SEATTLE FILMWORKS INC, 424B1, 1996-07-01

SEATTLE FILMWORKS INC
424B1, 1996-07-01
PHOTOFINISHING LABORATORIES

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PROSPECTUS

FILED PURSUANT TO
RULE 424(b)(1)
REGISTRATION NO. 333-4957

1,400,000 SHARES

[SEATTLE FILMWORKS LOGO]

COMMON STOCK
---------

All of the 1,400,000 shares of Common Stock of Seattle FilmWorks, Inc. (the
"Company") being offered hereby are being sold by the Selling Shareholders. See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders.

The Common Stock of the Company is traded on the Nasdaq National Market
("Nasdaq") under the symbol "FOTO." On June 27, 1996, the last reported sale
price of the Company's Common Stock on Nasdaq was $17.00 per share. See "Price
Range of Common Stock."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK.
-------------
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>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
<S> <C> <C> <C>
Per Share $16.00 $0.96 $15.04
Total(3) $22,400,000 $1,344,000 $21,056,000
</TABLE>

(1) For information regarding indemnification of the Underwriters, see
"Underwriting."

(2) Before deducting expenses estimated at $350,000, of which $175,000 are
payable by the Selling Shareholders and $175,000 are payable by the Company.

(3) One of the Selling Shareholders has granted to the Underwriters a 30-day
option to purchase up to 210,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Selling Shareholders will be $25,760,000,
$1,545,600 and $24,214,400, respectively.

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

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about July
3, 1996, at the office of Smith Barney Inc., 333 W. 34th Street, New York, New
York 10001.

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SMITH BARNEY INC. HAMBRECHT & QUIST

June 27, 1996

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<TABLE>
<S> <C>
INSIDE FRONT COVER: Seattle FilmWorks Logo; Six Amateur Photographs; Six Photographic and
Graphic Representations of Various Promotional Materials, Services and
Products, including the following captions: "2 Rolls of Film Introductory
Offer"; "Pictures Plus-TM- Index"; "Pictures On Disk-TM-"; "PhotoWorks-TM-
Software"; "PhotoMail-TM- Internet Delivery: Download your developed
pictures directly from our photofinishing lab via your on-line or Internet
Service"; "FilmWorksNet-TM-"; "Your personal and private home page on the
Seattle FilmWorks Web site. Free for all Seattle FilmWorks customers."

INSIDE BACK COVER: Seattle FilmWorks Logo; Seven Amateur Photographs; Five Photographic and
Graphic Representations of Various Promotional Materials, Services and
Products, including the following captions: "Backprinting and Referenced
Negatives"; "Corresponding numbers and dates appear on both prints and
negatives"; "Slides and Prints from any 36mm color film"; "Professor
FilmWorks."
</TABLE>

[PHOTOGRAPHS]

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

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 MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

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<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING
ELSEWHERE HEREIN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. EACH
PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.

THE COMPANY

Seattle FilmWorks, Inc. (the "Company" or "Seattle FilmWorks") is a leading
direct-to-consumer marketer and provider of high-quality amateur photofinishing
services and products. The Company offers an array of complementary services and
products primarily on a mail-order basis under the brand name Seattle
FilmWorks-Registered Trademark-. The Company has achieved 20 consecutive
quarters of growth in net revenues and net income compared to the corresponding
quarter of the prior fiscal year. From fiscal 1991 to fiscal 1995, net revenues
and net income per share increased at a 14% and 26% compound annual growth rate,
respectively.

Since 1978, the Company has been an industry leader in the introduction of
value-added photo-related services and products. The Company offers prints,
slides and digital images, all from the same roll of 35mm film. Seattle
FilmWorks was among the first to provide express-mail delivery, cross-referenced
data on prints and negatives, a composite photo index and a convenient reorder
system. To a lesser extent, the Company provides photofinishing services,
products and supplies on a wholesale basis.

Since 1994, the Company has been a pioneer in providing digital-imaging
technologies which enable photofinishing customers to creatively enhance and
share personal photographs with friends, family and business associates.
Products incorporating these technologies include (i) Pictures On Disk-TM-, a
single floppy disk containing digital images from a roll of film; (ii)
PhotoWorks-TM- software, which can be used to create digital photograph albums
and screen savers; (iii) PhotoMail-TM-, a service which reduces turnaround time
by privately delivering digital images to customers over the Internet; and (iv)
most recently, FilmWorks Net-TM-, a free service which provides customers the
ability to share pictures through the creation of a private photographic home
page uploaded to the Seattle FilmWorks Web site (www.filmworks.com). The Company
is currently developing additional digital-imaging and Internet-related services
and products.

The Company attributes its growth in photofinishing revenues in large part
to its direct-marketing programs, which are primarily based on the customer
acquisition technique of offering two rolls of film for $2.00 or less.
Direct-marketing techniques enable the Company to target selected consumers,
measure customer response and obtain direct customer feedback to changes in
marketing strategies. Recently, the Company has targeted the growing population
of personal computer users in connection with the introduction of
digital-imaging services and products. The Company has developed comprehensive
statistical models for the design and analysis of its direct-response marketing
programs using proprietary customer data compiled over 15 years.

From fiscal 1991 to fiscal 1995, net revenues increased from $36.6 million
to $62.2 million and net income increased from $2.4 million to $5.7 million,
respectively. For the six months ended March 25, 1995 and March 30, 1996, net
revenues increased from $24.6 million to $34.5 million and net income increased
from $1.0 million to $1.5 million, respectively. Beginning in fiscal 1995, the
Company shifted the focus of, and substantially expanded, its customer
acquisition programs. Management believes that these steps are the primary
reasons for the acceleration in growth of net revenues and net income during
fiscal 1995 and the first six months of fiscal 1996.

The Company's strategy for growth is to continue to leverage the strength of
its services, products and marketing programs to acquire additional customers
and increase the level of business with prospective and existing customers. In
an effort to promote customer loyalty and increase consumer demand, the Company
develops new services and products and continuously refines its marketing
programs.

The Company was incorporated in Washington State in June 1976. The Company's
executive offices are located at 1260 16th Avenue West, Seattle, Washington
98119, and its telephone number is (206) 281-1390.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the
Selling Shareholders............. 1,400,000 shares
Common Stock to be outstanding
after this offering (1).......... 10,818,688 shares
Use of proceeds................... The Company will not receive any of the proceeds from
the sale of Common Stock offered hereby.
Nasdaq National Market symbol..... FOTO
</TABLE>

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED (2)
---------------------------------------------------------------
SEPT. 28, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 30,
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
SIX MONTHS ENDED
--------------------------
MARCH 25, MARCH 30,
1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
STATEMENTS OF INCOME:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............. $ 36,645 $ 38,442 $ 42,728 $ 49,753 $ 62,185 $ 24,563 $ 34,510
Gross profit.............. 15,083 15,694 17,269 18,907 24,057 8,742 13,603
Operating expenses........ 11,666 11,660 12,284 12,709 15,729 7,363 11,537
Income from operations.... 3,417 4,034 4,985 6,198 8,328 1,379 2,066
Net income................ 2,373 2,905 3,570 4,438 5,682 994 1,454
Net income per share...... $ 0.19 $ 0.24 $ 0.29 $ 0.36 $ 0.48 $ 0.09 $ 0.12
Fully diluted weighted
average shares
outstanding (3).......... 12,180,794 12,266,046 12,358,157 12,394,677 11,731,761 11,555,702 11,844,024
Net income as a percentage
of net revenues.......... 6.5% 7.6% 8.4% 8.9% 9.1% 4.0% 4.2%
Net income per share
growth rate over prior
period................... 18.8%(4) 26.3% 20.8% 24.1% 33.3% 28.6% (4) 33.3%
</TABLE>

<TABLE>
<CAPTION>
MARCH 30,
1996
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash (5)............................................................................................ $ 7,114
Capitalized customer acquisition expenditures....................................................... 9,645
Total assets........................................................................................ 31,492
Long-term debt...................................................................................... 0
Shareholders' equity................................................................................ 19,639
</TABLE>

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

(1) Does not include 1,689,210 shares of Common Stock reserved for issuance upon
exercise of options under the Company's stock option plans, of which options
to purchase 1,306,498 shares had been granted as of June 26, 1996 at a
weighted average exercise price of $3.88 per share.

(2) Fiscal 1991, 1992, 1993 and 1994 were 52-week periods; fiscal 1995 was a
53-week period.

(3) Common share equivalents included in the computation of share amounts
represent shares issuable upon exercise of stock options using the treasury
stock method.

(4) As compared to the prior fiscal year or corresponding period in the prior
fiscal year.

(5) Includes cash, cash equivalents and securities available for sale.

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

THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR INDUSTRY TRENDS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS.
SUCH FACTORS INCLUDE, AMONG OTHERS, THOSE DISCUSSED IN "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
THE COMPANY'S FISCAL YEAR ENDS ON THE LAST SATURDAY IN SEPTEMBER. UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND REFLECTS A 3-FOR-2
STOCK SPLIT EFFECTIVE MARCH 15, 1996, A 3-FOR-2 STOCK SPLIT EFFECTIVE MARCH 15,
1995, A 2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 16, 1994 AND A 3-FOR-2 STOCK SPLIT
EFFECTIVE FEBRUARY 26, 1993.

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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING ANY OF THE SHARES OFFERED HEREBY.

ABILITY TO SUSTAIN AND MANAGE GROWTH

The Company has experienced significant growth in revenues and profitability
in recent periods. This growth has occurred despite little or no growth in the
U.S. photofinishing industry in the 1990s and an actual decline in the number of
rolls processed by the mail-order film processing portion of the domestic
photofinishing market during the same period. See "Business--Photofinishing
Industry and Direct-Marketing Overview." The continued growth of the Company's
revenues and profitability is dependent in large part on its ability to acquire
new customers at a reasonable cost. There can be no assurance that the Company
will continue to grow or to effectively manage its growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." The Company may, when and if the opportunity arises, acquire other
businesses involved in activities or having service and product lines that are
compatible with the Company's business, but the Company has no current
understanding, agreement or arrangement to make any acquisitions. Acquisitions
involve numerous risks, which could have a material adverse effect on the
Company's business, financial condition and operating results.

DEPENDENCE ON DIRECT-MARKETING PROGRAMS; ACCOUNTING FOR CUSTOMER ACQUISITION

Management believes that a large part of the Company's growth in
photofinishing revenues is attributable to its direct-marketing programs, which
are primarily based on its customer acquisition technique of offering two rolls
of film for $2.00 or less. The Company devotes substantial resources to and
regularly tests new and modified direct-marketing programs in an effort to
improve the efficiency of its customer acquisition and retention efforts. There
can be no assurance that the Company's customer acquisition and retention
efforts will continue to be effective. A decline in the effectiveness of these
efforts or a failure to compete effectively against new or existing competitors
which use direct-marketing techniques could have a material adverse effect on
the Company's business, financial condition and operating results. See
"Business--Marketing and Customer Acquisition" and "--Competition."

The direct costs of customer acquisition programs, primarily the cost of
film, postage and printed materials for the Company's free or low-cost film
offers sent to prospective and existing customers, but excluding advertising
costs, are deferred and amortized over a period of up to three years as part of
customer acquisition costs. The Company establishes amortization rates for these
capitalized assets based on estimates of the timing of future roll processing
volumes per customer. Rates of amortization are compared from time to time with
the actual timing of roll processing volumes in order to assess whether the
amortization rates appropriately match the direct costs of customer acquisition
with the related revenues. If the Company were to experience a material change
in the timing of roll processing volumes, it could be required to accelerate the
rate of amortization of capitalized customer acquisition expenditures, which
could have a material adverse effect on the Company's business, financial
condition and operating results. Moreover, if the Company were to experience a
significant decline in the amount of revenues from its customers without an
offsetting decrease in direct customer acquisition costs, the Company may not be
allowed to capitalize customer acquisition costs under generally accepted
accounting principles, which could have a material adverse effect on the
Company's business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RAPID TECHNOLOGICAL CHANGE

5
<PAGE>
satisfy evolving consumer needs. For example, the commercialization of filmless
digital imaging technologies, including mass-market filmless digital cameras,
may have a negative impact on companies such as Seattle FilmWorks, which process
traditional film-based images and slides. The development of these or other new
technologies, or any failure by the Company to anticipate or successfully
respond to such developments, could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Business--Competition."

FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY

The Company's quarterly operating results have fluctuated in the past and
are expected to fluctuate in the future as a result of a variety of factors,
including changes in the mix of sales, intensity of promotional activities,
price increases by suppliers, introductions of new products, research and
development requirements, actions by competitors, foreign currency exchange
rates, conditions in the direct-to-consumer market and the photofinishing
industry in general, national and global economic conditions and other factors.
Moreover, demand for the Company's photo-related services and products is highly
seasonal, with the highest volume of photofinishing activity occurring during
the summer months. As a result, the Company's operating results for any period
are not necessarily indicative of results for any future period. Due to the
foregoing factors, the Company's operating results in a future period may be
below the expectations of public market analysts and investors. In such event,
the price of the Common Stock may be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

COMPETITION

The market for consumer photofinishing services is characterized by intense
competition among a number of firms competing in a segment in which average
revenue per roll processed declined during the 1990s, according to
photofinishing industry data. Many of the Company's competitors have
substantially greater financial, technical and other resources than the Company.
The Company faces competition in the consumer photofinishing market from other
direct marketers and from competitors in other distribution channels, including
much larger companies which provide photofinishing services on a wholesale basis
to independent retail outlets and, in some cases, through multiple retail
outlets owned by the photofinisher, many of which provide photofinishing service
within hours. There are no significant proprietary or other barriers to entry
into the photofinishing industry. Many of the Company's competitors offer
similar photofinishing services and products at lower prices and with a more
rapid turnaround time than those offered by the Company. However, the Company
has sought to differentiate its photofinishing services by offering a number of
value-added services and products and emphasizing quality and convenience rather
than seeking to be a low-price or rapid turnaround provider. Although management
believes the Company is a leader in developing and marketing innovative
photo-related services and products, competitors can and do provide similar
services and products. There can be no assurance the Company will continue to
compete effectively through development of innovative services and products or
to respond appropriately to industry trends or to activities of competitors. In
addition, the wholesale distribution market for rolled film and photofinishing
supplies is highly competitive and is dominated by suppliers which manufacture
what they sell and may, therefore, potentially have lower costs of goods for
these items than the Company. There can be no assurance that the Company will be
able to compete effectively with current or future competitors or that the
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition and operating results. See
"Business--Competition."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends in large part on the abilities and continued
service of its executive officers and other key employees, in particular Gary R.
Christophersen, the Company's President and Chief Executive Officer. These
individuals, including Mr. Christophersen, are not subject to employment
agreements that would prevent them from leaving the Company. There can be no
assurance that the Company will be able to retain the services of such executive
officers and other key employees. The loss of key personnel could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management."

6
<PAGE>
DEPENDENCE ON THE INTERNET AND POTENTIAL LIABILITY FOR CONTENT

In October 1995, the Company introduced the private delivery of digital
photographs from its laboratory directly to customers over the Internet through
its PhotoMail-Registered Trademark- delivery service. More recently, the Company
announced FilmWorksNet-TM-, a free service to its customers through which the
customer can create and upload a private personal photographic home page to the
Seattle FilmWorks Web site for viewing by friends, family and business
associates to whom the customer gives a guest password. Although the Company
provides its services and products through multiple distribution channels, the
Company's success may depend in part on the continued expansion of the Internet
and its network infrastructure. Rapid growth in interest in and use of the
Internet is a recent phenomenon, and there can be no assurance that the
Company's Internet-related services will prove to be a competitive advantage.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access and quality of
service) remain unresolved and may affect both the growth of Internet use and
the Company's financial results. The law relating to the liability of on-line
services companies, Internet access and/or content providers, Web hosts and
electronic publishers for information carried on or disseminated through their
systems for, among other things, infringement of copyrighted material or
trademarks, violations of personal rights of privacy and publicity and
dissemination of material legally judged to be obscene, indecent or defamatory,
is currently unclear. Such claims have been brought, and sometimes successfully
asserted, against on-line services, including cases against Prodigy and NETCOM.
In addition, the recently passed Telecommunications Act of 1996 (the
"Telecommunications Act") imposes, in some circumstances, liability for or
prohibits the transmission over the Internet of certain types of information and
content. Although a federal district court recently blocked enforcement of that
portion of the Telecommunications Act intended to regulate obscene content, this
or other legislation could result in significant potential liability to the
Company, as well as additional costs and technological challenges in complying
with mandatory requirements. From time to time, the Company has assisted
authorities in the discovery and prosecution of child pornography. However, the
Company does not assume responsibility to edit the content of its customers'
photographs, slides, digital images or personal home pages unless responding to
a specific complaint. The potential liability for content made available over
the Internet through its Web site could require the Company to implement
additional measures to reduce its exposure to such liability, which may require
it to incur significant expense or to discontinue certain service or product
offerings. While the Company carries general liability insurance, such insurance
may not cover potential claims of this type or may not be adequate to compensate
the Company for any liability that may be imposed for information carried on or
disseminated through its systems. Any costs not covered by insurance incurred as
a result of such liability or asserted liability could have a material adverse
effect on the Company's business, financial condition and operating results. See
"Business--Governmental Regulation."

RELIANCE ON KEY VENDOR AND SUPPLIER RELATIONSHIPS; FOREIGN SOURCING

The Company obtains its conventional 35mm film from a few large
manufacturers of photographic film, including Agfa Corporation ("Agfa") and 3M,
Inc., its supply of Eastman motion picture film as surplus from motion picture
studios and television production companies and its photographic paper and
chemicals from a single supplier, Agfa. In addition, the individual cassettes
into which the Company spools 35mm film for still cameras are manufactured for
the Company by foreign sources, principally in China and South Korea. As there
are relatively few suppliers of film, photographic paper and chemicals, the
elimination of any one supplier could cause a material disruption within the
industry and could have a material adverse effect on the Company's business,
financial condition and operating results. Other than an agreement with Agfa
which is subject to possible termination beginning in September 1996, the
Company has no long-term purchase contracts or other contractual assurance of
continued supply, pricing or access to film, paper, chemicals or cassettes.
Although the Company has experienced limited delays in the delivery of certain
supplies in the past, such delays have not had a significant impact on the
Company's operations. While management believes that alternate sources of film,
paper, chemicals and cassettes are available, there can be no assurance that the
Company will be able to continue to acquire its requirements for these supplies
in sufficient

7
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quantities or on terms as favorable to the Company as those currently available
to it. Also, conversion to an alternate supplier may cause delays, reduced
quality or other problems. The Company's operations may be adversely affected by
political instability resulting in the disruption of trade with foreign
countries in which the Company's contractors and suppliers are located and
existing or potential duties, tariffs or quotas that may limit the quantity of
certain types of goods that may be imported into the United States. Moreover,
sales of the Company's services and products on a direct-to-consumer mail-order
basis are largely dependent on the U.S. Postal Service for receipt of orders and
delivery of processed film or other products. Any significant changes in the
operations of or prices charged by the U.S. Postal Service or extended
interruptions in postal deliveries could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Business--Operations" and "--Suppliers."

DEPENDENCE ON PRODUCTION CAPABILITIES, STATISTICAL MODELS AND MANAGEMENT
INFORMATION SYSTEMS

The Company depends on its management information systems to process orders,
provide rapid response to customer inquiries, manage inventory and accounts
receivable collections, purchase, sell and ship products efficiently and on a
timely basis and maintain cost-efficient operations. The Company has recently
replaced and upgraded a portion of its systems hardware. It is not uncommon for
system defects, shutdowns, slowdowns or other problems to occur in connection
with conversion to new data-processing equipment. While the Company has taken a
number of precautions against certain events that could disrupt the operation of
its management information systems, including in connection with the hardware
upgrade, there can be no assurance that the Company will not experience systems
failures or interruptions, which could have a material adverse effect on its
business, financial condition and operating results. See "Business--Management
Information Systems." The Company also depends on statistical models developed
to measure the effectiveness of its marketing programs and on its employees who
are knowledgeable about such models. In addition, the Company continually faces
risks regarding the availability and cost of labor, the potential need for
additional capital equipment, plant and equipment obsolescence, quality control,
excess or insufficient capacity and disruption in the Company's operations. The
loss of employees knowledgeable about the Company's statistical models or a
disruption in the Company's photofinishing or direct-marketing operations could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business--Operations" and "--Suppliers."

GOVERNMENTAL REGULATION

The Company's direct-mail operations are subject to regulation by the U.S.
Postal Service, the Federal Trade Commission and various state, local and
private consumer protection and other regulatory authorities. In general, these
regulations govern the manner in which orders may be solicited, the form and
content of advertisements, information which must be provided to prospective
customers, the time within which orders must be filled, obligations to customers
if orders are not shipped within a specified period of time and the time within
which refunds must be paid if the ordered merchandise is unavailable or
returned. From time to time the Company has modified its methods of doing
business and its marketing operations in response to inquiries and requests from
regulatory authorities. To date, such changes have not had an adverse effect on
the Company's business. There can be no assurance, however, that future
regulatory requirements or actions will not have a material adverse effect on
the Company's business, financial condition and operating results. See
"Business--Governmental Regulation."

POTENTIAL ADVERSE IMPACT OF ENVIRONMENTAL REGULATIONS

The Company's photofinishing operations involve the use of several chemicals
which are subject to federal, state and local governmental regulations relating
to the storage, use, handling and disposal of such chemicals. The Company
actively monitors its compliance with applicable regulations and works with
regulatory authorities to ensure compliance. However, there can be no assurance
that changes in environmental regulations or in the kinds of chemicals used by
the Company will not impose the need for additional capital equipment or other
requirements. Any failure by the Company to control the use of, or adequately
restrict the discharge of, hazardous substances under present or

8
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future regulations could subject it to substantial liability or could cause its
operations to be suspended. Such liability or suspension of operations could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business--Environmental Compliance."

STATE SALES TAX

Many states impose taxes on the sale or use of products and the sale of
certain services within the taxing state's borders. To the extent a seller of
taxable products or services is subject to the jurisdiction of a taxing state,
the state may impose a sales tax directly on the seller or may impose a duty on
the seller to collect a sales or use tax from the seller's customers. A seller
is generally considered subject to the jurisdiction of a taxing state for sales
or use tax purposes when the seller has an in-state presence that is beyond de
minimis. An in-state presence can include solicitation of orders for sales in
the taxing state either in-person or through an employee or other agent. The
Company currently collects and pays sales tax only with respect to shipments to
the state of Washington. The Company has structured its operations in a manner
designed to minimize the likelihood that it has more than a de minimis physical
presence in any state other than Washington. However, if a state taxing
authority determines that the Company has established more than a de minimis
physical presence in that particular state, the Company could be obligated to
collect a sales or use tax (or pay a sales tax in states that impose a tax on
the seller) on some sales of its services and products. Should the Company be
found liable by a state taxing authority for unpaid historic sales and use
taxes, such liabilities could have a material adverse effect on the Company's
business, financial condition and operating results. From time to time,
legislation has been introduced in the U.S. Congress that, if enacted into law,
would impose a state sales or use tax collection obligation on out-of-state
mail-order companies such as the Company. Enactment of any such legislation
could have a material adverse effect on the Company's business, financial
condition and operating results.

INTELLECTUAL PROPERTY

The Company considers a large portion of its PhotoWorks-TM- software, its
process for production of Pictures On Disk-TM- and certain other processes to be
proprietary. The Company has not filed any patents or patent applications, in
part to avoid disclosure of its competitive strengths. Moreover, the Company's
PhotoWorks-TM- Plus product is shipped in sealed packages on which notices are
prominently displayed informing the end-user that, by breaking the package seal,
the end-user agrees to be bound by the license agreement contained in the
package. The legal and practical enforceability and extent of liability for
violations of license agreements that purport to become effective upon opening a
sealed package are unclear. See "Business--Proprietary Technology."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock has been, and is likely to continue to
be, volatile. There can be no assurance that the market price of the Common
Stock will not fluctuate significantly from its current level. The market price
of the Common Stock could be subject to significant fluctuations in response to
a number of factors, such as actual or anticipated variations in the Company's
quarterly operating results, the introduction of new services or products by the
Company or its competitors, changes in other conditions or trends in the
Company's industry, changes in governmental regulations, changes in securities
analysts' estimates of the Company's, or its competitors' or industry's, future
performance or general market conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, stock
markets have experienced extreme price and volume volatility in recent years,
and this volatility has had a substantial effect on the market prices of
securities of many smaller public companies for reasons frequently unrelated to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."

ANTITAKEOVER CONSIDERATIONS

The Company's Board of Directors has the authority, without shareholder
approval, to issue up to 2,000,000 shares of Preferred Stock and to fix the
rights and preferences thereof. This authority, together with certain provisions
of the Company's Amended and Restated Articles of Incorporation and the
Washington Business Corporation Act, may discourage takeover attempts or tender
offers that could result in shareholders receiving a premium over the market
price for the Common Stock or that shareholders may otherwise consider to be in
their best interests.

9
<PAGE>
USE OF PROCEEDS

The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on the Common Stock
and does not anticipate paying any dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development of
its business. In addition, the Company is restricted under the covenants of a
bank loan agreement from declaring any dividends on shares of its capital stock
in excess of $4 million in any fiscal year, noncumulative from year to year,
without the bank's prior consent.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on Nasdaq under the symbol "FOTO." The following
table sets forth, for the periods indicated, the high and low sale prices of the
Common Stock as reported on Nasdaq, as adjusted for stock splits.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended September 24, 1994
First Quarter.............................................................................. $ 4.44 $ 3.83
Second Quarter............................................................................. 7.61 4.00
Third Quarter.............................................................................. 7.00 5.00
Fourth Quarter............................................................................. 8.89 5.78
Fiscal Year Ended September 30, 1995
First Quarter.............................................................................. $ 8.56 $ 6.56
Second Quarter............................................................................. 10.22 7.28
Third Quarter.............................................................................. 11.83 8.33
Fourth Quarter............................................................................. 15.83 11.17
Fiscal Year Ending September 28, 1996
First Quarter.............................................................................. $ 15.83 $ 12.00
Second Quarter............................................................................. 20.50 13.33
Third Quarter (through June 27, 1996)...................................................... 21.75 16.25
</TABLE>

On June 27, 1996, the last sale price reported on Nasdaq for the Common
Stock was $17.00 per share. At June 26, 1996, the Common Stock was held by an
estimated 5,400 shareholders, with 402 holders of record.

10
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PERCENTAGE, PER SHARE AND SHARE DATA)

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto and other
financial information included elsewhere in this Prospectus. The selected
financial data set forth below with respect to the Company's statements of
income for the fiscal years ended September 30, 1995, September 24, 1994 and
September 25, 1993, and the Company's balance sheets at September 30, 1995 and
September 24, 1994, are derived from the audited financial statements of the
Company included elsewhere in this Prospectus and should be read in conjunction
with those financial statements and the notes thereto. The selected income
statement data for the fiscal years ended September 26, 1992 and September 28,
1991 and the selected balance sheet data at September 25, 1993, September 26,
1992 and September 28, 1991 are derived from audited financial statements of the
Company which are not included in this Prospectus. In addition, the selected
financial data set forth below for each of the six months ended March 30, 1996
and March 25, 1995 have been derived from the unaudited financial statements of
the Company. In the opinion of the Company's management, the unaudited financial
statements have been prepared on a basis consistent with the audited financial
statements and include all adjustments, which are of a normal recurring nature
(except as described in the Notes thereto), necessary to present fairly the
financial position and results of operations and cash flows for the interim
periods, but are not necessarily indicative of the results of operations for a
full year.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) SIX MONTHS ENDED
------------------------------------------------------------------ ------------------------
SEPT. 28, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 30, MARCH 25, MARCH 30,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Net revenues................ $ 36,645 $ 38,442 $ 42,728 $ 49,753 $ 62,185 $ 24,563 $ 34,510
Cost of goods and
services................... 21,562 22,748 25,459 30,846 38,128 15,821 20,907
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 15,083 15,694 17,269 18,907 24,057 8,742 13,603
Operating expenses:
Customer acquisition
costs.................... 7,268 6,948 7,115 6,516 8,579 4,056 5,774
Other selling expenses.... 2,393 2,468 2,868 3,458 4,035 1,815 3,462
Research and
development (2).......... 0 0 285 459 458 211 521
General and
administrative........... 2,005 2,244 2,016 2,276 2,657 1,281 1,780
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 11,666 11,660 12,284 12,709 15,729 7,363 11,537
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations...... 3,417 4,034 4,985 6,198 8,328 1,379 2,066
Total other income.......... 24 140 290 187 252 118 160
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.. 3,441 4,174 5,275 6,385 8,580 1,497 2,226
Provision for income
taxes...................... 1,068 1,269 1,705 1,947 2,898 503 772
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................. $ 2,373 $ 2,905 $ 3,570 $ 4,438 $ 5,682 $ 994 $ 1,454
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share (3).... $ 0.19 $ 0.24 $ 0.29 $ 0.36 $ 0.48 $ 0.09 $ 0.12
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted weighted
average shares outstanding
(3)........................ 12,180,794 12,266,046 12,358,157 12,394,677 11,731,761 11,555,702 11,844,024
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income as a percentage
of net revenues............ 6.5% 7.6% 8.4% 8.9% 9.1% 4.0% 4.2%
Net income per share growth
rate over prior period..... 18.8%(4) 26.3% 20.8% 24.1% 33.3% 28.6%(4) 33.3%
BALANCE SHEET DATA:
Cash (6).................... $ 3,103 $ 6,337 $ 9,257 $ 4,041 $ 9,905 $ 3,299 $ 7,114
Capitalized customer
acquisition expenditures... 3,283 3,349 3,832 4,458 7,356 4,945 9,645
Total assets................ 11,474 15,538 19,632 18,835(5) 28,244 19,504 31,492
Long-term debt.............. 0 0 0 0 0 0 0
Shareholders' equity........ 6,541 9,553 13,376 11,347(5) 17,932 12,523 19,639
</TABLE>

- --------------------------
Footnotes on following page.

11
<PAGE>
(1) Fiscal 1991, 1992, 1993 and 1994 were 52-week periods; fiscal 1995 was a
53-week period.

(2) Prior to fiscal 1993, research and development expenses, which primarily
related to photofinishing and film-spooling equipment, were not material
and, accordingly, were included in general and administrative expenses or
cost of goods and services.

(3) All share and per share data reflect a 3-for-2 stock split effective March
15, 1996, a 3-for-2 stock split effective March 15, 1995, a 2-for-1 stock
split effective March 16, 1994 and a 3-for-2 stock split effective February
26, 1993. Common share equivalents included in the computation of share
amounts represent shares issuable upon exercise of stock options using the
treasury stock method.

(4) As compared to the prior fiscal year or corresponding period in the prior
fiscal year.

(5) Reflects the impact of repurchasing 1,125,000 shares of Common Stock for
$6,643,000 during the fourth quarter of fiscal 1994.

(6) Includes cash, cash equivalents and securities available for sale.

12
<PAGE>
FORWARD-LOOKING INFORMATION

This Prospectus contains certain forward-looking statements which involve
known and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others, those discussed in "Risk Factors" and
elsewhere in this Prospectus and in documents incorporated by reference herein.

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

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products
primarily on a mail-order basis under the brand name Seattle
FilmWorks-Registered Trademark-. The Company has experienced an increase in net
revenues in each year since 1990. Management believes this growth is
attributable principally to its direct-marketing programs, including the
customer acquisition technique of offering two rolls of film for $2.00 or less
(the "Introductory Offer"). The Introductory Offer has been nationally
advertised in package inserts, newspaper supplements and magazines and through
various other direct-response media.

Beginning in fiscal 1995, the Company shifted the focus of, and
substantially expanded, its customer acquisition programs. Management believes
that these steps are the primary reasons for the acceleration in growth of net
revenues and net income during fiscal 1995 and the first six months of fiscal
1996. In addition, management believes its core photofinishing business has
benefitted from the introduction of new products, such as the January 1994
introduction of Pictures On Disk-TM- and PhotoWorks-TM-.

Customer acquisition costs are comprised of the costs of generating a lead
and the amortization of direct costs associated with the Company's promotional
offers sent to prospective and existing customers. The costs of generating a
lead include all direct-response media, advertising and other costs associated
with developing target customer lists. These costs per lead have declined during
each of the last three fiscal years. The direct costs of customer acquisition
include film, postage and printed material costs associated with mailings to
prospective and existing customers. These direct costs per recipient of the
Introductory Offer have also declined during each of the last three fiscal
years.

The direct costs of customer acquisition are capitalized as an asset on the
Company's balance sheet under "capitalized customer acquisition expenditures."
Capitalized customer acquisition expenditures relating to prospective customers
are amortized over three years, and capitalized customer acquisition
expenditures relating to certain marketing activities to groups of existing
customers are amortized over six months. These amortization rates are based on
estimates of the timing of future roll processing volumes per customer. The
proportion of capitalized customer acquisition expenditures to be amortized over
three years relative to those to be amortized over six months will vary from
period to period based on the timing and mix of promotional activities. Rates of
amortization are compared from time to time with the actual timing of roll
processing volumes in order to assess whether the amortization rates
appropriately match the direct costs of customer acquisition with the related
revenues. If the Company were to experience a material change in the timing of
roll processing volumes, it could be required to accelerate the rate of
amortization of capitalized customer acquisition expenditures, which could have
a material adverse effect on the Company's business, financial condition and
operating results.

13
<PAGE>
Customer acquisition costs as a percentage of net revenues were essentially
flat in the first six months of fiscal 1996 as compared to the same period of
fiscal 1995 and increased to 13.8% in fiscal 1995 as compared to 13.1% in fiscal
1994. However, customer acquisition costs as a percentage of net revenues has
declined significantly from 19.8% in fiscal 1991 to 18.1% in fiscal 1992 and
16.6% in fiscal 1993. Management believes this trend toward decreasing customer
acquisition costs as a percentage of net revenues is due primarily to more
efficient customer acquisition programs. Future periods may reflect increased
customer acquisition costs due to timing of the amortization of capitalized
expenditures or the development and initiation of additional marketing programs.
For tax purposes, customer acquisition expenditures are expensed as incurred,
thereby reducing current federal income tax liabilities and increasing deferred
federal income tax liabilities. See Note F of Notes to Financial Statements.

Net income as a percentage of net revenues has improved from 6.5% in fiscal
1991 to 9.1% in fiscal 1995 primarily due to the relationship between changes in
costs of goods sold and customer acquisition costs which in turn are primarily
driven by changes in sales mix and the Company's customer acquisition strategy.
Operating results will fluctuate in the future due to changes in the mix of
sales, intensity of promotional activities, price increases by suppliers,
introductions of new products, research and development requirements, actions by
competitors, foreign currency exchange rates, conditions in the
direct-to-consumer market and the photofinishing industry in general, national
and global economic conditions and other factors.

SEASONALITY. Demand for the Company's photo-related services and products
is highly seasonal, with the highest volume of photofinishing activity occurring
during the summer months. This seasonality, when combined with the general
growth of the Company's photofinishing business, has produced greater
photofinishing net revenues during the last half of the Company's fiscal year
(April through September), with a peak occurring in the fourth fiscal quarter.
Net income is affected by the seasonality of the Company's net revenues due to
the fixed nature of a portion of the Company's operating expenses, seasonal
variation in sales mix and the Company's practice of relatively higher marketing
program expenditures prior to the summer months.

RESULTS OF OPERATIONS

The following table sets forth income statement data of the Company
expressed as a percentage of net revenues for the periods indicated.

14
<PAGE>
SIX MONTHS ENDED MARCH 30, 1996 COMPARED TO SIX MONTHS ENDED MARCH 25, 1995

Net revenues for the six months ended March 30, 1996 increased 40.5% to
$34,510,000 as compared to $24,563,000 for the same period of fiscal 1995. This
increase was primarily due to expanded customer acquisition activities and
marketing to existing customers during fiscal 1995 and the first six months of
fiscal 1996, as described below, which have resulted in increased net revenues
from photofinishing services and products. The quarter ended March 30, 1996
marks the fourth consecutive quarter of expanded customer acquisition efforts.
Management also believes that its Seattle FilmWorks-Registered Trademark-
branded business has benefitted from the Company's entry into the personal
computer market with its PhotoWorks-TM- and Pictures On Disk-TM- products, which
were introduced in January 1994.

Gross profit for the first six months of fiscal 1996 increased to 39.4% of
net revenues as compared to 35.6% for the same period of fiscal 1995 primarily
due to a product mix containing a higher percentage of the Company's Seattle
FilmWorks-Registered Trademark- branded products, which carry a higher gross
profit margin than the Company's other services and products. Gross profit was
also favorably impacted by the reversal of $227,000 of state tax reserves upon
the resolution of uncertainties related to a recent tax examination. Cost of
goods and services consist of labor, postage and supplies related to the
Company's services and products.

Total operating expenses for the first six months of fiscal 1996 increased
to 33.4% of net revenues as compared to 30.0% for the same period of fiscal
1995. The increase in total operating expenses was primarily due to an increase
in customer acquisition and other selling activities, which affect revenues in
current and future periods. Effective as of the beginning of the second quarter
of fiscal 1996, the Company reduced from twelve months to six months the
amortization period for certain marketing activities to specific groups of
existing customers. This change in accounting estimate resulted in incremental
amortization of $414,000 of previously deferred customer acquisition costs. The
Company capitalized $7,413,000 of customer acquisition expenditures for the
first six months of fiscal 1996 as compared to $3,066,000 for the first six
months of fiscal 1995. Capitalized customer acquisition expenditures as of March
30, 1996 increased to $9,645,000 as compared to $7,356,000 as of September 30,
1995.

Other selling expenses for the first six months of fiscal 1996 increased to
10.0% of net revenues as compared to 7.4% of net revenues for the first six
months of fiscal 1995. The increase in 1996 is primarily due to increased
marketing activities associated with expanded promotional activities to new and
existing customers as compared to the fiscal 1995 period. Other selling expenses
include marketing costs associated with building brand awareness, testing new
marketing strategies and marketing to existing customers, as well as certain
costs associated with acquiring new customers. The increase in fiscal 1996
includes approximately $43,000 resulting from an increase in amortization of a
noncompete agreement due to a change in the estimated life from ten years to
five years and the accrual of $126,000 in expenses related to securing certain
rights to the "PhotoWorks" mark claimed by a third party.

Research and development expenses for the first six months of fiscal 1996
increased to $521,000 as compared to $211,000 for the first six months of fiscal
1995. This increase was primarily due to the Company's continued development of
digital services and products. Research and development expenses consist
primarily of costs incurred in researching new computerized digital imaging
concepts, developing computer software products and creating equipment necessary
to provide customers with new computer-related photographic services and
products.

General and administrative expenses increased $499,000 for the first six
months of fiscal 1996 as compared to the same period of fiscal 1995 due to
increased compensation expenses based on the Company's profitability and
increased legal and accounting costs. General and administrative expenses
remained at 5.2% of net revenues for the first six months of both fiscal 1996
and fiscal 1995. General and administrative expenses consist of costs related to
computer operations, human resource functions, finance, accounting, investor
relations and general corporate activities.

15
<PAGE>
Total other income increased to $160,000 for the first six months of fiscal
1996 as compared to $118,000 for the first six months of fiscal 1995. The
increase was primarily due to interest income from short-term investments
attributable to higher levels of cash generated by operations.

The federal income tax rate for the first six months of fiscal 1996 as
compared to the first six months of fiscal 1995 increased to 34.7% from 33.6%.
The increase in the effective tax rate is due primarily to an increase in the
marginal federal corporate tax rate due to expected income levels.

Net income for the first six months of fiscal 1996 was $1,454,000, or $0.12
per share, as compared to $994,000, or $0.09 per share, for the same period in
fiscal 1995. The increase in net income in the 1996 period as compared to the
1995 period is primarily attributable to the increase in net revenues and gross
profit and is partially offset by the increase in operating expenses.

FISCAL YEARS ENDED SEPTEMBER 30, 1995, SEPTEMBER 24, 1994 AND SEPTEMBER 25,
1993

Net revenues increased 25.0% to $62,185,000 in fiscal 1995 from $49,753,000
in fiscal 1994. Net revenues in fiscal 1994 increased 16.4% to $49,753,000 from
$42,728,000 in fiscal 1993. The increases were primarily due to expanded
investment in customer acquisition and other selling activities during fiscal
1995, fiscal 1994 and fiscal 1993, which increased the number of new customers
and photofinishing orders processed in fiscal 1995 and fiscal 1994. In addition,
increased distribution of rolled film and photo-related products on a wholesale
basis during fiscal 1995 and fiscal 1994, including sales generated as a result
of the acquisition of selected assets of a wholesale film business in 1994,
favorably affected net revenues. Management also believes that its core
photofinishing business benefitted from the Company's entry into the personal
computer market with its PhotoWorks-TM- and Pictures On Disk-TM- products, which
were introduced in January 1994. The increased revenues in fiscal 1995 were also
favorably affected by an additional one-week reporting period in fiscal 1995 as
compared to fiscal 1994 and fiscal 1993.

Gross profit as a percentage of net revenues for fiscal 1995, fiscal 1994
and fiscal 1993 was 38.7%, 38.0% and 40.4%, respectively. The increase in gross
profit percentage in fiscal 1995 as compared to fiscal 1994 was primarily due to
a sales mix containing a higher proportion of photofinishing services, which
have a higher gross profit margin than the Company's wholesale film and
photo-related supplies business. Gross profit as a percentage of net revenues in
fiscal 1994 was lower than fiscal 1993, resulting from changes in customer
acquisition promotional activities, including free film offers, which resulted
in a decrease in revenues received in connection with certain promotional
offers. Also, fiscal 1994 net revenues included a higher proportion of sales of
lower-margin wholesale film and photo-related supplies as compared to fiscal
1993.

Total operating expenses as a percentage of net revenues for fiscal 1995,
fiscal 1994 and fiscal 1993 were 25.3%, 25.5% and 28.7%, respectively. Although
total operating expenses increased in actual dollars in both fiscal 1995 and
fiscal 1994 as compared to the prior fiscal year, total operating expenses as a
percentage of net revenues were substantially unchanged in fiscal 1995 as
compared to fiscal 1994, but decreased in fiscal 1994 as compared to fiscal 1993
primarily due to a decrease in customer acquisition costs as a percentage of net
revenues and an increase in net revenues in each of those years that was greater
than the increases in operating expenses. The decrease as a percentage of net
revenues in fiscal 1995 and fiscal 1994 as compared to fiscal 1993 is also
attributable to more cost-effective advertising programs.

Customer acquisition costs as a percentage of net revenues were 13.8% in
fiscal 1995, up from 13.1% in fiscal 1994 and down from 16.6% in fiscal 1993.
The increase in fiscal 1995 was primarily due to increased expenditures related
to the Company's customer acquisition programs targeted at personal computer
users. The decrease in fiscal 1994 from fiscal 1993 was primarily due to changes
in customer acquisition promotional activities, which allowed the Company to
maintain the response rate to the Introductory Offer while reducing advertising
expenses associated with attracting new customers.

Other selling expenses increased to $4,035,000 in fiscal 1995 as compared to
$3,458,000 in fiscal 1994 and $2,868,000 in fiscal 1993. The increases in fiscal
1995 and fiscal 1994 were primarily due to

16
<PAGE>
increased expenditures for selling activities promoting the sale of rolled film
and other photo-related products and increased marketing to existing customers.
Other selling expenses in fiscal 1995 and fiscal 1994 also included amortization
of a noncompete agreement associated with the January 1994 acquisition of
certain assets of a wholesale film business. See Note B of Notes to Financial
Statements. Expressed as a percentage of net revenues, other selling expenses
decreased to 6.5% in fiscal 1995 as compared to 6.9% in fiscal 1994 and 6.7% in
fiscal 1993.

General and administrative expenses increased to $2,657,000 in fiscal 1995
as compared to $2,276,000 in fiscal 1994. The increase in fiscal 1995 was
primarily due to increased expenditures relating to recruitment, consulting and
additional labor costs due to increased volumes. Expressed as a percentage of
net revenues, general and administrative expenses declined to 4.3% in fiscal
1995 as compared to 4.6% in fiscal 1994 and 4.7% in fiscal 1993.

Research and development expenses during fiscal 1995, fiscal 1994 and fiscal
1993 were $458,000, $459,000 and $285,000, respectively, increasing from fiscal
1993 primarily in connection with the development of the Company's
PhotoWorks-TM- and Pictures On Disk-TM- products. Prior to fiscal 1993, research
and development expenses, which primarily related to photofinishing and
film-spooling equipment, were not material and, accordingly, were included in
general and administrative expenses or cost of goods sold.

Total other income in fiscal 1995 was $252,000 as compared to $187,000 in
fiscal 1994 and $290,000 in fiscal 1993. The increase in total other income in
fiscal 1995 as compared to fiscal 1994 was primarily due to interest income from
short-term investments due to the availability of cash reserves generated from
operations during fiscal 1995. The decrease in total other income in fiscal 1994
as compared to fiscal 1993 resulted primarily from the receipt of sales tax
refunds in fiscal 1993 and no comparable refunds in fiscal 1994, as well as
slightly higher interest expense in fiscal 1994.

Net income increased to $0.48 per share in fiscal 1995 as compared to $0.36
per share in fiscal 1994 and $0.29 per share in fiscal 1993. The increases
resulted primarily from higher net revenues and increased income from
operations. Earnings per share for both fiscal 1995 and fiscal 1994 were also
favorably affected by the repurchase of 1,125,000 shares of Common Stock by the
Company during the fourth quarter of fiscal 1994.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the six months ended March 30,
1996 and March 25, 1995 was $726,000 and $419,000, respectively. The increase in
net cash used in operating activities for the six months ended March 30, 1996 as
compared to March 25, 1995 was primarily due to a net increase in customer
acquisition expenditures, which was partially offset by increases in net income,
depreciation and amortization and deferred taxes. Net cash provided by operating
activities was $6,908,000, $4,330,000 and $4,329,000 in fiscal 1995, fiscal 1994
and fiscal 1993, respectively. The increase in cash provided by operating
activities in fiscal 1995 as compared to fiscal 1994 was primarily due to an
increase in net income, deferred taxes and accounts payable. These increases
were partially offset by the increase in net customer acquisition expenditures.
Net cash provided by operating activities for fiscal 1994 as compared to fiscal
1993 was relatively unchanged as the increase in net income, income taxes
payable and accrued expenses was offset in part by a decrease in accounts
payable and increases in accounts receivable and inventories.

Net cash used in investing activities for the six months ended March 30,
1996 was $1,473,000 as compared to $675,000 provided by investing activities for
the six months ended March 25, 1995. The use of cash in investing activities for
the six months ended March 30, 1996 relates primarily to an increase in capital
expenditures. Net cash used in investing activities was $1,629,000, $809,000 and
$4,641,000 in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. Net cash
used in investing activities during fiscal 1995 increased primarily due to a net
decrease in sales of securities. The decrease in net cash used in investing
activities in fiscal 1994 as compared to fiscal 1993 was primarily due to a
decrease in the purchases of securities available for sale and an increase in
sales of securities. The sales of securities in fiscal 1994 were partially
offset by $1,637,000 paid in connection with the acquisition of assets of a
wholesale film business.

17
<PAGE>
Net cash provided by financing activities for the six months ended March 30,
1996 was $253,000 as compared to $181,000 for the six months ended March 25,
1995. Net cash provided by financing activities was $570,000 in fiscal 1995 as
compared to net cash used in financing activities of $6,517,000 and $318,000 in
fiscal 1994 and fiscal 1993, respectively. The increase in net cash provided by
financing activities in fiscal 1995 as compared to fiscal 1994 is primarily
attributable to the Company's repurchase of 1,125,000 shares of Common Stock
during fiscal 1994. The repurchase of Common Stock in fiscal 1994 is the primary
reason for the increase in net cash used in financing activities as compared to
fiscal 1993.

As of April 30, 1996, the Company's principal sources of liquidity included
cash and short-term investments of $5,771,135 and an unused revolving line of
credit of $6,000,000. The Company's ratio of current assets to current
liabilities was 1.9 to 1 at March 30, 1996, down slightly from the 2.0 to 1
ratio as of September 30, 1995. During the first two quarters of fiscal 1996,
the Company increased inventory levels by $2,366,000 to accommodate expanded
marketing plans, achieve faster turnaround of customer orders and support
increased photofinishing volume. This increase in inventory was also the
principal reason for the $1,688,000 increase in accounts payable during the same
period. Federal income taxes payable were favorably affected by the increase in
capitalized customer acquisition expenditures, which are expensed as incurred
for federal income tax purposes, thereby having the effect of substantially
reducing current federal income tax liabilities.

Capital expenditures during the first two quarters of fiscal 1996 and fiscal
1995 totaled $2,320,000 and $521,000, respectively, including equipment for new
photofinishing services and for expanding capacity of existing photofinishing
operations. The Company has committed to purchase equipment related to its
Pictures On Disk-TM- product in the amount of $470,000 by January 1, 1997. In
addition, the Company plans to expend approximately $1,180,000 during the
remainder of fiscal 1996, principally for capital equipment and leasehold
improvements to expand production capacity and for data processing equipment,
although it currently has binding commitments for only a portion of this amount.

The Company currently anticipates that existing funds, together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000, will be sufficient to finance its operations and planned capital
expenditures, and to service its indebtedness, for the foreseeable future.
However, if the Company does not generate sufficient cash from operations to
satisfy its ongoing expenses, it will be required to seek external sources of
financing or refinance its obligations. Possible sources of financing include
the sale of equity securities or additional bank borrowings. There can be no
assurance that the Company will be able to obtain adequate financing in the
future. See "Risk Factors."

IMPACT OF INFLATION

The results of the Company's operations have not been significantly affected
by inflation during any of the last three fiscal years. Although the Company has
incurred moderately increased costs for labor, materials, postage and overhead,
it has been able to offset the impact of such increases primarily through
enhanced operating efficiencies.

ADOPTION OF ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value-based method of
accounting for these equity instruments, which method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has elected to follow APB Opinion No. 25 and related interpretations in
accounting for its employee stock options.

18
<PAGE>
BUSINESS

OVERVIEW

Seattle FilmWorks is a leading direct-to-consumer marketer and provider of
high-quality amateur photofinishing services and products. The Company offers an
array of complementary services and products primarily on a mail-order basis
under the brand name Seattle FilmWorks-Registered Trademark-. The Company has
achieved 20 consecutive quarters of growth in net revenues and net income
compared to the corresponding quarter of the prior fiscal year. From fiscal 1991
to fiscal 1995, net revenues and net income per share increased at a 14% and 26%
compound annual growth rate, respectively.

PHOTOFINISHING INDUSTRY AND DIRECT-MARKETING OVERVIEW

According to information published by the Photo Marketing Association
International ("PMAI"), domestic amateur photofinishing sales totalled
approximately $5.5 billion in 1994, having exhibited little or no growth since
1990. In 1994, the dominant method of distributing photofinishing services and
products was through retail stores, including discount and mass merchants,
drugstores, supermarkets and camera/specialty stores. Management believes the
vast majority of rolls of film are sent to wholesale photofinishing laboratories
for processing, although a growing percentage are processed in-

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<PAGE>
store using on-site equipment. The following table sets forth U.S. amateur
photofinishing industry market shares in terms of rolls processed and total
sales for the years 1990 through 1994, based on information provided by PMAI:

U.S. AMATEUR PHOTOFINISHING INDUSTRY MARKET SHARES

<TABLE>
<CAPTION>
ROLLS PROCESSED (IN MILLIONS) DOLLAR SALES (IN BILLIONS)
------------------------------- -----------------------------
1990 1994 1990 1994
-------------- -------------- ------------- -------------
ROLLS % ROLLS % $ % $ %
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Discount and mass merchants, drugstores,
supermarkets and camera/specialty stores......... 468 67.1% 540 75.4% $3.46 62.9% $3.72 67.7%
Standalone minilabs............................... 127 18.2 99 13.8 1.48 26.9 1.29 23.4
Mail order........................................ 65 9.3 55 7.7 .30 5.4 .31 5.6
Other............................................. 38 5.4 22 3.1 .26 4.8 .18 3.3
----- ------ ----- ------ ----- ------ ----- ------
Total........................................... 698 100.0% 716 100.0% $5.50 100.0% $5.50 100.0%
----- ------ ----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------ ----- ------
</TABLE>

Outside the photofinishing industry, direct-to-consumer marketing, with
distribution through the mail, has grown significantly in recent years. Leading
users of direct marketing include mail-order houses and catalog mailers,
magazine publishers, insurance companies, book and record clubs, financial
institutions and credit card companies. Management believes growth in the use of
direct-marketing is generally attributable to social, economic and technological
changes and to the relative cost-effectiveness of direct-marketing techniques.
Management also believes several factors have enhanced consumer responsiveness
to direct marketing as a purchasing medium, including growth in the number of
people in the most active segment of the purchasing population, growth in the
number of two-career families that have more disposable income with less time to
shop and increased availability and use of credit cards. In the future, on-line
services and increased use of personal computers may provide additional channels
for direct-to-consumer marketing. See "Risk Factors--Dependence on
Direct-Marketing Programs; Accounting for Customer Acquisition" and
"--Dependence on the Internet and Potential Liability for Content."

Management has long believed that in order to grow successfully as a
direct-to-consumer mail-order provider of photofinishing services, the Company
must continually differentiate its services and products from those of its
industry peers.

OPERATING STRATEGY

Over the past five years, Seattle FilmWorks has consistently achieved annual
and corresponding quarter growth in net revenues and net income through the
execution of its operating strategy, the principal elements of which are the
introduction of innovative, value-added services and products, application of
direct-to-consumer marketing techniques and a commitment to customer
satisfaction.

INNOVATIVE, VALUE-ADDED SERVICES AND PRODUCTS. Management believes that
Seattle FilmWorks has distinguished itself from its competitors through service
and product differentiation. The Company strives to develop and introduce
value-added photofinishing services and products based on focused research and
development efforts as well as anticipation of consumer demand by monitoring
customer feedback. Management believes that the continuous expansion of its
array of complementary services and products promotes (i) increased acquisition
of new customers, (ii) retention of existing customers and (iii) higher
average-order sizes. Management believes that this operating strategy has
contributed to the Company's growth in an industry characterized by little or no
growth.

In the late 1970s, the Company introduced Seattle
FilmWorks-Registered Trademark- branded film and shortly thereafter offered its
customers the option of prints and/or individually color-corrected slides from
the same roll of film. More recently, the Company has been a leader in
introducing numerous other value-added features, including express-mail
delivery, cross-referencing data on prints and negatives, Pictures Plus
Index-TM-, a convenient Easy-Order System and Professor FilmWorks-TM- (free
telephone pre-recorded mini-lessons on photography).

In addition, the Company has been a leader in marketing photofinishing
services which employ digital technology. These include (i) Pictures On
Disk-TM-, a single floppy disk containing digital images

20
<PAGE>
from a roll of film; (ii) PhotoWorks-TM- software, which can be used to create
digital photograph albums and screen savers; (iii) PhotoMail-TM-, a service
which reduces turnaround time by privately delivering digital images to
customers over the Internet; and (iv) most recently, FilmWorks Net-TM-, a free
service which provides customers the ability to share pictures through the
creation of a private photographic home page uploaded to the Seattle FilmWorks
Web site (www.filmworks.com). The Company is currently developing additional
digital-imaging and Internet-related services and products. See
"Business--Services and Products."

DIRECT-TO-CONSUMER MARKETING. The Company's business model is founded on
direct-response marketing. Management believes an important advantage of its
direct-marketing strategy is the opportunity to contact a large number of
consumers who may appreciate the convenience of mail order and the Company's
array of complementary services and products. Direct access to consumers permits
the Company to target and monitor selected potential and existing customers,
measure customer response and obtain direct customer feedback to changes in
marketing strategies. Generally, the Company attempts to identify prospective
customers by targeting specific groups of individuals with common
characteristics. For example, recently the Company has targeted the growing
population of personal computer users in connection with the introduction of its
digital-imaging services and products. Information derived from the Company's
extensive database compiled over 15 years has been used to create statistical
models to develop targeted marketing programs and estimate future demand. In
addition, the Company's proprietary database is utilized to plan, personalize,
implement and evaluate marketing programs for existing customers. Historically,
the Company has been able to identify targeted consumer groups that, when
extended the Introductory Offer, yield economically attractive response rates.
See "Business--Marketing and Customer Acquisition."

COMMITMENT TO CUSTOMER SATISFACTION. The Company seeks to develop and
provide high-quality, user-friendly and reliable photofinishing services and
products to enhance brand recognition for "Seattle FilmWorks" and to engender
customer loyalty. Management believes that a significant portion of its business
comes from repeat customers. As part of its dedication to customer service,
Seattle FilmWorks offers a 100% money-back satisfaction guarantee, provides an
Easy-Order System whereby a customer sets up a standing order, thus avoiding the
need to fill out an order form with each order, and offers Professor
FilmWorks-TM-, free telephone pre-recorded mini-lessons on photography. In
addition, to achieve its customer service goals, the Company conducts customer
surveys and holds management meetings to identify areas for service enhancement.
Moreover, through investments in automation and state-of-the-art photofinishing
equipment, as well as through the commitment of its employees to quality
control, the Company delivers greater than 99.8% of its orders without loss or
damage. See "Business--Customer Service and Support."

GROWTH STRATEGY

NEW CUSTOMERS. Historically, the Company has grown primarily through the
acquisition of new customers. In a mail-order photofinishing environment that
has recently exhibited little or no growth, the Company has increased net
revenues at a 14% compound annual growth rate during the past five years and has
increased the total number of its customers. The Company continuously refines
existing, and develops, tests and implements new, marketing programs to
additional groups of consumers with different demographic characteristics to
offset the potential impact of market saturation in any given target customer
group. In addition, the Company continues to explore alternative direct-
marketing platforms in order to acquire additional customers. To this end, the
Company has established a Web site on the Internet (www.filmworks.com) from
which customers can access answers to frequently asked questions, download
versions of Company software, create and view personal home pages and send
electronic messages to customer service.

21
<PAGE>
INCREASING SALES TO NEW AND EXISTING CUSTOMERS. Management believes its
complementary value-added services and products promote customer loyalty and
increase customer demand. The Company strives to increase both average order
size and order frequency by informing both targeted consumers and its large
existing customer base of its integrated array of services and products. The
Company's commitment to expanding its service and product offerings, including
enhancements to its Internet-related offerings, supports this strategy. In
addition, the Company employs a variety of other specially designed
direct-marketing techniques to increase business from existing customers and
generate business from inactive customers.

MARKETING AND CUSTOMER ACQUISITION

One of the key elements of the Company's operating strategy is to generate
demand by utilizing its proprietary direct-marketing techniques and extensive
database to efficiently target existing and prospective customers. The Company
has used mail, print media, television, radio, telephone and, more recently, the
Internet and on-line services to target groups of consumers and businesses,
bypassing the traditional distribution channel of retail outlets.

The Company makes extensive use of marketing tests in order to evaluate
which of a variety of marketing programs offers the best probable return on
investment. The Company's direct-marketing programs use coded advertisements to
monitor consumer response and to provide measurable results for a specific
marketing program. Measuring the effectiveness of marketing tests takes into
account both the response rate to advertised offers and estimates of customer
lifetime value to the Company, measured in terms of profit generated from the
estimated future stream of orders, thereby allowing for the targeting of a
marketing effort to specific market segments through selected media. The Company
uses computers to maintain and analyze extensive data and segment markets using
geographic, demographic and psychographic information about potential customers.

Since the early 1980s, the primary method the Company has utilized to
acquire new film processing customers has been its Introductory Offer. The
Company regularly refines the Introductory Offer to improve its effectiveness,
but the basic concept of sending two rolls of branded film to targeted potential
customers has remained fairly constant. The Introductory Offer has been
nationally advertised through direct-response media, including package inserts,
newspaper supplements and magazines. The Company also has a customer referral
program in which existing customers suggest family and friends to whom the
Company mails an introductory package. Beginning in early 1995, the Company
further refined its Introductory Offer program by targeting the growing
population of personal computer users. Favorable rates of return from this group
led to an expansion in the Company's customer acquisition investment. See "Risk
Factors--Dependence on Direct-Marketing Programs; Accounting for Customer
Acquisition."

SERVICES AND PRODUCTS

Seattle FilmWorks is a leader in the development and introduction of
innovative photofinishing services and products. Beginning in 1978 with the
introduction of its privately branded film and continuing with the option of
receiving both photographic prints and individually color-corrected

22
<PAGE>
slides from the same roll of film, the Company established an early tradition of
service and product differentiation. The following table illustrates the
Company's service and product introductions during the past five years:

<TABLE>
<CAPTION>
YEAR OF
SERVICE OR PRODUCT INTRODUCTION
- ----------------------------------------------------------------------- ------------------
<S> <C>
FilmWorksNet-TM-....................................................... 1996
PhotoMail-TM-.......................................................... 1995
PhotoWorks-TM- for Macintosh........................................... 1995
PhotoWorks-TM- Plus for Windows........................................ 1994
PhotoWorks-TM- for Windows............................................. 1994
PhotoWorks-TM- for MS-DOS.............................................. 1994
Pictures On Disk-TM-................................................... 1994
Pictures Plus-TM- Index................................................ 1993
Professor FilmWorks-TM-................................................ 1992
Backprinting & Referenced Negatives.................................... 1992
Easy-Order System...................................................... 1991
Express-Mail Delivery.................................................. 1991
</TABLE>

In 1991, the Company began to offer mail-order photofinishing customers the
options of express-mail pickup and delivery service and the Easy-Order System,
whereby a customer sets up a standing order, thus avoiding the need to fill out
an order form with each order. This pattern of service and product innovation
continued with the introduction in early 1992 of the Company's system for
printing the date, roll identification and print number on the back of each
print and the corresponding information on each strip of negatives (known as
backprinting) and Professor FilmWorks-TM-. Additionally, in 1993, the Company
introduced the Pictures Plus-TM- Index, which offers thumbnail-size copies of
images from a roll of film on a single 4" by 6" print as a handy reference for
the customer.

In early 1994, the Company introduced Pictures On Disk-TM-, which delivers
on a single floppy disk a digital version of each photograph on a roll of film.
This product was coupled with the introduction of the Company's internally
developed PhotoWorks-TM- software, which enables users to create digital albums
of their photographs and to incorporate the digital images into text, slide
shows and screen savers. PhotoWorks-TM- software is available in Microsoft
Windows, MS-DOS and Apple Macintosh versions and is provided at no charge with a
customer's first order of Pictures On Disk-TM-. PhotoWorks-TM- is also available
for free download over the Internet from the Company's Web site. A more fully
featured version, PhotoWorks-TM- Plus, is sold directly to customers as an
upgrade and is available through selected retail software stores.

In October 1995, the Company introduced the private delivery of digital
photographs from its laboratory directly to customers over the Internet through
its PhotoMail-TM- delivery service. Customers requesting PhotoMail-TM- delivery
are sent an e-mail notifying them that their photographs are ready for
downloading at the Company's Web site (www.filmworks.com). Such customers can
then share their photographs with friends, family and business associates who
may download the photographs using a download password. Management believes that
communication with digital versions of personal photographs is a natural
extension of the rapid proliferation of e-mail and other forms of Internet
communication.

In February 1996, the Company announced FilmWorksNet-TM-, a free service
through which its customers can create and upload a private personalized
photographic home page to the Seattle FilmWorks Web site using the most recent
version of the PhotoWorks-TM- software (which is available for download at no
charge). By providing the guest password to their home page, Seattle FilmWorks
customers can share their photographs with friends, family and business
associates worldwide. Both PhotoMail-TM- and FilmWorksNet-TM- provide
flexibility and creativity in this new way of sharing photographs.

23
<PAGE>
Although mail-order photofinishing is viewed as a convenience by many
consumers, mail-order turnaround time (generally seven to ten days) is longer
than many alternative sources for photofinishing services (in some cases within
one hour). The Company has addressed this issue by offering the option of
express-mail pickup and delivery service by means of the U.S. Postal Service for
an extra charge and, more recently, with an immediate delivery-after-processing
option through its PhotoMail-TM- Internet delivery service. However, turnaround
time remains a competitive disadvantage for the Company.

Management believes that the prices for its services and products are
competitive. The Company, however, has chosen not to compete primarily on the
basis of price, but rather by offering a variety of value-added, innovative and
high-quality services and products, thereby seeking to differentiate itself from
other photofinishers.

The Company also provides a variety of reprint and enlargement services for
its mail-order customers, as well as selling 35mm rolled film, single-use
cameras and photofinishing supplies on a wholesale basis to photofinishing
minilabs, retail stores and commercial users of photographic film. These
products are packaged by the Company and marketed under the brand OptiColor-TM-
Film & Photo. Rolled film and single-use cameras are also marketed on a private
label basis with the customer specifying its own brand name. Although it
represents a small percentage of revenues, the Company also provides
photofinishing services on private label, retail and wholesale bases.

RESEARCH AND DEVELOPMENT

Through internal and external research and development efforts, the Company
has established the capability to develop innovative digital media and
photofinishing services and products. The Company seeks to identify customer
needs and shifts in consumer preferences in order to design or refine the
Company's services and products. During the first six months of fiscal 1996 and
in fiscal 1995, fiscal 1994 and fiscal 1993, the Company incurred research and
development expenses of $521,000, $458,000, $459,000 and $285,000, respectively,
primarily in connection with development and enhancement of its
FilmWorksNet-TM-, PhotoMail-TM-, PhotoWorks-TM- and Pictures On Disk-TM-
services and products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."

CUSTOMER SERVICE AND SUPPORT

Management believes that customer satisfaction is critical to the Company's
ongoing success. The Company has a 100% money-back satisfaction-guarantee policy
under which it will provide a full refund if a customer's complaint cannot
otherwise be resolved.

The direct-to-consumer photofinishing business involves contacts with a
large number of customers. For customer convenience, the Company provides
toll-free telephone access at 1-800-FILMWORKS. As of May 11, 1996, the Company
had a customer service staff of 46, which is equipped with direct access to the
Company's extensive proprietary database and is trained to promote certain of
the Company's services and products, as well as to answer questions regarding
order status, basic photography and photofinishing and use of PhotoWorks-TM-
software. On average, in a week the Company's customer support personnel respond
to approximately 22,000 telephone calls from customers, 2,000 written inquiries
and 2,000 e-mail messages. The majority of these inquiries are general
information requests and order status inquiries. In addition, the Company offers
free pre-recorded mini-lessons on photography over the telephone from Professor
FilmWorks-TM-.

The Company also maintains a Web site on the Internet (www.filmworks.com).
While on-line, customers may download versions of Company software, view
personal home pages, access answers to frequently asked questions and send
electronic messages to customer service. In the future, the Company expects to
offer its customers the ability to determine the status of their orders by
direct access through the Company's Web site.

24
<PAGE>
OPERATIONS

The Company operates a laboratory in a single facility in Seattle,
Washington, which is designed to produce consistent, high-quality
photofinishing. The system is designed for 24-hour in-house turnaround
processing of photofinishing orders. The process for producing prints begins
with the entry of each order into the Company's customer database, primarily
using information provided by the customer on the order form. Each roll received
for processing is barcoded with an identification number, which enables the
tracking of each order throughout the production process. Following order entry,
individual rolls of film are spliced together into a reel of film which is then
developed as a batch. Once the film is developed, each negative is computer
analyzed, and the color-corrected image is printed on photographic paper using
state-of-the-art equipment. Order information is then printed on the back of
each print and the corresponding information is printed on a paper tab which is
attached to each sleeved negative. After a visual quality inspection, the orders
are packaged for delivery to the customer. If a customer requests, photographs
are digitized and delivered through the mail on 3 1/2" diskettes or via download
over the Internet. Although much of the photofinishing and order handling
process has been automated, trained personnel operate machinery and regularly
monitor product quality with the assistance of computerized control and
measurement systems.

The Company has the ability to process various types of 35mm color film,
including those manufactured by Eastman Kodak Company, Fuji Photo Film U.S.A,
Inc., an affiliate of Konica Corporation, 3M, Inc., Agfa and other major
producers of conventional 35mm color negative film. The Company also has the
ability to process 35mm color negative film manufactured by Eastman Kodak
Company for professional motion picture studios which has been packaged by the
Company or others for use in 35mm still cameras.

Currently, the Company estimates that it is capable of processing up to
approximately 120,000 rolls of film per week with its existing facilities and
equipment. The Company has initiated steps to expand its processing capacity.

SUPPLIERS

The Company obtains its conventional 35mm film from a few large
manufacturers of photographic film, including Agfa and 3M, Inc., its supply of
Eastman motion picture film as surplus from motion picture studios and
television production companies and its photographic paper and chemicals from a
single supplier, Agfa. In addition, the individual cassettes into which the
Company spools 35mm film for still cameras are manufactured for the Company by
foreign sources, principally in China and South Korea. Currently, substantially
all of the Company's purchases from foreign suppliers are paid for in U.S.
dollars. The Company's mail-order services and products are handled largely
through the U.S. Postal Service. See "Risk Factors--Reliance on Key Vendor and
Supplier Relationships; Foreign Sourcing."

MANAGEMENT INFORMATION SYSTEMS

Management information systems ("MIS") are an essential component of the
Company's strategy to provide superior service to its customers, as well as to
effectively support internal operations. The systems support all major aspects
of the Company's business, including mail-order operations, order entry,
production, warehousing, distribution, purchasing, inventory control and
customer service, as well as various financial systems and electronic
communication systems. All shared data, including the Company's customer
database files, are backed up on a regular basis, with tapes stored at a secure
off-site facility. The Company uses MIS to automate much of its photofinishing
operations.

The Company has recently replaced and upgraded a portion of its MIS
hardware. It is not uncommon for system defects, shutdowns, slowdowns or other
problems to occur in connection with conversion to new data-processing
equipment. While the Company has taken a number of precautions against certain
events that could disrupt the operation of its MIS, including in connection with
the hardware upgrade, there can be no assurance that the Company will not
experience systems failures

25
<PAGE>
or interruptions, which could have a material adverse effect on its business,
financial condition and operating results. See "Risk Factors--Dependence on
Production Capabilities, Statistical Models and Management Information Systems."

COMPETITION

Management believes that the principal competitive factors in the consumer
photofinishing industry are price, convenience, range of available services,
quality of processing, speed of service and product differentiation. There are
no significant proprietary or other barriers to entry into the photofinishing
industry. The Company has sought to differentiate its photofinishing services by
offering a number of value-added services and products and emphasizing quality
and convenience rather than seeking to be a low-price or rapid turnaround
provider. Although management believes the Company is a leader in developing and
marketing innovative photo-related services and products, competitors can and do
provide similar services and products. Some of these competitors have introduced
products which compete with the Company's Pictures On Disk-TM- and
PhotoWorks-TM- products. Also, sales of consumer photofinishing services have
experienced little or no growth since 1990. See "Business--Photofinishing
Industry and Direct-Marketing Overview." Accordingly, the Company's growth has
been the result of market share gain.

In addition, the wholesale distribution market for rolled film and
photofinishing supplies is highly competitive and is dominated by suppliers
which manufacture what they sell and may, therefore, potentially have lower
costs of goods for these items than the Company. Relatively few firms, however,
have the capability to produce small-production quantities of private label
rolled film. Management believes the principal competitive factors in this
segment of the wholesale distribution market are price, ability to provide
private label products and capability to deliver small-production quantities on
short notice.

The photography industry is characterized by evolving technology and
changing services and products. The introduction of photographic services and
products embodying new technologies could render existing services and products
obsolete. The Company's future success will depend on its ability to adapt to
new technologies and develop new or modify existing services and products to
satisfy evolving consumer needs. For example, the commercialization of filmless
digital imaging technologies may have a negative impact on the photofinishing
industry generally. Moreover, Advanced Photo System ("APS"), which includes a
new film format, has been introduced, the processing of which requires special
equipment the Company does not presently possess. Management believes that APS
currently constitutes an insignificant percentage of the film the Company is
asked to process, and the Company has therefore decided not to establish this
capability. However, there can be no assurance that the development of these or
other new technologies or any failure by the Company to anticipate or
successfully respond to such developments will not have a material adverse
effect on the Company's business, financial condition and operating results. See
"Risk Factors--Competition" and "--Rapid Technological Change."

26
<PAGE>
PROPRIETARY TECHNOLOGY

The Company markets its services and products under registered and
common-law trademarks and service marks, including Seattle
FilmWorks-Registered Trademark-, OptiColor-TM- Film & Photo, Pictures On
Disk-TM-, PhotoMail-TM-, PhotoWorks-TM-, Pictures Plus-TM- Index, Professor
FilmWorks-TM- and FilmWorksNet-TM-. In January 1996, the Company filed a lawsuit
against a party which had filed for registration of the "PhotoWorks" mark in the
United States on July 22, 1994. The Company is currently attempting to resolve
these competing claims to the mark. In the second quarter of fiscal 1996, the
Company expensed $126,000 in anticipation of settlement. See "Risk
Factors--Intellectual Property." The Company considers a large portion of its
PhotoWorks-TM- software, its process for production of Pictures On Disk-TM- and
certain other processes to be proprietary. The Company has not filed any patents
or patent applications, in part to avoid disclosure of its competitive
strengths. The Company, however, does attempt to protect its proprietary rights
to software through a combination of copyright, trademark and trade secret laws
and employee and third-party nondisclosure agreements, by restricting access to
certain portions of its premises and by including contractual restrictions on
use and disclosure in its end-user licenses. Moreover, the Company's
PhotoWorks-TM- Plus product is shipped in sealed packages on which notices are
prominently displayed informing the end-user that, by breaking the package seal,
the end-user agrees to be bound by the license agreement contained in the
package. The legal and practical enforceability and extent of liability for
violations of license agreements that purport to become effective upon opening a
sealed package are unclear.

This Prospectus contains trademarks other than those of the Company.

GOVERNMENTAL REGULATION

The Company's direct-mail operations, including its transmission of digital
images over the Internet, are subject to regulation by the U.S. Postal Service,
the Federal Trade Commission and various state, local and private consumer
protection and other regulatory authorities. In general, these regulations
govern the manner in which orders may be solicited, the form and content of
advertisements, information which must be provided to prospective customers, the
time within which orders must be filled, obligations to customers if orders are
not shipped within a specified period of time and the time within which refunds
must be paid if the ordered merchandise is unavailable or returned. The law
relating to the liability of on-line services companies, Internet access and/or
content providers, Web hosts and electronic publishers for information carried
on or disseminated through their systems for, among other things, infringement
of copyrighted material or trademarks, violations of personal rights of privacy
and publicity and dissemination of material legally judged to be obscene,
indecent or defamatory, is currently unclear. Such claims have been brought, and
sometimes successfully asserted, against on-line services, including cases
against Prodigy and NETCOM. In addition, the recently passed Telecommunications
Act imposes, in some circumstances, liability for or prohibits the transmission
over the Internet of certain types of information and content. Although a
federal district court recently blocked enforcement of that portion of the
Telecommunications Act intended to regulate obscene content, this or other
legislation could result in significant potential liability to the Company, as
well as additional costs and technological challenges in complying with
mandatory requirements. See "Risk Factors--Dependence on the Internet and
Potential Liability for Content" and "--Governmental Regulation."

ENVIRONMENTAL COMPLIANCE

The Company's photofinishing operations involve the use of several chemicals
which are subject to federal, state and local governmental regulations relating
to the storage, use, handling and disposal of such chemicals. The Company
actively monitors its compliance with applicable regulations and works with
regulatory authorities to ensure compliance. To the best of management's
knowledge, the Company has never received a significant citation or fine for
failure to comply with applicable environmental requirements. However, there can
be no assurance that changes in environmental regulations or in the kinds of
chemicals used by the Company will not impose the need for additional capital
equipment or other requirements. See "Risk Factors--Potential Adverse Impact of
Environmental Regulations."

27
<PAGE>
EMPLOYEES

As of May 11, 1996, the Company had 582 employees, of whom approximately 439
were engaged in production operations, 68 in administration, 21 in marketing, 46
in customer support and 8 in research and development. None of the Company's
employees is covered by a collective bargaining agreement, and management
believes its relations with its employees are good.

PROPERTIES

The Company's headquarters are located in Seattle, Washington. This building
also houses the Company's photofinishing and mail-order operations. The
building's square footage has recently been expanded to approximately 60,000
square feet to accommodate increased levels of production. The building is
occupied under a lease which expires in September 2000.

The Company also occupies an 80,000-square-foot building that is utilized as
a warehouse storage and limited production facility. This building, located in
Seattle, Washington, is occupied under a three-year lease expiring January 31,
1999, with options to extend the lease for two additional one-year periods to
January 31, 2001.

Management believes that its corporate headquarters and warehouse facilities
will be adequate to support existing and anticipated levels of business for at
least the next 12 months.

LEGAL PROCEEDINGS

The Company is involved in various routine legal proceedings incident to the
ordinary course of its business. The Company also has filed a lawsuit in
connection with the use of the mark "PhotoWorks." See "Business--Proprietary
Technology." Management believes that the outcome of all pending legal
proceedings in the aggregate will not have a material adverse effect on the
Company's business, financial condition and operating results.

28
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Gary R. Christophersen 49 President, Chief Executive Officer and Director
Michael F. Lass 41 Vice President--Operations
Case H. Kuehn 43 Vice President--Finance, Chief Financial Officer and
Treasurer
Bruce A. Ericson 46 Vice President--Marketing
Annette F. Mack 39 Vice President--Human Resources
Sam Rubinstein 78 Director
Douglas A. Swerland 51 Director
Craig E. Tall 50 Director
Peter H. van Oppen 44 Director
</TABLE>

All directors are elected annually and hold office until the next annual
meeting of the shareholders of the Company and until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors.

GARY R. CHRISTOPHERSEN, the Company's President and Chief Executive Officer
since August 1988, joined the Company in January 1982 as Vice
President--Operations and has served as a Director of the Company since 1982.
From May 1983 to August 1988, Mr. Christophersen was a Senior Vice President of
the Company and its General Manager.

MICHAEL F. LASS, the Company's Vice President--Operations since September
1988, joined the Company in 1984 as Manager of Operations. From 1982 to 1984,
Mr. Lass was Vice President and General Manager of Breezin' Sportswear, a
manufacturer and marketer of sportswear, and, from 1980 to 1982, General Manager
and a director of Mountain Safety Research, Inc., a manufacturer of outdoor
recreational products.

CASE H. KUEHN has been the Company's Vice President--Finance, Chief
Financial Officer and Treasurer since February 1995. From April 1994 to February
1995, Mr. Kuehn was Chief Financial Officer of Shoe Inn, Inc., doing business as
Shoe Pavilion. From January 1992 to March 1994, Mr. Kuehn was General Manager of
Pro Mark Technologies, Inc., a manufacturer of computer/video-based inspection
equipment, and, from March 1990 to January 1992, Vice President, Commercial
Lending, at First National Bank of Chicago. From November 1985 to February 1990,
Mr. Kuehn performed business valuation consulting with Price Waterhouse.

BRUCE A. ERICSON, the Company's Vice President--Marketing since November
1989, joined the Company in May 1984 as Director of Publishing and, from January
1988 to October 1989, was its Director of Marketing.

ANNETTE F. MACK, the Company's Vice President--Human Resources since January
1996, joined the Company in March 1986 as Human Resources Manager and, from
August 1988 to December 1995, was its Director of Human Resources.

SAM RUBINSTEIN became a Director of the Company in March 1986. From June
1985 to May 1988, he was the Chairman of the Board and Chief Executive Officer
of Farwest Fisheries, Inc., a seafood processing and marketing firm. From 1974
to December 1987, Mr. Rubinstein was the Chairman of the Board and Chief
Executive Officer of Bonanza Stores, Inc., an operator of variety stores and
drugstores, and, from February 1984 to January 1986, the Chairman of the Board
and Chief Executive Officer of Whitney-Fidalgo Seafoods, Inc., a seafood
processor.

DOUGLAS A. SWERLAND became a Director of the Company in October 1988. In
December 1993, Mr. Swerland founded and became the President of Swerland Apparel
Ventures, Inc., a clothing

29
<PAGE>
superstore retailer specializing in designer clothing. Mr. Swerland had been
employed by Jay Jacobs, Inc., the operator of a chain of specialty retail
apparel stores, in various capacities beginning in 1969, most recently as
President and a director from 1978 to November 1995. Jay Jacobs, Inc. filed a
voluntary petition for Chapter 11 bankruptcy protection in May 1994 and emerged
therefrom in November 1995.

CRAIG E. TALL became a Director of the Company in October 1988. Since
September 1990, Mr. Tall has been an Executive Vice President of Washington
Mutual, Inc., a bank holding company. In addition, since April 1987, Mr. Tall
has been an Executive Vice President of Washington Mutual Bank.

PETER H. VAN OPPEN became a Director of the Company in October 1988. Since
February 1995, Mr. van Oppen has been Chairman and President and, since
September 1989, Chief Executive Officer of Interpoint Corporation, a publicly
held manufacturer of proprietary and custom electronic components and data
storage libraries ("Interpoint"). Mr. van Oppen was President and Chief
Operating Officer of Interpoint from March 1987 to September 1989 and, from 1985
to March 1987, its Executive Vice President for Finance and Operations. Mr. van
Oppen is also a director of Interpoint.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs. Rubinstein, Swerland, Tall
and van Oppen. The Audit Committee meets with the Company's accounting staff and
its independent certified public accountants to review (i) the scope and
findings of the annual audit, (ii) accounting policies and procedures and the
Company's financial reporting and (iii) internal controls employed by the
Company. The Audit Committee's findings and recommendations are reported to
management and the Board of Directors for appropriate action.

The Compensation Committee consists of Messrs. Swerland, Tall and van Oppen.
The Compensation Committee is responsible for establishing the policies which
govern executive officer compensation, setting compensation levels for the
Company's President and Chief Executive Officer and reviewing the compensation
packages for other executive officers recommended by the President. The
Compensation Committee also administers the Company's stock option and stock
purchase plans.

30
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth as of June 26, 1996, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information regarding the beneficial ownership of the Common Stock of the
Company with respect to (i) each person known by the Company to own beneficially
more than 5% of the outstanding Common Stock, (ii) each of the Company's
directors and executive officers, (iii) the Selling Shareholders and (iv) all
directors and executive officers of the Company as a group. Unless otherwise
indicated, management believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to all shares of Common Stock owned by
each person, subject to community property laws where applicable and the
information set forth in the footnotes to the table below. Pursuant to the rules
of the Securities and Exchange Commission (the "Commission"), in calculating
percentage ownership, each person is deemed to beneficially own shares which he
or she is entitled to purchase pursuant to options which are exercisable within
60 days after the date of this Prospectus, but options held by others (even if
exercisable within 60 days) are deemed not to be outstanding shares.

<TABLE>
<CAPTION>
AMOUNT AMOUNT
BENEFICIALLY OWNED AMOUNT BENEFICIALLY OWNED
PRIOR TO THE OFFERING TO BE SOLD AFTER THE OFFERING
------------------------ IN THE ------------------------
NAME AND ADDRESS NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sam Rubinstein (1)............................ 1,592,457 14.6% 1,050,000 542,457 5.0%
Suite 2720
1201 Third Avenue
Seattle, WA 98101
The Gladys and Sam Rubinstein Foundation...... 350,000 3.2% 350,000 0 *
Suite 2720
1201 Third Avenue
Seattle, WA 98101
T. Rowe Price Associates, Inc. (2)............ 975,000 9.0% 0 975,000 9.0%
T. Rowe Price Small Cap Fund, Inc.
100 East Pratt Street
Baltimore, MD 21202
Robert A. Simms (3)........................... 841,500 7.8% 0 841,500 7.8%
230 Park Avenue
New York, NY 10169
Gary Christophersen (4)....................... 698,176 6.3% 0 698,176 6.3%
1260 16th Avenue West
Seattle, WA 98119
Michael F. Lass (5)........................... 252,368 2.3% 0 252,368 2.3%
Bruce A. Ericson (6).......................... 160,747 1.5% 0 160,747 1.5%
Craig E. Tall (7)............................. 118,146 1.1% 0 118,146 1.1%
Case H. Kuehn (8)............................. 9,370 * 0 9,370 *
Annette F. Mack (9)........................... 41,589 * 0 41,589 *
Douglas A. Swerland (10)...................... 75,375 * 0 75,375 *
Peter H. van Oppen............................ 15,563 * 0 15,563 *
All directors and executive officers as a
group (9 persons) (11)....................... 2,963,791 25.5 % 1,400,000 1,913,791 16.5 %
</TABLE>

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

31
<PAGE>
(1)Includes options to purchase 108,000 shares of Common Stock granted under
the Company's 1987 Stock Option Plan, which options are presently
exercisable or exercisable within 60 days. Assumes no exercise of the
Underwriters' over-allotment option. If the over-allotment option is
exercised in full, the number of shares offered and beneficial ownership
after this offering in shares and as a percentage of outstanding shares
would be 1,610,000, 304,957 and 2.8%, respectively. Does not include 350,000
shares held by The Gladys and Sam Rubinstein Foundation (the "Foundation"),
beneficial ownership of which Mr. Rubinstein disclaims.

(2)The holding shown is as of February 14, 1996, as reported by T. Rowe Price
Associates, Inc. ("Price Associates") in a Schedule 13G filed by Price
Associates pursuant to Rule 13d-1 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Price Associates has indicated that these
shares are held by it in its capacity as investment advisor to various
individual and institutional investors. According to the Schedule 13G filed
by Price Associates, it has sole dispositive power, and T. Rowe Price Small
Cap Fund, Inc. has sole voting power, with respect to the shares.

(3)The holding shown is as of November 1, 1993, as reported by an amendment to
a Schedule 13D filed by Mr. Simms pursuant to Rule 13d-1 under the Exchange
Act.

(4)Includes options to purchase 222,080 shares of Common Stock granted under
the Company's 1987 Stock Option Plan, which options are presently
exercisable or exercisable within 60 days. Does not include 6,600 shares of
Common Stock held in trust for Mr. Christophersen's minor children,
beneficial ownership of which Mr. Christophersen disclaims.

(5)Includes options to purchase 180,563 shares of Common Stock granted under
the Company's 1987 Stock Option Plan, which options are presently
exercisable or exercisable within 60 days.

(6)Includes options to purchase 133,313 shares of Common Stock granted under
the Company's 1987 Stock Option Plan, which options are presently
exercisable or exercisable within 60 days.

(7)Includes options to purchase 54,000 shares of Common Stock granted under the
Company's 1987 Stock Option Plan, which options are presently exercisable or
exercisable within 60 days.

(8)Includes options to purchase 8,438 shares of Common Stock granted under the
Company's 1987 Stock Option Plan, which options are presently exercisable or
exercisable within 60 days.

(9)Includes options to purchase 37,688 shares of Common Stock granted under the
Company's 1987 Stock Option Plan, which options are presently exercisable or
exercisable within 60 days.

(10)Includes options to purchase 67,500 shares of Common Stock granted under the
Company's 1987 Stock Option Plan, which options are presently exercisable or
exercisable within 60 days.

(11)Includes options to purchase 811,582 shares of Common Stock granted under
the Company's 1987 Stock Option Plan, which options are presently
exercisable or exercisable within 60 days.

32
<PAGE>
UNDERWRITING

Upon the terms and subject to the conditions stated in the Underwriting
Agreement, dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Selling Shareholders have agreed to sell to such
Underwriter, the number of shares of Common Stock set forth opposite the name of
such Underwriter.

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------- ---------
<S> <C>
Smith Barney Inc............................. 400,000
Hambrecht & Quist LLC........................ 400,000
Alex. Brown & Sons Incorporated.............. 100,000
Dain Bosworth Incorporated................... 75,000
Dean Witter Reynolds Inc..................... 100,000

<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------- ---------
<S> <C>

Piper Jaffray Inc............................ 75,000
Prudential Securities Incorporated........... 100,000
Ragen MacKenzie Incorporated................. 75,000
Sutro & Co. Incorporated..................... 75,000
---------
Total.................................... 1,400,000
---------
---------
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.

The Underwriters, for whom Smith Barney Inc. and Hambrecht & Quist LLC are
acting as the Representatives, propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the shares of Common Stock to certain
dealers at a price which represents a concession not in excess of $0.57 per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
other dealers. The Representatives have advised the Company and the Selling
Shareholders that the Underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.

One of the Selling Shareholders has granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
210,000 additional shares of Common Stock at the price to the public set forth
on the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
offered hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.

The Company, its officers and directors and the Selling Shareholders have
agreed that, for a period of 180 days from the date of this Prospectus (90 days
in the case of officers and directors who are not Selling Shareholders), they
will not, without the prior written consent of Smith Barney Inc., offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, Common Stock,
(i) subject to certain exceptions relating to 201,036 shares of Common Stock
held in margin accounts, which may be resold upon a margin call, and (ii) except
for the issuance of shares of Common Stock or the granting of options to
purchase shares of Common Stock pursuant to the Company's stock option plans and
employee stock purchase plan.

The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").

In connection with this offering, the Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under the Exchange Act. Passive market

33
<PAGE>
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers for a security and making purchases of a
security which are limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each date are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller, Ehrman, White & McAuliffe, Seattle, Washington. Certain legal
matters relating to this offering will be passed upon for the Selling
Shareholders by Bogle & Gates P.L.L.C., Seattle, Washington. Certain legal
matters relating to this offering will be passed upon for the Underwriters by
Perkins Coie, Seattle, Washington.

EXPERTS

The financial statements and schedule of the Company at September 30, 1995
and September 24, 1994, and for each of the fiscal years ended September 30,
1995, September 24, 1994 and September 25, 1993 appearing in this Prospectus and
the Registration Statement, and incorporated herein by reference in Seattle
FilmWorks, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
incorporated herein by reference, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Such reports, proxy and information
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such information can also be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Common Stock is quoted on the Nasdaq National
Market. Reports and other information concerning the Company may be inspected
and copied at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3, including amendments thereto, under the Securities Act 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 thereto,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. 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 reference is made to the copy of such contract or
other document filed as an exhibit or incorporated by reference into the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits thereto. Copies of the Registration Statement and the exhibits
thereto may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.

34
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: (1) the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995, as amended by the
Company's Form 10-K/A filed on May 31, 1996; (2) the Company's Quarterly Reports
on Form 10-Q for the quarters ended December 30, 1995 and March 30, 1996, the
latter as amended by the Company's Form 10-Q/A filed with the Commission on May
31, 1996; (3) the Company's Proxy Statement for its Annual Meeting of
Shareholders held on February 13, 1996; and (4) the description of the Company's
Common Stock contained in its Registration Statement on Form 8-A filed with the
Commission on January 27, 1987, as amended by the Company's Form 8-A/A filed
with the Commission on May 31, 1996. All documents filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of the offering
covered by this Prospectus will be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing such documents.

Any statement contained herein or in any document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

The Company will provide, without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any and all
information that has been or may be incorporated by reference into this
Prospectus, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Such requests
should be directed to Seattle FilmWorks, Inc., 1260 16th Avenue West, Seattle,
Washington 98119, Attn: Corporate Secretary, phone number: (206) 281-1390.

35
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Income....................................................................................... F-4
Statements of Shareholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS

Shareholders and Board of Directors
SEATTLE FILMWORKS, INC.

We have audited the accompanying balance sheets of SEATTLE FILMWORKS, INC.
as of September 30, 1995 and September 24, 1994, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEATTLE FILMWORKS, INC. at
September 30, 1995 and September 24, 1994, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Seattle, Washington
November 8, 1995, except for Note G, as to
which the date is March 15, 1996

F-2
<PAGE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 30, MARCH 30,
1994 1995 1996
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents............. $ 2,711 $ 8,560 $ 6,614
Securities available for sale......... 1,330 1,345 500
Accounts receivable, net of allowance
for doubtful accounts of $461, $546
and $522 in 1994, 1995 and
1996, respectively................... 1,369 1,242 1,286
Inventories........................... 3,659 4,626 6,992
Capitalized promotional
expenditures......................... 388 158 43
Prepaid expenses and other............ 191 164 546
Deferred income taxes................. 316 398 353
------------- ------------- -----------
Total Current Assets................ 9,964 16,493 16,334
Furniture, Fixtures, and Equipment, at
cost, less accumulated depreciation
(Note C)............................... 2,986 3,200 4,329
Capitalized Customer Acquisition
Expenditures........................... 4,458 7,356 9,645
Deposits and Other Assets............... 95 68 245
Noncompete Agreements (Note B).......... 1,332 1,127 939
------------- ------------- -----------
Total Assets........................ $18,835 $28,244 $31,492
------------- ------------- -----------
------------- ------------- -----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable...................... $ 2,958 $ 4,782 $ 6,470
Accrued expenses...................... 1,991 2,364 2,257
Income taxes payable.................. 1,141 856 --
------------- ------------- -----------
Total Current Liabilities........... 6,090 8,002 8,727
Deferred Income Taxes................. 1,398 2,310 3,126
------------- ------------- -----------
Total Liabilities................... 7,488 10,312 11,853
------------- ------------- -----------
Shareholders' Equity (Note G)
Preferred stock, $.01 par value,
authorized 2,000,000 shares, none
issued............................... -- -- --
Common stock, $.01 par value,
authorized 67,500,000 shares, issued
and outstanding 10,510,559,
10,715,571 and 10,806,988 shares in
1994, 1995 and 1996, respectively.... 105 107 108
Additional paid-in capital............ 54 955 1,207
Retained earnings..................... 11,188 16,870 18,324
------------- ------------- -----------
Total Shareholders' Equity.......... 11,347 17,932 19,639
------------- ------------- -----------
Total Liabilities and Shareholders'
Equity............................. $18,835 $28,244 $31,492
------------- ------------- -----------
------------- ------------- -----------
</TABLE>

See Notes to Financial Statements.

F-3
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- ----------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30, MARCH 25, MARCH 30,
1993 1994 1995 1995 1996
------------- ------------- ------------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenues............................ $ 42,728 $ 49,753 $ 62,185 $ 24,563 $ 34,510
Cost of Goods and Services.............. 25,459 30,846 38,128 15,821 20,907
------------- ------------- ------------- ---------- ----------
Gross Profit........................ 17,269 18,907 24,057 8,742 13,603
Operating Expenses:
Customer acquisition costs............ 7,115 6,516 8,579 4,056 5,774
Other selling expenses................ 2,868 3,458 4,035 1,815 3,462
Research and development.............. 285 459 458 211 521
General and administrative............ 2,016 2,276 2,657 1,281 1,780
------------- ------------- ------------- ---------- ----------
Total Operating Expenses............ 12,284 12,709 15,729 7,363 11,537
------------- ------------- ------------- ---------- ----------
Income from Operations.................. 4,985 6,198 8,328 1,379 2,066
Other Income (Expense):
Interest expense...................... (10) (25) (4) (2) (1)
Interest income....................... 201 222 276 117 254
Nonoperating income (expense), net.... 99 (10) (20) 3 (93)
------------- ------------- ------------- ---------- ----------
Total Other Income.................. 290 187 252 118 160
------------- ------------- ------------- ---------- ----------
Income Before Income Taxes.............. 5,275 6,385 8,580 1,497 2,226
Provision for Income Taxes (Note F)..... 1,705 1,947 2,898 503 772
------------- ------------- ------------- ---------- ----------
Net Income.............................. $ 3,570 $ 4,438 $ 5,682 $ 994 $ 1,454
------------- ------------- ------------- ---------- ----------
------------- ------------- ------------- ---------- ----------
Net Income Per Share.................... $ 0.29 $ 0.36 $ 0.48 $ 0.09 $ 0.12
------------- ------------- ------------- ---------- ----------
------------- ------------- ------------- ---------- ----------
Fully Diluted Weighted Average Shares
Outstanding............................ 12,358,157 12,394,677 11,731,761 11,555,702 11,844,024
------------- ------------- ------------- ---------- ----------
------------- ------------- ------------- ---------- ----------
</TABLE>

See Notes to Financial Statements.

F-4
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK
------------------------
SHARES PAR PAID-IN RETAINED
OUTSTANDING VALUE CAPITAL EARNINGS TOTAL
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of September 26, 1992......................... 11,136,042 $ 111 $ 154 $ 9,288 $ 9,553
Stock options exercised................................ 517,334 5 9 -- 14
Income tax benefit of stock options.................... -- -- 571 -- 571
Purchase and retirement of Common Stock................ (101,781) -- (164) (168) (332)
Net income............................................. -- -- -- 3,570 3,570
------------- --------- --------- --------- ---------
Balance as of September 25, 1993......................... 11,551,595 116 570 12,690 13,376
Stock options exercised................................ 57,378 1 32 -- 33
Income tax benefit of stock options.................... -- -- 50 -- 50
Employee stock purchase plan........................... 26,586 -- 93 -- 93
Purchase and retirement of Common Stock................ (1,125,000) (12) (691) (5,940) (6,643)
Net income............................................. -- -- -- 4,438 4,438
------------- --------- --------- --------- ---------
Balance as of September 24, 1994......................... 10,510,559 105 54 11,188 11,347
Stock options exercised................................ 115,950 1 274 -- 275
Income tax benefit of stock options.................... -- -- 333 -- 333
Employee stock purchase plan........................... 94,612 1 348 -- 349
Purchase and retirement of Common Stock................ (5,550) -- (54) -- (54)
Net income............................................. -- -- -- 5,682 5,682
------------- --------- --------- --------- ---------
Balance as of September 30, 1995......................... 10,715,571 107 955 16,870 17,932
Stock options exercised (unaudited).................... 89,783 1 300 -- 301
Employee stock purchase plan (unaudited)............... 13,445 -- 162 -- 162
Purchase and retirement of Common Stock (unaudited).... (11,811) -- (210) -- (210)
Net income (unaudited)................................. -- -- -- 1,454 1,454
------------- --------- --------- --------- ---------
Balance as of March 30, 1996 (unaudited)................. 10,806,988 $ 108 $ 1,207 $ 18,324 $ 19,639
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
</TABLE>

See Notes to Financial Statements.

F-5
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- -------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30, MARCH 25, MARCH 30,
1993 1994 1995 1995 1996
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income............................ $ 3,570 $ 4,438 $ 5,682 $ 994 $ 1,454
Charges to income not affecting cash:
Depreciation and amortization....... 887 1,320 1,608 791 1,111
Amortization of capitalized customer
acquisition expenditures........... 3,542 4,684 6,289 2,579 5,124
Deferred income taxes............... (20) (89) 830 101 861
Loss (gain) on disposal of
equipment.......................... 16 5 24 (5) 88
Net change in receivables,
inventories, payables, and other..... 209 (672) 1,432 (2,066) (2,066)
Capitalized promotional expenditures,
net.................................. 150 (46) 230 253 115
Additions to capitalized customer
acquisition expenditures............. (4,025) (5,310) (9,187) (3,066) (7,413)
------------- ------------- ------------- ----------- -----------
Net Cash Provided by (Used in)
Operating Activities........... 4,329 4,330 6,908 (419) (726)
------------- ------------- ------------- ----------- -----------
Investing Activities:
Purchases of furniture, fixtures, and
equipment............................ (1,091) (1,414) (1,633) (521) (2,320)
Purchases of securities available for
sale................................. (4,450) (3,060) (1,356) (11) (2,350)
Sales of securities available for
sale................................. 900 5,280 1,341 1,190 3,195
Proceeds from sale of equipment....... -- 22 19 17 2
Purchase of assets from Private Label
Film, Inc............................ -- (1,637) -- -- --
------------- ------------- ------------- ----------- -----------
Net Cash Provided by (Used in)
Investing Activities........... (4,641) (809) (1,629) 675 (1,473)
------------- ------------- ------------- ----------- -----------
Financing Activities:
Proceeds from issuance of Common
Stock................................ 12 126 624 181 253
Payment on purchase of Common Stock... (330) (6,643) (54) -- --
------------- ------------- ------------- ----------- -----------
Net Cash Provided by (Used in)
Financing Activities........... (318) (6,517) 570 181 253
------------- ------------- ------------- ----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents............................ (630) (2,996) 5,849 437 (1,946)
Cash and Cash Equivalents at Beginning
of Year................................ 6,337 5,707 2,711 2,711 8,560
------------- ------------- ------------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 5,707 $ 2,711 $ 8,560 $ 3,148 $ 6,614
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>

See Notes to Financial Statements.

F-6
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEATTLE FILMWORKS, INC. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products
primarily on a mail-order basis under the brand name Seattle
FilmWorks-Registered Trademark-. To a lesser extent, the Company provides
services, products and photofinishing supplies on a wholesale basis to a
variety of commercial customers.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand
and highly liquid short-term investments with a maturity of less than three
months from date of purchase.

SECURITIES AVAILABLE FOR SALE: Securities available for sale consist
primarily of bankers' acceptances, commercial paper, and government securities
issued by financial institutions with high credit ratings. Company policy limits
the amount of credit exposure with any one financial institution. The fiscal
1994 and 1995 balances of $1,330,000 and $1,345,000, respectively, consisted
primarily of bankers' acceptances and government securities. The March 30, 1996
balance of $500,000 consisted of commercial paper with a maturity date of June
10, 1996. Securities available for sale are carried at amortized cost, which
approximates market.

ACCOUNTS RECEIVABLE: Accounts receivable primarily include amounts due from
mail-order customers from the sale of related photographic products and amounts
due from wholesale customers from the sale of film and single-use cameras. An
allowance for doubtful accounts is established for an estimate of bad debts.

INVENTORIES: Inventories are stated at the lower of cost (determined using
the first-in, first-out method) or market. Inventories consist primarily of film
and photofinishing supplies.

CAPITALIZED PROMOTIONAL EXPENDITURES: The Company's promotional programs run
for periods of one to six months. Promotional expenditures primarily consist of
advertising and media costs related to generating consumer interest in the
Company's photofinishing services. The Company capitalizes these costs as
promotional and advertising expenditures and expenses them the first time the
promotion is run. Advertising expense was $1,652,000, $1,944,000, and $1,882,000
in fiscal 1993, 1994, and 1995 respectively.

DEPRECIATION AND AMORTIZATION: Furniture, fixtures, and equipment is
depreciated using the straight-line and accelerated methods based on estimated
useful asset lives ranging from three to seven years. Expenditures for major
remodeling and improvements are capitalized as leasehold improvements. Leasehold
improvements are amortized over the shorter of the life of the lease or the life
of the asset.

Noncompete agreements are amortized as other selling expenses on a
straight-line basis. During fiscal 1996, the Company recorded an additional
$43,000 of amortization related to a change in estimated life of the benefit of
the noncompete agreement from ten years to five years. See Note B.

CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES: The Company's principal
technique for acquiring new customers is its Introductory Offer of two rolls of
35mm film for $2.00 or less. Customer acquisition costs are comprised of the
costs of generating a lead and the amortization of direct costs associated with
the Company's promotional offers sent to prospective and existing customers. The
costs of generating a lead, which are expensed when the promotion is run,
include all direct-response media, advertising and other costs associated with
developing target customer lists. The direct costs of customer acquisition
include film, postage and printed material costs associated with mailings to
prospective and existing customers.

F-7
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The direct costs of customer acquisition are capitalized as an asset on the
Company's balance sheet under "capitalized customer acquisition expenditures."
Capitalized customer acquisition expenditures relating to prospective customers
are amortized over three years, and capitalized customer acquisition
expenditures relating to certain marketing activities to groups of existing
customers are amortized over six months. These amortization rates are based on
the estimates of timing of future roll processing volumes per customer. Based on
the historical pattern of roll processing volumes and the estimate of orders to
be processed in the future, estimated amortization of capitalized customer
acquisition expenditures as of March 30, 1996 will be $3,775,321, $3,980,720,
$1,707,839 and $181,371 in fiscal 1996, fiscal 1997, fiscal 1998 and fiscal
1999, respectively.

Effective as of the beginning of the second quarter of fiscal 1996, the
Company reduced from twelve months to six months the amortization period for
certain marketing activities to specific groups of existing customers. This
change in accounting estimate was made to more accurately match revenues and
expenses, and resulted in $414,000 of incremental amortization of deferred
customer acquisition costs.

INCOME TAXES: The provision for federal income taxes is computed based on
pretax income reported in the financial statements. Research and development tax
credits are recorded as a reduction of the provision for federal income taxes in
the year realized. The provision for income taxes differs from income taxes
currently payable because certain items of income and expense are recognized in
different periods for financial reporting purposes than they are for federal
income tax purposes. Deferred income taxes have been recorded in recognition of
these temporary differences.

The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in the first quarter of fiscal 1994. The adoption
of this new Standard did not have a significant impact on operating results.

EARNINGS PER SHARE: Earnings per share is based on the weighted average
number of shares and dilutive common stock equivalents outstanding during the
fiscal year. Common stock equivalents consist of stock options.

STOCK COMPENSATION: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. Generally stock
compensation, if any, is measured as the difference between the exercise price
of a stock option and the fair market value of the Company's stock at the date
of the grant, which is then amortized over the related service period.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to
conform with the 1995 financial statements, primarily related to the
reclassification of all capitalized customer acquisition expenditures and
deferred tax liabilities to long term.

INTERIM FINANCIAL STATEMENTS: The interim financial statements for the six
months ended March 25, 1995 and March 30, 1996 and as of March 30, 1996 are
unaudited. Certain information and footnote disclosures normally included in
financial statements presented in accordance with

F-8
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
generally accepted accounting principles have been condensed or omitted. The
March 25, 1995 and March 30, 1996 financial statements should be read in
conjunction with the audited financial statements and notes thereto.

In the opinion of the Company's management, the unaudited financial
statements reflect all adjustments (which include only normal recurring
adjustments, and changes as discussed in this Note A) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. Interim results for the six months ended March 30, 1996 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 28, 1996.

NOTE B -- ACQUISITION OF PRIVATE LABEL FILM BUSINESS
On December 30, 1993, the Company acquired certain assets of Private Label
Film, Inc. for approximately $1,637,000. The assets relate to the manufacture
and sale of private label film and related products to retailers and commercial
users. This acquisition has been accounted for using the purchase method. The
purchase price was recorded as follows: equipment $100,000; and other assets of
$1,536,830 related to noncompete agreements, which includes capitalized legal
and accounting expenses. See Note A "Depreciation and Amortization."

NOTE C -- FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 30, MARCH 30,
1994 1995 1996
------------- ------------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Furniture, fixtures, and equipment.......................... $ 9,168 $ 9,673 $ 11,226
Leasehold improvements...................................... 1,610 1,610 2,012
------------- ------------- -----------
10,778 11,283 13,238
Less accumulated depreciation and amortization.............. (7,792) (8,083) (8,909)
------------- ------------- -----------
$ 2,986 $ 3,200 $ 4,329
------------- ------------- -----------
------------- ------------- -----------
</TABLE>

NOTE D -- CREDIT AGREEMENTS AND ACCRUED EXPENSES
At March 30, 1996, the Company has a $6,000,000 available line of credit,
with interest at the lending bank's prime rate. There were no borrowings
outstanding at the end of fiscal 1994 and 1995 or for the six months ended
March 30, 1996 under the line of credit. The Company is restricted under the
covenants of a bank loan agreement from declaring any dividends on shares of
its capital stock in excess of $4,000,000 in any fiscal year, noncumulative
from year to year, without the bank's prior consent.

Accrued expenses at the end of fiscal 1994 and fiscal 1995, and as of March
30, 1996, include accrued compensation of $1,197,000, $1,537,000 and $1,234,000,
respectively.

NOTE E -- PROPERTY AND LEASES
The Company's primary lease relates to its main operating facility. This
lease expires in September 2000. The Company also has a lease agreement for
additional warehouse and limited production space. This lease expires in
January 1999 with an option to extend the lease for two one-year periods. At
September 30, 1995, future minimum payments under noncancelable operating
leases for fiscal

F-9
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE E -- PROPERTY AND LEASES (CONTINUED)
1996 through 2000 are $443,000, $460,000, $460,000, $314,000, and $242,000,
respectively. Rental expense relating to operating leases for fiscal 1993,
1994, and 1995 was $314,000, $335,000, and $353,000, respectively.

NOTE F -- INCOME TAXES
The provision for income taxes is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) for income taxes
Current................................................................ $ 1,725 $ 2,036 $ 2,068
Deferred............................................................... (20) (89) 830
--------- --------- ---------
$ 1,705 $ 1,947 $ 2,898
--------- --------- ---------
--------- --------- ---------
</TABLE>

A reconciliation of the federal statutory tax rates to the effective tax
rates is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate................................. 34.0% 34.0% 34.0%
Research and development tax credits............... (.9) (.5) (.4)
Other, net......................................... (.8) (3.0) .2
----- ----- -----
32.3% 30.5% 33.8%
----- ----- -----
----- ----- -----
</TABLE>

The estimated effective tax rate for fiscal 1996 is 34.7%, a slight increase
over the 33.8% effective tax rate for fiscal 1995 primarily due to an increase
in the marginal federal tax rate applicable to expected taxable income levels.

Principal items comprising the cumulative deferred income taxes are as
follows:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Capitalized customer acquisition expenditures.................................... $ 1,517 $ 2,501
Other............................................................................ 196 175
--------- ---------
Total deferred tax liabilities..................................................... 1,713 2,676

Deferred tax assets:
Accrued expenses................................................................. 512 573
Depreciation and amortization.................................................... 119 191
--------- ---------
Total deferred tax assets.......................................................... 631 764
--------- ---------
Net deferred tax liability......................................................... $ 1,082 $ 1,912
--------- ---------
--------- ---------
</TABLE>

Taxes paid in 1993, 1994, and 1995 were $1,070,000, $1,520,000, and
$2,020,000, respectively.

NOTE G -- SHAREHOLDERS' EQUITY

STOCK OPTIONS

Pursuant to the Company's stock option plans adopted in 1982 and 1987,
options may be granted to purchase up to 4,603,125 shares of Common Stock at
prices equal to the fair market value of the shares at the time the options are
granted. Options generally vest over four years and become

F-10
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
exercisable commencing one year after the date of grant and expiring five years
after the date of grant. Shares of Common Stock reserved for issuance under
these stock option plans totaled 1,700,910 at March 30, 1996, of which 379,762
were available for options to be granted in the future.

The following schedule summarizes stock option activity for fiscal 1993,
1994, and 1995 and the six months ended March 30, 1996.

<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF SHARES PER SHARE
----------------- ------------------
<S> <C> <C>
Outstanding at September 26, 1992 (1,012,761 shares exercisable)........... 1,403,080 $ .05 - $ 2.63
Granted during fiscal 1993............................................... 422,100 $ 3.11 - $ 3.78
Canceled during fiscal 1993.............................................. (3,375) $ .81 - $ 2.48
Exercised during fiscal 1993............................................. (571,318) $ .05 - $ 1.00
-----------------

Outstanding at September 25, 1993 (861,971 shares exercisable)............. 1,250,487 $ .12 - $ 3.78
Granted during fiscal 1994............................................... 108,900 $ 4.00 - $ 8.11
Canceled during fiscal 1994.............................................. (18,675) $ 1.30 - $ 4.67
Exercised during fiscal 1994............................................. (57,376) $ .12 - $ 3.11
-----------------

Outstanding at September 24, 1994 (959,729 shares exercisable)............. 1,283,336 $ .26 - $ 8.11
Granted during fiscal 1995............................................... 152,325 $ 7.17 - $14.17
Canceled during fiscal 1995.............................................. (21,095) $ 3.11 - $ 7.44
Exercised during fiscal 1995............................................. (115,950) $ .26 - $ 6.56
-----------------

Outstanding at September 30, 1995 (1,004,825 shares exercisable)........... 1,298,616 $ .28 - $14.17
Granted during fiscal 1996 (unaudited)................................... 125,850 $12.83 - $18.13
Canceled during fiscal 1996 (unaudited).................................. (13,535) $ 3.11 - $14.17
Exercised during fiscal 1996 (unaudited)................................. (89,783) $ .28 - $ 9.11
-----------------
Outstanding at March 30, 1996 (unaudited) (1,020,521 shares exercisable)... 1,321,148 $ .31 - $18.13
-----------------
-----------------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

Effective September 22, 1993, the Company adopted an Employee Stock Purchase
Plan under which options may be granted to purchase up to 337,500 shares of
Common Stock. Under the Plan, eligible employees may purchase shares of the
Company's Common Stock at six-month intervals at 85% of the fair market value on
the first or last day of the six-month offering period, whichever is lower.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during the purchase period. During the first six months of fiscal
1996, a total of 13,445 shares were issued under the Plan at a price of $12.0417
per share. At March 30, 1996, 202,856 shares were reserved for future issuance.

STOCK SPLITS

All share data, per share data and related accounts in the accompanying
financial statements and these notes reflect a retroactive adjustment for a
three-for-two stock split effective February 26, 1993, a two-for-one stock split
effective March 16, 1994, a three-for-two stock split effective March 15, 1995,
and a three-for-two stock split effective March 15, 1996.

F-11
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I AND ALL INFORMATION FOR THE SIX MONTHS ENDED MARCH 25, 1995 AND MARCH
30, 1996 ARE UNAUDITED)

NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
PURCHASE AND RETIREMENT OF COMMON STOCK

On July 20, 1994, the Company repurchased 1,125,000 shares, or approximately
10% of its outstanding Common Stock, from Mr. Sam Rubinstein, a Director and the
largest shareholder of the Company, in a private transaction for $5.78 per share
plus legal and brokerage fees.

NOTE H -- RETIREMENT AND PROFIT-SHARING PLAN
The Company maintains a 401(k) Plan for substantially all employees. The
Company's contributions are based on matching a percentage of the employee's
voluntary contributions and discretionary profit-sharing contributions as
determined by the Board of Directors. The Company's contributions were
$237,000, $285,000, and $366,000 for fiscal 1993, 1994, and 1995, respectively.

NOTE I -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary financial data for the Company by
quarter for fiscal 1994 and 1995 and for the six months ended March 30, 1996
(in thousands, except per share data).

<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
FISCAL 1994
Net revenue...................................... $ 10,600 $ 10,672 $ 12,872 $ 15,609
Gross profit..................................... 3,968 3,803 4,776 6,360
Net income....................................... 543 279 1,176 2,440
Earnings per share............................... 0.04 0.02 0.09 0.21
FISCAL 1995
Net revenue...................................... $ 12,270 $ 12,293 $ 15,791 $ 21,831
Gross profit..................................... 4,590 4,152 6,136 9,179
Net income....................................... 655 339 1,513 3,175
Earnings per share............................... 0.06 0.03 0.13 0.27
FISCAL 1996
Net revenue...................................... $ 16,689 $ 17,821
Gross profit..................................... 6,292 7,311
Net income....................................... 951 503
Earnings per share............................... 0.08 0.04
</TABLE>

The sum of quarterly earnings per share will not necessarily equal the
earnings per share reported for the entire year since the weighted average
shares outstanding used in the earnings per share computation changes throughout
the year. All earnings per share data presented above have been adjusted to
reflect stock splits. See Note G.

F-12
<PAGE>
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- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Dividend Policy................................ 10
Price Range of Common Stock.................... 10
Selected Financial Data........................ 11
Forward-Looking Information.................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Business....................................... 19
Management..................................... 29
Principal and Selling Shareholders............. 31
Underwriting................................... 33
Legal Matters.................................. 34
Experts........................................ 34
Available Information.......................... 34
Incorporation of Certain Documents by
Reference..................................... 35
Index to Financial Statements.................. F-1
</TABLE>

1,400,000 SHARES

[SEATTLE FILMWORKS LOGO]

COMMON STOCK

---------

PROSPECTUS

JUNE 27, 1996

---------

SMITH BARNEY INC.

HAMBRECHT & QUIST

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