STORM PRIMAX INC, 424B1, 1996-10-02

STORM PRIMAX INC
424B1, 1996-10-02
PREPACKAGED SOFTWARE

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<PAGE>

FILED PURSUANT TO RULE 424(b)(1)
FILE NO. 333-06911

2,850,000 SHARES

[LOGO OF STORM TECHNOLOGY]

COMMON STOCK
(PAR VALUE $.001 PER SHARE)

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

Of the 2,850,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 850,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of shares being sold by the Selling
Stockholders.

Prior to this offering, there has been no public market for the Common Stock
of the Company. For factors to be considered in determining the initial public
offering price, see "Underwriting".

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "EASY".

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $10.50 $0.735 $9.765 $9.765
Total(3)........... $29,925,000 $2,094,750 $19,530,000 $8,300,250
</TABLE>

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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $800,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 427,500 shares at the initial public offering price
per share, less the underwriting discount, solely to cover over-
allotments. If such option is exercised in full, the total initial public
offering price, underwriting discount and proceeds to the Company will be
$34,413,750, $2,408,963 and $23,704,537, respectively. See "Underwriting".

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

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about October 4, 1996, against payment therefor in immediately available
funds.

GOLDMAN, SACHS & CO. HAMBRECHT & QUIST

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

The date of this Prospectus is September 30, 1996.
<PAGE>

[TEXT OVERLAY: "IMAGINE..."]

[film strip with pictures (from top to bottom): business man at meeting, couple
at beach, house, child holding fish, child golfing and child hugging dog]

[PICTURE OF MAN WITH PENSIVE LOOK AGAINST
BACKDROP OF MONTAGE OF PHOTOS INCLUDING BUSINESS MAN AT MEETING,
COUPLE AT BEACH, HOUSE, CHILD HOLDING FISH, CHILD GOLFING AND CHILD HUGGING DOG
APPEARS HERE]

[PICTURES]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>

[picture of real estate brochure with photo from film strip integrated with
text]

[picture of web page with photo from film strip integrated with text]

[diagram with (from left to right): picture of page of text, (1) picture of
photo from film strip being scanned by EasyPhoto Reader, (2) picture of computer
screen with combined text and photo of boy hugging dog, (3) picture of hard copy
of combined text and photo]

Now its easy to add the impact of color photos to your communications. (1) One
touch photo input. (2) Drag & Drop photos into computer documents. (3) Print or
send on-line with sharp details and true color.
<PAGE>

[picture of letter with photo from film strip integrated with text]

[picture of E-mail with photo from film strip integrated with text]

[picture of greeting card with photo from film strip integrated with text]

[picture of newsletter with photos integrated with text]

[picture of slide of photos on a bar graph]

[picture of EasyPhoto reader scanning a photo]

[picture of EasyPhoto SmartPage scanning a document with photo integrated with
text]

[picture of EasyPhoto Drive scanning a photo]

[film strip with pictures (from top to bottom): business man at meeting, couple
at beach, house, child holding fish, child golfing and child hugging dog]
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus, including share and per share data, (i)
reflects the automatic conversion of all outstanding shares of Preferred Stock
into shares of Common Stock effective upon the closing of the offering,
(ii) assumes the exercise, prior to the effectiveness of the offering, of
warrants to purchase 3,413 shares of Common Stock, which warrants will
terminate upon the effectiveness of the offering, and (iii) assumes no exercise
of the Underwriters' over-allotment option. See "Description of Capital Stock"
and "Underwriting."

THE COMPANY

Storm Technology, Inc. ("Storm" or the "Company") is a leading provider of
digital photo solutions that enable consumers and small businesses to input,
store, organize, enhance and use photos easily on their personal computers
("PCs"). The Company's vision is to empower consumers to use digital photos to
create more personal, memorable and effective communications. The Company
believes that the $16 billion worldwide chemical photography market is evolving
to a market that will increasingly include digital photos due in part to the
increasing availability of photo input devices and software that enable people
to use digital photos with their computers. This transition, coupled with the
recent proliferation of powerful multimedia home PCs, is leading to the
emergence of digital photos as a new and rapidly growing product category for
consumers. To capitalize on this emerging market opportunity, Storm develops
and markets software-differentiated, consumer-branded products that are easy to
use, result in high image quality and provide consumers and small businesses
with a comprehensive digital photo solution.

The Company's current photo scanner products, the EasyPhoto Reader, EasyPhoto
SmartPage and PhotoDrive, sell at affordable consumer-oriented price points and
are designed to function with typical home PC configurations (such as 486-based
computers with 8 MB of RAM). These photo scanners are tightly integrated with
the Company's EasyPhoto software environment, which combines an intuitive user
interface with advanced image compression technology, a photo-oriented virtual
memory system, powerful database functionality and a unique library of image
enhancement tools based on sophisticated imaging algorithms. In addition, the
EasyPhoto software environment is designed to capitalize fully on Microsoft's
Object Linking and Embedding (OLE) standard, enabling consumers to use their
photos in other applications directly through "drag and drop" of photographs
from their EasyPhoto database into virtually any document.

The Company's objective is to become the leading provider of digital photo
input and software solutions for consumers and small businesses. The Company's
strategy is focused on (i) making its EasyPhoto software environment the de
facto standard for organizing and storing digital photos on PCs, (ii)
developing and marketing high quality, easy to use, affordable photo input
solutions that are tightly integrated with its EasyPhoto software environment,
and (iii) distributing photo-centric applications that further enhance the
value of its photo input products. The Company plans to extend its competitive
advantage in these product categories through technology leadership, strategic
partnerships, brand marketing and worldwide retail and OEM distribution.

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<PAGE>

The Company's distribution efforts focus on aftermarket sales to existing PC
users through leading computer retail channels and on establishing OEM
relationships with a variety of key companies within the computer industry to
broaden the distribution channel for its products. The Company's products are
presently sold by most of the leading retailers of computer products in the
United States, including Best Buy, Circuit City, CompUSA, Computer City,
Egghead Software, Fry's Electronics, The Good Guys, OfficeMax, Staples and
others. Sales are promoted through proactive consumer marketing designed to
increase end user awareness and demand for EasyPhoto products. Key OEM
relationships include Hewlett-Packard, which incorporates the Company's
PhotoDrive in certain models of its Pavilion product line, Acer, Polaroid and
Epson. In addition, the Company recently entered into a technology and
distribution agreement with Intel Corporation, which also made an equity
investment in the Company.

RECENT ACQUISITION

In March 1996, the Company acquired from Primax Electronics, Ltd. ("Primax"),
a Republic of China corporation, all photo scanner technology, including
certain in-process technology, associated with the Company's EasyPhoto Reader,
PhotoDrive and certain other scanner products, as well as Primax's U.S.
subsidiary ("Primax USA"), which was primarily a sales distribution company for
Primax products in North America. The Company and Primax also entered into a
strategic manufacturing agreement, pursuant to which Primax has agreed to
manufacture a minimum of 85% of certain of the Company's photo scanners. As
part of this transaction, Primax was issued 4,214,329 shares of Storm Preferred
Stock. As a result of this transaction, a small prior investment in the Company
and the sale of certain shares to third parties in June 1996, Primax owned
approximately 48% of the Company's outstanding voting securities as of June 30,
1996. After completion of this offering, Primax will own approximately 31% of
the Company's outstanding voting securities.

RISK FACTORS

For a discussion of certain considerations relevant to an investment in the
Common Stock, see "Risk Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,000,000 shares
Common Stock offered by the Selling
Stockholders................................... 850,000 shares
Common Stock to be outstanding after the
offering....................................... 10,012,985 shares(1)
Use of proceeds................................. For working capital, other general
corporate purposes and repayment of
accounts payable to a related party. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.......... EASY
</TABLE>

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(1) Excludes (i) 333,917 shares of Common Stock issuable upon exercise of
options outstanding as of June 30, 1996 with a weighted average exercise
price of $3.25 per share, (ii) 257,791 shares of Common Stock reserved for
issuance upon exercise of options that may be granted in the future under
the Company's Amended and Restated Stock Option Plan (the "Option Plan"),
(iii) 33,750 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1996 and 78,750 shares of Common Stock reserved
for issuance upon exercise of options that may be granted in the future
under the Company's 1996 Directors Stock Option Plan (the "Directors
Plan"), (iv) 75,000 shares of Common Stock reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"), and (v)
42,815 shares of Common Stock issuable upon exercise of outstanding
warrants. See "Capitalization," "Management--Benefit Plans" and Note 6 of
Notes to the Company's Consolidated Financial Statements.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
------- ------- --------------------- ------- ------------------------
ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(1)
------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................. $ 2,983 $ 3,200 $ 5,794 $13,895 $ 2,003 $ 8,021 $10,125
Loss from operations..... (1,367) (2,189) (3,452) (4,690) (1,550) (7,922)(2) (3,385)
Net loss................. (1,325) (2,093) (3,396) (4,746) (1,525) (7,889)(2) (3,368)
Pro forma:
Net loss per common and
common equivalent
share(3).............. $ (0.45) $ (0.63) $ (0.20) $ (0.98) $ (0.42)
Weighted average number
of common and common
equivalent shares
outstanding(3)........ 7,588 7,588 7,473 8,047 8,047
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 2,503 $21,233
Working capital (deficit).............................. (1,365) 17,365
Total assets........................................... 10,893 29,623
Total stockholders' equity (deficit)................... (197) 18,533
</TABLE>

- --------

(1) The unaudited pro forma statement of operations data for the year ended
December 31, 1995 and the six months ended June 30, 1996 reflects the
effect of the acquisition of the outstanding stock of Primax USA and
certain technologies from Primax, both on March 18, 1996, as if the
acquisition had occurred on January 1, 1995. The acquisition was accounted
for as a purchase. The Company has discontinued the Primax USA product line
acquired in the Primax transaction. As a result, the revenues of Primax USA
are not indicative of the future revenues of the Company derived from the
operations or products of Primax USA.
(2) Includes a $5 million write-off of acquired in-process research and
development.
(3) See Note 2 of Notes to the Company's Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock by
the Company and the application of the net proceeds therefrom, after
deducting underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds."

5
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements, and actual results could differ materially from those
projected in the forward-looking statements as a result of numerous factors,
including the factors set forth below and elsewhere in this Prospectus.

LIMITED HISTORY OF PRODUCT REVENUES; OPERATING LOSSES

The Company, which was founded in January 1990, commenced shipment of its
initial EasyPhoto product in the first quarter of 1995. Accordingly, the
Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company has incurred net losses in
every period since inception. There can be no assurance that it will attain
profitability, or, if profitability is attained, that the Company will sustain
profitability on a quarterly or an annual basis. As of June 30, 1996, the
Company had an accumulated deficit of $16.4 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON DEVELOPING MARKET; PRODUCT CONCENTRATION

The market for digital photo products and, in particular, for the Company's
EasyPhoto line of scanners and software products, is new and rapidly evolving.
The Company currently derives substantially all of its revenues from its
EasyPhoto photo scanners and software 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 these products is
critical to the Company's future success. This success will depend in part on
the ability of the Company and its distributors and OEM partners to convince
end users to adopt digital photo products for the PC, and to educate end users
about the benefits of the Company's products. There can be no assurance that
the market for digital photos will develop as anticipated by the Company, or
that the Company's products will be broadly accepted. The failure of any of
these events to occur would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

ACCEPTANCE OF NEW PRODUCTS

The Company intends to begin volume shipments of two new products, EasyPhoto
SmartPage and EasyPhoto Drive, in the third quarter of 1996, and expects to
receive significant revenues from the sale of these products in the third and
fourth quarters of this year. There can be no assurance that these products
will achieve broad market acceptance or that they will be successfully
marketed or sold on a profitable basis. In addition, if the Company
experiences difficulties in acquiring sufficient quantities of these products
from its contract manufacturing sources, sales of these products could be
materially adversely affected. The failure of the Company to achieve
significant revenues from these products beginning in the third and fourth
quarter of this year would have a material adverse effect on the Company's
business, financial condition and results of operations.

POTENTIAL SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS

6
<PAGE>

distributors, the performance of the Company's contract manufacturers and
component suppliers, the Company's ability to respond to new product
introductions and price reductions by its competitors, the timing,
cancellation or rescheduling of significant orders from OEMs or distributors,
the availability of key components and changes in the cost of materials for
the Company's products, the level of demand for PCs, the Company's ability to
attract, retain and motivate qualified personnel, the timing and amount of
research and development, marketing and selling and general and administrative
expenditures, and general economic conditions. In addition, the Company has
experienced seasonality in its operating results, with the fourth quarter
typically having the highest total revenues of any quarter during the year.
The Company believes that the seasonality of its revenues results primarily
from the purchasing habits of consumers and the timing of the Company's fiscal
year end. The Company currently believes that these patterns will continue.

Revenues and operating results in any quarter depend 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 in the short
term 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 operating results and financial
condition. The Company may also be required to reduce prices in response to
competition or increase spending to pursue new product or market
opportunities. In the event of significant price competition in the market for
the Company's products, the Company would be required to decrease costs at
least proportionately in order to maintain profit margins and would be at a
significant disadvantage compared to competitors with substantially greater
resources, which could more readily withstand an extended period of downward
pricing pressure.

Due to the foregoing and other factors, it is likely that in some future
period the Company's operating results will be below results for the prior or
comparable period or 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 early-stage companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Information."

RECENT ACQUISITION; RELATIONSHIP WITH PRIMAX

In March 1996, the Company acquired from Primax, a Republic of China
corporation, all photo scanner technology, including certain in-process
technology, associated with the Company's EasyPhoto Reader, PhotoDrive and
certain other scanner products, as well as Primax USA, which was primarily a
sales distribution company for products in North America. As part of this
transaction, Primax was issued 4,214,329 shares of Storm Preferred Stock. As a
result of this transaction, a small prior investment in the Company and the
sale of certain shares to third parties in June 1996, Primax owned
approximately 48% of the voting securities of the Company as of June 30, 1996
(approximately 31% after completion of this offering). Achieving the
anticipated benefits of this acquisition will depend in part upon the
Company's ability to integrate the businesses and technology acquired from
Primax in an efficient and effective manner, and there can be no assurance
that such integration will occur smoothly or successfully. The integration of
certain operations following this acquisition will require the dedication of
management resources, which may temporarily distract attention from the day-
to-day business of the combined company. The inability of management to
successfully integrate the acquired business and technology could have a
material adverse effect on the business, financial condition and results of
operations of the Company.

7
<PAGE>

The Primax transaction, which was accounted for as a purchase, resulted in
the write-off by the Company of $5.0 million of acquired in-process research
and development during the first quarter of 1996. In addition, the Company
recorded $0.8 million of goodwill to be amortized over a four-year period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company also has discontinued the Primax USA product line
acquired in the Primax transaction. As a result, the revenues of Primax USA
contained in the Company's unaudited pro forma combined statements of
operations are not indicative of the future revenues of the Company derived
from the operations or products of Primax USA.

SOLE MANUFACTURING SOURCE; RELIANCE ON SOLE SUPPLIERS

Primax is currently the sole manufacturing source for most of the Company's
photo scanners and the Company expects that it will continue to rely in the
foreseeable future on Primax for a majority of its materials procurement,
assembly, system integration, testing and quality assurance. There can be no
assurance that Primax will be able to meet the Company's requirements for
quality manufactured products at competitive prices. Any inability to obtain
hardware components at competitive prices from Primax or to increase
manufacturing capacity from Primax as required could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company has the right to obtain an alternative manufacturing
source for up to 15% of its requirements, and may increase this percentage if
Primax is unable to provide competitive pricing, quality or availability.
However, there can be no assurance that the Company will be able to obtain
such alternative manufacturing source on favorable terms, if at all. Moreover,
commencement of production of products at new facilities involves certain
start-up risks and delays, such as those associated with the procurement of
materials and training of production personnel.

The Company is dependent on sole or limited source suppliers for certain key
components used in its products. These key components include an application
specific integrated circuit (ASIC) within the EasyPhoto Reader product, which
is currently available only from Epson and the hardware for its EasyPhoto
SmartPage product which is currently available only from Mustek. The Company
has no long term agreements with any of these suppliers for the purchase of
these components. In addition, Epson and Mustek could become competitors of
the Company. There can be no assurance that such limited source suppliers will
be willing or able to meet the Company's requirements for certain key
components. If the Company or Primax were unable to obtain sufficient supplies
from their current suppliers or develop alternative sources of these
components in a timely manner, the resultant shortage or delay could have a
material adverse impact on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."

DISTRIBUTION RISKS

Since February 1995, most of the Company's sales have been made to
distributors, computer superstores, consumer electronic superstores, office
supply superstores, specialty computer stores, on-line companies and OEMs and,
to a lesser extent, mass merchants and mail order companies. Accordingly, the
Company is dependent upon the continued viability and financial stability of
these resellers. The Company's reseller customers offer products of several
different companies, including scanner products that are competitive with the
Company's products. Accordingly, these resellers may give higher priority to
products of suppliers other than the Company through increased shelf space or
promotions, thus reducing their efforts to sell the Company's product. In
addition to the foregoing, any special distribution arrangements and product
pricing arrangements that the Company may implement in one or more
distribution channels for strategic purposes could adversely affect gross
profits for its products.

As is typical in the personal computer industry, 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

8
<PAGE>

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, financial condition
and results of operations, especially in light of the rapid product
obsolescence that often occurs during product transitions. In order to respond
to competitive pricing actions, increase sales or expand the distribution of
its products, the Company may reduce the prices of its products, which could
give rise to significant price protection charges and which would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the difficulty in predicting future sales
and the anticipated short product life cycles of the Company's products due to
frequent upgrades increase the risk that new product introductions, price
reductions by the Company or its competitors, or other factors affecting the
digital photo market could result in significant product returns. Any price
protection charges or product returns in excess of recorded allowances would
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Sales, Marketing and Customer
Support."

Since February 1995, the Company's sales to OEMs have represented only a
small percentage of net sales; however, the Company believes that its ability
to sell products to OEMs will become increasingly important to the Company's
success. OEMs have significantly different, and in some cases more stringent,
purchasing procedures and quality standards than retail distributors and other
resellers. There can be no assurance that the Company will be successful in
developing and delivering products for the OEM market, or that it will be
successful in establishing and maintaining an effective distribution and
customer support system for OEMs.

MANAGEMENT OF EXPANDED OPERATIONS; NEED FOR ADDITIONAL PERSONNEL

The Company has recently experienced and may continue to experience growth
in the number of employees, the scope of its operating and financial systems
and the geographic distribution of its operations and customers due to an
anticipated increase in sales and the recent acquisition transaction with
Primax. This recent increase in the scope and complexity of the Company's
business has placed, and will continue to place, a significant strain on the
Company's management and operations. Accordingly, the Company's future
operating results will depend on the ability of its officers and other key
employees to continue to implement and improve its operational, customer
support and financial control systems. There can be no assurance that the
Company will be able to manage any future expansion successfully, and any
inability to do so would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Management--Executive Officers, Directors and Key Employees."

In addition, the Company has recently recruited and expects to continue to
recruit a significant number of key employees in engineering, marketing, sales
and manufacturing who are expected to play a substantial role in the execution
of the Company's expansion plans. The Company's future performance depends
significantly upon the Company's ability to attract and retain these key
employees. The Company's ability to compete effectively and to manage future
growth, if any, will require the Company to continue to assimilate such new
personnel and to implement and improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and
manage its employee work force. There can be no assurance that the Company
will be able to do so successfully, and the Company's failure to do so could
have a material adverse effect upon the Company's business, financial
condition and results of operations.

COMPETITION

The market for the Company's products is a relatively new and emerging
market. Although the Company currently competes directly with a relatively
small number of competitors, it faces indirect competition from a number of
sources and expects to experience increased competition in the future.

9
<PAGE>

One source of potential future competition may arise from a group of
established manufacturers of text-oriented scanners such as Logitech Inc.
("Logitech"), Microtek Lab Inc. ("Microtek"), Mustek Inc. ("Mustek"), PlusTek
USA Inc. ("PlusTek"), UMAX Technologies Inc. ("UMAX") and Visioneer
Communications Inc. ("Visioneer"). These manufacturers may leverage their
existing scanning technology in the future in an attempt to produce digital
photo devices at a price point and profile that is attractive to consumers,
thereby competing more directly with those of the Company. A second source of
potential future competition may arise from other current significant
participants in the digital photo market. Certain companies, including Epson
America Inc. ("Epson"), Eastman Kodak Company ("Kodak") and Polaroid
Corporation ("Polaroid"), some of which are OEM software customers, have
shipped or indicated an intention to ship photo input devices. Other
companies, including Hewlett-Packard Company ("HP"), may choose to broaden
their product mix to include small or large sized sheetfed scanners that are
targeted toward consumers and directly compete with those offered by the
Company. In addition, competition with the Company's EasyPhoto software
environment and application products may emanate from developers of photo-
oriented software such as Adobe Systems Incorporated ("Adobe"), Fractal Design
Corporation ("Fractal Design"), Microsoft Corporation ("Microsoft"), and a
significant number of small companies, now developing photo-centric software.
This latter group of companies may in the future compete with the Company by
developing advanced software capabilities to be offered on a stand-alone
basis, bundled with hardware, or integrated as part of an operating system.
The Company believes that as the digital photo market evolves, it will face
competition from a variety of sources, including those identified above.

Many of the Company's 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. 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.

The Company believes that the principal competitive factors in its market
are integration of hardware and software design, ease of use, product
performance, feature functionality and reliability, price, availability of
third-party applications, timeliness of new product introductions, service,
support, size and installed base, as well as ability to enter into successful
strategic marketing alliances. Although the Company believes that it is
competitive with respect to most of these factors, there can be no assurance
that it will remain competitive in the future.

CUSTOMER CONCENTRATION

Historically, a relatively small number of customers have accounted for a
significant percentage of the Company's total revenues, and the Company
expects that it will continue to experience significant customer concentration
for the foreseeable future. In 1993, sales to Radius Inc. ("Radius") accounted
for 59% of total revenues; in 1994, sales to Apple Computer, Inc. ("Apple
Computer") and Radius accounted for 41% and 39%, respectively, of total
revenues; in 1995, sales to Circuit City Stores, Inc. ("Circuit City") and
Best Buy Company, Inc. ("Best Buy") accounted for 27% and 11%, respectively,
of total revenues; and in the six months ended June 30, 1996, sales to America
Online Inc. ("America Online"), Ingram Micro Inc. ("Ingram Micro") and Best
Buy accounted for 17%, 15% and 11%, respectively, of total revenues. The
Company does not expect that these customer percentages for the first half of
1996 will necessarily be representative of customer concentration for the full
year or any future period. In particular, the high percentage of sales to
America Online resulted from a promotional program during the first quarter of
1996. There can be no assurance that such customers or any other customers
will in the future continue to license or purchase products or services from
the Company at levels that equal or exceed those of prior periods, if at all.

10
<PAGE>

RAPID TECHNOLOGICAL CHANGE

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 purchases of existing products or cause distributors to request 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.

PROPRIETARY TECHNOLOGY

The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues
to implement protective measures and intends to defend its proprietary rights,
there can be no assurance that measures to deter or prevent unauthorized use
of the Company's technology will be successful. The Company relies on a
combination of patent, copyright and trade secret protection, nondisclosure
agreements and licensing arrangements to establish and protect its proprietary
rights. The Company has several patent applications pending in the United
States and intends to file additional applications as appropriate for patents
covering its products. There can be no assurance that patents will issue from
any of these pending applications or, if patents do issue, that any claims
allowed will be sufficiently broad to protect the Company's technology. There
can also be no assurance that any patents that may be issued to the Company
will not be challenged, invalidated or circumvented, or that any rights
granted thereunder would provide proprietary protection to the Company. In
addition, the laws of certain foreign countries may not protect the Company's
proprietary rights to the same extent as do the laws of the United States. See
"Business--Proprietary Rights."

The Company has from time to time received, and may receive in the future,
communications from third parties asserting that the Company's products,
trademarks or trade names infringe on the proprietary rights of third parties
or seeking indemnification against such infringement. In response to such
communications, the Company consults with its counsel to assess the basis for
any claims of infringement by the Company's products. Due to a recent
communication, the Company has entered into a patent cross license agreement
with a third party. This agreement provides for a lump sum payment by the
Company and potential ongoing royalty payments after two years relating to an
ancillary feature of certain of the Company's products for which payments
Primax has agreed to reimburse the Company pursuant to indemnification
obligations entered into in connection with the sale of technology to the
Company in March 1996. The Company believes that this agreement will not have
a material adverse effect on the Company's business, operating results or
financial condition.

The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly protracted
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, it available, such
licenses will be obtainable on commercially reasonable terms.

11
<PAGE>

The Company also relies on certain technology that it obtains from others,
including certain embedded system level software. The Company may find it
necessary or desirable in the future to obtain licenses relating to one or
more of its products or relating to current and future technologies. There can
be no assurance that the Company can obtain these licenses or other rights on
commercially reasonable terms, if at all.

UNCERTAINTY OF INTERNATIONAL SALES

The Company plans to expand distribution of its products in international
markets and, in particular, Europe and Asia Pacific. International sales have
been insignificant to date. The Company plans to expand its international
sales efforts through agreements with affiliated Primax companies. The Company
has limited experience in marketing, distributing, servicing and supporting
its products internationally. There can be no assurance that the Primax
companies, together with the Company, will successfully market, sell, deliver,
service and support the Company's 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 the
summer months in Europe and certain other parts of the world, and potentially
adverse tax consequences, any of which could adversely affect 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.

CONTROL BY MANAGEMENT AND MAJOR STOCKHOLDER

After this offering, the Company's executive officers and directors, and
their affiliates (including Primax), in the aggregate, will own and control
approximately 49% of the Company's Common Stock. In particular, Primax will
own approximately 31% of the Company's Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. In addition, the Board of
Directors has the authority to issue undesignated Preferred Stock and, subject
to certain limitations, to determine the rights, preferences, privileges and
restrictions, including voting rights, of such shares without any further vote
or action by the stockholders. The voting power of Primax and the Company's
executive officers and directors or the issuance of Preferred Stock under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock."

BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS

The completion of the offering made by this Prospectus will benefit Primax
directly through the sale of 772,500 shares at a large gain. In addition, this
offering will benefit all current stockholders of the Company, including its
directors and executive officers, indirectly by, among other things, creating
a public market for the Company's Common Stock, thereby increasing liquidity
and potentially increasing the market value of such stockholders' investment
in the Company. The Company's directors and executive officers and their
affiliates (including Primax) beneficially own prior to this offering an
aggregate of 5,664,047 shares of Common Stock. Based on the public offering
price of $10.50 per share, such shares beneficially owned (including shares
subject to such options) will have an aggregate market value of approximately
$59.5 million.

12
<PAGE>

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active public market for
the Common Stock will develop or continue after the offering. The initial
public offering price negotiated among the Company, the Selling Stockholders
and representatives of the Underwriters may not be indicative of future market
prices. See "Underwriting." The trading price of the Company's Common Stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, changes in earnings estimates by analysts,
announcements of technological innovations or new products by the Company or
its competitors and other events or factors. In addition, the stock market
from time to time has experienced extreme price and volume fluctuations that
have particularly affected the market price for many high technology companies
and that often have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
the Company's Common Stock.

IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS

The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock. Investors purchasing Common Stock
in this offering will, therefore, incur immediate dilution of $8.73 in net
tangible book value per share of Common Stock (based upon the initial public
offering price of $10.50 per share and after deducting the estimated
underwriting discount and offering expenses) from the initial public offering
price and will incur additional dilution upon the exercise of outstanding
options and warrants.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
10,012,985 shares of Common Stock (assuming no exercise of outstanding options
after June 30, 1996). Of these shares, the 2,850,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subjected to the resale limitations of Rule
144 adopted under the Securities Act. The remaining 7,162,985 shares
outstanding upon completion of this offering and held by existing shareholders
will be "restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of
the contractual restrictions described below, and the provisions of Rule 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) no shares will be available for immediate sale in the
public market on the date of the Prospectus, (ii) 2,960,057 currently
outstanding shares (as well as 98,803 additional shares issuable upon the
exercise of stock options granted under the Option Plan that will be vested)
will be eligible for sale upon expiration of lock-up agreements 180 days after
the date of this Prospectus and (iii) 4,202,928 currently outstanding shares
will be eligible for sale upon expiration of their respective two-year holding
periods, subject in the case of shares held by affiliates to compliance with
certain volume restrictions.

The Securities and Exchange Commission has proposed to reduce the two- and
three-year holding periods under Rule 144 to one and two years, respectively.
If enacted, such modification will have a material effect on the timing of
when certain shares of Common Stock become eligible for resale.

In addition, commencing 180 days after the offering, the holders of
4,202,928 shares of outstanding Common Stock and 42,815 shares of Common Stock
issuable upon exercise of certain warrants will have rights under certain
circumstances to require the Company to register their shares for future sale.
See "Description of Capital Stock--Registration Rights of Certain Holders."

13
<PAGE>

Persons who hold approximately 7,162,985 shares of the Company's Common
Stock after completion of the offering, including the Selling Stockholders and
all officers, directors and existing stockholders of the Company, have agreed
with the Representatives and/or the Company that, for a period of 180 days
following the date of this Prospectus, they will not sell, offer to sell,
contract to sell, grant any options to purchase, make any short sale or
otherwise dispose of any shares of Common Stock of the Company, or any options
or warrants to purchase any shares of Common Stock of the Company, whether now
owned or hereinafter acquired, by such holders or with respect to which they
have beneficial ownership within the rules and regulations of the SEC, except
for the shares of Common Stock offered in connection with the offering and
shares purchased in the open market. The Company has also agreed not to sell,
offer to sell, contract to sell, grant any option to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock for a period of 180 days following the date of this Prospectus without
the prior written consent of Goldman, Sachs & Co. on behalf of the
Underwriters, subject to certain limited exceptions. The lockup agreements may
be released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Goldman, Sachs & Co. on behalf of the
Underwriters.

The Company intends to file a Registration Statement on Form S-8 to register
the shares of Common Stock issuable upon exercise of options granted under the
Option Plan, the Directors' Plan and the Purchase Plan approximately 90 days
after this offering. Following the filing of the Form S-8, shares of Common
Stock issued under the Option Plan, Directors' Plan and Purchase Plan will be
available for sale in the public market upon vesting and exercise of such
options, subject to lock-up restrictions described above and the Rule 144
volume limitations applicable to affiliates.

Prior to this offering, there has been no public market for the Common Stock
and there is no assurance a significant public market for the Common Stock
will develop or be sustained after this offering. Sales of a substantial
amount of Common Stock in the public market could adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through the sale of its equity securities.

EFFECT OF ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and By-Laws
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions allow the Company to issue Preferred Stock
with rights senior to those of the Common Stock without any further vote or
action by the stockholders, eliminate the right of stockholders to act by
written consent and impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions. These provisions could also have the effect of delaying or preventing
a change in control of the Company. The issuance of Preferred Stock could
decrease the amount of earnings and assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. See "Description of Capital Stock."

Under the terms of the Series F Preferred Stock Purchase Agreement, in the
event of any proposed transaction that would result in a change of control or
a sale of all or substantially all of the Company's assets, the Company must
provide written notice to Intel and Intel has a right to propose a competitive
offer that the Board of Directors of the Company must consider in good faith.
In certain circumstances, this notice right could limit the price certain
investors might be willing to pay in the future for shares of the Company's
Common Stock, and could have the effect of delaying or preventing a change in
control of the Company.

14
<PAGE>

THE COMPANY

The Company was incorporated in California in January 1990 under the name
"Storm Technology, Inc." and changed its name to Storm Software, Inc. in
August 1994 and then to "Storm Primax, Inc." in March 1996. The Company
reincorporated in Delaware in September 1996 and changed its name back to
"Storm Technology, Inc.". References to the "Company" include its California
predecessor. The Company's executive offices are located at 521 Almanor
Avenue, Sunnyvale, California, 94086; (408) 522-1200.

Storm Technology and EasyPhoto are registered trademarks of the Company and
ClearScan, the EasyPhoto logo, EasyPhoto Reader, EasyPhoto SmartPage,
EasyPhoto Drive, EasyPhoto Phone EasyPhoto DesignWorks and PhotoDrive are
trademarks of the Company. This Prospectus also contains trademarks of other
companies.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock being offered by the Company are estimated to be approximately
$18.7 million ($22.9 million if the Underwriters' over-allotment option is
exercised in full), after deduction of the estimated underwriting discount and
offering expenses. The Company will not receive any proceeds from the sale of
Common Stock by the Selling Stockholders.

The principal purposes of the offering are to obtain additional working
capital, to create a public market for the Company's Common Stock and to
facilitate future access by the Company to public securities markets. The
Company expects to use the net proceeds of the offering for working capital
and other general corporate purposes and to repay approximately $3.9 million
of accounts payable owed to Primax. These accounts payable were assumed by the
Company as a result of the acquisition by the Company in March 1996 of
Primax's U.S. subsidiary. See "Certain Transactions." The Company may also use
a portion of the net proceeds to fund acquisitions of complementary
businesses, products or technologies, although there are no current agreements
or negotiations with respect to any material acquisitions of businesses,
products or technologies. Pending use of the net proceeds for the foregoing
purposes, the Company intends to invest the net proceeds in investment grade
income-bearing securities.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. The Company's
bank line of credit agreement currently prohibits the payment of dividends.
See Note 8 of Notes to Company's Consolidated Financial Statements.

15
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996,
was approximately $(1.0) million or $(0.12) per share after giving effect to
the issuance of 3,413 shares of Common Stock upon the exercise of outstanding
warrants that terminate upon the closing of the offering. "Net tangible book
value" per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities, divided by the total number of
shares of Common Stock outstanding, including shares of Common Stock resulting
from the conversion of the Preferred Stock. After giving effect to the
estimated net proceeds of approximately $18.7 million from the sale of the
2,000,000 shares of Common Stock offered by the Company at an initial public
offering price of $10.50 per share (assuming no exercise of the Underwriters'
over-allotment option and after deducting the estimated underwriting discount
and offering expenses) and the adjustments set forth above, the pro forma net
tangible book value of the Company as of June 30, 1996 would have been
approximately $17.8 million or $1.77 per share of Common Stock. This
represents an immediate increase in net tangible book value of $1.89 per share
to existing stockholders and an immediate dilution of $8.73 per share to new
investors. The following table illustrates the per share dilution in net
tangible book value to new investors:

<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $10.50
Pro forma net tangible book value per share before
offering.................................................. $(0.12)
Increase per share attributable to new investors........... 1.89
------
Pro forma net tangible book value per share after offering... 1.77
------
Dilution per share to new investors.......................... $ 8.73
======
</TABLE>

The following table summarizes, on a pro forma basis, as of June 30, 1996
the differences in the total consideration paid and the average price per
share paid between existing stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company at an initial
public offering price of $10.50 per share (assuming no exercise of the
Underwriters' over-allotment option and before deducting the underwriting
discount and estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 8,012,985 80.0% $16,079,000 43.4% $ 2.01
New investors(1)........ 2,000,000 20.0% 21,000,000 56.6% 10.50
---------- ----- ----------- -----
Total................. 10,012,985 100.0% $37,079,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The net effect of sales by the Selling Stockholders in this offering will
reduce the number of shares held by existing stockholders to 7,162,985
shares or approximately 71.5% of the total number of shares of Common
Stock outstanding after the offering, and will increase the number of
shares held by new investors to 2,850,000 shares or approximately 28.5% of
the total number of shares of Common Stock to be outstanding after the
offering. See "Principal and Selling Stockholders."

The above computations assume no exercise of outstanding options under the
Option Plan or the Directors Plan after June 30, 1996. As of June 30, 1996,
options to purchase 367,667 shares of Common Stock were outstanding under such
plans. In addition, 42,815 shares of Common Stock were reserved for issuance
upon exercise of outstanding warrants. The exercise of such options and
warrants will result in further dilution to new investors. See
"Capitalization," "Management--Benefit Plans" and Note 6 of Notes to the
Company's Consolidated Financial Statements.

16
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company, (i) as of
June 30, 1996 unaudited, (ii) pro forma unaudited as of such date to reflect
the conversion upon the closing of this offering of all outstanding shares of
Preferred Stock at June 30, 1996 into shares of Common Stock and (iii) as
adjusted as of such date to reflect the sale by the Company of 2,000,000
shares of Common Stock offered hereby, the application of the net proceeds
therefrom and the issuance of Common Stock upon the exercise of outstanding
warrants which terminate upon the closing of this offering.

<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1996
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, $.001 par value;
10,000,000 shares authorized and
6,713,192 shares outstanding, actual;
no shares outstanding pro forma; and
500,000 shares authorized and no
shares
outstanding, as adjusted(1).......... $ 7 $ -- $ --
Common Stock, $.001 par value;
10,000,000 shares authorized and
1,245,919 shares outstanding, actual;
8,012,985 shares outstanding pro
forma; and
30,000,000 shares authorized and
10,012,985 shares outstanding, as
adjusted(1)(2)....................... 1 8 10
Additional paid-in capital............. 16,391 16,391 35,119
Deferred compensation.................. (217) (217) (217)
Accumulated deficit.................... (16,379) (16,379) (16,379)
----------- ----------- -----------
Total stockholders' equity (deficit).. (197) (197) 18,533
----------- ----------- -----------
Total capitalization................. $ (197) $ (197) $ 18,533
=========== =========== ===========
</TABLE>
- --------
(1) Includes 500,000 shares of Preferred Stock and 30,000,000 shares of Common
Stock authorized upon reincorporation in Delaware on September 26, 1996.
(2) Excludes (i) 333,917 shares of Common Stock issuable upon exercise of
options outstanding under the Option Plan as of June 30, 1996, (ii)
257,791 shares of Common Stock reserved for issuance upon exercise of
options that may be granted in the future under the Option Plan, (iii)
33,750 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1996 and 78,750 shares of Common Stock reserved
for issuance upon exercise of options that may be granted under the
Directors Plan, (iv) 75,000 shares of Common Stock reserved for issuance
under the Purchase Plan, and (v) 42,815 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants. See "Capitalization,"
"Management--Benefit Plans" and Note 6 of Notes to the Company's
Consolidated Financial Statements.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of the Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto included elsewhere in this Prospectus. The
selected financial data for the years ended December 31, 1993, 1994 and 1995
and the balance sheet data at December 31, 1994 and 1995 are derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus, which have been audited by Price Waterhouse LLP, independent
accountants, whose report is included elsewhere in this Prospectus. The
selected financial data for the years ended December 31, 1991 and 1992 and as
of December 31, 1991, 1992 and 1993 are also derived from the consolidated
financial statements of the Company, which have been audited by Price
Waterhouse LLP, independent accountants. The statement of operations data
presented for the six-month periods ended June 30, 1995 and 1996 and the
balance sheet data as of June 30, 1996 are derived from unaudited financial
statements of the Company included elsewhere in this Prospectus, have been
prepared on the same basis as the audited financial statements, and, in the
opinion of management, include all normal recurring adjustments that the
Company considers necessary for a fair presentation of its results of
operations. The pro forma data for the year ended December 31, 1995 and the
six months ended June 30, 1996 have been derived from the unaudited Pro Forma
Combined Financial Information included elsewhere herein. The results of the
six-month period ended June 30, 1996 are not necessarily indicative of the
results to be expected for any future period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ----------------- ------- -----------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 899 $ 2,373 $ 1,211 $ 655 $ 5,245 $12,666 $ 1,542 $ 7,633 $ 9,625
Royalty and other...... 531 215 1,772 2,545 549 1,229 461 388 500
------ ------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 1,430 2,588 2,983 3,200 5,794 13,895 2,003 8,021 10,125
Cost of product
revenues............... 374 1,048 276 178 3,735 8,936 1,074 5,697 7,217
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 1,056 1,540 2,707 3,022 2,059 4,959 929 2,324 2,908
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 514 1,219 1,845 2,102 1,494 1,494 749 1,125 1,125
Marketing and selling.. 515 922 1,604 1,981 3,384 6,132 1,389 3,419 4,079
General and
administrative........ 530 500 625 628 633 2,023 341 702 1,089
In-process research and
development........... -- -- -- 500 -- -- -- 5,000 --
------ ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 1,559 2,641 4,074 5,211 5,511 9,649 2,479 10,246 6,293
------ ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (503) (1,101) (1,367) (2,189) (3,452) (4,690) (1,550) (7,922) (3,385)
Interest income, net.... 47 69 42 96 56 (56) 25 33 17
------ ------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $ (456) $(1,032) $(1,325) $(2,093) $(3,396) $(4,746) $(1,525) $(7,889) $(3,368)
====== ======= ======= ======= ======= ======= ======= ======= =======
Pro Forma:
Net loss per common and
common equivalent
share(2).............. $ (0.45) $ (0.63) $ (0.20) $ (0.98) $ (0.42)
Weighted average number
of common and common
equivalent shares
outstanding(2)........ 7,588 7,588 7,473 8,047 8,047
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments................. $2,849 $1,696 $1,663 $2,289 $1,865 $ 2,503
Working capital (deficit)......... 2,419 1,870 422 2,396 2,573 (1,365)
Total assets...................... 3,170 2,355 2,261 3,026 5,979 10,893
Long-term liability............... -- -- -- 100 -- --
Total stockholders' equity
(deficit)........................ 2,505 2,013 727 2,541 2,733 (197)
</TABLE>

- --------

(1) The unaudited pro forma combined statement of operations data for the year
ended December 31, 1995 and the six months ended June 30, 1996 reflect the
effect of the acquisition of the outstanding stock of Primax (USA) and
certain technologies from Primax, both on March 18, 1996, as if the
acquisition had occurred on January 1, 1995. The acquisition was accounted
for as a purchase. The Company has discontinued the Primax USA product
line acquired in the Primax transaction. As a result, the revenues of
Primax USA are not indicative of the future revenues of the Company
derived from the operations or products of Primax USA.
(2) See Note 2 of Notes to the Company's Consolidated Financial Statements.

18
<PAGE>

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

The Company's revenues and results of operations are difficult to forecast
and could differ materially from those projected in the forward-looking
statements contained in this Prospectus as a result of a number of factors,
including without limitation, those discussed under "Risk Factors" above.

OVERVIEW

The Company is a leading provider of digital photo solutions that enable
consumers and small businesses to input, store, organize, enhance and use
photos easily on their PCs. The Company was founded in 1990 to pioneer Joint
Photographic Experts Group ("JPEG") image compression technology. During its
initial years, the Company began its recruitment of an experienced management
team and developed and licensed its image compression hardware and software
technology to leading desktop publishing companies on an OEM basis as a source
of cash flow to fund the Company. In 1993, the Company released its PhotoFlash
image editing software targeted for use with desktop publishing applications
predominantly by small business users. PhotoFlash was distributed by the
Company exclusively to Apple Computer, Inc. in exchange for an advance and
ongoing royalties again intended to reduce the need for additional external
capital.

During 1994, the Company began development of its EasyPhoto software, a
powerful consumer-friendly environment for using digital photos, and began its
transition from being focused solely on OEM technology licensing to being a
provider of consumer-oriented digital photo solutions sold at retail and on an
OEM basis. This resulted in a shift in the Company's financial model to higher
sales growth at a lower gross margin.

In September 1994, the Company entered into an agreement with Primax
providing for the OEM purchase by the Company of photo scanners manufactured
by Primax to be bundled with the Company's EasyPhoto software environment. The
Company decided to enter into the photo input business primarily to take
advantage of a consumer need for an integrated hardware/software solution that
is easy to install and use and is affordable at consumer price points. Sales
of the EasyPhoto Reader product began in February 1995, and the Company
expanded retail distribution of the product throughout 1995.

In March 1996, the Company acquired from Primax the technology for the
hardware component of the EasyPhoto Reader product, in-process technology of
other photo scanner products and Primax's U.S. subsidiary, which was primarily
a sales distribution company for Primax products in North America. This
acquisition, which was accounted for as a purchase, resulted in a $5.0 million
write-off by the Company of acquired in-process research and development
during the first quarter of 1996. In addition, the Company recorded $0.8
million of goodwill to be amortized over a four-year period. Also in the first
quarter of 1996, the Company recorded reserves in anticipation of a price
reduction of its EasyPhoto Reader product and incurred lower margins on
product lines acquired from Primax USA that the Company is in the process of
phasing out. As a result, the revenues of Primax USA contained in the
Company's unaudited pro forma combined statements of operations for the year
ended December 31, 1995 and for the six months ended June 30, 1996 beginning
on page F-20 are not indicative of the future revenues of the Company derived
from the operations or products of Primax USA.

Product revenues from customers are generally recognized when the product is
shipped, provided collectibility is probable. Product revenues from
distributors and authorized resellers are subject to agreements allowing price
protection and certain rights of return. Accordingly, reserves for estimated
future returns and credits for price protection are provided for upon revenue
recognition. Such reserves are estimated based on historical rates of returns
and allowances, distributor inventory levels and other factors. 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 that often occurs during product transitions. Royalty and
other revenue under certain product royalty agreements are generally
recognized upon shipment of related products to customers.

19
<PAGE>

The Company has incurred net losses in every period since inception. There
can be no assurance that it will attain profitability, or, if profitability is
attained, that the Company will sustain profitability on a quarterly or an
annual basis. As of June 30, 1996, the Company had an accumulated deficit of
$16.4 million. The market for digital photo products and, in particular, for
the Company's digital photo hardware and software products, is new and rapidly
evolving. There can be no assurance that the market for digital photos will
develop as anticipated by the Company, or that the Company's products will be
broadly accepted. The Company intends to begin volume shipments of two new
products, EasyPhoto SmartPage and EasyPhoto Drive, in the third quarter of
1996, and expects to receive significant revenues from the sale of these
products in the third and fourth quarter of this year. There can be no
assurance that these products will achieve broad market acceptance or that
they will be successfully marketed or sold on a profitable basis. Primax is
currently the sole manufacturing source for most of the Company's hardware
products and the Company expects that it will continue to rely in the
foreseeable future on Primax for substantially all of its materials
procurement, assembly, system integration, testing and quality assurance.
There can be no assurance that Primax will be able to meet the Company's
requirements for quality manufactured products at competitive prices. The
Company has recently experienced and may continue to experience growth in the
number of employees, the scope of its operating and financial systems and the
geographic distribution of its operations and customers due to an anticipated
increase in sales and the recent acquisition transaction with Primax. The
Company's ability to compete effectively and to manage future growth, if any,
will require the Company to continue to assimilate such new personnel and to
implement and improve its financial and management controls, reporting systems
and procedures on a timely basis and expand, train and manage its employee
work force. There can be no assurance that the Company will be able to do so
successfully.

In June 1996, the Company recorded noncash deferred compensation of
approximately $233,000 in connection with certain stock options granted during
the second quarter of 1996. The deferred compensation will be expensed ratably
over the vesting periods of these options (primarily four years) and,
therefore, will continue to impact the Company's operating results through the
year 2000.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain line items
from the Company's statement of operations as a percentage of the Company's
total revenues:

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Product.................. 40.6% 20.5% 90.5% 77.0% 95.2%
Royalty and other........ 59.4 79.5 9.5 23.0 4.8
------- ------- ------- -------- --------
Total revenues......... 100.0 100.0 100.0 100.0 100.0
Cost of product revenues... 9.3 5.6 64.5 53.6 71.0
------- ------- ------- -------- --------
Gross profit............... 90.7 94.4 35.5 46.4 29.0
------- ------- ------- -------- --------
Operating Expenses:
Research and
development............. 61.8 65.7 25.8 37.4 14.0
Marketing and selling.... 53.8 61.9 58.4 69.4 42.6
General and
administrative.......... 20.9 19.6 10.9 17.0 8.8
In-process research and
development............. -- 15.6 -- -- 62.4
------- ------- ------- -------- --------
Total operating
expenses.............. 136.5 162.8 95.1 123.8 127.8
------- ------- ------- -------- --------
Loss from operations....... (45.8) (68.4) (59.6) (77.4) (98.8)
Interest income, net....... 1.4 3.0 1.0 1.3 0.4
------- ------- ------- -------- --------
Net loss................... (44.4)% (65.4)% (58.6)% (76.1)% (98.4)%
======= ======= ======= ======== ========
</TABLE>

20
<PAGE>

COMPARISON OF 1993, 1994 AND 1995

REVENUES

Total revenues increased from approximately $3.2 million in 1994 to $5.8
million in 1995. This 81% increase was due primarily to the introduction and
sales of the Company's EasyPhoto Reader product. Total revenues increased by
7% from $3.0 million in 1993 to $3.2 million in 1994, due primarily to
royalties generated from the licensing to Apple Computer on an exclusive basis
of the Company's PhotoFlash software.

Product revenues were $1.2 million, $0.7 million and $5.2 million,
respectively, in 1993, 1994 and 1995, and represented 40.6%, 20.5% and 90.5%,
respectively, of total revenues. Royalties and other revenues were $1.8
million, $2.5 million and $0.5 million, respectively, in 1993, 1994 and 1995,
and represented 59.4%, 79.5% and 9.5%, respectively, of total revenues. The
decrease in product revenues and the increase of royalty and other revenues in
1994 was due to the Company's relative focus on OEM licensing of its hardware
and software products on a royalty basis during that year. The increase in
product revenues in 1995 was due to the Company's introduction and sales of
the EasyPhoto Reader product, which is sold on a retail basis. The decrease in
royalty and other revenues in 1995 was due to a decrease in royalties from
Apple Computer for the PhotoFlash software and a decrease in royalties from
the licensing of image acceleration hardware technology. Such royalty
decreases were due primarily to the Company's focus on the EasyPhoto product
line.

COST OF PRODUCT REVENUES

Cost of product revenues were $0.3 million, $0.2 million and $3.7 million,
respectively, in 1993, 1994 and 1995, and, as a percentage of total revenues,
were 9.3%, 5.6% and 64.5%, respectively. The increase in 1995 both in absolute
dollars and as a percentage of total revenues, was due to the introduction of
the EasyPhoto Reader product, which included a relatively higher cost hardware
component purchased from Primax.

GROSS PROFIT

Gross profit was approximately $2.7 million, $3.0 million and $2.1 million,
respectively, for 1993, 1994 and 1995 and represented 90.7%, 94.4% and 35.5%,
respectively, of total revenues. The large decrease in gross margin in 1995
was due to the Company's transition from being engaged primarily in the high
margin OEM licensing business to providing lower margin hardware and software
solutions primarily on a retail basis.

RESEARCH AND DEVELOPMENT

Research and development expenses for 1993, 1994 and 1995 were approximately
$1.8 million, $2.1 million and $1.5 million, respectively, representing 61.8%,
65.7% and 25.8%, respectively, of total revenues. The increase in absolute
dollars in 1994 was primarily due to initial costs incurred in the development
of the EasyPhoto software environment. The decrease in research and
development expenses in absolute dollars in 1995 as compared to 1994 was
primarily due to a decrease in engineering headcount through attrition,
combined with an increase in relative focus on marketing and selling expenses
to support the release of the EasyPhoto Reader product. The Company believes
that a significant level of research and development expenses will be required
to be competitive in the future and intends to recruit additional engineering
personnel in 1996. Accordingly, the Company expects that such expenses will
increase.

MARKETING AND SELLING

Marketing and selling expenses for 1993, 1994 and 1995 were approximately
$1.6 million, $2.0 million and $3.4 million, respectively, representing 53.8%,
61.9% and 58.4%, respectively, of total revenues. The increase in absolute
dollars in 1995 was primarily due to initial and ongoing costs incurred for
the Company's introduction of the EasyPhoto Reader product into the
competitive retail

21
<PAGE>

market in the first quarter of 1995. The decrease in marketing and selling
expenses as a percentage of total revenues from 1994 to 1995 was due primarily
to increased total revenues. The Company believes that such expenses will
increase in dollar amounts as the Company expands its sales and marketing
staff.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were approximately $0.6 million in 1993,
1994 and 1995, and represented 20.9%, 19.6% and 10.9%, respectively of total
revenues. The Company believes that such expenses will increase in dollar
amounts as the Company expands its staffing and as the Company experiences
higher costs associated with being a public company.

IN-PROCESS RESEARCH AND DEVELOPMENT

The Company acquired certain products of a consumer application software
business in 1994, including certain in-process technology, which resulted in a
write-off of acquired in-process research and development. In 1995, the
Company terminated rights to such technology and returned the assets.

INTEREST INCOME, NET

Interest income, net consists primarily of interest earned on cash
equivalents and short-term investments. Interest income, net was approximately
$0.1 million in 1993, 1994 and 1995 and represented 1.4%, 3.0% and 1.0% of
total revenues, respectively. Interest income, net increased in 1994 as a
result of the investment of funds received from the issuance of securities.

PROVISION FOR INCOME TAXES

No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1995. As of
December 31, 1995, the Company has net operating loss carryforwards of
approximately $5.1 million for federal income tax purposes, which can be used
to reduce future taxable income. These net operating loss carryforwards begin
to expire in 2007.

The acquisition of Primax USA and certain technologies from Primax in March
1996 triggered an ownership change of greater than 50%, thereby limiting the
potential benefits from utilization of tax carryforwards, which totaled
approximately $5.1 million at December 31, 1995. The annual limitation on the
utilization of those carryforwards may range from $0.3 to $0.4 million.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1995

REVENUES

Product revenues increased from approximately $1.5 million for the six
months ended June 30, 1995 to approximately $7.6 million for the six months
ended June 30, 1996 due primarily to higher unit sales of the Company's
EasyPhoto Reader product during the first six months of 1996. In addition,
initial sales of the Company's EasyPhoto SmartPage product began in June 1996.

Royalty and other revenues decreased from $0.5 million for the six months
ended June 30, 1995 to $0.4 million for the six months ended June 30, 1996
primarily due to the Company's focus on the retail distribution of the
EasyPhoto Reader product during the first two quarters of 1996. This decrease
was partially offset by the initial recognition of royalty revenues related to
the OEM licensing of certain photo scanners during the second quarter of 1996.

22
<PAGE>

COST OF PRODUCT REVENUES

Cost of product revenues increased from $1.1 million for the six-month
period ended June 30, 1995 to $5.7 million for the six months ended June 30,
1996, as the Company incurred higher costs associated with higher unit sales
of the EasyPhoto Reader product and the introduction of the EasyPhoto
SmartPage product.

GROSS PROFIT

Gross profit was $0.9 million and $2.3 million, respectively, for the six
months ended June 30, 1995 and June 30, 1996, representing 46.4% and 29.0%,
respectively, of total revenues for such periods. The decrease in gross margin
was due to the Company's transition from being engaged primarily in the high
margin OEM licensing business to providing lower margin hardware and software
solutions primarily on a retail basis. Additionally, during the first quarter
of 1996, the Company recorded reserves in anticipation of a price reduction of
its EasyPhoto Reader product intended to increase unit sales and incurred
lower margins on product lines acquired from Primax USA that the Company is in
the process of phasing out.

RESEARCH AND DEVELOPMENT

Research and development expenses were $0.7 million and $1.1 million,
respectively, for the six months ended June 30, 1995 and June 30, 1996. These
expenses as a percentage of total revenues were 37.4% and 14.0%, respectively,
during these periods. The increase in these expenses in dollar amounts from
the first six months of 1995 to the first six months of 1996 was primarily
attributable to an increase in research and development personnel.

MARKETING AND SELLING

Marketing and selling expenses increased from $1.4 million for the six
months ended June 30, 1995 to $3.4 million for the six months ended June 30,
1996. These expenses as a percentage of total revenues were 69.4% and 42.6%,
respectively, during these periods. The increase in these expenses in dollar
amounts from the first six months of 1995 to the first six months of 1996 was
primarily the result of increased marketing, advertising and promotional
expenses associated with new and existing retail products and an increase in
the number of sales personnel due to the acquisition of Primax USA.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $0.3 million and $0.7 million,
respectively, for the first six months ended June 30, 1995 and June 30, 1996.
These expenses as a percentage of total revenues were 17.0% and 8.8%,
respectively, during these periods. The increase in these expenses in dollar
amounts from the first six months of 1995 to the first six months of 1996 was
primarily attributable to an increase in administrative personnel due to the
acquisition of Primax USA. As part of the Primax acquisition transaction, in
March 1996, the Company recorded $0.8 million of goodwill, which the Company
is amortizing over a four-year period as part of its general and
administrative expenses.

IN-PROCESS RESEARCH AND DEVELOPMENT

In March 1996, the Company acquired certain in-process photo scanner
technologies from Primax in a transaction accounted for as a purchase. The
Company recorded a one-time write-off of $5.0 million to acquired in-process
research and development as a result of the acquisition.

23
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table presents the Company's unaudited operating results for
each of the six quarters in the period ended June 30, 1996 and certain items
as a percentage of total revenues for the respective periods. The information
has been derived from unaudited financial statements of the Company that have
been prepared on the same basis as the audited financial statements appearing
elsewhere in this Prospectus, and, in the opinion of management, include all
normal recurring adjustments that the Company considers necessary for a fair
presentation of the interim periods when read in conjunction with the audited
financial statements of the Company. The operating results are not necessarily
indicative of the results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Product................ $ 285 $1,257 $ 795 $2,908 $ 2,435 $ 5,198
Royalty and other...... 405 56 51 37 94 294
------ ------ ------- ------ ------- -------
Total revenues......... 690 1,313 846 2,945 2,529 5,492
Cost of product
revenues............... 178 896 576 2,085 1,981 3,716
------ ------ ------- ------ ------- -------
Gross profit............ 512 417 270 860 548 1,776
------ ------ ------- ------ ------- -------
Operating expenses:
Research and
development........... 455 294 358 387 459 666
Marketing and selling.. 626 763 890 1,105 1,402 2,017
General and
administrative........ 188 153 145 147 225 477
In-process research and
development........... -- -- -- -- 5,000 --
------ ------ ------- ------ ------- -------
Total operating
expenses.............. 1,269 1,210 1,393 1,639 7,086 3,160
------ ------ ------- ------ ------- -------
Loss from operations.... (757) (793) (1,123) (779) (6,538) (1,384)
Interest income, net.... 16 9 8 23 19 14
------ ------ ------- ------ ------- -------
Net loss................ $ (741) $ (784) $(1,115) $ (756) $(6,519) $(1,370)
====== ====== ======= ====== ======= =======
AS A PERCENTAGE OF
TOTAL REVENUES:
Revenues:
Product................ 41.3% 95.7% 94.0% 98.7% 96.3% 94.6%
Royalty and other...... 58.7 4.3 6.0 1.3 3.7 5.4
------ ------ ------- ------ ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product
revenues............... 25.8 68.2 68.1 70.8 78.3 67.7
------ ------ ------- ------ ------- -------
Gross profit............ 74.2 31.8 31.9 29.2 21.7 32.3
------ ------ ------- ------ ------- -------
Operating expenses:
Research and
development........... 66.0 22.4 42.3 13.1 18.2 12.1
Marketing and selling.. 90.7 58.1 105.2 37.5 55.4 36.7
General and
administrative........ 27.2 11.7 17.1 5.0 8.9 8.7
In-process research and
development........... -- -- -- -- 197.7 --
------ ------ ------- ------ ------- -------
Total operating
expenses.............. 183.9 92.2 164.6 55.6 280.2 57.5
------ ------ ------- ------ ------- -------
Loss from operations.... (109.7) (60.4) (132.7) (26.4) (258.5) (25.2)
Interest income, net.... 2.3 0.7 0.9 0.7 0.7 0.3
------ ------ ------- ------ ------- -------
Net loss................ (107.4)% (59.7)% (131.8)% (25.7)% (257.8)% (24.9)%
====== ====== ======= ====== ======= =======
</TABLE>

24
<PAGE>

The Company has experienced seasonality in its operating results, with the
fourth quarter typically having the highest total revenues in any year and
with third quarter revenues usually reflecting a lower volume of sales in the
summer months. The Company believes that the seasonality of its revenues
results primarily from the purchasing habits of consumers and the timing of
the Company's fiscal year end. The Company currently believes that these
patterns will continue.

The Company's product revenues declined from the second quarter of 1995 to
the third quarter of 1995 due to large orders received from two large retail
accounts as initial purchases in June 1995 and lower volume of product
revenues in the third quarter of 1995 due to seasonality.

Cost of product revenues increased as a percentage of total revenues from
the fourth quarter of 1995 to the first quarter of 1996 mainly due to reserves
for price protection recorded against revenues for the first quarter of 1996
in anticipation of a price reduction of its EasyPhoto Reader product. During
the first quarter of 1996, the Company also incurred lower margins on product
lines acquired from Primax USA which the Company is in the process of phasing
out.

General and administrative expenses increased in dollar amounts from the
fourth quarter of 1995 to the first and second quarters of 1996 primarily as a
result of the inclusion of Primax USA administrative personnel at the end of
the first quarter of 1996 and the cost of a lease for an additional facility
that was assumed as part of the Primax transaction.

The Company has experienced and will 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 consumer
demand for digital photos on PCs in general and for the Company's products in
particular, the Company's success in developing, introducing and shipping new
products and product enhancements in a timely manner, the purchasing patterns
and potential product returns from the Company's retail distribution, reduced
revenue due to price protection granted to distributors, the performance of
the Company's contract manufacturers and component suppliers, the Company's
ability to respond to new product introductions and price reductions by its
competitors, the timing, cancellation or rescheduling of significant orders
from OEMs or distributors, 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, marketing and selling, general and administrative
expenditures, and general economic conditions. Revenues and operating results
in any quarter depend 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 will be magnified by the Company's
inability to adjust operating expenses in the short term 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 operating results and financial condition. The Company may also
be required to reduce prices in response to competition or increase spending
to pursue new product or market opportunities. In the event of significant
price competition in the market for the Company's products, the Company would
be required to decrease costs in order to maintain profit margins and would be
at a significant disadvantage compared to competitors with substantially
greater resources, which could more readily withstand an extended period of
downward pricing pressure.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its working capital and capital
expenditure requirements primarily through the private sale of equity
securities totalling approximately $12.8 million

25
<PAGE>

and cash generated from operations in 1993. In 1994 and 1995 and for the six
months ended June 30, 1996, approximately $2.8 million, $3.9 million and $1.2
million, respectively, of cash was used in operations.

In 1993 and 1994, the Company's investing activities used cash of
approximately $277,000 and $943,000, respectively. In 1995, the Company
generated cash from investing activities of approximately $1.6 million. In the
first six months ended June 30, 1996, the Company's investing activities used
cash of approximately $814,000. The Company's investing activities consisted
primarily of purchases of property and equipment and purchases and sales of
short-term investments. As of June 30, 1996, the Company's principal
commitments consisted primarily of a lease line of credit for equipment and
leases for office facilities. See Note 8 of Notes to the Company's
Consolidated Financial Statements.

To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. The
Company expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.

As of June 30, 1996, the Company had $2.5 million in cash, cash equivalents
and short-term investments. On May 16, 1996, the Company entered into a loan
and security agreement for a $3.5 million revolving line of credit and a $6.5
million accounts receivable line of credit. Borrowings under the accounts
receivable line of credit are limited to the sum of 80% of eligible domestic
non-distributor accounts receivable and 70% of eligible domestic distributor
accounts receivable. The lines of credit are secured by the assets of the
Company. All obligations up to an amount of $3.5 million under the revolving
line of credit are guaranteed by Primax. As of June 30, 1996, there were no
outstanding borrowings under the bank lines of credit. See Note 8 of Notes to
the Company's Consolidated Financial Statements.

The Company believes that the net proceeds from the offering, existing cash
balances, the bank lines of credit and funds generated from operations will be
sufficient to meet the Company's capital and operating requirements for the
next 12 months. Although operating activities may provide cash in certain
periods, to the extent that the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
Consequently, any such growth may require the Company to obtain additional
equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies, the Company from
time to time evaluates potential acquisitions of businesses, products and
technologies and may in the future require additional equity or debt
financings to consummate such potential acquisitions.

26
<PAGE>

BUSINESS

Storm Technology, Inc. ("Storm" or the "Company") is a leading provider of
digital photo solutions that enable consumers and small businesses to input,
store, organize, enhance and use photos easily on their personal computers
("PCs"). The Company's vision is to empower consumers to use digital photos to
create more personal, memorable and effective communications. The Company
believes that the $16 billion worldwide chemical photography market is
evolving to a market that will increasingly include digital photos due in part
to the increasing availability of photo input devices and software which
enable people to use digital photos with their computers. This transition,
coupled with the recent proliferation of powerful multimedia home PCs, is
leading to the emergence of digital photos as a new and rapidly growing
product category for consumers. To capitalize on this emerging market
opportunity, Storm develops and markets software-differentiated, consumer-
branded products that are easy to use, result in high image quality and
provide consumers and small businesses with a comprehensive digital photo
solution.

INDUSTRY BACKGROUND

Photographs empower people to communicate in a more personal, memorable and
effective way. While graphics professionals have utilized digital photos for
years, consumer usage has been limited due to the complexity, expense and high
end hardware requirements. However, the ability to utilize digital photos is
now becoming available to consumers as advances in digital technology, such as
PCs, software, related input and output devices and the Internet, are becoming
increasingly prevalent. The Company believes that this use of photos on
computers represents the early stages of an evolution from a purely chemical-
based photography market to a market that will increasingly include digital
photos.

According to Link Resources, U.S. households own more than 40 million PCs
and more than 35% of U.S. homes have at least one PC. The increasing
penetration of PCs into the home market has led to a significant increase in
the demand for add-on peripherals and software that increase the functionality
of a PC. For example, CD-ROM drives have facilitated increased educational and
entertainment value, modems have become virtually standard given the
increasing significance of Internet or on-line service access, and inkjet
printers have enabled high quality black-and-white or color output at a
relatively low cost. In addition, consumers are searching for compelling new
software applications for their PCs beyond word processing, personal finance
and games, due in part to their significant investment in PCs and peripherals.

The Company believes that the emergence of digital photos as a new and
rapidly growing product category for consumers has been driven in large part
by the convergence of these trends, and more specifically, by a number of
important technological developments. These developments include:

. The availability of low cost, photo-capable color inkjet printers,
enabling printing of high quality photos on regular bond paper and near
magazine quality photographic output on more expensive coated paper.

. The proliferation of 486 and Pentium class PCs, providing the computing
power necessary to process digital photos in typical sizes and quality.

. The availability of more affordable and greater storage capacity, which,
combined with JPEG image compression technology, has enhanced the
ability of standard PCs to store and manipulate photos. Hundreds or even
thousands of photos can now be stored on a typical hard disk.

. The rapid growth of the Internet and the proliferation of graphically-
oriented Web browsers, which have led to the presence of thousands of
photos on Web sites.

. The availability of photo-capable software incorporating Microsoft's
Object Linking and Embedding (OLE) standard, enabling different software
applications such as word processors and family-oriented software
programs to include photos.

27
<PAGE>

While these advances in technology have led to increasing availability of
photo-capable PCs, until recently, the use of photos on PCs has been limited,
primarily due to the shortcomings of digital photo peripherals and software.
The devices for reading photos into computers, such as photo CDs and scanners,
generally have been very expensive and difficult to use. These devices also
generally have involved long processing times or have not produced high
quality images. Digital cameras, which potentially may provide the most
efficient and effective means for the creation and reading of digital photos,
presently are too costly, have capacity and quality shortcomings and require
changes in consumer behavior that are not likely to occur quickly. The
software environments for utilizing digital photos often have been expensive,
complex or difficult to use because of either their orientation toward
professional users or their focus on other applications such as image editing
or page layout. Some existing software applications, such as genealogy charts,
personal calendars and greeting cards, allow for the use of digital photos.
However, these applications have not been optimized for photo usage and
provide limited tools for organization, enhancement and integration of digital
photos.

STORM SOLUTION

Storm's software-differentiated, consumer-branded family of products
provides a high quality, easy to use and comprehensive solution for the use of
digital photos on a personal computer at an affordable price. The Company's
first digital photo scanner product, the EasyPhoto Reader, which was
introduced in 1995, made it possible for a personal computer user to turn an
existing snapshot print into a useful digital photo. The following diagram
illustrates the operation of the EasyPhoto Reader product:

[LEAVE SPACE FOR DIAGRAM]

Begin by The EasyPhoto Drag and drop Print out a great
typing an Reader plugs your photo into looking document
ordinary directly into your document with sharp, true
letter, your computer (no with EasyPhoto color results.
invitation, boards to software
flyer, etc. on install) and lets (included).
your computer you add your
using your photos quickly
regular with the push of
programs. a button.

Storm's products provide easy to install and easy to operate methods to
input standard chemical-based photos into a PC, high quality resolution for
viewing and printing photos, automatic compression of stored photos to save
disk space, easy to use tools to retrieve, organize, edit and enhance the
photos in the computer and drag and drop capability to place photos into
virtually any computer document. For example, consumers are using the
Company's products to share photo memories with family and friends through
family trees, personal letters and greeting cards, and real estate brokerage
and service companies are using the EasyPhoto Reader to include digital photos
in their marketing and sales brochures and flyers.

The Company believes that the advanced functionality, ease of use and
competitive differentiation of its EasyPhoto products are driven by the
following key technological advantages:

. ADVANCED OLE CAPABILITIES: The EasyPhoto software environment is
designed to capitalize on Microsoft's OLE image handling standard to
facilitate using photos with other applications and to improve image
quality.

28
<PAGE>

. VIRTUAL MEMORY: The Company's unique image-oriented virtual memory
technology substantially reduces the processing and storage requirements
associated with digital images; this results in faster photo viewing and
manipulation while enabling consumers to enjoy advanced digital photo
functionality using consumer-oriented PC configurations, such as 486
class computers with only 8 megabytes (MB) of random access memory
(RAM).

. ADVANCED PHOTO DATABASE FUNCTIONALITY: Central to the EasyPhoto software
environment is a fully-featured database with visual photo access, which
is optimized for image management and retrieval.

. IMAGING ALGORITHMS: The EasyPhoto environment incorporates a number of
easy to use image enhancement tools based on sophisticated imaging
algorithms, such as the ability to quickly remove scratches and
eliminate "red eye" from flash photographs.

. PHOTO SCANNER TECHNOLOGY AND SOFTWARE INTEGRATION: The Company's photo
scanner technology enables high quality, cost-effective photo input in a
small form factor. The Company adds additional value to its photo
scanners by tightly integrating them with its EasyPhoto software
environment and photo-centric applications resulting in powerful yet
easy to use photo input solutions.

Storm offers its products through mass market distribution channels at
affordable consumer-oriented price levels. The Company's products are designed
to operate with the most popular consumer and small business operating
systems, including Windows 3.1, Windows 95 and Macintosh, and with most word
processors, presentation packages, drawing and publishing programs and home
creativity programs. The Company's products are designed to enable consumers
to realize the benefits of digital photography immediately without changing
their current film purchasing, photo taking and photo processing behavior.

STRATEGY

The Company's objective is to become the leading provider of digital photo
input and software solutions for consumers and small businesses. The Company's
strategy is focused on (i) making its EasyPhoto software environment the de
facto standard for organizing and storing digital photos on PCs, (ii)
developing and marketing high quality, easy to use, affordable photo input
solutions that are tightly integrated with its EasyPhoto software environment,
and (iii) distributing photo-centric applications that further enhance the
value of its photo input products. The Company expects to extend its
competitive advantage in these product categories through technology
leadership, strategic partnerships, brand marketing and worldwide retail and
OEM distribution. Key elements of the Company's strategy are:

ESTABLISH EASYPHOTO AS A LEADING CONSUMER BRAND FOR THE DIGITAL PHOTO MARKET

Extensive consumer market research by the Company has consistently
identified ease of use and high quality at affordable prices as the compelling
consumer needs that must be addressed in order to expand consumers' use of
digital photos. The Company's EasyPhoto brand is designed to address these
needs and is supported by innovative technology, consumer friendly products,
creative end-user marketing and competitive price performance. The Company
believes that it can achieve increased consumer recognition by extending
EasyPhoto branding throughout the Company's retail product offerings and
enabling OEMs to proliferate the EasyPhoto branded software environment.

ESTABLISH EASYPHOTO SOFTWARE AS THE LEADING SOFTWARE ENVIRONMENT FOR DIGITAL
PHOTOS

EasyPhoto was designed with an open architecture using industry standards
such as the JPEG image compression file format, Microsoft OLE for utilizing
photos in other applications and TWAIN for input of photos from all industry
standard scanning devices. By continually improving and widely proliferating
an open environment for digital photos, the Company intends to make EasyPhoto
the de facto standard for enabling consumers to input, organize, store,
enhance and use photos on PCs.

29
<PAGE>

ENHANCE ITS LEADING LINE OF PHOTO SCANNERS TO ADDRESS ADDITIONAL CUSTOMER
NEEDS

The Company believes that it is currently the leading provider, through
retail distribution and OEM partnerships, of photo-oriented scanners targeted
at the consumer and small business markets. Leveraging its expertise in
digital imaging hardware in addition to its core software technology, the
Company is continuing to enhance its EasyPhoto scanner line to address
additional customer demands, such as a preference for a photo-reading device
installed inside the computer, a need to scan larger sized photos and
continuous improvement in price performance. The Company expects its future
photo scanners to offer extended functionality and lower prices through the
use of large scale integrated circuits, an integrated subassembly for optics
and economies of scale.

MARKET A LINE OF PHOTO-CENTRIC SOFTWARE APPLICATIONS

The Company intends to capitalize on its unique technological expertise in
both imaging hardware and software by developing and marketing value-added
application software that enables consumers to use digital photos in
imaginative and persuasive ways. The Company also currently plans to
distribute third party photo-centric applications to its customers. Such
applications are intended to increase the Company's profit margin and expand
the consumer market for digital photos.

LEVERAGE STRATEGIC PARTNERSHIPS

The Company intends to use strategic partnerships in the following key
areas:

. MANUFACTURING. The Company's strategy is to utilize strategic
partnerships to manufacture its products with the highest quality at the
lowest possible cost. The Company presently maintains a strategic
relationship with Primax in Taiwan. The Company intends to develop a
relationship with a second source strategic manufacturing partner during
1997 to ensure cost leadership, sufficient capacity and product quality.

. DIGITAL CAMERA DEVELOPMENT. The Company intends to participate in the
emerging digital camera market through third party strategic
partnerships. An existing alliance involves customizing EasyPhoto
software for use with digital cameras from Epson.

. DISTRIBUTION. The Company believes that broadening the distribution of
its products through strategic alliances with a variety of companies
within the computer industry is a key element in establishing its
products as market leaders and its EasyPhoto software environment as an
industry standard. The Company has recently established an OEM
arrangement with HP for the incorporation of the Company's PhotoDrives
into certain models of HP's Pavilion line of computers, as well as with
Polaroid for a private label external photo reader device. The Company's
EasyPhoto software is distributed broadly by numerous partners,
including HP and Acer with their home PCs, Polaroid and Nikon Inc.
("Nikon") with select scanner products, Epson both with its digital
cameras and in 1996 as part of an Epson Color Stylus inkjet printer
promotion, and Intel to its motherboard customers. In addition, the
Company has entered into an agreement for the bundling of its EasyPhoto
software with Netscape's Navigator Gold Internet product.

ENSURE PRODUCTIVE RETAIL DISTRIBUTION ON A WORLDWIDE BASIS

The Company intends to enable its end-user customers to purchase its
products as easily and conveniently as possible through a broad array of
retail outlets, catalogs and alternative channels, provided that such outlets
are cost effective based on sell-through of the Company's products. The
Company's products are presently sold by most of the leading retailers of
computer products in the United States, including Best Buy, Circuit City,
CompUSA Inc. ("CompUSA"), Computer City, Egghead Inc. ("Egghead Software"),
Fry's Electronics, Good Guys Inc. ("Good Guys"), OfficeMax Inc. ("OfficeMax"),
Staples Inc. ("Staples") and others. In addition, the Company's retail
distribution includes on-line companies (such as America Online) and Internet
stores, mail order catalogs and

30
<PAGE>

direct consumer order fulfillment. Distribution partnerships with Primax for
Asia-Pacific distribution and Primax Electronics International B.V. ("Primax
International") for European distribution provide the Company with an
established channel to access key international markets.

PRODUCTS

The Company's products span the following categories of the digital photo
market: photo software environment, photo input solutions and photo-centric
application software. The products currently expected to be offered by Storm
by the end of 1996 are as shown in the following table:

<TABLE>
<CAPTION>
PRIMARY
DISTRIBUTION TARGET RETAIL FIRST SHIPMENT
PRODUCT CATEGORY/NAME DESCRIPTION CHANNEL STREET PRICE DATE(S)
--------------------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
1. PHOTO SOFTWARE ENVIRONMENT
EasyPhoto Software environment OEM N/A Version 1.0 February 1995
and core technology Version 2.0 October 1995
to input, store,
organize, enhance
and use digital
photos; includes
localized foreign
language versions

2. PHOTO INPUT SOLUTIONS*
EasyPhoto Reader External photo Retail $199 Version 1.0 February 1995
reader (up to 5 in. x Version 2.0 October 1995
7in. photos) Version 2.5 August 1996

EasyPhoto External large form Retail $299 Version 1.0 June 1996
SmartPage factor
photo/document
reader (up to 8 1/2 in.
x 14in.)

EasyPhoto Drive Internal photo Retail $199 Version 1.0 August 1996
reader (up to 5 in. x
7in. photo)

PhotoDrives (OEM) Internal photo OEM N/A April 1996
readers (up to 5 in. x
7in. photo) designed
to be incorporated
into 5 1/4 in. PC drive
bays

PhotoReaders (OEM) External photo OEM N/A January 1996
readers (up to 5 in. x
7in. photo) with
unique industrial
designs for specific
OEMs

3. PHOTO-CENTRIC APPLICATION SOFTWARE
EasyPhoto Phone Software application OEM or N/A September 1996
to share photos over bundled with
telephone lines EasyPhoto
branded
photo
scanners

EasyPhoto Software application OEM or N/A Expected in fourth quarter of 1996
DesignWorks to enable page bundled with
layout and use of EasyPhoto
text and sound for branded
photo-based projects photo
to send on-line or scanners
print out
</TABLE>
- --------
* Photo Input Solutions generally are bundled with the EasyPhoto Software
Environment

EASYPHOTO SOFTWARE ENVIRONMENT

The EasyPhoto software environment provides a user friendly, easy to install
environment for consumers to input, organize, store, enhance and use photos on
their PCs. EasyPhoto enables users to build galleries of photos using a
familiar film strip metaphor for display and to perform photo adjustment and
improvement functions such as editing, cropping and resizing of photos. In
addition to being integrated with the Company's own line of photo scanners,
EasyPhoto software has been distributed broadly through OEM partners,
including HP, Acer, Epson, Polaroid and Nikon, in conjunction with PCs,
scanners, printers and digital cameras.

31
<PAGE>

EasyPhoto creates a powerfully simple "digital shoebox" for photos,
utilizing the following key elements of the Company's technology:

ADVANCED OLE CAPABILITIES: EasyPhoto is designed to capitalize on
Microsoft's OLE standard to facilitate using photos with other
applications. The Company believes that EasyPhoto is one of the most fully-
featured OLE servers available today, enabling users to "drag and drop"
images into text documents, to resize and manipulate the images and, in
certain applications, to retain control over printing and adjustment of the
photo within the third party software application.

VIRTUAL MEMORY: The Company's proprietary virtual memory technology
substantially reduces the processing and storage requirements associated
with digital images, enabling consumers to enjoy advanced digital photo
functionality using consumer-oriented PC configurations, such as 486 class
computers with only 8 MB of RAM. The Company's unique "tiling" system,
which breaks images into large, independent sectors rather than numerous
linear strips, dramatically increases the speed with which images can be
manipulated on screen, without degrading image quality. In addition, the
Company's image compression technology minimizes the amount of memory
dedicated to image storage and limits time-consuming hard disk access.

ADVANCED PHOTO DATABASE FUNCTIONALITY: Central to the EasyPhoto software
environment is a fully-featured database with visual photo access that is
optimized for image management and retrieval. The database is organized
around a film strip metaphor and allows users to organize and find images
by visual content, subject or caption text. In addition, the photo database
is designed to store compressed "thumbnail" copies of digital images in
multiple film strips without duplicating the full images, thereby reducing
storage requirements and increasing overall speed.

IMAGING ALGORITHMS: The EasyPhoto environment incorporates a number of
easy-to-use image enhancement tools based on sophisticated imaging
algorithms. EasyPhoto's "magic filter" tools automatically detect and
digitally correct surface flaws such as scratches in the input image and
enable users to correct "red eye" in flash photographs. EasyPhoto's
ClearScan technology offers unique algorithms to identify and automatically
brighten dark areas. Finally, EasyPhoto's ClearPrint technology utilizes
intelligence regarding the capabilities of various output devices to
optimize the printed image.

EasyPhoto is now available in five languages, and the Company estimates that
it has an installed base of over 825,000 units as of July 31, 1996. The
EasyPhoto software, bundled with the EasyPhoto Reader, won a 1995 Software
Publishing Association (Codie) award for Best Product Launch.

EASYPHOTO READER

In February 1995, the Company
introduced the EasyPhoto Reader, which
was the first consumer-oriented photo
scanner designed specifically to read
photo prints of up to 5 in. x 7 in into a [PICTURE OF EASYPHOTO RIDER]
personal computer. Smaller than a
standard mousepad, the device was
designed specifically with the consumer
in mind to occupy limited desk space.
Installation is easy, with no interface
boards required. The device plugs
directly into the parallel port of a
computer with a pass-through connector
that enables printers to utilize the same
port. The EasyPhoto Reader includes a
motorized feeder and photo guides to read
photos automatically at the push of a
single button and to
ensure consistently high quality. It also reads over 16.7 million colors and
its standard hardware resolution, compatible with typical consumer output
devices, is set at 200 dots per inch (dpi), with software interpolation
enabling resolutions of up to 1200 dpi. The Company presently believes the

32
<PAGE>

EasyPhoto Reader to be the highest quality, easiest to use photo scanning
device at its present target street price of $199.

EASYPHOTO SMARTPAGE

The EasyPhoto SmartPage is a full-page,
sheetfed color scanner capable of
scanning wallet-sized to full-page photos [PICTURE OF EASYPHOTO
and documents (up to 8 1/2 in. x 14 in). While SMARTPAGE]
alternative products exist in the larger
size sheetfed category, the EasyPhoto
SmartPage is uniquely positioned beyond
the capabilities of text-based document
scanners toward the more demanding
requirements of color rich photo-centric
usage. The initial version of the
EasyPhoto SmartPage, which began shipping
in June 1996, uses a plug-and-play
interface board to scan photos at 300 dpi
resolution, with software interpolation
enabling resolutions of up to 1200 dpi as
with the EasyPhoto Reader. The product's
automatic document feeder handles up to
10 pages at a time to scan multiple
photos or documents with no intervention
required. Documents, which may include a
combination of photos, text and graphics,
may be stored either in
bitmapped form for applications such as electronic faxing or in text form for
use in computer data files via the bundled OCR software from TextBridge. The
EasyPhoto SmartPage is sold at a targeted street price of $299. The EasyPhoto
SmartPage hardware is currently purchased on an OEM basis from a third party.

EASYPHOTO DRIVE

The EasyPhoto Drive performs the [PICTURE OF EASYPHOTO DRIVE]
same photo reading functions as the
EasyPhoto Reader but is embedded
within a 5 1/4 in. drive bay of a PC,
permitting consumers to incorporate
photo reading capabilities inside
their PCs rather than having to
utilize an external device. A unique
feature of the EasyPhoto Drive is the
automatic nature of the photo scanning
process. Simply inserting a photo into
the EasyPhoto Drive launches the
EasyPhoto software on the PC and scans
the photo into the computer,
displaying the scan on the screen in
real
time as it is completed. The photo is then available for manipulation,
storage, organization and retrieval through the EasyPhoto software
environment. The EasyPhoto Drive was released in August 1996 at a targeted
street price of $199. The EasyPhoto Drive is capable of up to a 400 dpi
hardware resolution and 1200 dpi effective resolution through software
interpolation. The product includes an ISA interface board to be installed
with the drive.

33
<PAGE>

PHOTODRIVE (OEM)

The PhotoDrive product first began
shipping in April 1996 and is an OEM-only [PICTURE OF PHOTODRIVE]
version of the EasyPhoto Drive with
equivalent specifications and capabilities.
Through October 1996, HP is the exclusive
OEM of the PhotoDrive product and bundles it
with certain models of the HP Pavilion line
of PCs. The PhotoDrive is generally offered
to PC suppliers with a customized
front bezel in order to integrate seamlessly
into the supplier's personal computer casing
from a design perspective. The Company
intends to expand distribution of the
PhotoDrive to additional OEMs once the
exclusivity period offered to HP
has elapsed.

PHOTO READER (OEM)

The Company also sells custom industrial design photo readers on an OEM
basis. The first such OEM is Polaroid with its PhotoPad product. The Company's
OEM distribution of its Photo Reader products is intended, in part, to address
certain non-consumer markets to which the Company does not directly market its
retail products, such as vertical markets in real estate, construction or
insurance.

PHOTO-CENTRIC APPLICATION SOFTWARE

While the EasyPhoto software environment enables organization of digital
photos, photo-centric application software enables the consumer to use digital
photos in interesting and creative ways. The Company expects such applications
to be developed both internally and by third parties for marketing and
distribution by the Company. The Company's first two such applications are
EasyPhoto Phone and EasyPhoto DesignWorks. EasyPhoto Phone, released in
September 1996, was originally developed by Intel and enables easy sharing of
photos over normal analog phone lines, with simultaneous voice in the event
that digital simultaneous voice and data (DSVD) modems are available.
EasyPhoto DesignWorks, developed by the Company and currently targeted for
release in the fourth quarter of 1996, enables page layout and use of the text
and sound to create photo-based projects such as photo albums, vacation
scrapbooks, organization charts and insurance inventories to send on line,
display on screen or print. Both EasyPhoto Phone and EasyPhoto DesignWorks
will be tightly integrated with the EasyPhoto software environment through its
embedded OLE capabilities, and will be distributed by the Company with
EasyPhoto scanners and on an OEM basis through PC providers.

PRODUCT WARRANTY

The Company's products are sold with a 30-day money-back guarantee directly
from the Company (in addition to any return policies available from the
retailer) as well as a 12-month hardware warranty.

MARKETING AND SALES

The Company pursues a two-pronged approach to marketing and sales. The first
focuses on aftermarket sales to existing PC users through leading computer
retail channels. Sales are promoted in this category through proactive
consumer marketing efforts designed to increase end user awareness of and
demand for EasyPhoto products. The second focuses on establishing OEM
relationships with leading personal computer manufacturers that distribute the
Company's products pre-installed in new PCs. Strategic marketing alliances
with a variety of select companies within the computer industry serve to
further broaden the distribution channel for the Company's products and to
establish the EasyPhoto brand.

34
<PAGE>

MARKETING

The Company's marketing group is responsible for positioning and promoting
the Company's products on a worldwide basis. It employs a variety of consumer
marketing techniques to broaden end-user awareness of and demand for EasyPhoto
products. First among these is its effort to generate broad-based press
coverage, including in part product reviews, application stories and visual
product demonstrations in trade and consumer media. A small sampling of past
press coverage encompasses such publications and media as wide ranging as The
Wall Street Journal, The Today Show, CNN, PC Magazine, MacWorld, Family PC,
Brides Magazine and Rolling Stone. The Company estimates that it has generated
over 150 million press exposures for EasyPhoto products in the first quarter
of 1996 based upon subscription and viewer data reported by the media
providers.

While press coverage has been an essential component in building demand for
its EasyPhoto products, additional key elements include consumer advertising,
sampling, direct marketing, retail promotions and trade show participation.
The Company also seeks to reach a wide array of consumers through its World
Wide Web ("web") site located at http://www.easyphoto.com/storm/. Information
contained in the Company's web site shall not be deemed part of this
Prospectus.

As is common practice in the industry, in the event of a price decrease the
Company generally gives its distributors and resellers credit equal to the
difference between the price originally paid and the new price on units
remaining in the customers' inventories on the date of the price decrease.
When a price decrease is anticipated, the Company establishes reserves for
amounts estimated to be reimbursed to qualifying customers. In addition,
resellers and distributors generally have the right to return excess inventory
within specified time periods. See "Risk Factors--Distribution Risks" for a
discussion of certain risks relating to the Company's products.

STRATEGIC MARKETING ALLIANCES

The Company believes that broadening the awareness and distribution of its
products through strategic alliances with a variety of companies within the
computer industry is an important element in establishing its products as
market leaders and its EasyPhoto software as an industry standard. The Company
has recently established an OEM arrangement with HP for the incorporation of
the Company's PhotoDrives into certain models of HP's Pavilion line of home
computers, as well as with Polaroid for a private label external photo reader
device. The Company's EasyPhoto software is distributed broadly by numerous
partners, including HP and Acer with their home PCs, Polaroid and Nikon with
select scanner products, Epson both with its digital cameras and in 1996 as
part of an Epson Color Stylus inkjet printer promotion. The Company has
entered into an agreement with Intel Corp. ("Intel") providing for the right
to offer to sell the Company's EasyPhoto software environment by Intel to its
motherboard customers. The Intel agreement has a five-year term and is
automatically renewed for two successive two-year terms unless either party
provides written notice of termination. In addition, the Company has entered
into an agreement for the bundling of its EasyPhoto software with Netscape's
Navigator Gold Internet product.

35
<PAGE>

RETAIL DISTRIBUTION

Retail distribution for the Company's products includes computer
superstores, consumer electronic superstores, office supply superstores and
specialty computer stores. In addition, the Company's retail distribution
includes on-line companies (such as America Online) and Internet stores, mail
order catalogs and direct consumer order fulfillment. The Company's products
are sold through many of the leading retailers of computer products in North
America, including the following retail chains and catalogs:

<TABLE>

RETAIL CHAINS CATALOGS
- ----------------------------------------------------------- -------------------
<S> <C> <C> <C>
Best Buy Elek-Tek, Inc. Nobody Beats the Wiz MicroWarehouse
Circuit City Fry's Electronics OfficeMax MidWest Micro
CompUSA Future Shop Ltd. Staples Multiple Zones
Computer City Incredible Universe The Good Guys PC Connection, Inc.
Egghead Software Media Play Tops Appliance City, Inc. Tiger Direct Inc.
Electronics Boutique MicroCenter Ultimate Electronics Inc.
</TABLE>

The Company also has distribution relationships with top North American
distributors, including Ingram Micro, Ingram Micro Canada and D&H Distributing
Co. These relationships are key to supplying the Company's products to smaller
regional, local and independent computer resellers and VARs.

CUSTOMER CONCENTRATION

Historically, a relatively small number of customers have accounted for a
significant percentage of the Company's total revenues, and the Company
expects that it will continue to experience significant customer concentration
for the foreseeable future. In 1993, sales to Radius accounted for 59% of
total revenues; in 1994, sales to Apple Computer and Radius accounted for 41%
and 39%, respectively, of total revenues; in 1995, sales to Circuit City and
Best Buy accounted for 27% and 11%, respectively, of total revenues; and in
the six months ended June 30, 1996, sales to America Online, Ingram Micro and
Best Buy accounted for 17%, 15% and 11%, respectively, of total revenues. The
Company does not expect that these customer percentages for the first half of
1996 will necessarily be representative of customer concentration for the full
year or any future period. In particular, the high percentage of sales to
America Online resulted from a promotional program during the first quarter of
1996. There can be no assurance that such customers or any other customers
will in the future continue to license or purchase products or services from
the Company at levels that equal or exceed those of prior periods, if at all.

INTERNATIONAL

The Company entered into international distribution agreements dated as of
February 29, 1996 with Primax and with Primax International, a wholly-owned
subsidiary of Primax, for the exclusive distribution of certain products in
Japan (OEM customers only), Taiwan, Korea, Hong Kong, China, India, ASEAN
countries (Singapore, Philippines, Thailand, Malaysia, Vietnam and Indonesia)
and Europe and nonexclusive distribution in Australia, New Zealand, the Middle
East and Africa. Subject to certain other terms and conditions, the Company
granted Primax and Primax International the right to distribute in their
respective territories certain of the Company's image scanning products and
technology. Primax and Primax International's exclusive distribution rights
are subject to certain quotas. Upon failure to meet such quotas, their
respective exclusive distribution licenses will convert to nonexclusive
licenses.

COMPETITION

36
<PAGE>

One source of potential future competition may arise from a group of
established manufacturers of text-oriented scanners such as Logitech,
Microtek, Mustek, PlusTek, UMAX and Visioneer. These manufacturers may
leverage their existing scanning technology in the future in an attempt to
produce digital photo devices at a price point and profile that is attractive
to consumers, thereby competing more directly with those of the Company. A
second source of potential future competition may arise from other current
significant participants in the digital photo market. Certain companies,
including Epson, Kodak and Polaroid, some of which are OEM software customers,
have shipped or indicated an intention to ship photo input devices. Other
companies, including HP, may choose to broaden their product mix to include
small or large sized sheetfed scanners that are targeted toward consumers and
directly compete with those offered by the Company. In addition, competition
with the Company's EasyPhoto software environment and application products may
emanate from developers of photo-oriented software such as Adobe, Fractal
Design, Microsoft, and a significant number of small companies now developing
photo-centric software. This latter group of companies may in the future
compete with the Company by developing advanced software capabilities to be
offered on a stand-alone basis, bundled with hardware, or integrated as part
of an operating system. The Company believes that as the digital photo market
evolves, it will face competition from a variety of sources, including those
identified above.

The Company believes that the principal competitive factors in its market
are integration of hardware and software design, ease of use, product
performance, feature functionality and reliability, price, availability of
third-party applications, timeliness of new product introductions, service,
support and size of installed base, as well as ability to enter into
successful strategic marketing alliances. Although the Company believes that
it is competitive with respect to most of these factors, there can be no
assurance that it will remain competitive in the future.

MANUFACTURING

The Company and Primax entered into a Manufacturing and Purchase Agreement
dated as of February 24, 1996 ("Manufacturing Agreement"), which provides
that, among other rights and obligations, Primax is the exclusive manufacturer
of certain of the Company's photo scanner products for a minimum 85% of its
unit volume. In addition to Primax's manufacturing obligations, Primax will in
certain circumstances deliver products it manufactures directly to the
Company's international and OEM customers. The Company will pay Primax
directly for all retail products. With regard to shipments to the Company's
OEM customers, Primax will receive payments directly from the customers then
forward a portion of such payment to the Company as a royalty.

The Company expects that it will continue to rely in the foreseeable future
on Primax for a majority of its manufacturing needs, including materials
procurement, assembly, system integration, testing and quality assurance.
There can be no assurance that Primax will be able to meet the Company's
requirements for quality manufactured products at competitive prices. Any
inability to obtain hardware components at competitive prices from Primax or
to increase manufacturing capacity from Primax as required could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company has the right to obtain an alternative
manufacturing source if Primax is unable to provide competitive pricing,
quality or availability. However, there can be no assurance that

37
<PAGE>

the Company will be able to obtain such alternative manufacturing source on
favorable terms, if at all. Moreover, commencement of production of products
at new facilities involves certain start-up risks and delays, such as those
associated with the procurement of materials and training of production
personnel.

In addition, the Company is dependent on sole or limited source suppliers
for certain key components used in its products. These key components include
an ASIC within the EasyPhoto Reader product, which is currently available only
from Epson and the hardware for its EasyPhoto SmartPage product, which is
currently available only from Mustek. The Company has no long term agreements
with any of these suppliers for the purchase of these components. There can be
no assurance that such limited source suppliers will be able to meet the
Company's requirements for certain key components. If the Company or Primax
were unable to obtain sufficient supplies from their current suppliers or
develop alternative sources of these components in a timely manner, the
resultant shortage or delay could have a material adverse impact on the
Company's results of operations.

PRODUCT DEVELOPMENT

The Company's research and development team is located at the Company's
headquarters in Sunnyvale, California, and, as of June 30, 1996, employed 24
software and hardware design engineers, technicians and support staff. The
primary activities of these employees are new product development, enhancement
of existing products, product testing and technical documentation development.

A principal focus of the Company's development activities is to integrate
its hardware and software systems with 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 open environment accessible to third-party developers.

The Company believes that continued investment in research and development
is critical to the Company's future success. The Company is focusing on the
development of enhanced versions of the EasyPhoto software environment and new
photo input solutions and ongoing enhancements of existing photo scanner
products. During the years ended December 31, 1993, 1994 and 1995 and the six-
month periods ended June 30, 1995 and 1996, the Company's research and
development expenses were approximately $1.8 million, $2.1 million, $1.5
million, $0.7 million and $1.1 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

PROPRIETARY RIGHTS

The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues
to implement protective measures and intends to defend its proprietary rights,
there can be no assurance that these measures will be successful. The Company
relies on a combination of patent, copyright and trade secret protection,
nondisclosure agreements and cross-licensing arrangements to establish and
protect its proprietary rights. The Company has several patent applications
pending in the United States and intends to file additional applications as
appropriate for patents covering its products. There can be no assurance that
patents will issue from any of these pending applications or, if patents do
issue, that claims allowed will be sufficiently broad to protect the Company's
technology. There can also be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
In addition, the laws of certain foreign countries may not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The Company believes, however, that its success does not depend
primarily on its ownership of patents or other intellectual property rights,
but instead depends primarily upon innovative management, technical expertise
and marketing skills.

38
<PAGE>

The Company has from time to time received, and may receive in the future,
communications from third parties asserting that the Company's products,
trademarks or trade names infringe on the proprietary rights of third parties
or seeking indemnification against such infringement. In response to such
communications, the Company consults with its counsel to assess the basis for
any claims of infringement by the Company's products. Due to a recent
communication, the Company has entered into a patent cross license agreement
with a third party. This agreement provides for a lump sum payment by the
Company and potential ongoing payments after two years relating to an
ancillary feature of certain of the Company's products for which payments
Primax has agreed to reimburse the Company pursuant to indemnification
obligations entered into in connection with the sale of technology to the
Company in March 1996. The Company believes that this agreement will not have
a material adverse effect on the Company's business, operating results or
financial condition.

The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly protracted
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 will be obtainable on commercially reasonable terms.

EMPLOYEES

As of June 30, 1996, the Company had a total of 66 employees. Of this total,
24 were engaged in research, product development and engineering, 27 were
engaged in sales, marketing and customer support, and 15 were engaged in
finance, operations and administrative activities. Competition for employees
in the Company's industry is intense. None of the Company's employees are
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

FACILITIES

Substantially all of the Company's operations are currently located in one
facility of approximately 29,000 square feet of leased office and
manufacturing space located in Sunnyvale, California. This lease will expire
in May 2000. The Company believes that additional space is likely to be
required in the fourth quarter of 1996 and is currently negotiating an
agreement to secure such space.

39
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The names, ages and positions of the executive officers and directors of the
Company, as of June 30, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
L. William Krause.............. 54 President, Chief Executive Officer and
Director
Adriaan Ligtenberg............. 40 Chief Technical Officer, Vice President,
Engineering and Director
Rick M. McConnell.............. 30 Chief Financial Officer and Vice President,
Finance and Administration
Barbara K. Windham............. 37 Vice President, Marketing
Robert F. Preston.............. 39 Vice President, Sales
Joseph G. Finegold............. 46 Vice President, Operations
Sherry A. Whiteley............. 36 Vice President, Human Resources
Richard C. Alberding(1)........ 65 Director
Mary Jane Elmore(1)............ 42 Director
Raymond Liang(2)............... 50 Director
Andrew S. Rappaport(2)......... 38 Director

An additional key employee of the Company is:

<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dolf Starreveld................ 36 Director of Engineering
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee

L. William Krause has served as President and Chief Executive Officer of the
Company since joining the Company in October 1991. Prior to joining the
Company, Mr. Krause spent ten years at 3Com Corporation, a manufacturer of
global data networking systems, where he was President and Chief Executive
Officer until he retired in September 1990. He continued as Chairman of the
Board for 3Com Corporation until 1993. Previously, Mr. Krause served in
various marketing and general management executive positions at Hewlett-
Packard, a manufacturer of computer hardware and software. Mr. Krause
currently serves as a director of Sybase, Inc. and Aureal Semiconductor, Inc.

Adriaan Ligtenberg founded the Company and has served as Director since its
inception, as Chief Technical Officer and Vice President, Engineering since
October 1991, and was its first Chief Executive Officer. Prior to Storm, Mr.
Ligtenberg co-founded C-Cube Microsystems Inc., a manufacturer of video
compression hardware, and served as Vice President from May 1989 until
December 1989. Prior to that, Mr. Ligtenberg was employed for five years by
AT&T Bell Laboratories Inc., a researcher for the communications industry,
where he served as Head of the Image Systems Group. He has been a core member
of the JPEG and MPEG image compression standards committees of the ISO/CCITT
and holds a Ph.D. from the Swiss Federal Institute of Technology.

Rick M. McConnell has served as Chief Financial Officer and Vice President,
Finance and Administration of the Company since January 1994. Prior to that,
Mr. McConnell was Director of Finance and Administration from June 1992 until
January 1994, after receiving his Masters in Business Administration from the
Stanford Graduate School of Business. From July 1987 to June 1990, Mr.
McConnell was employed as a financial engineer by The First Boston
Corporation, predecessor to CS First Boston, a financial services firm.

40
<PAGE>

Barbara K. Windham has served as Vice President, Marketing of the Company
since November 1994. Ms. Windham served as a Director of Marketing for
Electronic Arts, a marketer of entertainment software, from January 1988 to
April 1994. Previously, Ms. Windham worked at Worlds of Wonder Inc. and spent
five years at Procter & Gamble Co. in various marketing management positions.

Robert F. Preston has served as Vice President, Sales of the Company since
February 1996. From July 1993 to January 1996, Mr. Preston was Vice President
of Sales of Xircom, Inc., a manufacturer of network access products. In
January 1989, Mr. Preston founded Robert Preston & Associates, a full service
sales and marketing consulting firm, and served as its President from January
1989 to July 1993. Prior to 1989, Mr. Preston served in various sales and
marketing positions at Personal Computer Products, Inc., AST Research, Inc.
and International Business Machine Corp.

Joseph G. Finegold has served as Vice President, Operations of the Company
since June 1996. From November 1995 to June 1996, Mr. Finegold served as
Director of Production at Silicon Graphics, Inc., a manufacturer of
engineering workstations. From October 1994 to November 1995, Mr. Finegold was
Vice President of FAFCO, Inc., a solar heating and thermal energy storage
company. From December 1991 to October 1994, Mr. Finegold served as a product
marketing manager and a manufacturing manager for Quantum Corporation, a disk
drive company. From June 1985 to December 1991 Mr. Finegold served in the
positions of manufacturing manager and product manager for Hewlett-Packard.

Sherry A. Whiteley has served as Vice President, Human Resources of the
Company since June 1996. From May 1991 to June 1996, Ms. Whiteley served as a
director of Human Resources of Silicon Graphics Inc., and from November 1987
to April 1991 was the Vice President of Product Development at Activision,
Inc., a developer and distributor of entertainment software.

Richard C. Alberding has served as a director since March 1996. From 1958 to
1991, he served in various management positions with Hewlett-Packard, serving
most recently as Executive Vice President of Worldwide Marketing, Sales and
Support and as a member of the Executive Committee. Mr. Alberding is now
retired and is also a director of Digital Microwave Corp., Paging Network
Inc., Digital Link Corporation, Kennametal Inc., Quickturn Design Systems
Inc., Sybase, Inc. and Walker Interactive Systems Inc. and is a director of
various private companies.

Mary Jane Elmore has served as a director since November 1991. Since 1983,
Ms. Elmore has been a general partner of Institutional Venture Management, the
general partner of several Institutional Venture Partners venture capital
investment partnerships. Ms. Elmore also serves as a director of Clarify Inc.

Raymond Liang has served as a director since March 1996. Mr. Liang has been
Chief Executive Officer and President of Primax, which after giving effect to
the offering will be a 31.2% stockholder of the Company. Primax's stock is
traded publicly in Taiwan.

Andrew Rappaport has served as a director of the Company since November
1991. Mr. Rappaport has been the President of The Technology Research Group
Inc., a management consulting firm, since August 1984. Mr. Rappaport is also a
director of Aureal Semiconductor Inc.

Dolf Starreveld is a co-founder of the Company and has served as Director of
Engineering since January 1990. Prior to joining the Company, Mr. Starreveld
acted as a consultant for Apple Computer Europe and as Director of the
Computer Systems Group of the Department of Science at the University of
Amsterdam, where he obtained his Master's degree in high energy physics. He
has also been a member of the JPEG image compression Standards Committee of
the ISO/CCITT.

BOARD COMMITTEES

The Board of Directors has two standing committees: a Compensation Committee
and an Audit Committee. The Compensation Committee provides recommendations to
the Board concerning

41
<PAGE>

salaries and incentive compensation for officers and employees of the Company,
including stock options. The Audit Committee recommends the Company's
independent accountants and reviews the results and scope of audit and other
accounting related services provided by such auditors.

BOARD COMPENSATION

Historically, members of the Board of Directors have not received any cash
compensation for their services as members of the Board, although they are
reimbursed for reasonable travel expenses while attending Board and committee
meetings. Directors who are not employees of the Company or Primax are
eligible to participate in the automatic option grant program following the
closing of the Offering. See "--Benefit Plans--1996 Outside Directors Stock
Option Plan."

BOARD COMPOSITION

Currently all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors and executive officers
of the Company.

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth information concerning the compensation
received for services rendered to the Company during the year ended December
31, 1995 by the Chief Executive Officer of the Company and each of the
executive officers who served as such during 1995 (the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
1995 ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS (#)
--------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
L. William Krause.............. $150,000 -- -- --
Chief Executive Officer,
President
Dr. Adriaan Ligtenberg......... 125,000 -- -- --
Chief Technical Officer, Vice
President, Engineering
Rick M. McConnell.............. 90,000 -- -- 4,375
Chief Financial Officer, Vice
President, Finance and
Administration
Barbara K. Windham............. 125,000 $12,361 -- --
Vice President, Marketing
Former Officer:
Rick Cavin (1)................. 114,583 12,361 $2,945(2) --
Vice President, Sales
</TABLE>
- --------
(1) Mr. Cavin ceased to be an executive officer of the Company in November
1995.
(2) Represents the payment to Mr. Cavin of his accrued vacation time upon his
departure from the Company.

42
<PAGE>

STOCK OPTIONS

The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Executive
Officers during the year ended December 31, 1995.

OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) IN 1995 SHARE(2) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
L. William Krause....... 0 -- -- -- -- --
Dr. Adriaan Ligtenberg.. 0 -- -- -- -- --
Rick M. McConnell(4).... 2,500 6.8% $0.40 1/19/05 $ 629 $1,593
1,875 5.1% $0.40 8/31/05 $472 $1,195
Robert F. Preston....... 0 -- -- -- -- --
Barbara K. Windham(5)... 3,000 8.2% $0.40 8/31/05 $ 755 $ 1,912
Former Officer:
Rick Cavin.............. 0 -- -- -- -- --
</TABLE>
- --------
(1) All options granted in 1995 were granted under the Option Plan (as defined
under "Benefit Plans"). The options generally have a four year vesting
schedule with 25% of the shares vesting at the end of each year. The Board
of Directors has discretion, subject to plan limits, to modify the terms
of outstanding options and to reprice the options. See "--Benefit Plans."
(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
options were granted as determined by the Board of Directors for each
grant date. The Company's Common Stock was not traded publicly at the time
of the option grants to the Named Executive Officers.
(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. The assumed 5% and 10% rates of stock price
appreciation are mandated by federal securities law and do not represent
the Company's estimate or projection of the future Common Stock price.
(4) Mr. McConnell was granted 2,500 options on January 19, 1995 and 1,875
options on August 31, 1995.
(5) Ms. Windham's option was granted on August 31, 1995.

Subsequent to December 31, 1995, the Company has granted options to the
following officers: Rick M. McConnell--options to purchase 29,374 shares at
$0.40 per share and 13,750 shares at $8.00 per share; Robert F. Preston,
options to purchase 56,250 shares at $0.40 per share and 12,500 shares at
$8.00 per share; and Barbara Windham, options to purchase 39,150 shares at
$0.40 and 12,500 shares at $8.00 per share.

43
<PAGE>

The following table sets forth certain information regarding option
exercises during the year ended December 31, 1995 and the value of unexercised
stock options held by each of the Named Executive Officers as of December 31,
1995.

AGGREGATE OPTION EXERCISES IN 1995
AND 1995 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
NUMBER OF SHARES 1995 1995(2)
ACQUIRED ON VALUE -------------- --------------
NAME EXERCISE REALIZED EXERCISABLE(1) EXERCISABLE(1)
---- ---------------- -------- -------------- --------------
<S> <C> <C> <C> <C>
L. William Krause....... 0 -- 0 --
Dr. Adriaan Ligtenberg.. 0 -- 0 --
Rick M. McConnell....... 0 -- 8,125 0
Robert F. Preston....... 0 -- 0 --
Barbara K. Windham...... 33,000 0 0 0
Former Officer:
Rick Cavin ............. 0 -- 0 --
</TABLE>
- --------
(1) All options are immediately exercisable upon grant but are subject to a
repurchase option which vests monthly over four years.
(2) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1995 of $0.40 per share, as determined by the
Company's Board of Directors, less the aggregate exercise price.

BENEFIT PLANS

AMENDED AND RESTATED STOCK OPTION PLAN

The Board of Directors has reserved a total of 1,111,210 shares of Common
Stock for issuance under the Company's Amended and Restated Stock Option Plan
(the "Option Plan"), which amount will automatically be increased on the first
day of each fiscal year of the Company beginning on and after January 1, 1997
by a number of shares equal to 4% of the number of shares of the Company's
Common Stock issued and outstanding on the last day of the preceding fiscal
year. However, the automatic share reserve increase on the first day of a
fiscal year may not cause the aggregate of the outstanding options and the
share reserve for future issuances of options under the Option Plan to exceed
22% of the total number of shares of the Company's issued and outstanding
Common Stock on such date. The Option Plan permits the grant of options
intended to qualify as "incentive stock options" within the meaning of section
422 of the Internal Revenue Code of 1986, as amended, as well as nonstatutory
stock options. As of June 30, 1996, 249,120 shares subject to repurchase by
the Company had been issued upon the exercise of options granted under the
Option Plan, 270,382 shares not subject to repurchase had been issued upon the
exercise of options granted under the Option Plan, 333,917 shares were subject
to outstanding options granted under the Option Plan at a weighted average
exercise price of $3.25 and 257,791 shares remained available for future grant
under the Option Plan. Since June 30, 1996, the Company has granted options to
purchase an aggregate of 212,000 shares at a weighted average exercise price
of $8.00 per share. Options may be granted to employees (including directors
and officers who are also employees), consultants and prospective employees
and consultants, although only employees (including directors and officers who
are also employees) may receive incentive stock options. The exercise price
per share of a nonstatutory stock option must equal at least 85% of the fair
market value of a share of Common Stock on the date of grant, and in the case
of an incentive stock option, must be no less than the fair market value of a
share of Common Stock on the date of grant. Options granted under the Option
Plan are immediately exercisable, are subject to a repurchase option which
generally vests over a four year period and must be exercised within ten
years.

44
<PAGE>

1996 EMPLOYEE STOCK PURCHASE PLAN

A total of 75,000 shares of Common Stock have been reserved for issuance
under the Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"),
none of which have yet been issued. The Purchase Plan permits eligible
employees to purchase Common Stock at a discount through accumulated payroll
deductions. The Purchase Plan is implemented through concurrent offering
periods, each of which is approximately 24 months in duration. Each offering
period will be divided into four consecutive 6-month purchase periods, and
participants will purchase shares on the last day of each purchase period. The
price at which shares are purchased under the Purchase Plan is equal to 85% of
the fair market value of a share of Common Stock on the first day of the
offering period or the last day of the purchase period, whichever is lower.
The initial offering period commenced on September 28, 1996.

1996 OUTSIDE DIRECTORS STOCK OPTION PLAN

A total of 112,500 shares of Common Stock have been reserved for issuance
under the Company's 1996 Outside Directors Stock Option Plan (the "Directors
Plan"), including 33,750 options granted prior to June 30, 1996. The Directors
Plan provides for the automatic grant of nonstatutory stock options to
directors of the Company who are not employees of the Company or Primax
("Outside Directors"). On May 20, 1996, each Outside Director was granted an
option to purchase 11,250 shares of Common Stock at an exercise price equal to
$4.00 per share. Thereafter, each new Outside Director elected after the
effective date of the offering automatically will be granted on the date of
his or her initial election an option to purchase 11,250 shares of Common
Stock. In addition, each Outside Director, other than an Outside Director who
has served on the Board of Directors for less than six months, will thereafter
be granted automatically an option to purchase 6,000 shares of Common Stock at
each annual meeting of the stockholders provided the Outside Director
continues to serve in such capacity following the annual meeting. The exercise
price per share of options granted under the Directors Plan will be equal to
the fair market value of a share of Common Stock on the date of grant. Shares
subject to an option granted under the Directors Plan vest over two years and
options granted under the Directors Plan must be exercised within ten years
from the date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 31, 1995, the Compensation Committee of the
Company's Board of Directors established the levels of compensation for
certain of the Company's executive officers. The members of the Company's
Compensation Committee elected as of April 18, 1996 are Richard C. Alberding
and Mary Jane Elmore. Neither of these individuals has ever been an officer or
employee of the Company. Mr. Krause, the Company's President and Chief
Executive Officer, participated in the deliberations of the Compensation
Committee regarding executive compensation that occurred during 1995, but did
not take part in the deliberations regarding his own compensation.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions.
In addition, the Bylaws of the Company provide that the Company is required to
indemnify its officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors
as incurred in connection with proceedings against them for which they may be
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from willful misconduct of a
culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms. The
Company is in the process of obtaining directors' and officers' liability
insurance. At present, the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
the Company in which indemnification would be required or permitted. The
Company believes that its charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and
officers.

45
<PAGE>

CERTAIN TRANSACTIONS

The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such
individuals to the fullest extent permitted by Delaware law. See "Management--
Limitation of Liability and Indemnification Matters."

Since the Company's inception in January 1991, the Company has issued, in
preferred stock financing transactions (collectively, the "Preferred Stock
Financings"), shares of Preferred Stock as follows: an aggregate of 749,999
shares of Series A Preferred Stock at $4.00 per share on November 27, 1991; an
aggregate of 119,790 shares of Series B Preferred Stock at $4.80 per share on
January 30, 1992; an aggregate of 818,215 shares of Series C Preferred Stock
at $4.80 per share on May 19, 1994; an aggregate of 689,892 shares of Series D
Preferred Stock at $5.20 per share on July 27, 1995 and October 11, 1995; an
aggregate of 4,214,329 shares of Series E Preferred Stock at $.80 per share on
March 18, 1996; and an aggregate of 120,967 shares of Series F Preferred Stock
at $12.40 per share on June 11, 1996.

Preferred Stock issued in the Preferred Stock Financings will convert into
Common Stock on a1-for-1 basis upon the closing of the sale of the shares of
Common Stock offered hereby, except that the 120,967 shares of Series F
Preferred Stock held by Intel will convert into 171,428 shares of Common Stock
based on a $10.50 per share price for the shares sold in the offering. The
following table summarizes the shares of Preferred Stock purchased by
executive officers, directors and five percent stockholders of the Company and
persons and entities associated with them in the Private Placement
Transactions.

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTORS(1) STOCK STOCK STOCK STOCK STOCK STOCK
------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aperture Associates L.P....................... -- 72,916 135,416 48,077 -- --
Institutional Venture Partners(2)............. 425,862 -- 183,125 100,299 -- --
L. William Krause............................. 23,275 -- 20,833 19,230 -- --
Merrill, Pickard, Anderson & Eyre(3).......... -- -- 333,333 54,899 -- --
Nazem & Company............................... -- -- -- 362,012 -- --
Primax Electronics, Ltd.(3)................... -- -- -- 19,230 4,214,329 --
Sequoia Capital............................... -- 41,666 16,134 9,518 -- --
Technology Venture Investors ................. 300,862 -- 129,374 70,859 -- --
Intel(4)...................................... -- -- -- -- -- 120,967
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal and Selling Stockholders."

(2) Mary Jane Elmore, a director of the Company, is a general partner of
Institutional Venture Management V, the general partner of Institutional
Venture Partners V.

(3) Raymond Liang, a director of the Company, serves as Chairman and Chief
Executive Officer of Primax, which owned approximately 48% of the
Company's Common Stock as of June 30, 1996.

(4) Under the terms of the Series F Preferred Stock Purchase Agreement, in the
event of any proposed transaction that would result in a change of control
or a sale of all or substantially all of the Company's assets, the Company
must provide written notice to Intel, and Intel has a right to propose a
competitive offer that the Board of Directors of the Company must consider
in good faith.

46
<PAGE>

On February 24, 1996, the Company, Storm Acquisition Corporation, a wholly-
owned subsidiary of the Company ("Sub"), Primax and Primax USA entered into a
Reorganization Agreement, which was consummated March 18, 1996. Raymond Liang,
a director of the Company, serves as Chairman and CEO of Primax, which held
approximately 48% of the Company's Common Stock as of June 30, 1996. As a
result, Sub was merged with and into Primax USA (the "Merger"), whereby all of
the outstanding shares of common stock of Primax USA was converted into Series
E Preferred Stock of Storm. As a result of the Merger, 1,250,000 shares of
Storm Series E Preferred Stock were issued for all outstanding shares of
Common Stock of Primax USA and 2,964,329 shares of Storm Series E Preferred
Stock were issued to Primax Taiwan for the transfer of its assets and
technology. As part of the merger, the following ancillary documents were
executed:

ASSET TRANSFER AGREEMENT: On February 24, 1996, the Company and Primax
Taiwan entered into an Asset Transfer Agreement, which was consummated
March 18, 1996, ("Asset Transfer Agreement") which provided for, among
other rights and obligations, Primax's assignment and license of certain
patents, technology and know-how which related to the development of A6
Products (image scanning products and technology which accept photos up to
a maximum of five inches in width, excluding hand scanners which are not
made to be attached to a feeder base). Primax also assigned to Storm an
undivided one-half interest in certain other technology rendering such
technology the joint property of the parties. Other than the Company's
agreement to issue 2,964,329 shares of Series E Preferred Stock at $0.80
per share to Primax, neither party has a payment obligation to the other
party under the Asset Transfer Agreement.

MANUFACTURING AGREEMENT: On February 24, 1996, the Company and Primax
entered into the Manufacturing Agreement, which provides that, among other
rights and obligations, Primax is the exclusive manufacturer of certain of
the Company's photo scanner products for a minimum 85% of its unit volume.
The Company has the right to obtain an alternative manufacturing source if
Primax is unable to provide competitive pricing, quality or availability.

INTERNATIONAL DISTRIBUTION AGREEMENTS: The Company entered into
international distribution agreements dated as of February 29, 1996 with
Primax and Primax International. The primary distinction between the
distribution agreements, which are substantially similar in all other
respects, is the territory covered by the agreements. Subject to certain
other terms and conditions, the Company granted to Primax and to Primax
Europe certain rights, exclusive in certain territories and non-exclusive
in others, to distribute the Company's A6 Products, which A6 Products will
likely be manufactured by Primax pursuant to the Manufacturing Agreement
(see above). Primax's and Primax International's distribution rights are
subject to certain quotas and upon their failure to satisfy such quotas,
their respective exclusive distribution licenses will convert to
nonexclusive licenses.

NORTH AMERICAN DISTRIBUTION AGREEMENT: The Company and Primax entered
into the North American Distribution Agreement dated as of February 29,
1996, pursuant to which Primax granted the Company the right to distribute
Primax's non-A6 Products. The Company's right is exclusive with respect to
all customers other than OEM customers in the United States and Canada and
nonexclusive with respect to OEM customers in the United States and Canada
and all customers in South America, Central America and Mexico. If the
Company fails to satisfy certain distribution quotas, its exclusive
distribution license will convert to a nonexclusive license and certain
restrictions in the Asset Transfer Agreement will lapse.

SALES REPRESENTATIVE AGREEMENT: The Company and Primax entered into a
Sales Representative Agreement dated as of February 29, 1996, appointing
the Company as its exclusive sales representative to OEM customers in the
United States and Canada for Primax's pointing devices (such as mice, game
pads, joysticks, track balls, touch pads and remote cursor devices). In
consideration for accepting orders from and providing service to Primax's
OEM customers, the Company was to have received commissions for all sales
of pointing devices. If the Company failed to satisfy certain sales quotas,
its exclusive appointment as sales representative for pointing device
products would have resulted in a nonexclusive representation agreement.
This agreement was terminated by the parties effective July 1, 1996.

47
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted
to reflect the sale of the shares offered by this Prospectus, (i) by each of
the Company's directors and each of the Named Executive Officers, (ii) by all
current directors and executive officers as a group, and (iii) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING(1) OWNED AFTER OFFERING(1)
--------------------------- SHARES ---------------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- -------------- ------------ ------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Primax Electronics, Ltd.............................. 3,855,559 48.1% 772,500 3,083,059 30.8%
6F, N. 159 Kang Ning St.
Shi Chi Town, Taipei Hsien
Taiwan R.O.C.

Institutional Venture Partners V(2).................. 720,536 9.0% -- 720,536 7.2%
Mary Jane Elmore
3000 Sand Hill Road
Menlo Park, CA 94025

Technology Venture Investors IV(3)................... 501,095 6.3% -- 501,095 5.0%
2480 Sand Hill Road,
Suite #101
Menlo Park, CA 94025

Dr. Adriaan Ligtenberg............................... 423,833 5.3% -- 423,833 4.2%
L. William Krause(4)................................. 365,913 4.6% -- 365,913 3.7%
Barbara K. Windham .................................. 72,150 * -- 72,150 *
Robert F. Preston ................................... 56,250 * -- 56,250 *
Rick M. McConnell ................................... 49,999 * -- 49,999 *
Joseph G. Finegold(5)................................ 37,500 * -- 37,500 *
Sherry A. Whiteley(6)................................ 37,500 * -- 37,500 *
Andrew S. Rappaport(7)............................... 33,557 * -- 33,557 *
Rick Cavin........................................... 7,500 * -- 7,500 *
Richard C. Alberding(8).............................. 11,250 * -- 11,250 *
Raymond Liang(9)..................................... 3,882,309 48.5% 772,500 3,109,809 31.1%

All directors and executive officers as a
group(11 persons)(10)............................... 5,690,797 69.9% 772,500 4,918,297 48.5%

Other Selling Stockholders,
each of whom owns less than 1%
of the Company's outstanding
Common Stock prior to this
offering............................................ 95,000 1.2% 77,500 17,500 *
</TABLE>
- --------
*Less than 1%.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Includes 12,056 shares held by Institutional Venture Management V and
697,230 shares held by Institutional Venture Partners V. Ms. Elmore, a
director of the Company, is a general partner of Institutional Venture
Management V, the general partner of Institutional Venture Partners V,
which retains certain voting power over such shares. Although Ms. Elmore
may be deemed to be the beneficial owner of such shares, she disclaims
all such beneficial ownership except to the extent of any pecuniary
interest therein which she may have. Also includes 11,250 shares subject
to options held by Ms. Elmore exercisable within 60 days of June 30, 1996
of which 10,312 shares are subject to repurchase by the Company.

48
<PAGE>

(3) Includes 445,706 shares held by Technology Venture Investors IV, 52,095
shares held by TVI Partners IV, L.P., 1,533 shares held by TVI Affiliates
IV, L.P. and 1,761 shares held by TVI Affiliates IV 1988, L.P.
(4) Includes 346,683 shares held as Trustee of the Krause Trust dated June
21, 1994, as amended, 13,461 shares held as Trustee for LWK Ventures
Money Purchase Pension Plan dated January 1, 1991, and 5,769 shares held
as Trustee for LWK Ventures Profit Sharing Plan dated January 1, 1991.
(5) Includes 37,500 shares subject to options exercisable within 60 days of
June 30, 1996 of which 37,500 shares are subject to repurchase by the
Company.
(6) Includes 37,500 shares subject to options exercisable within 60 days of
June 30, 1996 of which 37,500 shares are subject to repurchase by the
Company.
(7) Includes 28,750 shares subject to options exercisable within 60 days of
June 30, 1996 of which 11,822 shares are subject to repurchase by the
Company.
(8) Includes 11,250 shares subject to options exercisable within 60 days of
June 30, 1996 of which 10,312 shares are subject to repurchase by the
Company.
(9) Includes 3,855,559 shares held by Primax. Mr. Liang, a director of the
Company, is Chairman and Chief Executive Officer of Primax, which retains
certain voting power over such shares. Although Mr. Liang may be deemed
to be the beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest
therein which he may have.
(10) Includes 126,250 shares subject to options exercisable within 60 days of
June 30, 1996 of which 107,446 shares are subject to repurchase by the
Company.

49
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $0.001 per share, and 500,000 shares of Preferred
Stock, par value $0.001 per share.

COMMON STOCK

As of June 30, 1996, assuming the conversion of all shares of Preferred
Stock into Common Stock, there were 8,012,985 shares of Common Stock
outstanding held of record by approximately 99 stockholders.

Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company. Subject to the preferences
that may be applicable to any outstanding Preferred Stock, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
liquidation rights of any outstanding Preferred Stock. The Common Stock has no
preemptive, redemption, conversion or other subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
in the offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.

PREFERRED STOCK

Upon the closing of the offering, each outstanding share of Preferred Stock
will be converted into one share of Common Stock and automatically retired.
Thereafter, the Board of Directors will be authorized, without further
stockholder approval, to issue up to 500,000 shares of Preferred Stock and to
determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any unissued shares of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designations of such series. The issuance of Preferred Stock
may have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the
holders of the Common Stock. In certain circumstances, such issuance could
have the effect of decreasing the market price of the Common Stock. As of the
closing of the offering, no shares of Preferred Stock will be outstanding and
the Company currently has no plans to issue any shares of Preferred Stock.

WARRANTS

In May 1992, the Company issued for cash a warrant to Dominion Ventures,
Inc. to purchase an aggregate of 3,135 shares of Series B Preferred Stock.
This warrant has an exercise price of $4.80 per share and no expiration
provision.

In connection with certain market research studies performed for the Company
in 1994, the Company issued three warrants to Griggs Anderson Research to
purchase an aggregate of 3,413 shares of Common Stock. The warrants have an
exercise price of $0.40 per share and expire in 1999.

50
<PAGE>

On May 22, 1996, in connection with a strategic marketing agreement, the
Company issued a warrant to Intel to purchase 28,000 shares of Common Stock.
On June 11, 1996, in connection with the Series F Preferred Stock financing,
Intel exercised its contractual rights to convert its original warrant into a
right to purchase 28,000 shares of Series F Preferred Stock at a price of
$12.40 per share. The warrant expires in 1999.

REGISTRATION RIGHTS

Following the closing of the offering, certain holders of shares of Common
Stock (the "Holders"), will be entitled to certain rights with respect to the
registration of such shares under the Securities Act of 1933, as amended (the
"Securities Act"). Under the terms of agreements between the Company and such
Holders, beginning three months after the effectiveness of the offering, the
Holders have the right to require the Company, on not more than two occasions,
to file a registration statement under the Securities Act in order to register
all or any part of their shares of Common Stock. The Company may in certain
circumstances defer such registrations and the Underwriters have the right,
subject to certain limitations, to limit the number of shares included in such
registrations. Further, the Holders may require the Company to register all or
a portion of their shares with registration rights on Form S-3, when such form
becomes available to the Company, subject to certain conditions and
limitations. In the event that the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other security holders, the Holders are also entitled to include their
shares of Common Stock in such registration, subject to certain marketing and
other limitations. In addition, the co-founders and certain officers,
directors and employees of the Company, may include their shares in such a
registration subject to additional limitations. The registration rights of the
Holders and the co-founders expire on the date seven years from the closing of
the offering. Generally, the Company is required to bear the expense of all
such registrations. The Company intends to file a registration statement under
the Securities Act as soon as possible after the effective date of the
offering covering the shares of Common Stock reserved for issuance under the
Option Plan, the Purchase Plan and the Directors Option Plan.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law.
In general, Section 203 of the Delaware Law prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares
of Common Stock held by stockholders.

These and other provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors
and therefore may discourage another person or entity from making a tender
offer for the Company's Common Stock, including offers at a premium over the
market price of the Common Stock, and might result in delays in changes in
control of management. In addition, these provisions could have the effect of
making it more difficult for proposals favored by the stockholders to be
presented for stockholder consideration.

The Company has also included in its Certificate of Incorporation provisions
to eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
Delaware General Corporation Law and to indemnify its directors and officers
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law.

51
<PAGE>

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe L.P.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
10,012,985 shares of Common Stock (assuming no exercise of outstanding options
after June 30, 1996). Of these shares, the 2,850,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subjected to the resale limitations of Rule
144 adopted under the Securities Act. The remaining 7,162,985 shares
outstanding upon completion of this offering and held by existing shareholders
will be "Restricted Securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below,
and the provisions of Rule 144, 144(k) and 701, additional shares will be
available for sale in the public market as follows: (i) no shares will be
available for immediate sale in the public market on the date of the
Prospectus, (ii) 2,960,057 currently outstanding shares (as well as 98,803
additional shares issuable upon the exercise of stock options granted under
the Option Plan that will be vested) will be eligible for sale upon expiration
of lock-up agreements 180 days after the date of this Prospectus and (iv)
4,202,928 currently outstanding shares will be eligible for sale upon
expiration of their respective two-year holding periods, subject in the case
of shares held by affiliates to compliance with certain volume restrictions.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years (and, with respect to non-affiliates of the Company, a
person who has beneficially owned Restricted Securities less than three
years), will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of the Company's Common Stock (approximately 100,130 shares immediately
after the offering) or (ii) the average weekly trading volume of the Company's
Common Stock in the Nasdaq Stock Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Such sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least three
years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above. The Securities and Exchange Commission has
recently proposed to reduce the two and three year holding periods under Rule
144 to one and two years, respectively. If enacted, such modification will
have a material effect on the timing of when certain shares of Common Stock
become eligible for resale.

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer director or consultant to the
Company who purchased his or her shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to

52
<PAGE>

sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell such shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this Prospectus before selling such shares.

The Company intends to file a Registration Statement on Form S-8 to register
the shares of Common Stock issuable upon exercise of options granted under the
Option Plan, the Directors' Plan and the Purchase Plan. Following the filing
of the Form S-8, shares of Common Stock issued under the Option Plan,
Directors' Plan and Purchase Plan will be available for sale in the public
market upon vesting and exercise of such options, subject to lock-up
restrictions described above and the Rule 144 volume limitations applicable to
affiliates.

53
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Gray Cary Ware & Freidenrich, a Professional Corporation, Palo
Alto, California. Certain legal matters relating to the offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. A general partnership, of
which certain members of Gray Cary Ware & Freidenrich are partners, owns an
aggregate of 5,208 shares of common stock of the Company.

EXPERTS

The Consolidated Financial Statements of the Company as of December 31,
1993, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 and the financial statements of Primax Electronics (U.S.A.),
Inc. as of December 31, 1993, 1994 and 1995 and for each of the three years in
the period ended December 31, 1995 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as part thereof. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.

The Company intends to furnish its stockholders with annual reports
containing audited annual financial statements and quarterly reports
containing unaudited interim financial statements for the first three fiscal
quarters of each fiscal year of the Company.

54
<PAGE>

STORM TECHNOLOGY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STORM TECHNOLOGY, INC.:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheet.............................................. F-3
Consolidated Statement of Operations.................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit)................ F-5
Consolidated Statement of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1995 for Storm Technology, Inc. and Primax Electronics
(USA), Inc.:........................................................... F-20
Unaudited Pro Forma Combined Statement of Operations for the Six Months
Ended June 30, 1996 for Storm Technology, Inc. and Primax Electronics
(USA), Inc.:........................................................... F-21
PRIMAX ELECTRONICS (USA), INC.:
Report of Independent Accountants....................................... F-23
Balance Sheet........................................................... F-24
Statement of Operations................................................. F-25
Statement of Shareholders' Equity (Deficit)............................. F-26
Statement of Cash Flows................................................. F-27
Notes to Financial Statements........................................... F-28
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Storm Technology, Inc.

In our opinion, the accompanying consolidated balance sheet at December 31,
1994 and 1995 and the related consolidated statements of operations,
stockholders' equity (deficit) and of cash flows for each of the three years
in the period ended December 31, 1995 present fairly, in all material
respects, the financial position of Storm Technology, Inc. and the results of
the operations and cash flows 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 19, 1996

F-2
<PAGE>

STORM TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30, 1996
---------------- ---------------------
PRO FORMA
1994 1995 ACTUAL (NOTE 2)
------- ------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 542 $ 1,865 $ 1,503 $ 1,503
Short-term investments................ 1,747 -- 1,000 1,000
Accounts receivable, net (Note 4)..... 231 2,676 4,259 4,259
Receivable from related party......... -- -- 453 453
Inventories........................... 31 1,212 2,420 2,420
Other current assets.................. 230 66 90 90
------- ------- -------- --------
Total current assets................ 2,781 5,819 9,725 9,725
Property and equipment, net (Note 4).... 245 160 322 322
Goodwill................................ -- -- 782 782
Other assets............................ -- -- 64 64
------- ------- -------- --------
Total assets...................... $ 3,026 $ 5,979 $ 10,893 $ 10,893
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $ 99 $ 342 $ 909 $ 909
Accrued liabilities (Note 4).......... 286 314 2,352 2,352
Payable to related party.............. -- 2,590 7,829 7,829
------- ------- -------- --------
Total current liabilities........... 385 3,246 11,090 11,090
------- ------- -------- --------
Long-term liability..................... 100 -- -- --
------- ------- -------- --------
Commitments (Note 8)
Stockholders' equity (deficit) (Note 6):
Convertible preferred stock, $0.001
par value, 10,000,000 shares
authorized; 1,688,004, 2,377,896 and
6,713,192 shares issued and
outstanding at December 31, 1994 and
1995 and June 30, 1996 (unaudited),
respectively; no shares issued or
outstanding at June 30, 1996 pro
forma (unaudited).................... 2 2 7 --
Common stock, $0.001 par value,
10,000,000 shares authorized,
879,481, 938,741 and 1,245,919 shares
issued and outstanding at December
31, 1994 and 1995 and June 30, 1996
(unaudited), respectively; 8,012,985
shares issued and outstanding at June
30, 1996 pro forma (unaudited)....... 1 1 1 8
Additional paid-in capital............ 7,632 11,220 16,391 16,391
Deferred compensation................. -- -- (217) (217)
Accumulated deficit................... (5,094) (8,490) (16,379) (16,379)
------- ------- -------- --------
Total stockholders' equity
(deficit).......................... 2,541 2,733 (197) (197)
------- ------- -------- --------
Total liabilities and
stockholders' equity (deficit)... $ 3,026 $ 5,979 $ 10,893 $ 10,893
======= ======= ======== ========
</TABLE>

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

F-3
<PAGE>

STORM TECHNOLOGY, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product....................... $ 1,211 $ 655 $ 5,245 $ 1,542 $ 7,633
Royalty and other............. 1,772 2,545 549 461 388
------- ------- ------- -------- --------
Total revenues.............. 2,983 3,200 5,794 2,003 8,021
Cost of product revenues........ 276 178 3,735 1,074 5,697
------- ------- ------- -------- --------
Gross profit.................... 2,707 3,022 2,059 929 2,324
------- ------- ------- -------- --------
Operating expenses:
Research and development...... 1,845 2,102 1,494 749 1,125
Marketing and selling......... 1,604 1,981 3,384 1,389 3,419
General and administrative.... 625 628 633 341 702
In-process research and
development.................. -- 500 -- -- 5,000
------- ------- ------- -------- --------
Total operating expenses.... 4,074 5,211 5,511 2,479 10,246
------- ------- ------- -------- --------
Loss from operations............ (1,367) (2,189) (3,452) (1,550) (7,922)
Interest income, net............ 42 96 56 25 33
------- ------- ------- -------- --------
Net loss........................ $(1,325) $(2,093) $(3,396) $ (1,525) $ (7,889)
======= ======= ======= ======== ========
Pro forma net loss per common
and common equivalent share
(unaudited--Note 2)............ $ (0.45) $ (0.20) $ (0.98)
======= ======== ========
Pro forma weighted average
number of common and common
equivalent shares (unaudited--
Note 2)........................ 7,588 7,473 8,047
======= ======== ========
</TABLE>

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

F-4
<PAGE>

STORM TECHNOLOGY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ----------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
--------- ------ --------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1992................... 869,789 $ 1 780,411 $ 1 $ 3,687 $ -- $ (1,676) $ 2,013
Issuance of common stock
under stock
option plan............ -- -- 98,311 -- 39 -- -- 39
Net loss................ -- -- -- -- -- -- (1,325) (1,325)
--------- ---- --------- ---- ------- ----- -------- -------
BALANCE AT DECEMBER 31,
1993................... 869,789 1 878,722 1 3,726 -- (3,001) 727
Issuance of common stock
under stock
option plan............ -- -- 21,749 -- 10 -- -- 10
Repurchase of common
stock.................. -- -- (20,990) -- (10) -- -- (10)
Issuance of Series C
convertible preferred
stock for cash, net of
issuance costs of $20.. 818,215 1 -- -- 3,906 -- -- 3,907
Net loss................ -- -- -- -- -- -- (2,093) (2,093)
--------- ---- --------- ---- ------- ----- -------- -------
BALANCE AT DECEMBER 31,
1994................... 1,688,004 2 879,481 1 7,632 -- (5,094) 2,541
Issuance of common stock
under stock
option plan............ -- -- 59,260 -- 24 -- -- 24
Issuance of Series D
convertible preferred
stock for cash, net of
issuance costs of $23.. 689,892 -- -- -- 3,564 -- -- 3,564
Net loss................ -- -- -- -- -- -- (3,396) (3,396)
--------- ---- --------- ---- ------- ----- -------- -------
BALANCE AT DECEMBER 31,
1995................... 2,377,896 2 938,741 1 11,220 -- (8,490) 2,733
Issuance of common stock
under stock option plan
(unaudited)............ -- -- 307,178 -- 123 -- -- 123
Issuance of Series E
convertible preferred
stock for acquired
business and
technology, net of
issuance costs of $128
(unaudited)............ 4,214,329 5 -- -- 3,238 -- -- 3,243
Issuance of Series F
convertible preferred
stock for cash, net of
issuance costs of $10
(unaudited)............ 120,967 -- -- -- 1,490 -- -- 1,490
Deferred stock
compensation related to
the issuance of certain
stock options
(unaudited)............ -- -- -- -- 233 (233) -- --
Other (unaudited)....... -- -- -- -- 87 16 -- 103
Net loss (unaudited).... -- -- -- -- -- -- (7,889) (7,889)
--------- ---- --------- ---- ------- ----- -------- -------
BALANCE AT JUNE 30, 1996
(UNAUDITED)............ 6,713,192 $ 7 1,245,919 $ 1 $16,391 $(217) $(16,379) $ (197)
========= ==== ========= ==== ======= ===== ======== =======
</TABLE>

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

F-5
<PAGE>

STORM TECHNOLOGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss........................ $(1,325) $(2,093) $(3,396) $ (1,525) $ (7,889)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and
amortization................. 80 143 142 77 117
Write-off of purchased in-
process research and
development (Note 3)......... -- 500 -- -- 5,000
Other non-cash charges........ -- -- -- -- 35
Changes in assets and
liabilities:
Accounts receivable......... 287 (58) (2,445) (652) 389
Inventories................. (12) 7 (1,181) (500) 1,244
Other current assets........ (68) (139) 164 168 (24)
Other long-term assets...... -- -- -- -- (64)
Accounts payable............ 101 (125) 2,833 652 407
Accrued liabilities......... 1,091 (1,024) 28 (1) 36
Payable to related party.... -- -- -- 4 (412)
------- ------- ------- -------- --------
Net cash provided by (used
in) operating
activities............... 154 (2,789) (3,855) (1,777) (1,161)
------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (187) (147) (57) (28) (182)
(Purchases) sales of short-
term investments............. (90) (451) 1,747 1,747 (900)
Other......................... -- (345) (100) (100) 268
------- ------- ------- -------- --------
Net cash (used in)
provided by investing
activities............... (277) (943) 1,590 1,619 (814)
------- ------- ------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
convertible preferred stock,
net.......................... -- 3,907 3,564 -- 1,490
Proceeds from issuance of
common stock................. -- 10 24 7 123
Repurchase of common stock.... -- (10) -- -- --
------- ------- ------- -------- --------
Net cash provided by
financing activities..... -- 3,907 3,588 7 1,613
------- ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents........... (123) 175 1,323 (151) (362)
Cash and cash equivalents at the
beginning of the period........ 490 367 542 542 1,865
------- ------- ------- -------- --------
Cash and cash equivalents at the
end of the period.............. $ 367 $ 542 $ 1,865 $ 391 $ 1,503
======= ======= ======= ======== ========
</TABLE>

Refer to Note 3 for disclosure of non-cash investing activities.

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

F-6
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

Storm Technology, Inc. (the "Company," formerly Storm Software, Inc.), was
incorporated in California on January 17, 1990. The Company is a leading
provider of digital photo solutions which enable consumers and small
businesses to input, store, organize, enhance and use photos easily on their
personal computers.

Unaudited

On March 18, 1996, the Company acquired all outstanding shares of Primax
Electronics (USA), Inc. ("Primax USA") and certain technologies from Primax
Electronics, Ltd. ("Primax Taiwan") in exchange for 4,214,329 shares of the
Company's Series E Preferred Stock. The accompanying financial statements
present the accounts of Storm Technology, Inc. for the three year periods
ended December 31, 1993, 1994 and 1995 and for the unaudited six month periods
ended June 30, 1995 and 1996. The consolidated financial statements for the
six month period ended June 30, 1996 include the results of Primax USA for the
period subsequent to the acquisition date through June 30, 1996. All
significant intercompany accounts and transactions have been eliminated.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of the Company's significant accounting policies:

Revenue recognition

Revenue from product sales to customers is generally recognized when the
product is shipped, provided 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 and credits for price protection are provided for
upon revenue recognition. Such reserves are estimated based on historical
rates of returns and allowances, distributor inventory levels and other
factors.

Revenue from royalty fees under certain product royalty agreements is
generally recognized upon shipment of related products to customers.

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents.

Short-term investments

The Company classifies short-term investments, consisting solely of U.S.
Government obligations maturing within one year, as available-for-sale.

Fair value of financial instruments

The carrying amount of the Company's financial instruments, including short-
term investments, accounts receivable, receivable from related party and
payable to related party, approximate fair values.

F-7
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Concentration of credit risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of bank deposits, short-term
investments and accounts receivable. The Company places its cash primarily in
checking and money market accounts, certificates of deposits and U.S. treasury
bills. The Company's accounts receivable are derived from revenues earned from
customers located primarily in the U.S. The Company performs ongoing
evaluations of its customers' financial condition and maintains an allowance
for doubtful accounts based upon the expected collectibility.

The following table summarizes the revenues from customers in excess of 10%
of total revenues for each applicable period:

<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS
DECEMBER 31, ENDED
---------------- JUNE 30,
1993 1994 1995 1996
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Radius Inc. ................................ 59% 39% -- --
Apple Computer, Inc. ....................... -- 41% -- --
Circuit City Stores, Inc. .................. -- -- 27% --
Best Buy Company, Inc. ..................... -- -- 11% 11%
Ingram Micro Inc. .......................... -- -- -- 15%
America Online Inc. ........................ -- -- -- 17%
</TABLE>

At December 31, 1993, Radius Inc. accounted for 53% of total accounts
receivable. At December 31, 1994, Radius Inc. and Apple Computer, Inc.
accounted for 67% and 0% of total accounts receivable, respectively. At
December 31, 1995, Circuit City Stores, Inc. and Best Buy Company, Inc.
accounted for 34% and 25% of total accounts receivable, respectively. At June
30, 1996, Best Buy Company, Inc., Ingram Micro Inc. and America Online Inc.
accounted for 8%, 11% and 9% of total accounts receivable, respectively
(unaudited).

Inventories

Inventories, which consist entirely of finished goods, are stated at the
lower of cost, determined using the first-in, first-out method, or market.

The Company currently buys most of its photo readers from one supplier.
Although there are a limited number of manufacturers of the photo readers,
management believes that other suppliers could provide similar photo readers
on comparable terms. A change in suppliers, however, could cause a possible
loss of sales, which may affect operating results adversely.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets
ranging from three to five years.

F-8
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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.

Goodwill (unaudited)

Goodwill represents cost in excess of net assets acquired from Primax Taiwan
on March 18, 1996 (see Note 3). The goodwill is being amortized over a period
of four years and amortization expense totaled $52 for the period ended June
30, 1996. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. The Company measures the potential
impairment of recorded goodwill by comparing the undiscounted expected future
operating cash flows in relation to its net investment. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred.

Advertising expense

Advertising is expensed as incurred and amounted to $12, $69, $423, $171 and
$314 for the years ended December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1995 and 1996, respectively.

Income taxes

Income taxes are accounted for under the asset and liability approach. The
asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.

Stock-based compensation (unaudited)

In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company will be required to adopt SFAS 123 in the year
ending December 31, 1996. It is the Company's intention to continue to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25 and to adopt the "disclosure only" alternative described in
SFAS 123.

Pro forma net loss per share (unaudited)

Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if-
converted method) and stock options (using the treasury stock method). Common
equivalent shares are excluded from the computation if their effect is anti-
dilutive, except that, pursuant to a Securities and Exchange Commission Staff
Accounting Bulletin, shares of common stock, convertible preferred stock
(using the if-converted method) and common stock options and warrants (using
the treasury stock method and the assumed initial public offering price)
issued within 12 months prior to the Company's initial public offering have
been included in the computation as if they were outstanding for each period
presented.

Historical net loss per share has not been presented since such amounts are
not deemed to be meaningful due to the significant change in the Company's
capital structure which will occur in connection with the Offering.

F-9
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Pro forma balance sheet information (unaudited)

Upon the effective date of the proposed initial public offering of the
Company's common stock, each outstanding share of convertible preferred stock
will automatically convert into shares of common stock.

The pro forma balance sheet information at June 30, 1996 is adjusted to
reflect the conversion of the outstanding shares of convertible preferred
stock into 6,767,066 shares of common stock at June 30, 1996.

Interim financial information

The unaudited interim financial statements have been prepared on the same
basis as the Company's audited financial statements for the year ended
December 31, 1995. In management's opinion, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results for the six months ended June 30, 1995 and 1996 have been made. The
results for the six months ended June 30, 1996 are not necessarily indicative
of the results to be expected for the entire year ending December 31, 1996.

Management estimates

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

NOTE 3--ACQUISITIONS:

In 1994, the Company acquired certain assets of CyberPuppy Software, Inc.
("CyberPuppy") for a total purchase price of $550, which included minimum
guaranteed royalties totaling $200. Of the purchase price, $500 was allocated
to in-process research and development, and charged to expense during 1994.
During 1995, the Company terminated their rights to the acquired intellectual
property and returned the remaining assets of the CyberPuppy business in
exchange for cancellation of the remaining minimum guaranteed royalties
commitment.

Unaudited

On March 18, 1996, the Company acquired all outstanding shares of Primax USA
and certain technologies from Primax Taiwan in exchange for 4,214,329 shares
of the Company's Series E Convertible Preferred Stock. The transaction was
accounted for under the purchase method of accounting. Approximately $5
million of the purchase price was allocated to in-process research and
development. The value assigned to in-process research and development was
determined by an independent appraiser. Because such technology was in-process
hardware research and development, the amount was immediately charged to
operations.

In conjunction with the acquisition, liabilities were assumed as follows:

<TABLE>
<S> <C>
Tangible assets.................................................. $ 5,287
In-process research and development.............................. 5,000
Goodwill......................................................... 834
Series E Preferred Stock issued, net............................. (3,243)
-------
Liabilities assumed................................................ $(7,878)
=======
</TABLE>

F-10
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The Company's consolidated financial statements for the six month period
ended June 30, 1996 include Primax USA for the period subsequent to the
acquisition date.

The following table presents the unaudited pro forma consolidated results of
operations for the six months ended June 30, 1995 and 1996 as if the
transaction completed in 1996 had been completed on January 1, 1995, with the
pro forma adjustments giving effect principally to the elimination of service
revenues recognized by Primax USA related to services performed for Storm and
the amortization of goodwill:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------ DECEMBER 31,
1995 1996 1995
-------- -------- ------------
<S> <C> <C> <C>
Total revenues.............................. $ 5,014 $10,125 $13,895
Net loss.................................... (2,169) (3,368) (4,746)
Pro forma net loss per common and common
equivalent share (see Note 2).............. $ (0.29) $ (0.42) $ (0.63)
</TABLE>

In connection with the acquisition, the Company also entered into a series
of distribution agreements with Primax Taiwan and Primax Electronics Europe
B.V. The agreements provide Primax Taiwan with an exclusive license to
manufacture and distribute certain products owned by the Company in both
domestic and international markets for a term of four years.

NOTE 4--BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995 JUNE 30, 1996
----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net consisted of:
Accounts receivable............................. $ 298 $2,832 $5,157
Allowance for sales returns and other credits... (64) (137) (602)
Allowance for doubtful accounts................. (3) (19) (296)
----- ------ ------
$ 231 $2,676 $4,259
===== ====== ======
Property and equipment, net consisted of:
Computer equipment.............................. $ 464 $ 521 $ 705
Furniture and fixtures.......................... 46 46 89
----- ------ ------
510 567 794

Less: accumulated depreciation.................. (265) (407) (472)
----- ------ ------
$ 245 $ 160 $ 322
===== ====== ======
Accrued liabilities consisted of:
Accrued employee benefits....................... $ 85 $ 92 $ 218
Reserve for returns of discontinued products.... -- -- 1,116
Marketing costs................................. 70 132 545
Other........................................... 131 90 473
----- ------ ------
$ 286 $ 314 $2,352
===== ====== ======
</TABLE>

F-11
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 5--RELATED PARTY TRANSACTIONS (UNAUDITED):

During the year ended December 31, 1995 and the six months ended June 30,
1996, Storm purchased inventories from Primax Taiwan totaling $4,665 and
$5,476, respectively.

The receivable from related party at June 30, 1996 of $453 is due from
Primax Taiwan and consists of royalty and other income and receivables assumed
in connection with the acquisition of Primax USA. The payable to related party
in the amount of $2,590 at December 31, 1995 consists of the amounts payable
to Primax Taiwan for purchased inventories. At June 30, 1996, the payable to
related party of $7,829 includes approximately $5,000 of payable to Primax
Taiwan assumed from Primax USA.

NOTE 6--STOCKHOLDERS' EQUITY (DEFICIT):

Delaware reincorporation and reverse stock split (unaudited)

In March 1996, the Board approved reincorporation in the State of Delaware,
including a one for four reverse stock split of the outstanding shares of the
Company's common stock effected through the exchange ratio of the
reincorporation merger. The reincorporation must be approved by the
stockholders and a certificate of merger must be filed with the State of
Delaware to effect the reincorporation. Such certificate of merger has not yet
been submitted. All share and per share data have been retroactively adjusted
to reflect this reincorporation.

Convertible Preferred Stock

Convertible preferred stock as of December 31, 1995 consisted of the
following series:

<TABLE>
<CAPTION>
NON-
CUMULATIVE
LIQUIDATION DIVIDENDS
SERIES AUTHORIZED OUTSTANDING PREFERENCE PER SHARE
------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
A.............................. 750,000 749,999 $3,000 $0.32
B.............................. 122,927 119,790 575 0.40
C.............................. 818,217 818,215 3,927 0.40
D.............................. 689,897 689,892 3,587 0.40
</TABLE>

The aggregate authorized number of preferred shares is 10,000,000.

The holders of Common and Series A, B, C and D shares, have voting rights
equal to common stock on an as-if converted basis and are entitled to elect
three members of the Company's Board of Directors (the "Board"). The holders
of common stock, voting as a class, are entitled to elect one director to the
Board.

Holders of Series A, B, C and D shares are entitled to receive noncumulative
dividends at the rates shown above when and if declared by the Board, prior to
and in preference to any declaration or payment of any dividend on common
stock.

In the event of liquidation, the holders of Series A, B, C and D shares are
entitled to receive, prior to and in preference to any distribution to the
holders of common stock, the amounts shown above, plus any accrued but unpaid
dividends. After completion of this distribution, the holders of Series E
shares are entitled to receive, prior to and in preference to the holders of
common stock, the amount shown above, plus any accrued but unpaid dividends.

F-12
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

After completion of this distribution, each holder of the common shares,
with each holder of Series A, B, C and D shares, treated on an as-if converted
basis, shall receive an amount equal to $12.00 per share. If $12.00 per share
has been paid to each holder of preferred shares as provided above, the
holders of common stock are entitled to receive, in addition, an amount equal
to all declared but unpaid dividends. After the above distributions have been
made, the remaining assets shall be distributed among the holders of the
preferred and common shares, assuming full conversion.

Each Series A, B, C and D share is convertible into shares of common stock
on a one-for-one basis, with automatic conversion (i) upon the vote of 66 2/3%
of the holders of Series A, B, C and D shares outstanding at the time of such
vote; or (ii) upon the closing of an underwritten public offering in which the
aggregate offering price is not less than $7,500 and the per share price is
not less than $8.80 per share, subject to adjustment for dilution. At December
31, 1995, 2,381,041 shares of common stock were reserved for conversion of the
preferred stock.

The holders of Series A, B, C, and D shares have a right of first refusal to
purchase, pro rata, any new securities issued by the Company, so as to
maintain their percentage ownership of the common stock of the Company on an
as-converted basis. This right terminates upon the closing of a public
offering at a minimum price of $8.80 per share and aggregate minimum offering
proceeds of $7,500.

Series E Convertible Preferred Stock--(unaudited)

On March 18, 1996, the Company issued 4,214,329 shares of Series E
convertible preferred stock (the "Series E shares"). Each share of Series E
stock is convertible into one share of common stock. Holders of the Series E
shares, voting as a class, are entitled to elect three Directors to the Board.

The holders of Series E shares will be entitled to receive non-cumulative
dividends at a rate of $0.08 per share, when and if declared by the Board,
prior to and in preference to any declaration or payment of any dividend on
Common Stock, but subsequent to any declaration or payment of any dividend on
Series A, B, C and D preferred stock.

In the event of liquidation, the holders of Series E shares are entitled to
receive, prior to and in preference to any distribution to the holders of
Common Stock, but subsequent to any distribution to the holders of Series A,
B, C and D shares, $0.80 per share plus any accrued but unpaid dividends.
After completion of such distribution to the holders of Series E shares, each
holder of the common shares, with each holder of Series A, B, C, D and E
shares, treated on an as-if converted basis, shall receive an amount equal to
$12.00 per share.

The holders of Series E shares have the same rights of first refusal to
purchase any new securities issued by the Company, with the same termination
conditions as the holders of the Series A, B, C and D Shares.

Series F Convertible Preferred Stock--(unaudited)

On June 11, 1996, the Company issued 120,967 shares of Series F Convertible
Preferred Stock at $12.40 per share. Each holder of a Series F share is
entitled to similar voting and liquidation rights as holders of Series A, B, C
and D shares. Holders of Series F shares are entitled to receive non-
cumulative dividends at a rate of $0.40 per share when and if declared by the
Board, prior to and in preference to any declaration or payment of any
dividend on common stock.

F-13
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

In the event of liquidation, the holders of Series F shares are entitled to
receive $12.40 per share, plus any accrued but unpaid dividends, prior to and
in preference of any distribution to the holders of Series E shares and common
shares. Holders of Series F shares will also participate in the distribution
of any remaining assets after the liquidation preferences of holders of Series
A, B, C, D and E shares and common stock.

The holders of Series F shares join in the right of first refusal to
purchase any new securities issued by the Company, so as to maintain their
percentage ownership of the common stock of the Company on an as-if converted
basis. This right terminates upon the closing of a public offering.

Under the terms of the Series F Preferred Stock Purchase Agreement, the
Company is required to notify holders of Series F of any proposed transaction
that would result in a change of control or a sale of all or substantially all
of the Company's assets. The holders of Series F have a right to propose a
competitive offer that the Board must consider in good faith.

Warrants for Series B Convertible Preferred Stock

In May 1992, the Company issued warrants to purchase 3,135 shares of Series
B for $4.80 per share and no expiration provision. Such warrants are
outstanding at December 31, 1995 and June 30, 1996 (unaudited).

Warrants for Series F Convertible Preferred Stock (Unaudited)

On May 22, 1996, in connection with a strategic marketing agreement, the
Company issued a warrant to Intel to purchase 28,000 shares of Common Stock.
On June 11, 1996, in connection with the Series F Preferred Stock financing,
Intel exercised its contractual right to convert its original warrant into a
right to purchase 28,000 shares of Series F Preferred Stock at a price of
$12.40 per share.

Warrants for common stock

In 1994, the Company issued warrants to purchase 3,413 shares of common
stock for $0.40 per share. Such warrants are outstanding at December 31, 1995
and June 30, 1996 (unaudited) and expire in 1999.

Stock option plan

In November 1991, the Company adopted the 1991 Stock Option Plan (the
"Option Plan") that allows for the issuance of incentive and nonqualified
stock options to employees and consultants of the Company, and expires in
2001. The Option Plan, as amended, provides for the issuance of up to 513,634
incentive and nonqualified stock options as of December 31, 1995.

F-14
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The following table summarizes activity under the Option Plan:

<TABLE>
<CAPTION>
EXERCISE
SHARES OPTIONS PRICE PER
AVAILABLE OUTSTANDING SHARE
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992............ 77,729 225,660 $0.40
Additional shares authorized............ 156,250 --
Options granted......................... (129,179) 129,179 0.40
Options exercised....................... -- (98,311) 0.40
Options canceled........................ 55,655 (55,655) 0.40
-------- --------
BALANCE AT DECEMBER 31, 1993............ 160,455 200,873 0.40
Shares repurchased...................... 20,990 --
Options granted......................... (117,750) 117,750 0.40
Options exercised....................... -- (21,749) 0.40
Options canceled........................ 67,318 (67,318) 0.40
-------- --------
BALANCE AT DECEMBER 31, 1994............ 131,013 229,556 0.40
Options granted......................... (36,705) 36,705 0.40
Options exercised....................... -- (59,260) 0.40
Options canceled........................ 87,896 (87,896) 0.40
-------- --------
BALANCE AT DECEMBER 31, 1995............ 182,204 119,105 0.40
Additional shares authorized (unau-
dited)................................. 597,577 --
Options granted (unaudited)............. (537,067) 537,067 0.40-10.00
Options exercised (unaudited)........... -- (307,178) 0.40-5.00
Options canceled (unaudited)............ 15,077 (15,077) 0.40
-------- --------
BALANCE AT JUNE 30, 1996 (UNAUDITED).... 257,791 333,917 0.40-10.00
======== ========
</TABLE>

Options granted under the Option Plan are generally for periods not to
exceed ten years, and generally must be issued at prices not less than 100%
and 85% for incentive and nonqualified stock options, respectively, of the
fair market value of the stock as determined by the Board on the date of
grant. Options granted to stockholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years, and must be issued
at prices not less than 110% of the fair market value of the stock on the date
of grant.

Initial options granted under the Option Plan generally vest 25% after the
first year and ratably each month over the remaining thirty six month period.
Options granted subsequent to the initial grant vest ratably over four years.
At December 31, 1995, 71,571 options to purchase shares were vested.

As of June 30, 1996, 249,120 shares (unaudited) of Common Stock, subject to
repurchase by the Company, have been issued upon exercise of options granted
under the Option Plan.

1996 Employee Stock Purchase Plan (unaudited)

In June 1996, the Board approved the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan permits eligible employees to purchase
Common Stock at a discount through accumulated payroll deductions. The price
at which shares are purchased under the Purchase Plan is equal to 85% of the
fair market value of a share of Common Stock on the first day of the offering
period or the last day of the purchase period, whichever is lower. A total of
75,000 shares of Common Stock have been reserved for issuance under the
Purchase Plan.

F-15
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

1996 Outside Directors Stock Option Plan (unaudited)

In June 1996, the Company commenced the 1996 Outside Directors Stock Option
Plan (the "Directors Plan"). The Directors Plan provides for the automatic
grant of nonstatutory stock options to directors of the Company who are not
employees of the Company or Primax Taiwan ("Outside Directors"). The exercise
price per share of options granted under the Directors Plan will be equal to
the fair market value of a share of Common Stock on the date of grant. Shares
subject to an option granted under the Directors Plan vest over two years and
options granted under the Directors Plan must be exercised within ten years
from the date of grant. On May 20, 1996, each Outside Director was granted an
option to purchase 11,250 shares of Common Stock at a price of $4.00 per
share. A total of 112,500 shares of Common Stock have been reserved for
issuance under the Director's Plan, including 33,750 options granted prior to
June 30, 1996.

NOTE 7--INCOME TAXES:

No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1995. As of
December 31, 1995, the Company has net operating loss carryforwards of
approximately $5,100 for federal income tax purposes, which can be used to
reduce future taxable income. These net operating loss carryforwards begin to
expire in 2007.

The tax provision is reconciled to the amount computed using the federal
statutory rate as follows:

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
--------------------- --------------
1993 1994 1995 1995 1996
----- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C>
Benefit at federal statutory tax....... $(464) $(733) $(1,189) $(534) $(2,761)
Net operating losses with no current
benefit............................... 464 733 1,189 534 2,761
----- ----- ------- ----- -------
Provision for income taxes............. $ -- $ -- $ -- $ -- $ --
===== ===== ======= ===== =======
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Federal and state loss carryforwards..................... $ 1,568 $ 1,893
Reserves and accruals.................................... 248 180
Deferred tax asset valuation allowance................... (1,816) (2,073)
------- -------
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.

Under the Tax Reform Act of 1986, the annual benefit from net operating loss
carryforwards is restricted by cumulative ownership changes of 50 percent over
a three-year period, as defined. As a result of prior financings which
resulted in such an ownership change in November 1991, approximately $400 of
the Company's net operating loss carryforwards are limited to usage of
approximately $200 per year.

F-16
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

UNAUDITED

Further, the acquisition of Primax USA and certain technologies from Primax
Taiwan in March 1996 triggered another ownership change of greater than 50%
and the potential benefits from utilization of tax net operating loss
carryforwards generated from November 1991 through the date of the
acquisition, totaling approximately $5,100, will be impaired. The approximate
annual limitation on the utilization of those carryforwards may range from
$300 to $400, provided that this amount is reduced to the extent that the net
operating loss carryforwards generated through November 1991 are utilized.
Accordingly, the balance of net operating loss carryforwards at December 31,
1995 has been adjusted to reflect the limitation.

The Internal Revenue Service ("IRS") is examining Primax USA's federal
income tax returns. In January 1996, Primax USA received an IRS tax assessment
for the tax years ended December 31, 1991, 1992 and 1993. Primax Taiwan has
agreed to indemnify the Company with respect to this matter.

NOTE 8--COMMITMENTS:

Leases

The Company has entered into a three-year noncancelable operating lease for
office space and certain equipment leases which expire at various dates
through 1997. Future minimum noncancelable lease payments under the Company's
leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996................................................................. $192
1997................................................................. 2
----
$194
====
</TABLE>

In connection with the acquisition of Primax USA, Storm assumed a
noncancelable operating lease for office space. The lease expires in June
2000. Monthly rental charges are approximately $20 (unaudited).

Rent expense for the years ended December 31, 1993, 1994 and 1995 was $171,
$303 and $315, respectively. Rent expense for the six months ended June 30,
1995 and 1996 was $168 and $201, respectively (unaudited).

Lines of credit--(unaudited)

On May 16, 1996, the Company entered into a loan and security agreement with
a bank, providing for a $3,500 revolving line of credit and a $6,500 accounts
receivable line of credit. Borrowings under the accounts receivable line of
credit are limited to the sum of 80% of eligible domestic non-distributor
accounts receivable and 70% of eligible domestic distributor accounts
receivable, which sum totaled approximately $3,400 at June 30, 1996.

The lines of credit bear interest at the bank's prime rate plus 0.75%, and
are secured by the Company's cash, cash equivalents, investments, accounts
receivable, inventories, property and equipment and all intellectual property.
All obligations under the revolving line of credit are guaranteed by Primax
Taiwan up to an amount of $3,500. The lines of credit contain certain
covenants limiting any dividend payments as well as maintenance of financial
ratios, future profitability and minimum tangible net worth. The lines of
credit expire on May 15, 1997.

F-17
<PAGE>

STORM TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

License Agreement--(unaudited)

The Company has entered into a patent cross license agreement with a third
party which provides for a lump sum payment by the Company and potential
ongoing royalty payments after two years relating to an ancillary feature of
certain of the Company's products for which payments Primax has agreed to
reimburse the Company pursuant to indemnification obligations entered into in
connection with the sale of technology to the Company in March 1996. The
Company believes that this agreement will not have a material adverse effect
on the Company's business, operating results or financial condition.

F-18
<PAGE>

STORM TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION

The following Unaudited Pro Forma Combined Financial Information gives
effect to the acquisition by Storm Technology, Inc. (formerly Storm Software,
Inc.) ("Storm" or the "Company") of Primax Electronics (USA), Inc. ("Primax
USA") and certain technologies from Primax Electronics, Ltd. ("Primax Taiwan")
in a transaction accounted for as a purchase. The Unaudited Pro Forma Combined
Statement of Operations is based on the individual statements of operations of
Storm and Primax USA appearing elsewhere in this Prospectus, and combines the
results of operations of Storm and Primax USA (acquired by Storm as of March
18, 1996) for the year ended December 31, 1995 and the six months ended June
30, 1996 as if the acquisition occurred on January 1, 1995.

The Unaudited Pro Forma Combined Financial Information gives effect only to
the adjustments set forth in the accompanying notes and does not reflect any
synergies anticipated by Storm management as a result of the acquisition of
Primax USA and the technologies. The Unaudited Pro Forma Combined Financial
Information is not necessarily indicative of the results of operations that
would have been achieved had the acquisition been completed as of the
beginning of the earliest period presented, nor is it necessarily indicative
of Storm's future results of operations.

The Unaudited Pro Forma Combined Financial Information should be read in
conjunction with the historical financial statements of Storm and Primax USA
included elsewhere in this Prospectus.

F-19
<PAGE>

STORM TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
PRIMAX --------------------------
STORM(1) USA(2) ADJUSTMENTS(3) COMBINED(4)
-------- ------ -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product........................ $ 5,245 $7,421 $ 12,666
Royalty and other.............. 549 1,040 $(360)(a) 1,229
------- ------ ----- --------
Total revenues............... 5,794 8,461 (360) 13,895
Cost of product revenues......... 3,735 5,201 -- 8,936
------- ------ ----- --------
Gross profit..................... 2,059 3,260 (360) 4,959
------- ------ ----- --------
Operating expenses:
Research and development....... 1,494 -- -- 1,494
Marketing and selling.......... 3,384 2,748 -- 6,132
General and administrative..... 633 1,182 208(b) 2,023
------- ------ ----- --------
Total operating expenses..... 5,511 3,930 208 9,649
------- ------ ----- --------
Loss from operations............. (3,452) (670) (568) (4,690)
Interest income (expense), net... 56 (112) -- (56)
------- ------ ----- --------
Net loss......................... $(3,396) $ (782) $(568) $ (4,746)
======= ====== ===== ========
Pro forma:
Net loss per common and common
equivalent share.............. $ (0.45) $ (0.63)
======= ========
Weighted average number of
common and common equivalent
shares(3)..................... 7,588(d) -- (e) 7,588
======= ===== ========
</TABLE>
- --------
(1) Represents historical results of operations of the Company for the year
ended December 31, 1995.
(2) Represents historical results of operations for Primax USA for the year
ended December 31, 1995.
(3) See Note 1 for description of adjustment references (a) through (e).
(4) Reflects the results of operations of the Company on a pro forma basis
assuming the acquisition had been completed on January 1, 1995. The
Company has discontinued the Primax USA product line acquired in the
Primax transaction. As a result, the revenues of Primax USA are not
indicative of the future revenues of the Company derived from the
operations or products of Primax USA.

F-20
<PAGE>

STORM TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
--------------------------
PRIMAX
STORM(1) USA(2) ADJUSTMENTS(3) COMBINED(4)
-------- ------ -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product........................ $ 7,633 $1,992 $ 9,625
Royalty and other.............. 388 177 $ (65)(a) 500
------- ------ ------ -------
Total revenues............... 8,021 2,169 (65) 10,125
Cost of product revenues......... 5,697 1,520 -- 7,217
------- ------ ------ -------
Gross profit..................... 2,324 649 (65) 2,908
------- ------ ------ -------
Operating expenses:
Research and development....... 1,125 -- -- 1,125
Marketing and selling.......... 3,419 660 -- 4,079
General and administrative..... 702 283 104 (b) 1,089
In-process research and
development................... 5,000 -- (5,000)(c) --
------- ------ ------ -------
Total operating expenses..... 10,246 943 (4,896) 6,293
------- ------ ------ -------
Loss from operations............. (7,922) (294) 4,831 (3,385)
Interest income (expense), net... 33 (16) -- 17
------- ------ ------ -------
Net loss......................... $(7,889) $ (310) $4,831 $(3,368)
======= ====== ====== =======
Pro forma:
Net loss per common and common
equivalent share.............. $ (0.98) $ (0.42)
======= =======
Weighted average number of
common and common equivalent
shares (3).................... 8,047(d) -- (e) 8,047
======= ====== =======
</TABLE>
- --------
(1) Represents historical results of operations of the Company for the six
months ended June 30, 1996.
(2) Represents historical results of operations for Primax USA for the period
from January 1 through March 18, 1996.
(3) See Note 1 for description of adjustment references (a) through (e).
(4) Reflects the results of operations of the Company on a pro forma basis
assuming the acquisition had been completed on January 1, 1996.

F-21
<PAGE>

STORM TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 1--BASIS OF PRESENTATION AND PRO FORMA ADJUSTMENTS:

The Unaudited Pro Forma Combined Statements of Operations have been prepared
to reflect the acquisition of Primax USA and certain technologies from Primax
Taiwan by Storm in exchange of 4,214,329 shares of the Company's Series E
Preferred Stock.

The following significant adjustments were applied to the historical
statements of operations of the Company and Primax USA to arrive at the Pro
Forma Combined Statements of Operations:

(a) The pro forma adjustments to royalty and other revenues represent the
elimination of service income recognized by Primax USA during the year
ended December 31, 1995 and the six months ended June 30, 1996 for customer
services provided to Storm on behalf of Primax Taiwan.

(b) The pro forma adjustment to general and administrative expense
reflects the amortization of goodwill resulting from the acquisition of
Primax USA. Goodwill is being amortized using the straight-line method over
four years resulting in adjustments of $208 and $104 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively.

(c) The pro forma adjustment to in-process research and development
reflects the exclusion of the charge of $5,000 for in-process technology
that was obtained from Primax Taiwan.

(d) Pro forma net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of convertible preferred stock
(using the if-converted method) and stock options (using the treasury stock
method). Common equivalent shares are excluded from the computation if
their effect is anti-dilutive, except that, pursuant to a Securities and
Exchange Commission Staff Accounting Bulletin, shares of common stock,
convertible preferred stock (using the if-converted method) and common
stock options and warrants (using the treasury stock method and the assumed
initial public offering price) issued within 12 months prior to the
Company's initial public offering have been included in the computation as
if they were outstanding for each period presented.

(e) The Company issued 4,214,329 shares of Series E Convertible Preferred
Stock to Primax Taiwan in connection with the acquisition of Primax USA and
certain technologies. A pro forma adjustment for the issuance of such
shares is not required as the shares are reflected as outstanding during
the period. (See (d) above.)

F-22
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Primax Electronics (USA), Inc.

In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Primax Electronics (USA),
Inc. (a subsidiary of Primax Electronics, Ltd.) at December 31, 1994 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 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
February 29, 1996, except as to Note 7,
which is as of March 18, 1996

F-23
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................... $ 282 $ 144
Restricted cash (Note 4)..................................... 200 300
Accounts receivable, net of allowance for doubtful accounts
of $111 and $153............................................ 973 1,841
Receivable from Parent (Note 2).............................. 491 391
Inventories.................................................. 1,338 3,751
Prepaid expenses and other assets............................ 39 68
------ ------
Total current assets....................................... 3,323 6,495
------ ------
Property and equipment, net (Note 3)........................... 154 258
Other assets................................................... 9 59
------ ------
$3,486 $6,812
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit (Note 4)..................................... $ 500 $1,575
Note payable to related party................................ 827 --
Payable to Parent (Note 2)................................... 1,180 4,976
Accounts payable............................................. 176 117
Accrued liabilities.......................................... 90 213
------ ------
Total current liabilities.................................. 2,773 6,881
------ ------
Commitments (Note 6)
Shareholders' equity (deficit):
Common stock, no par value, 4,000,000 shares authorized;
3,325,000 shares issued and outstanding..................... 1,801 1,801
Accumulated deficit.......................................... (1,088) (1,870)
------ ------
Total shareholders' equity (deficit)....................... 713 (69)
------ ------
$3,486 $6,812
====== ======
</TABLE>

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

F-24
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

STATEMENT OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ MARCH 17,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product............................... $ 6,619 $ 4,787 $ 7,421 $1,992
Service income........................ 764 1,038 1,040 177
------- ------- ------- ------
Total revenues...................... 7,383 5,825 8,461 2,169
Cost of product sales................... 5,031 3,215 5,201 1,520
------- ------- ------- ------
Gross profit............................ 2,352 2,610 3,260 649
------- ------- ------- ------
Operating expenses:
Marketing and selling................. 1,145 1,445 2,748 660
General and administrative............ 1,058 1,440 1,182 283
------- ------- ------- ------
Total operating expenses............ 2,203 2,885 3,930 943
------- ------- ------- ------
Operating income (loss)................. 149 (275) (670) (294)
Interest expense, net................... 66 88 112 16
------- ------- ------- ------
Net income (loss) before provision for
income taxes........................... 83 (363) (782) (310)
Provision for income taxes (Note 5)..... 3 -- -- --
------- ------- ------- ------
Net income (loss)....................... $ 80 $ (363) $ (782) $ (310)
======= ======= ======= ======
</TABLE>

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

F-25
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK
----------------
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992............... 950,000 $ 851 $ (805) $ 46
Net income................................. -- -- 80 80
--------- ------ ------- -----
BALANCE AT DECEMBER 31, 1993............... 950,000 851 (725) 126
Issuance of common stock................... 2,375,000 950 -- 950
Net loss................................... -- -- (363) (363)
--------- ------ ------- -----
BALANCE AT DECEMBER 31, 1994............... 3,325,000 1,801 (1,088) 713
Net loss................................... -- -- (782) (782)
--------- ------ ------- -----
BALANCE AT DECEMBER 31, 1995............... 3,325,000 $1,801 $(1,870) $ (69)
========= ====== ======= =====
</TABLE>

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

F-26
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, THROUGH
--------------------------- MARCH 17,
1993 1994 1995 1996
------- ------- --------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 80 $ (363) $ (782) $ (310)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation........................ 25 38 58 12
Provision for doubtful accounts..... 52 21 42 10
Increase in inventory reserve....... 51 33 62 21
Changes in assets and liabilities:
Accounts receivable................ (83) 139 (910) 40
Receivable from Parent............. (234) 48 100 (123)
Inventory.......................... 7 (715) (2,475) 643
Prepaid expenses and other assets.. (18) 17 (29) (85)
Accounts payable................... 100 68 (59) (23)
Payable to Parent.................. (608) 496 3,796 (44)
Accrued liabilities................ (2) (64) 123 116
Other assets....................... -- -- (50) --
------- ------- --------- -------
Net cash provided by (used in)
operating activities............ (630) (282) (124) 257
------- ------- --------- -------
Cash used in investing activities:
Payment for acquisition of property
and equipment....................... (93) (58) (162) (18)
(Increase) decrease in restricted
cash................................ -- -- (100) 200
------- ------- --------- -------
Net cash provided by (used in)
investing activities.............. (93) (58) (262) 182
------- ------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of common
stock............................... -- 950 -- --
Contribution of capital.............. -- -- -- 1,260
(Repayments) borrowings under lines
of credit........................... (48) 75 1,075 (1,575)
Proceeds (repayments) of note payable
to related party.................... 824 (497) (827) --
------- ------- --------- -------
Net cash provided by (used in)
financing activities............ 776 528 248 (315)
------- ------- --------- -------
Net increase (decrease) in cash........ 53 188 (138) 124
Cash at beginning of period............ 41 94 282 144
------- ------- --------- -------
Cash at end of period.................. $ 94 $ 282 $ 144 $ 268
======= ======= ========= =======
Supplemental Cash Flow Disclosure:
Interest paid........................ $ 8 $ 91 $ 195 $ 28
======= ======= ========= =======
</TABLE>

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

F-27
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

Primax Electronics (USA), Inc. ("Primax USA") was incorporated in California
in November 1990 and merged with DVT, Inc. and P-MAX, Inc. in December 1990.
Primax USA is 97% owned by Primax Electronics, Ltd. (the Parent), a company
incorporated in the Republic of China. Primax USA distributes computer
peripheral products, most of which are manufactured by the Parent and
affiliates.

Management received assurance that the Parent and affiliated companies will
provide sufficient financing to enable Primax USA to continue operations
through 1996. Consequently, the accompanying financial statements are prepared
on the basis that Primax USA is a going concern.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

Revenues from product sales, net of provisions for estimated returns, are
recognized upon product shipment. Service income is recognized as the services
are performed.

Restricted cash

Restricted cash consists of certificates of deposit with maturities greater
than 90 days held as collateral for lines of credit (see Note 4).

Inventories

Inventories consist of finished goods and are stated at the lower of cost
using the weighted average method or market value.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
which range from five to ten years. Leasehold improvements are amortized over
the life of the lease.

Concentration of credit risk

Financial instruments that potentially subject Primax USA to significant
concentrations of credit risk consist principally of bank deposits and
accounts receivable. Primax USA sells its products to distributors primarily
in North America and performs ongoing customer credit evaluations. Primax USA
maintains an allowance for doubtful accounts receivable based upon the
expected collectibility of all accounts receivable. To date, Primax USA has
not incurred any significant losses due to uncollectible accounts receivable.

F-28
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)

The following table summarizes revenues from customers in excess of 10% of
the total revenues:

<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE
PERIOD FROM
FOR THE YEAR ENDED JANUARY 1
DECEMBER 31, THROUGH
------------------------ MARCH 17,
1993 1994 1995 1996
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Compaq Inc. ....................... 17% -- -- --
Inmac Corp. ....................... 15% -- -- --
Solectek Corporation............... 12% 14% -- --
Global Computer Supplies........... -- 13% 10% --
Ingram Micro....................... -- -- 16% 10%
Staples, Inc. .................... -- -- -- 11%
Woods Wire Products, Inc........... -- -- -- 18%
</TABLE>

At December 31, 1993, Compaq, Inc., Inmac, Inc. and Solectek Corporation
accounted for 20%, 19% and 15%, respectively, of total accounts receivable. At
December 31, 1994, Inmac, Inc., Solectek Corporation and Global Computer
Supplies accounted for 11%, 21% and 10%, respectively, of total accounts
receivable. At December 31, 1995, Ingram Micro accounted for 30% of total
accounts receivable. Staples accounted for 21% of accounts receivable at
December 31, 1995.

Income taxes

Primax USA accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). Under the asset and liability approach of FAS 109, the
expected future tax consequences of temporary differences between the book and
tax bases of assets and liabilities are recognized as deferred tax assets and
liabilities.

Fair value of investments

The carrying amount of the Primax USA's financial instruments, including
restricted cash, accounts receivable, lines of credit and note payable to
related party, approximate fair value.

Management estimates

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

F-29
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)

NOTE 2--RELATED PARTY TRANSACTIONS:

During 1993, 1994 and 1995, Primax USA purchased inventory from its Parent,
earned service income on sales by its Parent to customers in the United
States, and made net cash payments to its Parent. The following are schedules
detailing the transactions between the Primax USA and its Parent:

<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 1
THROUGH
MARCH 17,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Payable at beginning of period... $ 1,292 $ 684 $ 1,180 $4,976
Purchases of inventory........... 5,434 3,724 7,338 853
Cash paid to Parent.............. (6,042) (3,228) (3,542) (897)
------- ------- ------- ------
Payable at end of period......... $ 684 $ 1,180 $ 4,976 $4,932
======= ======= ======= ======
<CAPTION>
(UNAUDITED)
JANUARY 1
THROUGH
MARCH 17,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Receivable at beginning of
period.......................... $ 305 $ 539 $ 491 $ 391
Service income................... 764 1,038 1,040 177
Disbursements made on behalf of
Parent.......................... 430 457 561 160
Cash received from Parent........ (960) (1,543) (1,701) (214)
------- ------- ------- ------
Receivable at end of period...... $ 539 $ 491 $ 391 $ 514
======= ======= ======= ======
</TABLE>

At December 31, 1994, Primax USA had an unsecured note payable of $750
bearing interest at 5% per annum due to an affiliated company. Interest
payable on the note aggregated $77 at December 31, 1994. This note, including
accrued interest, was repaid in 1995.

During 1994, Primax USA issued 2,375,000 shares of Primax USA's Common Stock
to its Parent in exchange for cash of $950.

NOTE 3--PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Computers and equipment.................................... $ 162 $ 246
Furniture and fixtures..................................... 80 124
Leasehold improvements..................................... 3 37
----- ------
245 407
Less: accumulated depreciation and amortization............ (91) (149)
----- ------
$ 154 $ 258
===== ======
</TABLE>

F-30
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)

NOTE 4--LINES OF CREDIT:

At December 31, 1994, Primax USA had a $250 line of credit with a bank
bearing interest at the bank's prime rate plus 1.25% (9.75% as of December 31,
1994) and secured by a $100 certificate of deposit and all of Primax USA's
accounts receivable, inventories and property and equipment. Borrowings under
the line aggregated $250 at December 31, 1994. The line of credit expired in
September 1995.

At December 31, 1994, Primax USA also had a $250 line of credit with another
bank bearing interest at the bank's prime rate plus 1.5% (10% at December 31,
1994) and secured by a $100 certificate of deposit. Borrowings under the line
aggregated $250 at December 31, 1994. The line of credit expired in September
1995.

At December 31, 1995, Primax USA had a $1,000 line of credit with a bank
bearing interest at the bank's prime rate plus 1.25% (10% as of December 31,
1995). The line of credit was secured by a $200 certificate of deposit, all of
Primax USA's accounts receivable, inventories and property and equipment, and
a promissory note from the parent company equivalent to 110% of the loan
amount. Borrowing under the line aggregated $975 at December 31, 1995. Under
the agreement, Primax USA is required to maintain a tangible net worth of
$300.

At December 31, 1995, Primax USA also had a $1,000 line of credit with
another bank bearing interest at the bank's prime rate plus 1.25% (10% as of
December 31, 1995). The line of credit is secured by a $100 certificate of
deposit, all of the Company's accounts receivable, inventories and property
and equipment. Borrowings under the line aggregated $600 at December 31, 1995.
This line of credit expired on January 13, 1996 and is currently under
renegotiation.

The weighted average interest rate on outstanding borrowings from the lines
of credit was 9.875% and 10% at December 31, 1994 and 1995, respectively.

NOTE 5--INCOME TAXES:

No provision for federal or state income taxes has been recorded in 1994 and
1995 as Primax USA has incurred net operating losses for each year ended
December 31, 1994 and 1995.

At December 31, 1995, Primax USA had net operating loss carryforwards
available to reduce future taxable income for federal and state income tax
purposes of approximately $969 and $364, respectively. Primax USA's net
operating loss carryforwards expire in different years through 2009. The
income tax benefit from the utilization of net operating loss carryforwards
may be limited in certain circumstances. These circumstances include, but are
not limited to, cumulative stock ownership changes of more than 50% over a
three-year period.

The tax provision is reconciled to the amount computed using the federal
statutory rate as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994 1995
---- ----- -----
<S> <C> <C> <C>
Provision (benefit) at federal statutory tax.......... 28 (127) (266)
State taxes, net of federal benefit................... 3 -- --
Net operating losses with no current benefit.......... -- 127 266
Net operating losses utilized......................... (30) -- --
Other................................................. 2 -- --
---- ----- -----
Provision for income taxes............................ $ 3 $ -- $ --
==== ===== =====
</TABLE>

F-31
<PAGE>

PRIMAX ELECTRONICS (USA), INC.
(A SUBSIDIARY OF PRIMAX ELECTRONICS, LTD.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)

Deferred tax assets comprise the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Net operating losses...................................... $ 169 $ 363
Reserves and accruals..................................... 163 259
------ ------
Gross deferred tax assets and liabilities................. 332 622
Deferred tax assets valuation allowance................... (332) (622)
------ ------
Net deferred tax assets................................... $ -- $ --
====== ======
</TABLE>

Primax USA has provided a valuation allowance because of the uncertainty
regarding realization of the deferred tax assets.

The Internal Revenue Service is examining Primax USA's federal income tax
returns. In January 1996 Primax USA received an IRS tax assessment for the tax
years ended December 31, 1991, 1992 and 1993. Management is defending the
assessment and believes that the ultimate outcome will not have a material
effect on Primax USA's financial position. The Parent will indemnify Primax
USA for costs incurred in relation to the IRS examination.

NOTE 6--COMMITMENTS:

Primax USA has a noncancelable operating lease agreement for its facility
located in Sunnyvale, California. The agreement, which has an initial
expiration date of April 30, 2000, includes an option to extend for five
years. Rental expense for the years ended December 31, 1993, 1994 and 1995 and
the period from January 1, 1996 through March 17, 1996 was $129, $127, $204
and $52 (unaudited), respectively.

Future minimum lease payments under noncancelable operating leases at
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996................................................................. $229
1997................................................................. 229
1998................................................................. 229
1999................................................................. 229
2000................................................................. 76
----
$992
====
</TABLE>

NOTE 7--SUBSEQUENT EVENTS:

On March 18, 1996 Primax USA completed a merger whereby it was acquired by
Storm Acquisition Corporation, a wholly owned subsidiary of Storm Software,
Inc.

F-32
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co. and Hambrecht & Quist LLC are acting as representatives, has
severally agreed to purchase from the Company and the Selling Stockholders,
the respective number of shares of Common Stock set forth opposite its name
below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co............................................... 1,021,500
Hambrecht & Quist LLC............................................. 1,021,500
Donaldson, Lufkin & Jenrette Securities Corporation............... 75,000
J.J.B. Hilliard, W.L. Lyons, Inc. ................................ 47,000
Montgomery Securities............................................. 75,000
J.P. Morgan Securities Inc. ...................................... 75,000
Morgan Stanley & Co. Incorporated................................. 75,000
Needham & Company, Inc. .......................................... 47,000
Prudential Securities Incorporated................................ 75,000
Ragen MacKenzie Incorporated...................................... 47,000
Robertson, Stephens & Company LLC................................. 75,000
Smith Barney Inc. ................................................ 75,000
SoundView Financial Group, Inc. .................................. 47,000
Sutro & Co. Incorporated.......................................... 47,000
Wessels, Arnold & Henderson, L.L.C. .............................. 47,000
---------
Total........................................................... 2,850,000
=========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $.40 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.

The Company has granted to the Underwriters an option exercisable for 30
calendar days after the date of this Prospectus to purchase up to an aggregate
of 427,500 additional shares of Common Stock to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,850,000 shares of Common Stock offered.

The Company, the Selling Stockholders and certain other stockholders of the
Company have agreed that, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than, with respect to the
Company, pursuant to employee stock option or purchase plans existing, or on
the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) that are substantially similar to
the shares of Common Stock or that are convertible or exchangeable into
securities substantially similar to the shares of Common Stock without the
prior written consent of the representatives, except for the shares of Common
Stock offered in connection with the offering or shares purchased in the open
market.

U-1
<PAGE>

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.

Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price was negotiated among the Company, the
Selling Stockholders and the representatives. Among the factors considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

The Common Stock will be quoted on the Nasdaq National Market under the
symbol "EASY."

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

U-2
<PAGE>

[EASY PHOTO LOGO]
AWARD WINNING PRODUCTS

[picture of EasyPhoto Reader, EasyPhoto SmartPage and EasyPhoto Drive packaging]

Storm Technology, Inc. provides digital photo solutions that enable consumers to
input, store, organize, enhance and use photos easily on their personal
computers.

[pictures of various awards won by the Company]

This Prospectus includes tradenames of the Company and other companies.
<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 27
Management............................................................... 40
Certain Transactions..................................................... 46
Principal and Selling Stockholders....................................... 48
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>

THROUGH AND INCLUDING OCTOBER 25, 1996 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.

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

2,850,000 SHARES

STORM TECHNOLOGY, INC.

COMMON STOCK
(PAR VALUE $.001 PER SHARE)

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

[LOGO OF STORM TECHNOLOGY]

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

GOLDMAN, SACHS & CO.

HAMBRECHT & QUIST

REPRESENTATIVES OF THE UNDERWRITERS

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