RADIUS INC
10-Q, 1998-02-10
COMPUTER PERIPHERAL EQUIPMENT, NEC
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  Form 10-Q

(Mark One)

[x]      Quarterly report pursuant to Section 13 or 15(d) of the Securities 
         Exchange Act of 1934 for the quarterly period ended December 27, 1997.

                                       OR

[ ]      Transition report pursuant to Section 13(d) or 15(d) of the Securities 
         Exchange Act of 1934 for the transition period from         to        .
                                                             -------    ------- 

                         Commission file number: 0-18690

                                  RADIUS INC.
             (Exact name of Registrant as specified in its charter)

                 California                                    68-0101300
         (State or other jurisdiction of                    (I.R.S. employer
         incorporation or organization)                   identification number)

                             215 Moffett Park Drive
                               Sunnyvale, CA 94089
              (Address of principal executive offices and zip code)

                                 (408) 541-6100
              (Registrant's telephone number, including area code)
                 -----------------------------------------------


Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                            YES  X          NO 
                                ---            ---

The number of shares outstanding of the Registrant's Common Stock on February 
9, 1998 was 55,139,731.

- - --------------------------------------------------------------------------------
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<PAGE>


                                  RADIUS INC.

                                     INDEX
<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION                                                                 PAGE
                                                                                               ----
<S>                                                                                            <C>
Item 1.  Financial Statements

              Consolidated Balance Sheets at December 31, 1997 and September 30, 1997            3

              Consolidated Statements of Operations for the Three Months Ended
              December 31, 1997 and 1996                                                         4

              Consolidated Statements of Cash Flows for the Three Months Ended
              December 31, 1997 and 1996                                                         5

              Notes to Consolidated Financial Statements                                         6

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations                                                                          10


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                                                      21

Item 5.  Other Information                                                                      21

Item 6.  Exhibits and Reports on Form 8-K                                                       21


SIGNATURES                                                                                      21

</TABLE>


                                      -2-
<PAGE>


PART 1.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                   RADIUS INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                DECEMBER 31,        SEPTEMBER 30,
                                                                                  1997                1997 (1)
                                                                                ------------        -------------
                                                                                (unaudited)
<S>                                                                             <C>                 <C>
ASSETS:
Current assets:
   Cash                                                                         $    845             $    773
   Accounts receivable, net                                                        2,798                2,168
   Inventories                                                                       640                  805
   Investment in Splash Technology Holdings, Inc.                                 11,332               22,093
   Prepaid expenses and other current assets                                         197                  184
                                                                                --------             --------
         Total current assets                                                     15,812               26,023
Property and equipment, net                                                          205                  249
                                                                                --------             --------
                                                                                 $16,017              $26,272
                                                                                --------             --------
                                                                                --------             --------

LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency):
Current liabilities:
   Accounts payable                                                              $ 4,000               $4,511
   Accrued payroll and related expenses                                            1,031                1,320
   Accrued warranty costs                                                            433                  538
   Other accrued liabilities                                                       2,401                2,690
   Accrued income taxes                                                            2,107                2,111
   Accrued restructuring and other charges                                         1,772                2,033
   Short-term borrowings                                                           6,466                4,638
   Obligation under capital leases                                                   118                  273
                                                                                --------             --------
         Total current liabilities                                                18,328               18,114


Shareholders' equity (Net capital deficiency):
   Common stock                                                                  169,025              168,994
   Unrealized gain on available-for-sale securities                               11,332               22,093
   Accumulated deficit                                                          (182,711)            (182,972)
   Accumulated translation adjustment                                                 43                   43
                                                                                --------             --------
         Total shareholders' equity (Net capital deficiency)                      (2,311)               8,158
                                                                                --------             --------
                                                                                 $16,017              $26,272
                                                                                --------             --------
                                                                                --------             --------

</TABLE>

(1) The balance sheet at September 30, 1997 has been derived from the audited 
financial statements at that date but does not include all of the information 
and footnotes required by generally accepted accounting principles for 
complete financial statements.

                             See accompanying notes.


                                      -3-

<PAGE>


                                   RADIUS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share data; unaudited)

<TABLE>
<CAPTION>
                                                                                       THREE MONTHS ENDED
                                                                                          DECEMBER 31,
                                                                                       ------------------

                                                                                   1997                1996
                                                                                   ----                ----
<S>                                                                             <C>                 <C>
Net sales                                                                       $  5,107              $10,802
Commissions and royalties                                                            433                1,295
                                                                                --------            ---------
           Total net sales                                                         5,540               12,097

Cost of sales                                                                      3,597                7,026
                                                                                --------             --------
         Gross profit                                                              1,943                5,071
                                                                                --------             --------

Operating expenses:
   Research and development                                                          494                  904
   Selling, general and administrative                                             2,094                4,098
                                                                                --------             --------
         Total operating expenses                                                  2,588                5,002
                                                                                --------             --------

Income (loss) from operations                                                       (645)                  69

Other income (expense), net                                                        1,079                   (5)

Interest expense                                                                    (173)                (737)
                                                                                ---------            ---------
Income (loss) before income taxes                                                    261                 (673)

Provision  for income taxes                                                           --                  121
                                                                                --------             --------
Net income (loss)                                                               $    261              $  (794)
                                                                                --------            ---------
                                                                                --------            ---------

Preferred stock dividend                                                              --                   75

Net income (loss) applicable to common shareholders                             $    261              $  (869)
                                                                                --------            ---------
                                                                                --------            ---------

Income (loss) per share:

   Basic net income (loss) per share applicable to common shareholders          $   0.00              $ (0.02)
                                                                                --------            ---------
                                                                                --------            ---------

   Diluted net income (loss) per share applicable to common shareholders        $   0.00              $ (0.02)
                                                                                --------            ---------
                                                                                --------            ---------

Shares used in per share computations:

   Shares used in computing basic net income (loss) per share                     55,126               54,660
                                                                                --------            ---------
                                                                                --------            ---------

   Shares used in computing diluted net income (loss) per share                   56,169               54,660
                                                                                --------            ---------
                                                                                --------            ---------

</TABLE>

                             See accompanying notes.


                                      -4-

<PAGE>

                                   RADIUS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                            (in thousands, unaudited)

<TABLE>
<CAPTION>

                                                                                           THREE MONTHS ENDED
                                                                                              DECEMBER 31,
                                                                                           ------------------

                                                                                            1997         1996
                                                                                            ----         ----
<S>                                                                                    <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                                                      $   261     $   (794)
   Adjustments to reconcile net income (loss) to net cash used in
     operating activities:
     Depreciation and amortization                                                             44          302
     Gain on the sale of Splash Common Stock                                               (1,056)          --
    (Increase) decrease in assets:
       Accounts receivable                                                                   (630)      (2,699)
       Inventories                                                                            165        1,150
       Prepaid expenses and other current assets                                              (13)         (21)
     Increase (decrease) in liabilities:
       Accounts payable                                                                      (511)         (58)
       Accrued payroll and related expenses                                                  (289)        (592)
       Accrued warranty costs                                                                (105)          19
       Other accrued liabilities                                                             (289)        (132)
       Accrued restructuring costs                                                           (261)         (16)
       Accrued income taxes                                                                    (4)         142
                                                                                         ---------    --------
       Total adjustments                                                                   (2,949)      (1,905)
                                                                                         ---------    --------
         Net cash used in operating activities                                             (2,688)      (2,699)

Cash flows from investing activities:
   Capital expenditures                                                                        --          (50)
   Net proceeds from the sale of Splash Common Stock                                        1,056           --
                                                                                         ---------    --------
         Net cash provided by (used in) investing activities                                1,056          (50)

Cash flows from financing activities:
   Short-term borrowings, net                                                               1,828        1,913
   Principal payments of long-term debt and capital leases                                   (155)        (372)
   Issuance of common stock                                                                    31           32
                                                                                         ---------    --------
         Net cash provided by financing activities                                          1,704        1,573
                                                                                         ---------    --------
Net increase (decrease) in cash and cash equivalents                                           72       (1,176)
Cash and cash equivalents, beginning of period                                                773        2,974
                                                                                         ---------    --------
Cash and cash equivalents, end of period                                                  $   845     $  1,798
                                                                                         ---------    --------
                                                                                         ---------    --------

Supplemental disclosure of cash flow information: 
    Cash paid during the period for:
      Interest                                                                           $    146     $    715
                                                                                         ---------    --------
                                                                                         ---------    --------
      Income taxes                                                                       $      4     $     55
                                                                                         ---------    --------
                                                                                         ---------    --------
    Non-cash financing activity:
      Dividend paid on preferred stock                                                   $     --     $     75
                                                                                         ---------    --------
                                                                                         ---------    --------

</TABLE>
                             See accompanying notes.


                                      -5-

<PAGE>

                                   RADIUS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

The consolidated financial statements of Radius Inc. ("Radius" or the 
"Company") as of December 31, 1997 and for the three months ended December 
31, 1997 and 1996 are unaudited. In the opinion of management, the 
consolidated financial statements reflect all adjustments (consisting only of 
normal recurring items) necessary for a fair presentation in conformity with 
generally accepted accounting principles. Preparing financial statements 
requires management to make estimates and assumptions that affect the 
reported amounts of assets, liabilities, revenues and expenses. Examples 
include provisions for returns and bad debts and the length of product life 
cycles. The information included in this Form 10-Q should be read in 
conjunction with the Consolidated Financial Statements and notes thereto 
included in the Company's Annual Report on Form 10-K for the fiscal year 
ended September 30, 1997.

For clarity of presentation, all fiscal periods are reported as ending on a 
calendar month end.

NOTE 2.  INVENTORIES

Inventories, stated at the lower of cost or market, consist of (in thousands):

<TABLE>
<CAPTION>

                                                                   DECEMBER 31,          SEPTEMBER 30,
                                                                      1997                  1997
                                                                   ------------          -------------

                                                                   (unaudited)
<S>                                                                <C>                   <C>
            Work in process                                        $     74              $    176
            Finished goods                                              566                   629
                                                                   --------              --------
                                                                   $    640              $    805
                                                                   --------              --------
                                                                   --------              --------

</TABLE>

NOTE 3.  COMMITMENTS AND CONTINGENCIES

(a)  On November 16, 1995, Electronics for Imaging, Inc. ("EFI") filed a suit 
in the United States District Court in the Northern District of California 
alleging that the Company infringes a patent allegedly owned by EFI. Although 
the complaint does not specify which of the Company's products allegedly 
infringe the patent, subsequent pleading indicates that EFI alleges that the 
Company's Color Server products allegedly infringe. In January 1996, the 
Company completed the divestiture of the Color Server Group.

The Company has filed an answer denying all material allegations, and has 
filed counterclaims against EFI alleging causes of action for interference 
with prospective economic benefit, antitrust violations, and unfair business 
practices. EFI's motion to dismiss or sever the Company's amended 
counterclaims was granted in part and the ruling permitted the Company to 
file an amended counterclaim for antitrust violations. The Company has filed 
an amended antitrust claim. The Company believes it has meritorious defenses 
to EFI's claims and is defending them vigorously. In addition, the Company 
believes it has indemnification rights with respect to EFI's claims. A motion 
for summary judgment based on these indemnification rights disposing of EFI's 
claims was filed, and the court granted this motion finding the Company 
immune from suit under the patent after February 22, 1995. The Company 
expects to vigorously defend the remaining claims of EFI and to vigorously 
prosecute the claims it has asserted against EFI. In the opinion of 
management, based on the facts known at this time, although the eventual 
outcome of this case is unlikely to have a material adverse effect on the 
results of operations or financial position of the Company, the costs of 
defense, regardless of outcome, may have a material adverse effect on the 
results of operations or financial position of the Company. In addition, in 
connection with the divestiture of its Color Server business, the Company has 
certain indemnification obligations for which approximately $2.0 million 
remains held in escrow at December 31, 1997 to secure such obligations in the 
event that the purchaser suffers any losses resulting from this litigation.

(b) The Company was named as one of approximately 42 defendants in Shapiro et 
al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara 
County, case no. CV751685, filed August 14, 1995. Radius was named as one of 
approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et 
al., Superior Court of New Jersey, Essex 


                                      -6-

<PAGE>

County, case no. L-13780-95, filed December 15, 1995. Plaintiffs in each case 
purport to represent alleged classes of similarly situated persons and/or the 
general public, and allege that the defendants falsely advertised that the 
viewing areas of their computer monitors are larger than in fact they are. 
The Company was served with the Shapiro complaint on August 22, 1995 and was 
served with the Maizes complaint on January 5, 1996. Defendants' petition to 
the California State Judicial Council to coordinate the Shapiro case with 
similar cases brought in other California jurisdictions was granted in part 
and the coordinated proceedings are being held in Superior Court of 
California, San Francisco County. An amended consolidated complaint was filed 
on March 26, 1996.

Although the Company believes it has meritorious defenses to the plaintiffs' 
claims, due to the costs of defense, on March 11, 1997, the Company along 
with all but two of the other named defendants agreed to settle the suits, 
subject to final court approval, which the court tentatively approved on June 
30, 1997. The settlement provides that class members are eligible for a $13 
rebate per monitor purchased during the class period on applicable new 
purchases over a three year period, subject to specific limitations. Class 
members who are consumers and do not elect to use the rebate fully can 
thereafter elect to receive a $6 refund per monitor (up to a maximum of $30 
per consumer class member) during the following six months. The Company is 
responsible only to class members who purchased Radius branded monitors 
during the class period of May 1, 1991 to May 1, 1995. Additionally, the 
Company will pay its share of publication and administration costs associated 
with the implementation of the settlement, pay its share of plaintiffs' 
stipulated attorneys' fees and will agree to abide by certain limitations in 
the description of its monitors. This settlement remains subject to final 
court approval.

(c) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates filed 
a suit in the United States District Court for the District of Colorado 
alleging a breach of contract and related claims in the approximate amount of 
$800,000, maintaining that the Company failed to comply with various return, 
price protection, inventory balancing and marketing development funding 
undertakings. In 1997, the Company filed an answer to the complaint and cross 
claimed against the plaintiffs and in October 1997 additionally cross claimed 
against Deutsche Financial, Inc., a factor in the account relationship 
between the Company and the plaintiffs, seeking the recovery of approximately 
$2 million. The Company continues to investigate these claims as well as 
cross claims and expects to vigorously defend and prosecute them as 
applicable.

(d) The Company is involved in a number of other judicial and administrative 
proceedings incidental to its business. The Company intends to defend such 
lawsuits vigorously and although adverse decisions (or settlements) may occur 
in one or more of such cases, the final resolution of these lawsuits, 
individually or in the aggregate, is not expected to have a material adverse 
effect on the financial position of the Company. However, depending on the 
amount and timing of an unfavorable resolution of these lawsuits, it is 
possible that the Company's future results of operations or cash flows could 
be materially adversely affected in a particular period. In addition, the 
costs of defense, regardless of the outcome, could have a material adverse 
effect on the results of operations and financial condition of the Company.

(e) In September 1992, the Company and certain of its officers and directors 
were named as defendants in a securities class action litigation brought in 
the United States District Court for the Northern District of California that 
sought unspecified damages, prejudgment and postjudgment interest, attorneys' 
fees, expert witness fees and costs, and equitable relief. In July 1994, 
SuperMac and certain of its officers and directors, several venture capital 
firms and several of the underwriters of SuperMac's May 1992 initial public 
offering and its February 1993 secondary offering were named as defendants in 
a class action litigation brought in the same court that sought unspecified 
damages, prejudgment and postjudgment interest, attorneys' fees, experts' 
fees and costs, and equitable relief (including the imposition of a 
constructive trust on the proceeds of defendants' trading activities).

In June 1995, the Court approved the settlement of both litigations and 
entered a Final Judgment and Order of Dismissal. Under the settlement of the 
litigation brought in 1992 against the Company, the Company's insurance 
carrier paid $3.7 million in cash and the Company is required to issue 
128,695 shares of its Common Stock to a class action settlement fund. In the 
settlement of the litigation brought in 1994 against SuperMac, the Company 
paid $250,000 in cash and is required to issue into a class action settlement 
fund 707,609 shares of its Common Stock. The number of shares required to be 
issued by the Company increased by 100,000 since the price of the Common 
Stock was below $12 per share during the 60-day period following the initial 
issuance of shares. In connection with these settlements, the Company 
recorded a charge of $12.4 million in the Consolidated Statement of 
Operations in 1995 reflecting settlement costs not covered by insurance as 
well as related legal fees.

As of December 31, 1997, the Company had issued 836,304 of its Common Stock 
due to the settlement and approximately 100,000 shares remained to be issued.


                                      -7-

<PAGE>


NOTE 4.  INVESTMENT IN SPLASH TECHNOLOGY HOLDINGS, INC.

In January 1996, the Company completed the sale of its Color Server Group 
("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly owned 
subsidiary of Splash Technology Holdings, Inc. ("Splash"), a corporation 
formed by various investment entities associated with Summit Partners. In 
fiscal 1996, the Company received approximately $21.0 million in cash and, as 
of December 31, 1997, an additional $2.0 million is being maintained in 
escrow to secure certain indemnification obligations. The Company also 
received 4,282 shares of Splash's 6% Series B Redeemable and Convertible 
Preferred Stock (the "Series B Preferred Stock"). The shares of Series B 
Preferred Stock were converted into shares of Splash's Common Stock in 
connection with the initial public offering of Splash. In June 1996, the 
Company granted IBM Credit, its secured lender, an option to purchase 428 
shares of Series B Preferred (now 174,113 shares of Splash Common Stock) in 
connection with the restructuring of the terms of its loan agreement with IBM 
Credit. These shares of Splash Common Stock have been pledged to IBM Credit. 
IBM Credit has not exercised its option.

On October 8, 1996, Splash completed its initial public offering of common 
stock. During the fourth quarter of fiscal 1997 and in December 1997, the 
Company sold an aggregate of 996,875 and 40,000 shares, respectively, of the 
1,741,127 shares of Splash Common Stock owned by the Company. The Company 
continues to own 530,139 shares of Splash Common Stock (net of the option to 
buy 174,113 shares held by IBM Credit exercisable at a nominal price). The 
investment, which is available for sale, subject to certain market trading 
restrictions, is accounted for in accordance with FASB Statement No. 115. The 
unrealized gain of $11.3 million relating to the remaining 530,139 shares 
held, based upon the closing price of $21.375 per share at December 26, 1997 
is recorded as a component of shareholders' equity at December 31, 1997. 
Since then, the closing price of Splash Common Stock has further declined to 
$14.38 on February 5, 1998. The value of the 530,139 shares still held by the 
Company is $7.6 million as of February 5, 1998. See Management's Discussion 
and Analysis of Financial Condition and Results of Operations - Financial 
Condition.

NOTE 5.  EARNINGS PER SHARE

In 1997, The Financial Accounting Board issued Statement of Financial 
Accounting Standards No. 128 (SFAS128), EARNINGS PER SHARE. Statement 128 
replaced the previously reported primary and fully diluted earnings per share 
with basic and diluted earnings per share. Unlike primary earnings per share, 
basic earnings per share excludes any dilutive effects of options, warrants 
and convertible securities. Diluted earnings per share is very similar to the 
previously reported fully diluted earnings per share. All earnings per share 
amounts for all periods have been restated to conform to Statement 128 
requirements.

Basic earnings per share is computed using the weighted average number of 
common shares. Diluted earnings per share is computed using the weighted 
average number of common shares and dilutive common share equivalents 
outstanding during the period. Dilutive common share equivalents in 1997 
consist of employee stock options using the treasury stock method.


                                      -8-

<PAGE>

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>

                                                                                   THREE MONTHS ENDED
                                                                                      DECEMBER 31,
                                                                                  --------------------

                                                                                 1997                1996
                                                                             -----------          ----------
                                                                                        (UNAUDITED)
<S>                                                                          <C>                  <C>
NUMERATOR:
   Net income (loss)                                                          $      261           $   (794)
   Preferred stock dividends                                                          --                (75)
                                                                             -----------          ----------
   Numerator for basic earnings per share -
     income (loss) available to common stockholders                           $      261           $   (869)
                                                                             -----------          ----------
                                                                             -----------          ----------

   Effect of dilutive securities:
     Preferred stock dividends                                                        --                  --
                                                                             -----------          ----------

   Numerator for diluted earnings per share - income (loss)
     available to common stockholders                                         $      261           $   (869)
                                                                             -----------          ----------
                                                                             -----------          ----------

DENOMINATOR:
   Denominator for basic earnings per share - weighted-average
     shares outstanding                                                           55,126              54,660

   Effect of dilutive securities:
     Employee stock options                                                        1,043                  --
                                                                             -----------          ----------
   Dilutive potential common shares                                                1,043                   -

   Denominator for diluted earnings per share - adjusted
     weighted-average shares outstanding                                          56,169              54,660
                                                                             -----------          ----------
                                                                             -----------          ----------

Basic earnings (loss) per share                                              $      0.00           $  (0.02)
                                                                             -----------          ----------
                                                                             -----------          ----------

Diluted earnings (loss) per share                                            $      0.00           $  (0.02) (1)
                                                                             -----------          ----------
                                                                             -----------          ----------
</TABLE>

(1) Diluted earnings per share does not reflect any potential shares relating 
to employee stock options or the convertible preferred stock due to a loss 
reported for the period, in accordance with FAS 128. The assumed issuance of 
any additional shares would be antidilutive.

For additional disclosure regarding the employee stock options and 
convertible preferred stock, see Note 4 in the Company's 1997 Form 10-K.


                                      -9-

<PAGE>

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following 
discussion contains forward-looking statements within the meaning of Section 
21E of the Securities Exchange Act of 1934 that are subject to risks and 
uncertainties. Statements indicating that the Company or management 
"intends", "plans", "expects," "estimates" or "believes" are forward-looking, 
as are all other statements concerning future financial results, product 
offerings or other events that have not yet occurred. There are several 
important factors that could cause actual results or events to differ 
materially from those anticipated by the forward-looking statements contained 
in this discussion and other sections of this Form 10-Q. Such factors 
include, but are not limited to: the Company's ability to achieve 
profitability; the Company's ability to dispose of its remaining holdings in 
Splash on a timely and profitable basis; the Company's ability to repay its 
indebtedness to IBM Credit; the timely payment of royalty obligations by Umax 
to the Company and Umax's success in the Mac clone business, the Company's 
ability to successfully renew or replace its lease of space for its main 
offices in Sunnyvale; the Company's ability to successfully conclude or 
settle its patent infringement litigation with EFI; the success of the Apple 
Macintosh computer line and operating system, the success of Apple as well as 
the Company's ability to compete successfully with Apple in its market; the 
Company's ability to successfully develop, introduce and market new products, 
including products for Windows operating system, to keep pace with 
technological innovation, particularly in light of its limited financial 
resources; the ability of the Company's manufacturers and suppliers to 
deliver components and manufacture the Company's products; the Company's 
reliance on international sales and the effect of its partially exclusive 
distributor arrangements with respect to Europe and Japan; and the Company's 
ability to attract and retain its key personnel.

Each forward-looking statement should be read in conjunction with the entire 
consolidated interim financial statements and the notes thereto in Part I, 
Item 1 of this Quarterly Report, with the information contained in Item 2, 
including, but not limited to, "Certain Factors That May Affect Future 
Results," and with "Management's Discussion and Analysis of Financial 
Condition and Results of Operations" contained in the Company's Annual Report 
on Form 10-K for the fiscal year ended September 30, 1997, including, but not 
limited to, "Management's Discussion and Analysis of Financial Condition and 
Results of Operations -- Certain Factors That May Affect the Company's Future 
Results of Operations."

OVERVIEW

The Company designs, develops, assembles, markets and supports color 
publishing and digital video computer products for creative professionals. 
The Company's current product line includes: multimedia authoring and editing 
video systems and software that can acquire and manipulate video and audio 
information; high resolution color reference displays that allow users to 
view text, graphics, images and video; accelerated color graphics products 
that facilitate the creation of graphical images; and PCI bus adapter cards 
featuring Windows compatibility to users of MacOS products ("PC on a card" or 
"DOS on Mac" products).

To date, substantially all of the Company's products have been designed for 
and sold to users of Macintosh computer products (the "Macintosh") 
manufactured by Apple Computer, Inc. ("Apple") as Apple products have been 
the preferred platform in the Company's target markets. The Company's current 
product development plans include adding cross platform (Windows) 
capabilities to some of the Company's products in order to market these 
products to users of the Windows operating system. There can be no assurance 
that the Company will be successful in developing and marketing products for 
the Windows operating system, particularly in light of the Company's current 
financial condition.

As shown in the accompanying consolidated financial statements, the Company 
has incurred substantial operating and net losses and currently has 
liabilities in excess of assets. During fiscal 1996 and 1997, management 
implemented a number of actions to address its cash flow and operating issues 
including: restructuring its outstanding indebtedness to trade creditors and 
its secured creditor; refocusing its efforts on providing solutions for high 
end digital video and graphics customers; discontinuing sales of mass market 
and other low value added products; divesting a number of businesses and 
product lines, including its Color Server Group, which is now known as Splash 
Technology Holdings, Inc. ("Splash"); significantly reducing expenses and 
headcount; and reducing its lease obligations for its current facility lease 
given its reduced occupancy requirements. There can be no assurance that 
these measures will be sufficient to allow the Company to achieve 
profitability.


                                      -10-

<PAGE>
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain operational
data as a percentage of net sales (may not add due to rounding).

<TABLE>
<CAPTION>

                                                                   THREE MONTHS ENDED DECEMBER 31,
                                                                   -------------------------------
                                                                       1997              1996
                                                                       ----              ----
<S>                                                                <C>                   <C>
         Total net sales                                               100.0%             100.0%
         Cost of sales                                                  64.9               58.1
                                                                      ------             ------
              Gross profit                                              35.1               41.9
                                                                      ------             ------
         Operating expenses:
           Research and development                                      8.9                7.5
           Selling, general and administrative                          37.8               33.9
                                                                      ------             ------
              Total operating expenses                                  46.7               41.4
                                                                      ------             ------
         Income (loss) from operations                                 (11.6)               0.5
         Other income (expense), net                                    19.4                0.0
         Interest expense                                               (3.1)              (6.1)
                                                                     --------            -------
         Income (loss) before income taxes                               4.7               (5.6)
                                                                     -------             -------

         Provision  for income taxes                                     0.0                1.0
                                                                     -------             ------

         Net income (loss)                                               4.7%              (6.6)%
                                                                      ------             ------
                                                                      ------             ------

</TABLE>
NET SALES

The Company's total net sales decreased 54.2% to $5.5 million in the first 
quarter of fiscal 1998 from $12.1 million for the same quarter in fiscal 
1997. The decline is due primarily to the following factors: the Company's 
decision to focus its efforts on its color publishing and digital video 
software product lines while discontinuing the development of its accelerated 
color graphics products and its DOS on Mac products; a decline in the sales 
of its color publishing products; reduced commissions paid by the its 
international distributors due to the company's above decisions as to its 
product focus; and reduced royalties paid by Umax Computer Corporation under 
its license agreement for the MacOS compatible systems signed in February 
1996.

The Company expects these trends to continue. The Company also anticipates 
that, as a result of these trends the proportion of hardware sales will 
decline in the coming periods. For example, in the Company's digital video 
product line, the sales of the systems products have been declining while the 
sale of the software products for digital video camcorders (PhotoDV 
introduced in April 1997 and MotoDV introduced in September 1997) have 
increased during 1997. The Company's EditDV product, which the Company 
introduced in November 1997, may add to this trend. There can be no assurance 
that sales of these software products will continue to increase or that they 
will increase to a sufficient extent to offset the anticipated decline in 
hardware sales. Moreover, the Company anticipates that its royalties from 
Umax will decline significantly during fiscal 1998 due to Apple's decision 
not to extend the operating system licenses and the expiration of this 
obligation in March 1998.

Effective January 1, 1998, the Company has modified its relationships with 
its distributors in Japan and Europe for its digital video software products. 
Sales will now be made for these products based upon a price list and they 
will no longer pay commissions upon their sale of these products. Commission 
will still be paid on the sales of all of the Company's other products.

Sales to Ingram Micro and Microage Computer Center accounted for 61.0% and 
12.0% of net sales for the first quarter of fiscal 1998, respectively. For 
the corresponding period of fiscal 1997, the same customers accounted for 
81.5% and 0.6% of the Company's net sales.

                                      -11-

<PAGE>

GROSS PROFIT

The Company's gross profit margin was 35.1% and 41.9% for the first quarter 
of fiscal 1998 and 1997, respectively. The decrease in gross profit margin 
for the three month period ended December 31, 1997 was due primarily to sales 
of its accelerated graphics products and its DOS on Mac products at very low 
profit margins. Excluding these products the gross profit margin would have 
been 39.1%.

The Company anticipates continued price reductions and margin pressure within 
its industry; however, these trends may be offset if the Company increases 
sales of higher gross margin software products that are expected to become a 
focus of the Company's sales and marketing efforts in the coming periods, 
although there can be no assurance that the Company will be successful in 
marketing these products. Additionally, the Company is taking further steps 
to reduce product costs and controlling expenses. There can be no assurance 
that the Company's gross margins will improve or remain at current levels.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased to $0.5 million or 8.9% of net 
sales in the first quarter of fiscal 1998 from $0.9 million or 7.5% of net 
sales in the same quarter of fiscal 1997. This decrease is primarily the 
result of funds received for the outplacement of some of the Company's 
engineers in October 1997. The company continues to expect to spend 
approximately $3.0 million on the development of its digital video and color 
product lines during fiscal 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased to $2.1 million or 
37.8% of net sales in the first quarter of fiscal 1998 from $4.1 million or 
33.9% of net sales in the same quarter of fiscal 1997. The Company decreased 
its selling, general and administrative expenses primarily by reducing 
expenses related to headcount resulting from the efforts to refocus its 
business. The increase in selling, general and administrative expenses 
expressed as a percentage of sales is due to the decline in sales from the 
first quarter of fiscal 1997. Although the Company expects selling, general 
and administrative expenses to increase gradually over time, the Company does 
not expect them to approach historical levels in absolute amount.

OTHER INCOME (EXPENSE), NET

Other income was $1.1 million in the first quarter of fiscal 1998 and was 
immaterial in the first quarter of fiscal 1997. This income resulted from the 
sale of 40,000 shares of Splash Common Stock in December 1997.

INTEREST EXPENSE

Interest expense declined to $0.2 million in the first quarter of fiscal 1998 
from $0.7 million in the same quarter of fiscal 1997. This decrease was due 
to lower average borrowings primarily as a result of the term loan repayment 
to IBM Credit in August 1997.

NET PROFIT

As a result of the above factors, the Company had a net profit of $0.3 
million for the first quarter fiscal 1998 as compared to a net loss of $0.8 
million in the first quarter fiscal 1997.

FINANCIAL CONDITION

The Company's cash and cash equivalents remained essentially unchanged at 
$0.8 million at December 31,1997, as compared with the fiscal 1997 ending 
balance. However, as of December 31, 1997, the Company's liabilities exceeded 
its assets. The value of the Company's investment in Splash Technology 
Holdings, Inc. also declined from $22.1 million at the end of fiscal year 
1997 to $11.3 million at the end of the first quarter of fiscal 1998 due to 
the sale of 40,000 shares, and more importantly, due to the substantial 
decline in the closing price of Splash Common Stock from $38.75 to $21.375 
during that period of time. Since then, the closing price of Splash Common 
Stock has further declined to $14.38 on February 5, 1998. The value of the 
530,139 shares (net of the option to buy 174,113 shares held by IBM Credit 
and which is exercisable at a nominal price) still held by the Company is 
$7.6 million as of February 5, 1998.


                                      -12-

<PAGE>

The Company's principal source(s) of liquidity currently are cash generated 
by operations, if any; an up to $6.5 million amended working capital line of 
credit provided by IBM Credit pursuant to the terms of the restructured loan 
with IBM Credit; and cash generated from the sale of Splash Common Stock net 
of repayments on the working capital line of credit. The loan agreement was 
amended in January 1998. Under the terms of the amended working capital line 
of credit, the amount available to borrow will be decreased to $6.0 million 
on March 2, 1998 and will be further reduced by mandatory pre-payments which 
arise from the sale of additional shares of Splash Common Stock until the 
working capital line of credit is fully repaid. The borrowing base under the 
amended working capital line of credit is defined as (i) sixty percent of the 
value of the Splash Common Stock held by the Company (net of IBM Credit's 
option to purchase 174,113 shares); (ii) the lesser of 10% of the gross value 
of eligible inventory or $500,000; plus (iii) 80% of the Company's eligible 
domestic accounts receivable; (iv) the lesser of 50% of the gross value of 
certain eligible Japanese and European accounts receivable or $500,000); plus 
(v) 50% of the approximately $2.0 million held in escrow in connection with 
the law suit filed by EFI. As the borrowing base is primarily dependent on 
the daily closing price of Splash Common Stock, there can be no assurance 
that it will be sufficient to allow the Company to borrow up to the full 
amount of the amended working capital line of credit. At February 5, 1998 the 
Company had borrowed $6.0 million against the working capital line of credit.

The Company has granted to IBM Credit a security interest in substantially 
all of its assets to secure the Company's various obligations to IBM Credit. 
The Company has also granted to Mitsubishi Electronics a security interest 
(securing an amount up to $4.4 million) in all of the Company's technology 
and intellectual property rights related to and incorporated into the 
Company's PressView products.

As of December 31, 1997, the Company was not in compliance with all of the 
financial covenants under the amended loan agreement dated November 10, 1997 
(specifically, minimum working capital and current assets to current 
liabilities ratio). The Company obtained a waiver from IBM Credit of this 
noncompliance. There can be no assurance that IBM Credit will grant a waiver 
in the future in the event the Company is not in compliance with the amended 
financial covenants.

As a result of IBM's control over the Company's cash flow and restrictions on 
the use of the Company's excess cash flow, the Company anticipates that it 
will not have significant cash available for expenditures other than for its 
ordinary course of business operating expenses, which will be significantly 
lower than historical amounts. In the event the Company were unable to 
generate sufficient net sales or if the Company incurs unforeseen operating 
expenses, it may not be able to meet its operating expenses without 
additional financing or a restructuring of its loan agreements with IBM 
Credit. In the event that the Company desires to acquire any strategic 
technologies or businesses, it would probably be unable to do so without 
obtaining additional financing or the consent of IBM Credit. See 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations -- Certain Factors That May Affect the Company's Future Results of 
Operations -- Need for Additional Financing; Loan Restrictions."

A significant portion of the Company's net worth and liquidity is represented 
by the Company's remaining holdings in Splash. Although the Company may trade 
its shares in the open market pursuant to Rule 144 or privately, the market 
price of Splash Common Stock has been volatile with relatively limited volume 
since Splash's secondary public offering in August 1997. There are other 
shareholders in Splash with large blocks of restricted common stock who may 
try to sell their shares at the same time as the Company. If too many shares 
are offered for sale at the same time, the price may be further depressed.

CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS

A number of uncertainties exist that could affect the Company's future 
operating results, including, without limitation, the following:


                                      -13-

<PAGE>



VALUE AND LIQUIDITY OF INTEREST IN SPLASH TECHNOLOGY HOLDINGS, INC.

A significant portion of the Company's net worth and liquidity resides in the 
Company's remaining holdings in Splash. Although the Company may trade its 
shares pursuant to Rule 144 or privately, the market price of Splash Common 
Stock has been volatile with relatively limited volume since Splash's 
secondary public offering in August 1997. There are other shareholders in 
Splash with large blocks of restricted common stock who may try to sell their 
shares when the Company is in the market. If too many shares are offered for 
sale at the same time, the price may be depressed. Ideally, proceeds from the 
sale of Splash Common Stock held by the Company will be sufficient to repay 
the balance of the IBM Credit facility and to provide sufficient working 
capital to the Company during fiscal 1998, but there can be no assurance that 
the Company will be able to effectively time its sales or that the market 
value of Splash Common Stock will be adequate to achieve such goals. With the 
recent decline in the closing price of Splash Common Stock to $14.38 on 
February 5, 1998, the Company would have $1.6 million net proceeds after 
retirement of the IBM Credit debt if it were to sell its remaining 530,139 
shares of Splash Common Stock as of that date.

CONTINUING OPERATING LOSSES

The Company experienced operating losses in each of its prior five fiscal 
years. In the future, the Company's ability to achieve and subsequently 
sustain profitable operations will depend upon a number of factors, including 
the Company's ability to control costs; the Company's ability to service its 
outstanding indebtedness to IBM Credit; the Company's ability to realize 
appreciation in minority ownership interests in Splash and other investments, 
which cannot be assured in light of the substantial decline in the market 
value of Splash Common Stock; the Company's ability to generate sufficient 
cash from operations or obtain additional funds to fund its operating 
expenses; the Company's ability to successfully market its software products; 
the Company's ability to develop innovative and cost-competitive new products 
and to bring those products to market in a timely manner; the commercial 
acceptance of Apple computers and the MacOS and the rate and mix of Apple 
computers and related products sold; the Company's ability to successfully 
develop and market products for the Microsoft Windows and NT operating 
systems in a timely manner; competitive factors such as new product 
introductions, product enhancements and aggressive marketing and pricing 
practices; general economic conditions; the Company's ability to successfully 
negotiate a lease renewal for its main offices facility, and negotiate a 
settlement or other favorable conclusion of the EFI litigation; and other 
factors. For these and other reasons, there can be no assurance that the 
Company will be able to achieve or subsequently maintain profitability in the 
near term, if at all.

FLUCTUATIONS IN OPERATING RESULTS

The Company has experienced substantial fluctuations in operating results. 
The Company's customers generally order on an as-needed basis, and the 
Company has historically operated with relatively small backlogs. Quarterly 
sales and operating results depend heavily on the volume and timing of 
bookings received during the quarter, which are difficult to forecast. A 
substantial portion of the Company's revenues are derived from sales made 
late in each quarter, which increases the difficulty in forecasting sales 
accurately. Since the end of the Company's 1995 fiscal year, shortages of 
available cash have restricted the Company's ability to purchase inventory 
and have delayed the Company's receipt of products from suppliers and 
increased shipping and other costs. Furthermore, because of its financial 
condition, the Company believes that many suppliers are hesitant to continue 
their relationships with or extend credit terms to the Company and potential 
new suppliers are reluctant to provide goods to the Company. The Company 
recognizes sales upon shipment of product, and allowances are recorded for 
estimated uncollectable amounts, returns, credits and similar costs, 
including product warranties and price protection. Due to the inherent 
uncertainty of such estimates, there can be no assurance that the Company's 
forecasts regarding bookings, collections, rates of return, credits and 
related matters will be accurate. A significant portion of the operating 
expenses of the Company are relatively fixed in nature, and planned 
expenditures are based primarily on sales forecasts which, as indicated 
above, are uncertain. Any inability on the part of the Company to adjust 
spending quickly enough to compensate for any failure to meet sales forecasts 
or to receive anticipated collections, or any unexpected increase in product 
returns or other costs, could also have an adverse impact on the Company's 
operating results. As a strategic response to a changing competitive 
environment, the Company has elected, and, in the future, may elect from time 
to time, to make certain pricing, service or marketing decisions or 
acquisitions that could have a material adverse effect on the Company's 
business, results of operations and financial condition. The Company also 
completed a variety of business divestitures during fiscal 1996 and 1997, 
restructured the terms of its indebtedness to IBM Credit and issued a 
substantial amount of equity in the Company to its creditors in satisfaction 
of approximately $45.9 million in claims and indebtedness during the fourth 
quarter of fiscal 1996. In addition, the Company has begun to focus its 
efforts on developing and marketing software products, an area in which it 
has limited experience. As a result, the Company believes that 
period-to-period comparisons of its results of operations will not 
necessarily be meaningful and should not be relied upon as any 


                                      -14-
<PAGE>
indication of future performance. Due to all of the foregoing factors, it is 
likely that in some future quarter the Company's operating results will be 
below the expectations of public market analysts and investors. In such 
event, the price of the Company's Common Stock would be likely to be 
materially adversely affected.

NEED FOR ADDITIONAL FINANCING; LOAN RESTRICTIONS

The Company intends to finance its working capital needs through cash 
generated by operations, sales of liquid assets and borrowings under a 
restructured working line of credit with IBM Credit. Because the Company has 
experienced operating losses in each of its prior five fiscal years, the 
Company must significantly reduce operating expenses and/or significantly 
increase net sales in order to finance its working capital needs with cash 
generated by operations. This is particularly important as a result of the 
substantial decline in the value of the Splash Common Stock. Furthermore, 
pursuant to the restructured loan with IBM Credit, the Company is required to 
deposit its revenues in accounts subject to control by IBM Credit. At any 
time, regardless of whether the Company is in default of its obligations to 
IBM Credit, IBM Credit is permitted to apply these amounts towards the 
repayment of the Company's obligations to IBM Credit. This loan is also 
subject to mandatory prepayment as follows: (i) upon the disposition of any 
assets of the Company outside of the ordinary course of business, all net 
proceeds to the Company must be applied towards the Company's obligations 
under the loan; (ii) upon the closing of any financing, 10% of the proceeds 
must be applied towards the Company's obligations under the loan; (iii) upon 
the thirtieth day following the end of each fiscal quarter, an amount of no 
less than 50% of operating cash flow for such prior fiscal quarter must be 
applied towards the Company's obligations under the loan; and (iv) upon the 
receipt of any other amounts other than sales of inventory or used or 
obsolete equipment in the ordinary course of business, and not otherwise 
described in the preceding clause (i) - (iii), all of such amounts must be 
applied towards the Company's obligations under the loan. IBM Credit's 
control over the Company's financial resources as well as these prepayment 
provisions will place a further strain on the ability of the Company to fund 
its working capital needs internally. Accordingly, there can be no assurance 
that the Company will be able to successfully fund its working capital needs 
internally.

Although the restructured loan provides for an amended working line of credit 
of up to $6.5 million, the Company will only be able to borrow amounts up to 
the "borrowing base" which is defined as (i) sixty percent of the value of 
the Splash Common Stock held by the Company (net of IBM Credit's option to 
purchase 174,113 shares); (ii) the lesser of 10% of the gross value of 
eligible inventory or $500,000; plus (iii) 80% of the Company's eligible 
domestic accounts receivable; (iv) the lesser of 50% of the gross value of 
certain eligible Japanese and European accounts receivable or $500,000); plus 
(v) 50% of the approximately $2.0 million held in escrow in connection with 
the law suit filed by EFI. The amended working capital line of credit will be 
reduced to $6.0 million on March 2, 1998 and will be further reduced by fifty 
percent of the value of Splash Common Stock shares sold by the Company other 
than the shares representing the option held by IBM Credit. Also under the 
terms of the amended working capital line of credit, the Company has the 
obligation to sell up to 232,151 shares of Splash Common Stock at a price 
approved by IBM Credit and pay seventy-five percent of the proceeds to IBM 
Credit as a "cancellation fee" of the option that IBM holds for 174,113 
shares of Splash Common Stock. Once the line of credit has been reduced to 
zero, if ever, the Company does not expect that it will be a source of 
working capital in the future.

The restructured loan and amended working capital line of credit also imposes 
certain operating and financial restrictions on the Company and requires the 
Company to maintain certain financial covenants such as minimum working 
capital, restricts the ability of the Company to incur additional 
indebtedness, pay dividends, create liens, sell assets or engage in mergers 
or acquisitions, or make certain capital expenditures. The failure to comply 
with these covenants would constitute a default under the loan, which is 
secured by substantially all of the Company's assets. In the event of such a 
default, IBM Credit could elect to declare all of the funds borrowed pursuant 
thereto to be due and payable together with accrued and unpaid interest 
proceeding and to apply all amounts on deposit in the Company's bank 
accounts, which could result in the Company becoming a debtor in a 
bankruptcy. The loan restrictions could limit the ability of the Company to 
effect future financings or otherwise restrict corporate activities.

As of December 31, 1997, the Company was not in compliance with all of the 
financial covenants under the restructured loan agreement and amended working 
capital line of credit (specifically, minimum working capital and current 
assets to current liabilities ratio) however, IBM Credit has waived such 
defaults.

In the event that the Splash Common Stock and the working capital line of 
credit are insufficient to fund the Company's working capital needs, the 
Company may need to raise additional capital through public or private 
financings, strategic relationships or other arrangements. There can be no 
assurance that such additional funding will be available on terms attractive 
to the Company, or at all. The failure of the Company to raise capital when 
needed would have a material adverse 


                                      -15-

<PAGE>

effect on the Company's business, operating results and financial condition. 
If the additional funds are raised through the issuance of equity securities, 
the percentage ownership of the Company of its then-current shareholders 
would be reduced. Furthermore, such equity securities might have rights, 
preferences or privileges senior to those of the Company's Common Stock.

DEPENDENCE ON AND COMPETITION WITH APPLE

Historically, substantially all of the Company's products have been designed 
for and sold to users of Apple personal computers. Although the Company has 
begun to market certain products for the Windows environment, it is expected 
that sales of products for Apple computers will continue to represent 
substantially all of the sales of the Company for fiscal 1998. Apple has lost 
significant market share over the past couple of years and is experiencing 
declining sales in an absolute sense. The Company's operating results would 
be adversely affected if these trends should continue or if other 
developments were to adversely affect Apple's business. Furthermore, any 
continued difficulty that may be experienced by Apple in the development, 
manufacturing, marketing or sale of its computers, or other disruptions to, 
or uncertainty in the market regarding, Apple's business, resulting from 
these or other factors could result in further reduced demand for Apple 
computers, which in turn could materially and adversely affect sales of the 
Company's products. Recently, Apple has announced large losses, management 
changes, headcount reductions, and other significant events which have led to 
uncertainty in the market regarding Apple's business and products. In 
addition, news reports indicating that Apple may be or may have been the 
target of merger, acquisition, or takeover negotiations, have led or could 
lead to uncertainty in the market regarding Apple's business and products. 
Also, Apple's decision not to renew the licenses to the MacOS with the Mac 
clone manufacturers further limits the market available for the Company's 
Macintosh products.

As software applications for the color publishing and multimedia markets 
become more available on platforms other than Macintosh, it is likely that 
these other platforms will continue to gain acceptance in these markets. For 
example, newer versions of the Windows operating environment support high 
performance graphics and video applications similar to those offered on the 
Macintosh. There is a risk that this trend will reduce the support given to 
Macintosh products by third party developers and could substantially reduce 
demand for Macintosh products and peripherals over the long term.

A number of the Company's products compete with products marketed by Apple. 
As a competitor of the Company, Apple could in the future take steps to 
hinder the Company's development of compatible products and slow sales of the 
Company's products. The Company's business is based in part on supplying 
products that meet the needs of high-end customers that are not fully met by 
Apple's products. As Apple improves its products or bundles additional 
hardware or software into its computers, it reduces the market for Radius 
products that provide those capabilities. For example, the Company believes 
that the on-board performance capabilities included in Macintosh Power PC 
products have reduced and continue to reduce overall sales for the Company's 
graphics cards. In the past, the Company has developed new products as 
Apple's progress has rendered existing Company products obsolete. However, in 
light of the Company's current financial condition there can be no assurance 
that the Company will continue to develop new products on a timely basis or 
that any such products will be successful. In order to develop products for 
the Macintosh on a timely basis, the Company depends upon access to advance 
information concerning new Macintosh products. A decision by Apple to cease 
sharing advance product information with the Company would adversely affect 
the Company's business.

New products anticipated from and introduced by Apple could cause customers 
to defer or alter buying decisions due to uncertainty in the marketplace, as 
well as presenting additional direct competition for the Company. For 
example, the Company believes that Apple's transition during 1994 to Power PC 
products caused delays and uncertainties in the marketplace and had the 
effect of reducing demand for the Company's products. In addition, sales of 
the Company's products have been adversely affected by Apple's revamping of 
its entire product line from NuBus-based to PCI Bus-based computers. In the 
past, transitions in Apple's products have been accompanied by shortages in 
those products and in key components for them, leading to a slowdown in sales 
of those products and in the development and sale by the Company of 
compatible products. In addition, it is possible that the introduction of new 
Apple products with improved performance capabilities may create 
uncertainties in the market concerning the need for the performance 
enhancements provided by the Company's products and could reduce demand for 
such products.

COMPETITION

The markets for the Company's products are highly competitive, and the 
Company expects competition to intensify. Many of the Company's current and 
prospective competitors have significantly greater financial, technical, 
manufacturing and marketing resources than the Company. The Company believes 
that its ability to compete will depend on a number of factors, including the 
amount of financial resources available to the Company, its ability to repay 
its indebtedness to IBM Credit, success and timing of new product 
developments by the Company and its competitors, product performance, price 
and quality, breadth of distribution and customer support. There can be no 
assurance that the Company will be able to 


                                      -16-

<PAGE>

compete successfully with respect to these factors. In addition, the 
introduction of lower priced competitive products could result in price 
reductions that would adversely affect the Company's results of operations.

DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS

The Company outsources the manufacturing and assembly of its products to 
third party manufacturers. Although the Company uses a number of 
manufacturer/assemblers, each of its products is manufactured and assembled 
by a single manufacturer. The failure of a manufacturer to ship the 
quantities of a product ordered by the Company could cause a material 
disruption in the Company's sales of that product. In the past, most recently 
in the fourth quarter of fiscal 1996, the Company has experienced substantial 
delays in its ability to fill customer orders for displays and other 
products, due to the inability of certain manufacturers to meet their volume 
and schedule requirements and, more recently, due to the Company's shortages 
in available cash. Such shortages have caused some manufacturers to put the 
Company on a cash or prepay basis and/or to require the Company to provide 
security for their risk in procuring components or reserving manufacturing 
time, and there is a risk that manufacturers will discontinue their 
relationship with the Company. The Company currently has arranged payment 
terms for certain of its major manufacturers such that certain of the 
Company's major customers pay these manufacturers directly for products 
ordered and shipped. In the event these customers do not pay these 
manufacturers, there can be no assurance that such manufacturers will not 
cease supplying the Company. In addition, as a condition to continuing its 
manufacturing arrangement with the Company, the Company granted Mitsubishi 
Electronics, the manufacturer of the Company's PressView products, a security 
interest in all of the Company's technology and intellectual property rights 
related to and incorporated into the Company's PressView products. There can 
be no assurance that other manufacturers will not require special terms in 
order to continue their relationship with the Company.

The Company is also dependent on sole or limited source suppliers for certain 
key components used in its products, including certain cables, digital video 
integrated circuits, color-calibrated monitors and other products. Certain 
other components and molded plastic parts are also purchased from sole or 
limited source suppliers. The Company purchases these sole or limited source 
components primarily pursuant to purchase orders placed from time to time in 
the ordinary course of business and has no guaranteed supply arrangements 
with sole or limited source suppliers. Therefore, these suppliers are not 
obligated to supply products to the Company for any specific period, in any 
specific quantity or at any specific price, except as may be provided in a 
particular purchase order. Although the Company expects that these suppliers 
will continue to meet its requirements for the components, there can be no 
assurance that they will do so, particularly in light of the Company's 
financial condition. The Company's reliance on a limited number of suppliers 
involves a number of risks, including the absence of adequate capacity, the 
unavailability or interruption in the supply of key components and reduced 
control over delivery schedules and costs. The Company expects to continue to 
rely on a limited number of suppliers for the foreseeable future. If these 
suppliers became unwilling or unable to continue to provide these components 
the Company would have to develop alternative sources for these components 
which could result in delays or reductions in product shipments which could 
have a material adverse effect on the Company's business, operating results 
and financial condition. Certain suppliers, due to the Company's shortages in 
available cash, have put the Company on a cash or prepay basis and/or 
required the Company to provide security for their risk in procuring 
components or reserving manufacturing time, and there is a risk that 
suppliers will discontinue their relationship with the Company.

The introduction of new products presents additional difficulties in 
obtaining timely shipments from suppliers. Additional time may be needed to 
identify and qualify suppliers of the new products. Also, the Company has 
experienced delays in achieving volume production of new products due to the 
time required for suppliers to build their manufacturing capacity. An 
extended interruption in the supply of any of the components for the 
Company's products, regardless of the cause, could have an adverse impact on 
the Company's results of operations.

TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS

The personal computer industry in general, and color publishing and video 
applications within the industry, are characterized by rapidly changing 
technology, often resulting in short product life cycles and rapid price 
declines. The Company believes that its success will be highly dependent on 
its ability to develop innovative and cost-competitive new products and to 
bring them to the marketplace in a timely manner. Should the Company fail to 
introduce new products on a timely basis, the Company's operating results 
could be adversely affected. As a result of the Company's financial 
condition, it has had to significantly reduce its research and development 
expenditures. For the 1997 fiscal year, the Company spent approximately $5.0 
million on research and development as compared with approximately $7.5 
million for the 1996 fiscal year and $19.3 for the 1995 fiscal year. 
Furthermore, as described in "-- Need for Additional Financing; Loan 
Restrictions," the terms of the restructured loan with IBM Credit will 
restrict the Company's ability to fund its working capital needs and, as a 
result, the ability of the Company to maintain historical levels of research 
and development expenditures. Continued reduction in the available cash 
resources of the Company could result in the interruption or cancellation of 
research and product 


                                      -17-

<PAGE>

development efforts which would have a material adverse effect on the 
business, operating results and financial condition of the Company.

The Company anticipates that the video editing industry will follow the 
pattern of the professional publishing industry in which desktop publishing 
products, including those produced by Radius, replaced more expensive, 
proprietary products, and the Company also anticipates that this evolution 
will lead to an increase in the purchase and use of video editing products, 
in particular digital video editing products for use with digital video 
camcorders. As a result, the Company has devoted significant resources to 
this product line. There can be no assurance that this evolution will occur 
in the digital video editing industry as expected by the Company, or that 
even if it does occur that it will not occur at a slower pace than 
anticipated. There can also be no assurance that any digital video editing 
products developed by the Company will achieve consumer acceptance or broad 
commercial success. In the event that the increased use of such video editing 
products does not occur or in the event that the Company is unable to 
successfully develop and market such products, the Company's business, 
operating results and financial condition would be materially adversely 
affected, particularly in light of the fact that the Company anticipates that 
it will begin to de-emphasize many of its traditional hardware products in 
the future.

DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS

The Company's primary means of distribution is through a limited number of 
third-party distributors and master resellers that are not under the direct 
control of the Company. Furthermore, the Company relies on one exclusive or 
primary distributor for its sales in each of Japan and Europe. The Company 
does not maintain a direct sales force. As a result, the Company's business 
and financial results are highly dependent on the amount of the Company's 
products that is ordered by these distributors and resellers. Such orders are 
in turn dependent upon the continued viability and financial condition of 
these distributors and resellers as well as on their ability to resell such 
products and maintain appropriate inventory levels. Furthermore, many of 
these distributors and resellers generally carry the product lines of a 
number of companies, are not subject to minimum order requirements and can 
discontinue marketing the Company's products at any time. Accordingly, the 
Company must compete for the focus and sales efforts of these third parties. 
Because certain of the Company's major suppliers have arrangements with the 
Company pursuant to which certain of the Company's major customers are 
responsible for payment of goods sent to the Company, the Company is 
dependent on certain resellers to make payments to its suppliers. In 
addition, due in part to the historical volatility of the personal computer 
industry, certain of the Company's resellers have from time to time 
experienced declining profit margins, cash flow shortages and other financial 
difficulties. The future growth and success of the Company will continue to 
depend in large part upon its indirect distribution channels, including its 
reseller channels. If its resellers or other distributors were to experience 
financial difficulties, the Company's results of operations could be 
adversely affected.

INTERNATIONAL SALES

Prior to the second fiscal quarter of 1996, the Company's international sales 
were primarily made through distributors and the Company's subsidiary in 
Japan. Effective April 1, and July 1, 1996 the Company appointed an exclusive 
distributor for Japan and Europe, respectively. The Company expects that 
international sales, particularly sales to Japan, will represent a 
significant portion of its business activity and that it will be subject to 
the normal risks of international sales such as currency fluctuations, longer 
payment cycles, export controls and other governmental regulations and, in 
some countries, a lesser degree of intellectual property protection as 
compared to that provided under the laws of the United States. Sales in Japan 
could be affected by the economic conditions in that region. Asian sales 
outside of Japan are not material. Furthermore, a reduction in sales efforts 
or financial viability of the distributors could adversely affect the 
Company's net sales and its ability to provide service and support to 
Japanese and European customers. Additionally, fluctuations in exchange rates 
could affect demand for the Company's products. If for any reason exchange or 
price controls or other restrictions on foreign currencies are imposed, the 
Company's business, operating results and financial condition could be 
materially adversely affected. Net sales could also be adversely affected in 
the future as a result of the exclusive distributor relationships for Japan 
and Europe because the Company only recognizes as net sales a portion of the 
sales price of any product sold through such distributor arrangements. 
Accordingly, even if sales for such regions increase or remain similar to 
historic levels, the Company would recognize a lesser amount of net sales for 
such regions as compared to historic levels.

During the third quarter of fiscal 1997, the exclusivity clause in the 
agreement with the Japanese distributor was terminated. No other distribution 
relationship for Japan has been entered into by the Company.

Effective January 1, 1998, the Company has modified its relationships with 
its distributors in Japan and Europe for its digital video software products. 
Sales will now be made for these products based upon a price list and they 
will no longer pay commissions upon their sale of these products. Commission 
will still be paid on the sales of all of the Company's other products.


                                      -18-

<PAGE>

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant degree upon the continued 
contributions of its key management, marketing, product development and 
operational personnel and the Company's ability to retain and continue to 
attract highly skilled personnel. The Company does not carry any key person 
life insurance with respect to any of its personnel. Competition for 
employees in the computer industry is intense, and there can be no assurance 
that the Company will be able to attract and retain qualified employees. Many 
members of the Company's management have departed within the past year, 
including its former President and Chief Executive Officer and three other 
Vice Presidents, and the Company has also had substantial layoffs and other 
employee departures. Because of the Company's financial difficulties and the 
very tight labor market for technical personnel, it has become increasingly 
difficult for it to hire new employees and retain key management and current 
employees. The failure of the Company to attract and retain key personnel 
would have a material adverse effect on the Company's business, operating 
results and financial condition.

DEPENDENCE ON PROPRIETARY RIGHTS

The Company relies on a combination of patent, copyright, trademark and trade 
secret protection, nondisclosure agreements and licensing arrangements to 
establish and protect its proprietary rights. The Company has a number of 
patents and patent applications and intends to file additional patent 
applications as it considers appropriate. There can be no assurance that 
patents will issue from any of these pending applications or, if patents do 
issue, that any claims allowed will be sufficiently broad to protect the 
Company's technology. In addition, there can be no assurance that any patents 
that may be issued to the Company will not be challenged, invalidated or 
circumvented, or that any rights granted thereunder would provide proprietary 
protection to the Company. The Company has a number of trademarks and 
trademark applications. There can be no assurance that litigation with 
respect to trademarks will not result from the Company's use of registered or 
common law marks, or that, if litigation against the Company were successful, 
any resulting loss of the right to use a trademark would not reduce sales of 
the Company's products in addition to the possibility of a significant 
damages award. Although, the Company intends to defend its proprietary 
rights, policing unauthorized use of proprietary technology or products is 
difficult, and there can be no assurance that the Company's efforts will be 
successful. The laws of certain foreign countries may not protect the 
proprietary rights of the Company to the same extent as do the laws of the 
United States.

The Company has received, and may receive in the future, communications 
asserting that its products infringe the proprietary rights of third parties, 
and the Company is engaged and has been engaged in litigation alleging that 
the Company's products infringe others' patent rights. As a result of such 
claims or litigation, it may become necessary or desirable in the future for 
the Company to obtain licenses relating to one or more of its products or 
relating to current or future technologies, and there can be no assurance 
that it would be able to do so on commercially reasonable terms.

IMPACT OF YEAR 2000

The Year 2000 Issue is the result of computer programs being written using 
two digits rather than four to define the applicable year. Any of the 
Company's computer programs that have time-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities.

The Company has been studying this issue but has not yet completed the 
process. As a result, the Company has no reasonable basis to conclude that 
the Year 2000 Issue will not materially affect future financial results, or 
cause reported financial information not to be indicative of future operating 
results or future financial condition.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market could 
adversely affect the prevailing market price of the Company's Common Stock. 
The Company estimates that approximately 10 million shares of common stock 
issued to unsecured creditors under the Plan in September 1996 have not yet 
been sold and are eligible for sale under Rule 144. The tradability of such 
shares of Common Stock could materially and adversely affect the market price 
of the Common Stock.

As of December 31, 1997, there were 6,105,680 shares of Common Stock reserved 
for issuance upon exercise of outstanding options by employees and 
consultants. As of such date there were an additional 1,129,100 shares of 
Common Stock available for issuance under options to be granted to employees 
and consultants and 158,998 shares reserved for 


                                      -19-

<PAGE>

issuances for purchases under the Company's Employee Stock Purchase Plan. 
Additionally, 152,500 shares of Common Stock were reserved for issuance under 
the Company's stock option plans for non-employee directors, 47,500 of which 
were subject to outstanding options. The Company has amended its 1995 Stock 
Option Plan (the "1995 Plan") to increase the number of shares available for 
issuance thereunder by 2,700,000 shares, subject to shareholder approval at 
its Annual Meeting of Shareholders in February 1998. The Company may also 
seek to obtain Board and/or shareholder approval for grants of options in 
excess of the amounts described above. All of the shares of Common Stock to 
be issued upon exercise of options granted or to be granted or upon stock 
purchases will be available for sale in the public market. Such availability 
will further increase the number of freely tradeable shares of Common Stock 
outstanding which could exert downward pressure on the trading price of the 
Common Stock.

As of July 31, 1997, the Company granted a warrant to purchase 250,000 shares 
of the Company's Common Stock at an exercise price of $1.50 per share which 
is exercisable two years from the grant date to WPS, L.L.C. in consideration 
of consulting services performed during the third quarter of 1997. The value 
of the warrants has been deemed to be immaterial.

As of August 29, 1997, the Company granted a warrant to purchase 500,000 
shares of the Company's Common Stock at a price of $1.25 per share 
exercisable over a forty two month period from the grant date to Reply 
Corporation (Reply) as part of the technology licensing agreement with Reply. 
The value of the warrants has been deemed to be immaterial. See Notes to 
Consolidated Financial Statements - Note 9 Technology licensing from Reply 
Corporation in the Company's 1997 Form 10-K.

POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ SMALLCAP MARKET

The Company's Common Stock is listed on the Nasdaq SmallCap Market pursuant 
to an agreement with the NASD which requires that the Company comply with the 
continued listing requirements for the Nasdaq SmallCap Market. Failure to 
meet the continued listing requirements in the future would subject the 
Common Stock to delisting. Companies traded on the Nasdaq SmallCap Market 
will be required commencing in March 1998, for example, to maintain a minimum 
bid price of $1.00 per share. Because the Company's Common Stock has not 
traded over $1.00 per share since November 1996, the Common Stock could be 
delisted from the Nasdaq SmallCap Market. As a result, the Board of Directors 
has proposed, subject to shareholder approval at the February 1998 annual 
meeting of shareholders, a significant reverse stock split if the trading 
price of the Company's Common Stock remains below $1.00 per share. There can 
be no assurance that such a proposal will be timely approved by the 
shareholders, or if approved, that the stock price will perform as hoped. If 
the Company's Common Stock is delisted, there can be no assurance that the 
Company will meet the requirements for initial inclusion on Nasdaq in the 
future, particularly in light of the fact that Nasdaq requires traded 
securities to have a $4.00 minimum per share bid requirement. Moreover, the 
NASD is considering the elimination of the SmallCap Market altogether. 
Trading, if any, in the listed securities after delisting or the elimination 
of the SmallCap Market would be conducted in the over-the-counter market in 
what are commonly referred to as the "pink sheets." As a result, investors 
may find it more difficult to dispose of, or to obtain accurate quotations as 
to the value of, the Company's securities.


                                      -20-

<PAGE>

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See Note 3 to Consolidated Financial Statements - Commitments and 
Contingencies.

ITEM 5.  OTHER INFORMATION

The value of the Company's investment in Splash Technology Holdings, Inc. 
declined from $22.1 million at the end of fiscal year 1997 to $11.3 million 
at the end of the first quarter of fiscal 1998 due to the sale of 40,000 
shares, and more importantly, due to the substantial decline in the closing 
price of Splash Common Stock from $38.75 to $21.375 during that period of 
time. Since then the closing price of Splash Common Stock has further 
declined to $14.38 on February 5, 1998. The value of the 530,139 shares (net 
of the option to buy 174,113 shares held by IBM Credit and which is 
exercisable at a nominal price) still held by the Company is $7.6 million as 
of February 5, 1998.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

The following exhibits are filed with this Quarterly Report:

10.01    Amended and Restated Working Capital and Term Loan Agreement dated as
         of January 8, 1998 between IBM Credit and the Registrant.

27.01    Financial Data Schedule (EDGAR version only).

(b)  REPORTS ON FORM 8-K

No report on Form 8-K was filed during the three months ended December 31, 
1997.

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

Dated:  February  10, 1998                  RADIUS INC.



                                                    By: /s/
                                                        ------------------
                                                        Henry V. Morgan
                                                        Chief Financial Officer


                                      -21-




<PAGE>

EXHIBIT 10.01

                                  AMENDMENT
                                      TO
                             AMENDED AND RESTATED
                         WORKING CAPITAL FINANCING AND
                             TERM LOAN AGREEMENT

    This Amendment ("Amendment") to the Amended and Restated Working Capital 
Financing and Term Loan Agreement is made as of January 8, 1998 by and between 
Radius Inc., a California corporation ("Customer") and IBM CREDIT CORPORATION, 
a Delaware corporation ("IBM Credit").

                                   RECITALS

    A. Customer and IBM Credit have entered into that certain Amended and 
Restated Working Capital Financing and Term Loan Agreement, dated as of 
August 30, 1996 (as amended, supplemented or otherwise modified from time to 
time, the "Agreement");

    B. Customer and IBM Credit agree to amend the Agreement on the terms and 
subject to the conditions set forth in this Amendment;

                                   AGREEMENT

    NOW THEREFORE, in consideration of the premises set forth herein, and for 
other good and valuable consideration, the receipt and sufficiency of which 
is hereby acknowledged, the parties hereto agree as follows:

Section 1. Definitions. All capitalized terms not otherwise defined herein 
shall have the respective meanings set forth in the Agreement.

Section 2. Sale of Splash Stock. Customer sold 40,000 shares of common stock 
of Splash Technology Holdings, Inc. (the "Splash Stock") between November 11, 
1997 and January 8, 1998. Pursuant to the terms of the Agreement, Customer 
agreed to pay IBM Credit as the Cancellation Fee seventy-five percent (75%) 
of the proceeds of the sale, transfer or other disposition of the first 
232,151 shares of Splash Stock sold on or after November 11, 1997. IBM Credit 
and Customer hereby agree that the sale of 35,000 shares of such Splash Stock 
was for the account of Customer and has been applied to Customer's 
outstandings under the Agreement. IBM Credit and Customer further agree that 
the sale of the remaining 5,000 shares of such Splash Stock was for the 
account of Customer and the proceeds of such sale have been remitted to CLB 
Associates/Clearbrook Companies, as partial compensation for services 
rendered.

Section 3. Amendment. The Agreement is hereby amended by deleting Exhibit A 
to the Agreement in its entirety and substituting, in lieu thereof, the 
Exhibit A attached hereto.

Section 4. Rights and Remedies. Except to the extent specifically waived 
herein IBM Credit reserves any and all rights and remedies that IBM Credit 
now has or may have in the future with respect to Customer, including any and 
all rights or remedies which it may have in the future as a result of 
Customer's failure to comply with its financial covenants to IBM Credit. 
Except to the extent specifically waived herein neither this Amendment, any 
of IBM Credit's actions or IBM Credit's failure to act shall be deemed to be 
a waiver of any such rights or remedies.

Section 5. Governing Law. This Amendment shall be governed by and interpreted 
in accordance with the laws which govern the Agreement.


                                       1

<PAGE>

Section 6. Counterparts. This Amendment may be executed in any number of 
counterparts, each of which shall be an original and all of which shall 
constitute one agreement.

    IN WITNESS WHEREOF, this Amendment has been executed by duly authorized 
representatives of the undersigned as of the day and year first above written.

    RADIUS INC.                              IBM CREDIT CORPORATION
    
    By:    /s/ Henry V. Morgan               By:     /s/ Joni Tooliatos
       --------------------------               ---------------------------
    Name: Henry V. Morgan                    Name:   Joni Tooliatos
         ------------------------                 -------------------------
    Title: SVP & CFO                         Title:  Center Operations Mgr.
          -----------------------                  ------------------------


                                       2


<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          SEP-30-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                             845
<SECURITIES>                                         0
<RECEIVABLES>                                     7508
<ALLOWANCES>                                    (4710)
<INVENTORY>                                        640
<CURRENT-ASSETS>                                 15812
<PP&E>                                           19788
<DEPRECIATION>                                 (19583)
<TOTAL-ASSETS>                                   16017
<CURRENT-LIABILITIES>                            18328
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        169025
<OTHER-SE>                                    (171336)
<TOTAL-LIABILITY-AND-EQUITY>                     16017
<SALES>                                           5540
<TOTAL-REVENUES>                                  5540
<CGS>                                             3597
<TOTAL-COSTS>                                     3597
<OTHER-EXPENSES>                                  2588
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 173
<INCOME-PRETAX>                                    261
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       261
<EPS-PRIMARY>                                     0.00
<EPS-DILUTED>                                     0.00
        

</TABLE>


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