TRUEVISION INC, 10-Q, 1997-05-13

TRUEVISION INC
10-Q, 1997-05-13
ELECTRONIC COMPUTERS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

For the quarter ended March 29, 1997 Commission file number 000-18404

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TRUEVISION, INC.
(Exact name of registrant as specified in its charter)

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DELAWARE 77-0161747
(State of Incorporation) (I.R.S. Employer Identification No.)

2500 WALSH AVENUE, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (408) 562-4200

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 .
---------- ---------

Number of shares of Common Stock outstanding as of March 29, 1997:
12,727,920

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INDEX
TRUEVISION, INC.

Page
PART I - FINANCIAL INFORMATION Number
------
Item 1: Consolidated Interim Financial Statements

Consolidated Interim Balance Sheets -
March 29, 1997 and June 29, 1996 3

Consolidated Interim Statements of Operations - Three months
ended March 29, 1997 and March 30, 1996, and nine months
ended March 29, 1997 and March 30, 1996 4

Consolidated Interim Statements of Cash Flows -
Nine months ended March 29, 1997 and March 30, 1996 5

Notes to Consolidated Interim Financial Statements 6

Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9

PART II - OTHER INFORMATION

Item 6: Exhibits and Reports on Form 8-K 20

SIGNATURES 21

<PAGE>
PART I--FINANCIAL INFORMATION

TRUEVISION, INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
MARCH 29, JUNE 29,
1997 1996
- ------------------------------------------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 3,110 $ 6,101
Accounts receivable, net........................ 6,876 17,413
Inventory....................................... 12,228 9,627
Prepaid expenses and other assets............... 1,228 1,662
Deferred income taxes........................... 57 60
Income taxes receivable......................... 1,041 230
-------- ---------
Total current assets.......................... 24,540 35,093
Property and equipment, net....................... 2,963 3,131
Other assets, net................................. 197 251
Deferred income taxes............................. 1,453 1,453
-------- ---------
Total assets.................................... $ 29,153 $ 39,928
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Line of credit.................................. $ 3,898 $ 3,437
Accounts payable................................ 4,401 6,288
Accrued employee compensation................... 1,007 541
Advances on inventory held by distributors...... 711 --
Other accrued liabilities....................... 2,262 2,165
Current portion of long-term obligations........ 169 243
-------- ---------
Total current liabilities..................... 12,448 12,674
Long-term obligations............................. 99 151
-------- ---------
Total liabilities............................... 12,547 12,825
-------- ---------
Stockholders' equity:
Preferred stock................................. -- --
Common stock.................................... 53,015 52,680
Accumulated deficit............................. (36,213) (25,352)
Cumulative translation adjustment............... (196) (225)
-------- ---------
Total stockholders' equity........................ 16,606 27,103
-------- ---------
Total liabilities and stockholders' equity.... $ 29,153 $ 39,928
-------- ---------
-------- ---------
</TABLE>

See accompanying notes to Consolidated Interim Financial Statements

<PAGE>

TRUEVISION, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)

THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
MAR. 29, MAR. 30, MAR. 29, MAR. 30,
1997 1996 1997 1996
- -------------------------------------------------- ------------ ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales......................................... $ 11,904 $ 18,825 $ 32,863 $ 54,043
Cost of sales..................................... 7,678 11,424 21,800 33,441
----------- ---------- ---------- ---------
Gross profit...................................... 4,226 7,401 11,063 20,602
----------- ---------- ---------- ---------
Operating expenses:
Research and development........................ 1,674 1,883 4,934 5,394
Selling, general and administrative............. 3,889 4,251 11,503 12,462
----------- ---------- ---------- ---------
Total operating expenses........................ 5,563 6,134 16,437 17,856
----------- ---------- ---------- ---------
Income (loss) from operations..................... (1,337) 1,267 (5,374) 2,746
Interest income................................... 1 35 4 71
Interest expense.................................. (82) (86) (209) (213)
Other income (expense), net....................... (44) (129) (424) (258)
----------- ---------- ---------- ---------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting
principle....................................... (1,462) 1,087 (6,003) 2,346
Provision for income taxes........................ -- 33 -- 69
----------- ---------- ---------- ---------
Income (loss) before cumulative effect of change
in accounting principle......................... (1,462) 1,054 (6,003) 2,277
Cumulative effect of change in accounting
principle....................................... -- -- (4,858) --
----------- ---------- ---------- ---------
Net income (loss)................................. $ (1,462) $ 1,054 $ (10,861) $ 2,277
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
Per common share:
Income (loss) before cumulative effect of change
in accounting principle....................... $ (0.12) $ 0.08 $ (0.48) $ 0.17
Cumulative effect of change in accounting
principle..................................... $ -- $ -- $ (0.38) $ --
Net income (loss)............................... $ (0.12) $ 0.08 $ (0.86) $ 0.17
Weighted average common shares and equivalents.... 12,710 13,327 12,682 13,449

</TABLE>

See accompanying notes to Consolidated Interim Financial Statements.

<PAGE>

Truevision, Inc.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
MARCH 29, MARCH 30,
1997 1996
- ---------------------------------------------------------------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING CASH FLOWS:
Net income (loss)..................................................... $ (10,861) $ 2,277
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Cumulative effect of change in accounting principle................. 4,858 --
Provision for doubtful accounts..................................... 122 282
Depreciation and other amortization................................. 1,669 1,371
(Gain) loss on disposal of fixed assets............................. (16) 51
Income tax benefit from disqualifying dispositions of employee
stock options..................................................... -- 320
Other............................................................... 32 (27)
Changes in assets and liabilities:
Accounts receivable................................................. 344 (2,116)
Inventory........................................................... 2,283 267
Prepaid expenses and other assets................................... 380 2,487
Income taxes receivable............................................. (811) 69
Accounts payable.................................................... (1,887) (2,749)
Advances on inventory held by distributors.......................... 711 --
Accrued employee compensation....................................... 466 (102)
Other accrued liabilities........................................... 97 (2,041)
Accrued litigation settlement....................................... -- (6,600)
---------- -----------
Net cash used in operating activities................................. (2,613) (6,511)
---------- -----------
INVESTING CASH FLOWS:
Acquisitions of property and equipment................................ (731) (888)
Acquisitions of other assets.......................................... (317) (35)
---------- -----------
Net cash used in investing activities................................. (1,048) (923)
---------- -----------
FINANCING CASH FLOWS:
Proceeds from line of credit, net..................................... 461 288
Borrowings (repayments) of debt obligations, net...................... (126) (347)
Issuance of common stock, net......................................... 335 4,723
---------- -----------
Net cash provided by financing activities............................. 670 4,664
---------- -----------
Net decrease in cash and cash equivalents............................. (2,991) (2,770)
Cash and cash equivalents, beginning of period........................ 6,101 10,377
---------- -----------
Cash and cash equivalents, end of period.............................. $ 3,110 $ 7,607
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................ $ 209 $ 213
Income taxes........................................................ $ 82 $ 16
Noncash investing and financing activities:
Property and equipment acquired under capital leases................ $ -- $ 593
Property and equipment transferred from inventory................... $ 329 $ --
</TABLE>

See accompanying notes to Consolidated Interim Financial Statements.

5
<PAGE>

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The consolidated interim financial statements presented in this Quarterly
Report on Form 10-Q are unaudited. However, in the opinion of management, all
adjustments have been made for a fair presentation of the interim periods
presented. The consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 29, 1996.

The results of operations for the three and nine month periods ended
March 29, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 28, 1997.

During fiscal 1995, the Company changed to a fiscal calendar and its
reporting year ends on the Saturday closest to June 30.

NOTE 2. INVENTORY

A summary of inventory follows (in thousands):

<TABLE>
<CAPTION>
MAR. 29, JUNE 29,
1997 1996
--------- -----------
<S> <C> <C>
Purchased parts and subassemblies........................ $ 5,817 $ 4,194
Work-in-progress......................................... 1,752 1,237
Finished goods........................................... 2,895 4,196
Finished goods held by distributors...................... 1,764 --
---------- -----------
Total.................................................... $ 12,228 $ 9,627
---------- -----------
---------- -----------
</TABLE>

NOTE 3. PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

<TABLE>
<CAPTION>
MAR. 29, JUNE 29,
1997 1996
--------- -----------
<S> <C> <C>
Computer equipment and machinery........................... $ 12,811 $ 12,758
Furniture and fixtures..................................... 809 819
Leasehold improvements..................................... 167 105
--------- ---------
Subtotal................................................. 13,787 13,682
Less: Accumulated depreciation............................. (10,824) (10,551)
--------- ---------
Total...................................................... $ 2,963 $ 3,131
--------- ---------
--------- ---------
</TABLE>

NOTE 4. ACCOUNTING CHANGE--RECOGNITION OF DISTRIBUTOR REVENUE

Revenue from product sales to OEM and other end users is recognized upon
shipment. In the quarter ended September 28, 1996, the Company changed its
accounting method for recognizing distributor revenue, whereby the Company
recognizes revenue, and does not relieve inventory on shipments to
distributors, until shipment by the distributor. Previously, the Company
recognized revenue, after recording appropriate reserves for sales returns
from distributors and allowances granted to them, at the time of shipment to
the distributor. Distributor agreements allow certain rights of return and
price protection on products held by distributors. Cash received in advance
of recognizing distributor revenue is recorded as advances on inventory held
by distributors. The Company believes that deferral of distributor sales and
related gross margins until the product is shipped by the distributors
results in a more meaningful measurement of operations and is a preferable
method of accounting for distributor revenue.

<PAGE>

The cumulative effect on prior years of changing the accounting method
was a charge of $4.9 million, or $0.38 per share. This amount was reflected
in the quarter ended September 28, 1996. The estimated pro forma amounts for
the quarter ended March 30, 1996 assuming the new method of accounting had
been applied retroactively would be net sales of $17.5 million and net income
of $0.6 million, or $0.04 per share. The estimated pro forma amounts for the
nine months ended March 30, 1996 assuming the new method of accounting had
been applied retroactively would be net sales of $51.8 million and net income
of $1.3 million, or $.10 per share.

NOTE 5. EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings per Share. This
Statement is effective for financial statements issued for periods ending
after December 15, 1997. This Statement simplifies the standards for
computing earnings per share ("EPS") previously found in APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of "basic"
EPS. Basic EPS is calculated by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for
the period, without consideration for common stock equivalents. "Fully
diluted" EPS is replaced by "diluted" EPS and is computed similarly to fully
diluted EPS under the provisions of APB Opinion No. 15. The pro forma
earnings per share data for the three months ended March 29, 1997 and March
30, 1996, and the nine month periods ended March 29, 1997 and March 30, 1996
determined in accordance with this new Statement would have been as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
MAR. 29, MAR. 30, MAR. 29, MAR. 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS:

Income (loss) before cumulative effect of change in accounting
principle............................................................ $ (0.12) $ 0.08 $ (0.48) $ 0.18
Cumulative effect of change in accounting principle.................... $ -- $ -- $ (0.38) $ --

Net income (loss)...................................................... $ (0.12) $ 0.08 $ (0.86) $ 0.18

Diluted EPS:

Income (loss) before cumulative effect of change in accounting
principle............................................................ $ (0.12) $ 0.08 $ (0.48) $ 0.17
Cumulative effect of change in accounting principle.................... $ -- $ -- $ (0.38) $ --

Net income (loss)...................................................... $ (0.12) $ 0.08 $ (0.86) $ 0.17

Weighted average common shares........................................... 12,710 12,512 12,682 12,336

Weighted average common shares and equivalents when dilutive............. -- 13,327 -- 13,449
</TABLE>

<PAGE>

NOTE 6. STOCKHOLDER'S EQUITY

In late April 1997, the Company offered employees the opportunity to
participate in an option repricing program. Under the program, each employee
could elect on or before April 30 that his or her existing option issued
under the Company's Amended 1988 Stock Incentive Plan (the "Option Plan") be
converted into a repriced option, subject to final approval by the
Compensation Committee of the Company s Board of Directors. The per share
exercise price of each repriced option would be equal to the fair market
value of the Company's common stock on the conversion date (on or about May
2, 1997). In return for the lower exercise price, the shares subject to the
repriced options would be an amount equal to 90% of the shares subject to the
converted option. All repriced options would have a vesting start date
identical to that of the converted option, but the vesting schedule of the
repriced option would be forty-two months instead of the forty-eight months
vesting schedule of the converted option. On May 2, 1997, the option
repricing program and the options elected for conversion under the program
were approved by the Compensation Committee. On such date, the fair market
value of the Company's common stock was $2.16 and options for a total of
2,302,179 outstanding shares were converted into repriced options for a total
of 2,058,949 outstanding shares. The weighted average per share exercise
price of the outstanding shares subject to the options prior to conversion was
$4.99. Prior to this repricing, options for a total of 2,685,130 shares were
outstanding under the Option Plan.

<PAGE>

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

The text of this document includes forward-looking statements which are
subject to certain risks and uncertainties. Actual results may differ
materially from those described herein, depending on such factors as are
described herein, including without limitation those described under "Certain
Factors That May Affect The Company's Future Results Of Operations."

RESULTS OF OPERATIONS

CURRENT QUARTER COMPARED TO PRIOR QUARTER AND PRIOR YEAR QUARTER

On September 27, 1996, the Company announced a change in its method of
accounting for recognizing distributor revenue. As a result, the quarter
ended September 28, 1996 includes a $4.9 million, or $0.38 per share, charge
for the cumulative effect of the change in accounting principle. For a more
complete discussion, see "Accounting Change". The following table sets forth
net sales and gross profit for the quarters ended March 29, 1997, December
28, 1996 and March 30, 1996. Note, the net sales and gross profit reflected
in the table for the quarter ended March 30, 1996 is on a pro forma basis
assuming the new method had been applied retroactively (in millions):

Mar. 29, Dec. 28, Mar. 30,
1997 1996 1996
--------- --------- ----------
NET SALES:
OEM $ 3.9 $ 2.3 $ 9.4
Retail/Distribution 8.0 8.6 8.1*
--------- --------- ----------
Total net sales $ 11.9 $ 10.9 $ 17.5
--------- --------- ----------
--------- --------- ----------
GROSS PROFIT $ 4.2 $ 4.2 $ 6.9
--------- --------- ----------
--------- --------- ----------

* As compared to net sales of $9.4 million for the quarter ended March
30, 1996 under the previous accounting method.

NET SALES. Net sales were $11.9 million for the quarter ended March 29,
1997, an increase of $1.0 million, or 9%, from the quarter ended December 28,
1996, and a pro forma decrease of $5.6 million, or 32%, from the quarter
ended March 30, 1996. International net sales represented 23% of net sales
for the quarter ended March 29, 1997, compared to 36% for the quarter ended
December 28, 1996, and 29% for the quarter ended March 30, 1996.
International net sales for the quarter ended March 29, 1997 decreased
primarily due to lower TARGA+ product line sales (see retail/distribution
discussion below). Additionally, international net sales for the quarter
ended December 28, 1996 included nonrecurring engineering services revenue of
$0.4 million and end-of-life sales of the TARGA+ product line.

OEM net sales were $3.9 million for the quarter ended March 29, 1997, an
increase of $1.6 million, or 70%, from the quarter ended December 28, 1996,
and a decrease of $5.5 million, or 58%, from the quarter ended March 30,
1996. OEM net sales for the quarter ended March 29, 1997 increased from the
quarter ended December 28, 1996 primarily due to the initial shipments of the
Company's DVCPRO TARGA 2000 RTX product and shipments of the TARGA 2000
RTX/DTX to an OEM software company bundling Truevision products with its
software. The decrease in OEM business from the quarter ended March 30, 1996
was primarily due to a reduction in sales to Avid Technology, Inc. ("Avid")
as discussed below.

During fiscal 1995, the Company entered into a three-year OEM agreement
with Avid under which Avid agreed to make minimum aggregate purchases of
certain products during calendar years 1995 through 1997. The agreement also
provided Avid the right to manufacture certain Truevision products rather
than purchasing them from the Company, subject to the payment of royalties.
In the fourth quarter of fiscal 1996, Avid exercised that right with respect
to the current products of the Company that were used by Avid and a fully
paid license for Avid to manufacture the current products used by Avid was
negotiated. As a result, the Company does not expect to receive any

<PAGE>

further revenues or royalties resulting from Avid's manufacture and use of
such products. The Company has no further obligations to Avid. In the quarters
ended March 29, 1997, December 28, 1996 and March 30, 1996, Avid accounted
for 1%, 0% and 41%, respectively, of the Company's net sales.

Net sales to the retail/distribution channel were $8.0 million during
the quarter ended March 29, 1997, a decrease of $0.6 million, or 7%, from the
quarter ended December 28, 1996, and a pro forma decrease of $0.1 million, or
1%, from the quarter ended March 30, 1996. In the quarter ended March 29,
1997, unit sales of the TARGA 2000 RTX product line increased but were offset
by lower sales of the Company's TARGA+ product line, which has been
discontinued. Sales to the retail/distribution channel during the quarter
ended December 28, 1996 included end-of-life sales of the TARGA+ product line.

Truevision's non-OEM customers generally have not placed scheduled
orders in advance and, historically, backlog at the beginning of each quarter
represents only a portion of the product sales anticipated in that quarter.
Quarterly net sales and operating results therefore depend on the volume and
timing of bookings received during a quarter and continued sell-through of
products by the distribution channel, which are difficult to forecast. The
absence of backlog has limited the Company's ability to predict appropriate
production and inventory levels, which has had and could have in the future
an adverse effect on operating results. Truevision's results of operations
may fluctuate from quarter to quarter due to these and other factors, such as
announcements by Truevision, its competitors or the manufacturers of
platforms with which Truevision's products are used.

OEM net sales for the quarters ended March 29, 1997, December 28, 1996
and March 30, 1996 included $0.2 million, $0.5 million and $0.5 million,
respectively, of revenues from license fees under product license agreements
and engineering services revenue from product design and development
agreements.

GROSS PROFIT. The Company had a gross profit of $4.2 million, or 36% of
net sales, for the quarter ended March 29, 1997, compared to $4.2 million, or
38% of net sales, in the quarter ended December 28, 1996, and pro forma $6.9
million, or 39% of net sales, for the quarter ended March 30, 1996. The
Company's gross profit for the quarter ended March 29, 1997 decreased
primarily due to unabsorbed manufacturing overhead costs related to lower
production levels. The gross profit for the quarters ended March 29, 1997,
December 28, 1996 and March 30, 1996 included revenue from license fees and
engineering services revenue for the periods. The revenue from license fees
and engineering services revenue for the quarters ended March 29, 1997 and
December 28, 1996 approximated the related costs. The Company's lower
production levels in the current quarter could result in lower margins in
future quarters because the fixed manufacturing overhead costs have been
spread over fewer units produced.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.7 million for the quarter ended March 29, 1997, compared to $1.5
million for the quarter ended December 28, 1996, and $1.9 million for the
quarter ended March 30, 1996. Research and development expenses for the
quarter ended March 29, 1997 increased from the quarter ended December 28,
1996 primarily due to an increase in labor and project material costs. In
the absence of unusual circumstances or events, the Company expects that
research and development spending in absolute dollars will remain relatively
constant through the remainder of fiscal 1997.

The Company believes that continued investment in research and
development is critical to its future growth and competitive position in its
market for broadcast video and color imaging systems and is directly related
to timely development of new and enhanced products. The Company, therefore,
may experience increased research and development spending in future periods.
Because of the inherent uncertainty of development projects, there can be no
assurance that increased research and development efforts will result in
successful product introductions, or enable the Company to maintain or
increase sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3.9 million for the quarter ended March 29,
1997, compared to $3.3 million for the quarter ended December 28, 1996, and
$4.3 million for the quarter ended March 30, 1996. Selling, general and
administrative expenses for the quarter ended March 29, 1996 increased from
the quarter ended December 28, 1996 primarily due to start-up costs
associated with launching the new signature VAR sales channel which is being
used to market the TARGA 2000 RTX product line.

10
<PAGE>

OTHER INCOME (EXPENSE). Other expense for the quarter ended March 29,
1997 is comprised primarily of residual expenses associated with the old
RasterOps product line, offset by tax related credits generated from the
amended income tax returns for the years ended August 28, 1992 and September
30, 1989. Other expense for the quarter ended March 30, 1996 is comprised
primarily of residual expenses associated with the old RasterOps product line.

CURRENT NINE MONTH PERIOD COMPARED TO PRIOR YEAR NINE MONTH PERIOD

On September 27, 1996, the Company announced a change in its method of
accounting for recognizing distributor revenue. As a result, the quarter
ended September 28, 1996 includes a $4.9 million, or $0.38 per share, charge
for the cumulative effect of the change in accounting. For a more complete
discussion, see "Accounting Change". The following table sets forth net
sales and gross profit for the nine month periods ended March 29, 1997 and
March 30, 1996. Note, the net sales and gross profit for the nine month
period ended March 30, 1996 is on a pro forma basis assuming the new method
had been applied retroactively (in millions):

Mar. 29, Mar. 30,
1997 1996
---------- ----------
Net Sales:
OEM $ 8.3 $ 29.3
Retail/Distribution 24.6 22.5*
---------- ----------
Total net sales $ 32.9 $ 51.8
---------- ----------
---------- ----------

Gross Profit $ 11.1 $ 19.6
---------- ----------
---------- ----------

* As compared to net sales of $24.7 million for the nine month period
ended March 30, 1996 under the previous accounting method.

NET SALES. Net sales were $32.9 million for the nine month period ended
March 29, 1997, a pro forma decrease of $18.9 million, or 36%, from the nine
month period ended March 30, 1996. International net sales represented 29%
of net sales for the nine month period ended March 29, 1997, compared to 25%
for the nine month period ended March 30, 1996.

OEM net sales were $8.3 million for the nine month period ended March
29, 1997, a decrease of $21.0 million, or 72%, from the nine month period
ended March 30, 1996. The decrease in OEM business from the nine month
period ended March 30, 1996 was primarily due to a reduction in sales to Avid
as discussed below.

Net sales to the retail/distribution channel were $24.6 million during
the nine month period ended March 29, 1997, a pro forma increase of $2.1
million, or 9%, from the nine month period ended March 30, 1996. Sales to
the retail/distribution channel for the nine month period ended March 29,
1997 increased primarily due to the addition of the RTX and Bravado product
lines but sales were still adversely impacted by delays in the availability
of third party software applications. During the second quarter of fiscal
1997, the Company's software development partners made progress toward the
completion of new applications for the Company s high-end TARGA 2000

<PAGE>
RTX. Two such applications were released in early January. Future sales
could be adversely impacted if future third party software applications are
not readily available.

OEM net sales for the nine month periods ended March 29, 1997 and March
30, 1996 included $0.7 million and $1.0 million, respectively, of revenues
from license fees under product license agreements and engineering services
revenue from product design and development agreements.

GROSS PROFIT. The Company had a gross profit of $11.1 million, or 34% of
net sales, for the nine month period ended March 29, 1997, compared to pro
forma $19.6 million, or 38% of net sales, for the nine month period ended
March 30, 1996. The Company's gross profit decreased primarily due to lower
OEM sales to Avid for the nine month period ended March 29, 1997. The
Company's gross margins decreased primarily due to a write-down of certain
inventory to lower of cost or market, reduction of certain products' average
selling prices and absorption of period costs (i.e., other cost of sales)
over a lower sales base during the first quarter of fiscal 1997. The gross
profit for the nine month periods ended March 29, 1997 and March 30, 1996
included revenue from license fees and engineering services revenue for the
periods. The revenue from license fees and engineering services revenue for
the nine month period ended March 29, 1997 approximated the related costs.
The Company's lower production levels could result in lower margins in future
quarters because the fixed manufacturing overhead costs have been spread over
fewer units produced.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $4.9 million for the nine month period ended March 29, 1997, compared to
$5.4 million for the nine month period ended March 30, 1996. Research and
development expenses for the current nine month period decreased primarily
due to a shift in resources to support engineering revenue as discussed
above. In the absence of unusual circumstances or events, the Company
expects that research and development spending in absolute dollars will
remain relatively constant through the remainder of fiscal 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $11.5 million for the nine month period ended
March 29, 1997, compared to $12.5 million for the nine month period ended
March 30, 1996. Selling, general and administrative expenses for the current
nine month period decreased primarily due to lower variable costs related to
lower sales levels and the Company's efforts to reduce expense levels,
partially offset by start-up costs associated with launching the new
signature VAR sales channel which is being used to market the TARGA 2000 RTX
product line.

OTHER INCOME (EXPENSE). Other expense for the nine month period ended
March 29, 1997 is comprised primarily of charges associated with the
discontinuance of the initial development of a separate computer system
product line and residual expenses associated with the old RasterOps product
line, partially offset by tax related credits generated from the amended
income tax returns for the years ended August 28, 1992 and September 30,
1989. Other expense for the nine month period ended March 30, 1996 is
comprised primarily of residual expenses associated with the old RasterOps
product line.

<PAGE>

ACCOUNTING CHANGE

In the quarter ended September 28, 1996, the Company changed its
accounting method for recognizing distributor revenue, whereby the Company
recognizes revenue, and does not relieve inventory on shipments to
distributors, until shipment by the distributor. Previously, the Company
recognized revenue, after recording appropriate reserves for sales returns
from distributors and allowances granted to them, at the time of shipment to
the distributor. Distributor agreements allow certain rights of return and
price protection on products held by distributors. Cash received in advance
of recognizing distributor revenue is recorded as advances on inventory held
by distributors. The Company believes that deferral of distributor sales and
related gross margins until the product is shipped by the distributors
results in a more meaningful measurement of operations and is a preferable
method of accounting for distributor revenue

The cumulative effect on prior years of changing the accounting method
was a charge of $4.9 million, or $0.38 per share. This amount was reflected
in the quarter ended September 28, 1996. The estimated pro forma amounts for
the quarter ended March 30, 1996 assuming the new method had been applied
retroactively would be net sales of $17.5 million and net income of $0.6
million, or $0.04 per share. The estimated pro forma amounts for the nine
month period ended March 30, 1996 assuming the new method of accounting had
been applied retroactively would be net sales of $51.8 million and net income
of $1.3 million, or $.10 per share.

LIQUIDITY AND CAPITAL RESOURCES

At March 29, 1997, the Company had cash and cash equivalents of $3.1
million, compared to $6.1 million at June 29, 1996. Net cash used in
operations was $2.6 million during the nine month period ended March 29,
1997, compared to $6.5 million during the nine month period ended March 30,
1996. During the nine month period of fiscal 1996, cash flow from operations
was negatively impacted by the Company's settlement payment in August 1995
related to the stockholders class action lawsuit, and an increase of accounts
receivable due to increased revenues and the timing of revenues (i.e., late
in the third quarter of fiscal 1996).

Net cash used in investing activities was $1.0 million during the nine
month period ended March 29, 1997, compared to $0.9 million during the nine
month period ended March 30, 1996. The Company spent approximately $0.7
million and $0.9 million for new equipment during the nine month periods
ended March 29, 1997 and March 30, 1996, respectively. Additionally, the
Company acquired equipment under capital leases totaling $0.6 million during
the nine month period ended March 30, 1996. The Company has no material
commitments for the purchase of capital equipment.

Net cash provided by financing activities was $0.7 million during the
nine month period ended March 29, 1997, compared to $4.7 million during the
nine month period ended March 30, 1996. In August 1995, the Company issued
650,000 shares of its common stock in a private placement to investors.

The Company satisfied its cash requirements for the nine month period
ended March 29, 1997 primarily from its beginning balance of $6.1 million,
proceeds from the bank line of credit, and from sales of stock under the
employee stock purchase plan and stock options exercised. For the nine month
period ended March 30, 1996, the Company's cash requirements were satisfied
primarily from its beginning balance of $10.4 million and funds generated
from the issuance of 650,000 shares of the Company's common stock in August
1995. In February 1997, the Company entered into a new bank revolving line
of credit agreement ("credit agreement") which consists of a $5 million
revolving line of credit facility ("Facility A") and a $2 million EXIM backed
revolving line of credit facility ("Facility B"). This credit agreement
expires on August 20, 1997 and replaces the Company s previous $7 million
bank revolving line of credit agreement. Under Facility A, borrowings are
available up to $5 million based on domestic eligible invoiced receivables.
Under Facility B, borrowings are available up to $2 million based on foreign
eligible invoiced receivables, and export finished goods and channel
inventory (borrowings on inventory are capped at a maximum of $1 million).
The credit agreement contains various financial covenants, including
maintaining certain financial ratios and tests. The primary financial
covenants include quick ratio, tangible net worth, debt to tangible net worth
and profitability covenants. At March 29, 1997, the Company was in violation
of certain financial covenants. However, a waiver of its covenant
violations as of March 29, 1997

<PAGE>

has been obtained from the bank. The waiver described above requires the
Company to be in compliance with these covenants for each subsequent quarter.
The Company believes that there is a substantial probability that the
Company will be in violation of certain of these financial covenants for the
quarter ended June 28, 1997. In such an event, a further waiver will be
required from the bank. Although the Company currently has a waiver of its
covenant violations from the bank, there can be no assurance that a waiver
would be granted in the future. As of March 29, 1997, the Company had
borrowings of $3.9 million under the bank line of credit.

The Company believes that, absent further substantial losses, its
current cash and cash generated from operations, if any, together with its
existing credit facilities will be sufficient to meet the Company's cash
requirements for at least the next year at its current level of operations,
but may not be sufficient to allow for significant changes in operating
level.

The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of
opportunities as they may arise. The Company may, from time to time, as
market and business conditions warrant, invest in or acquire complementary
businesses, products or technologies. The Company may effect additional
equity or debt financings to fund such activities. The sale of additional
equity or convertible debt securities could result in additional dilution in
the equity ownership of the Company's stockholders.

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

SUBSTANTIAL RECENT OPERATING LOSSES. From fiscal 1992 to 1993, the
Company's net sales declined by $21.7 million, or 18%; from fiscal 1993 to
1994, the Company's net sales declined by $20.8 million, or 21%; and from
fiscal 1994 to 1995, the Company's net sales declined by $12.9 million or
16%. In addition, the Company experienced significant operating losses during
such periods. During the first three fiscal quarters of 1997, the Company
experienced declines in net sales and again experienced significant operating
losses. There can be no assurance that net sales will not decline in the
future, or that the Company will not experience significant operating losses
in the future. As of March 29, 1997, the Company had an accumulated deficit
of $36.2 million. The Company believes that continued investment in its
business, particularly research and development, is critical to its future
growth and competitive position. The Company, therefore, may experience
increased operating expenses both as a total amount and in relation to
revenue levels, and in particular, increased relative levels of research and
development expenses in future periods. There can be no assurance that such
research and development and other efforts will result in successful product
introductions or enable the Company to maintain or increase net sales, and
there can be no assurance that the Company will operate profitably.

SIGNIFICANT VOLATILITY IN OPERATING RESULTS. In the past, the Company
has experienced significant fluctuations in its quarterly operating results,
and it anticipates that such fluctuations will continue and could intensify
in the future. Fluctuations in operating results may result in volatility in
the price of the Company's Common Stock. Operating results may fluctuate as a
result of many factors, including announcements by the Company, its
competitors or the manufacturers of the platforms with which its products are
used, volume and timing of orders received during the period, the timing of
new product introductions by the Company and its competitors, product line
maturation, the impact of price competition of the Company's average selling
prices, the availability and pricing of components for the Company's
products, and changes in product or distribution channels. Many of these
factors are beyond the Company's control. In addition, due to the short
product life cycles that characterize the Company's markets, the Company's
failure to introduce new, competitive products consistently and in a timely
manner would adversely affect the Company's business, financial condition and
results of operations for one or more product cycles. Furthermore, the
Company adopted a deferred revenue recognition policy with respect to sales
made through distributors. While the Company believes that such a method is
more conservative and better reflects sales performance of the Company's
products, such a method is likely to be more volatile than a revenue
recognition policy based on shipments to distributors.

The volume and timing of recognition of revenue from distributors and
orders received from other direct customers during a quarter are difficult to
forecast. Truevision's customers (other than some OEM customers) generally do
not place scheduled orders in advance and, as a result, backlog at the
beginning of each quarter represents only a small percentage of the product
sales anticipated in that quarter. Quarterly net sales and operating results
therefore depend on the volume and timing of bookings received by the Company
and sales made by distributors during a quarter, which are difficult to
forecast. As a result, a shortfall in sales in any quarter in comparison to
expectations may not be identifiable until the end of the quarter. In
addition, in large part due to delays in receipt of component supplies,
release of new products which introduce manufacturing delays, and the timing
of orders received from certain customers, the Company has in the past
recorded a substantial portion of its net sales in the last weeks of the
quarter. Notwithstanding the difficulty in forecasting future sales, the
Company generally must plan production, order components and undertake its

<PAGE>

development, sales and marketing activities and other commitments months in
advance. Accordingly, any shortfall in net sales in a given quarter may
disproportionately impact the Company's business, financial condition and
results of operations due to an inability to adjust expenses or inventory
during the quarter to match the level of sales for the quarter. Excess
inventory could also result in cash flow difficulties as well as expenses
associated with inventory write-offs.

DEPENDENCE ON KEY CUSTOMERS. The Company's operating results have
depended increasingly upon its ability to obtain orders from, maintain
relationships with and provide support to key customers. In addition, these
key customers could design their own products competitive with those of the
Company. Any cancellation of, or reduction or delay in, orders from these key
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In fiscal 1996 and 1995, Avid
accounted for 35.9% and 15.7%, respectively, of the Company's net sales. The
agreement between the Company and Avid provided that Avid had the right to
manufacture certain Truevision products rather than purchasing them from the
Company subject to the payment of royalties. In the fourth quarter of fiscal
1996, Avid exercised that right with respect to the current products of the
Company that are used by Avid. At that time, Avid and the Company negotiated
a fully paid license for Avid to manufacture the current products used by
Avid, which are not the Company's most advanced product offering. The
Company does not expect to receive any further revenues or royalties
resulting from Avid's manufacture and use of such products. This will have a
negative impact on the Company's net sales in future periods when compared
with prior periods.

DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS AND SUBCONTRACTORS.
Certain components used in the Company's products are currently available
only from a single source, and others are available from only a limited
number of sources. In particular, the Company's "hub" chips that are the
basis of the most recent generation of Truevision products are available only
from LSI and are subject to substantial lead times, and other components
(particularly certain ASICs) are also available only from single sources such
as LSI, Matsushita, Sony and Toshiba. In the past, the Company has
experienced delays in the receipt of certain of its key components and
discontinuations of certain components, which have resulted in delays in
product deliveries. In particular, delays in receipt of certain components
interfered with the Company's ability to ship certain products in the quarter
ended April 1, 1995, and had a material adverse effect on the Company's
results of operations for that quarter. There can be no assurance that delays
in the receipt of key components and product deliveries will not recur in the
future or that these vendors will continue to supply the Company. The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays
or reductions in product shipments to the Company's customers. Any such
delays or reductions could have a material adverse effect on the Company's
reputation and customer relationships which could, in turn have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, shortages of raw materials or production capacity
constraints at the Company's subcontractors or suppliers could negatively
affect the Company's ability to meet its production obligations and result in
increased prices for components. Any such reduction may result in delays in
shipments of the Company's products or increase the prices of components,
either of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

For the assembly of its products, the Company relies primarily on
subcontractors who use components purchased, tested and kitted by the
Company, in addition to one contract manufacturer who purchases components,
manufactures products, conducts all testing and delivers fully packaged
finished products. The Company has in the past experienced interruptions in
these services and delays in product deliveries, which have in certain cases
had a material adverse effect on the Company's results of operations for
particular periods, and there can be no assurance that such problems will not
recur in the future. The process of qualifying additional subcontractors is a
lengthy one, and the inability of any of the Company's subcontractors to
provide the Company with these services in a timely fashion could have a
material adverse effect on the Company's business, financial condition and
results of operations until such time as alternate sources of such services
are established and the quality of such services reaches an acceptable level.

RISKS ASSOCIATED WITH MANUFACTURING OPERATIONS. Truevision products are
primarily complex, board-level products, which require sophisticated
manufacturing technologies and operations. Furthermore, the Company has
recently introduced several new, complex, board-level products. The
manufacture of increasingly complex products places a substantial strain on
the Company's contract manufacturing operations, and the Company has in the
past experienced delays in product shipments

<PAGE>

in connection with these factors. The Company's future operating results will
depend in part on its ability to rapidly and cost-effectively ramp
manufacturing of complex new and existing board products. Any delays or
dislocations in this process could have a material adverse effect on the
Company's business, financial condition and results of operations.

DISCONTINUANCE OF RASTEROPS GRAPHICS PRODUCTS; INCREASING DEPENDENCE ON
TRUEVISION VIDEO PRODUCTS. In the past, the Company derived a significant
portion of its net sales from sales of the RasterOps color graphics products,
including monitors for the Apple Macintosh computer platform. For fiscal
1994, 1995 and 1996, sales of the RasterOps product line accounted for $46.1
million (or 58.2%), $21.0 million (or 31.7%), and $0.9 million (or 1.2%),
respectively, of the Company's net sales. In particular, sales of the
Company's RasterOps monitor products contributed $30.4 million, $13.7 million
and $0.0 million to the Company's net sales in fiscal 1994, 1995 and 1996,
respectively. The Company does not anticipate that their will be any material
revenues in the future derived from the RasterOps product line. This shift
in contribution resulted in part from a reduction in demand for RasterOps
products due primarily to intensified competition, particularly late in the
first quarter of fiscal 1995, and Apple Computer Inc.'s ("Apple") integration
of graphics acceleration features into its Macintosh computers. In addition,
the RasterOps monitor business was receiving increased competition with the
entry of large competitors such as Apple and Sony into the market for
computer monitors. As a result of the increased competition and declining
profit margins for the RasterOps product line, the Company decided to
eliminate all RasterOps products (including its monitor products) and to
shift its focus from the RasterOps product line to the Truevision product
line. The accumulated charges associated with the Company's restructuring
aggregated $10.1 million in fiscal 1995 and 1994. In light of the decline in
sales of the RasterOps product line, the Company's future operating results
will substantially depend on sales of the Truevision product line. There can
be no assurance that the Company will be successful in maintaining or
increasing sales of the Truevision product line.

DEPENDENCE ON EMERGING MARKET. The market for digital desktop video
authoring products is an emerging one, and the size and timing of its
development are subject to substantial uncertainties and are outside the
control of the Company. There can be no assurance of the rate that
applications requiring development of new video content, if any, will develop
or of the rate, if at all, at which digital, open system, desktop solutions
for video authoring will achieve market acceptance. Additionally, there can
be no assurance that third-party software application developers, which are
necessary to implement the Company's open systems approach, will be
successful in developing and bringing to market applications that will gain
market acceptance. If the market for digital desktop video authoring
products were to fail to develop, or were to develop more slowly than
anticipated, the Company's business, financial condition and results of
operations could be materially adversely affected.

RAPID TECHNOLOGICAL CHANGE; NEED FOR MARKET ACCEPTANCE OF DVR
ARCHITECTURE. The personal computer and workstation industry and the related
computer imaging market are characterized by intense competition, rapidly
changing technology and evolving industry standards, often resulting in short
product life cycles and rapid price declines. Accordingly, the Company's
success is highly dependent on its ability to develop, introduce to the
marketplace in a timely manner and sell complex new products. In this
respect, the Company has recently introduced and plans to introduce
additional new versions of its TARGA 2000 product for the PCI bus. The
Company has in the past experienced some delays in product introductions due
to longer than anticipated development time and time required to obtain
necessary components, as well as delays in market acceptance. If the Company
were to experience similar delays in the future, with respect to its PCI bus
product or otherwise, the Company's business, financial condition and results
of operations could be materially adversely affected.

The Company's most recent introductions in the Truevision product line,
including versions of the TARGA 2000, are based on the Company's DVR
architecture, and it is expected that any new Truevision products introduced
in the foreseeable future will also be based on the DVR architecture. The DVR
architecture is a new technology that has not yet achieved widespread
commercial acceptance, and there can be no assurance that it will do so in
the future. Failure of the DVR architecture to achieve widespread commercial
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.

FUTURE CAPITAL NEEDS UNCERTAIN. The Company's future capital
requirements will depend upon many factors, including the extent and timing
of the introduction of the Company's products in the

<PAGE>

market, the progress of the Company's research and development, the Company's
operating results and the status of competitive products. The Company
anticipates that, absent future substantial operating losses, its existing
capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements for at least the next
twelve months at its current level of operations, but may not be sufficient
to allow for unrestricted growth. The Company's actual capital needs are
difficult to predict, however, and there can be no assurance that the Company
will not require additional capital prior to such time. In particular, it is
likely that the Company will seek additional funding during the next twelve
months to finance working capital. In the event the Company experiences
further operating losses, the Company believes that it will require further
capital infusions or other sources of cash. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or
at all, when required. Shortages of working capital may cause delays in the
Company's ability to obtain in a timely manner adequate supplies of
components or subcontracted services. The Company has in the past
experienced, and may continue to experience, difficulties and delays in
obtaining certain components and services on a timely basis due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, if additional financing was not available, the Company
could be required to restrict, reduce, or suspend its operations, seek a
merger partner or sell securities on terms that are highly dilutive or
otherwise disadvantageous to the Company's current stockholders. In this
respect, the Company elected in both the fourth quarter of fiscal 1995 and
the first quarter of fiscal 1996 to raise capital through private placements
of equity securities at prices less that fair market value on the date of the
issuance. If adequate financing sources are insufficient or not available,
the Company's business, financial condition and results of operations could
be materially adversely affected.

The Company has a line of credit with a commercial bank that includes
financial and other covenants that must be satisfied for borrowings to be
permitted and that limits borrowing to percentages of accounts receivable and
inventory. The more significant financial covenants of the current line of
credit are quick ratio, tangible net worth, debt to tangible net worth and
profitability covenants. The Company is currently and has in the past been in
violation of certain of the covenants; in each instance, a waiver of such
violations has been obtained from the bank. Although the Company currently
has a waiver of its covenant violations from the bank, the Company believes
that there is a substantial probability that the Company will be in violation
of certain of these financial covenants for the quarter ended June 28, 1997.
In such an event, a further waiver will be required from the bank. There
can be no assurance that waivers would be granted in the future if necessary.
If the Company were unable to access the line of credit as required, its
business, financial position and results of operations could be materially
adversely affected.

COMPETITION. The Company's markets are intensely competitive, and the
Company expects this competition to continue to increase. The Company has
experienced continued competitive pricing pressures on its product lines, and
the Company expects that these pricing pressures will continue. To the extent
that competitive pressures require price reductions more rapidly than the
Company is able to cut its costs, the Company's gross margins and results of
operations will be adversely affected. Many of the Company's competitors are
well established, have substantial name recognition and have greater
financial, technological, production and sales and marketing resources than
the Company. In addition to products currently in production by such
competitors, the Company expects that additional competitive products will be
developed and that new companies will enter its market, both of which will
continue to increase competition. There can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete. The Company believes that its
ability to compete depends on elements both within and outside its control,
including the success and timing of new product development by the Company
and its competitors, product performance and price, distribution and general
economic conditions or by a downturn in the demand for personal computers or
workstations. There can be no assurance that the Company will be able to
compete successfully with respect to these or other factors, and the
Company's results of operations may fluctuate from quarter to quarter due to
these and other factors.

DEPENDENCE ON KEY PERSONNEL. The Company's future success substantially
depends on the efforts of certain of its officers and key technical and other
employees. The loss of any one of these officers or employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that its future success also
substantially depends on its ability to attract, retain and motivate highly
skilled employees, who are in great demand. There can be no assurance that
the Company will be successful in doing so.

<PAGE>
SHORT PRODUCT LIFE CYCLES. The market in which the Company operates is
increasingly characterized by frequent new product introductions, which
results in short product life cycles. The Company must continually monitor
industry trends and make difficult choices in selecting new technologies and
features to incorporate into its products. Each new product cycle presents
new opportunities for current or prospective competitors of the Company to
gain market share. If the Company does not successfully introduce new
products on a timely basis within a given product cycle, the Company's sales
will be adversely affected for that cycle and possibly subsequent cycles.
Moreover, because of the possibility of short product life cycles coupled
with long lead times for many components used in the Company's products, the
Company may not be able to quickly reduce its production or inventory levels
in response to unexpected shortfalls in sales or, conversely, to increase
production in response to unexpected demand.

As is customary for high technology companies, sales of individual
products can often be characterized by steep declines in sales, pricing and
margins toward the end of the respective product's life cycle, the precise
timing of which may be difficult to predict. As new products are planned and
introduced, the Company attempts to monitor closely the inventory of older
products and to phase out their manufacture in a controlled manner.
Nevertheless, the Company has in the past experienced and could in the future
experience unexpected reductions in sales of older generation products as
customers anticipate new products. These reductions have resulted in and
could in the future give rise to additional charges for obsolete or excess
inventory, returns of older generation products by distributors, or
substantial price protection charges. For example, to the extent that the
Company is unsuccessful in managing product transitions, its business,
financial condition and operating results could be materially adversely
affected.

DEPENDENCE ON SOFTWARE DEVELOPERS. The Company's open system strategy
places greater reliance by the Company on the development efforts of software
developers such as Adobe, Avid, D Vision, in:sync, Kinetix (Autodesk),
Macromedia, Scitex, SoftImage (Microsoft) and others. Other than its ability
to provide development assistance and marketing and other support, the
Company has little or no control of the time of introduction of these
developers' software applications or their feature sets. To enable the
Company to compete successfully with providers of complete systems such as
Avid, Data Translation and Scitex, among others, it is imperative that
independent software applications of sufficient quality are available at a
competitive price, both of which are out of the Company's ability to control.
Several of these independent software developers have experienced delays in
releasing their software applications which have, in turn, adversely impacted
the ability of the Company's products to compete effectively in the market.
The Company believes that market pressures will force application vendors to
offer ever increasing feature sets and performance at ever decreasing prices;
however there can be no assurance that this would ever happen or that it
would happen in a timely enough manner to avoid having an material adverse
impact on the Company's net sales and results of operations.

RELATIONSHIP WITH SYSTEM SOFTWARE VENDORS. The success of the Company's
open systems, desktop strategy is substantially dependent on its ability to
maintain product compatibility and informal relationships with system
software vendors such as Apple and Microsoft. If the Company's relationship
with either Apple or Microsoft were to deteriorate, its business and results
of operations could be materially adversely affected.

UNCERTAINTY REGARDING PROPRIETARY RIGHTS. The Company attempts to
protect its intellectual property rights through patents, trademarks, trade
secrets and a variety of other measures. There can be no assurance, however,
that such measures will provide adequate protection for the Company's
intellectual property, that the Company's trade secrets or proprietary
technology will not otherwise become known or become independently developed
by competitors or that the Company can otherwise meaningfully protect its
intellectual property rights. There can be no assurance that any patent owned
by the Company will not be invalidated, that any rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued with the scope
of the claim sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company or that
third parties will not assert intellectual property infringement claims
against the Company. The failure of the Company to protect its proprietary
rights could have a material adverse effect on its business, financial
condition and results of operations.

<PAGE>

Litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity of and scope of
the proprietary rights of others or to defend against claims of infringement
or invalidity. Such litigation could result in substantial costs and
diversion of management resources and could have a material adverse effect on
the Company's business, financial condition and results of operations. From
time to time in the past the Company has received communications from third
parties alleging that the Company may be in violation of such third parties'
intellectual property rights, and there can be no assurance that such claims,
or claims for indemnification resulting from infringement claims against
others, will not be asserted in the future. If any such claims or actions are
asserted against the Company, the Company may seek to obtain a license under
a third parties' intellectual property rights. There can be no assurance,
however, that a license would be obtainable on reasonable terms or at all. In
addition, should the Company be required to litigate any such claims, such
litigation could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation.

INTEGRATION OF PRODUCT FUNCTIONALITY BY MOTHERBOARD MANUFACTURERS. In
general, the Company's products are individual add-in subsystems that
function with computer systems to provide additional functionality.
Historically, as a given functionality becomes technologically stable and
widely accepted by users, the cost of providing the functionality is
typically reduced by means of large scale integration onto semiconductor
chips which are then incorporated onto motherboards. The Company has
experienced such integration and incorporation with respect to its RasterOps
branded products and expects that integration and incorporation will continue
to occur with respect to the functionality provided by the Truevision
products. The Company's success will remain dependent, in part, on its
ability to continue to develop products which incorporate new and rapidly
evolving technologies that computer makers have not yet fully incorporated
into motherboards.

INTERNATIONAL OPERATIONS. For fiscal 1996, 1995 and 1994, international
sales represented 25.2%, 29.6% and 30.7%, respectively, of the Company's net
sales. The Company expects that international sales will continue to
represent a significant portion of net sales. Although the Company's sales
are denominated in dollars, its international business may be affected by
changes in demand resulting from fluctuations in exchange rates as well as by
risks such as unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, difficulties in
managing international distributors, potentially adverse tax consequences,
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. In addition, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do
the laws of the United States.

VOLATILITY OF STOCK PRICES. The market price of the Company's Common
Stock has been volatile and trading volumes at times have been relatively
low. Factors such as variations in the Company's net sales, operating results
and cash flows, and announcements of technological innovations or price
reductions by the Company, its competitors, or providers of alternative
products could cause the market price of the Company's Common Stock to
fluctuate substantially. In addition, the stock markets have experienced
significant price and volume fluctuations that particularly have affected
technology-based companies and resulted in changes in the market prices of
the stocks of many companies that have not been directly related to the
operating performance of those companies. Such broad market fluctuations and
general economic conditions may adversely affect the market price of the
Company's Common Stock.

<PAGE>

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27 Financial Data Schedule

(b) Reports on Form 8-K

There were no reports on Form 8-K filed for the quarter ended
March 29, 1997.

<PAGE>

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.

by: /s/ R. John Curson
Date: May 12, 1997 -----------------------------------------
R. John Curson

Senior Vice President, Chief Financial
Officer and Secretary
(signing as duly authorized signatory on
behalf of the registrant and in his
capacity as principal financial officer of
the registrant.)

<PAGE>
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<S> <C>
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0
0
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</TABLE>