those ~~consistent levels of revenue and profitability~~services.

~~Beginning in~~In the first half of ~~2004,~~2005 ~~supply~~we ~~shortages~~began ~~and~~a ~~petroleum price increases have~~restructuring ~~placed~~plan ~~significant~~which ~~upward~~eliminated ~~pressures~~approximately on33% ~~the price~~ of ~~polycarbonate,~~our ~~a petroleum-based plastic that is the primary raw material used in the manufacturing of~~ CD ~~and~~replication ~~DVD media~~capacity. While ~~we believe there are alternative~~ ~~sources~~this ofrestructuring ~~polycarbonate~~plan ~~available~~was inprimarily ~~addition~~aimed toat ~~our~~reducing ~~current~~this ~~inventory~~capacity ~~of polycarbonate,~~and ~~we have entered into a new purchase agreement with our~~its ~~polycarbonate~~related ~~supplier that limits price increases through June 2006. However~~costs, ~~the~~ ~~increases~~it ~~allowed~~also ~~under~~represents ~~the~~a ~~previous~~move ~~agreement~~toward ~~have~~less ~~had,~~dependency ~~and the increases allowed in the new agreement will continue to have, a negative impact~~ on ~~our~~ ~~gross~~Company-owned ~~profit~~assets ~~margins. While we will be working with our customers~~ in ~~2005~~the todelivery ~~pass on to them some or all~~ of ~~these~~our ~~cost increases,~~services ~~there~~and ~~are no assurances that we~~ will beresult ~~successful~~ in ~~doing so or~~a ~~that~~greater ~~our~~dependence ~~attempts~~on tooutsourcing ~~pass~~this ~~along~~volume ~~these cost increases will not result~~ in apeak ~~loss of~~demand ~~business to competitors~~periods.

We ~~continue~~ expect to ~~face~~continue ~~significant~~to evolve ~~costs~~our ~~and~~strategy ~~resource~~of ~~constraints~~increasing ~~in connection with~~ our ~~compliance~~emphasis ~~with~~on the ~~necessary~~value ~~reporting,~~we ~~compliance~~provide ~~and administrative aspects~~our ofcustomers athrough ~~public~~our ~~company.~~program ~~These~~management ~~requirements~~capabilities, ~~drive~~with ~~additional~~less ~~SG&A~~dependency ~~costs for~~on ~~professional~~Company-owned ~~services,~~assets ~~both~~in ~~legal~~delivering ~~and~~those ~~accounting,~~services. ~~governance~~However, ~~and~~this ~~management~~value ~~requirements~~proposition tois ~~support~~not ~~all~~fully oftested ~~the~~and ~~additional~~we ~~legislation~~can ~~imposed~~not onbe ~~public companies.~~assured ~~Many~~that ofit ~~our~~will ~~competitors~~be accepted ~~are~~by ~~not~~the ~~public~~marketplace ~~entities~~ or ~~are~~that ~~larger~~we ~~public~~will be successful in implementing ~~entities~~it. Should ~~and~~we ~~the~~fully ~~related~~implement ~~impact~~this model, ofwe ~~complying~~will ~~with~~face ~~these~~a ~~requirements~~number ~~can~~of ~~affect our~~risks ~~ability~~and touncertainties, ~~perform~~including ~~competitively.~~the following:

As• A ~~discussed~~program management inbusiness ~~previous~~model ~~sections~~is ofvery ~~this~~dependent ~~Form~~on ~~10-Q~~customer relationships, invendor ~~the~~relationships ~~second~~and ~~quarter~~the ability of ~~2005~~those wevendors ~~implemented~~to acommit ~~restructuring~~and ~~plan~~deliver ~~that~~to required ~~includes~~service levels, and our ability to employ and retain qualified ~~both~~employees. It ~~cost~~also ~~reduction~~requires ~~activities~~the asability to ~~well~~deliver to service levels profitably when the ~~implementation~~delivery of ~~pricing~~these ~~strategies~~services is ~~with~~not analways ~~overall~~within ~~goal~~the ofdirect ~~profitability~~control atof orthe ~~near~~company.

20• The implementation of this model will require that the skill sets of our employees be modified to align with the emphasis on program management capabilities. If we are not successful in doing so, it will impact our ability to be successful.

~~the~~• Changes ~~level of quarterly revenue we experienced~~ in ~~the first two quarters~~our ofservice ~~2005. It~~offerings isresulting ~~difficult~~from at this ~~time~~shift ~~to predict~~could ~~with~~negatively ~~certainty~~affect ~~the final timing and costs associated with its implementation and whether the resulting impact of these initiatives will have a further negative impact on~~ our ~~ability to achieve these~~ revenue ~~levels. During the second quarter, the restructuring~~ ~~activities caused us to not meet all service level requirements of all customers. While we believe we have responded appropriately~~ and that ultimately the changes will result in an improved service/delivery model for our customers, the risk of loss of opportunities with these customers may by affected by this service level performance. In addition, the restructuring has resulted in some employee turnover and the risk exists that we may not be able to replace these employees on a timely basis with qualified and experienced people. In line with our goal, we have completed a significant portion of this plan in the early part of our third quarter of 2005.profitability;

~~Given the~~• A ~~dynamic~~shift ~~market~~toward less ~~conditions~~dependency inon ~~which~~Company-owned wefacilities ~~operate,~~and ~~our~~equipment ~~ability~~could toresult ~~accurately~~in ~~predict~~additional ~~revenue~~restructuring activities and ~~earnings~~the ~~for~~need ato ~~given~~continue ~~time~~to ~~period~~develop isand implement ~~difficult. Any~~future ~~predictions~~cost ~~made~~savings ~~are~~initiatives ~~subject~~ to ~~management’s~~ ~~interpretation~~align ofcosts ~~all~~with of the ~~data~~marketplace. These ~~available,~~activities ~~and~~ may not ~~directly reflect~~be ~~forecasts~~successful ~~produced~~or ~~internally~~meet ~~within~~the ~~any~~changes ~~individual~~in ~~forecast. We~~the ~~have very limited visibility to our~~marketplace ~~customers’~~and ~~near~~could orhave ~~long-term~~a ~~demand~~disruptive ~~for~~impact on our ~~services,~~customers and ~~changes~~employees bywhich ~~our~~could ~~customers in the content of the products we produce for them can~~ significantly affect ~~our~~future levels of ~~reported~~ revenue and ~~related profits~~profitability.

InAs previously ~~light~~discussed ofin our filings with the ~~discussion~~SEC, ~~above~~starting in the second quarter of 2004, we ~~are~~were ~~forecasting~~informed of changes to certain programs we support for several of our large customers that may result in noticeable future declines in the level of business we currently have with these customers. The first of these customer-driven changes involves the elimination of certain recovery media and printed materials from some of the new PCs sold by our PC OEM customers. This change began to significantly impact our revenues starting in the second quarter of 2005. In the third quarter of 2005, the continuing effects of this change contributed to bea ~~approximately~~25% year-over-year ~~$40~~revenue ~~million~~decline ~~and~~in our PC-OEM customer base. We expect that this continuing initiative ~~net~~will ~~loss~~negatively impact our revenues with this segment for the balance of 2005 and beyond. While there maybe an opportunity to beoffset some of this decline with program expansion in other segments of our business with some of our PC-OEM customers, we are not assured of the ~~range~~timing or size of ~~($0~~those opportunities.~~04)~~ As ~~per~~we ~~share~~previously discussed, we had also been informed in 2004 by one of our larger customers that , possibly starting in 2005, a certain portion of their customer base supported by us will be migrated to ~~($0~~a new service delivery system operated by one of competitors.~~09)~~ This ~~per~~new ~~share~~delivery system ~~including~~was completed subsequent to the end of the third quarter of 2005 and the ~~restructuring~~change ~~charges~~will ~~related~~begin to negatively impact our ~~current~~revenues ~~cost~~and ~~reduction~~profitability ~~initiatives,~~with orthis customer in the fourth quarter of 2005 and beyond. We currently believe this change will result in a year-over-year reduction in revenue with this customer ~~loss~~of approximately 10%. One of ~~($0~~our customers has also recently announced plans to expand their internal capabilities for producing DVD media.~~03)~~ We ~~per~~do ~~share~~not anticipate that this change will have any affect on our business over the next twelve months. At this time, we are unable to accurately ~~($0~~quantify its potential affect, if any, on our business with this customer past that period.~~07)~~ In ~~per~~addition ~~share~~to ~~excluding~~these and other market changes, our customers continue to demand general pricing decreases in the services we provide. We continue to evaluate our response to these ~~charges~~pricing pressures and in some instances have implemented strategies designed to properly align our pricing with the value of products and services we provide. These pricing strategies may result in losses of significant portions of business if not accepted by our customers and affect our ability to increase or achieve consistent levels of revenue and profitability.

~~Cautionary~~Beginning in the first half of 2004, supply shortages ~~Statement~~and ~~for~~petroleum ~~Purposes~~price increases have placed significant upward pressures on the price of polycarbonate, a petroleum-based plastic that is the ~~“Safe~~primary ~~Harbor”~~raw material ~~Provisions~~used ofin the ~~Private~~manufacturing of CD and DVD media. While we believe there ~~Securities~~are ~~Litigation~~alternative ~~Reform~~sources ~~Act~~of polycarbonate available in addition to our current inventory of ~~1995~~polycarbonate, we have entered into a new purchase agreement with our polycarbonate supplier that limits price increases through June 2006. However, the increases allowed under the previous agreement have had, and the increases allowed in the new agreement will continue

to have, a negative impact on our gross profit margins. We will continue to work with our customers in 2005 to pass on to them some or all of these cost increases, however there are no assurances that we will be successful in doing so or that our attempts to pass along these cost increases will not result in a loss of business to competitors.

We continue to face significant costs and resource constraints in connection with our compliance with the necessary reporting, compliance and administrative aspects of a public company. These requirements drive additional SG&A costs for professional services, both legal and accounting, governance, and management requirements to support all of the additional legislation imposed on public companies. Many of our competitors are not public entities or are larger public entities, and the related impact of complying with these requirements can affect our ability to perform competitively.

As discussed in previous sections of this Form 10-Q, in the second quarter of 2005 we implemented a restructuring plan that includes both cost reduction activities as well the implementation of pricing strategies with an overall goal of moving towards profitability at a lower revenue level. It is difficult at this time to predict with certainty the final scope, timing and costs associated with its implementation and whether the resulting impact of these initiatives will have a further negative impact on our ability to achieve these revenue levels. During the second and third quarters of 2005, the restructuring activities negatively impacted our ability to meet all service level requirements of all customers. While we believe we have responded appropriately and that ultimately the changes will result in an improved service/delivery model for our customers, the risk of loss of revenue or future opportunities with these customers may by affected by this service level performance. In addition, the restructuring has resulted in some employee turnover and the risk exists that we may not be able to replace these employees on a timely basis with qualified and experienced people. In line with our goal, we substantially completed the previously announced plan during our third quarter of 2005.

We also continue to explore additional strategies to lower our overall costs. As part of this effort and after a careful study of our U.S. assembly and distribution infrastructure, we have decided to close our Fremont, California facility, from which we had already eliminated CD/DVD replication capacity in the previously announced restructuring plan. With the Fremont lease up for renewal in early 2006, we decided to take the additional step of closing the facility and we will be transferring assembly, fulfillment and customer care activities from this facility to other Zomax operations. The restructuring activity surrounding our closure of the Fremont facility will result in net restructuring charges of approximately $1.8 million for employee liabilities, retention, equipment transfers and write-offs and other site clean up costs. Closure of the facility is expected to be completed in early 2006. We believe that the savings from this action should result in a payback of these one time costs in less than six months.

Given the dynamic market conditions in which we operate, our ability to accurately predict revenue and earnings for a given time period is difficult. Any predictions made are subject to management’s interpretation of all of the data available, and may not directly reflect forecasts produced internally within any individual forecast. We have very limited visibility to our customers’ near or long-term demand for our services, and changes by our customers in the content of the products we produce for them can significantly affect our levels of reported revenue and related profits.

In light of the discussion above, we are forecasting revenues in the fourth quarter of 2005 to be in the mid-$40 million range and for our net loss to be approximately ($0.10) per share including restructuring charges related to our Fremont site closure, or a loss of approximately ($0.05) to ($0.06) per share excluding these charges. Based on this guidance for fourth quarter profitability and until there is evidence to support the reversal of our deferred tax valuation allowance, we will incur taxes only related to our Canada operations. Accordingly, our losses above do not include any related tax benefits.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words or expressions. Our forward-looking statements represent our expectations or beliefs concerning future events, including but not limited to the following:

• our ability to successfully execute our plans to achieve our goal of profitability at orlower nearrevenue the levels ofthat quarterlywhat revenue we experienced in the first twothree quarters of 2005;

• our belief that subsequent to our plan to achieve profitability at lower levels of revenue, opportunities will exist to allow us to achieve top line growth through both internal efforts and acquisition activities;

• the negative effect on our revenues of one of our largerPC customerOEM customers’s continuing initiativeinitiatives to eliminate certain recovery CDs and print material from some of their new PC shipments and the opportunity to offset some of this effect with new business from thisthose customercustomers;

• the effect on our business of communication from one of our larger customers regarding their intention to award certain business currently provided by us to one of our competitors, and the possible lack of permanency of that decision and/or changes in their implementation timeline;22

• the strengtheffect ofon our customerbusiness relationshipsof andcommunication relatedfrom impactone onof our abilitylarger customers regarding their intention to retainaward suchcertain customersbusiness incurrently provided by us to one of our competitors, and the futurepossible lack of permanency of that decision;

• our ability to execute our restructuring activities and that our existing customers will not be negatively impacted due to potential disruption in our ability to provide continuing effective service;

• the impact of polycarbonate price increases on our gross profit margins and our ability to pass these price increases on to our customers;

• our expectationsability aboutto ourmanage abilitynear-term exposure to meetcontinuing theupward challengespolycarbonate ofpricing pressures through our businesssupply agreement with our polycarbonate supplier;

• our expectations about our ability to meet the challenges of our business;

• the growth prospects of supply-chain outsourcing services;

• the impact on our revenues of our ability or willingness to perform our services at prices acceptablerequired toby or mandated by our customers;

• the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs; and

•We caution that any forward-looking statements made by us in this report or in other announcements made by us are qualified by important risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. The risks and uncertainties described below may not be the only ones we face. Additional risks and uncertainties that we do not yet know of or that we currently think are immaterial may also impair our ~~forecast~~business operations. If any of the events or circumstances described in the following listing of risks and uncertainties actually occur, our business, financial condition or results of operations could suffer. The risks and uncertainties described below may be amended, supplemented or superseded from time to time by other reports we file with the SEC in the future. These risks and uncertainties include, without limitation, the risks and uncertainties described in the section captioned “Outlook” above, the changes and volatility in the personal computer hardware and software industry, particularly with respect to the demand for CD and DVD media, from which a significant portion of our revenues are derived; macroeconomic factors that influence the demand for personal computer hardware and ~~net~~software ~~loss~~and ~~per~~the resulting ~~share~~demand for our services; consolidation among our customers or competitors, which could cause disruption in our customer relationships or displacement of us as a services provider to one or more customers; our ability to make the ~~third~~proper strategic choices with respect to pursing profitable growth in our business; increased competition within our industry and increased pricing pressure from our customers; the volatility of polycarbonate prices; our dependence on relatively few customers for a majority of our revenues; fluctuations in our operating results from quarter-to-quarter, which are influenced by many factors outside of ~~2005.~~our control, including variations in the demand for particular services we offer or the content included in the products we produce for our customers; the potential negative impact on our customer relationships as we transition their production to other locations or attempt to execute pricing strategies that are not acceptable to the marketplace, our ability to accurately predict the amount of time and cost required to fully complete our restructuring plan, our ability to retain key employees during and subsequent to the execution of these restructuring activities; turnover in our financial organization, may impact our ability meet all of our reporting and internal control compliance requirements; and other risks and uncertainties, as discussed in detail under the caption “Risks and Uncertainties” in Item 1 of our 2004 Form 10-K captioned as follows:

21• We are dependent on a small number of key customers in the personal computer (PC) hardware and software industries.

• We caution that any forward-looking statements made by us in this report or in other announcements made by us are qualified by important risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. The risks and uncertainties described below may not be ~~the~~able only ones we face. Additional risks and uncertainties that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following listing of risks and uncertainties actually occur, our business, financial condition or results of operations could suffer. The risks and uncertainties described below may be amended, supplemented or superseded from time to ~~time~~effectively bycompete ~~other reports we file with the SEC~~ in ~~the~~an ~~future. These risks and uncertainties include, without limitation, the~~increasingly ~~risks~~competitive and uncertainties described in the section captioned “Outlook” above, the changes and volatility in the personal computer hardware and software industry, particularly with respect to the demand for CD and DVD media, from which a significant portion of our revenues are derived; macroeconomic factors that influence the demand for personal computer hardware and software and the resulting demand for our services; consolidation among our customers or competitors, which could cause disruption in our customer relationships or displacement of us as a services provider to one or more customers; our ability to make the proper strategic choices with respect to pursing profitable growth in our business; increased competition within our industry and increased pricing pressure from our customers; the volatility of polycarbonate prices; our dependence on relatively few customers for a majority of our revenues; fluctuations in our operating results from quarter-to-quarter, which are influenced by many factors outside of our control, including variations in the demand for particular services we offer or the content included in the products we produce for our customers; the potential negative impact on our customer relationships as we transition their production to other locations or attempt to execute pricing strategies that are not acceptable to the market place, our ability to accurately predict the amount of time and cost required to fully complete our restructuring plan, our ability to retain key employees during and subsequent to the execution of these restructuring activities; turnover in our financial organization, including the announced resignation of our current CFO, may impact our ability meet all of our reporting and internal control compliance requirements; and other risks and uncertainties, as discussed in detail under the caption “Risks and Uncertainties” in Item 1 of our 2004 Form 10-K captioned as follows:environment.

• We ~~are~~have ~~dependent~~experienced onincreasing acosts ~~small~~of ~~number~~polycarbonate, ofa petroleum-based ~~key~~raw ~~customers~~material used in the ~~personal computer~~manufacture ~~(PC)~~of ~~hardware~~optical ~~and software industries~~media.

• We may not be able to ~~effectively~~meet ~~compete~~our incustomers’ anrequirements ~~increasingly~~regarding the ~~competitive~~security ~~environment~~of their intellectual property, inventory and other assets.

• We ~~have~~are ~~experienced~~dependent ~~increasing~~on ~~costs~~revenues from the replication of ~~polycarbonate,~~CD aand DVD media ~~petroleum-based~~which ~~raw~~may ~~material~~be ~~used~~threatened inby the ~~manufacture~~development and rate of ~~optical~~market acceptance of new media storage techniques or other electronic media technologies.

• We ~~may~~concluded ~~not~~that beour ~~able~~internal tocontrols ~~meet~~over ~~our~~financial ~~customers’~~reporting ~~requirements~~were not ~~regarding~~operating ~~the security~~effectively as of ~~their~~December 31, ~~intellectual~~2004. The ~~property,~~circumstances ~~inventory~~giving rise ~~and~~to such conclusion may be the subject of governmental investigations or other ~~assets~~proceedings.

• We undertake no obligation to update or revise any forward-looking statements we make in this report due to new information or future events. Investors are ~~dependent~~advised to consult any further disclosures we make on ~~revenues~~this subject ~~from~~in ~~the~~our ~~replication~~filings ofwith CDthe Securities and ~~DVD~~Exchange ~~media~~Commission, especially ~~which~~on ~~may~~Forms be10-K, ~~threatened~~10-Q byand ~~the~~8-K, ~~development~~in ~~and~~which ~~rate~~we ofdiscuss ~~market~~in ~~acceptance~~more ofdetail ~~new~~various ~~media~~important ~~storage~~factors ~~techniques~~that orcould ~~other~~cause ~~electronic~~actual ~~media~~results ~~technologies~~to differ from expected or historical results.

• We concluded that our internal controls over financial reporting were not operating effectively as of December 31, 2004. The circumstances giving rise to such conclusion may be the subject of governmental investigations or other proceedings.23

We undertake no obligation to update or revise any forward-looking statements we make in this report due to new information or future events. Investors are advised to consult any further disclosures we make on this subject in our filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historical results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency. A portion of our operations is located in Ireland and Canada. The financial results of these operations are translated to US dollars at current exchange rates. Changes in exchange rates between periods can affect the comparability of results reported in US dollars.

In addition to these translation gains and losses, we also incur transaction gains and losses which are reflected in our financial statements. A majority of the sales from our Canadian operations, and a large portion of the related costs, are denominated in US dollars. As a result, ~~we have limited~~ our exposure to the Canadian currency is limited to local currency denominated expenses. The majority of sales revenues and related costs in our Ireland operations are denominated in Euros. Foreign currency transaction gains and losses historically have not been material to our results of operations or our financial condition. However, we anticipate we will continue to incur exchange gains and losses from foreign operations in the future. These gains and losses may be significant depending on factors such as changes in foreign currency or weak economic conditions in foreign markets. In addition, demand for our products and services can be impacted by the value primarily of the U.S. dollar relative to other currencies.

significant depending on factors such as changes in foreign currency or weak economic conditions in foreign markets. In addition, demand for our products and services can be impacted by the value primarily of the U.S. dollar relative to other currencies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). In light of the material weakness in the Company’s internal control over financial reporting in the supervision and oversight of accounting personnel at the Company’s Ireland subsidiary, Zomax, Ltd. (“Zomax Ireland”) as discussed below and as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the chief executive officer and chief financial officer concluded that, as of ~~July 1~~September 30, 2005, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

(b) Change in internal control over financial reporting

The Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and the board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of December 31, 2004, the Company’s assessment of the effectiveness of its internal control over financial reporting identified a material weakness in the Company’s internal control over financial reporting in the supervision and oversight of accounting personnel at the Company’s Ireland subsidiary, Zomax, Ltd. (“Zomax Ireland”). Specifically, there was insufficient review of journal entries and account reconciliations prepared by Zomax Ireland accounting personnel, and Company accounting policies communicated to Zomax Ireland were not followed. The aforementioned material weakness in internal control permitted (i) the intentional recording of incorrect accounting entries by local accounting personnel, (ii) the inadequate preparation and review of certain balance sheet account reconciliations, and (iii) failure of Zomax Ireland to follow certain Company accounting policies. The Company is fully cooperating in an informal inquiry by the SEC into these activities.

During the first ~~six~~nine months of 2005, the Company has implemented the following remediation steps to address the material weakness discussed above:

• The former Ireland financial controller has been replaced by an individual with appropriate experience and qualifications.

• Our corporate ~~operations~~ controller has been assigned to directly oversee and implement changes to the monthly financial close process in Zomax Ireland. These changes include the implementation of appropriate journal entry reviews, balance sheet reconciliation processes and procedures to ensure Company policies are followed.

• We have established owners of all primary business processes across our global operations who are responsible for ensuring formalized policies and procedures are created and that employees are properly trained on these policies. This training will emphasize employee’s general understanding of our control system with particular attention to their responsibility for the integrity of the control procedures within their respective operations.

Additionally, the Company has begun to implement the following remediation steps to further address the material weakness in the Company’s internal control over financial reporting discussed above:

• We are evaluating the establishment of an internal audit program for possible implementation in 2006.

• We With a new chief financial officer recently appointed, we continue to assess our global financial organization structure for possible staffing and structural changes. The assessment is focused toward ~~better~~ better positioning the organizations’ ability to supervise and oversee the ~~performance~~ performance and compliance of all aspects of the financial reporting and ~~control~~ control requirements necessary for support of the Company.

The Company believes that, once fully implemented, these remediation steps will correct the material weakness discussed above.

There were no other changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

2425

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 5 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on
Form 10-Q.

In addition to the proceedings described in Item 1 of Part I of this Quarterly Report, we are a party to various other suits, claims and proceedings arising in the ordinary course of our business and we intend to vigorously defend them. The amount of monetary liability, if any, resulting from an adverse outcome in any of such suits, proceedings and claims in which we are a defendant cannot be determined at this time. However, in the opinion of our management, the aggregate amount of liability under these other suits, proceedings and claims will not have a material adverse effect on our consolidated results of operations, financial condition or cash flows.

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

(a) Our annual meeting was held on May 24, 2005.

(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s nominees as listed in the proxy statement and all of such nominees were elected.

The shareholders set the number of directors at six (6) by electing six (6) directors. The following persons were elected to serve as directors on our Board until the next annual meeting of shareholders with the following votes:

Nominees	Votes For	Votes Withheld
Anthony Angelini	29,320,981	358,258
Janice Ozzello Wilcox	29,323,836	355,403
Robert Ezrilov	29,316,059	363,180
Howard P. Liszt	29,315,759	363,480
Paul F. Foley	29,315,548	363,691
Joseph J. Lahti	29,310,659	368,580

The shareholders ratified the appointment of Deloitte & Touche, LLP as our independent registered public accounting firm for the fiscal year ending December 30, 2005, by a vote of 29,502,675 shares in favor, with 109,073 shares voted against and 67,491 shares abstaining.

ITEM 6. EXHIBITS

The following exhibits are filed with this Report:

10.1	~~Stipulation and Settlement Agreement dated April 27, 2005~~	Authorized Replicator Agreement with Microsoft dated July 1, 2005
10.2	Separation Agreement and Release dated June 14, 2005 with Robert J. Rueckl
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

2526

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 10, 2005		ZOMAX INCORPORATED
Date: November 9, 2005		ZOMAX INCORPORATED
	By:	/s/ Anthony Angelini
		Anthony Angelini, President and Chief Executive Officer (principal executive officer)
	By:	/s/ ~~Robert~~Richard JD. ~~Rueckl~~Barnes
		Robert J. Rueckl, Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
		Richard D. Barnes, Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

2627

EXHIBIT INDEX

ZOMAX INCORPORATED

FORM 10-Q FOR QUARTER ENDED ~~JULY~~SEPTEMBER 130, 2005

Exhibit Number		Description
10.1		Stipulation and Settlement Agreement dated April 27, 2005
10.1*		Authorized Replicator Agreement with Microsoft dated July 1, 2005
10.2		Separation Agreement and Release dated June 14, 2005 with Robert J. Rueckl
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

27* Portions of this Exhibit 10.1 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)

ZOMAX INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

(In thousands, except per share data)

Restatement of Financial Statements

Introduction and Overview

• our ability to successfully execute our plans to achieve our goal of profitability at orlower nearrevenue the levels ofthat quarterlywhat revenue we experienced in the first twothree quarters of 2005;

• our belief that subsequent to our plan to achieve profitability at lower levels of revenue, opportunities will exist to allow us to achieve top line growth through both internal efforts and acquisition activities;

• the strength of our customer relationships, the related impact on our ability to retain such customers and our ability to develop new customers in the future;

• our ability to execute our restructuring activities and that our existing customers will not be negatively impacted due to potential disruption in our ability to provide continuing effective service;

• the impact of polycarbonate price increases on our gross profit margins and our ability to pass these price increases on to our customers;

• our expectationsability aboutto ourmanage abilitynear-term exposure to meetcontinuing theupward challengespolycarbonate ofpricing pressures through our businesssupply agreement with our polycarbonate supplier;

• the growth prospects of supply-chain outsourcing services;

• the impact on our revenues of our ability or willingness to perform our services at prices acceptablerequired toby or mandated by our customers;

• the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs; and

• our abilityforecast toof managerevenues near-termand exposurenet toloss continuingper upwardshare polycarbonatein pricingthe pressuresfourth throughquarter ourof supply agreement with our polycarbonate supplier; and2005.

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