VISIONEER INC, 10-K405/A, 1997-09-02

VISIONEER INC
10-K405/A, 1997-09-02
COMPUTER PERIPHERAL EQUIPMENT, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K/A-2

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996 COMMISSION FILE NUMBER 0-27038

VISIONEER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>

34800 CAMPUS DRIVE
FREMONT, CA 94555
(510) 608-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.001
par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $49,605,711 as of July 31, 1997, based upon the
closing sale price on the NASDAQ National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares of the registrant's Common Stock, $0.001 par value,
outstanding as of July 31, 1997 was 19,499,020.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

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PART 1

ITEM 1. BUSINESS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS DOCUMENT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING THE RISKS AND UNCERTAINTIES DISCUSSED BELOW.

GENERAL

Visioneer designs, develops and markets intelligent paper input and
management systems and software which facilitate the imaging, manipulation,
distribution and storage of paper-based information on personal computers,
multi-function-peripherals and digital cameras. The Company's PaperPort products
provide an easy-to-use, fast and cost-effective solution for document and image
input and management at the desktop. The Company's products leverage peripherals
and applications resident on the computer and transform personal computers into
multi-function, paper-to-digital information systems for the electronic faxing,
filing, editing, printing and sending of paper-based documents via e-mail,
on-line information services and the Internet.

The market for paper input systems, and in particular for the Company's
PaperPort products, is relatively new and rapidly evolving. The Company
currently derives substantially all of its revenues from its PaperPort products
and expects that revenues from these products will continue to account for
substantially all of its revenues for the foreseeable future. Broad market
acceptance of PaperPort products is critical to the Company's future success.
This success will depend in part, on the ability of the Company, its
distributors, and OEM partners to convince end users to adopt paper input
systems for the desktop, and to educate end users about the benefits of the
Company's products. This success will also depend in part on the Company's
ability to offer competitive hardware and software features in its PaperPort
products, including color scanning capabilities, in a limited period of time.
See "-- Competition." The success of the Company's PaperPort products, which
primarily are comprised of the PaperPort scanners integrated with PaperPort
Software, will also depend in part on the Company's ability to convince
developers and manufacturers of complementary third-party software, peripheral
and accessory products to make their products PaperPort software compatible by
using the PaperPort application programming interface (API) as a software
interface for linking, attaching and integrating digitized documents to their
software applications and peripherals. See "-- Visioneer Products -- The
PaperPort API and Image Exchange Formats." In this regard, the Company seeks to
establish the PaperPort API as the industry-accepted software interface for
paper input and digitized document management through promotion of its PaperPort
API as an open development environment. There can be no assurance that the
market for paper input systems will develop, that the Company's products will be
widely accepted or will obtain any particular level of market share, that the
Company will be able to offer in a timely manner competitive hardware and
software features that meet market demand, or that third-party developers and
manufacturers will develop PaperPort-compatible applications using the PaperPort
API. The failure of any of these events to occur could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Item 7 -- Management's Discussion and Analysis of Results of
Operations -- Overview" and "-- Total Net Revenues."

VISIONEER PRODUCTS

The Company has pioneered a new category of intelligent paper input systems
for use with personal computers. These systems bridge the separation between
paper-based and digital information by seamlessly integrating the input,
manipulation, management, distribution and storage of paper-based information
and images. Visioneer provides an easy-to-use, fast and cost-effective solution
for personal document input and management at the desktop, which reduces the
need for redundant office equipment. The speed, convenience and advanced
software capabilities of the Visioneer solution also create new uses for
paper-based documents, such as electronic filing and attaching paper-based
documents to e-mail messages.

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The Company's PaperPort products provide a compact, integrated hardware and
software solution at the desktop. PaperPort's high-performance scanners
intelligently automate the paper input process by performing multiple operating
functions without user intervention and provide advantages in scanning speed,
image quality and image orientation. PaperPort software provides a user-friendly
interface and application-rich environment for performing numerous annotation
and image manipulation functions. The Company has established an open
development environment and offers direct links to more than 150 popular
software applications and peripherals. Visioneer's paper input system leverages
peripherals and third-party applications resident on the computer to provide
enhanced faxing, electronic filing, business card reading, personal copying,
convenient scanning and text editing, and also serves as a means of attaching
paper documents to e-mail messages.

Product Description

The PaperPort is an integrated hardware and software solution for paper
input and digitized document management that is easy to use, fast and
cost-effective. The PaperPort Vx and mx are small in size (12" X 2.5" X 3.75")
and are designed to operate on the desktop between the keyboard and monitor. The
PaperPort ix, a scanning keyboard, is a scanner fully integrated into a
keyboard. PaperPorts are designed to handle multiple sizes, shapes and textures
of paper, including business cards, newspaper articles, business memos, receipts
and photographs, and a broad range of paper types. The Company's current line of
PaperPort scanners process up to 8-bit, 400 dpi grayscale images, offering
high-quality, high-resolution images.

Visioneer's PaperPort products incorporate proprietary technology to
provide ease of use. Visioneer's AnyPort technology allows users to connect the
PaperPort hardware component directly to a serial or parallel port on a
Windows-based personal computer, or a serial or SCSI port on a Macintosh-based
computer, without the need for add-on hardware cards. Similarly, the PaperPort
utilizes Visioneer's Paper-Driven technology to automate the paper input process
by simultaneously starting the PaperPort when the user inserts a piece of paper,
launching the integrated PaperPort software and digitizing the image for viewing
on the computer screen. The PaperPort completes the paper input process at
speeds of up to two seconds per page and an average scanning time of six seconds
per page.

PaperPort ix for Windows was introduced in June 1996, and is compatible
with Windows 3.1 and Windows 95. The Company's fourth-generation PaperPort
product, PaperPort mx, was introduced in January 1997. PaperPort mx for Windows
is compatible with Windows 3.1, Windows 95 and Windows NT. PaperPort Vx for
Macintosh, introduced in October 1995, is compatible with Macintosh computers
with four megabytes of RAM and is accelerated for the PowerPC processor found in
advanced Macintosh computers. As of February 15, 1997, PaperPort ix sells for an
average retail price of $249, PaperPort mx sells for an average price of $269,
and PaperPort Vx for Macintosh, which includes a SCSI adapter for improved
performance, sells for an average retail price of $299 in the United States.
Prices for the Company's products in international markets vary by country and
are generally higher than the average retail price for such products in the
United States.

PaperPort Deluxe

In November 1996, the Company previewed PaperPort Deluxe Software at Comdex
in Las Vegas. PaperPort Deluxe Software offers many new paper management
features and is compatible with the Windows 95 and Windows NT operating systems.
It communicates with most TWAIN-compliant input devices. PaperPort Deluxe
Software turns many scanners, multi-function-peripherals and digital cameras
into a versatile solution for sending, filing, copying and finding paper and
photographs. Key features not incorporated into prior image-scanning software
include SimpleSearch, which enables the user to perform a text search and
retrieval on all scanned images; an advanced filing system which allows for
color-coded folders and nested folders; and ScanDirect, which enables direct
scanning into linked applications. In addition, PaperPort Deluxe Software comes
bundled with several software applications, including Visioneer's proprietary
FormTyper, which allows for easy filling in of forms on-screen;
QuickenExpensAble SE, from Intuit Software, for scanning and organizing receipts
within expense reports; Netscape Navigator 2.0.1, for easy Internet access; and
Netcentric FaxStorm, for sending scanned documents as e-mail messages via the
Internet

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to be received by traditional fax machines. Single-user PaperPort Deluxe
Software and multi-user software volume license agreements targeted at corporate
accounts commenced shipping at the end of January 1997. Single-user PaperPort
Deluxe Software sell for a suggested retail price of $99 in the United States.

The PaperPort API and Image Exchange Formats

The Company seeks to establish the PaperPort API as an industry-accepted
software interface for linking, attaching and integrating paper-based documents
with complementary third-party software applications, peripherals and
accessories. The Company independently develops direct links to software
applications in strategic categories, including word processing, e-mailing,
electronic faxing, and Optical Character Recognition (OCR) software. In
addition, the Company actively licenses the PaperPort API to many software and
peripheral companies.

New Products, Product Upgrades and Extensions

The Company intends to design and develop products to extend the life and
usability of its products for its installed base through the development of
software upgrades and add-on accessory products. The Company plans to offer
these upgrades to its installed base as well as that of its OEM partners. The
Company also plans to incorporate new software features into its PaperPort
software and develop links to additional third-party software applications. The
Company also plans to expand its product line in 1997 through the development of
alternative form factors comprising new hardware shapes and sizes, enhanced
imaging capabilities, and other features and functionality. The Company believes
that the development of these and other products and features is essential to
its success. Accordingly, the Company will continue to make significant
investments in the research and development of new products. Such expenses may
fluctuate from quarter to quarter depending on a wide range of factors including
the status of various development projects.

TECHNOLOGY

The Company's PaperPort products incorporate a number of advanced
technologies designed to simplify the process of installation, paper input,
image manipulation, digitized document management and integration with resident
applications and peripherals.

The Company has devoted substantial resources to developing hardware and
software technologies to create an easy-to-use, integrated system for individual
computer users. The Company's system-design approach has driven the development
of several integration, intelligent automation and image manipulation
technologies within the software. The "Paper-Driven" technology automates the
functions of turning on the system, launching the software and placing the
digitized document into the PaperPort application. With each launch, software
applications on the hard drive are recognized, and linking icons to applications
supported by the PaperPort API are placed on the desktop. In addition,
"AutoLaunch" technology allows users to launch with one keystroke digitized
documents directly into third-party software applications and peripherals
already installed on the user's personal computer. The PaperPort software
locates these paper-enabled third-party software applications and peripherals
and builds drag and drop buttons for one-button distribution of these digitized
documents.

Using the PaperPort API, developers can create PaperPort links to expedite
the intelligent transfer of documents between the PaperPort software and their
applications. These functions allow developers to automate certain tasks such as
user interface management, file conversion, software initialization, object
control and OCR.

MARKETING, SALES AND DISTRIBUTION

The primary market for the Company's products is comprised of computer
users who require access to both paper and electronic information. The SOHO
market, which currently represents a significant majority of the Company's
branded business, has been targeted in the past by the Company because mobile
and home-based professionals require office-like productivity without access to
copiers, fax machines and scanners. However, this market has within the last
year been increasingly attracted to scanners offering color imaging

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capability. Because the Company's current products are limited to black and
white imaging, the Company began focusing its most recent sales and marketing
efforts on the corporate and legal markets. These markets are less sensitive to
color, which demand larger storage requirements, and are more interested in
business productivity paper management systems.

The Company has hired a staff of regional marketing managers whose primary
objective is to penetrate key corporate accounts. To service these corporate
accounts, the Company expanded its corporate reseller channels, authorizing
Inacom Corporation and Gateway 2000, Inc. as direct resellers of the PaperPort
product line. In 1997, the Company expects to target additional corporate
resellers as well as corporate software resellers to sell PaperPort and
PaperPort Software. The Company has also made available site licenses for its
software.

The Company builds awareness of its integrated paper input solutions
through targeted advertising, aggressive public relations efforts and other
marketing activities. The Company believes that its efforts have resulted in
increased brand perception of the Visioneer and PaperPort names within its
target markets and with selected resellers. The Company also promotes its
product line through retail merchandising efforts.

To date, the Company has derived substantially all of its branded revenues
from sales through its independent distributors. Although the Company has
established strategic software OEM partnerships, the Company expects that sales
through its independent distributors will continue to account for a substantial
portion of its revenues for the foreseeable future. The Company currently
maintains distribution agreements with Ingram Micro Inc. ("Ingram"), Best Buy
Company, Inc. ("Best Buy"), Tech Data Corporation ("Tech Data") and Merisel,
Inc. ("Merisel") for distribution of its products in North America. Sales to
these independent distributors accounted for 52% of the Company's total net
revenues in 1996 in the aggregate, 37%, 6%, 5% and 4%, respectively, as compared
to 78% in 1995. The Company believes these percentages may further decrease in
the future because of its efforts to expand its software OEM partnerships and
its distribution channels domestically and internationally. The Company's
agreements with its distributors are not exclusive, and each of the Company's
distributors can cease marketing the Company's products with limited notice and
with little or no penalty. There can be no assurance that the Company's
independent distributors will continue to offer the Company's products or that
the Company will be able to recruit additional or replacement distributors. The
loss of one or more of the Company's major distributors would have a material
adverse effect on the Company's business, operating results and financial
condition. Many of the Company's distributors offer competitive products. There
can be no assurance that the Company's distributors will give priority to the
marketing of the Company's products as compared to competitor's products. Any
reduction or delay in sales of the Company's products by its distributors would
have a material adverse effect on the Company's business, operating results and
financial condition.

The Company grants its distributors price protection and certain rights of
return with respect to products purchased by them. The Company accrues for
expected returns and anticipated price reductions in amounts that the Company
believes are reasonable. However, there can be no assurance that these accruals
will be sufficient or that any future returns or price protection charges will
not have a material adverse effect on the Company's business and operating
results, especially in light of the rapid product obsolescence which often
occurs during product transitions. The short product life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors, or other factors affecting the paper input market could result in
significant product returns. These risks are especially true in respect to the
Company's ability to successfully manage the introduction of its new products in
1997. In addition, there can be no assurance that new product introductions by
competitors or other market factors will not require the Company to reduce
prices in a manner or at a time or rate which gives rise to significant price
protection charges and which would have a material adverse effect on the
Company's operation results. Any product returns or price protection charges in
excess of recorded allowances would have a material adverse effect on the
Company's business, operating results and financial condition. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Total Net Revenues."

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A component of the Company's strategy is its expansion into international
markets and in particular, into the United Kingdom and Japan. Net revenues from
distributors outside North America represented approximately 13% of net revenues
in 1996 as compared to 6% in 1995. The Company plans to expand its international
sales by establishing a more extensive network of international distributors,
entering into agreements with third parties to provide customer service and
support internationally, and developing versions of its products suitable to the
market requirements, such as different languages, of particular foreign
countries. The Company has limited experience in developing international
versions of its products and marketing, distributing, servicing and supporting
such products. There can be no assurance that the Company will be able to
develop new or additional versions of its existing products or successfully
market, sell, deliver, service and support its products in international
markets. In addition, there are certain risks inherent in doing business
internationally, such as unexpected changes in regulatory requirements, import
and export duties and restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
uncertainties in connection with collecting accounts receivable, political
instability, fluctuations in currency exchange rates, logistical difficulties in
managing multinational operations, seasonal reductions in business activity
during summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, including the inability of the Company to
recover withholding taxes, any of which could adversely impact the success of
the Company's international operations. There can be no assurance that one or
more of these factors will not have a material adverse effect on the Company's
international operations and, consequently, on the Company's business, operating
results and financial condition.

OEM RELATIONSHIPS

The Company has established a limited number of strategic OEM relationships
in order to promote its Visioneer and PaperPort brand names, drive industry
standardization and open new markets for its products. In November 1994, the
Company entered into its first OEM agreement with Hewlett-Packard, pursuant to
which Hewlett-Packard included a version of the PaperPort-branded software as
the standard user-interface software for Hewlett-Packard's then current flatbed
scanner product line, the ScanJet 4 series, and it is distributing a modified
PaperPort product under Hewlett-Packard's brand name, the Hewlett-Packard
ScanJet 4s. Pursuant to the agreement, Hewlett-Packard placed purchase orders
directly with Flextronics Technologies, Inc. ("Flextronics"). Hewlett-Packard
made fixed, per unit royalty payments to Visioneer based on the number of
ScanJet 4s products and other ScanJet 4 products bundled with PaperPort software
shipped by Flextronics to Hewlett-Packard. To date, sales of the ScanJet 4s have
been below the Company's expectations. In addition, in April 1996, the Company
was informed by Hewlett-Packard that it did not intend to purchase any
additional ScanJet 4s products.

On August 14, 1996, the Company entered into a new three year agreement
with Hewlett-Packard to develop and supply additional software products on a
non-exclusive basis to Hewlett-Packard. Under this agreement, Hewlett-Packard
was granted the royalty-bearing right to distribute certain versions of the
Company's PaperPort software with a variety of scanner products, including
existing flatbed scanners and network scanners. Hewlett-Packard is not obligated
under the agreement to distribute Visioneer software; however, Hewlett-Packard
is required to make certain minimum royalty payments to the Company through the
third quarter of 1997. In the fourth quarter of 1996, Hewlett-Packard requested
that, beginning in the second half of 1997, the Company include in its OEM
software offering many of the same features currently included in the Company's
stand-alone product, PaperPort Deluxe Software. However, this is inconsistent
with the Company's general strategy of building a strong stand-alone software
business, so the Company was unable to comply with Hewlett-Packard's request.
Accordingly, Hewlett-Packard has informed the Company that it will work with
another company to develop products containing certain of the requested
capabilities by the end of 1997. The Company expects that Hewlett-Packard will
develop, market and manufacture products, including such new products to be
developed by another company, that will compete with the Company's products.
Hewlett-Packard also stated that this decision will not impact scanners that
Hewlett-Packard already ships or its obligations under the agreement recently
signed with the Company, and the Company will continue to supply a version of
Limited Edition PaperPort software technology on a non-exclusive basis for
Hewlett-Packard scanners under that agreement; however, Hewlett-Packard is not
obligated to distribute

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these products. There can be no assurance that Hewlett-Packard will continue to
market and distribute Visioneer software under this agreement.

In June 1995, the Company entered into an agreement with Compaq pursuant to
which the Company and Compaq developed a scanner keyboard, incorporating the
Company's technology (the "Compaq Agreement"), which is a Compaq-branded
product. Compaq introduced the scanner keyboard as a standard feature on the
Compaq Presario 7232 PC in February 1996, and also sells it separately as an
option for use with other Compaq PCs or any other industry-standard PC with the
minimum hardware requirements. Compaq includes a version of the PaperPort
branded software on each personal computer system which it sells with the
scanner keyboard or bundled with the scanner keyboard which it sells separately.
Pursuant to the Compaq Agreement, the Company was responsible for the cost of
development of the scanner keyboard and retained ownership rights to the scanner
keyboard. In addition, Compaq places purchase orders on NMB Technologies, Inc.
("NMB") to manufacturer its scanner keyboard, and subsequently makes fixed, per
unit royalty payments to Visioneer based on the number of scanner keyboards
shipped by Compaq to its customers. The royalty payments vary depending on
whether the scanner keyboards are integrated with Compaq's personal computers or
sold as an option. To date, sales of the Compaq scanner keyboard products have
been below the Company's expectations. In the fourth quarter of 1996, the
Company was notified by Compaq of its intention to discontinue production of its
scanner keyboard products. In addition, Compaq chose to aggressively lower the
price on their scanner keyboard products in the fourth quarter of 1996 in order
to sell through its scanner keyboard inventory. As a result of Compaq's pricing
strategy and the slow market acceptance of the Company's PaperPort ix scanner,
sales of PaperPort ix was adversely effected in the fourth quarter.

The Company has focused its recent OEM activities on licensing software to
companies with whom it does not compete with. On November 1996, the Company and
Xerox Corporation ("Xerox") entered into a non-exclusive agreement pursuant to
which the Company has agreed to license Xerox the royalty-bearing right to copy
and distribute certain versions of Visioneer PaperPort software programs with
the Xerox Document Centre System (DCS) product line of digital network fax and
copier machines.

The Company is pursuing and may enter into additional OEM agreements to
distribute the Company's hardware and software products. However, there are
certain risks associated with such relationships, including whether sufficient
priority will be given by such OEM partners to marketing the Company's products
and whether such OEM partners will continue to offer the Company's products.
Such risks were experienced by the Company during 1996. The Company believes
that sales of the Hewlett-Packard ScanJet 4s products and Compaq's scanner
keyboards were below expectations because these OEM partners did not concentrate
enough sales and marketing effort to build product awareness. The loss of one or
more of the Company's OEM partners or the inability of the Company to enter into
new OEM partnerships could have a material adverse effect on the Company's
business, operating results and financial condition. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview".

RESEARCH AND DEVELOPMENT

The Company's research and development team is located at the Company's
headquarters in Fremont, California, and, as of December 31, 1996, employed 51
full-time and 19 contract software and hardware design engineers, technicians
and support staff. The primary activities of these employees during 1996 was the
development of PaperPort Deluxe Software, the design and development of new form
factors and enhanced imaging capabilities, enhancement of existing products,
product testing and technical documentation development.

A key element of the Company's strategy is to integrate its hardware and
software systems and develop an intelligent user interface. To achieve this,
software development activities play a significant role in designing a
user-friendly interface, incorporating advanced user features and developing an
environment which is open to third-party developers. To accomplish this task,
approximately 70% of the Company's engineering resources are devoted to software
development and design.

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The hardware engineering group includes engineers with significant design
experience with ASICs, digital image processing, compression techniques and
intelligent hardware-to-software synchronization. Hardware design engineers use
a variety of state-of-the-art CAD tools, including high-level design languages
such as Verilog, automatic logic synthesis using Synopsys and hardware emulation
using Quickturn Design Systems, Inc.'s products.

MANUFACTURING

As a part of a cost reduction effort, in the latter part of 1996, the
Company transitioned the manufacturing of its PaperPort Vx line from
Flextronics, its independent contract manufacturer in San Jose, California, to
Flextronics' operations in Xi Xiang, China. The Company places purchase orders
on Flextronics for finished PaperPort Vx products and relies on Flextronics for
materials procurement, assembly, system integration, testing, quality assurance
and shipment of product to the Company's distributors. The Company expects that
it will continue to rely in the foreseeable future on Flextronics to manufacture
at least one of the Company's product lines. As of February 21, 1997, there was
no formal manufacturing agreement between Flextronics' operations in Xi Xiang,
China and the Company. There can be no assurance that a final agreement can be
reached, which may result in interruptions in or discontinuations of production
of the Company's product lines.

In the second quarter of 1996, the Company began procuring its new scanning
keyboard, the PaperPort ix, with NMB Technologies, Inc. ("NMB") in Bangkok
Thailand, on a purchase order basis. As of February 21, 1997, there was no
formal agreement between NMB and the Company. There can be no assurance that a
formalized agreement will be reached, which may result in an interruption in or
discontinuation of production capacity for the Company's products. In such
event, the Company's business, operating results and financial condition may be
adversely effected.

Commencement of production of new or existing products at new or existing
facilities involves certain start-up risks, such as those associated with the
procurement of materials and training of production personnel, which may result
in production delays. In the process of integrating the various hardware and
software components and commencing manufacture of PaperPort Vx in China and
PaperPort ix in Thailand the Company's subcontractors experienced certain
performance and assembly problems, material procurement delays, and various
other start-up costs characteristic of the manufacture of new products. In
addition, initial production delays caused the Company to incur freight
expediting costs for finished goods to its warehouses and customers during the
quarter ended December 31, 1996. Although most of these issues have been
resolved, the additional costs have negatively impacted the Company's operating
results for 1996, and will not allow the Company to recognize any net cost
savings from moving the manufacture of PaperPort Vx to China until sometime in
the first half of 1997. There can be no assurance that the Company will not
experience additional problems or production delays. Any performance problems or
production delays could have a material adverse effect on the Company's
business, operating results and financial condition.

Inherent in the electronics business are product returns from distribution.
There are primarily two reasons for the return of PaperPort products. The
majority of the returns are from end-users who are dissatisfied with the
experience of the product and as a result take advantage of the Company's 30 day
money back guarantee. A much smaller portion of the returns from distribution
are a result of an improperly functioning product. In either case, once the box
has been opened, the Company is unable to sell these returned units as new. All
returned product need to be screened, retested, and if need be, repaired to
original factory new specifications, before they can be sold as factory
reconditioned product. The Company has established a reserve to rework this
product; however, in the event that the Company's contract manufacturers are
unable to process these returned products in a timely manor, the Company may
need to increase its reserves to compensate for the diminishing value of the
inventory.

Products as complex as those offered by the Company may contain certain
component, ASIC, other hardware, firmware, software or mechanical errors which
are detected only after commencement of product shipments. The existence of any
such errors could result in decreased shipments of products for an extended
period of time which, in turn, could cause the loss of revenues and market
acceptance of the Company's

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products, and the loss of credibility with distributors, OEM partners and end
user customers. In addition, such errors could result in additional warranty
expense and diversion of engineering and other resources.

The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's success will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion new products and enhancements to its existing products that meet
changing customer requirements and emerging industry standards. The development
of new, technologically-advanced products and product enhancements is a complex
and uncertain process requiring high levels of innovation, as well as the
accurate anticipation of technological and market trends. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products and product enhancements successfully, that any
new products or product enhancements will gain market acceptance, or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or product announcements by competitors. New product
announcements by the Company could cause customers to defer purchasing existing
products or cause distributors to claim price protection credits or return such
products to the Company. Any of these events could have a material adverse
effect on the Company's business, operating results and financial condition.

There can be no assurance that current or future independent contract
manufacturers will be able to meet the Company's requirements for manufactured
products. Any inability to increase manufacturing capacity as required could
have a material adverse effect on the Company's business, operating results and
financial condition. Furthermore, the manufacture of the Company's products
currently represents and is expected to continue to represent a relatively small
percentage of total revenues of Flextronics and NMB, which may limit the
Company's ability to influence such manufacturing operations. In addition, the
current purchase order arrangements with Flextronics and NMB would allow these
contract manufacturers to terminate the arrangements by not accepting the
Company's purchase orders. The unanticipated loss of any of the Company's
contract manufacturers could cause delays in the Company's ability to fulfill
orders while the Company identifies a replacement manufacturer. Such an event
would have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company is continually
exploring alternative manufacturing sources, including potential sources for new
products. However, there can be no assurance that such alternative sources can
be successfully developed.

The Company's manufacturing policies are designed to respond to rapid
changes in customer demand, but may in certain instances result in excess or
insufficient inventory, or inappropriate mix of component inventory, if orders
do not match forecasts. To the extent the Company has excess inventories, the
Company may experience inventory write-downs or may have to lower prices of its
products which would result in substantial price protection charges and a
negative impact on gross margins. To the extent the Company has insufficient
inventory, the Company may be materially adversely impacted by the loss of one
or more of the Company's distribution and reseller relationships and the
inability of the Company to obtain market acceptance of its products or other
circumstances.

Certain key components used in the manufacture of the Company's products
are currently purchased by the Company or its contract manufacturer from single
or limited sources that specialize in such components. At present,
single-sourced components include the Company's ASIC, certain other integrated
circuits and components, printed circuit boards, mechanical assemblies, such as
the contact image sensor array (CIS), custom-molded plastics, power supplies and
cables. Lead times for materials and components ordered by the Company or its
contract manufacturers vary significantly and depend on factors such as the
specific supplier, contract terms and demand for a component at a given time.
The Company uses a rolling 180-day forecast based on anticipated orders from its
distributors to determine its finished goods inventory and manufacturing
requirements, and the level of safety stock of key long lead time components. If
orders do not match forecasts, the Company may have excess or inadequate
inventory of certain materials and components. To the extent the Company has
excess inventory of components, the Company's results of operations may be
adversely impacted. In this regard, the Company took charges to write-down
excess inventories associated with the Company's lower than expected PaperPort
ix sales and product transitions. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview and Total
Cost of Revenues." In addition, certain electronic components in general are
currently in short supply.

8
<PAGE> 10

Although the Company believes that it will be able to secure additional or
replacement production capacity for specialized components, such capacity may
not be available at acceptable prices in a timely manner. Any shortages or
interruptions in the supply of any of the components used in the Company's
products, or the inability of the Company to procure these components from
alternate sources at acceptable prices in a timely manner, would have a material
adverse effect on the Company's business, operating results and financial
condition.

COMPETITION

The market for paper input systems is new, intensely competitive and
rapidly evolving. The Company believes that this market is characterized by a
limited period of time during which the Company must be able to provide product
features that meet customer needs at appropriate price levels. If the Company is
unable to provide such products during this limited period of time, it may not
remain competitive with others over the long term. The Company expects that
competition will continue to be intense and may increase from a variety of
sources. The Company's current competitors include manufacturers of scanners and
multi-function peripheral devices and developers of digital image processing
software. Scanner manufacturers include Brother, Epson, Fujitsu,
Hewlett-Packard, Logitech, Microtek, Plustek and Umax, many of which have
recently introduced products comprised of a hardware component bundled with a
software interface which compete with the PaperPort. Certain of these
manufacturers offer products at retail prices that are lower than the current
retail price of PaperPort Vx and ix, and some of these products incorporate
hardware and software features, such as color imaging capabilities, which are
not available with PaperPort Vx and ix. Certain of these features and product
pricing may be important to meeting market demand and may give the manufacturer
of such products a competitive edge. To the extent the Company is unable to
offer products with such features on a timely basis at appropriate prices, the
Company's products will not achieve market acceptance. In addition,
multi-function peripheral device manufacturers such as Brother, Canon,
Hewlett-Packard and Xerox have introduced group-use peripherals and digital
image processing products, some with software interfaces, providing copying,
printing and scanning and such manufacturers may in the future offer paper input
systems which more directly compete with those of the Company. Finally, a number
of software providers including Caere, Delrina, Documagix and Filenet offer
document management and image processing capabilities in their products. These
companies may in the future compete with the Company by developing advanced
software capabilities to be offered in a bundled hardware and software solution.
Furthermore, the Company's OEM partners may in the future develop products which
compete with those of the Company and may, in turn, terminate their
relationships with the Company. In addition, the Company expects that because of
the lack of significant barriers to entry into the paper input systems market,
new competitors may enter the market in the future.

Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
customer bases, than the Company. As a result, these competitors may be able to
respond more effectively to new or emerging technologies and changes in customer
requirements, withstand significant price decreases or devote greater resources
to the development, promotion, sale and support of their products than the
Company. Consequently, the Company expects to continue to experience increased
competition, which could result in significant price reductions, decreased gross
margins, loss of market share and lack of acceptance of the Company's products.
There can be no assurance that the Company will be able to compete successfully
in the future or that competition will not have a material adverse effect on the
Company's business, operating results and financial condition.

PROPRIETARY TECHNOLOGY

The Company's future success depends in part upon its proprietary
technology. The Company is subject to the risk of alleged infringement of
intellectual property rights of others. In this regard, the Company has obtained
licenses to certain user interface patents held by Wang Corporation and a
compression/decompression patent held by Unisys Corporation which relate to the
Company's technology. With regard to such patents, the Company approached the
licensors and after discussions, entered into technology

9
<PAGE> 11

license agreements to use such patents. In connection with the technology
license agreement for the user interface patents, the Company issued shares of
its Preferred Stock and warrants to purchase Preferred Stock to Wang
Corporation.

On November 1, 1996, Millennium, L.P. ("Millennium"), a Cayman Island
limited partnership, filed an infringement action against Compaq alleging that
Compaq's scanner keyboard system, which utilizes certain technology that is
licensed from the Company, and used in its products, infringes certain patent
claims. The Company has acknowledged that it will indemnify Compaq with respect
to the claims that Millennium has asserted against Compaq to the extent required
by the Company's OEM agreement with Compaq. The Company intends to defend
against these claims vigorously. However, if the Company is unsuccessful in this
matter, it could have a significant material adverse effect on the Company's
business, operating results and financial condition. The Company is not aware of
any other pending or threatened infringement claims with respect to the
Company's current or future products. However, the outcome of the Millennium
lawsuit cannot be accurately predicted and there can be no assurance that other
parties will not assert such claims or that any such claims will not require the
Company to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.

The Company also relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions and
software which is bundled with the Company's software to provide additional
functionality, such as Textbridge, OCR software from Xerox. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability to maintain any of these technology licenses could result in delays or
reductions in product shipments until equivalent technology is identified,
licensed and integrated or bundled. Any such delays or reductions in product
shipments would materially adversely affect the Company's business, operating
results and financial condition.

The Company generally enters into confidentiality or license agreements
with its employees, consultants and vendors, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. To license its
products, the Company primarily relies on "shrink wrap" licenses that are not
signed by the end user customer and, therefore, may not be enforceable under the
laws of certain jurisdictions. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the Company will be able to protect its
technology, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to that of the
Company. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Furthermore, litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results or financial
condition.

As of December 31, 1996, the Company held three patents and had five
pending U.S. patent applications. The Company has filed counterpart applications
in several European countries, Canada, Japan and Australia. The Company intends
to file additional U.S. and foreign patent applications in the future. There can
be no assurance that patents will issue from any application filed by the
Company or that, if patents do issue, the claims allowed will be sufficiently
broad to protect the Company's technology. The source code for the Company's
proprietary software is protected both as a trade secret and as a copyrighted
work.

On September 26, 1996, the Company granted Storm Technology, Inc. (Storm) a
non-exclusive, non-transferable, world-wide, royalty bearing license under
certain Visioneer Patents to make or have made on its

10
<PAGE> 12

behalf, use and sell licensed products. A one time, non-refundable payment was
made to the Company covering all products distributed by or on behalf of Storm
or its OEM partners prior to September 26, 1996.

EMPLOYEES

As of December 31, 1996, the Company had a total of 124 full-time salaried
employees, 51 of which were in research and development, 52 of which were
engaged in sales, marketing, customer support and operations and 21 of which
were in administration and finance. The Company's future success depends in a
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for highly qualified
personnel is intense and there can be no assurance that the Company will be able
to retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppage and considers its
relations with its employees to be good.

The Company has recently experienced rapid expansion, which has placed and,
if such expansion continues, would continue to place, a significant strain on
its managerial, operational and financial resources and increased demands on its
systems and controls. This expansion has resulted in a continuing increase in
the level of responsibility for management personnel and in the hiring of senior
management personnel. The Company anticipates its need to hire additional
employees in the near future. There can be no assurance that the Company will be
successful in hiring, integrating or retaining such personnel. The Company
intends to expand its internal maintenance and support organization and contract
manufacturing capacity in 1997. Any inability of the Company to hire and
integrate necessary personnel, or increase manufacturing capacity as required
could have a material adverse effect on the Company's business, results of
operations and financial condition.

RECENT DEVELOPMENTS

In April 1997, J. Larry Smart was appointed President and Chief Executive
Officer of the Company, succeeding Michael A. McConnell who resigned at that
time. Mr. Smart served as Chairman of the Board of Directors since February 1997
until assuming such position. Mr. McConnell subsequently resigned as a director
of the Company in May 1997.

In May 1997, the Company experienced additional changes in its executive
management team. Rudolph E. Burger, Ph.D. was promoted to Senior Vice President,
Technology of the Company, succeeding Todd Basche who resigned at that time. Dr.
Burger served as Vice President of Business Development of the Company from July
1995 until assuming such position. Michael T. Burt was appointed Vice President,
Operations of the Company, succeeding David C. Craft who resigned at that time.
Finally, Michael Weissman was appointed Vice President of Marketing of the
Company, succeeding Bruce S. Mowery who resigned at such time. In addition, in
May 1997, the Company effected a reduction in force of 39 full-time employees
and 20 contractors.

ITEM 2. PROPERTIES

The Company leases its principal facility, which contains approximately
41,000 square feet of office space, in Fremont, California. This facility is
leased through July 2001, and the Company has an option to extend this lease for
an additional four-year term. The Company believes that its existing facilities
are adequate to meet its current and foreseeable requirements or that suitable
additional or substitute space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

Other than the infringement action filed by Millennium mentioned below,
there are no other material pending legal proceedings to which the Registrant is
a party or of which any of its properties is the subject.

11
<PAGE> 13

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

The Company's Common Stock commenced trading on the Nasdaq National Market
on December 11, 1995 and is traded under the symbol "VSNR." The following table
sets forth for the periods indicated the high and low sale prices for the Common
Stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1995:
4th quarter (commencing December 11, 1995)........................... 23 12

FISCAL 1996:
1st quarter.......................................................... 22 14 1/4
2nd quarter.......................................................... 15 9 1/
3rd quarter..........................................................
9 7/8 5 1/
4th quarter.......................................................... 7 4 7/

FISCAL 1997:
1st quarter.......................................................... 6 3 1/
2nd quarter..........................................................
4 3/8 2 1/
</TABLE>

HOLDERS OF RECORD

As of July 31, 1997, there were approximately 281 holders of record of the
Common Stock.

DIVIDENDS

To date, the Company has not paid any cash dividends on shares of its
Common Stock. The Company presently intends to retain all future earnings for
its business and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.

12
<PAGE> 14

ITEM 6. SELECTED FINANCIAL DATA

The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
Notes to Financial Statements contained in Item 8 of this report.

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, INCEPTION
---------------------------------------------- (MAR. 10, 1992)
1996 1995 1994 1993 TO DEC. 31, 1992
-------- -------- -------- ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Product revenues............... $ 44,233 $ 34,734 $ 3,903 $ -- $ --
Royalty revenues............... 11,848 2,605 -- -- --
-------- -------- -------- ------- ------
Total net revenues..... 56,081 37,339 3,903 -- --
Cost of revenues:
Cost of product revenues....... 42,164 25,664 4,481 -- --
Cost of royalty revenues....... 3,303 1,274 -- -- --
-------- -------- -------- ------- ------
Total cost of
revenues............. 45,467 26,938 4,481 -- --
-------- -------- -------- ------- ------
Gross profit (loss).............. 10,614 10,401 (578) -- --
-------- -------- -------- ------- ------
Operating expenses:
Research and development....... 10,938 8,975 4,532 3,739 84
Selling, general and
administrative.............. 26,342 11,805 6,482 1,808 283
Non-recurring item(2).......... -- 1,600 -- -- --
-------- -------- -------- ------- ------
Total operating
expenses............. 37,280 22,380 11,014 5,547 367
-------- -------- -------- ------- ------
Operating loss................... (26,666) (11,979) (11,592) (5,547) (367)
Net interest income.............. 2,274 426 137 114 2
-------- -------- -------- ------- ------
Net loss......................... $(24,392) $(11,553) $(11,455) $(5,433) $ (365)
======== ======== ======== ======= ======
Net loss per share............... $ (1.28)
========
Unaudited pro forma net loss per
share(3)....................... $ (0.74)
========
Common and common equivalent
shares used in per share
computation(3)................. 19,088 15,644
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash, cash equivalents and
short-term investments...... $ 31,200 $ 46,166 $ 4,032 $ 3,086 $ 5,273
Working capital (deficit)...... 28,807 46,677 3,376 (441) 5,252
Total assets................... 51,785 65,793 7,378 3,589 5,288
Capital lease obligations, less
current portion............. -- -- 248 -- --
Total stockholders' equity
(deficit)................... $ 33,193 $ 49,860 $ 4,053 $ (8) $ 5,262
</TABLE>

- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
Company's fiscal year ends.

(2) See Note 8 in Notes to Financial Statements.

(3) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net loss and pro forma
net loss per share.

13
<PAGE> 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS DOCUMENT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN
RISK AND UNCERTAINTIES, INCLUDING THE RISKS AND UNCERTAINTIES DISCUSSED BELOW.

OVERVIEW

Visioneer designs, develops and markets intelligent paper input systems and
image management software. The Company has a limited operating history upon
which an evaluation of the Company and its prospects can be based. The success
of the Company will depend on its ability to improve its gross margins and
generate sales of PaperPort products significantly in excess of sales during
1996, which in turn will depend in part on the ability of the Company and its
distributors and OEM partners to convince end users to adopt paper input systems
for the desktop and to educate end users about the benefits of the Company's
products. There can be no assurance that the market for paper input systems will
develop or that the Company will achieve market acceptance of its products. The
Company has incurred annual net losses since inception. There can be no
assurance that the Company will be able to attain profitability during any
particular period or in the near future. As of December 31, 1996, the Company
had an accumulated deficit of $53.2 million. Although the Company has
experienced revenue growth during several quarters, the growth rates have
neither been consistent nor sustainable and are not indicative of future
operating results.

The Company was founded in March 1992 and commenced shipment of its initial
PaperPort product for Windows in the first quarter of 1994. The Company
subsequently introduced a Macintosh version of its PaperPort product in November
1994 and an enhanced version of its PaperPort for Windows in February 1995. In
October 1995, the Company introduced PaperPort Vx for Windows and Macintosh,
which incorporate enhanced features and functionality. In June 1996, the Company
introduced PaperPort ix for Windows, an integrated scanner keyboard, and in
November 1996, the Company announced its first major stand-alone software
product, PaperPort Deluxe.

In 1995, a key component of the Company's business strategy was to
establish strategic relationships with OEM partners, provide and license them
with integrated hardware and software PaperPort solutions, and license them
PaperPort software to be used on their hardware. In this regard, the Company
established an OEM agreement with Hewlett-Packard pursuant to which
Hewlett-Packard used a version of the PaperPort-branded software as the standard
user-interface software for Hewlett-Packard's current scanner product line, the
ScanJet 4 series, and distributed a modified PaperPort product under
Hewlett-Packard's brand name, the ScanJet 4s, which commenced in the fourth
quarter of 1995. Under the Hewlett-Packard Agreement, Hewlett-Packard made
fixed, per-unit royalty payments to Visioneer and was not required to make any
minimum payments. In addition, the Company entered into an OEM agreement with
Compaq pursuant to which the Company and Compaq have developed a scanner
keyboard, incorporating the Company's technology, which is a Compaq-branded
product. Compaq offers the scanner keyboard as a standard feature on some of its
personal computer system lines, and also sells the scanner keyboard separately
as an option for use with other Compaq PCs or any other industry-standard PC
with minimum hardware requirements. Compaq included a version of the
PaperPort-branded software on each personal computer system which it sells with
the scanner keyboard or bundled with the scanner keyboard which it sells
separately. To date, neither of the Company's OEM relationships has achieved the
Company's expectations. In addition, both Hewlett-Packard, in April 1996, and
Compaq, in the fourth quarter of 1996, have informed the Company that they no
longer intended to take any additional deliveries of the ScanJet 4s product and
the Compaq scanner keyboard product, respectively. To date, revenues from these
OEM partnerships have been significantly lower than original projections. The
Company believes neither Hewlett-Packard nor Compaq made significant sales and
marketing investments to promote their products, and was a major reason why the
market for its PaperPort products did not grow as quickly as the Company had
planned.

14
<PAGE> 16

Company's PaperPort software with a variety of scanner products, including
existing flatbed scanners and network scanners. Hewlett-Packard is not obligated
under the agreement to distribute Visioneer software; however, Hewlett-Packard
is required to make certain minimum royalty payments to the Company through the
third quarter of 1997. In the fourth quarter of 1996, Hewlett-Packard requested
that, beginning in the second half of 1997, the Company include in its OEM
software offering many of the same features currently included in the Company's
stand-alone product, PaperPort Deluxe Software. However, this is inconsistent
with the Company's general strategy of building a strong stand-alone software
business, so the Company was unable to comply with Hewlett-Packard's request.
Accordingly, Hewlett-Packard has informed the Company that it will work with
another company to develop new products containing certain of the requested
capabilities by the end of 1997. The Company expects that Hewlett-Packard will
develop, market and manufacture products including such new products to be
developed by another company, that will compete with the Company's products.
Hewlett-Packard also stated that this decision will not impact scanners that
Hewlett-Packard already ships or its obligations under the agreement recently
signed with the Company, and the Company will continue to supply a version of
Limited Edition PaperPort software technology on a non-exclusive basis for
Hewlett-Packard scanners under that agreement; however, Hewlett-Packard is not
obligated to distribute these products. There can be no assurance that
Hewlett-Packard will continue to market and distribute Visioneer software under
this agreement.

In April 1996, the Company announced a change in strategy away from
dependence on OEM relationships, and its intent to use its own resources to
promote market demand, to build a premier brand name and become the brand name
leader in the market for paper input systems. Although OEM revenues were
significantly lower than the Company's expectations, the Company made the
decision not to scale back its operations proportionately, but rather, the
Company chose to refocus its energy and commit additional resources to its sales
and marketing effort, even in the face of continuing short-term operating
losses. There can be no assurance that the Company's new strategy will be
successful. If the Company is not able to build market demand and its brand
recognition, the Company's business, operating results and financial condition
will be adversely effected.

15
<PAGE> 17

RESULTS OF OPERATIONS

The following table presents, as a percentage of total net revenues,
certain selected financial data for each of the three years in the period ended
December 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Revenues:
Product revenues................................................. 78.9% 93.0% 100.0%
Royalty revenues................................................. 21.1% 7.0% 0.0%
----- ----- -----
Total net revenues....................................... 100.0% 100.0% 100.0%
Cost of revenues:
Cost of product revenues......................................... 75.2% 68.7% 114.8%
Cost of royalty revenues......................................... 5.9% 3.4% 0.0%
----- ----- -----
Total cost of revenues................................... 81.1% 72.1% 114.8%
----- ----- -----
Gross profit (loss)................................................ 18.9% 27.9% -14.8%
----- ----- -----
Operating expenses:
Research and development......................................... 19.5% 24.0% 116.1%
Selling, general and administrative.............................. 47.0% 31.6% 166.1%
Non-recurring item (Note 8)...................................... 0.0% 4.3% 0.0%
----- ----- -----
Total operating expenses................................. 66.5% 59.9% 282.2%
----- ----- -----
Operating loss..................................................... (47.5%) (32.1%) (297.0%)
Interest income.................................................... 4.2% 1.4% 7.6%
Interest expense................................................... (0.1%) (0.3%) (4.1%)
----- ----- -----
Net loss........................................................... (43.5%) (30.9%) (293.5%)
===== ===== =====
</TABLE>

Total Net Revenues

The Company derives its revenue from two sources, the sale of PaperPort
products and royalties earned pursuant to arrangements with certain OEM
customers. To date, over 85% of the Company's product revenues have been derived
from sales of its PaperPort products to independent distributors in North
America and, to a lesser extent, in Europe and the Asia-Pacific region. Revenues
from all sales to distributors and authorized resellers are subject to
agreements allowing price protection and certain rights of return. Under the
price protection rights granted by the Company, if the Company lowers its
selling price it is then obligated to issue credit to its distributors and
resellers equal to the difference between the new selling price and the price
paid for all unsold inventory held by the distributor and reseller. Accordingly,
reserves for estimated future returns, exchanges and price protection are
provided upon revenue recognition.

In 1995, in accordance with the terms of the Hewlett-Packard Agreement, the
Company recognized royalty revenues on the Hewlett-Packard ScanJet 4s products
upon Hewlett-Packard's shipment of such products to its distributors. Effective
January 1, 1996, under a revised agreement with Hewlett-Packard, the Company
earned royalties when ScanJet 4s products were shipped to Hewlett-Packard by
Flextronics, one of the Company's independent contract manufacturers. In
addition, any unrecognized royalty revenues from products shipped to
Hewlett-Packard by Flextronics in 1995 were considered earned and was recognized
in the first quarter of 1996. This royalty revenue adjustment amounted to $2.6
million.

Total net revenues increased 50% to $56.1 million in 1996 from $37.3
million in 1995. The increase was attributable to several factors; the market's
increasing acceptance of the Company's solutions for paper management systems,
new product introductions by the Company and increased royalty revenues from its
OEM partners. 1996 marked the addition of Compaq as an OEM partner, and the
introduction of PaperPort ix, the scanning keyboard product. Increased product
sales and increased royalty revenues contributed nearly equally to the $18.7
million increase in total net revenues that the Company experienced from 1995 to
1996.

16
<PAGE> 18

Total net revenues increased 857% in 1995 from $3.9 million in 1994. The
increase was primarily attributable to sales of the second generation of
PaperPort for Windows, the introduction and sales of the initial version of
PaperPort for Macintosh, and the introduction of PaperPort Vx in the fourth
quarter for both Windows and Macintosh platforms. The Company's ability to grow
its revenues will partially depend upon its ability to attain wider market
acceptance for its current products, and its ability to introduce new products
with enhanced end-user features on a timely basis. In light of Hewlett-Packard's
and Compaq's decisions to discontinue their orders for the ScanJet 4s and
scanner keyboard products and the low market acceptance of the Company's
PaperPort ix product, the Company believes that its rate of revenue growth in
1997 over 1996 as compared to 1996 over 1995 may not be sustainable and is not
indicative of future operating results.

The Company's largest distributors of its products in 1996 were Ingram,
Best Buy, Tech Data and Merisel. Sales to these independent distributors, in the
aggregate, accounted for approximately 52% and 78% of the Company's total net
revenues in 1996 and 1995, respectively. Sales to Ingram accounted for
approximately 37% of the Company's total net revenues in 1996 and 62% in 1995;
Best Buy was a new distributor for the Company in 1996 and accounted for
approximately 6% of the Company's total net revenues; sales to Tech Data
accounted for approximately 5% and 6% of the Company's total net revenues in
1996 and 1995, respectively and sales to Merisel accounted for approximately 4%
and 10% of the Company's total net revenues in 1996 and 1995, respectively.
During 1996, the Company's dependence on any single distributor decreased, and
is expected to decrease in 1997, as the Company actively pursues its strategy to
increase and diversify its distribution channels throughout the world.

Total net revenues from independent distributors outside North America,
primarily in Europe and the Asia-Pacific region, were approximately 13% of total
net revenues in 1996 as compared to 6% in 1995. Total net revenues from
international sales increased to $7.1 million in 1996 from $2.0 million in 1995.
Sales to Japan commenced at the end of the second quarter in 1996 with the
introduction of localized versions of PaperPort Vx for both Windows and
Macintosh platforms. Sales to Japan for 1996 surpassed sales to any other
foreign country. Although the Company's international sales are primarily
denominated in U.S. dollars, these sales are subject to a number of risks
inherent in doing business on an international level, such as unexpected changes
in regulatory requirements, import and export duties and restrictions,
fluctuations in currency exchange rates, and the logistical difficulties of
managing multinational operations, any of which could adversely impact the
success of the Company's international operations. See "Item
1 -- Business -- Sales, Marketing and Distribution." The growth of the Company's
international business will depend, in part, on the Company's ability to
increase awareness of the Company's products in international markets.

The introduction of major new products and enhancements of existing
products, such as PaperPort mx and PaperPort Deluxe, is expected to have a
significant impact on the Company's quarterly and annual revenues. As is
characteristic of the initial stages of personal computer product life cycles,
the Company expects that sales volumes of any new product may increase in the
first few months following introduction due to the purchase of initial inventory
by the Company's distribution channel. Thereafter, revenues may decline or
stabilize until the end of a product life cycle, at which time revenues are
likely to decline significantly. Many competitors entered the market in 1996 and
although they helped to establish market demand for paper input products, they
also applied pricing pressures to which the Company responded. In addition, the
Company must successfully manage its transition to promoting and manufacturing
new products and new versions of existing products. At the end of a product life
cycle the Company may experience higher rates of return on its older products
and may be required to lower the prices of such products, which would result in
increased price protection charges. This could have a material adverse impact on
the Company's total net revenues and operating results. Although the Company has
sought to mitigate the effect of such transition by controlling inventory levels
of its distributors, channel inventory levels are very difficult to quantify
accurately, and the Company may experience higher than normal rates of return on
its older version products and may incur significant price protection charges in
connection with its planned release of new PaperPort products and price
reductions in 1997. In this regard, receivable allowances increased from $2.5
million at December 31, 1995 to $3.9 million at December 31, 1996. Due to the
inherent uncertainties of product development and new product introductions, the
Company cannot accurately predict the exact quarter in which a new product or

17
<PAGE> 19

version will be ready to ship. Any delay in the scheduled release of major new
products would have a material adverse impact on the Company's total net
revenues and operating results.

The Company has experienced and may continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of the
Company's direct control. These factors include development of the paper input
systems market, demand for the Company's products, the Company's success in
developing, introducing and shipping new products and product enhancements, the
market acceptance of such products, the Company's ability to respond to new
product introductions and price reductions by its competitors, the timing,
cancellation or rescheduling of significant orders, the purchasing patterns and
potential product returns from the Company's distribution channels, the
Company's relationships with its OEM partners and distributors, the performance
of the Company's contract manufacturers and component suppliers, the
availability of key components and changes in the cost of materials for the
Company's products, the Company's ability to attract, retain and motivate
qualified personnel, the timing and amount of research and development and
selling, general and administrative expenditures, and general economic
conditions.

Revenues and operating results in any quarter depend, to a large extent, on
the volume, timing and ability to fulfill customer orders, the receipt of which
is difficult to forecast. A significant portion of the Company's operating
expenses is relatively fixed in advance, based in large part on the Company's
forecasts of future sales. If sales are below expectations in any given period,
the adverse effect of a shortfall in sales on the Company's operating results
may be magnified by the Company's inability to adjust operating expenses to
compensate for such shortfall. Accordingly, any significant shortfall in
revenues relative to the Company's expectations would have an immediate material
adverse impact on the Company's business, operating results and financial
condition. The Company may also be required to reduce prices in response to
competition or to increase its spending to pursue new product or market
opportunities. In this regard, the Company reduced the retail price on its
PaperPort Vx Windows products from $299 to $249 and PaperPort ix from $349 to
$249 on February 1, 1997. In the event of significant additional price
competition in the market for the Company's products, which is anticipated, the
Company will be required to decrease costs at least proportionately and the
Company will be at a significant disadvantage with respect to its competitors
that have substantially greater resources. Such competitors may more readily
withstand an extended period of downward pricing pressure. In such event, the
Company will also incur price protection charges from its distributors. Any
price protection charges in excess of recorded allowances would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company realizes substantially more revenue from the sale of
PaperPort branded products, 79% in 1996, than from its royalty arrangements, 21%
in 1996. However, the effect on gross profit and net income from any shifts in
product mix is uncertain and depends on the Company's ability to control its
costs.

Due to all of the foregoing factors, it is likely that at some point in the
future the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected. Accordingly, the Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks.

Total Cost of Revenues

Total cost of revenues consists primarily of the costs associated with the
purchase of PaperPort products from Flextronics and NMB, the Company's primary
contract manufacturers, and related costs of freight, inventory rework,
inventory obsolescence and warranty. The Company's PaperPort hardware products
are currently manufactured, assembled and tested by these two contract
manufacturers, under a cost-plus arrangement. In 1996, PaperPort Vx was
manufactured by Flextronics, and the Company's scanning keyboard, PaperPort ix,
was manufactured by NMB. The contract manufacturers purchase most of the
required manufacturing components, with the exception of certain long lead-time
key components, certain integrated application software which the Company
purchases or licenses from third-party vendors and certain components which the
contract manufacturers have difficulty procuring. Such components are purchased
by

18
<PAGE> 20

the Company, and either consigned or resold to its contract manufacturers. See
"Item 1 -- Business -- Manufacturing."

Total cost of revenues as a percentage of total net revenues was 81% in
1996 as compared to 72% in 1995. The increase was primarily a result of charges
taken in the fourth quarter of 1996 for write-offs relating to excess and
obsolete inventory and adverse purchase commitments for components and
expediting charges relating to the transition of manufacturing PaperPort
products from Flextronics, California, to Flextronics, Xi Xiang, China. A
substantial portion of the total manufacturing cost of the PaperPort is
represented by various components, particularly PCBAs, a contact image sensor
array and the Company's ASIC. Prices and availability of these components can
fluctuate significantly. Because the market for paper input systems and, in
particular, the Company's products, is new and rapidly evolving, the Company's
ability to forecast its demand for key components was and still is limited. At
the beginning of 1996, in conjunction with the Company's sales forecasts, which
were partially influenced by the sales forecasts from its OEM partners, the
Company placed purchase orders with its contract manufacturers for PaperPort
products and made purchase commitments to vendors for certain key long lead time
components in order to safe guard future product availability. Later, in April,
the Company was notified by Hewlett-Packard that it did not intend to accept any
further shipments of the ScanJet 4s product. In the fourth quarter of 1996, the
Company was also notified by Compaq that it was discontinuing its scanner
keyboard products. In addition, sales to date of the Company's PaperPort ix have
been below original expectations. As a consequence, based on the Company's
inventory levels on certain scanners and components, and certain adverse
purchase commitments for long lead time components at December 31, 1996, the
Company booked approximately $5.0 million of inventory related reserves in the
quarter ended December 31, 1996.

Total cost of revenues as a percentage of total net revenues decreased to
72% in 1995 as compared to 115% in 1994. This improvement resulted primarily
from fixed costs spread over increased unit shipments, cost reduction programs,
other cost efficiencies associated with higher volume production, and the
commencement of higher margin royalty revenue earned from the Hewlett-Packard
OEM agreement in the fourth quarter of 1995.

During the latter half of the year, as part of a cost reduction effort, the
Company transitioned its contract manufacturing operations for PaperPort Vx and
mx from Flextronics, San Jose, California, to Flextronics, Xi Xiang, China. As
is typical with any ramp-up of production at a new factory, there were certain
delays in production and initial costs incurred, such as those associated with
the procurement of materials, training of production personnel and start-up
performance and assembly problems. Due to delays in production, the Company
incurred additional expense to expedite the delivery of PaperPort Vx inventory
in the quarter ended December 31, 1996. Although many of these problems have
been solved, the costs associated with them were in excess of expectations and
negatively impacted gross profit for 1996. There can be no assurance that the
Company will resolve all of the remainder of its start-up problems and not
experience additional problems or production delays in 1997 as it continues to
manufacture its existing products and starts production of new products.
Although the Company will pursue cost-reduction efforts in the future, no
assurance can be given that the Company's efforts to reduce product unit costs
will be successful.

Due to variations in product mix, pricing actions, and manufacturing
related costs associated with product transitions the Company anticipates
quarterly fluctuations in its cost of revenue levels in 1997. The Company's
strategy is designed however, to increase its market share and expand its
presence in the price sensitive consumer market place. This strategy, along with
the expectation of continued aggressive pricing environment and product
transitions, will continue to put pressure on the Company's cost of revenues and
gross margins.

The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. For example, in
connection with the Company's introduction of the PaperPort mx, the Company
lowered the price of its existing PaperPort products, and this adversely
impacted the Company's gross profit for such products shipped in the quarter
ended December 31, 1996. The Company booked reserves to cover price protection
rights that it gives to its distributors. Subsequently, the Company lowered the
prices of PaperPort Vx and ix effective February 1, 1997. The Company expects
that, based on historical trends in the computer and peripherals industry and,
in particular, based on the Company's recent

19
<PAGE> 21

observations and experiences in the paper input systems market, prices will
continue to decline in the future and competitors will offer products which meet
or exceed performance and capabilities of the Company's products. The Company
intends to introduce new hardware designs, software upgrades, accessory products
and new software features, in part, to respond to anticipated competitive price
pressures and new product introductions. If prices fall faster than expected by
the Company, or if the Company reduces its prices in order to become or remain
competitive or for any other reason, the Company may be unable to respond with
significant cost reductions, and its gross profit could be materially adversely
affected. In addition, the Company's gross profit will depend in part on other
factors outside of the Company's control, including the availability and prices
of key components, the success of the Company's product transition, competition,
the timing and amount of royalties received under its OEM arrangements and
general economic conditions. Fluctuations in gross profit could have a material
adverse effect on the Company's financial condition and operating results.

Essentially all of the Company's hardware manufacturing is concentrated in
the Far East, with Flextronics, China, and NMB, Thailand. Although this
manufacturing strategy has been adopted to help reduce product costs in the
future, the Company is exposed to certain economic and political risks
associated with doing business in this region. Changes in the economic and
political climates in the Far East may have a material adverse affect on the
financial condition and results of operations of the Company.

Research and Development Expenses

Research and development expenses consist principally of personnel costs,
costs of contractors and outside consultants, supplies and material expenses,
equipment depreciation and overhead costs relating to occupancy.

Research and development expenses increased 22% in absolute dollars to
$10.9 million in 1996 from $9.0 million in 1995, while declining as a percentage
of total net revenues to 20% from 24%. The increase in spending was primarily
due to the hiring of additional consultants for product development. At December
31, 1996, the Company employed 51 employees and 19 consultants in research and
development compared to 51 employees and 9 consultants at December 31, 1995.
Research and development expenses increased 98% in absolute dollars in 1995 from
1994, while declining sharply as a percentage of net revenues in 1995 as
compared to 1994. As in 1996, the increase in spending was primarily due to the
hiring of additional engineers and consultants for product development. The
Company believes that the development of new products and the enhancement of
existing products is essential to its success. Accordingly, the Company will
continue to invest in research and development activities. However, such
expenses may fluctuate from quarter to quarter depending on a wide range of
factors including the status of various development projects. To date, the
Company has not capitalized any development costs and does not anticipate
capitalizing any such costs in the foreseeable future.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include personnel and related
overhead costs for sales, marketing, customer support, finance, human resources
and general management. Such costs also include advertising, commissions to
manufacturers' representative organizations (MROs), trade shows and other
marketing and promotional expenses.

Selling, general and administrative expenses increased 123% in absolute
dollars to $26.3 million in 1996 from $11.8 million in 1995. As a percentage of
total net revenues, selling, general and administrative expense increased to 47%
from 32%. The increase in spending was primarily attributed to three major
factors. First, the Company substantially increased its sales and marketing
efforts to create and expand overall market demand and build the Company's brand
name and product awareness. In this regard, sales and marketing expenses
increased over 100% from 1996 as compared to 1995. Second, customer support
costs increased significantly as a natural consequence of increased sales,
increased installed base, and expansion of distribution to international
channels. Finally, an increase in general administration expenses, including
employees and expenses, were required to support the Company's growing
operations. Selling, general and administrative expenses

20
<PAGE> 22

increased 82% in absolute dollars in 1995 from 1994, while declining
significantly as a percentage of total net revenues. As the Company experienced
tremendous growth in 1995, it was necessary to expand its infrastructure,
including additional employees and computer equipment and software systems. In
addition, higher advertising and other sales and marketing costs were incurred
in connection with product introductions and increased sales. The Company
anticipates that these expenses will continue to increase in absolute terms for
the foreseeable future as the Company expands its selling, marketing and
administrative functions, including costs associated with being a public
company. Such expenses may, however, fluctuate from quarter to quarter depending
on a variety of factors, including the timing of the introduction of any new
products, expansion of the Company's distribution channels, general advertising
not related to product introductions and expansion into international markets.

Non-Recurring Item

The non-recurring item in 1995 represents amounts paid to Wang Laboratories
Corporation ("Wang") in connection with the settlement of a patent matter.

Other Income, Net

Other income, net, consists primarily of interest earned on cash
equivalents and short-term investments. Other income, net, was $2.3 million for
the year ended December 31, 1996, and $426,000 for the year ended December 31,
1995. The overall increase was primarily the result of an increase in interest
income from increased cash equivalents and short-term investments made with the
application of proceeds from the Company's initial public offering in 1995 and
the subsequent exercise by the underwriters of the over-allotment in January
1996. For the year ended December 31, 1994, other income, net was $137,000. The
increase of $289,000 from 1994 to 1995 was attributable to an increase in
interest income from increased cash equivalents and short-term investments made
with the application of proceeds from issuance of the Company's Preferred Stock
in 1995.

Taxation

At December 31, 1996, the Company had net operating loss carryforwards for
federal tax purposes and federal tax credit carryforwards of approximately $35.2
million. In addition, the Company had gross deferred tax assets of approximately
$21.9 million which were fully reserved because of the uncertainty of their
realization. See Note 3 of Notes to Financial Statements. There was no tax
provision for 1996, 1995 and 1994, due to the net loss incurred, and the Company
did not record a tax benefit of operating losses since inception to 1996 due to
the uncertainty of their realization.

Liquidity and Capital Resources

Through September 30, 1995, the Company financed its operations primarily
through private placements of equity securities, from which it raised an
aggregate of approximately $33 million, net of issuance costs. In December 1995,
the Company completed its initial public offering, and raised approximately
$43.5 million, net of issuance costs. In January 1996, the over allotment option
granted to the underwriters in the initial public offering was exercised,
resulting in proceeds of approximately $6.4 million, net of issuance costs. As
of December 31, 1996, the Company had cash, cash equivalents and short-term
investments of $31.2 million and working capital of $28.8 million, as compared
to $46.2 million in cash, cash equivalents and short-term investments and $46.7
million of working capital at December 31, 1995.

The Company used $18.9 million of cash for its operating activities for
1996, as compared to $10.5 million for 1995. Negative cash flows from operating
activities were attributed primarily to a net loss incurred during 1996 of $24.4
million, due to factors previously discussed. During 1996, the Company continued
to expand its product offerings and distribution channels, domestically and
internationally. Consequently, the Company's inventory levels continued to
increase. In addition, based on the forecasted demand for its own products,
which was partially influenced by its OEM partners, the Company purchased safety
stock on certain long lead-time components, and made purchase commitments on
certain other components which increased

21
<PAGE> 23

inventories of these components, thereby further reducing the Company's cash
resources. As a result of such investment in inventory, the Company was subject
to an increased risk of inventory obsolescence, which could materially adversely
affect the Company's operating results. In this regard, as actual sales of the
Company's products have fallen short of original forecasts, the Company
increased its inventory reserves and accrued liabilities in the fourth quarter
by approximately $5.0 million. In 1995, the Company used $10.5 million of cash
towards its operating activities, primarily to fund losses of $11.6 million for
the year.

Cash used for financing activities during 1996 was $5.6 million. The
Company increased investments of short-term securities by $2.5 million and
capital expenditures were approximately $3.1 million. Capital expenditures
consisted primarily of purchases of manufacturing tools and molds, computer
equipment and software tools. Cash used for financing activities during 1995 was
$7.1 million. Short-term investments increased by $4.1 million and capital
expenditures were approximately $3.0 million.

Cash provided by financing activities during 1996 was $7.0 million. The
majority of the cash resulted from the exercise of the over-allotment option
granted to the underwriters in the December 1995 initial public offering.
Proceeds, net of underwriting discounts and related expenses, from the January
exercise of the over-allotment option were $6.6 million.

The Company believes that its existing sources of liquidity will provide
adequate cash to fund its operations for at least the next twelve months.
Thereafter, if cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell additional
equity or debt securities or obtain lines of credit. The sale of additional
equity or convertible debt securities may result in additional dilution to the
Company's stockholders.

22
<PAGE> 24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants................................................... 24
Balance Sheets...................................................................... 25
Statements of Operations............................................................ 26
Statements of Cash Flows............................................................ 27
Statements of Stockholders' Equity.................................................. 28
Notes to Financial Statements....................................................... 29

Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule................... 37
Schedule II -Valuation and Qualifying Accounts and Reserves......................... 38
</TABLE>

23
<PAGE> 25

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Visioneer, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Visioneer, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP

San Jose, California
January 31, 1997

24
<PAGE> 26

VISIONEER, INC

BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 22,391 $ 39,909
Short-term investments............................................... 8,747 4,895
Restricted cash...................................................... 62 1,362
Accounts receivable, less allowances of $3,931 and $2,531............ 10,780 11,138
Inventory............................................................ 4,508 3,764
Prepaid expenses and other current assets............................ 911 1,542
-------- --------
Total current assets......................................... 47,399 62,610
Property and equipment, net............................................ 4,158 3,054
Other assets........................................................... 228 129
-------- --------
$ 51,785 $ 65,793
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 11,449 $ 10,212
Deferred revenue..................................................... 334 1,472
Accrued liabilities.................................................. 6,809 4,001
Current portion of capital lease obligations......................... -- 248
-------- --------
Total current liabilities.................................... 18,592 15,933
-------- --------
Commitments and contingencies (Notes 7, 8 & 9)......................... -- --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized at
December 31, 1996 and 1995; none issued and outstanding at
December 31, 1996 and 1995........................................ -- --
Common stock, $0.001 par value; 50,000,000 shares authorized at
December 31, 1996 and 1995; 19,202,609 and 18,371,047 shares
issued and outstanding at December 31, 1996 and 1995,
respectively...................................................... 19 18
Additional paid-in-capital........................................... 86,951 79,444
Deferred compensation relating to stock options...................... (250) (350)
Notes receivable from stockholders................................... (329) (446)
Accumulated deficit.................................................. (53,198) (28,806)
-------- --------
Total stockholders' equity................................... 33,193 49,860
-------- --------
$ 51,785 $ 65,793
======== ========
</TABLE>

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

25
<PAGE> 27

VISIONEER, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenues......................................... $ 44,233 $ 34,734 $ 3,903
Royalty revenues......................................... 11,848 2,605 --
-------- -------- --------
Total net revenues............................... 56,081 37,339 3,903
Cost of revenues:
Cost of product revenues................................. 42,164 25,664 4,481
Cost of royalty revenues................................. 3,303 1,274 --
-------- -------- --------
Total cost of revenues........................... 45,467 26,938 4,481
-------- -------- --------
Gross profit (loss)........................................ 10,614 10,401 (578)
-------- -------- --------
Operating expenses:
Research and development................................. 10,938 8,975 4,532
Selling, general and administrative...................... 26,342 11,805 6,482
Non-recurring item (Note 8).............................. -- 1,600 --
-------- -------- --------
Total operating expenses......................... 37,280 22,380 11,014
-------- -------- --------
Operating loss............................................. (26,666) (11,979) (11,592)
Interest income............................................ 2,344 523 296
Interest expense........................................... (70) (97) (159)
-------- -------- --------
Net loss................................................... $(24,392) $(11,553) $(11,455)
======== ======== ========
Net loss per share......................................... $ (1.28)
========
Unaudited pro forma net loss per share (Note 1)............ $ (0.74)
========
Weighted average common shares and equivalents (Note 1).... 19,088 15,644
======== ========
</TABLE>

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

26
<PAGE> 28

VISIONEER, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(24,392) $(11,553) $(11,455)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 1,982 726 422
Accounts receivable allowances........................ 1,400 2,231 300
Patent infringement settlement costs.................. -- 1,500 --
Other................................................. 493 50 102
Changes in assets and liabilities:
Accounts receivable................................. (1,042) (12,054) (1,615)
Inventory........................................... (744) (2,709) (1,055)
Prepaid expenses and other current assets........... 631 (1,491) 19
Other assets........................................ (99) (6) (101)
Accounts payable.................................... 1,237 9,403 390
Deferred revenue.................................... (1,138) 639 833
Other accrued liabilities........................... 2,808 2,775 1,048
-------- -------- --------
Net cash used in operating activities...................... (18,864) (10,489) (11,112)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of short-term investments.......... (3,852) (2,731) (728)
Transfer from (to) restricted cash....................... 1,300 (1,362) --
Capital expenditures for property and equipment.......... (3,086) (2,978) (813)
-------- -------- --------
Net cash (used in) provided by investing activities........ (5,638) (7,071) (1,541)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................ -- 12,217 12,395
Proceeds from issuance of common stock, net.............. 7,232 43,593 19
Proceeds from sale-leaseback............................. -- -- 549
Payments on capitalized lease obligatiions............... (248) (209) (92)
-------- -------- --------
Net cash provided by financing activities.................. 6,984 55,601 12,871
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (17,518) 38,041 218
Cash and cash equivalents at beginning of period........... 39,909 1,868 1,650
-------- -------- --------
Cash and cash equivalents at end of period................. $ 22,391 $ 39,909 $ 1,868
======== ======== ========
NON CASH FINANCING AND INVESTING ACTIVITIES:
Issuance (retirement) of common stock in exchange for
notes receivable...................................... $ (117) $ 375 $ 137
Issuance of preferred stock upon the conversion of notes
payable............................................... -- -- 3,000
Equipment acquired under capital lease obligations....... -- -- 564
Issuance of Series C convertible preferred stock pursuant
to patent agreement................................... -- 1,200 --
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................ $ 71 $ 97 $ 60
</TABLE>

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

27
<PAGE> 29

VISIONEER, INC.

STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------ PAID IN DEFERRED FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL
----------- ------ ---------- ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 4,017,339 $ 4 1,532,701 $ 2 $ 5,791 $ -- $ (7) $ (5,798) $ (8)
Issuance of Series C
convertible preferred
stock................ 3,104,205 3 -- -- 12,392 -- -- -- 12,395
Issuance of Series C
convertible preferred
stock upon conversion
of note payable...... 750,000 1 -- -- 2,999 -- -- -- 3,000
Issuance of common
stock pursuant to
exercise of stock
options.............. -- -- 81,993 -- 14 -- -- -- 14
Issuance of restricted
common stock......... -- -- 730,000 -- 137 -- (137) -- --
Payment on notes
receivable from
stockholders......... -- -- -- -- -- -- 5 -- 5
Repurchase of
restricted common
stock................ -- -- (20,417) -- (2) -- 2 -- --
Issuance of Series C
convertible preferred
stock warrants....... -- -- -- -- 102 -- -- -- 102
Net loss............... -- -- -- -- -- -- -- (11,455) (11,455)
----------- --- ----------- --- ------- ----- ----- -------- --------
Balance at December 31,
1994................... 7,871,544 8 2,324,277 2 21,433 -- (137) (17,253) 4,053
Issuance of Series C
convertible preferred
stock................ 3,037,500 3 -- -- 12,114 -- -- -- 12,117
Issuance of common
stock pursuant to
exercise of stock
options.............. -- -- 203,895 -- 49 -- (3) -- 46
Issuance of restricted
common stock......... -- -- 1,052,999 1 393 -- (372) -- 22
Repurchase of
restricted common
stock................ -- -- (334,168) -- (71) -- 66 -- (5)
Deferred compensation
relating to stock
options.............. -- -- -- -- 400 (350) -- -- 50
Issuance of Series C
convertible preferred
stock pursuant to the
settlement of the
patent matter........ 150,000 -- -- -- 1,200 -- -- -- 1,200
Issuance of common
stock warrants....... -- -- -- -- 300 -- -- -- 300
Issuance of Series C
convertible preferred
stock pursuant to the
exercise of
warrants............. 65,000 -- -- -- 100 -- -- -- 100
Conversion of
convertible preferred
stock to common
stock................ (11,124,044) (11) 11,124,044 11 -- -- -- -- --
Issuance of common
stock pursuant to
initial public
offering (net of
issuance cost of
$1,110,000).......... -- -- 4,000,000 4 43,526 -- -- -- 43,530
Net loss............... -- -- -- -- -- -- -- (11,553) (11,553)
----------- --- ----------- --- ------- ----- ----- -------- --------
Balance at December 31,
1995................... -- -- 18,371,047 18 79,444 (350) (446) (28,806) 49,860
Issuance of common
stock pursuant to
exercise of the
over-allotment option
granted to
underwriters......... -- -- 600,000 1 6,415 -- -- -- 6,416
Deferred compensation
expense related to
stock options........ -- -- -- -- -- 100 -- -- 100
Issuance of common
stock pursuant to
stock option
exercises............ -- -- 278,066 -- 513 -- -- -- 513
Issuance of common
stock pursuant
employee stock
purchase plan........ -- -- 110,996 -- 637 -- -- -- 637
Repurchase of
restricted stock..... -- -- (157,500) -- (58) -- 117 -- 59
Net loss............... -- -- -- -- -- -- -- (24,392) (24,392)
----------- --- ----------- --- ------- ----- ----- -------- --------
Balance on December 31,
1996................... -- $ -- 19,202,609 $ 19 $ 86,951 $ (250) $ (329) $ (53,198) $ 33,193
=========== === =========== === ======= ===== ===== ======== ========
</TABLE>

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

28
<PAGE> 30

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization and presentation

Visioneer, Inc. (the "Company"), formerly known as Visioneer
Communications, Inc., was incorporated in the state of California on March 10,
1992 as Avance Technologies, Inc., and was reincorporated in the state of
Delaware on December 5, 1995 under the name Visioneer, Inc.

The Company designs, develops and markets intelligent paper input systems
which facilitate the imaging, manipulation, distribution and storage of
paper-based information on personal computers.

The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, fiscal 1996 ended December 29, 1996 and contained 52 weeks, fiscal
1995 ended December 31, 1995 and contained 52 weeks, fiscal 1994 ended January 1
and contained 52 weeks, and fiscal 1993 ended January 2 and also contained 52
weeks. The Company reports quarterly results on thirteen-week quarterly periods,
each ending on the Sunday closest to month-end. For purposes of presentation,
the Company has indicated its accounting year as ending on December 31 or its
interim quarterly periods as ending on the respective calendar month-end.

Use of estimates

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

Revenue recognition

Revenue from product sales to customers is generally recognized when the
product is shipped, provided no significant obligations remain and
collectibility is probable.

Revenues from sales to distributors and authorized resellers are subject to
agreements allowing price protection and certain rights of return. Accordingly,
reserves for estimated future returns, exchanges and credits for price
protection are provided for upon revenue recognition. The Company has limited
control over the extent to which products sold to distributors and resellers are
sold through to end users. Accordingly, a portion of the Company's sales may
from time to time result in increased inventory at its distributors and
resellers. The Company provides sales returns reserves for distributor
inventories. These reserves are based on the Company's estimates of expected
sell through by distributors and resellers of its products. Actual results could
differ from these estimates.

The Company earns royalty revenue pursuant to certain license agreements
and records revenue when earned. Payments received from customers prior to
revenue recognition are reported as "deferred revenue."

The Company provides a limited amount of free telephone technical support
to customers. These activities are generally considered insignificant post
contract customer support obligations. Estimated costs of these activities are
accrued at the time of product shipment.

Cash, cash equivalents and short-term investments

Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less. The Company has classified all its securities as
"available for sale." These securities comprised primarily of commercial paper
with maturities within one year. At December 31, 1996 and 1995 the fair market
value of these securities approximated cost.

29
<PAGE> 31

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Inventory

Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which is generally one to five years. Leasehold
improvements are amortized over the term of the related lease or the useful
life, if shorter.

Software development costs

Software development costs incurred prior to establishment of technological
feasibility are expensed as incurred. The Company defines establishment of
technological feasibility as the completion of a working model. Software
development costs incurred subsequent to the establishment of technological
feasibility through the period of general market availability of products will
be capitalized, if material. To date, all software development costs have been
expensed.

Warranty costs

The Company provides for estimated cost which may be incurred under its
product warranties upon product shipment.

Income taxes

The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's Financial Statements or income tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment's of changes in the tax laws or rates.

Concentration of credit risk, major customers and geographic information

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and trade accounts receivable.

The Company invests in a wide variety of financial instruments, such as
certificates of deposits, commercial paper, municipal debt and U.S. government
agency debt. The Company, by policy, limits the amount of credit exposures to
any one financial institution.

The Company primarily sells its products in North America to distributors
and resellers. The Company derived approximately 13% and 6% of its total net
revenues from customers outside the United States, primarily in Europe and
Japan, in the years ended December 31, 1996 and 1995, respectively. During 1996,
two customers accounted for 37% and 14%, respectively, of total net revenues.
The same two customers accounted for 62% and 6%, respectively, of total net
revenues in 1995. The Company performs ongoing credit evaluations of the
customers' financial conditions and maintains an allowance for uncollectible
receivables based upon expected collectibility of accounts receivable. At
December 31, 1996 and 1995 the Company's top two customers in aggregate
accounted for 40% and 73% respectively, of accounts receivable.

Net loss per share and pro forma net loss per share

Net loss per share and pro forma net loss per share data are based upon the
weighted average number of outstanding shares of common stock. Stock options and
warrants are excluded from the calculation of net loss per share for the for the
twelve month period ended December 31, 1996 as their effect is anti-dilutive.

30
<PAGE> 32

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Additionally, pursuant to the requirements of the Securities and Exchange
Commission, common equivalent shares, including preferred stock (using the
if-converted method) and stock options and warrants (using the treasury stock
method) issued subsequent to September 1994 through December 11, 1995, have been
included in the computations for the periods through December 11, 1995 as if
they were outstanding for the entire period.

Historical net loss per share data for 1994 and 1995 have not been
presented since such amount is not deemed to be meaningful due to the
significant change in the Company's capital structure as a result of the initial
public offering in 1995.

Employee stock plans

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Compensation." SFAS 123 establishes an accounting
method based on the fair value of equity instruments awarded to employees as
compensation. The Company has elected to retain its current application of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted, as required, the disclosure provisions
of SFAS No. 123.

NOTE 2. BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials.................................................. $ 1,433 $ 518
Work-in-process................................................ 1,453 2,311
Finished goods................................................. 1,622 935
------- -------
$ 4,508 $ 3,764
======= =======
Property and equipment:
Machinery and equipment........................................ $ 5,129 $ 3,035
Software....................................................... 1,259 815
Leasehold improvements......................................... 368 30
Furniture and fixtures......................................... 607 397
------- -------
7,363 4,277
Accumulated depreciation and amortization...................... (3,205) (1,223)
------- -------
$ 4,158 $ 3,054
======= =======
Accrued liabilities:
Accrued compensation........................................... $ 809 $ 444
Accrued sales and marketing incentives......................... 2,474 2,153
Accrued warranty and upgrade costs............................. 510 300
Accrued payable to sub-contractors............................. 1,100 325
Other.......................................................... 1,916 779
------- -------
$ 6,809 $ 4,001
======= =======
</TABLE>

31
<PAGE> 33

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. INCOME TAXES:

No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses through December 31, 1996.

Deferred income tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Federal and state loss and credit carryforwards............ $ 13,695 $ 8,272
Capitalized start-up and development costs................. 1,183 935
Other asset valuation reserves............................. 4,295 2,000
Other...................................................... 2,748 362
-------- --------
Gross deferred tax assets.................................. 21,921 11,569
Deferred tax liabilities................................... (223) (113)
Valuation allowance........................................ (21,698) (11,456)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
</TABLE>

Management believes that based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the lack of significant history of profits, the fact that
the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the lack of carryback capacity
to realize these assets.

At December 31, 1996, the Company had federal net operating loss
carryforwards and tax credit carryforwards of approximately $32.2 million. The
net operating loss and credit carryforwards will expire at various dates
beginning 2007, if not utilized. Utilization of the net operating losses and
credits may be subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization. At December 31, 1996 the
federal net operating loss carryforwards of the Company were not subject to any
material annual limitations.

The federal net operating loss carryforwards differ from the accumulated
deficit principally due to temporary differences in the recognition of certain
items for financial statement and federal tax reporting purposes, consisting
primarily of certain reserves and allowances not currently deductible for tax
purposes and certain start-up and development costs capitalized for tax
purposes.

NOTE 4. STOCKHOLDERS' EQUITY:

Preferred Stock

As of December 31, 1994, the Company had issued 7,871,544 shares of
Convertible Preferred Stock. During 1995, the Company issued an additional
3,037,500 shares of Convertible Preferred Stock for cash.

In connection with a technology licensing arrangement the company issued
150,000 shares of its Series C Convertible Preferred Stock in the quarter ended
December 31, 1995. The Company has valued these shares at $8.00 per share. (See
Note 8).

32
<PAGE> 34

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Upon the closing of the Company's initial public offering on December 11,
1995, all of the Convertible Preferred Stock automatically converted into Common
Stock.

Restricted Common Stock

In February 1993, the Company's board of directors adopted the 1993
Restricted Stock Purchase Plan (the "Purchase Plan") which provided for the sale
of Common Stock to employees and consultants. Restricted shares purchased under
the Purchase Plan are subject to a repurchase right by the Company. This
repurchase right generally lapses over a 48-month period. This plan was
terminated on October 16, 1995. As of December 31, 1996, shares outstanding
under the Purchase Plan aggregated 1,094,565, of which 423, 648 were subject to
the Company's repurchase rights.

Series C Convertible Preferred Stock warrants

At December 31, 1994, the Company had 101,500 Series C Convertible
Preferred Stock warrants outstanding which were exercisable at $4 per share. In
conjunction with the Company's initial public offering, 85,000 of these warrants
were exercised on a net issuance basis for 65,000 Common shares. The remaining
16,500 warrants automatically converted into Common Stock warrants upon the
completion of the Company's initial public offering. These warrants expire on
June 30, 2004.

During the quarter ended December 31, 1995 the Company issued a warrant to
purchase 110,000 shares of its Series C Convertible Preferred Stock in
connection with a technology licensing arrangement (See Note 8). The warrant
expires on November 1, 1999 and is exercisable at $9 per share. The Company has
assigned a value of $300,000 to this warrant. The warrant automatically
converted into a Common Stock warrant upon the completion of the Company's
initial public offering.

Notes receivable from stockholders

In exchange for the issuance of Common Stock in fiscal 1995 and 1994 under
the Purchase Plan, the Company received notes receivable from Stockholders which
bear interest at rates varying from 4.86% to 7.2% per annum. Principal and
interest are due and payable on the fifth anniversary of the date of issuance.
The outstanding loan balance has been shown as a reduction to stockholders'
equity.

NOTE 5. STOCK COMPENSATION PLANS:

1993 Incentive Stock Option Plan

In February 1993, the Company's board of directors adopted the 1993
Incentive Stock Option Plan (the "Option Plan"). Under the Option Plan, the
Board of Directors are authorized to issue options for up to 2,870,000 shares of
Common Stock to employees and consultants of the Company at grant prices
determined by the board of directors on the date of grant. The Option Plan
allows for incentive stock options to be granted to employees and non-statutory
stock options to be granted to employees and consultants.

Options granted under the Option Plan expire no later than ten years from
the date of grant (no later than five years for 10% shareholders). The exercise
price shall be at least 100% and 85% of the fair value of the stock subject to
the option on the date the option is granted as determined by the board of
directors for incentive stock options and non-statutory stock options,
respectively (110% of the fair value for 10% shareholders). The options
generally become exercisable in increments over a period of four years from the
date of grant, with the first increment vesting after one year. At the
discretion of the Board of Directors, options may be granted with different
vesting terms. During 1995, the Company granted 47,275 options to consultants
and 23,000 options to certain employees, for which, in addition to normal four
year time based vesting, vesting is accelerated if certain performance based
milestones are met.

33
<PAGE> 35

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes activity under the option plan:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -----------------------------
AVAILABLE NUMBER PRICE PER
FOR GRANT OF SHARES SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1993...................... 474,949 516,285 $0.15
Additional shares authorized...................... 1,000,000 -- --
Options granted................................... (889,725) 889,725 $0.15-$ 0.40
Options exercised................................. -- (81,993) $0.15-$ 0.40
Options canceled.................................. 216,166 (216,166) $0.15-$ 0.40
---------- ----------
Balance at December 31, 1994...................... 801,390 1,107,851 $0.15-$ 0.40
Additional shares authorized...................... 870,000 -- --
Options granted................................... (1,025,000) 1,025,000 $0.40-$ 7.00
Options exercised................................. -- (203,895) $0.15-$ 4.25
Options canceled.................................. 269,939 (269,939) $0.15-$ 0.40
---------- ----------
Balance at December 31, 1995...................... 916,329 1,659,017 $0.15-$ 7.00
Options granted................................... (1,825,600) 1,825,600 $0.40-$10.75
Options exercised................................. -- (278,066) $0.15-$10.75
Options canceled.................................. 1,167,841 (1,167,841) $0.15-$10.75
---------- ----------
Balance at December 31, 1996...................... 258,570 2,038,710 $0.15-$10.75
========== ==========
</TABLE>

At December 31, 1996, options to purchase 443,772 shares were exercisable.

1995 Directors' Stock Option Plan

In October 1995, the Company instituted a directors' stock option plan and
reserved a total of 200,000 shares of the Company's Common Stock for issuance of
stock options thereunder. The 1995 Directors' Stock Option Plan allows for
granting of stock options to members of the Board of Directors who are not
employees of the Company. The options generally become exercisable in increments
over a period of four years from the date of grant, with the first increment
vesting after one year. During 1995, options to purchase 100,000 shares of
common stock were granted to Directors at an exercise price of $12 per share.
During 1996, no new shares were issued, no shares were exercised and 20,000
shares were canceled.

Based on an independent consultant's valuation report, management believes
that the exercise price for certain options granted during 1995 was below the
estimated fair value of the Company's Common Stock at the dates of grants. The
Company recorded deferred compensation expense of $400,000 related to these
grants which is being amortized over related vesting periods of the options. As
of December 31, 1996 the Company had recorded an expense of $150,000 related to
this compensation.

1995 Employee Stock Purchase Plan

In October 1995, the Company instituted an employee stock purchase plan
(the "1995 Purchase Plan") and reserved a total of 300,000 shares of the
Company's Common Stock for issuance thereunder. The 1995 Purchase Plan permits
employees to acquire shares of the Company's Common Stock through payroll
deductions and became effective upon completion of the initial public offering
of the Company's Common Stock. During 1996, shares issued under this plan
aggregated 110,996.

As of December 31, 1996, the Company has three stock-based compensation
plans, described above. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
options

34
<PAGE> 36

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

granted in 1996 and 1995 under the Company's option plans been determined based
on fair market value at the grant dates, as prescribed by SFAS No. 123, the
Company's net loss and pro forma net loss (in thousands) and the Company's net
loss and pro forma net loss per share would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net loss -- as reported...................................... $(24,392) $(11,553)
Net loss -- pro forma........................................ $(26,172) $(11,883)
Net loss per share -- as reported............................ $ (1.28)
Unaudited pro forma net loss per share -- as reported........ $ (0.74)
Net loss per share -- pro forma.............................. $ (1.37)
Unaudited pro forma net loss per share -- adjusted........... $ (0.76)
</TABLE>

The weighted average fair market value of options granted was $3.80 per
share and $1.31 per share for the years ended December 31, 1996 and 1995,
respectively.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable period: expected volatility of
70%, risk-free interest rate of 6.19% for options granted, and a weighted
average expected option term of 5.0 years for both periods. The Company has not
paid dividends and assumed no dividend yield.

The following table summarizes information about stock options outstanding
under both the 1993 Incentive Stock Option Plan and the 1995 Directors' Stock
Option Plan at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
EXERCISE NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- -------------- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.15 184,490 6.91 $ 0.15 110,860 $ 0.15
$ 0.40 460,107 7.98 $ 0.40 179,866 $ 0.40
$ 0.50 131,672 8.57 $ 0.50 28,896 $ 0.50
$ 4.25 175,878 8.63 $ 4.25 26,266 $ 4.25
$ 5.00 13,050 9.97 $ 5.00 -- $ 5.00
$ 5.50 70,250 9.72 $ 5.50 -- $ 5.50
$ 6.50 787,988 9.51 $ 6.50 40,295 $ 6.50
$ 6.75 53,000 9.82 $ 6.75 -- $ 6.75
$ 7.00 152,275 8.83 $ 7.00 57,589 $ 7.00
$10.75 10,000 9.34 $ 10.75 -- $ 10.75
$12.00 80,000 8.95 $ 12.00 20,000 $ 12.00
--------- -------
$0.15-$12.00 2,118,710 8.77 $ 4.29 463,772 $ 2.41
========= =======
</TABLE>

For the Employee Stock Purchase Plan, the fair value of each purchase right
is estimated at the beginning of the offering period using the Black-Scholes
option-pricing model with the following weighted-average assumptions used in
1995 and 1996 respectively: expected volatility of 70%; risk-free interest rate
of 5.17% and 5.33%; and expected lives of 6 months for both periods. The Company
has not paid dividends and assumed no dividend yield. The weighted-average fair
value of those purchase rights granted in 1995 and 1996 was $3.90 and $2.89,
respectively.

35
<PAGE> 37

VISIONEER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. RIGHTS PLAN:

On October 23, 1996, the Board of Directors ("Board") adopted a Preferred
Shares Rights Agreement ("Agreement") and pursuant to the Agreement authorized
and declared a dividend of one preferred share purchase right ("Right") for each
common share outstanding of the Company on November 11, 1996. The Rights are
designed to protect and maximize the value of the outstanding equity interests
in the Company in the event of an unsolicited attempt by an acquirer to take
over the Company, in a manner or terms not approved by the Board. Each Right
becomes exercisable to purchase one thousandth of a share of Series A
Participating Preferred Stock at an exercise price of $27.50 and expires on
October 23, 2006. The Company may redeem the Rights at a price of $0.01 per
Right.

NOTE 7. COMMITMENTS:

Operating and capital leases

The Company leases its facility in California and certain equipment under
noncancelable operating leases. As of December 31, 1996, the Company had no
leases classified as capital leases. Total rent expense under operating leases
for the years ended December 31, 1996, 1995, and 1994 was $546,000, $305,000 and
$299,000 respectively. Future minimum lease payments under the Company's current
operating leases as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
(THOUSANDS)
<S> <C>
Years ending December 31:
1997........................................... $ 671
1998........................................... 696
1999........................................... 715
2000 and thereafter............................ 1,169
------
Total minimum payment............................ $ 3,251
======
</TABLE>

Letters of credit

As of December 31, 1996, one secured standby letter of credit for $62,000
was outstanding. This letter of credit was issued to secure the last month's
deposit on the Company's facilities in Fremont, California. The letter of credit
is secured by a certificate of deposit which is presented as restricted cash at
December 31, 1996.

NOTE 8. NON-RECURRING ITEM:

During the year ended December 31, 1995, the Company recorded an expense of
$1,600,000 representing the fair value of securities issued and cash paid in
connection with the settlement of a patent matter. In addition, the Company has
also agreed to pay certain annual minimum and per unit royalties which are being
recognized as expense in periods in which the related revenues are recognized.

NOTE 9. LITIGATION AND PATENT INFRINGEMENT CLAIMS:

36
<PAGE> 38

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Stockholders of Visioneer, Inc.

Our audits of the financial statements referred to in our report dated
January 31, 1997, appearing on page 24 in the 1996 Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.

Price Waterhouse LLP

San Jose, California
January 31, 1997

37
<PAGE> 39

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
DECEMBER 31, PERIOD EXPENSES WRITE-OFFS END OF PERIOD
- ------------ ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1996 $2,531 $4,469 $ (3,069) $ 3,931
1995 $ 300 $3,348 $ (1,117) $ 2,531
1994 $ -- $ 300 $ -- $ 300
</TABLE>

INVENTORY

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
DECEMBER 31, PERIOD EXPENSES WRITE-OFFS END OF PERIOD
- ------------ ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1996 $ 662 $7,901 $ (2,865) $ 5,698
1995 $ 100 $ 810 $ (248) $ 662
1994 $ -- $ 100 $ -- $ 100
</TABLE>

38
<PAGE> 40

PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of July 31, 1997.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------
<S> <C> <C>
J. Larry Smart 50 President and Chief Executive Officer, and Director
Rudolph E. Burger, Ph.D. 39 Senior Vice President, Technology
Michael T. Burt 47 Vice President, Operations
Geoffrey C. Darby 50 Vice President of Finance and Administration and
Chief Financial Officer
Murray Dennis 50 Vice President of Worldwide Sales
Michael Weissman 32 Vice President, Marketing
William J. Harding Ph.D.(1)(2) 49 Director
Jeffrey Heimbuck 51 Director
David F. Marquardt(2) 48 Director
Vincent Worms(1) 44 Director
</TABLE>

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

(1) Member of the Audit Committee of the Board of Directors.

(2) Member of the Compensation Committee of the Board of Directors.

Mr. Smart has served as President and Chief Executive Officer of the
Company since April 1997, replacing Michael A. McConnell who resigned at that
time. Mr. Smart served as Chairman of the Board of Directors from February 1997
until assuming the position of President and Chief Executive Officer. From April
1996 to March 1997, Mr. Smart was Chairman, President and Chief Executive
Officer of StreamLogic Corporation, a network storage company. From July 1995 to
March 1996, Mr. Smart was President and Chief Executive Officer of Micropolis
Corporation, a disk drive design and manufacturing company. From March 1994 to
February 1995, Mr. Smart was President and Chief Executive Officer of Maxtor
Corporation, a disk drive development and manufacturing company. From July 1991
to March 1994, Mr. Smart was President and Chief Executive Officer of Southwall
Technologies, a thin film technology Company. Mr. Smart currently serves as
Chairman of the Board of Southwall Technologies and Western Micro Technologies,
a distributor of electronic components and systems.

Dr. Burger has served as Senior Vice President, Technology of the Company
since May 1997, replacing Todd Basche who resigned as Vice President of
Engineering at that time. From July 1995 to May 1997, Dr. Burger was the
Company's Vice President of Business Development. Prior to that from September ,
1993 to July 1995, Dr. Burger was the Vice President, Software Products for
Xerox Desktop Document Systems, a manufacturer of copiers, scanners, printers
and document processing software. In May 1989 Dr. Burger founded Savitar, Inc.,
a developer of color imaging software, where he served as president until
September, 1993.

Mr. Burt has served as Vice President, Operations of the Company since May
1997, replacing David C. Craft who resigned at that time. From October 1996 to
April 1997, Mr. Burt was director of Operations for Be Inc., a developer of
computer operating system software. Prior to that from June 1983 to October
1996, Mr. Burt managed various manufacturing and corporate functions for Apple
Computer, Inc., a developer and manufacturer of computer hardware and software
products.

Mr. Darby has served as Vice President of Finance and Administration and
Chief Financial Officer of the Company since September 1994. From February 1989
to August 1994, Mr. Darby was Vice President of

39
<PAGE> 41

Finance and Administration and Chief Financial Officer at Megatest Corporation,
Inc. a semiconductor test equipment company.

Mr. Dennis has served as Vice President of Worldwide Sales of the Company
since July 1996 and previously served as a consultant to the Company from May
1996 to July 1996. From October 1994 to May 1996, Mr. Dennis was President and
Chief Executive Officer of Socket Communications, a maker of wireless and wired
data communication products. From October 1991 to October 1994, Mr. Dennis
served as Senior Vice President, Sales and Service of SuperMac Technology, a
company specializing in desktop publishing and video editing systems which was
acquired by Radius, Inc.

Mr. Weissman has served as Vice President, Marketing of the Company since
May 1997, replacing Bruce S. Mowery who resigned at that time. Prior to that
from July 1992 to May 1997 Mr. Weissman served as Senior Product Manager,
Printers for Canon Computer Systems, Inc., a developer and manufacturer of
printer and software products. From June 1988 to July 1992, Mr. Weissman served
as Senior Product Manager, Multifunctional Peripherals for Toshiba America
Information Systems, Inc., a developer and manufacturer of image management
systems.

Dr. Harding has served as a director of the Company since May 1995. Since
1994, Dr. Harding has been a general partner of Morgan Stanley Venture Partners
II, L.P., which manages the Morgan Stanley Venture Capital Funds. During 1994,
Dr. Harding was a private investor. From 1985 through 1993, Dr. Harding was a
general partner of J.H. Whitney & Co., a venture capital firm.

Mr. Heimbuck has served as a director of the Company since April 1997,
replacing James P. Lally, who resigned in March 1997. From July 1992 to June
1996, Mr. Heimbuck served as President and Chief Executive Officer of Inmac
Corp., a direct marketer of computer related products. From July 1988 to July
1992, Mr. Heimbuck served as President of Plus Development and Quantum
Commercial Products, a division of Quantum Corporation, a manufacturer of disk
drives and other mass storage products.

Mr. Marquardt has served as a director of the Company since November 1992.
Since August 1980, Mr. Marquardt has been a general partner of Technology
Venture Investors, a venture capital firm. Mr. Marquardt currently serves as a
director of Auspex Systems, Inc. and Microsoft Corporation.

Mr. Worms has served as a director of the Company since March 1992. Since
1982, Mr. Worms has been a general partner and co-President of Partech
International Venture Capital, a venture capital firm. Mr. Worms currently
serves as a director of Sangstat Medical Corporation and Business Objects, Inc.

COMPENSATION OF DIRECTORS

Directors received no cash compensation for their services as directors in
1996. Directors will receive compensation of $25,000 per year for their services
as directors commencing in the 1997 fiscal year, which amount will be paid at
the end of each fiscal year to directors who served during the entire fiscal
year. Directors are reimbursed for out-of-pocket travel expenses associated with
their attendance at Board meetings. Nonemployee directors of the Company are
automatically granted options to purchase shares of the Company's Common Stock
pursuant to the terms of the Company's 1995 Directors' Stock Option Plan (the
"Directors' Option Plan"). Under such plan, each person that was a nonemployee
director of the Company on the date of the Company's initial public offering,
which was December 11, 1995, was granted an option to purchase 20,000 shares of
Common Stock on the date of such offering and each person who thereafter first
becomes a nonemployee director will be granted an option to purchase 20,000
shares of Common Stock on the date on which he or she first becomes a
nonemployee director (the "First Option"). Thereafter, on January 1 of each
year, commencing January 1, 1997, each nonemployee director will be
automatically granted an additional option to purchase 5,000 shares of Common
Stock (a "Subsequent Option") if, on such date, he or she has served on the
Company's Board of Directors for at least six months. The Directors' Plan
provides that the First Option will become exercisable in installments as to 25%
of the total number of shares subject to the First Option on each anniversary of
the date of grant of the First Option and each Subsequent Option will become
exercisable in full on the first anniversary of the date of grant of that
Subsequent Option. Options granted under the Directors' Option Plan have an
exercise price equal to the fair market value of the

40
<PAGE> 42

Company's Common Stock on the date of grant, and a term of ten years. Pursuant
to the Directors' Option Plan, on January 1, 1997, each nonemployee director who
was a director as of such date was granted an option to purchase 5,000 shares of
Common Stock at an exercise price of $4.50 per share. Pursuant to the Directors'
Option Plan, on April 9, 1997, Mr. Heimbuck, who became a director on such date,
was granted a First Option to purchase 20,000 shares of Common Stock at an
exercise price of $3.50 per share. In addition, the Board of Directors granted
Mr. Heimbuck options for 25,000 and 5,000 shares of Common Stock at an exercise
price of $3.50 per share, of which the option for 5,000 shares is subject to
stockholder approval. The terms of such options, including vesting terms, are
substantially similar to the terms of the First Option.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and holders of more than
ten percent of the Company's Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 29, 1996 the
Company's officers, directors and holders of more than ten percent of the
Company's Common Stock complied with all applicable Section 16(a) Filing
requirements.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table shows the compensation received by the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company for the fiscal years ended December 29, 1996, December 31, 1995
and December 31, 1994 (collectively, the "Named Executive Officers"):

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------------------- ---------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
SALARY BONUS COMPEN- STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) SATION($) AWARDS($)(2) OPTIONS(#) SATION($)
- --------------------------- ------- -------- ------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. McConnell(3) 1996 $244,417 -- -- -- -- --
President and Chief 1995 $166,000 -- -- $ 0 -- --
Executive Officer 1994 -- -- -- -- -- --
Todd Basche(4) 1996 $199,624 $20,000 -- -- -- --
Vice President of 1995 $169,000 -- -- $ 0 -- --
Engineering 1994 $140,000 -- -- $ 0 75,000 --
David D. Craft(5) 1996 $175,922 $19,500 -- -- 40,000 --
Vice President of 1995 $148,500 -- -- -- 30,000 --
Operations 1994 $125,000 -- -- -- 60,000
Geoffrey C. Darby(6) 1996 $160,214 $20,000 -- -- 30,000 --
Vice President of Finance 1995 $135,000 $30,000 -- -- 20,000 --
and Administration and 1994 $ 54,519 -- -- $ 0 -- --
Chief Financial Officer
Bruce S. Mowery(7) 1996 $153,382 $35,000 -- -- 150,000 --
Vice President of 1995 -- -- -- -- -- --
Marketing 1994 -- -- -- -- -- --
</TABLE>

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

(1) Includes amounts paid in 1997 for services rendered in 1996.

(2) There were no restricted stock awards to the Named Executive Officers during
1996. The aggregate number and value of shares of restricted Common Stock of
the Company outstanding at December 29, 1996 and held by the Named Executive
Officers as group was 1,094,565 shares and $5,190,427 (net of the
consideration paid by the Named Executive Officers), respectively, based on
the closing price of the Company's Common Stock of $5.13 per share as
reported on the Nasdaq National Market on December 27, 1996.

41
<PAGE> 43

On February 21, 1994, Mr. Basche purchased 100,000 shares of restricted
Common Stock under the Company's 1993 Restricted Stock Purchase Plan. These
shares were subject to repurchase by the Company, at the original $0.15 per
share purchase price, upon Mr. Basche's cessation of service prior to
vesting in those shares. Such right of repurchase lapsed with respect to
25% of these shares on March 11, 1994, and continued to lapse at a rate of
approximately 2% per month after such date. See footnote (#4) below.

On April 12, 1995, Mr. Basche purchased 100,000 shares of restricted Common
Stock under the Company's 1993 Restricted Stock Purchase Plan. These shares
were subject to repurchase by the Company, at the original $0.40 per share
purchase price, upon Mr. Basche's cessation of service prior to vesting of
those shares. Such right of repurchase lapsed at a rate of approximately 2%
per month after February 16, 1995. See footnote (#4) below.

On December 9, 1994, Mr. Darby purchased 110,000 shares of restricted
Common Stock under the Company's 1993 Restricted Stock Purchase Plan. These
shares are subject to repurchase by the Company, at the original $0.40 per
share purchase price, upon Mr. Darby's cessation of service prior to
vesting in those shares. Such right of repurchase lapsed with respect to
25% of these shares on August 9, 1995, and will continue to lapse at a rate
of approximately 2% per month after such date.

On April 12, 1995, Mr. McConnell purchased 560,000 shares of restricted
Common Stock under the Company's 1993 Restricted Stock Purchase Plan. These
shares were subject to repurchase by the Company, at the original $0.40 per
share purchase price, upon Mr. McConnell's cessation of service prior to
vesting of those shares. Such right of repurchase lapsed with respect to
25% of these shares on January 23, 1996, and continued to lapse at a rate
of approximately 2% per month after such date. See footnote (#3) below.

(3) On April 3, 1997, Mr. McConnell resigned as President and Chief Executive
Officer of the Company, and was succeeded by J. Larry Smart, whose
annualized base salary is $240,000. Mr. Smart was granted a nonstatutory
stock option in April 1997 to purchase 135,000 shares of the Company's
Common Stock at an exercise price of $3.75 under the Company's 1997 Employee
Stock Option Plan (the "April Option"), and an incentive stock option in
June 1997 to purchase 180,000 shares of the Company's Common Stock at an
exercise price of $3.437 per share under the Company's 1993 Incentive Stock
Option Plan (the "June Option"). The April Option vests at the rate of
15,000 per month commencing April 1, 1997 until January 1, 1998, at which
time the option will vest in full, provided that Mr. Smart remains employed
by the Company. The June Option vests at the rate of 15,000 per month
commencing January 1, 1998, of which certain shares are subject to
acceleration upon the achievement of certain milestones, including the
acquisition of the Company. See "Change-in-Control Agreements." In
connection with Mr. McConnell's resignation, the Company entered into a
severance agreement with Mr. McConnell, which is described in "Item
13 -- Certain Relationships and Related Transactions."

(4) On May 16, 1997, Mr. Basche resigned as Vice President of Engineering of the
Company, and was succeeded by Rudolph E. Burger as Senior Vice President,
Technology whose annualized base salary is $187,500. Dr. Burger received a
bonus of $7,424 on July 11, 1997. Dr. Burger was granted an incentive stock
option to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $2.69 per share. Dr. Burger's option vests at the rate of
approximately 2% per month. In connection with Mr. Basche's resignation, the
Company entered into a severance agreement with Mr. Basche, which is
described in "Item 13 -- Certain Relationships and Related Transactions."

(5) On May 21, 1997, Mr. Craft resigned as Vice President of Operations of the
Company, and was succeeded by Michael T. Burt whose annualized base salary
is $120,000. Mr. Burt was granted a nonstatutory stock option to purchase
100,000 shares of the Company's Common Stock at an exercise price of $2.81
per share. Mr. Burt's option vests at the rate of 25% on May 20, 1998 and
approximately 2% per month thereafter. In connection with Mr. Craft's
resignation, the Company entered into a severance agreement with Mr. Craft
which is described in "Item 13 -- Certain Relationships and Related
Transactions."

42
<PAGE> 44

(6) Mr. Darby joined the Company in September 1994. Mr. Darby's annualized base
salary for the year ended December 31, 1994 was $135,000. Mr. Darby received
a bonus of $7,498 on July 11, 1997.

(7) The Company hired Bruce S. Mowery as its Vice President of Marketing in
March 1996. Mr. Mowery's annualized base salary for the fiscal year ended
December 29, 1996 was $190,000. On May 16, 1997, Mr. Mowery resigned as Vice
President of Marketing of the Company, and was succeeded by Michael Weissman
whose annualized base salary is $125,000. Mr. Weissman received a signing
bonus of $20,000 and was granted a nonstatutory stock option to purchase
100,000 shares of the Company's Common Stock at an exercise price of $2.69
per share. Mr. Weissman's option vests at the rate of 25% on May 20, 1998
and approximately 2% per month thereafter. In connection with Mr. Mowery's
resignation, the Company entered into a severance agreement with Mr. Mowery,
which is described in "Item 13 -- Certain Relationships and Related
Transactions."

STOCK OPTION GRANTS IN FISCAL YEAR 1996

The following table sets forth information for the Named Executive Officers
with respect to grants of options to purchase Common Stock of the Company made
in the fiscal year ended December 29, 1996 and the value of all options held by
such executive officers on December 29, 1996.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
- -------------------------- ------------- -------------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David D. Craft(4)......... 40,000 2.19 $ 6.50 07/25/06 $163,513 $ 414,373
Geoffrey C. Darby......... 30,000 1.6 $ 6.50 07/25/06 $122,634 $ 310,780
Bruce S. Mowery(5)........ 150,000 8.2 $ 6.50 07/25/06 $613,172 $1,553,899
</TABLE>

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

(1) No stock appreciation rights (SARs) were granted during 1996. All options
were granted pursuant to the Company's 1993 Incentive Stock Option Plan. Mr.
Craft's and Mr. Darby's grants commence vesting upon the date of grant, and
vest at a rate of approximately 2% per month. Mr. Mowery's grant vests at
the rate of 25% on the first anniversary of the grant date and approximately
2% per month thereafter. Each grant continues to vest as long as the
optionee remains an employee with or consultant to the Company. The maximum
term of each option granted is ten years from the date of grant. The
exercise price is equal to the fair market value of the stock on the grant
date.

(2) There were an aggregate of 1,427,600 shares granted in 1996 under the
Company's 1993 Incentive Stock Option Plan, with an aggregated value of
$9,287,825, based on the closing price of the Company's Common Stock of
$5.13 per share as reported on the Nasdaq National Market on December 27,
1996.

(3) Potential realizable values are reported net of the option exercise price
but before taxes associated with the exercise. The 5% and 10% assumed annual
rates of compounded stock appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. Actual gains, if
any, on stock option exercises are dependent on the future financial
performance of the Company, overall market conditions and the option
holders' continued employment through the vesting period.

(4) See footnote (#5) under "Summary Compensation Table" above.

(5) Mr. Mowery's options were canceled and reissued on July 25, 1996 with an
exercise price of $6.50 per share. See footnote (#7) under "Summary
Compensation Table" above.

43
<PAGE> 45

OPTION CANCELLATIONS AND REISSUANCES

The following table provides information regarding the cancellation and
reissuance of certain options held by any of the Company's executive officers
during the last ten completed fiscal years.

<TABLE>
<CAPTION>
EXERCISE
NUMBER OF MARKET PRICE AT NEW
DATE OF SHARES PRICE AT TIME OF EXERCISE EXPIRATION
CANCELLATION CANCELLED CANCELLATION CANCELLATION PRICE OF DATE OF
AND AND AND AND REISSUED REISSUED
EMPLOYEE TITLE REISSUANCE REISSUED REISSUANCE REISSUANCE OPTION OPTION
- ----------------- ------------------ ------------ --------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Murray Dennis Vice President of 7/25/96 150,000 $ 6.50 $10.75 $ 6.50 7/25/06
Worldwide Sales

Bruce S. Vice President of 7/25/96 150,000 $ 6.50 $10.75 $ 6.50 5/02/06
Mowery(1) Marketing
</TABLE>

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

(1) See footnote (#7) under "Summary Compensation Table" above.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND YEAR END OPTION VALUES

The following table sets forth information for each of the Named Executive
Officers concerning options exercised during the fiscal year ended December 29,
1996. Also reported are values for "in-the-money" options that represent the
positive spread between the respective exercise prices of outstanding options
and the fair market value of the Company's Common Stock as of December 29, 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT 12/29/96(1) AT 12/29/96(2)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. McConnell(3)....... -- -- -- -- -- --
Todd Basche(4)................ -- -- 32,395 33,334 $ 159,062 $ 161,628
David D. Craft(5)............. -- -- 41,457 88,543 $ 182,584 $ 136,366
Geoffrey C. Darby(6).......... -- -- 3,125 46,875 -- $ 17,600
Bruce S. Mowery............... -- -- -- 150,000 -- --
</TABLE>

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

(1) No stock appreciation rights (SARs) were outstanding during 1996.

(2) Based on the closing price of the Company's Common Stock of $5.13 per share
as reported on the Nasdaq National Market on December 27, 1996.

(3) See footnote (#3) under "Summary Compensation Table" above.

(4) See footnote (#4) under "Summary Compensation Table" above.

(5) See footnote (#5) under "Summary Compensation Table" above.

(6) See footnote (#7) under "Summary Compensation Table" above.

CHANGE-IN-CONTROL AGREEMENTS

The Company has entered into Employment Agreements with each of its
executive officers (excluding J. Larry Smart, the terms of whose employment
relationship with the Company is governed by certain letter agreements between
Mr. Smart and the Company dated April 1, 1997 and July 7, 1997 (the "Letter
Agreements")) pursuant to which such individuals, in the event of an involuntary
termination of their employment with the Company (other than for cause), which
involuntary termination includes a material reduction in job responsibilities, a
greater than 20% reduction in annual base compensation, or the requirement that
the executive officer relocate to a location outside of the San Francisco Bay
Area prior to, but in contemplation of, or within twelve (12) months after, a
Change of Control of the Company (as defined below), will be entitled to receive
payment of six (6) months severance and acceleration of vesting on the greater
of one-half of their unvested stock options or restricted stock grants
previously granted by the Company or the number of option shares or shares of
restricted stock previously granted by the Company that would have vested if
such individual remained an employee of the Company for one year after the date

of such

44
<PAGE> 46

involuntary termination. A Change of Control is deemed to include: (i) the
acquisition by any individual person or entity of twenty percent (20%) or more
of the Company's total voting power without the consent of the Company or its
Board of Directors; (ii) a merger or consolidation of the Company, not approved
by the Company or its Board of Directors, pursuant to which at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company prior to such Change of Control does not continue to represent at
least fifty percent (50%) of the total voting power of the Company after such
occurrence; (iii) a liquidation or sale or disposition of all or substantially
all of the Company's assets without approval by the Company's stockholders; or
(iv) a change in the composition of the Company's Board of Directors such that
fewer than a majority of the directors are either those who were serving as of
October 22, 1996 ("Incumbent Directors") or are elected to the Board by the
Incumbent Directors.

Pursuant to the Letter Agreements, Mr. Smart will become immediately vested
with respect to 60,000 additional shares of Common Stock under the June Option
(or such lesser number of unvested shares remaining under the June Option) upon
a Change of Control of the Company by merger or sale of substantially all of the
Company's assets to a third party, provided Mr. Smart remains the President and
Chief Executive Officer of the Company upon the consummation of such event.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee was formed in August 1995 to review
and approve the compensation and benefits for the Company's executive officers,
administer the Company's stock purchase and option plans and make
recommendations to the Board of Directors regarding such matters. Directors
Harding and Marquardt comprised the Compensation Committee of the Board of
Directors during 1996. Neither Dr. Harding nor Mr. Marquardt has ever been an
officer or employee of the Company or any of its subsidiaries, nor were there
any compensation committee interlocks or other relationships during 1996
requiring disclosure under item 402(j) of Regulation S-K of the Securities and
Exchange Commission.

45
<PAGE> 47

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company's
Common Stock as of July 31, 1997 as to (i) each person (or group of affiliated
persons) who is known by the Company to beneficially own more than five percent
of the Company's Common Stock, (ii) each of the Company's directors, (iii) each
of the Named Executive Officers (as named in the Summary Compensation Table),
and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME OF STOCKHOLDER NUMBER PERCENT
- ------------------------------------------------------------------------- --------- -------
<S> <C> <C>
Technology Venture Investors-IV, L.P.(2)................................. 2,194,649 11.3 %
2480 Sand Hill Road
Menlo Park, CA 94025
Morgan Stanley Venture Capital Fund II, L.P.(3).......................... 1,755,000 9.0
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Parvest U.S. Partners II, C.V.(4)........................................ 1,697,661 8.7
Partech International, Inc.
101 California Street -- Suite 3150
San Francisco, CA 94111
William J. Harding(3).................................................... 1,755,000 9.0
Jeffrey Heimbuck......................................................... 0
David F. Marquardt(2).................................................... 2,194,649 11.3
Michael A. McConnell..................................................... 555,100 2.8
Vincent Worms (4)........................................................ 1,697,661 8.7
J. Larry Smart(5)........................................................ 75,000 *
Todd Basche.............................................................. 201,921 1.0
David D. Craft(5)........................................................ 197,787 *
Geoffrey C. Darby(5)..................................................... 125,095 *
Bruce S. Mowery(5)....................................................... 57,314 *
All directors and executive officers as a group
as of July 31, 1997 (10 persons)(2)(3)(5).............................. 5,940,218 30.4
</TABLE>

- ---------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of July 31, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table.

(2) Includes 2,186,199 shares owned by Technology Venture Investors IV, L.P. and
5,000 shares issuable upon exercise of an outstanding option exercisable
within 60 days of July 31, 1997 held by David F. Marquardt. Mr. Marquardt is
a director of the Company, is a general partner of TVI Management-IV, L.P.,
which is the sole general partner of Technology Venture Investors IV, L.P.,
and, as such, Mr. Marquardt may be deemed to share voting and investment
power with respect to such shares. Mr. Marquardt disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest in
such shares. Also includes 3,450 shares held directly by Mr. Marquardt.

(3) Includes 1,159,959 shares owned by Morgan Stanley Venture Capital Fund II,
L.P., 301,052 shares owned by Morgan Stanley Venture Investors, L.P.,
288,989 shares owned by Morgan Stanley Venture Capital Fund II, C.V., and
5,000 shares issuable upon exercise of an outstanding option exercisable
within 60 days of July 31, 1997 held by William J. Harding, a director of
the Company. Mr. Harding is a general partner of Morgan Stanley Venture
Partners II, L.P., the general partner of Morgan Stanley

46
<PAGE> 48

Venture Capital Fund II, L.P., Morgan Stanley Venture Investors, L.P. and
Morgan Stanley Venture Capital Fund II, C.V. and, as such, may be deemed to
share voting and investment power with respect to such shares. Dr. Harding
disclaims beneficial ownership with respect to such shares except to the
extent of his pecuniary interest in such shares.

(4) Includes 869,722 shares owned by Parvest U.S. Partners II, C.V., 361,945
shares owned by Paribas U.S. Partners, V.O.F., 405,494 shares held by
certain entities that may be deemed affiliated with Parvest U.S. Partners
II, C.V. and Paribas U.S. Partners, V.O.F., and 5,000 shares issuable upon
exercise of an outstanding option exercisable within 60 days of July 31,
1997 held by Vincent Worms. Mr. Worms is a director of the Company, is a
general partner of Parvest U.S. Partners II, C.V. and is a general partner
of the general partner of the investment general partner of Paribas U.S.
Partners, V.O.F. and, as such, may be deemed to share voting and investment
power with respect to such shares. Mr. Worms disclaims beneficial ownership
with respect to such shares except to the extent of his pecuniary interest
in such shares. Also includes 55,500 shares held directly by Mr. Worms.

(5) Includes 75,000 shares issuable upon the exercise of outstanding options
held by Mr. Smart, 16,515 shares issuable upon the exercise of outstanding
options held by Mr. Craft, 8,750 shares issuable upon the exercise of
outstanding options held by Mr. Darby, and 52,314 shares issuable upon
exercise of outstanding options held by Mr. Mowery which are currently
exercisable or exercisable within 60 days of July 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 1996, the Company entered into a Settlement Agreement and
Mutual Release with Marc Randolph, who was then the Vice President of Marketing
of the Company, pursuant to which Mr. Randolph's position as an officer of the
Company was terminated. In addition, under such severance agreement, Mr.
Randolph remained an employee of the Company until September 1996, and continued
to vest in shares of Common Stock held by him until such time. In connection
with Mr. Randolph's termination of employment in September 1996, the Company
repurchased 129,167 shares of Common Stock from Mr. Randolph at the original
issue price of $0.40 per share, which shares were purchased by Mr. Randolph in
April 1995 as part of the purchase of 200,000 shares of Common Stock under the
Company's 1993 Restricted Stock Purchase Plan in consideration of a promissory
note issued to the Company in the principal amount of $80,000. In connection
with such repurchase, the Company canceled $51,666.80 under such promissory note
and Mr. Randolph repaid the remaining principal and interest owing under such
note.

In May 1996, the Company entered into a Settlement Agreement and Mutual
Release with Linda Starr, who was then the Vice President of Sales of the
Company, pursuant to which Ms. Starr's employment with the Company terminated.
In connection with such termination, the Company paid Ms. Starr $115,000 as
severance pay and accelerated the vesting of 13,125 shares under an option to
purchase 70,000 shares of Common Stock at an exercise price of $0.40 per share
and 1,875 shares under an option to purchase 10,000 shares of Common Stock at an
exercise price of $0.40 per share in addition to the number of shares that were
vested under such option grants as of the date of Ms. Starr's termination.

In April 1995, the Company sold to Michael A. McConnell, the President and
Chief Executive Officer of the Company, 560,000 shares of restricted Common
Stock at a purchase price of $0.40 per share pursuant to the Company's 1993
Restricted Stock Purchase Plan. These shares were subject to repurchase by the
Company, at the original $0.40 per share purchase price, upon Mr. McConnell's
cessation of service prior to vesting in those shares. In connection with the
share purchase, the Company loaned $224,000 to Mr. McConnell pursuant to a
promissory note secured by the 560,000 shares of restricted Common Stock
purchased by Mr. McConnell. In April 1997, the Company entered into a Settlement
Agreement and Mutual Release with Michael A. McConnell, who was then the
President, Chief Executive Officer and a director of the Company, pursuant to
which Mr. McConnell resigned his position as an officer of the Company as of
April 3, 1997, and as a director in May 1997.

In addition, the Company has entered into Settlement Agreements and Mutual
Releases with each of Todd Basche, Bruce Mowery and David D. Craft. Mr. Basche,
who was then Vice President of Engineering,

47
<PAGE> 49

resigned his position as an officer of the Company as of May 16, 1997, and
pursuant to a Settlement Agreement and Mutual Release of even date (the "Basche
Settlement"), the Company made a severance payment to Mr. Basche in the amount
of $60,230.80. In addition, the Company repurchased by cancellation of
indebtedness 43,750 shares of Common Stock held by Mr. Basche at a price of
approximately $0.40 per share. Mr. Basche remains indebted to the Company in the
amount of $101,154 (including principal and interest) as of May 16, 1997 under
certain promissory notes signed by Mr. Basche in connection with previously made
purchases of the Company's Common Stock and a loan agreement entered into
between the Company and Mr. Basche as of March 31, 1994 (the "Loan Agreement"),
which amount is after forgiveness of $60,000 in principal under the Loan
Agreement. Pursuant to the Basche Settlement, all principal and interest accrued
under such notes and the Loan Agreement is due and payable in full on the
earlier of December 31, 1997 or upon the sale after June 1, 1997 of any shares
of the Company's Common Stock held by Mr. Basche. Stock options previously
granted by the Company to Mr. Basche that had vested as of his termination date
remained exercisable for ninety (90) days after such date.

Mr. Mowery, who was then Vice President of Marketing, resigned his position
as an officer of the Company as of May 16, 1997, and pursuant to a Settlement
Agreement and Mutual Release of even date, the Company made a severance payment
to Mr. Mowery in the amount of $66,923.04. Stock options previously granted by
the Company to Mr. Mowery that had vested as of his termination date remained
exercisable for two hundred ten (210) days after such date.

Mr. Craft, who was then Vice President of Operations, resigned his position
as an officer of the Company as of May 21, 1997, and pursuant to a Settlement
Agreement and Mutual Release of even date, the Company made a severance payment
to Mr. Craft in the amount of $84,307.72. Stock options previously granted by
the Company to Mr. Craft that would have vested as of November 30, 1997 will
continue to be exercisable by Mr. Craft for a period of ninety (90) days after
such date.

The Company has entered into Employment Agreements with each of its
executive officers, excluding J. Larry Smart, the terms of whose employment
relationship with the Company is governed by the Letter Agreements. See "Item
11 -- Executive Compensation -- Change in Control Agreements."

See "Item 10 -- Directors and Executive Officers of the
Registrant -- Compensation of Directors" for a discussion of option grants to
Jeffrey Heimbuck made outside of the 1995 Directors' Stock Option Plan.

The Company believes that the relationships set forth above are on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between the Company and
its officers, directors, principal shareholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.

48
<PAGE> 50

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this Report:

(1) Financial Statements -- See Index to Financial Statements at Item 8
of this Report.

(2) Financial Statements Schedules -- The following financial statement
schedule for the Company's fiscal years ended December 31, 1996,
1995 and 1994 is contained in Item 8 of this Report:

II -- Valuation and Qualifying Accounts and Reserves

Report of Price Waterhouse LLP, Independent Accountants. Refer to Item
8 above.

Any other necessary financial statement schedules required by Item 8
of the Report have been incorporated into the Financial Statements
included as part of this Report.

(3) Exhibits -- Refer to Item 14(c) below.

(b) Reports on Form 8-K.

The Company filed a current Report on Form 8-K reporting that on
October 23, 1996, the Company's Board of Directors had declared a dividend
of one preferred share purchase right for each outstanding share of Common
Stock, entitling stockholders of record on November 11, 1996 to purchase
from the Company one one-thousandth of a share of Series A Preferred Stock
of the Company at a price of $27.50 pursuant to the terms of a Preferred
Shares Rights Agreement dated as of October 23, 1996 between the Company
and U.S. Stock Transfer Corporation, as rights agent.

Exhibits (numbered in accordance with Item 601 of Regulation S-K)

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ------------ --------------------------------------------------------------------------------
<S> <C>
3.2(1) Bylaws of Registrant.
3.4(1) Amended and Restated Certificate of Incorporation of Registrant.
4.1(1) Form of Common Stock Certificate.
4.2(6) Preferred Shares Rights Agreement, dated as of October 23, 1996, between the
Registrant and U.S. Stock Transfer Corporation, including the Certificate of
Designation of Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and Summary of Rights attached
thereto as Exhibits A, B and C, respectively.
10.1(1) Form of Indemnification Agreement.
10.2(1)** 1993 Incentive Stock Option Plan and form of Option Agreement.
10.3(1)** 1995 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4(1)** 1995 Directors' Option Plan and form of Option Agreement.
10.5(1) Third Amended and Restated Registration Rights Agreement dated May 9, 1995 among
the Registrant and certain security holders of the Registrant.
10.7(1) OEM Agreement dated November 2, 1994 between the Registrant and Hewlett-Packard
Company, as amended by Amendment No. 1 dated August 1, 1995.
10.8(1) Distribution Agreement dated January 31, 1994 between the Registrant and Ingram
Micro Inc.
10.9(1) Distribution Agreement dated February 24, 1994 between the Registrant and
Merisel Americas, Inc.
10.10(1) Manufacturing Contract dated March 30, 1995 between the Registrant and
Flextronics Technologies, Inc.
10.11(1) Manufacturing Services Agreement dated June 20, 1995 between the Registrant and
International Business Machines Corporation.
</TABLE>

49
<PAGE> 51

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ------------ --------------------------------------------------------------------------------
<S> <C>
10.12(1)** Loan Agreement dated March 31, 1994 between the Registrant and Todd Basche.
10.13(1) LZW Paper Input System Patent License Agreement dated October 20, 1995 between
the Registrant and Unisys Corporation.
10.14(1) Patent License agreement dated November 13, 1995 between the Registrant and Wang
Laboratories, Inc.
10.15(1) Loan and Security Agreement dated November 28, 1995 between the Registrant and
Silicon Valley Bank.
10.16(2) Amendment No. 2 dated December 15, 1995 to OEM Agreement dated November 2, 1994
between the Registrant and Hewlett-Packard Company.
10.17(2) Amendment No. 3 dated January 31, 1995 to OEM Agreement dated November 2, 1994
between the Registrant and Hewlett-Packard Company.
10.18(3) OEM Agreement dated June 30, 1995 between the Registrant and Compaq Computer
Corporation.
10.19(4) Building Lease dated May 21, 1996 between the Registrant and John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga Family Trust) as
amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated
7/20/77 (Richard T. Peery, Separate Property Trust) as amended.
10.20(5) Software License Agreement dated August 14, 1996 between the Registrant and
Hewlett-Packard Company.
10.21** Form of Employment Agreement between the Registrant and each of its Executive
Offices.
10.22(8) 1997 Employee Stock Option Plan
10.23(8) Director 1997 Compensation Plan
10.24(9) Manufacturing Agreement dated May 8, 1997 between the Registrant and NMB
Technologies, Inc.
10.25(9) Loan and Security Agreement dated June 26, 1997 between the Registrant and
Silicon Valley Bank
10.26(9)** Letter Agreements dated April 1, 1997 and July 7, 1997 between the Registrant
and J. Larry Smart
10.27(9)** Letter Agreement dated April 9, 1997 between the Registrant and Jeffrey
Heimbuck, and Nonstatutory Stock Option Agreements dated April 9, 1997 between
the Registrant and Jeffrey Heimbuck
11.1 Calculation of Earnings Per Share.
23.1 Consent of Price Waterhouse LLP
24.1(7) Power of Attorney.
27.1 Financial Data Schedule
</TABLE>

- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 33-98356) filed with the Commission on October 19, 1995.

(2) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.

(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996.

(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996.

(5) Incorporated by reference from Exhibit 10.19 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1996.

(6) Incorporated by reference from Exhibit 4.1 of the Registrant's current
Report on Form 8-K dated October 30, 1996.

50
<PAGE> 52

(7) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 1996.

(8) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.

(9) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.

** Management compensatory plan or arrangement.

51
<PAGE> 53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California, on August 29, 1997.

VISIONEER, INC.

By: /s/ GEOFFREY C. DARBY

------------------------------------
Geoffrey C. Darby
Vice President of Finance and
Administration and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------- ----------------

<S> <C> <C>
/s/ J. LARRY SMART* President, Chief Executive Officer and August 29, 1997
- ----------------------------------- Director
J. Larry Smart (Principal Executive Officer)

/s/ GEOFFREY C. DARBY Vice President of Finance and August 29, 1997
- ----------------------------------- Administration, Chief Financial Officer
Geoffrey C. Darby (Principal Financial and Accounting
Officer)

/s/ WILLIAM J. HARDING* Director August 29, 1997
- -----------------------------------
William J. Harding

/s/ JEFFREY HEIMBUCK Director August 29, 1997
- -----------------------------------
Jeffrey Heimbuck

/s/ DAVID F. MARQUARDT* Director August 29, 1997
- -----------------------------------
David F. Marquardt

/s/ VINCENT WORMS* Director August 29, 1997
- -----------------------------------
Vincent Worms

*By: /s/ GEOFFREY C. DARBY August 29, 1997
- -----------------------------------
Geoffrey C. Darby
Attorney-in-fact
</TABLE>

52
<PAGE> 54

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- --------- -----------------------------------------------------------------------------------
<S> <C> <C>
3.2(1) Bylaws of Registrant..................................................
3.4(1) Amended and Restated Certificate of Incorporation of Registrant.......
4.1(1) Form of Common Stock Certificate......................................
4.2(6) Preferred Shares Rights Agreement, dated as of October 23, 1996,
between the Registrant and U.S. Stock Transfer Corporation, including
the Certificate of Designation of Rights, Preferences and Privileges
of Series A Participating Preferred Stock, the form of Rights
Certificate and Summary of Rights attached thereto as Exhibits A, B
and C, respectively...................................................
10.1(1) Form of Indemnification Agreement.....................................
10.2(1)** 1993 Incentive Stock Option Plan and form of Option Agreement.........
10.3(1)** 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.............................................................
10.4(1)** 1995 Directors' Option Plan and form of Option Agreement..............
10.5(1) Third Amended and Restated Registration Rights Agreement dated May 9,
1995 among the Registrant and certain security holders of the
Registrant............................................................
10.7(1) OEM Agreement dated November 2, 1994 between the Registrant and
Hewlett-Packard Company, as amended by Amendment No. 1 dated August 1,
1995..................................................................
10.8(1) Distribution Agreement dated January 31, 1994 between the Registrant
and Ingram Micro Inc. ................................................
10.9(1) Distribution Agreement dated February 24, 1994 between the Registrant
and Merisel Americas, Inc. ...........................................
10.10(1) Manufacturing Contract dated March 30, 1995 between the Registrant and
Flextronics Technologies, Inc. .......................................
10.11(1) Manufacturing Services Agreement dated June 20, 1995 between the
Registrant and International Business Machines Corporation............
10.12(1)** Loan Agreement dated March 31, 1994 between the Registrant and Todd
Basche ...............................................................
10.13(1) LZW Paper Input System Patent License Agreement dated October 20, 1995
between the Registrant and Unisys Corporation.........................
10.14(1) Patent License agreement dated November 13, 1995 between the
Registrant and Wang Laboratories, Inc. ...............................
10.15(1) Loan and Security Agreement dated November 28, 1995 between the
Registrant and Silicon Valley Bank....................................
10.16(2) Amendment No. 2 dated December 15, 1995 to OEM Agreement dated Novem-
ber 2, 1994 between the Registrant and Hewlett-Packard Company........
10.17(2) Amendment No. 3 dated January 31, 1995 to OEM Agreement dated November
2, 1994 between the Registrant and Hewlett-Packard Company............
10.18(3) OEM Agreement dated June 30, 1995 between the Registrant and Compaq
Computer Corporation..................................................
10.19(4) Building Lease dated May 21, 1996 between the Registrant and John
Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery, Separate
Property Trust) as amended............................................
</TABLE>
<PAGE> 55

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- --------- -----------------------------------------------------------------------------------
<S> <C> <C>
10.20(5) Software License Agreement dated August 14, 1996 between the
Registrant and Hewlett-Packard Company................................
10.21(7)** Form of Employment Agreement between the Registrant and each of its
Executive Officers....................................................
10.22(8) 1997 Employee Stock Option Plan.......................................
10.23(8) Director 1997 Compensation Plan.......................................
10.24(9) Manufacturing Agreement dated May 8, 1997 between the Registrant and
NMB Technologies, Inc.................................................
10.25(9) Loan and Security Agreement dated June 26, 1997 between the Registrant
and Silicon Valley Bank...............................................
10.26(9)** Letter Agreements dated April 1, 1997 and July 7, 1997 between the
Registrant and J. Larry Smart.........................................
10.27(9)** Letter Agreement dated April 9, 1997 between the Registrant and
Jeffrey Heimbuck, and Nonstatutory Stock Option Agreements dated April
9, 1997 between the Registrant and Jeffrey Heimbuck...................
11.1 Calculation of Earnings Per Share.....................................
23.1 Consent of Price Waterhouse LLP.......................................
24.1(2) Power of Attorney.....................................................
27.1 Financial Data Schedule...............................................
</TABLE>