JETFAX INC, 424B1, 1997-06-11

JETFAX INC
424B1, 1997-06-11
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE>

Filed Pursuant to Rule 424(b)(1)
Registration No. 333-23763

PROSPECTUS

- -------------------------------------------------------------------------------
3,500,000 Shares

[LOGO OF JETFAX]

Common Stock
- -------------------------------------------------------------------------------

Of the 3,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby, 2,750,000 shares are being offered by JetFax, Inc.
("JetFax" or the "Company") and 750,000 shares are being sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The
Company's Common Stock has been approved for quotation on The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol
"JTFX."

SEE "RISK FACTORS" ON PAGES 6 TO 16 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discount and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
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<S> <C> <C> <C> <C>
Per Share................. $8.00 $0.56 $7.44 $7.44
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Total (3)................. $28,000,000 $1,960,000 $20,460,000 $5,580,000
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $800,000.

(3) The Company has granted to the several Underwriters a 30-day over-
allotment option to purchase up to 525,000 additional shares of the Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $32,200,000, the total Underwriting Discount and
Commissions will be $2,254,000, the total Proceeds to Company will be
$24,366,000 and the total Proceeds to Selling Stockholders will be
$5,580,000. See "Underwriting."

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

The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares of Common Stock to the
Underwriters is expected to be made at the office of Prudential Securities
Incorporated, One New York Plaza, New York, New York, on or about June 16,
1997.

PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY

June 10, 1997
<PAGE>

[APPEARS IN SIDEBAR TO THE LEFT:]

JETFAX'S EMBEDDED SYSTEM TECHNOLOGY, BRANDED PRODUCTS AND DESKTOP SOFTWARE
SOLUTIONS MAKE JETFAX A LEADER IN THE MULTIFUNCTION PRODUCT ("MFP") MARKET.

JETFAX DEVELOPS AND PROVIDES COMPLETE HARDWARE AND SOFTWARE SOLUTIONS TO MEET
THE MULTIFUNCTION NEEDS OF OEMS AND END USERS, FROM SMALL OFFICE/HOME OFFICE
(SOHO) TO CORPORATE WORKGROUPS.

[APPEARS TO RIGHT OF SIDEBAR:]
[JETFAX LOGO]
BRANDED PRODUCTS
Jetfax manufactures and
markets innovative MFP
solutions under the JetFax brand name
to corporate end users.

MULTIFUNCTION PRODUCT (MFP)
PRINT-FAX-COPY-SCAN
IN A SINGLE, INTEGRATED DEVICE

[APPEARS SIDEWAYS ON RIGHT:]
EMBEDDED SYSTEM

JetFax's proven embedded
system provides
the intelligence of the MFP,
controlling and optimizing
the print, fax, copy and scan
functions.

[APPEARS SIDEWAYS ON LEFT:]
JETSUITE SOFTWARE

JetSuite, an all-in-one
software application, enables
end users to fully utilize
the print, fax, copy and scan
capabilities of a MFP
from their desktops.

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

"JETFAX," "JETSUITE," "JETSOFT," "JETPCL," "JETFILE," "CONCORDE" AND THE
"JETFAX" LOGO ARE TRADEMARKS OF THE COMPANY. TRADEMARKS OF OTHERS ARE ALSO
REFERRED TO IN THIS PROSPECTUS.

2
<PAGE>

EMBEDDED SYSTEM
[Picture of an embedded system board featuring a "JetFax" ASIC. There is an
arrow pointing to the right and down from the picture.]

JETFAX'S PROVEN
EMBEDDED SYSTEM
TECHNOLOGY INTEGRATES
MULTIFUNCTION
CAPABILITIES.
BY UTILIZING JETFAX'S
EMBEDDED SYSTEM
EXPERTISE AND ABILITY
TO CUSTOMIZE SYSTEMS TO
OEMS' SPECIFICATIONS,
JETFAX BELIEVES
IT ENABLES ITS OEM
CUSTOMERS TO REDUCE
TIME-TO-MARKET AS WELL AS
DEVELOPMENT AND PRODUCT COSTS.

CORPORATE MARKET
[Picture of corporate users representing the corporate market. Three people are
gathered around a JetFax M5.]

JETFAX'S AWARD WINNING BRANDED
PRODUCTS ARE TARGETED
AT THE CORPORATE MFP
MARKET AND HAVE MORE
ADVANCED FEATURES THAN
THOSE FOUND ON TYPICAL
SMALL OFFICE/HOME
OFFICE (SOHO) MFPs.
THESE CORPORATE
FEATURES INCLUDE HIGHER
SCANNING AND
TRANSMISSION SPEEDS,
INCREASED MEMORY AND
PAPER CAPACITIES,
IMPROVED PERFORMANCE
AND A TWO-LINE UPGRADE.

<PAGE>

[ON LEFT SIDE BAR:]
SOHO MARKET
[Picture of SOHO user representing the SOHO market. One person sitting at a desk
talking on phone using a SOHO MFP which contains JetFax embedded system
technology.]

JETFAX SERVES THE
GROWING MARKET OF
THE SMALL OFFICE/HOME
OFFICE (SOHO) USERS BY
LICENSING ITS CORE
MULTIFUNCTION TECHNOLOGY
AND DESKTOP SOFTWARE
TO OEMs FOR USE IN
A BROAD RANGE OF
MODERATELY PRICED
PRODUCTS. SOHO USERS
ENJOY THE ECONOMIC
BENEFITS AND SPACE
SAVINGS THAT RESULT FROM
THE PURCHASE OF A SINGLE
DEVICE THAT MEETS
MULTIPLE OFFICE NEEDS.

JETSUITE SOFTWARE
[Screen picture of JetSuite software showing thumbnail pictures of documents on
a desktop. Also displayed are icons for print, fax, copy, mail and OCR. There is
an arrow pointing up and to the left of the picture.]

JETSUITE INTEGRATES PRINTING, PC FAXING, COPYING, SCANNING, DOCUMENT
MANAGEMENT AND DEVICE CONFIGURATION INTO ONE PACKAGE,
ELIMINATING THE NEED TO INSTALL AND LEARN MULTIPLE APPLICATIONS.
JETSUITE IS CURRENTLY EXPECTED TO BE RELEASED WITH SEVERAL OEM
PRODUCTS IN THE SECOND QUARTER OF 1997.

[ON RIGHT SIDE BAR:]

[JETFAX LOGO]

JETFAX LICENSES AND SELLS ITS EMBEDDED
SYSTEM TECHNOLOGY, DESKTOP SOFTWARE AND
BRANDED PRODUCTS TO A NUMBER OF
MANUFACTURERS AND
DISTRIBUTORS INCLUDING:

HEWLETT-PACKARD COMPANY

IKON OFFICE SOLUTIONS

INTEL CORPORATION

OKI DATA CORPORATION

SAMSUNG ELECTRONICS CORPORATION

XEROX CORPORATION

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, the information in this
Prospectus assumes: (i) the conversion of all outstanding Preferred Stock into
Common Stock except for the Series P Redeemable Preferred Stock, (ii) the
redemption of all outstanding shares of Series P Redeemable Preferred Stock,
(iii) the issuance of 470,079 shares of Common Stock upon the automatic net
exercise in full of certain warrants outstanding at March 31, 1997, (iv) the
issuance of 162,703 shares of Common Stock upon the conversion of cumulative
unpaid dividends on the Series F Convertible Preferred Stock and (v) that the
Underwriters' over-allotment option will not be exercised. Certain terms not
otherwise defined herein are defined in the "Glossary."

THE COMPANY

JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
The Company focuses on two distinct segments of the MFP market: the small
office/home office ("SOHO") segment and the corporate segment. According to CAP
Ventures, Inc., the total United States market for MFPs is expected to increase
from approximately $1.9 billion in 1996 to $7.6 billion in 2000, representing a
compound annual growth rate of more than 40%. Drivers of this growth include
the increasing number of SOHO offices and telecommuters, the rising demand for
cost, space and production efficiency and the expanding volume of information
conveyed through fax, the Internet and e-mail. Rather than making several trips
to a fax or copier, queuing for a particular office device or purchasing and
maintaining multiple single-function office devices, today's office workers can
perform print, fax, copy and scan functions with one device that provides
nearly seamless document management directly from their desktops.

The Company's embedded system technology consists of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. With outsourcing becoming
increasingly attractive to OEMs, JetFax believes it has a number of advantages
over competitive suppliers of MFP technology due to its proven industry
expertise and its ability to offer OEMs a variety of advanced solutions. The
Company believes its embedded system technology and desktop software enable
OEMs to offer more competitive products with improved price/performance,
shortened development cycles and reduced development and product costs. The
Company currently licenses its embedded system technology or desktop software
to 25 licensees worldwide, including Hewlett-Packard Company, Oki Data
Corporation, Samsung Electronics Corporation, Xerox Corporation and Intel
Corporation. For example, effective in January 1997, the Company entered into a
development and license agreement with Hewlett-Packard for the inclusion of
JetFax embedded system technology and JetSuite software in a Hewlett-Packard
product which is currently under development.

Since its inception in 1988, the majority of the Company's revenues have been
generated from sales of JetFax branded products and consumables, including the
JetFax M5, the Company's current branded product. A substantial portion of the
Company's branded products sales is through IKON Office Solutions, one of the
leading distributors of office equipment. The Company believes that it offers
the most advanced and innovative MFP solutions currently available in its
product class. For example, the JetFax M5 was the first MFP to support two
telephone lines for simultaneous receiving and sending of faxes, and the
Company was one of the first to

3
<PAGE>

market a MFP with a high speed 33.6 Kbps modem. JetFax has received a number of
highly acclaimed industry awards and distinctions for its innovative
contributions to MFP technology, including the following for the JetFax M5:
Buyer's Laboratory's "Pick of the Year" in 1996, "Editor's Choice '96 for
Premium Laser Fax" by Better Buys for Business and "Win 100" for top computer
hardware products in 1996 by Windows Magazine.

The Company believes its JetSuite software will define a new category of all-
in-one software for MFPs that will replace the piecemeal software applications
historically bundled by MFP vendors. JetSuite's portable document software
enables a user to view, manage, transmit and process information from the
desktop, providing full fax, scan, optical character recognition, print, copy
and e-mail functionality. As a result, SOHO and corporate workers can increase
productivity and realize substantial time and cost savings relative to
traditional office protocols and equipment usage. The Company's JetSuite
desktop software can be sold on a stand-alone basis or bundled with the JetFax
embedded system to provide a complete, integrated hardware and software
solution. The Company plans to release JetSuite with several OEM products in
the third quarter of 1997. The Company also offers JetPCL software, which
provides high quality conversion of documents encoded in Hewlett-Packard's
Printer Control Language ("PCL"), the industry standard.

The Company's objective is to become a leading, single source for
multifunction products and solutions providing proven embedded system
technology, high quality branded products and advanced desktop software. To
accomplish this goal, JetFax intends to (i) penetrate the SOHO market through
OEM licensing agreements of the JetFax embedded system and JetSuite software,
(ii) increase the installed base of JetFax's branded products and related
higher margin consumables, upgrades and accessory sales, (iii) establish
JetSuite as an industry standard in the MFP market, (iv) leverage the Company's
experience and relationships in international markets and (v) continue to
anticipate the needs of the MFP market and respond with innovative, complete
MFP solutions.

The Company's executive offices are located at 1376 Willow Road, Menlo Park,
California 94025, and its telephone number is (415) 324-0600. The Company was
incorporated in Delaware in August 1988.

THE OFFERING

<TABLE>
<C> <S>
Common Stock Offered by the Company.......... 2,750,000 shares
Common Stock Offered by the Selling
Stockholders................................ 750,000 shares
Common Stock to be Outstanding after the
Offering.................................... 10,690,312 shares (1)
Use of Proceeds by the Company............... For redemption of Series P Redeemable
Preferred Stock, payment of acquisition
obligations, repayment of indebtedness,
working capital and general corporate
purposes.
Nasdaq National Market Symbol................ JTFX
</TABLE>
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(1) Excludes (i) 1,160,635 shares of Common Stock issuable upon exercise of
stock options outstanding at March 31, 1997 under the Company's stock
option plans with a weighted average exercise price of $1.22 per share,
(ii) 401,999 shares of Common Stock issuable upon exercise of options
granted outside of the Company's stock option plans with an exercise price
of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $2.75 per share and (iv) 100,000 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $1.75 per share. See "Management--Incentive Stock Plans," "Certain
Transactions" and Note 10 of Notes to Financial Statements.

4
<PAGE>

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTER ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31,
------------------------------------- ------------------ ----------------
1993 1994 1995 1996 1995 1996 (1) 1996 1997(1)
-------- -------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product............... $ 4,542 $ 6,086 $ 6,413 $ 11,143 $ 7,336 $ 10,205 $ 3,807 $ 4,250
Development fees...... -- 75 1,200 699 466 1,416 233 743
Software and
technology license
fees................. -- -- 139 1,345 667 1,241 678 223
-------- -------- ------- -------- -------- -------- ------- -------
Total revenues....... 4,542 6,161 7,752 13,187 8,469 12,862 4,718 5,216
Costs and expenses:
Cost of product
revenues............. 3,695 5,486 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development.......... 1,397 1,311 1,118 1,249 919 1,709 330 1,477(2)
Selling and marketing. 633 1,303 1,325 2,710 1,745 2,785 965 972
General and
administrative....... 1,019 615 746 750 500 823 250 352
-------- -------- ------- -------- -------- -------- ------- -------
Total costs and
expenses............ 6,744 8,715 8,438 15,811 10,957 13,812 4,854 5,780
-------- -------- ------- -------- -------- -------- ------- -------
Loss from operations... (2,202) (2,554) (686) (2,624) (2,488) (950) (136) (564)
Interest and other
income (expense)...... (18) (5) (68) (270) (192) 13 (78) (27)
-------- -------- ------- -------- -------- -------- ------- -------
Loss before
extraordinary item and
income taxes.......... (2,220) (2,559) (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes................. -- -- -- 35 35 105 -- 45
-------- -------- ------- -------- -------- -------- ------- -------
Loss before
extraordinary item.... (2,220) (2,559) (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item (3). -- -- 349 -- -- -- -- --
-------- -------- ------- -------- -------- -------- ------- -------
Net loss............... $ (2,220) $ (2,559) $ (405) $ (2,929) $ (2,715) $ (1,042) $ (214) $ (636)
======== ======== ======= ======== ======== ======== ======= =======
PRO FORMA DATA (4):
Net loss per share..... $ (0.14) $ (0.08)
======== =======
Common and common
equivalent shares used
in computing net loss
per share............. 8,454 8,474
======== =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED (5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital........... $ 1,564 $ 17,309
Total assets.............. 8,020 22,421
Long-term note payable,
less current portion..... 181 --
Redeemable preferred
stock.................... 2,764 --
Total stockholders'
equity................... 101 18,761
</TABLE>
- --------
(1) Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4, 1997
is referred to herein as the nine months ended December 31, 1996. For
presentation purposes, the Company refers to its reporting year ended
January 4, 1997 as ending on December 31, 1996 and the 13-week period from
January 5, 1997 to April 5, 1997 is referred to herein as the quarter ended
March 31, 1997.

(2) Includes $551,000 of expenses related to the acquisition of the Crandell
Group, Inc. by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(3) Represents a gain on exchange of stockholder debt and receivables for notes
payable. See Note 2 of Notes to Financial Statements.

(4) For an explanation of the determination of the number of shares used in
computing pro forma net loss per share, see Note 1 of Notes to Financial
Statements.

(5) Reflects (i) the conversion of each of the outstanding shares of
convertible preferred stock, except the Series P Redeemable Preferred
Stock, upon the closing of the Offering, (ii) the redemption of all
outstanding shares of Series P Redeemable Preferred Stock, (iii) the
issuance of 470,079 shares of Common Stock upon the automatic net exercise
in full of certain warrants outstanding at March 31, 1997 upon the closing
of the Offering, (iv) the issuance of 162,703 shares of Common Stock upon
the conversion of cumulative unpaid dividends on the Series F Convertible
Preferred Stock upon the closing of the Offering and (v) the sale by the
Company of the 2,750,000 shares of Common Stock offered hereby at an
initial public offering price of $8.00 per share, after deducting the
underwriting discount and commissions and estimated offering expenses, and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."

5
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.

When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 regarding events,
conditions and financial trends that may affect the Company's future plans of
operations, business strategy, results of operations and financial position.
Prospective investors are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company had net losses
of approximately $405,000, $2.9 million, $1.0 million and $636,000 for the
fiscal years ended March 31, 1995 and March 31, 1996, the nine months ended
December 31, 1996 and the quarter ended March 31, 1997, respectively. The
Company's historical losses and certain preferred stock dividends have
resulted in an accumulated deficit of approximately $14.6 million as of March
31, 1997. There can be no assurance that the Company will achieve
profitability on a quarterly or annual basis in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company in the past has
experienced, and in the future may experience, significant fluctuations in
quarterly operating results that have been or may be caused by many factors
including: the timing of introductions of new products or product enhancements
by the Company, its OEMs and their competitors; initiation or termination of
arrangements between the Company and its existing and potential significant
OEM customers or dealers and distributors; the size and timing of and
fluctuations in end user demand for the Company's branded products and OEM
products incorporating the Company's technology; inventories of the Company's
branded products or products incorporating the Company's technology carried by
the Company, its distributors or dealers, its OEMs or the OEMs' distributors
that exceed current or projected end user demand; the phase-out or early
termination of the Company's branded products or OEM products incorporating
the Company's technology; the amount and timing of development agreements,
one-time software licensing transactions and recurring licensing fees; non-
performance by the Company, its suppliers or its OEM or other customers
pursuant to their plans and agreements; seasonal trends; competition and
pricing; customer order deferrals and cancellations in anticipation of new
products or product enhancements; industry and technology developments;
changes in the Company's operating expenses; software and hardware defects;
product delays or product quality problems; currency fluctuations; and general
economic conditions. The Company expects that its operating results will
continue to fluctuate significantly as a result of these and other factors.
For example, during the fiscal year ended March 31, 1996, the Company recorded
a $760,000 loss on a purchase commitment with a supplier due to a reduction in
the selling price of the Company's product. A substantial portion of the
Company's operating expenses is related to personnel, development of new
products, marketing programs and facilities. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues and anticipated OEM commitments. If
such commitments do not result in revenues or operating expenses are
significantly higher, the Company's business, financial condition and results
of operations will be adversely affected, which could have a material adverse
effect on the price of the Company's Common Stock.

Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month of a quarter, with such revenues frequently
concentrated in the last weeks or days of a quarter. The Company's branded
products are primarily sold through dealers, and such dealers often place
orders for products at or near the end of a quarter. As a result, because one
or more key orders that are scheduled to be booked and shipped at

6
<PAGE>

the end of a quarter may be delayed until the beginning of the next quarter or
cancelled, revenues for future quarters are not predictable with any
significant degree of accuracy. For these and other reasons, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indicators of
future performance. It is likely that in future quarters, the Company's
operating results, from time to time, will be below the expectations of public
market analysts and investors, which could have a material adverse effect on
the price of the Company's Common Stock.

The Company's product revenues for April and May 1997 were less than its
product revenues for the first two months of the quarter ended March 31, 1997.
The Company expects that its product revenues and total revenues for the
quarter which will end June 30, 1997 will be less than the product revenues
and total revenues, respectively, of the quarter ended March 31, 1997, but
will significantly exceed those of the same quarter in the prior year (the
quarter ended June 30, 1996).

The accuracy of quarterly license revenues from OEMs reported by the Company
has been, and the Company believes will continue to be, dependent on the
timing and accuracy of product sales reports received from the Company's OEMs.
These reports are provided only on a quarterly basis (which may not coincide
with the Company's quarter) and are subject to delay and potential revision by
the Company's OEMs. Therefore, the Company is required to estimate all of the
recurring license revenues from OEMs for each quarter. As a result, the
Company will record an estimate of such revenues prior to public announcement
of the Company's quarterly results. In the event the product sales reports
received from the Company's OEMs are delayed or subsequently revised, the
Company may be required to restate its recognized revenues or adjust revenues
for subsequent periods, which could have a material adverse effect on the
Company's business, financial condition and results of operations and the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

DEPENDENCE ON THE MFP MARKET. The market for MFPs is relatively new and
rapidly evolving. The Company's future success is dependent to a significant
degree upon broad market acceptance of the type of MFPs on which the Company
is focusing its development efforts. This success will be dependent in part on
the ability of the Company and its OEM customers to develop MFPs that provide
the functionality, performance, speed and connectivity demanded by the market
at acceptable price points and to convince end users to broadly adopt MFPs for
office and home office use. There can be no assurance that the market for MFPs
will continue to develop, that the Company and its OEM customers will be
successful in developing MFPs that gain broad market acceptance, that the
Company will be able to offer in a timely manner its embedded system
technology, branded products or desktop software or that the Company's OEM
customers will choose the Company's technology for use in their MFPs. The
failure of any of these events to occur would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Customers."

RISKS ASSOCIATED WITH CHANGE IN FOCUS OF THE COMPANY'S BUSINESS. The Company
has historically focused primarily on the development, manufacture and sale of
its branded MFPs and currently derives a substantial portion of its revenues
from the sale of its branded MFPs. The Company expects that its revenue
growth, commencing in 1997, will be dependent, in part, on increased licensing
of the Company's embedded system technology and desktop software products.
However, there can be no assurance that the Company will realize growth in
revenues from sales and licensing of its embedded system technology or desktop
software. If such growth in revenues does not occur and if revenues from the
sale of the Company's branded MFPs were not to continue at past growth rates,
due either to a change in the Company's deployment of resources or otherwise,
it could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--JetFax Strategy."

RISKS ASSOCIATED WITH INCREASED FOCUS ON MFP DESKTOP SOFTWARE
BUSINESS. Commencing in the second half of 1997, the Company expects that its
business, financial condition and results of operations will be more dependent
on sales of its MFP desktop software, particularly JetSuite, which will be
sold both separately and bundled with the Company's branded products and
embedded system technology. JetSuite is expected to be released with several
OEM products in the third quarter of 1997. There can be no assurance that such
release

7
<PAGE>

will not be delayed or that errors will not be found in new products,
including JetSuite, after commencement of commercial shipments. Such errors
may result in a delay in market acceptance or a product recall. In July 1996,
the Company acquired substantially all of the assets of Crandell Group, Inc.
(the "Crandell Acquisition"), a developer of desktop software products (the
"Crandell Group"). Prior to the Crandell Acquisition, the Company had limited
experience in developing, marketing and supporting desktop software products.
The Company's on-going ability to develop its MFP desktop software products
business will depend upon several factors, including, but not limited to, the
commercial acceptance of the Company's MFP desktop software products, upgrades
and add-on software products, the ability of the Company's personnel and
distribution channels to sell and support MFP desktop software products and
the Company's ability to continue to integrate the operations and personnel of
the Crandell Group into the Company. Because the market for MFP desktop
software products is new and emerging, there can be no assurance that a
significant market, if any, will develop for sales of the Company's MFP
desktop software products, or for sales of upgrades and add-on software
products, and such a failure would likely have a material adverse effect on
the Company's MFP desktop software products business. There can be no
assurance that the Company's MFP desktop software products business will be
successful. Any failure by the Company to develop a successful MFP desktop
software products business would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Technology" and "Certain Transactions."

DEPENDENCE ON DEALERS AND DISTRIBUTORS. The Company has derived a
substantial portion of its revenues from sales of its branded MFPs through
dealers and distributors. The Company expects that sales of these products
through its dealers and distributors will continue to account for a
substantial portion of its revenues for the foreseeable future. The Company
currently maintains distribution relationships with dealers associated with
IKON Office Solutions (formerly Alco Standard), a national group of office
equipment dealers ("IKON"). Sales to these IKON dealers accounted for 13%, 21%
and 25% of the Company's total revenues in the fiscal year ended March 31,
1996, the nine months ended December 31, 1996 and the quarter ended March 31,
1997, respectively. Sales to A. Messerli AG ("Messerli"), one of the Company's
office equipment dealers located in Switzerland, accounted for 11%, 10% and 4%
of the Company's total revenues in the fiscal year ended March 31, 1996, the
nine months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. Each of the Company's dealers and distributors can cease
marketing the Company's products with limited notice and with little or no
penalty. There can be no assurance that the Company's dealers and distributors
will continue to offer the Company's products or that the Company will be able
to recruit additional or replacement dealers and distributors. The loss of one
or more of the Company's major dealers and distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's dealers and distributors also offer competitive
products manufactured by third parties. There can be no assurance that the
Company's dealers and distributors will give priority to the marketing of the
Company's products as compared to its competitors' products. Any reduction or
delay in sales of the Company's products by its dealers and distributors could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business --Sales and Marketing."

DEPENDENCE ON OEMS. The Company has derived a significant portion of its
revenues from licensing of its embedded system technology and software and
from development services to OEMs. The Company currently has OEM relationships
with Hewlett-Packard Company ("Hewlett-Packard"), Oki Data Corporation ("Oki
Data"), Samsung Electronics Corporation ("Samsung") and Xerox Corporation
("Xerox"). Revenues from these OEMs accounted for 18%, 16%, 17% and 17% of the
Company's total revenues in the fiscal years ended March 31, 1995 and March
31, 1996, the nine months ended December 31, 1996 and the quarter ended
March 31, 1997, respectively. Revenues from Xerox accounted for 17%, 11%, 6%
and less than 1% of the Company's total revenues in the fiscal years ended
March 31, 1995 and March 31, 1996, the nine months ended December 31, 1996 and
the quarter ended March 31, 1997, respectively. In the quarter ended March 31,
1997, Hewlett-Packard accounted for 11% of the Company's total revenues, and
was the only OEM customer that accounted for greater than 10% of the Company's
total revenues in such period. The Company anticipates that a significant
portion of its revenues will be derived from OEMs in the future and that the
Company's revenues will be increasingly dependent upon, among other things,
the ability and willingness of OEMs to timely develop and promote MFPs

8
<PAGE>

that incorporate the Company's technology. The ability and willingness of
these OEMs to do so is based upon a number of factors, such as the timely
development by the Company and the OEMs of new products with additional
functionality, increased speed and enhanced performance at acceptable prices
to end users; development costs of the OEMs; licensing and development fees of
the Company; compatibility with emerging industry standards; technological
advances; intellectual property issues; general industry competition; and
overall economic conditions. Many of these factors are beyond the control of
the Company and its OEMs. Many OEMs, including some of the Company's OEM
customers, are concurrently developing and promoting MFPs that do not
incorporate the Company's technology. In such cases, the OEMs may have
profitability or other incentives to promote internal solutions or competing
products in lieu of products incorporating the Company's technology. No
assurance can be given as to the ability or willingness of the Company's OEMs
to continue developing, marketing and selling products incorporating the
Company's technology. For example, the Company no longer receives royalties
from the Xerox WorkCenter 250 MFP, which incorporated the Company's embedded
system technology, as Xerox has ceased production of that model due to the
product reaching the end of its life cycle and pricing pressures from
competitors' products. The loss of any of the Company's significant OEMs could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Customers."

RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE. The market for the Company's
products and services is characterized by rapidly changing technology,
evolving industry standards and needs, and frequent new product introductions.
The Company currently derives all of its revenues from the sale of its branded
MFPs and related consumables, the licensing of its technology and software,
and the provision of related development services. The Company anticipates
that these sources of revenues will continue to account for substantially all
of its revenues for the foreseeable future. The market expects the Company and
its OEMs to develop and release, in a regular and timely manner, new MFPs with
better performance and improved features at competitive price points. As the
complexity of product development increases and the expected time-to-market
continues to decrease, the risk and difficulty in meeting such schedules
increase as well as the costs to the Company and its OEMs. In addition, the
Company, its OEMs and their competitors, from time to time, may announce new
products, capabilities or technologies that may replace or shorten the life
cycles of the Company's branded products and software and the OEM products
incorporating the Company's technology. The Company's success will depend on,
among other things, market acceptance of the Company's branded products,
software and embedded system technology and the demand for MFPs by the
Company's OEM customers; the ability of the Company and its OEM customers to
respond to industry changes and market demands in a timely manner; achievement
of new design wins by the Company in the Company's development of its branded
products as well as the OEMs' development of associated new MFPs; the ability
of the Company and its OEM customers to reduce production costs; and the
regular and continued introduction of new and enhanced technology, services
and products by the Company and its OEMs on a timely and cost-effective basis.
There can be no assurance that the products and technology of competitors of
the Company or its OEMs will not render the Company's branded products,
technology, software or its OEMs' products noncompetitive or obsolete. Any
failure by the Company or its OEMs to anticipate or respond adequately to the
rapidly changing technology and evolving industry standards and needs, or any
significant delay in development or introduction of new and enhanced products
and services, could result in a loss of competitiveness or revenues, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Research and Development."

RELIANCE ON LIMITED PRODUCT LINE. The Company has been primarily engaged in
the development, manufacture and sale of MFPs and related technology and has
derived a substantial portion of its revenues from sales of its branded MFPs
and consumables. Sales of the Company's branded products and related
consumables accounted for 83%, 84%, 79% and 81% of the Company's total
revenues in the fiscal years ended March 31, 1995 and March 31, 1996, the nine
months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. Dependence on a single product line makes the Company
particularly vulnerable to the successful introduction of competitive
products. The Company currently derives a substantial portion of its branded
product revenues from sales of the JetFax M5. Sales of the JetFax M5 (which
began shipping commercially in June 1995)

9
<PAGE>

and related consumables and upgrades accounted for 48%, 64% and 71% of the
Company's total revenues in the fiscal year ended March 31, 1996, the nine
months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. A reduction in demand for the JetFax M5, or the Company's
failure to timely introduce its next MFP, would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Products."

RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND INTRODUCTION; PRODUCT
DELAYS. The Company's future success is dependent to a significant degree on
its ability to further develop its embedded system technology and software for
MFPs in the time frame required by its OEM and other customers and to develop
technology with the quality, speed and other specifications required by its
OEM and other customers. The Company in the past has experienced delays in
product development, and the Company may experience similar delays in the
future. Prior delays have resulted from numerous factors such as changing OEM
product specifications, delays in receiving necessary components, difficulties
in hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resource limitation difficulties with
independent contractors, changing market or competitive product requirements
and unanticipated engineering complexity. The Company has experienced delays
in one of its current development projects and, pursuant to certain provisions
of its development agreement, the final milestone payment thereunder could be
reduced. In addition, the Company's software and hardware have in the past,
and may in the future, contain undetected errors or failures that become
evident upon product introduction or as product production volumes increase.
There can be no assurance that errors will not be found; that the Company will
not experience problems or delays in meeting the delivery schedules for or in
the acceptance of products by the Company's OEMs or other customers; that
there will not be problems or delays in shipments of the Company's branded
products or OEMs' products; or that the Company's new products and technology
will meet performance specifications under all conditions or for all
anticipated applications. Given the short product life cycles in the MFP
market, any delay or difficulty associated with new product development,
introductions or enhancements could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Technology" and "--Research and Development."

HIGHLY COMPETITIVE INDUSTRY. The market for MFPs and related technology and
software is highly competitive and characterized by continuous pressure to
enhance performance, to introduce new features and to accelerate the release
of new products. The Company's branded products compete primarily with the
dominant vendors in the fax market, all of whom have substantially greater
resources than the Company and include, among others, Canon Inc., Panasonic, a
division of Matsushita Electrical Industrial Co., Ltd., Pitney Bowes Inc.,
Ricoh Co. Ltd., Sharp Electronics Corporation and Xerox. The Company also
competes on the basis of vendor name and recognition, technology and software
expertise, product functionality, development time and price.

The Company's technology, development services and software primarily
compete with solutions developed internally by OEMs. Virtually all of the
Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and to
develop future products. These OEMs have or may develop competing
multifunction technologies and software which may be implemented into their
products, thereby replacing the Company's proposed or current technologies,
eliminating a need for the Company's services and products to these OEMs. The
Company also competes with technologies, software and development services
provided in the MFP market by other systems and software suppliers to OEMs.
With respect to MFP embedded system technologies, the Company competes with,
among others, Peerless Systems Corporation, Personal Computer Products, Inc.
and Xionics Document Technologies, Inc. With respect to desktop software, the
Company competes with, among others, Caere Corporation, Simplify Development
Corporation, Smith Micro Software, Inc., Visioneer Inc., Wordcraft
International and Xerox.

As the MFP market continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute products or technologies. Software solutions may also be
introduced by competitors that are less costly or provide better performance
or functionality. The Company anticipates

10
<PAGE>

increasing competition for its MFPs, technologies and software under
development. Most of the Company's existing competitors, many of its potential
competitors and all of the Company's OEMs have substantially greater
financial, technical, marketing and sales resources than the Company. In the
event that price competition increases, competitive pressures could cause the
Company to reduce the price of its branded products, to reduce the amount of
royalties received on new licenses and to reduce the fees for its development
services in order to maintain existing business and generate additional
product sales and license and development revenues, which could reduce profit
margins and result in losses and a decrease in market share. No assurances can
be given as to the ability of the Company to compete favorably with the
internal development capabilities of its current and prospective OEM customers
or with other third-party vendors, and the inability to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.

EFFECT OF RAPID GROWTH ON EXISTING RESOURCES; POTENTIAL ACQUISITIONS. The
Company has grown rapidly in recent years. A continuing period of rapid growth
could place a significant strain on the Company's management, operations and
other resources. The Company's ability to manage its growth will require it to
continue to invest in its operational, financial and management information
systems, procedures and controls, and to attract, retain, motivate and
effectively manage its employees. The Company recently installed and
implemented a new management information system and used the accounting
applications of the system for the first time in connection with the December
31, 1996 monthly accounting close. The Company has also begun using the
manufacturing applications for inventory control and product ordering.
However, further improvements in these systems are needed and will continue to
be needed in order to manage additional growth in revenues and assets. There
is no guarantee that the implementation of the management information system
will contribute to the Company's ability to manage its growth and,
furthermore, any problems encountered as a result of the implementation of
such system, including additional modules and features, could adversely affect
the Company's operations. There can be no assurance that the Company will be
able to manage its growth effectively and to successfully utilize the new
management information system, and failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing and Operations."

The Company may, from time to time, pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
the Company's operating results, including the diversion of management's
attention, the assimilation of the operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential
loss of key employees. JetFax has no present commitments nor is it engaged in
any discussions or negotiations with respect to possible acquisitions. No
assurance can be given that any acquisition by the Company will not materially
and adversely affect the Company or that any such acquisition will enhance the
Company's business.

DEPENDENCE ON OUTSIDE SUPPLIERS; DEPENDENCE ON SOLE SOURCE SUPPLIERS. The
Company relies on various suppliers of components for its products. Many of
these components are standard and generally available from multiple sources.
However, there can be no assurance that alternative sources of such components
will be available at acceptable prices or in a timely manner. The Company
generally buys components under purchase orders and does not have long-term
agreements with its suppliers. Although alternate suppliers may be readily
available for some of these components, for other components it could take an
undetermined amount of time to qualify a replacement supplier and order and
receive replacement components. The Company does not always maintain
sufficient inventory to allow it to fill customer orders without interruption
during the time that would be required to obtain an adequate supply of single
sourced components. Although the Company believes it could develop other
sources for single source components, no alternative source currently exists
and the process could take several months or longer. Therefore, any
interruption in the supply of such components could have a material adverse
effect on the Company's business, financial condition and results of
operations.

11
<PAGE>

of tariffs and import restrictions and other factors beyond the Company's
control. There can be no assurance that United States or foreign trading
policies will not restrict the availability of components or increase their
cost. Any significant increase in component prices or decrease in component
availability could have a material adverse effect on the Company's business,
financial condition and results of operations.

Certain components used in the Company's products are available only from
one source. The Company is dependent on Oki America, Inc. ("Oki America"), as
the supplier of major components, including the printer engine, of the JetFax
M5. Oki America is also a competitor of the Company. The Company is also
dependent on American Microsystems, Inc. ("AMI") to provide unique application
specific integrated circuits ("ASICs") incorporating the Company's imaging and
logic circuitry, Motorola, Inc. ("Motorola") to provide microprocessors, Pixel
Magic, Inc., a subsidiary of Oak Technology, Inc. ("Pixel"), to provide a
specialized imaging processor and Rockwell Semiconductor Systems ("Rockwell")
to provide modem chips. If Oki America, AMI, Motorola, Pixel or Rockwell were
to limit or reduce the sale of such components to the Company, or if such
suppliers were to experience financial difficulties or other problems which
prevented them from supplying the Company with the necessary components, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. These sole source providers are subject
to quality and performance issues, materials shortages, excess demand,
reduction in capacity and/or other factors that may disrupt the flow of goods
to the Company or its customers and thereby adversely affect the Company's
business and customer relationships. Any shortage or interruption in the
supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Manufacturing and Operations."

DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT. The
Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs and
strategic partners and limits access to and distribution of its designs,
software and other proprietary information. Despite these efforts, the Company
may be unable to effectively protect its proprietary rights and, in any event,
enforcement of the Company's proprietary rights may be expensive. The
Company's source code also is protected as a trade secret. However, the
Company from time to time licenses portions of its source code and designs to
OEMs and also places such source code and designs in escrow to be released to
OEMs in certain circumstances, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information. Further, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.

12
<PAGE>

proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from daily operations. In
addition, the Company may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to
infringing or substituted technology. The failure of the Company to develop,
or license on acceptable terms, a substitute technology could have a material
adverse affect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property and Proprietary Rights."

DEPENDENCE ON KEY PERSONNEL. The Company is largely dependent upon the
skills and efforts of its senior management, particularly Edward R. Prince,
III ("Rudy Prince"), its President and Chief Executive Officer, and Lon Radin,
its Vice President of Engineering, and other officers and key employees, some
of whom only recently have joined the Company. The Company maintains key
person life insurance policies on Rudy Prince and Lon Radin. None of the
Company's officers or key employees, other than Michael Crandell, Vice
President of Software, are covered by an employment agreement with the
Company. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly skilled engineering,
managerial, sales, marketing and operations personnel, many of whom are in
great demand. Competition for such personnel, especially engineering, has
recently increased significantly. The loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management."

INTERNATIONAL ACTIVITIES. Revenues from sales to the Company's customers
outside the United States accounted for 22%, 39%, 26% and 24% of the Company's
total revenues for the fiscal years ended March 31, 1995 and March 31, 1996,
the nine months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. The Company expects that revenues from customers located outside
the United States may increase in both absolute dollars and as a percentage of
total revenues in the future. The international market for the Company's
branded products and products incorporating the Company's technology and
software is highly competitive, and the Company expects to face substantial
competition in this market from established and emerging companies and
technologies developed internally by its OEM customers. Risks inherent in the
Company's international business activities also include currency fluctuations
and restrictions, the burdens of complying with a wide variety of foreign laws
and regulations, including Postal, Telephone and Telegraph ("PTT")
regulations, longer accounts receivable cycles, the imposition of government
controls, risks of localizing and internationalizing products to local
requirements in foreign countries, trade restrictions, tariffs and other trade
barriers, restrictions on the repatriation of earnings and potentially adverse
tax consequences, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Substantially all of the Company's international sales are currently
denominated in U.S. dollars and, therefore, increases in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less
competitive in foreign markets. Because of the Company's international
activities, it faces certain currency exposure and translation risks. To date,
the Company has not hedged against currency exposure or translation risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON SINGLE MANUFACTURING FACILITY; RISKS RELATED TO POTENTIAL
DISRUPTION. The Company's manufacturing operations are located in its facility
in Northern California. In addition, a number of the suppliers of components
for the Company's products and providers of outsourced assembly, upon which
the Company relies, are located in Northern California. Since the Company does
not currently operate multiple facilities in different geographic areas, or
have alternative sources for many of its components or outsourced assembly, a
disruption of the Company's manufacturing operations, or the operations of its
suppliers, resulting from sustained process abnormalities, human error,
government intervention or natural disasters such as earthquakes, fires or
floods could cause the Company to cease or limit its manufacturing operations
and consequently have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Manufacturing
and Operations."

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<PAGE>

CERTAIN CHARGES TO BE INCURRED THROUGH THE CLOSING OF THE OFFERING. Through
the closing of the Offering, the Company will incur certain significant
additional charges relating to the Crandell Acquisition. Based upon a closing
date of June 16, 1997 and an initial public offering price of $8.00 per share,
the Company anticipates such additional charges to be approximately $1.1
million with no related tax benefit due to the Company's operating losses.
Such charges relate to noncash compensation of $100,000 from a variable
warrant issued to the selling stockholder/employees of the Crandell Group and
a payment of approximately $1.0 million required to be paid at the closing of
the Offering in lieu of future royalty payments to the Crandell Group.
Subsequent to the closing of the Offering, no further charges to earnings will
be incurred related to these items. See Note 3 of Notes to Financial
Statements.

NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE. Prior to the Offering, there was no public market
for the Common Stock, and there can be no assurance that an active trading
market will develop or be sustained upon completion of the Offering. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the representatives of the Underwriters
based on a number of factors, including market valuations of other companies
engaged in activities similar to those of the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors
deemed relevant. The initial public offering price may not be indicative of
the market price of the Common Stock following completion of the Offering. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products by the Company or its competitors, developments
or disputes with respect to proprietary rights, general trends in the
industry, overall market conditions and other factors. In addition, the stock
market historically has experienced extreme price and volume fluctuations,
which have particularly affected the market price of securities of many high
technology companies and which at times have been unrelated or
disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Upon completion of the
Offering, the Company will have 10,690,312 shares of Common Stock outstanding
(11,215,312 shares if the Underwriters' over-allotment option is exercised in
full), 3,500,000 (4,025,000 if the Underwriters' over-allotment option is
exercised in full) of which will be freely tradeable without restriction or
the requirement of future registration under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 7,190,312 shares of
Common Stock are "restricted securities" as that term is defined by Rule 144
promulgated under the Securities Act. Of such shares, 10,000 shares will be
eligible for sale in the public market immediately following commencement of
the Offering and 7,162,359 shares will become eligible for sale 90 days
following commencement of the Offering. All of the Company's officers and
directors and certain stockholders, including the Selling Stockholders, owning
upon completion of the Offering, in the aggregate, 7,016,148 shares of Common
Stock, have executed agreements pursuant to which each has agreed that they
will not, for a period of 180 days from the date of this Prospectus, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters. In addition, certain other
stockholders of the Company holding an aggregate of 111,000 shares are subject
to 90 day lock-up agreements with the Company and stockholders holding an
aggregate of 53,164 shares are subject to 180 day lock-up agreements with the
Company. Further, holders of outstanding warrants and vested stock options
for, in the aggregate, an additional 1,319,573 shares of Common Stock are
subject to 180 day lock-up agreements with the Company and/or Prudential
Securities Incorporated. The Company has agreed that it will not, for a period
of 180 days from the date of this Prospectus, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company

14
<PAGE>

or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock, or other capital stock of the Company without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, except that such agreement does not prevent the Company from
granting additional options under the Company's 1995 Stock Plan (the "1995
Plan") or the 1997 Director Stock Option Plan (the "Director Plan") or from
issuing shares under the 1997 Employee Stock Purchase Plan (the "Purchase
Plan"). Upon the expiration of or release from such lock-up agreements,
7,162,359 shares will be eligible for immediate sale under Rule 144 or Rule
701 and 1,319,573 additional shares subject to outstanding warrants and vested
stock options could also be sold, subject in some cases to compliance with
certain volume limitations. The remaining 17,953 shares held by existing
stockholders will become eligible for sale at various times over a period of
less than one year. Prudential Securities Incorporated may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. Sales of such shares in the future
could adversely affect the prevailing market price of the Common Stock. No
prediction can be made as to the effect, if any, that future sales of shares
or the availability of shares for sale will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. Beginning in November 1997, the holders of
an aggregate of 7,371,713 shares of Common Stock of the Company which are
"restricted securities" (including shares purchasable upon exercise of
outstanding warrants) (the "Registrable Securities") will be entitled to
certain rights with respect to registration of such shares. If exercised, such
registration rights could result in the Registrable Securities being sold
earlier than otherwise allowable under Rule 144, and could adversely affect
the prevailing market price of the Common Stock. See "Description of Capital
Stock--Registration Rights of Certain Holders" and "Shares Eligible for Future
Sale."

CONTROL BY EXISTING STOCKHOLDERS. Upon completion of the Offering, the
current officers, directors and their affiliates and five percent stockholders
will beneficially own approximately 42.3% of the outstanding shares of the
Common Stock of the Company (40.4% if the Underwriters' over-allotment option
is exercised in full). Accordingly, such persons, if they act together, likely
will have effective control over the Company through their ability to control
the election of directors and all other matters that require action by the
Company's stockholders, irrespective of how other stockholders may vote. Such
persons could prevent or delay a change in control of the Company, which may
be favored by a majority of the remaining stockholders. The ability to prevent
or delay a change in control of the Company also may have an adverse effect on
the market price of the Common Stock. See "Management--Executive Officers and
Directors," "Principal and Selling Stockholders" and "Description of Capital
Stock."

BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS. The current stockholders
of the Company will receive certain benefits as a result of the Offering. The
Offering is expected to result in the creation of a public market for the sale
of shares held by the Company's stockholders. In addition, at an initial
public offering price of $8.00 per share, the Selling Stockholders will
receive, in the aggregate, net proceeds (after deducting underwriting
discounts and commissions) of $5.6 million from the sale of their shares in
the Offering. Each of the Selling Stockholders will realize a gain for each
share sold by such Selling Stockholder in the Offering equal to the difference
between $7.44 (which is the initial public offering price per share, net of
underwriting discounts and commissions) and the acquisition cost of such
Selling Stockholder's shares (which purchase prices averaged approximately
$1.70 per share for all outstanding shares of Common Stock). Each current
stockholder of the Company will also receive an unrealized gain for each share
of Common Stock held by such stockholder upon completion of the Offering equal
to the price at which such share of Common Stock may be sold in the public
market less the acquisition cost of such share. The shares of Common Stock
held by the current stockholders upon completion of the Offering (excluding
shares subject to options outstanding under the Company's 1995 Plan as of
March 31, 1997 and shares issuable upon the exercise of outstanding warrants
as of March 31, 1997) will have an aggregate value of approximately $57.5
million, at an initial public offering price of $8.00 per share, which
represents approximately $45.3 million in appreciation in the value of such
shares (based on an average price of $1.70 per share for all outstanding
shares of Common Stock). The shares of Common Stock which will be issued upon
the automatic net exercise in full of certain warrants held by certain
stockholders upon

15
<PAGE>

the closing of the Offering will have an aggregate value of approximately $3.8
million, at an initial public offering price of $8.00 per share. Furthermore,
of the net proceeds to be received by the Company from the sale of the shares
of Common Stock offered hereby, approximately $1.3 million will be used to pay
the Company's obligations to the Crandell Group and approximately $2.8 million
will be used for payment to Ailicec International Enterprises Ltd. in
redemption of all outstanding shares of Series P Redeemable Preferred Stock
and accrued dividends thereon. See "Use of Proceeds" and "Dilution."

EFFECT OF ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and
certain provisions of Delaware law could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that investors might be willing to pay in the future for the Company's
Common Stock. These provisions permit the issuance of "blank check" preferred
stock by the Board of Directors without stockholder approval, require super-
majority approval to amend certain provisions in the Charter and Bylaws,
require that all stockholder actions be taken at duly called annual or special
meetings and not by written consent and impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. Furthermore, the Company will be subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibits the Company from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. Such
application of Section 203 could also have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in the
Offering will experience immediate and substantial dilution in the net
tangible book value of the Common Stock from the initial public offering
price. To the extent outstanding options and warrants to purchase shares of
the Company's Common Stock are exercised, there will be further dilution. See
"Dilution."

NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTION ON PAYMENT OF
DIVIDENDS. The Company has never declared or paid cash dividends on its Common
Stock and intends to retain all available funds for use in the operation and
expansion of its business. The Company therefore does not anticipate that any
cash dividends will be declared or paid in the foreseeable future. In
addition, the Company's credit facility prohibits the payment of cash
dividends without the consent of the lender.

16
<PAGE>

THE COMPANY

The Company's embedded system technology is made up of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. The Company believes its embedded
systems technology and desktop software enable OEMs to offer more competitive
products with improved price/performance, shortened development cycles and
reduced development and product costs. The Company currently licenses its
embedded system technology or software to 25 licensees worldwide, including
Hewlett-Packard, Oki Data, Samsung, Xerox and Intel Corporation ("Intel").

Since its inception in 1988, the majority of the Company's revenues have
been generated from sales of JetFax branded products and consumables,
including the JetFax M5, the Company's current branded product. The Company
believes that it offers the most advanced and innovative MFP solutions
currently available in its product class. For example, the JetFax M5 was the
first MFP to support two telephone lines for simultaneous receiving and
sending of faxes, and the Company was one of the first to market a MFP with a
high speed 33.6 Kbps modem.

The Company believes its JetSuite software will define a new category of
all-in-one software for MFPs that will replace the piecemeal software
components historically bundled by MFP vendors. As a result, SOHO and
corporate workers can increase productivity and realize substantial time and
cost savings relative to traditional office protocols and equipment usage. The
Company's JetSuite desktop software can be sold on a stand-alone basis or
bundled with the JetFax embedded system to provide a complete, integrated
hardware and software solution. The Company plans to release JetSuite with
several OEM products in the third quarter of 1997. The Company also offers
JetPCL software, which provides high quality conversion of documents encoded
in Hewlett-Packard's Printer Control Language ("PCL"), the industry standard.

The Company's executive offices are located at 1376 Willow Road, Menlo Park,
California 94025, and its telephone number is (415) 324-0600. The Company was
incorporated in Delaware in August 1988.

17
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby are estimated to be $19,660,000
(approximately $23,566,000 if the Underwriters' over-allotment option is
exercised in full) at an initial public offering price of $8.00 per share and
after deducting the underwriting discount and commissions and estimated
offering expenses. The Company expects to use approximately $2,764,000 of the
net proceeds from the Offering for payment to the holders of the Company's
Series P Redeemable Preferred Stock in redemption thereof pursuant to the
terms of the Company's Certificate of Designation of Series P Redeemable
Preferred Stock. The Company expects to use approximately $1,250,000 of the
net proceeds received by it from the Offering for payment to the Crandell
Group in lieu of future royalty payments and for repayment of a related note
payable. The Company also intends to repay amounts outstanding under its
equipment term loan and line of credit facility ($1,244,000 at March 31, 1997)
with a portion of the net proceeds of the Offering. The interest rate on the
line of credit is the bank's prime rate (8.5% as of March 31, 1997) plus 1.0%
and the interest rate on the equipment term loan is the bank's prime rate plus
1.5%. The Company intends to use the remaining net proceeds for working
capital and other general corporate purposes. Pending such uses, the Company
intends to invest the net proceeds from the Offering in short-term,
investment-grade, interest-bearing instruments. The Company will not receive
any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Certain Transactions," "Principal and Selling Stockholders"
and Note 7 of Notes to Financial Statements.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on shares of its
Common Stock and does not expect to declare or pay cash dividends on its
Common Stock in the foreseeable future. The Company intends to retain any
earnings for future growth. In addition, the Company's credit facility
prohibits the payment of cash dividends without the consent of the lender. See
Note 7 of Notes to Financial Statements.

18
<PAGE>

CAPITALIZATION

The following table sets forth as of March 31, 1997: (i) the unaudited
actual capitalization of the Company, (ii) the unaudited pro forma
capitalization of the Company reflecting the conversion of all outstanding
preferred stock, except the Series P Redeemable Preferred Stock, into
6,293,978 shares of Common Stock; the issuance of 470,079 shares of Common
Stock upon the automatic net exercise in full of certain warrants at $2.15 per
share and the issuance of 162,703 shares of Common Stock upon the conversion
of approximately $970,000 of cumulative unpaid dividends on the Series F
Convertible Preferred Stock at a conversion price equal to 75% of the initial
public offering price; and (iii) the unaudited pro forma capitalization of the
Company as adjusted to give effect to the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby at an initial public offering price
of $8.00 per share, after deducting the underwriting discount and commissions
and estimated offering expenses, the application of the estimated net proceeds
therefrom including the redemption of all outstanding shares of Series P
Redeemable Preferred Stock, as set forth under the caption "Use of Proceeds"
and the increase in the authorized number of shares of Common Stock to
35,000,000 and the decrease in the authorized number of shares of Preferred
Stock to 5,000,000.

<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable (1)............................. $ 181 $ 181 $ --
-------- -------- --------
Redeemable preferred stock, $0.01 par value,
500,000 shares authorized, actual, pro forma
and as adjusted; 344,350 shares outstanding,
actual and pro forma; none outstanding, as
adjusted.................................... 2,764 2,764 --
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value, 9,000,000
shares authorized, actual and pro forma;
5,000,000 shares, as adjusted; 6,293,978
shares outstanding, actual; no shares
outstanding, pro forma and as adjusted..... 63 -- --
Common stock, $0.01 par value, 13,500,000
shares authorized, actual and pro forma;
35,000,000 shares, as adjusted; 1,013,552
shares outstanding, actual; 7,940,312
shares outstanding, pro forma; 10,690,312
shares outstanding, as adjusted (2)........ 10 79 107
Additional paid-in capital.................. 14,670 14,664 34,296
Accumulated deficit......................... (14,642) (14,642) (15,642)
-------- -------- --------
Total stockholders' equity................... 101 101 18,761
-------- -------- --------
Total capitalization..................... $ 3,046 $ 3,046 $ 18,761
======== ======== ========
</TABLE>
- --------
(1) See Note 7 of Notes to Financial Statements.

(2) Excludes (i) 1,160,635 shares of Common Stock issuable upon exercise of
stock options outstanding at March 31, 1997 under the Company's stock
option plans with a weighted average exercise price of $1.22 per share,
(ii) 401,999 shares of Common Stock issuable upon exercise of options
granted outside of the Company's stock option plans with an exercise price
of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $2.75 per share and (iv) 100,000 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $1.75 per share. See "Management--Incentive Stock Plans," "Certain
Transactions" and Note 10 of Notes to Financial Statements.

19
<PAGE>

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. The pro forma net tangible book
value of the Company as of March 31, 1997 was $(361,000) or $(0.05) per share.
Pro forma net tangible book value per share is determined by dividing the net
tangible book value of the Company (tangible assets less liabilities) by the
pro forma number of shares of the Company's Common Stock outstanding as of
March 31, 1997. Without taking into account any changes in net tangible book
value subsequent to March 31, 1997, other than to give effect to the receipt
of the net proceeds of the sale of the 2,750,000 shares of Common Stock
offered by the Company hereby at an initial public offering price of $8.00 per
share, after deducting the underwriting discount and commissions and estimated
offering expenses, and the application of the net proceeds therefrom, the pro
forma net tangible book value of the Common Stock as of March 31, 1997 would
have been $18,299,000, or $1.71 per share. This represents an immediate
dilution in pro forma net tangible book value of $6.29 per share to new
investors purchasing shares in the Offering. The following table illustrates
the per share dilution as of March 31, 1997:

<TABLE>
<S> <C> <C>
Initial public offering price.................................. $8.00
Pro forma net tangible book value at March 31, 1997.......... $(0.05)
Increase per share attributable to new investors............. 1.76
------
Pro forma net tangible book value after the Offering........... 1.71
-----
Dilution per share to new investors............................ $6.29
=====
</TABLE>

The following table sets forth, on an as adjusted basis as of March 31,
1997, after giving effect to the conversion of all outstanding Preferred Stock
into Common Stock, except the Series P Redeemable Preferred Stock, the
differences between existing stockholders and purchasers of Common Stock in
the Offering at an initial public offering price of $8.00 per share with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 7,940,312 74.3% $ 13,519,652 38.1% $ 1.70
New investors (1)....... 2,750,000 25.7 22,000,000 61.9 8.00
---------- ----- ------------ -----
Total................. 10,690,312 100.0% $ 35,519,652 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in the Offering will reduce the number
of shares held by existing stockholders to 7,190,312 or approximately
67.3% of the total number of shares of Common Stock to be outstanding
after the Offering, and will increase the number of shares held by new
investors to 3,500,000, or approximately 32.7% of the total number of
shares of Common Stock to be outstanding after the Offering. If the
Underwriters' over-allotment option is exercised in full, the number of
shares held by new investors will increase to 4,025,000 shares, or
approximately 35.9% of the total number of shares to be outstanding after
the Offering. See "Principal and Selling Stockholders."

The foregoing tables assume no exercise of the Underwriters' over-allotment
option or stock options or warrants outstanding at March 31, 1997. At March
31, 1997, there were (i) 1,160,635 shares of Common Stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$1.22 per share, (ii) 401,999 shares of Common Stock issuable upon exercise of
options granted outside of the Company's stock option plans with an exercise
price of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of outstanding warrants with an exercise price of $2.75 per share and
(iv) 100,000 shares of Common Stock issuable upon exercise of outstanding
warrants with an exercise price of $1.75 per share. To the extent that
outstanding options and warrants are exercised in the future, there will be
further dilution to new investors. See "Management--Incentive Stock Plans,"
"Certain Transactions" and Note 10 of Notes to Financial Statements.

20
<PAGE>

SELECTED FINANCIAL DATA

The statement of operations data set forth below for the fiscal years ended
March 31, 1995 and 1996, and the nine months ended December 31, 1996, and the
balance sheet data at March 31, 1996 and December 31, 1996 are derived from
the financial statements of the Company included elsewhere in this Prospectus,
which have been audited by Deloitte & Touche LLP, independent auditors. The
statement of operations data for the fiscal years ended March 31, 1993 and
1994, and the balance sheet data at March 31, 1993, 1994 and 1995, are derived
from audited financial statements not included herein. The selected financial
data for the nine months ended December 31, 1995 and for the quarters ended
March 31, 1996 and 1997, and the balance sheet data at March 31, 1997, have
been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements and which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's results of
operations. The following financial data is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED QUARTER ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31,
-------------------------------------- ------------------ ----------------
1993 1994 1995 1996 1995 1996 (1) 1996 1997 (1)
-------- -------- -------- -------- -------- -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product............... $ 4,542 $ 6,086 $ 6,413 $ 11,143 $ 7,336 $ 10,205 $3,807 $4,250
Development fees ..... -- 75 1,200 699 466 1,416 233 743
Software and
technology license
fees................. -- -- 139 1,345 667 1,241 678 223
-------- -------- -------- -------- -------- -------- ------ ------
Total revenues ...... 4,542 6,161 7,752 13,187 8,469 12,862 4,718 5,216
Costs and expenses:
Cost of product
revenues ............ 3,695 5,486 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development ......... 1,397 1,311 1,118 1,249 919 1,709 330 1,477(2)
Selling and marketing
..................... 633 1,303 1,325 2,710 1,745 2,785 965 972
General and
administrative ...... 1,019 615 746 750 500 823 250 352
-------- -------- -------- -------- -------- -------- ------ ------
Total costs and
expenses ........... 6,744 8,715 8,438 15,811 10,957 13,812 4,854 5,780
-------- -------- -------- -------- -------- -------- ------ ------
Loss from operations .. (2,202) (2,554) (686) (2,624) (2,488) (950) (136) (564)
Interest and other
income (expense)...... (18) (5) (68) (270) (192) 13 (78) (27)
-------- -------- -------- -------- -------- -------- ------ ------
Loss before
extraordinary item and
income taxes ......... (2,220) (2,559) (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes ................ -- -- -- 35 35 105 -- 45
-------- -------- -------- -------- -------- -------- ------ ------
Loss before
extraordinary item ... (2,220) (2,559) (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item (3). -- -- 349 -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------ ------
Net loss............... $ (2,220) $ (2,559) $ (405) $ (2,929) $ (2,715) $ (1,042) $ (214) $ (636)
======== ======== ======== ======== ======== ======== ====== ======
PRO FORMA DATA (4):
Net loss per share..... $ (0.14) $(0.08)
======== ======
Common and common
equivalent shares used
in computing net loss
per share............. 8,454 8,474
======== ======
<CAPTION>

MARCH 31,
-------------------------------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ (2,138) $ (4,636) $ (2,097) $ 3,780 $1,962 $1,564
Total assets........... 2,939 2,527 3,434 9,619 6,121 8,020
Long-term note payable,
less current portion.. 4 4 2,372 -- 198 181
Redeemable preferred
stock................. -- -- -- 2,610 2,726 2,764
Total stockholders'
equity (deficiency)... (1,899) (4,458) (4,185) 1,369 219 101
</TABLE>
- --------
(1) Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4,
1997 is referred to herein as the nine months ended December 31, 1996. For
presentation purposes, the Company refers to its reporting year ended
January 4, 1997 as ending on December 31, 1996 and the 13-week period from
January 5, 1997 to April 5, 1997 is referred to herein as the quarter
ended March 31, 1997.
(2) Includes $551,000 of expenses related to the Crandell Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(3) Represents a gain on exchange of stockholder debt and receivables for
notes payable. See Note 2 of Notes to Financial Statements.
(4) For an explanation of the determination of the number of shares used in
computing pro forma net loss per share, see Note 1 of Notes to Financial
Statements.

21
<PAGE>

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

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussions in this Prospectus contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors"
as well as those discussed elsewhere in this Prospectus.

OVERVIEW

JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the MFP
market, which consists of electronic office devices that combine print, fax,
copy and scan capabilities in a single unit. The Company was incorporated in
August 1988 and since that time has engaged in the development, manufacture
and sale of its branded MFPs, including the 8000-D, the JetFax 4 and the
JetFax M5, and has entered into agreements with a number of OEMs for the
customization and integration of the Company's embedded system technology and
desktop software in OEMs' MFPs. In July 1996, the Company purchased
substantially all of the assets of the Crandell Group. At the time of the
acquisition, the Crandell Group's products included desktop software for
document conversion and portable document handling and products in development
included a fully integrated Microsoft Windows desktop application for MFPs.
The Company has continued to develop this software, under the JetSuite name,
and plans to release JetSuite with several OEM products in the third quarter
of 1997.

Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
following December 31. The 40-week period from April 1, 1996 to January 4,
1997 is referred to herein as the nine months ended December 31, 1996 and the
13-week period from January 5, 1997 to April 5, 1997 is referred to herein as
the quarter ended March 31, 1997. For presentation purposes, the Company
refers to its reporting year ended January 4, 1997 as ending on December 31,
1996. The most recent fiscal year discussion and analysis is based on the nine
months ended December 31, 1996 compared to the nine months ended December 31,
1995.

Revenues increased from $4.5 million for the fiscal year ended March 31,
1993 to $13.2 million for the fiscal year ended March 31, 1996. Revenues were
$12.9 million for the nine months ended December 31, 1996 and $5.2 million for
the quarter ended March 31, 1997. At March 31, 1997, the Company had an
accumulated deficit of $14.6 million and total stockholders' equity of
$101,000.

The Company's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, consumables and upgrades; (ii)
development fees for engineering services; and (iii) software and technology
license fees related to both its embedded system technology for MFPs and its
desktop software. Historically, product revenues have accounted for the
majority of the Company's total revenues. For the nine months ended December
31, 1996, product revenues, development fees and software and technology
license fees, as a percentage of total revenues, were 79%, 11% and 10%,
respectively. For the quarter ended March 31, 1997, product revenues,
development fees and software and technology fees, as a percentage of total
revenues, were 82%, 14% and 4%, respectively. For the nine months ended
December 31, 1996, revenues generated from the desktop software business
acquired from the Crandell Group in July 1996 included $628,000 of software
license fees and $388,000 of development fees.

Product revenues result from the sale of the Company's branded MFP products
into the corporate market through business equipment dealers. Product revenues
are generally recognized when the product is shipped to the customer.
Development fee revenues are derived from customizing the Company's embedded
system technology and software for inclusion in specific applications for its
OEMs' products. Development fee revenues are recognized on the percentage of
completion method over the development period. See Note 1 of Notes to
Financial Statements.

22
<PAGE>

The Company's development contracts with certain OEM customers have enabled
JetFax to accelerate its product development efforts. The Company classifies
all development costs related to such contracts as research and development
expenses because such development fees have only partially funded the
Company's product development activities, and the Company generally retains
ownership of the technology developed under these agreements.

Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. These payments can take the form of one-time
license fees, non-refundable prepaid royalties or recurring per unit
royalties. One-time license fees and non-refundable prepaid royalties are
recognized upon the later of delivery of the contracted technology or
satisfaction of contractual milestones, if any. Recurring license revenues
from per unit fees paid by the Company's OEMs are recognized upon the
manufacture or shipment of products incorporating the Company's technology as
specified in the related agreements. The recurring license revenues reported
by the Company are dependent on the timing and accuracy of product
manufacturing or sales reports received from the Company's OEM customers.
These reports are provided on a quarterly basis which may not coincide with
the Company's quarter end. However, the Company attempts to get verbal
estimates more frequently. The quarterly reports, as well as any verbal
estimates, are subject to delay and potential revision by the OEM. Therefore,
the Company may be unable to estimate such revenues accurately prior to public
announcement of the Company's quarterly results. In such an event, the Company
may subsequently be required to revise its previously reported revenues when
it publishes its financial statements or adjust revenues for subsequent
periods, which could have a material adverse effect on the Company's business,
financial condition and results of operations and the price of the Company's
Common Stock.

A substantial portion of the Company's branded products sales is to dealers
in the IKON network. These IKON dealers accounted for 21% and 30% of the
Company's total revenues for the nine months ended December 31, 1996 and the
quarter ended March 31, 1997, respectively. The Company's OEM customers for
engineering development and technology licenses are Hewlett-Packard, Oki Data,
Samsung, Xerox and Intel Corporation. The royalty payments owed the Company by
Xerox under the existing technology agreements were largely completed during
the nine months ended December 31, 1996. The Company expects that the ongoing
obligations under existing OEM contracts will generate future royalty
payments. The termination of a major dealer relationship or an OEM agreement
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on Dealers
and Distributors" and "--Dependence on OEMs."

International revenues accounted for 22%, 39%, 26% and 24% of total revenues
for the fiscal years ended March 31, 1995 and March 31, 1996, the nine months
ended December 31, 1996 and the quarter ended March 31, 1997, respectively.
The increase from the fiscal year ended March 31, 1995 to the fiscal year
ended March 31, 1996 was primarily due to higher sales of the JetFax 4 in
Europe. The decrease from the fiscal year ended March 31, 1996 to the nine
months ended December 31, 1996 was primarily due to higher than normal
inventory levels of the JetFax M5 in Germany at the prior fiscal year end. All
of the development fees and software and technology license revenues, and most
of the product revenues, have been denominated and collected in United States
dollars. The Company has not hedged the foreign currency exposure related to
product sales denominated in foreign currencies as the impact has not been
significant. See "Risk Factors--International Activities."

The gross margins for the Company's branded MFP products have been and are
expected to continue to be constrained by the competitive nature of the
marketplace, pricing pressures and the greater name recognition of the larger
companies with which JetFax competes. The Company believes that sales of its
branded MFP products provide a substantial revenue base, an opportunity to
stay in close touch with evolving customer and market needs and a high level
of credibility in demonstrating the Company's advanced technology. The margins
on consumables, such as toner cartridges and drums, and on upgrades, such as
the two-line upgrade, are typically higher than on the base unit. In addition,
the Company's consumables generate recurring revenues which tend to increase
as the cumulative number of units sold increases.

23
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenues, certain
items in the Company's statements of operations for the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED QUARTER ENDED
MARCH 31, DECEMBER 31, MARCH 31,
------------------- ------------------- ---------------
1995 1996 1995 1996 1996 1997
-------- -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... 82.7% 84.5% 86.6% 79.3% 80.7% 81.5%
Development fees...... 15.5 5.3 5.5 11.0 4.9 14.2
Software and
technology license
fees................. 1.8 10.2 7.9 9.7 14.4 4.3
-------- -------- -------- -------- ------ ------
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product
revenues............. 67.7 84.2 92.0 66.0 70.1 57.1
Research and
development.......... 14.4 9.5 10.9 13.3 7.0 28.3(1)
Selling and marketing. 17.1 20.6 20.6 21.7 20.5 18.6
General and
administrative....... 9.6 5.7 5.9 6.4 5.2 6.8
-------- -------- -------- -------- ------ ------
Total costs and
expenses........... 108.8 119.9 129.4 107.4 102.8 110.8
-------- -------- -------- -------- ------ ------
Loss from operations.... (8.8) (19.9) (29.4) (7.4) (2.8) (10.8)
Interest and other
income (expense)....... (0.9) (2.0) (2.3) 0.1 (1.7) (0.5)
-------- -------- -------- -------- ------ ------
Loss before
extraordinary item and
income taxes............ (9.7) (21.9) (31.7) (7.3) (4.5) (11.3)
Provision for income
taxes................... -- 0.3 0.4 0.8 -- 0.9
-------- -------- -------- -------- ------ ------
Loss before
extraordinary item...... (9.7) (22.2) (32.1) (8.1) (4.5) (12.2)
Extraordinary item...... 4.5 -- -- -- -- --
-------- -------- -------- -------- ------ ------
Net loss................ (5.2)% (22.2)% (32.1)% (8.1)% (4.5)% (12.2)%
======== ======== ======== ======== ====== ======
</TABLE>
- --------
(1) Includes $551,000 of expenses (representing 10.6% of total revenues)
related to the Crandell Acquisition.

Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996

Revenues. Total revenues increased 11% from $4.7 million for the quarter
ended March 31, 1996 to $5.2 million for the quarter ended March 31, 1997.
Product revenues increased 12% from $3.8 million for the quarter ended March
31, 1996 to $4.3 million for the quarter ended March 31, 1997, reflecting
primarily increased domestic unit shipments of the JetFax M5 and related
consumables and upgrades, which more than offset the lower average selling
price of the JetFax M5 during the quarter ended March 31, 1997. Development
fees increased 219% from $233,000 for the quarter ended March 31, 1996 to
$743,000 for the quarter ended March 31, 1997 due to significant new OEM
programs undertaken in the last twelve months. Through March 31, 1997, the
Company recognized cumulative revenues of $316,000 pursuant to a development
agreement with one of its OEMs, of which approximately $96,000 was recognized
during the quarter ended March 31, 1997. The Company has experienced delays in
completion of the development project for this OEM. Pursuant to certain
provisions of the development agreement, the final milestone payment may be
reduced; however, the Company believes that a reduction, if any, in this
payment would not have a material adverse effect on the Company's results of
operations or cash flows. Software and technology licensing fees decreased 67%
from $678,000 in the quarter ended March 31, 1996 to $223,000 in the quarter
ended March 31, 1997, as the royalties from Xerox declined due to the end of
life of Xerox products for which JetFax earned royalties. International
revenues decreased from 33% of total revenues for the quarter ended March 31,
1996 to 24% for the quarter ended March 31, 1997 as a result of lower
international product shipments primarily in Europe, a reduction in German
distribution inventory levels and the transition from a local German
distributor to a new Company sales office in Germany.

Cost of Product Revenues. Cost of product revenues decreased 10% from $3.3
million for the quarter ended March 31, 1996 to $3.0 million for the quarter
ended March 31, 1997. The product gross margin increased

24
<PAGE>

from 13.1% for the quarter ended March 31, 1996 to 29.9% for the quarter ended
March 31, 1997. Product margins improved on the Company's main product, the
JetFax M5, due to the higher production levels and cost reduction efforts
implemented over the past year. Additionally, the higher margin JetFax M5 and
related consumables and upgrades accounted for a higher percentage of the
overall product mix than a year ago.

Research and Development. Research and development expenses increased from
$330,000 for the quarter ended March 31, 1996 to $1.5 million for the quarter
ended March 31, 1997. The quarter ended March 31, 1997 included an accounting
charge for a variable equity award of $525,000 classified as compensation,
which was related to warrants issued as part of the Crandell Acquisition and
$26,000 of compensation expenses associated with the continuing employment of
the founders of the Crandell Group. These compensation expenses are based on a
percentage of ongoing desktop software sales and will be paid in full and will
terminate upon the closing of the Offering. See Note 3 of Notes to Financial
Statements. Excluding these expenses, research and development expenses were
$926,000, or 17.8% of total revenues, for the quarter ended March 31, 1997, an
increase of 188% from the quarter ended March 31, 1996. This increase resulted
primarily from: (i) the software development personnel added with the Crandell
Acquisition in July 1996; (ii) quick turnaround engineering prototype expenses
for the development of an embedded system; and (iii) expenses related to
hiring additional engineering personnel.

Selling and Marketing. Selling and marketing expenses were essentially flat,
increasing from $965,000 for the quarter ended March 31, 1996 to $972,000 for
the quarter ended March 31, 1997. As a percentage of total revenues, selling
and marketing expenses declined from 20.5% for the quarter ended March 31,
1996 to 18.6% for the quarter ended March 31, 1997.

General and Administrative. General and administrative expenses increased
41% from $250,000, or 5.2% of total revenues, for the quarter ended March 31,
1996 to $352,000, or 6.8% of total revenues, for the quarter ended March 31,
1997. The increase was primarily due to higher personnel, consulting and
hiring expenses.

Interest and Other Income (Expense). Interest and other income (expense)
decreased from $78,000 for the quarter ended March 31, 1996 to $27,000 for the
quarter ended March 31, 1997. The decrease was primarily due to lower interest
expense resulting from the lower level of debt outstanding.

Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the quarters ended March 31,
1996 and March 31, 1997. The $45,000 income tax provision for the quarter
ended March 31, 1997 was related to foreign withholding taxes on certain
development fees.

Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995

Revenues. Total revenues increased 52% from $8.5 million for the nine months
ended December 31, 1995 to $12.9 million for the nine months ended December
31, 1996. Product revenues increased 39% from $7.3 million for the nine months
ended December 31, 1995 to $10.2 million for the nine months ended
December 31, 1996, reflecting primarily increased unit shipments and higher
average selling prices of the Company's MFPs as the Company transitioned from
the JetFax 4, an inkjet MFP, to the JetFax M5, a high performance, laser/LED
MFP, which began commercial shipment in June 1995. In addition, during the
nine months ended December 31, 1996, the Company expanded the number of large
business equipment dealers marketing the Company's products. Development fees
increased 203% from $466,000 for the nine months ended December 31, 1995 to
$1.4 million for the nine months ended December 31, 1996 as major programs
were initiated or continued for OEMs. Software and technology license fees
increased 86% from $667,000 for the nine months ended December 31, 1995 to
$1.2 million for the nine months ended December 31, 1996. This increase was
primarily due to the Crandell Acquisition in July 1996 which added software
license fees of $628,000 for the last two quarters of the nine months ended
December 31, 1996, but the increase was partially offset by a decline in
royalties from Xerox due to the end of life of a related Xerox product.

Cost of Product Revenues. Cost of product revenues consists primarily of
purchased materials; direct production labor and supervision for assembly and
test; subcontracted manufacturing, mainly for printed circuit

25
<PAGE>

boards; indirect labor for inventory management, shipping and receiving,
purchasing, manufacturing engineering, document control and operations
management; and related facility and support costs. Cost of product revenues
may vary as a percentage of total revenues in the future as a result of a
number of factors including: relative production volumes; the mix of product
shipped and the varying proportion of MFPs versus consumables and upgrades;
changes in production yields, especially those associated with the
introduction of new products; risk of inventory obsolescence and excess
inventory; pricing pressures in the market; and vendor quality or supply
problems.

Cost of product revenues increased 9% from $7.8 million for the nine months
ended December 31, 1995 to $8.5 million for the nine months ended December 31,
1996, due to increased sales levels. The product gross margin increased from
negative 6.2% for the nine months ended December 31, 1995 to 16.8% for the
nine months ended December 31, 1996. The product gross margin for the nine
months ended December 31, 1995 was adversely affected by reserves of $760,000
taken in the quarter ended September 30, 1995 for the write down of certain
inventory to net realizable value and to record estimated losses on purchase
commitments related to the pricing decline on the JetFax 4. The Company had a
fixed price order from Xerox for JetFax 4 units, but the price at which the
units could be sold in the market had declined substantially due to
competition from other manufacturers' new product introductions. A settlement
of the purchase commitment from Xerox was negotiated in the quarter ended
September 30, 1996, which resulted in a reduction of the inventory reserve and
a credit to cost of product revenues of $280,000.

Excluding the impact of these reserves, the product gross margin was 4.1%
for the nine months ended December 31, 1995 as compared to 14.0% for the nine
months ended December 31, 1996. The lower product gross margin in the prior
nine month period primarily reflected the impact of competitive pricing
pressures in the inkjet MFP market and the startup and higher initial
production costs associated with the June 1995 commercial release of the
JetFax M5.

Research and Development. Research and development expenses were comprised
mainly of personnel related costs, engineering prototypes and supplies,
engineering contractors, computer equipment depreciation and facilities
expenses. Research and development expenses increased 86% from $919,000 for
the nine months ended December 31, 1995 to $1.7 million for the nine months
ended December 31, 1996. This increase resulted primarily from: (i) the
software development personnel added with the Crandell Acquisition in July
1996; (ii) certain compensation expenses associated with the continuing
employment of the founders of the Crandell Group, which are based on a
percentage of ongoing desktop software sales (these compensation expenses will
be paid in full and terminate upon the closing of the Offering); and (iii)
quick turnaround engineering prototype expenses for the development of an
embedded system. See "Certain Transactions."

Selling and Marketing. Selling and marketing expenses consisted primarily of
personnel related costs and commissions, travel and entertainment expenses of
direct sales and marketing personnel, advertising and promotional expenses,
marketing communications, customer support and service and facilities
expenses. Selling and marketing expenses increased 59% from $1.7 million for
the nine months ended December 31, 1995 to $2.8 million for the nine months
ended December 31, 1996. The increase was primarily related to higher
commissions resulting from higher sales levels and to continuing efforts to
increase the number of large dealers selling the Company's branded products in
the business equipment dealer marketing channel.

General and Administrative. General and administrative expenses included
personnel related costs for administrative, finance and executive personnel,
outside professional fees and facilities expenses. The expenses related to
general and administrative functions increased 65% from $500,000 for the nine
months ended December 31, 1995 to $823,000 for the nine months ended December
31, 1996. The increase was primarily due to higher personnel costs, legal and
consulting expenses and bank fees related to the establishment of a credit
facility.

Interest and Other Income (Expense). Interest and other income (expense)
consisted primarily of interest expense, a small amount of interest income and
miscellaneous items of other income and expense. Interest and other income
(expense) was a net expense of $192,000 for the nine months ended December 31,
1995 and net income of $13,000 for the nine months ended December 31, 1996.
During the nine months ended December 31, 1995, the

26
<PAGE>

Company incurred interest expense on approximately $3.0 million of the
Company's 10% senior subordinated secured convertible notes outstanding on
December 31, 1995. These notes were repaid or converted into shares of
preferred stock in March 1996. In addition, the investment proceeds from the
sale of Convertible Preferred Stock in March 1996 resulted in net interest
income of $22,000 for the nine months ended December 31, 1996.

Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the nine months ended December
31, 1995 or the nine months ended December 31, 1996. The $35,000 income tax
provision for the nine months ended December 31, 1995 and the $105,000 income
tax provision for the nine months ended December 31, 1996 were related to
foreign withholding taxes on certain development fees.

At December 31, 1996, net operating loss carryforwards of approximately
$11.1 million and $6.3 million were available to offset future federal and
state taxable income, respectively, and research and development tax credits
of $108,000 and $156,000 were available to offset future federal and state
income taxes, respectively. The operating loss and credit carryforwards will
expire, if not utilized, at various dates beginning in 2003 through 2011.
Utilization of the net operating loss and credit carryforwards may be subject
to significant limitations as a result of certain ownership changes. See Note
11 of Notes to Financial Statements.

The Company recognizes deferred tax assets and liabilities based on the
difference between financial reporting and tax bases of assets and liabilities
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Based on the weight of available
evidence, which includes the Company's historical losses since inception, and
the uncertainties regarding future results of operations, the Company has
provided a full valuation allowance against its net deferred tax assets of
$4.9 million at December 31, 1996, as it is more likely than not that the
deferred tax assets will not be realized. See Note 11 of Notes to Financial
Statements.

Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995

Revenues. Total revenues increased 70% from $7.8 million for the fiscal year
ended March 31, 1995 to $13.2 million for the fiscal year ended March 31,
1996. This increase resulted primarily from the June 1995 commercial release
of the JetFax M5 and, to a lesser extent, increased sales of consumables and
upgrades. Product revenues increased 74% from $6.4 million for the fiscal year
ended March 31, 1995 to $11.1 million for the fiscal year ended March 31,
1996. Development fees decreased 42% from $1.2 million for the fiscal year
ended March 31, 1995 to $699,000 for the fiscal year ended March 31, 1996, due
to the completion of a major development project for Xerox. Correspondingly,
software and technology license fees increased from $139,000 for the fiscal
year ended March 31, 1995 to $1.3 million for the fiscal year ended March 31,
1996, reflecting receipt of royalties on the Xerox products that had begun
production.

Cost of Product Revenues. Cost of product revenues increased 111% from $5.2
million for the fiscal year ended March 31, 1995 to $11.1 million for the
fiscal year ended March 31, 1996. The decline in product gross margin was
primarily due to reserves of $760,000 taken in the quarter ended September 30,
1995 for the write-down of certain inventories to net realizable value and to
record losses on purchase commitments due to the pricing decline on the JetFax
4. Excluding the impact of these reserves, the product gross margin was 18.2%
for the fiscal year ended March 31, 1995 as compared to 7.2% for the fiscal
year ended March 31, 1996. The lower product gross margin primarily reflected
the impact of the competitive pricing pressures in the inkjet MFP market and
the startup and higher initial production costs associated with the June 1995
commercial release of the JetFax M5. For the quarter ended March 31, 1996, the
product gross margin had increased to 13.1%.

Research and Development. Research and development expenses increased from
$1.1 million for the fiscal year ended March 31, 1995 to $1.2 million for the
fiscal year ended March 31, 1996, but declined as a percentage of total
revenues from 14.4% to 9.5%, respectively, primarily due to the increase in
total revenues. The major technical development effort for Xerox and the
internal development of the second generation embedded system used in the
Company's JetFax M5 were largely completed during the fiscal year ended March
31, 1995, leading

27
<PAGE>

to a relatively minor increase in research and development expenses for the
fiscal year ended March 31, 1996 as personnel were deployed to other
development programs.

Selling and Marketing. Selling and marketing expenses increased 105% from
$1.3 million for the fiscal year ended March 31, 1995 to $2.7 million for the
fiscal year ended March 31, 1996. The higher expenses for marketing and sales
personnel, commissions, product communication materials, dealer incentives and
cooperative advertising shared with the dealers were related to the commercial
release of the JetFax M5 and building the Company's network of business
equipment dealers.

General and Administrative. General and administrative expenses were
approximately $750,000 for both the fiscal years ended March 31, 1995 and
March 31, 1996, but declined as a percentage of total revenues from 9.6% for
the fiscal year ended March 31, 1995 to 5.7% for the fiscal year ended March
31, 1996.

Interest and Other Income (Expense). Interest expense increased from $68,000
for the fiscal year ended March 31, 1995 to $270,000 for the fiscal year ended
March 31, 1996. The increase in interest expense for the fiscal year ended
March 31, 1996 was related to the issuance of 10% senior secured convertible
notes throughout the year ended March 31, 1995 which totaled $2.0 million at
such year end. The highest balance owed under such notes was $3.0 million in
March 1996 when such notes were either repaid or converted into shares of
Convertible Preferred Stock.

Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the fiscal years ended March
31, 1995 or March 31, 1996. The $35,000 income tax provision for the fiscal
year ended March 31, 1996 was related to foreign withholding taxes.

QUARTERLY RESULTS OF OPERATIONS

The Company's quarterly results may be subject to fluctuations resulting
from a variety of factors, including: the timing of introductions of new
products or product enhancements by the Company, its OEMs and their
competitors; initiation or termination of arrangements between the Company and
its existing and potential significant OEM customers or dealers and
distributors; the size and timing of and fluctuations in end user demand for
the Company's branded products and OEM products incorporating the Company's
technology; inventories of the Company's branded products or products
incorporating the Company's technology carried by the Company, its
distributors or dealers, its OEMs or the OEMs' distributors that exceed
current or projected end user demand; the phase-out or early termination of
the Company's branded products or OEM products incorporating the Company's
technology; the amount and timing of development agreements, one-time software
licensing transactions and recurring licensing fees; non-performance by the
Company, its suppliers or its OEM or other customers pursuant to their plans
and agreements; seasonal trends; competition and pricing; customer order
deferrals and cancellations in anticipation of new products or product
enhancements; industry and technology developments; changes in the Company's
operating expenses; software and hardware defects; product delays or product
quality problems; currency fluctuations; and general economic conditions. The
Company expects that its operating results will continue to fluctuate
significantly as a result of these and other factors. A substantial portion of
the Company's operating expenses is related to personnel, development of new
products, marketing programs and facilities. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues and anticipated OEM commitments. If
such commitments do not generate revenues or operating expenses are
significantly higher, the Company's business, financial condition and results
of operations will be adversely affected, which could have a material adverse
effect on the price of the Company's Common Stock. As a result, the Company
does not believe that its operating results for any one quarter are
necessarily indicative of results for any future interim period. See "Risk
Factors--Potential Fluctuations in Quarterly Results."

The following quarterly information has been prepared on the same basis as
the Financial Statements and related Notes included elsewhere in this
Prospectus and in the opinion of the Company's management reflects all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair presentation in accordance with generally accepted accounting principles
for the periods presented.

28
<PAGE>

The following table presents the unaudited statements of operations for each
of the Company's last eight quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Product................ $1,691 $ 2,388 $ 3,257 $ 3,807 $ 3,290 $ 3,173 $ 3,742 $ 4,250
Development fees....... -- 233 233 233 217 380 819 743
Software and technology
license fees.......... 107 120 440 678 289 518 434 223
------ ------- ------- ------- ------- ------- ------- -------
Total revenues........ 1,798 2,741 3,930 4,718 3,796 4,071 4,995 5,216
Costs and expenses:
Cost of product
revenues.............. 1,635 3,152 3,006 3,309 2,948 2,549 2,998 2,979
Research and
development........... 347 272 300 330 349 662 698 1,477(1)
Selling and marketing.. 389 576 780 965 925 924 936 972
General and
administrative........ 142 131 227 250 182 293 348 352
------ ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 2,513 4,131 4,313 4,854 4,404 4,428 4,980 5,780
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (715) (1,390) (383) (136) (608) (357) 15 (564)
Interest and other
income (expense)....... (50) (67) (75) (78) 16 3 (6) (27)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item and
income taxes........... (765) (1,457) (458) (214) (592) (354) 9 (591)
Provision for income
taxes.................. 35 -- -- -- 1 63 41 45
------ ------- ------- ------- ------- ------- ------- -------
Net loss................ $ (800) $(1,457) $ (458) $ (214) $ (593) $ (417) $ (32) $ (636)
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes $551,000 of expenses related to the Crandell Acquisition.

The following table sets forth certain revenue and expense items as a
percentage of total revenues for each of the Company's last eight quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ 94.0% 87.1% 82.9% 80.7% 86.7% 77.9% 74.9% 81.5%
Development fees....... -- 8.5 5.9 4.9 5.7 9.3 16.4 14.2
Software and technology
license fees.......... 6.0 4.4 11.2 14.4 7.6 12.7 8.7 4.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product
revenues.............. 90.9 115.0 76.5 70.1 77.7 62.6 60.0 57.1
Research and
development........... 19.3 9.9 7.6 7.0 9.2 16.3 14.0 28.3(1)
Selling and marketing.. 21.6 21.0 19.9 20.5 24.4 22.7 18.7 18.6
General and
administrative........ 7.9 4.8 5.8 5.2 4.8 7.2 7.0 6.8
----- ----- ----- ----- ----- ----- ----- -----
Total costs and
expenses............. 139.8 150.7 109.8 102.8 116.0 108.8 99.7 110.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (39.8) (50.7) (9.8) (2.8) (16.0) (8.8) 0.3 (10.8)
Interest and other
income (expense)....... (2.8) (2.5) (1.9) (1.7) 0.4 0.1 (0.1) (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
extraordinary item and
income taxes........... (42.6) (53.2) (11.7) (4.5) (15.6) (8.7) 0.2 (11.3)
Provision for income
taxes.................. 1.9 -- -- -- -- 1.5 0.8 0.9
----- ----- ----- ----- ----- ----- ----- -----
Net loss................ (44.5)% (53.2)% (11.7)% (4.5)% (15.6)% (10.2)% (0.6)% (12.2)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) Includes 10.6% of total revenues from expenses related to the Crandell
Acquisition.

Product revenues increased each quarter during the fiscal year ended March
31, 1996, resulting mainly from the introduction of the JetFax M5 in the first
quarter and the steadily increasing unit shipments as the year progressed.
Product revenues decreased during the quarters ended March 31, 1996 and June
30, 1996, due primarily to the decline in unit shipments and sales price of
the JetFax 4, which had substantial pricing competition in the market; and to
a lesser extent to a decline in international unit shipments of the JetFax M5

29
<PAGE>

and the resulting lower overall JetFax M5 average selling price. Higher unit
prices are normally achieved in international markets. Product revenues
increased in the quarter ended December 31, 1996 from the prior two quarters,
due mainly to an increase in domestic JetFax M5 unit shipments resulting from
increased numbers of large dealers selling the Company's branded products in
the business equipment dealer marketing channel. For information regarding
recent quarterly results, see "Risk Factors--Potential Fluctuations in
Quarterly Results."

Development fees increased in the quarters ended September 30, 1996 and
December 31, 1996 due to initiation of major development programs for several
OEM customers.

Cost of product revenues increased in the quarter ended September 30, 1995.
The product gross margin was adversely affected by reserves of $760,000 taken
in the quarter ended September 30, 1995 for the write down of certain
inventory to net realizable value and to record estimated losses on purchase
commitments related to the pricing decline on the JetFax 4. The Company had a
fixed price order from Xerox for JetFax 4 units, but the price at which the
units could be sold in the market had declined substantially due to
competition from other manufacturers' new product introductions. A settlement
of the purchase commitment with Xerox was negotiated in the quarter ended
September 30, 1996, which resulted in a reduction of the inventory reserve and
a credit to cost of product revenues of $280,000.

Excluding the impact of these reserves, the product gross margin was
negative 0.2% for the quarter ended September 30, 1995 compared to 7.2% for
the fiscal year ended March 31, 1996. Excluding the impact of the $280,000
credit to cost of product revenues in the quarter ended September 30, 1996,
product gross margin improved from 10.4% for the quarter ended June 30, 1996,
to 10.8% for the quarter ended September 30, 1996, to 19.9% for the quarter
ended December 31, 1996.

Research and development expenses increased in the quarters ended September
30, 1996 and December 31, 1996 primarily due to software development personnel
added with the Crandell Acquisition in July 1996. The increase in research and
development expenses was also due to increased compensation expenses related
to the continuing employment of the founders of the Crandell Group. These
compensation expenses were based on a percentage of ongoing desktop software
sales and will be paid in full and terminate upon the closing of the Offering.
Additionally, quick turnaround prototype expenses for ASICs and printed
circuit board manufacture related to the Company's third generation controller
for laser MFPs contributed to higher expenses in the quarter ended September
30, 1996.

General and administrative expenses decreased in the quarter ended June 30,
1996 from the quarter ended March 31, 1996 due to lower headcount. Expenses in
the September 30, 1996 and December 31, 1996 quarters increased due to higher
headcount, legal and consulting expenses and bank fees.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date principally through private
placements of debt and equity securities, proceeds from borrowings under a
bank line of credit and debt associated with the Crandell Acquisition. The
total amount of equity raised through March 31, 1997 in the form of Common
Stock and Series A through F Convertible Preferred Stock was $13.5 million.
Additionally, $2.8 million of Series P Redeemable Preferred Stock was
outstanding on March 31, 1997. See Notes 9 and 10 of Notes to Financial
Statements. The Series A through F Convertible Preferred Stock will convert
into Common Stock upon the closing of the Offering. The holder of the Series P
Redeemable Preferred Stock has elected to have the stock and accrued dividends
redeemed at the closing of the Offering.

At March 31, 1997, $1.5 million of debt was outstanding, which consisted of
$1.0 million under a bank line of credit, a $244,000 equipment term loan and a
$250,000 note payable related to the Crandell Acquisition. At March 31, 1997,
the Company had $452,000 available under its bank credit facility. See Note 7
of Notes to Financial Statements. This lending facility is collateralized by
substantially all of the Company's assets. The maximum amount available under
the line of credit is the lesser of $1.5 million or 75% of the Company's
eligible

30
<PAGE>

outstanding accounts receivable. The revolving line of credit terminates in
August 1997 and is subject to renegotiation at that time. The Company also has
$244,000 outstanding under an equipment loan due in monthly installments
through February 2000. The interest rate on the line of credit is the bank's
prime rate (8.5% as of March 31, 1997) plus 1.0%; the interest rate on the
equipment term loan is the bank's prime rate plus 1.5%. The line of credit and
equipment term loan contain certain covenants which, among other things,
require the Company to maintain tangible net worth (as defined) of $2.5
million, quarterly net income, a quick ratio of 0.8 to 1.0, a maximum debt to
net worth ratio (as defined) of 2.0 to 1.0 (1.5 to 1.0 after December 31,
1996) and certain minimum liquidity and debt service coverage. In addition,
the agreement prohibits the payment of cash dividends. In March 1997, the
Company received a waiver of the quarterly net income and certain other
covenants in its bank line of credit through June 30, 1997. The $250,000 note
payable to the Crandell Group is subordinated to the bank loan, is non-
interest bearing and matures July 31, 1997. See Notes 3 and 7 of Notes to
Financial Statements. The note to the Crandell Group is to be repaid in full
upon the closing of the Offering. See "Use of Proceeds."

Cash and cash equivalents decreased from $106,000 at December 31, 1996 to
$16,000 at March 31, 1997. Inventories increased $902,000 from $2.3 million at
December 31, 1996 to $3.2 million at March 31, 1997, due primarily to: (i)
stocking higher levels of consumables for the JetFax 4 and consumables and
product upgrades for the JetFax M5 to better match demand particularly as the
installed base of the JetFax M5 has grown, and (ii) increased parts inventory
to support projected higher sales levels. Accounts receivable increased
$764,000 from $2.4 million at December 31, 1996 to $3.2 million at March 31,
1997 principally due to the increase in product sales and higher receivables
related to development contracts. Net property and other assets increased by
$271,000 from $1.2 million at December 31, 1996 to $1.5 million at March 31,
1997, resulting primarily from a $243,000 increase in deferred costs related
to this Offering. Accounts payable increased from $1.9 million at December 31,
1996 to $3.0 million at March 31, 1997 related to the higher inventory levels
and deferred costs related to this Offering. During the quarter ended March
31, 1997, the Company borrowed $794,000 net against its bank line of credit to
cover working capital needs.

Cash and cash equivalents decreased from $3.5 million at March 31, 1996 to
$106,000 at December 31, 1996, due primarily to cash used in operations, which
included a $2.9 million reduction in accounts payable and accrued liabilities.
Accounts receivable increased by $515,000 from $1.9 million at March 31, 1996
to $2.4 million at December 31, 1996, mainly as a result of the higher revenue
levels. Inventories declined $1.0 million from $3.4 million at March 31, 1996
to $2.3 million at December 31, 1996, primarily attributable to more effective
inventory management. Net property and other assets increased by $1.0 million
from $199,000 at March 31, 1996 to $1.2 million at December 31, 1996, due
primarily to the software technology acquired in connection with the Crandell
Acquisition, the software and computers purchased for the integrated
manufacturing and accounting system, and material handling equipment. During
the nine months ended December 31, 1996, the Company borrowed $450,000 against
its bank line of credit to cover cash requirements.

Cash and cash equivalents increased from $122,000 at March 31, 1995 to $3.5
million at March 31, 1996, due principally to the issuance of Series F
Convertible Preferred Stock in March 1996. Accounts payable and accrued
liabilities increased by $2.6 million from $3.0 million at March 31, 1995 to
$5.6 million at March 31, 1996, resulting mainly from an extension of
payments. Accounts receivable increased by $467,000 from $1.5 million at March
31, 1995 to $1.9 million at March 31, 1996, primarily due to the higher
revenue levels. Inventories increased $1.9 million from $1.5 million at March
31, 1995 to $3.4 million at March 31, 1996, as the Company prepared for
forecasted increases in product shipment levels. Net property and other assets
were relatively unchanged at March 31, 1995 as compared to March 31, 1996.

The Company currently believes that the net proceeds of the Offering,
together with available borrowings under its line of credit and funds from
current and anticipated operations, will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, there can be no
assurance that necessary additional capital will be available on terms
acceptable to the Company, if at all.

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<PAGE>

BUSINESS

OVERVIEW

Since its inception in 1988, the majority of the Company's revenues have
been generated from sales of JetFax branded products and consumables,
including the JetFax M5, the Company's current branded product. The Company
believes that it offers the most advanced and innovative MFP solutions
currently available in its product class. For example, the JetFax M5 was the
first MFP to support two telephone lines for simultaneous receiving and
sending of faxes, and the Company was one of the first to market a MFP with a
high speed 33.6 Kbps modem.

The Company believes its JetSuite software will define a new category of
all-in-one software for MFPs that will replace the piecemeal software
components historically bundled by MFP vendors. As a result, corporate and
SOHO workers can increase productivity and realize substantial time and cost
savings relative to traditional office protocols and equipment usage. The
Company's JetSuite desktop software can be sold on a stand-alone basis or
bundled with the JetFax embedded system to provide a complete, integrated
hardware and software solution. The Company plans to release JetSuite with
several OEM products in the third quarter of 1997. The Company also offers
JetPCL software, which provides high quality conversion of documents encoded
in Hewlett-Packard's Printer Control Language ("PCL"), the industry standard.

INDUSTRY BACKGROUND

Within the overall electronic office devices market, which includes
printers, faxes, copiers and scanners, the market for MFPs is rapidly growing.
The two fastest growing segments of the MFP market are the SOHO and corporate
segments based on unit sales. According to CAP Ventures, Inc., the total
United States market for MFPs is expected to increase from approximately $1.9
billion in 1996 to $7.6 billion in 2000, an annual compound growth rate of
more than 40%. The advent of MFPs has eroded the boundaries between the
previously distinct printer, fax, copier and scanner markets, allowing MFPs to
have particular success as a value-added substitute in the fax market. MFPs
are also recognized as an attractive alternative to single-function printers
because of the MFP's ability to manage and process information in both paper
and electronic formats. CAP Ventures, Inc. anticipates that 50% of the United
States fax market and 23% of the United States printer market will consist of
MFPs by the year 2000, with annual unit sales in the United States growing
from 1.3 million MFPs in 1996 to more than 5.9 million MFPs in 2000.

Because the SOHO end user is price sensitive and space limited, MFPs which
provide printing, plain paper and PC faxing, copying and scanning in one unit
for under $1,000 represent an efficient and affordable solution. In 1996,
there were $683 million in MFP sales into the SOHO market and in 2000, CAP
Ventures, Inc. expects there to be more than $2.3 billion in MFP sales into
the SOHO market, a compound annual growth rate of more than 35%.

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<PAGE>

The corporate segment of the MFP market is evolving to meet information
processing and management demands that exceed the capabilities of traditional
electronic office devices. Historically, corporate end users have purchased
single-function fax machines as a cost-effective solution to their real-time
document communications needs. Today, MFPs are replacing stand-alone fax
machines by offering convenient access to printing, copying and scanning
capabilities without compromising the traditional corporate fax functionality.
CAP Ventures, Inc. forecasts that sales of MFPs into the United States
corporate market segment will grow from $294 million in 1996 to $1.2 billion
in 2000, a compound annual growth rate of 42%. Typical MFPs sold in the
corporate market sell for between $1,000 and $4,000 and are based on
laser/LED, rather than ink jet, printing engines, feature higher scanning and
transmission speeds and increased memory and paper capacities.

The Company believes that the increased demand for MFPs and related desktop
software is due to a number of favorable industry trends, including the
following:

Rapid, Widespread Growth of Paper and Electronic Information. The demand for
technology that addresses the needs for real-time processing, managing and
transmitting paper and electronic information is growing. As fax, e-mail and
the Internet become increasingly ubiquitous, electronic distribution of
documents is being recognized as a more efficient alternative than physical
distribution by mail or courier. Today's office workers benefit from the
ability to directly send, receive, print and scan documents at their PC.
Traditionally, this multitasking capability required purchasing, placing and
servicing separate single-function office products.

Increased Outsourcing by OEMs. The increasing rates of technological change
and product obsolescence continue to shorten the manufacturing, time-to-market
and product life cycles in today's MFP market. OEMs are under constant
pressure to develop new MFPs with enhanced functionality at the lowest
possible cost, resulting in increased complexity and development challenges.
Developing and manufacturing such increasingly complex MFPs requires advanced,
proven technology and broad research and development expertise. Unlike the
development of single function office products, MFP development requires
knowledge of printer, fax, copier and scanner technologies. Most single
function device manufacturers do not have expertise in all of the required
areas. Consequently, many OEMs opt to outsource their MFP design and software,
assembly of controller boards and product manufacturing to reduce costs and
time-to-market.

Demand for MFP Software. The architecture and software used by MFPs
represent a major departure from those used by stand-alone devices. MFPs
typically are shipped with a number of software packages intended for single
function use, requiring a customer to install and learn three or four
different interfaces to fully utilize their MFP. Today, the principal vendors
of MFPs bundle software packages which neither integrate nor easily exploit
all of the capabilities of the MFP. Most of the bundled software packages are
minor modifications of existing PC fax or scanner applications. In order to
fully utilize all of the capabilities of a MFP, users need fully integrated
desktop software.

Proliferation of SOHO Business Environment. Corporate restructuring and
downsizing and advances in telecommunication technologies have resulted in the
rapid growth of the number of SOHO offices. SOHO workers have essentially the
same quality and functional needs as workers in large corporate offices, but
lack the space and financial resources required for separate single-function
machines. MFPs offer print, fax, copy and scan functions in a single unit for
significantly less cost than would otherwise be incurred by purchasing each of
these products separately.

Increased Use of the Internet for Document Transmissions. As the number of
e-mail and Internet users increases, the use of the Internet for transmitting
and routing scanned documents has become very compelling. By using a MFP to
input documents to be routed over the Internet, the costs of transmitting
documents can be greatly reduced or eliminated and documents can be sent with
greater resolution and clarity than with typical fax transmissions. In
addition, documents sent directly to an individual's e-mail address as a file
attachment can be viewed, printed or deleted at their PC, thereby providing
improved confidentiality.

Increased Use of Consumables. By supporting multiple output functions
including PC printing, copying and receipt of plain paper faxes, MFPs may
consume a greater level of toner or ink cartridges than single function

33
<PAGE>

products such as printers or copiers. For a typical corporate MFP, the cost of
the consumables may match or exceed the cost of the actual MFP during the
first several years of the product's life. Typically, these consumables
generate higher margins than those of the products themselves.

THE JETFAX SOLUTION

JetFax's comprehensive solution is to offer to the SOHO and corporate
markets its proven embedded system technology, high quality branded MFPs and
advanced desktop software. JetFax's embedded system solutions for MFPs consist
of proprietary ASICs, software and firmware that reside on a controller
circuit board and represent the Company's core MFP technology. The MFP
embedded system is essentially the intelligence of the MFP, processing and
managing the print, fax, copy and scan functions of a MFP. The Company's third
generation embedded system technology is designed to enable OEMs to offer more
competitive products with improved price/performance, shorter development
cycles and reduced development and product costs. JetFax believes that its
embedded system technology allows an OEM to refresh or broaden its product
lines more quickly than it could through internal development of products.

JetFax manufactures and markets MFPs for resale under the JetFax brand name.
In addition, the Company has in the past manufactured products for its OEMs.
The products manufactured by the Company are targeted at the corporate MFP
market and have more advanced features than those found on typical SOHO MFPs.
These corporate features include higher scanning and transmission speeds,
increased memory and paper capacities, and improved reliability and
performance at greater usage levels. Through its branded products, the Company
believes that it is able to more quickly bring advanced and innovative MFP
features to market. For example, the JetFax M5 was the first MFP in its
product class to support two telephone lines for simultaneous receiving and
sending of faxes, and was one of the first to market a MFP with a high speed
33.6 Kbps modem. By integrating and testing products incorporating these
features, JetFax believes that it is able to reduce time-to-market for its
branded MFPs as well as those of its OEMs. JetFax also sells consumables for
its branded products that the Company believes will represent increasing
amounts of total product revenues as its installed base of MFPs grows.

The Company's primary software product, JetSuite, which is expected to be
released with several OEM products in the third quarter of 1997, provides a
fully integrated software application for a MFP. JetSuite operates with
JetFax's embedded system designs, as well as with those of its OEMs, to
provide an end user with access to all of the MFP's capabilities. JetSuite
integrates printing, PC faxing, scanning, document management and device
configuration into one package, eliminating the need to install and learn
multiple applications. JetSuite's foundation in portable document technology
allows the user to move easily between the hard copy world of printers and
faxes and the electronic world of e-mail and the Internet. By storing and
viewing all documents in JetSuite's portable document format, pages which are
either scanned at the MFP, created from any Windows application, or copied
from the Internet can be easily e-mailed and viewed by anyone using Microsoft
Windows 3.1 or Windows 95. As a single source of JetSuite software and JetFax
embedded system technology, JetFax believes it simplifies and accelerates an
OEM's ability to introduce MFPs into the market.

JETFAX STRATEGY

Offer Compelling MFP Solutions to OEMs. The Company plans to continue
leveraging its embedded system and software technologies by offering OEMs
compelling MFP solutions which reduce the OEM's time-to-market and development
and product costs. The Company licenses its embedded system technology and
software to OEMs for use in their MFPs which are sold into the SOHO and
corporate markets. The Company also offers a variety of product options,
ranging from assembled circuit boards to fully integrated products. The
Company is allocating substantial resources to the continued development of
innovative technologies which address the SOHO and corporate market
requirements for future MFP solutions.

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<PAGE>

Expand Sales of JetFax Branded MFP and Related Consumables. The Company
seeks to increase the sales of its branded MFPs and consumables in the
corporate market through growth of its distribution channel and its
relationships with key dealers and major accounts. In the United States and
Canada, the Company distributes JetFax branded products, options and
consumables through IKON and office equipment dealers primarily associated
with Business Technology Association, formerly known as NOMDA, the largest
national association of office machine dealers focused on the sale of fax
machines and copiers ("BTA"). The Company intends to increase its penetration
of both the IKON and BTA dealer channels. The Company also intends to leverage
its dealer network and installed base of JetFax branded MFPs to increase sales
of consumables, thereby generating recurring revenues.

Establish JetSuite as the Leading MFP Desktop Software Application. JetFax
plans to establish its JetSuite software as the leading MFP desktop software
and anticipates releasing JetSuite with several OEM products in the third
quarter of 1997. JetSuite is designed to provide an end user with access to
all of the capabilities of a MFP from a single, integrated Microsoft Windows
application. This level of integration will enable OEMs to support a single
software package rather than the multiple, discrete applications utilized with
most MFPs today. The Company plans to license JetSuite software to a number of
OEMs. For example, the Company entered into license agreements for JetSuite
with Hewlett-Packard effective in January 1997 and Oki Data in September 1996.
The Company intends to maintain use of the Company's JetSuite trademark with
OEM products in order to gain further name recognition for both the Company
and its products. The Company also plans to offer upgrades and add-on software
products to end users who have purchased MFPs bundled with JetSuite software.
JetFax intends to build on JetSuite's foundation in portable document
technology to take advantage of a variety of document delivery systems
including the Internet.

Leverage International Relationships and Experience. Most foreign countries
require independent testing of each new MFP for compliance with
telecommunications and safety laws, which can take several months. The Company
has successfully taken products through international regulatory approval
processes in over 35 countries. JetFax believes that its international
experience and focus provide a competitive advantage and international markets
represent a source of potential growth. The Company plans to build on its long
history of international relationships, including those with a number of
dealers, distributors and telecom regulatory authorities, to market its
products abroad and obtain international regulatory approvals on new products.
By being able to offer its OEMs proven worldwide solutions and regulatory
experience, the Company believes it will enable its OEMs to achieve broader
international distribution in a shorter amount of time.

PRODUCTS

JetFax offers the following products and solutions to its OEMs and other
customers:

JetFax Branded Products and Related Consumables. JetFax develops,
manufactures and markets a high quality MFP under the JetFax brand name. For
this branded solution, JetFax procures an integrated printing and scanning
engine and integrates its embedded system technology with the engine at its
facility.

The Company's current branded MFP is the JetFax M5, which the Company began
shipping commercially in June 1995. The JetFax M5 offers the functionality of
a high-volume, full-featured plain paper fax machine in addition to its
multifunction print, copy and scan capabilities. The JetFax M5 is based on a
LED printer engine, which uses the same drum and toner print technology as a
laser printer ("laser/LED"). A range of upgrades is made available by the
Company to expand the capabilities of the JetFax M5, including a two-line
upgrade which allows simultaneous receiving and sending of faxes and a high-
speed modem upgrade for single-line models which allows the modem speed to be
increased from 14.4 Kbps to 33.6 Kbps, thereby reducing the transmission time
of a typical fax. List prices of the JetFax M5 range from approximately $3,000
to more than $4,000 depending on the options included.

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<PAGE>

The following table lists the principal branded products developed, marketed
and shipped by the Company since 1989:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRODUCT NAME PRODUCT CATEGORY DATES SHIPPED AWARD(S) WON
- --------------------------------------------------------------------------------
<C> <C> <C> <S>
JetFax M5 High-volume 1995-present . "Pick of the Year" in 1996
laser/LED MFP by Buyer's Laboratory
. "Editor's Choice 96
Premium Laser
Fax" by Better Buys for
Business
. "Win 100" for top computer
hardware by Windows
Magazine in 1996
. "Sehr gut" award by Facts
magazine
in 1996
- --------------------------------------------------------------------------------
JetFax 4 Inkjet 1995-1996 . "Sehr gut" award by Facts
multifunction magazine in 1996
fax machine
- --------------------------------------------------------------------------------
JetFax 8000-D High-volume laser 1992-1995 . "Pick of the Year" by
fax machine Buyer's Laboratory in 1993
. "Award of Merit" by BYTE
magazine in 1992
- --------------------------------------------------------------------------------
JetFax II Printer add-on with 1991-1994 . "Best Fax Server" by
LAN fax server LAN magazine in 1991
capability
- --------------------------------------------------------------------------------
JetFax Laser printer add- 1989-1991 . "Best of Show" Comdex by
on PC Week magazine in 1988
for plain paper fax
- --------------------------------------------------------------------------------
</TABLE>

The Company also sells consumables for its products, including toner
cartridges, imaging drums and inkjet cartridges. These consumables, which need
to be purchased periodically by customers over the life of the product, are
typically procured by the Company from the manufacturer of the printing engine
and are labeled with the JetFax brand name. Certain consumables not procured
from the Company or its suppliers are not easily used with JetFax products or
do not provide optimal functionality. Revenues from sales of consumables
represented 16% and 18% of the Company's total revenues in the nine months
ended December 31, 1996 and the quarter ended March 31, 1997, respectively.
The Company believes that such revenues will increase as the installed base of
JetFax branded MFPs grows.

Embedded System Technology. JetFax develops and licenses its embedded system
technology for manufacture and integration by its OEM customers into their
MFPs. This technology includes a complete embedded system design, modified to
meet the OEMs' specifications and requirements. Such hardware and software
modifications are performed by JetFax and typically include changes to the
printer and scanner interfaces and to the control panel and user interface.
The Company generally receives development fees in return for such
modifications, in addition to prepaid and per unit royalties for the license.
The Company's embedded system technology has been customized and licensed for
use in the Minoltafax 1000, the Xerox 3006, the Xerox WorkCenter 250 and the
dex 855 manufactured by Samsung, and it is being customized for use by
Hewlett-Packard.

The Company offers completely assembled embedded system circuit boards to
its OEMs as well as systems integration services. An OEM can choose to procure
the embedded system boards directly from JetFax for integration at the OEM's
facility or the OEM can ship its printing/scanning engine to JetFax for final
assembly and testing. The Company believes its ability to offer a variety of
manufacturing and systems integration capabilities provides OEMs with a means
to reduce development costs and time-to-market.

JetSuite Software. The Company believes its JetSuite software will define a
new category of all-in-one software for MFPs that will replace the piecemeal
software components historically bundled by MFP vendors.

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<PAGE>

Versions of JetSuite for Microsoft Windows 3.1 and Microsoft Windows 95 are
scheduled for commercial release with several OEM products in the third
quarter of 1997. A version for Microsoft Windows NT is under development.
JetSuite software is designed to provide a comprehensive software solution for
users of MFPs. JetSuite is installed on a user's PC and combines low-level
device drivers for printing, faxing, copying and scanning with a visual
"desktop" application that allows a user to organize, convert and manage
documents created or received using a MFP. In addition to basic MFP device
support and its desktop manager, JetSuite will provide other advanced
capabilities. Using JetSuite, a user will be able to create a self-viewing,
portable version of any document, whether "printed" electronically, captured
from an Internet Web page, scanned or faxed. Such a portable document can then
be e-mailed and viewed without requiring the recipient to have a specific
software application or viewer installed on their system. All of the
document's original formatting, layout, colors and look are maintained in a
portable JetSuite document. As a document communication tool, JetSuite will
fully support both fax-based and e-mail-based document transmission. JetSuite
will also provide links to popular third party software applications, such as
word processors and graphics programs, allowing users to move documents in and
out of the JetSuite desktop easily.

The Company offers JetSuite to OEMs for use with the OEMs' embedded system
or bundled with JetFax's embedded system technology. The Company also intends
to include JetSuite with JetFax branded MFPs. The Company will offer JetSuite
to OEM customers and end users in both standard and more full featured "pro"
versions. The Company also intends to develop JetSuite add-on software
products offering additional or advanced document management capabilities such
as advanced optical character recognition ("OCR") and enhanced search and
retrieval tools. JetFax believes that both the "pro" version and any add-on
products could be promoted to any base of standard JetSuite users as upgrades,
and that the "pro" version could also be promoted directly to end users of
existing MFPs that do not include JetSuite.

JetPCL. Hewlett-Packard's Printer Control Language ("PCL") is the industry
standard method of delivering commands from a PC software package to a
printer. The Company's JetPCL software is a PCL-emulator that provides high-
quality conversion of documents encoded in PCL into various image formats,
including fax. JetPCL is currently a leading PCL conversion package for
suppliers of standalone fax and network fax server products and the Company
has licensed JetPCL to more than 25 OEM customers. JetPCL also supports host-
based conversion of PCL for print devices, allowing lower cost printers to
support legacy DOS applications that generate PCL output. JetPCL is included
in the Company's JetSuite software, providing PCL capability for DOS-based
printing on MFPs. JetPCL supports PCL versions 4, 5 and 5E and is available on
the following platforms: DOS, DOS Extender, OS/2, NetWare NLM, Microsoft
Windows 3.1, Microsoft Windows 95, Microsoft Windows NT and major UNIX
platforms.

TECHNOLOGY

Embedded System Technology. JetFax's third generation embedded system
technology is based on the Company's application specific integrated circuit
("ASIC") semiconductor designs integrated with a Motorola 680X0
microprocessor. The specialized ASICs perform most of the heavy computational
tasks, allowing the single 680X0 microprocessor to drive the embedded system
and service all of the functions--printing, faxing, copying and scanning--
required by a MFP. The ASICs perform a variety of imaging functions and
provide high-speed data paths for large image data files that are quickly
moving through the various processes in the system. The ASIC imaging functions
include error diffusion scanning, edge enhancement, background compensation,
scaling and print smoothing. A high-speed image bus and numerous direct memory
access (DMA) channels are also provided by the ASICs to optimize system
performance and provide easy access to a specialized compression/decompression
imaging processor. The Company believes it has developed an economical
hardware design with enough modularity built in to support a range of products
and speeds, including such features as high speed 33.6 Kbps modems, quick
scanning of under three seconds per page and extensive battery-protected
memory.

The firmware in JetFax's embedded system is centered on the Company's task-
swapping, real-time operating system. The operating system rotates among the
various functions such as printing, faxing, copying or

37
<PAGE>

scanning, allocating enough processing time for each task to prevent any
significant performance deterioration when swapping among other tasks. The
majority of firmware in the Company's embedded system, including the operating
system, is written in assembly code, which the Company believes provides
greater efficiency and maximum use of available processing power. The Company
constantly evaluates the level of assembly coding used in its systems and
incorporates higher-level languages in those areas where the use of such
languages may result in greater efficiencies.

Software Technology. The foundation of JetSuite, the Company's primary
software product, is its portable document technology which replicates
documents for storage, transmission and viewing. JetSuite portable documents
use a highly compressed print-imaging format containing a combination of text,
fonts, color, graphic elements (such as lines and circles) and bitmaps. This
portable document technology allows a single document data base to handle both
hard copy images from scanned or faxed documents and electronically created
documents. JetSuite portable documents (.JSD files) can easily be shared with
others by using a freely distributable compact version of the JetSuite viewer
that combines with a .JSD file to create a self-viewing document. Self-viewing
documents can be transmitted to other PC users through standard e-mail without
requiring the recipient to have a particular viewer or software application.
JetSuite integrates with leading e-mail applications to allow users to e-mail
any document displayed on the desktop by dragging and dropping the document to
the installed e-mail application icon.

JetSuite also provides a range of imaging functionality for fast viewing,
zooming and panning, as well as document markup and cleanup functionality. The
JetSuite scan function includes support of the industry standard TWAIN
interface, allowing users to scan documents directly to other scanning
applications. In its fax application, JetSuite includes full functionality for
both sending and receiving faxes, a phone book for managing names, addresses,
phone numbers and fax groups and an inbox and outbox for managing faxes.
JetSuite also includes integrated third party OCR technology, which allows
users to convert scanned text documents to editable text files in a variety of
different word processor and spreadsheet formats.

CUSTOMERS

The Company's customers include office equipment dealers and distributors
who resell the Company's branded MFPs, options and consumables as well as OEMs
that license the Company's embedded system technology and software and
manufacture and distribute MFPs.

JetFax Branded Products. In the United States and Canada, the Company
distributes JetFax branded products, options and consumables through office
equipment dealers, primarily through IKON and dealers associated with BTA. In
the fiscal year ended March 31, 1996, the nine months ended December 31, 1996
and the quarter ended March 31, 1997, revenues recorded by the Company from
dealers associated with IKON represented 13%, 21% and 25%, respectively, of
the Company's total revenues. The Company also distributes its products
through regional distributors. As of March 31, 1997, the Company had
approximately 200 dealer sales locations in the United States and Canada. The
Company sells its branded products internationally through office equipment
dealers. Sales to Messerli, one of the Company's office equipment dealers
located in Switzerland, accounted for 11%, 10% and 4% of the Company's total
revenues in the fiscal year ended March 31, 1996, the nine months ended
December 31, 1996 and the quarter ended March 31, 1997, respectively.

OEM Relationships and JetSuite Software. The Company receives license fees
and development fees for the Company's embedded system technology and desktop
software from a number of manufacturers of MFPs. JetFax currently licenses
embedded system technology or desktop software to 25 companies and has OEM
relationships with Hewlett-Packard, Oki Data, Samsung, Xerox and Intel.

Hewlett-Packard Company. Effective in January 1997, the Company entered into
a development and license agreement with Hewlett-Packard for the inclusion of
the JetFax embedded system technology and JetSuite software in a Hewlett-
Packard product which is currently under development.

38
<PAGE>

Oki Data Corporation. In September 1996, the Company entered into a license
agreement with Oki Data for the inclusion of JetSuite software with a number
of Oki Data MFPs which are currently under development.

Samsung Electronics Corporation. In June 1995, the Company entered into a
development agreement with Samsung for the use of the Company's third
generation embedded system technology in a new laser multifunction product.
This product which will originally be marketed by Danka Corporation in the
United States, was announced in February 1997 as the dex 855.

Xerox Corporation. JetFax began developing MFPs for Xerox in 1993, resulting
in the launch of the Xerox 3006 in November 1994 as the industry's first
inkjet 4-in-1 (print, fax, copy and scan) multifunction product. The Company
designed the complete mechanical enclosure of the Xerox 3006 in addition to
licensing the embedded system technology and software drivers for Xerox's
manufacture. The Xerox 3006 was launched in more than 30 countries and
continues to be sold through both Xerox direct sales forces and dealers in
both Europe and the United States. Subsequent to this development, JetFax
delivered a modified version of its embedded system technology to Xerox for
use in the Xerox WorkCenter 250, a retail MFP launched in October 1995
targeted at the SOHO market. The WorkCenter 250 received numerous industry
awards, including PC Magazine's "Best of 1995," Imaging Magazine's "Product of
the Year" for 1995, Home PC magazine's "Editor's Choice" in April 1996 and
Windows Magazine's "Win 100" Best Product in 1996.

Intel Corporation. The Company licenses its portable document software
technologies to Intel Corporation. Pursuant to the license agreement entered
into in 1994, Intel utilizes the Company's portable document technology in
Intel's Proshare video-conferencing system. This technology enables video-
conference users to capture and share documents on the screen during a video
conference call.

For a discussion of certain risks relating to the Company's reliance on its
OEMs, dealers and distributors, see "Risk Factors--Dependence on Dealers and
Distributors" and "--Dependence on OEMs."

SALES AND MARKETING

The Company markets and sells its products worldwide to OEMs, dealers and
distributors. The Company maintains separate sales forces for its branded
products and OEM/licensing businesses, and its marketing department supports
all aspects of the Company's worldwide business. As of May 1, 1997, the sales
and marketing department (including order entry, technology support and
customer service personnel) consisted of 27 employees and contractors.

OEM Relationships. The Company licenses its embedded system technology,
JetSuite software and JetPCL software to OEMs. The Company continues to
enhance its relationships with existing OEMs and seeks to obtain new OEM
customers through dedicated account management and marketing programs. The
Company works closely with OEM accounts to define product requirements, create
development plans and manage development programs. The marketing group
promotes JetFax as a leading provider to OEMs of MFP solutions through a
combination of public relations and press coverage, exhibits and presentations
at trade shows, product brochures and other marketing promotions.

JetFax Branded Products. The Company's branded products are primarily sold
in the United States through office equipment dealers. The Company's sales
force provides dealer training programs, sales incentive programs which
include cash incentives, group trips, volume discounts and market development
funds. Marketing activities to promote JetFax branded products include direct
mail, print advertising and an ongoing public relations program.

JetSuite Software. The Company anticipates releasing JetSuite with several
OEM products in the second quarter of 1997, and the Company's software
marketing strategy is to license JetSuite software for bundling with multiple
OEM products. In addition, the Company intends to promote JetSuite upgrades
and add-on software products in a number of ways, including in-box flyers,
software installation and reminder screens, mailings to registered users,
website advertisements and co-promotions with OEMs.

39
<PAGE>

The Company's international sales efforts are focused on Western Europe,
Australia and New Zealand. The Company's branded products are sold
internationally through office equipment distributors in Australia, Canada,
Germany, the Netherlands, New Zealand, Scandinavia, Switzerland and the United
Kingdom. The Company also sells directly to office equipment dealers in
Germany and the United Kingdom. The Company has sales, service or support
personnel located in Germany, the Netherlands, Ireland and the United Kingdom.
International marketing efforts are focused on providing country specific
marketing materials, sales incentive programs for dealers and participation in
trade shows.

RESEARCH AND DEVELOPMENT

JetFax's principal research and development activities are located at the
Company's headquarters in Menlo Park, California and at its software
applications division located in Santa Barbara, California. As of May 1, 1997,
the Company's research and development department consisted of 30 employees.
The primary activities of these employees are new product development,
enhancement of existing products, product testing and technical documentation.

The Company's research and development efforts focus on ongoing development
of both the Company's MFP embedded system technology and desktop software. The
Company is in the process of developing future MFPs with both improved feature
sets and reduced manufacturing costs. These improvements are expected to
include increased printing speed, additional base memory, higher speed
scanning, simpler PC connectivity and advanced compression algorithms that
will decrease fax transmission cost while increasing memory storage. In the
second half of 1997, the Company intends to begin commercial shipment of its
new branded MFP, which will include JetSuite software. The Company believes
that its branded product development efforts provide the Company with a
competitive advantage for its embedded system technology and software by
defining the needs for new products, guiding future enhancements and testing
new implementations. By introducing advanced new features in the corporate
market, the Company believes that it is able to maintain its technology lead
while further refining such features before introducing them to its OEMs. See
"Risk Factors--Risks Associated with Product Development and Introduction;
Product Delays."

COMPETITION

The market for MFPs and related technology and software is highly
competitive and characterized by continuous pressure to enhance performance,
to introduce new features and to accelerate the release of new products. The
Company's branded products compete primarily with the dominant vendors in the
fax market, all of whom have substantially greater resources than the Company
and include, among others, Canon Inc., Panasonic, a division of Matsushita
Electrical Industrial Co., Ltd., Pitney Bowes Inc., Ricoh Co. Ltd., Sharp
Electronics Corporation and Xerox. The Company also competes on the basis of
vendor name and recognition, technology and software expertise, product
functionality, development time and price.

40
<PAGE>

markets with similar or substitute products or technologies. Software
solutions may also be introduced by competitors that are less costly or
provide better performance or functionality. The Company anticipates
increasing competition for its MFPs, technologies and software under
development. Most of the Company's existing competitors, many of its potential
competitors and all of the Company's OEMs have substantially greater
financial, technical, marketing and sales resources than the Company. In the
event that price competition increases, competitive pressures could cause the
Company to reduce the price of its branded products, to reduce the amount of
royalties received on new licenses and to reduce the fees for its development
services in order to maintain existing business and generate additional
product sales and license and development revenue, which could reduce profit
margins and result in losses and a decrease in market share. No assurances can
be given as to the ability of the Company to compete favorably with the
internal development capabilities of its current and prospective OEM customers
or with other third-party vendors, and the inability to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs and
strategic partners and limits access to and distribution of its designs,
software and other proprietary information. Despite these efforts, the Company
may be unable to effectively protect its proprietary rights and, in any event,
enforcement of the Company's proprietary rights may be expensive. The
Company's source code also is protected as a trade secret. However, the
Company from time to time licenses portions of its source code and designs to
OEMs and also places such source code and designs in escrow to be released to
OEMs in certain circumstances, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information. Further, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.

As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on the
Company's technology increasingly may become the subject of infringement
claims. The Company has in the past received communications from third parties
asserting that the Company's trademarks or products infringe the proprietary
rights of third parties or seeking indemnification against such infringement.
The Company is generally required to agree to indemnify its OEMs from third
party claims asserting such infringement. There can be no assurance that third
parties will not assert infringement claims against the Company or its OEMs in
the future. Any such claims, regardless of merit, could be time consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation to determine the
validity of any claims, whether or not such litigation is determined in favor
of the Company, could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel from daily
operations. In addition, the Company may lack sufficient resources to initiate
a meritorious claim. In the event of an adverse ruling in any litigation
regarding intellectual property, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing or substituted technology. The failure of the Company
to develop, or license on acceptable terms, a substitute technology could have
a material adverse affect on the Company's business, financial condition and
results of operations.

41
<PAGE>

MANUFACTURING AND OPERATIONS

The Company manufactures its JetFax branded products for distribution to the
corporate segment of the MFP market. The Company generally outsources
materials from suppliers and performs final assembly and testing at its main
facility in Menlo Park, California. As of May 1, 1997, the Company's
manufacturing and operations department consisted of 24 employees. See "Risk
Factors--Dependence on Single Manufacturing Facility; Risks Related to
Potential Disruption."

The JetFax M5 is the Company's current branded MFP. The major components of
the JetFax M5 are the print engine, the scanner, the user interface and the
multifunction embedded system technology and modem electronics, all of which
are outsourced. The JetFax embedded system and modem assemblies are built to
specification by an external printer circuit board assembler. Final product
assembly at the Company's headquarters consists of integrating the components
on a progressive assembly line. Each JetFax M5 is tested at the Company by an
internal self test for a period of not less than 24 hours, followed by a
series of functional and margin tests to help ensure reliable performance at
the customer's site. The Company's final assembly and test facilities have
recently been improved to allow for better material flow, process definition
and production efficiency.

The Company relies on various suppliers of components for its products. Many
of these components are standard and generally available from multiple
sources. However, there can be no assurance that alternative sources of such
components will be available at acceptable prices or in a timely manner. Any
shortage or interruption in the supply of any of the components used in the
Company's products, or the inability of the Company to procure these
components from alternate sources on acceptable terms, would have a material
adverse effect on the Company's business and financial condition and results
of operations. The Company generally buys components under purchase orders and
does not have long-term agreements with its suppliers. Although alternate
suppliers may be readily available for some of these components, for other
components it could take an undetermined amount of time to qualify a
replacement supplier and order and receive replacement components. The Company
does not always maintain sufficient inventory to allow it to fill customer
orders without interruption during the time that would be required to obtain
an adequate supply of single sourced components. Although the Company believes
it could develop other sources for single source components, no alternative
source currently exists and the process could take several months or longer.
Therefore, any interruption in the supply of such components could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Many of the components used in the Company's products are purchased from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to risk of changes in governmental policies, imposition of tariffs
and import restrictions and other factors beyond the Company's control. There
can be no assurance that United States or foreign trading policies will not
restrict the availability of components or increase their cost. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Certain components used in the Company's products are available only from
one source. The Company is dependent on Oki America, as the supplier of major
components, including the printer engine, of the JetFax M5. Oki America is
also a competitor of the Company. The Company is also dependent on AMI to
provide unique ASICs incorporating the Company's imaging and logic circuitry,
Motorola to provide microprocessors, Pixel, to provide a specialized imaging
processor and Rockwell to provide modem chips. If Oki America, AMI, Motorola,
Pixel or Rockwell were to limit or reduce the sale of such components to the
Company, or if such suppliers were to experience financial difficulties or
other problems which prevented them from supplying the Company with the
necessary components, it would have a material adverse effect on the Company's
business, financial condition and results of operations. These sole source
providers are subject to quality and performance issues, materials shortages,
excess demand, reduction in capacity and/or other factors that may disrupt the
flow of goods to the Company or the Company's customers and thereby adversely
affect the Company's business and customer relationships. Any disruption in
the Company's sources of supply could limit or delay production or shipment of

42
<PAGE>

products incorporating the Company's technology, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing and Operations."

The Company recently installed and implemented a new management information
system and used the accounting applications of the system for the first time
in connection with the December 31, 1996 monthly accounting close. The Company
has also begun using the manufacturing applications for inventory control and
product ordering. However, further improvements in these systems are needed
and will continue to be needed in order to manage expected growth in revenue
and assets. There is no guarantee that the implementation of the management
information system will contribute to the Company's ability to manage its
growth and, furthermore, any problems encountered as a result of the
implementation of such system, including additional modules and features,
could adversely affect the Company's operations.

EMPLOYEES

As of May 1, 1997, the Company had 86 employees and 5 full-time equivalent
contractors. Of these persons, 30 were in research and development, 27 were in
sales and marketing, 24 were in manufacturing and operations and 10 were in
finance and administration. There is no labor union representation for any of
the Company's employees. The Company has never experienced a work stoppage,
and relations with employees are considered good. The Company hires contract
employees on an as-needed basis to meet temporary or specific needs.

PROPERTIES

The Company's headquarters and principal operations are in leased facilities
totaling approximately 38,000 square feet in Menlo Park, California, and the
lease for this facility expires in February 1998. The Company has a month-to-
month lease for approximately 2,400 square feet in Santa Barbara, California
for its software application organization. The Company believes that suitable
additional or alternative space at commercially reasonable terms will be
available in the future as required.

LITIGATION

To the Company's knowledge, there are no pending legal proceedings which are
material to the Company or its business to which it is a party or to which any
of its properties is subject.

43
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information as of May 1, 1997 with
respect to the executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rudy Prince............. 39 President, Chief Executive Officer
and Chairman of the Board
Michael Crandell........ 41 Vice President of Software
John H. Harris.......... 41 Vice President of International Operations
Hansgregory C. Hartmann. 39 Vice President of Manufacturing
Allen K. Jones.......... 49 Vice President of Finance, Chief Financial Officer
and Secretary
Lon B. Radin............ 46 Vice President of Engineering and Director
Thomas B. Akin (1) (2).. 45 Director
Douglas Y. Bech (1) (2). 51 Director
Steven J. Carnevale (2). 41 Director
Chung Chiu.............. 63 Director
Shelley A. Harrison (1). 54 Director
Edward R. Prince, Jr.
(1)..................... 67 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

RUDY PRINCE co-founded the Company and has served as its President and Chief
Executive Officer and a member of the Board of Directors since August 1988.
Mr. Prince was appointed as the Chairman of the Board of Directors in October
1996. From June 1985 to February 1988, Mr. Prince was the Vice President of
Sales and Marketing at Entropic Speech, Inc., a manufacturer of
telecommunications products. Prior to that, Mr. Prince served as Sales Manager
with Digicon, Inc., a geophysical contractor ("Digicon"), from March 1980 to
June 1985. From August 1978 to March 1980, Mr. Prince served as a marketing
representative with the Data Processing Division of International Business
Machines Corporation. Mr. Prince holds a B.S. in Mechanical Engineering from
the University of Texas at Austin. Mr. Prince is the son of Edward R. Prince,
Jr., a director of the Company.

MICHAEL CRANDELL joined the Company in July 1996 as the Vice President of
Software. From January 1993 to July 1996, Mr. Crandell served as the President
of the Crandell Group, the assets of which were purchased by the Company in
July 1996. Prior to that, Mr. Crandell served as the President of Crandell
Development Corporation, a software development company from November 1984 to
December 1992. From 1981 to November 1984, Mr. Crandell worked as a Software
Engineer with Compucorp, Inc. Mr. Crandell holds a B.A. in Religious Studies
from Stanford University.

JOHN H. HARRIS joined the Company in March 1990 as the Vice President of
International Operations. From July 1987 to February 1990, Mr. Harris served
in various sales management positions with Landmark Graphics Corporation, a
supplier of graphics workstations for the oil industry, most recently as the
Regional Sales Director. From May 1981 to June 1987, Mr. Harris served as the
North American Sales Manager and Far East Sales manager for Digicon. Mr.
Harris holds a B.A. in Marketing from the University of Houston.

HANSGREGORY C. HARTMANN joined the Company in August 1995 as the Vice
President of Manufacturing. From June 1980 to August 1995, Mr. Hartmann held
various positions with Hewlett-Packard. From November 1992 to August 1995, he
was the Manager of the Channel Development and Information Services for U.S.
Channel Marketing in the Computer Products Organization of Hewlett-Packard
and, from September 1991 to

44
<PAGE>

November 1992, he was the Business Development Manager for the North American
Distribution Operation of Hewlett-Packard. From July 1985 to September 1991,
Mr. Hartmann served as the Engineering Manager for the Personal Computer
Distribution Operation of Hewlett-Packard. Mr. Hartmann holds a B.S. in
Electrical Engineering from the New Jersey Institute of Technology and a M.S.
in Manufacturing Systems Engineering from Stanford University.

ALLEN K. JONES joined the Company in May 1996 as the Vice President of
Finance, Chief Financial Officer and Secretary. From January 1976 to January
1996, Mr. Jones served in various positions with Varian Associates, Inc., a
diversified electronics company, most recently as the Vice President and
Controller from January 1995 to January 1996 and prior to that as the Vice
President and Treasurer from May 1990 to December 1994. Mr. Jones holds a B.S.
in Chemical Engineering from Cornell University and a M.B.A. from the Wharton
School of Finance at the University of Pennsylvania.

LON B. RADIN co-founded the Company and serves as the Vice President of
Engineering and a member of the Board of Directors of the Company. Dr. Radin
also served as the Chairman of the Board of Directors from August 1988 to
October 1996. From 1986 to 1988, Dr. Radin was the sole proprietor of L-Tel
Laboratories, a developer of digital fax telephone devices. From 1981 to 1986,
Dr. Radin served in various positions, most recently as the Director of
Software and Manager of Research with Time & Space Processing, Inc., a
software developer of telecommunications products for the defense industry.
Prior to that Dr. Radin served as a software services consultant for The
Systems Group, an engineering consulting firm from 1976 to 1981. Dr. Radin
holds a B.S. in Physics and Mathematics from the University of Michigan and a
Ph.D. and an M.A. in Mathematics from the University of California at
Berkeley.

THOMAS B. AKIN has served as a director of the Company since July 1996.
Since October 1995, Mr. Akin has served as a Managing General Partner of
Talkot Partners II, LLC, an investment firm. From November 1981 to February
1994, Mr. Akin served in various capacities, most recently as the Managing
Director of Western Regional Sales for Merrill Lynch & Co. Mr. Akin was on a
leave of absence from Merrill Lynch & Co. from February 1994 until his
retirement in April 1997. Mr. Akin holds a B.A. in Biology from the
University of California at Santa Cruz and an M.B.A. from the University of
California at Los Angeles.

DOUGLAS Y. BECH has served as a director of the Company since August 1988.
Mr. Bech was a founding partner of and, since August 1994 has served as a
Managing Director of Raintree Capital Company, LLC, a merchant banking firm.
In addition, since October 1994, Mr. Bech has been a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a law firm. From May 1993 through July 1994,
Mr. Bech was a partner of Gardere & Wynne, L.L.P., a law firm. From September
1970 to May 1993, Mr. Bech was associated with or a partner of the law firm
Andrews & Kurth L.L.P. Mr. Bech holds a B.A. in Political Science from Baylor
University and a J.D. from The University of Texas Law School. Mr. Bech is a
director of Wainoco Oil Corporation, Pride Companies, L.P. and several private
companies.

STEVEN J. CARNEVALE has served as a director of the Company since July 1996.
In July 1996, Mr. Carnevale became a General Partner in Talkot Capital, LLC,
an investment firm. From August 1992 to July 1996, Mr. Carnevale was a General
Partner of Endeavor Capital Management, an investment firm. From November 1990
to August 1992, Mr. Carnevale was the owner and CEO of Orca Industries, a
specialty computer manufacturer. Mr. Carnevale holds a B.S. in Engineering
from the University of Michigan.

CHUNG CHIU has served as a director of the Company since August 1991. Since
October 1978, Mr. Chiu has served as the Managing Director of Ailicec
International Enterprises Limited, a textile, electronics and machineries
conglomerate with operations largely in the Peoples Republic of China.

SHELLEY A. HARRISON has served as a director of the Company since February
1995. Since 1987, Dr. Harrison has been one of the general partners of the
high technology venture capital fund, Poly Ventures, Limited Partnership and
Chairman and Chief Executive Officer of Spacehab Inc., a developer of
pressurized laboratory and logistics modules. Dr. Harrison served as President
of Harrison Enterprises, Inc., a technology investment consulting firm, from
1982 to 1987. Prior to that Dr. Harrison served as Chairman and Chief

45
<PAGE>

Executive Officer of Symbol Technologies, Inc., a manufacturer of bar code
laser scanners from 1973 to 1982. Dr. Harrison holds a B.S. in Electrical
Engineering from New York University and a M.S. and Ph.D. in Electrophysics
from Polytechnic University. Dr. Harrison is a trustee of Polytechnic
University and is a director of Spacehab Inc., NetManage Inc. and several
private companies.

EDWARD R. PRINCE, JR. has served as a director of the Company since August
1988. Since August 1994, Mr. Prince has served as the Vice Chairman of Zydeco
Exploration, Inc. and Zydeco Energy, Inc., oil and gas exploration companies.
Prior to that from November 1970 to May 1994, Mr. Prince served in various
capacities, most recently as the Chairman and Chief Executive Officer of
Digicon. Mr. Prince holds a B.S. from the United States Military Academy at
West Point and an M.S. in Applied Mathematics from North Carolina State
College. Mr. Prince is the father of Rudy Prince, the Company's Chairman of
the Board, Chief Executive Officer and President. Mr. Prince is a director of
Geoscience Corporation and Zydeco Energy, Inc.

Currently all directors are elected annually and serve until the next annual
meeting of stockholders or until the election and qualification of their
successors. All executive officers serve at the discretion of the Board of
Directors.

COMPENSATION OF DIRECTORS

The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but the non-
employee directors are reimbursed for reasonable expenses incurred in
connection with attendance at Board and committee meetings.

In March 1997, the Company adopted the 1997 Director Option Plan, pursuant
to which the Company's non-employee directors who are directors on the
effective date of this Offering will receive an option to purchase shares of
the Company's Common Stock on the effective date of the Offering and annually
thereafter and each director who becomes a director after this Offering
receives an option to purchase shares of the Company's Common Stock upon
joining as a director of the Company and annually thereafter. See "--Incentive
Stock Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the nine months ended December 31, 1996, Messrs. Akin, Bech and
Harrison and Mr. Edward R. Prince, Jr. served as the Compensation Committee of
the Company's Board of Directors. During the nine months ended December 31,
1996, no interlocking relationship existed between any member of the Company's
Compensation Committee and any other member of the Company's Board of
Directors. Mr. Edward R. Prince, Jr. is the father of Rudy Prince, the
Company's Chairman of the Board, Chief Executive Officer and President.

46
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and each of the Company's
three other most highly compensated executive officers (collectively, the
"Named Executive Officers") during the nine months ended December 31, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
-------------------- OPTIONS/
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) SARS (#)
--------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Rudy Prince.................................. $ 102,995 -- 100,000
President, Chief Executive Officer and
Chairman of the Board
Lon B. Radin................................. 92,604 -- 100,000
Vice President of Engineering
John H. Harris............................... 81,641 -- 50,000
Vice President of International Operations
Hansgregory C. Hartmann...................... 76,974 $ 5,000 60,000
Vice President of Manufacturing
</TABLE>
- --------
(1) The salaries and bonus set forth in the table are given for the fiscal
year ended December 31, 1996, which is a nine-month period. For the
twelve-month period ended December 31, 1996, the salaries earned by each
Named Executive Officer were as follows: Rudy Prince, $129,245; John H.
Harris, $105,489; Hansgregory C. Hartmann, $101,974 and Lon B. Radin,
$118,854.

47
<PAGE>

OPTION GRANTS, EXERCISES AND HOLDINGS

Option Grants. The following table sets forth certain information regarding
options granted to the Named Executive Officers during the nine months ended
December 31, 1996.

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM (4)
OPTIONS FISCAL YEAR PRICE EXPIRATION ------------------------
NAME GRANTED (#) (1) ($/SHARE)(2) DATE (3) 5%($) 10%($)
---- ----------- ------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rudy Prince (5)......... 100,000 9.9% $ 0.50 10/03/06 $ 31,445 $ 79,687
Lon B. Radin (5)........ 100,000 9.9 0.50 10/03/06 31,445 79,687
John H. Harris (5)...... 50,000 5.0 0.30 04/25/06 9,433 23,906
Hansgregory C. Hartmann
(5) ................... 50,000 5.0 0.30 04/25/06 9,433 23,906
10,000 1.0 1.25 10/31/06 7,861 19,922
</TABLE>
- --------
(1) The Company granted options to employees to purchase 1,009,000 shares of
Common Stock during the nine months ended December 31, 1996.

(2) The exercise price may be paid in cash, check, promissory note or shares
of the Company's Common Stock through a cashless exercise procedure
involving same-day sale of the purchased shares or by any combination of
such methods.

(3) Options may terminate before their expiration date if the optionee's
status as an employee or consultant is terminated or upon optionees'
death.

(4) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.

(5) Each option vests at the rate of 1/4th of the shares subject to the option
at the end of twelve months and 1/48th of the shares subject to the option
at the end of each monthly period thereafter as long as such optionee's
employment has not terminated.

48
<PAGE>

Option Exercises and Holdings. The following table sets forth certain
information regarding options held as of December 31, 1996 by the Named
Executive Officers.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ($)(1)
------------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Rudy Prince............. 0 100,000 $ 0 $ 350,000
Lon B. Radin............ 0 100,000 0 350,000
John H. Harris.......... 0 50,000 0 185,000
Hansgregory C. Hartmann. 16,666 43,334 61,664 150,836
</TABLE>
- --------
(1) Calculated based on fair market value of the Common Stock of $4.00 per
share, less the exercise price. The fair market value of the Common Stock
was determined by the Board of Directors to be $4.00 per share on January
22, 1997, which is the first date following December 31, 1996 on which
such a determination was made by the Board of Directors.

There were no option exercises by any of the Named Executive Officers during
the nine months ended December 31, 1996.

EMPLOYMENT AGREEMENT

In July 1996, in connection with the Crandell Acquisition, the Company and
Michael Crandell entered into a two-year employment agreement whereby Mr.
Crandell serves as Vice President of Software of the Company. Pursuant to such
agreement, Mr. Crandell receives a salary of $110,000 annually and was granted
an option to purchase 187,500 shares of Common Stock at $0.30 per share under
the Company's 1995 Plan. One-fourth of the shares covered by this option vest
on July 31, 1997, and the balance vest at the rate of 1/48th per month. Mr.
Crandell's employment can be terminated if there is any material breach or
default by the Crandell Group of any term or condition of the Crandell Asset
Purchase Agreement or any material breach by the Company of certain of the
material covenants set forth in such agreement. The employment agreement
contains a five-year non-compete provision.

INCENTIVE STOCK PLANS

1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Plan") was adopted by the Board of Directors in May 1989 and amended in May
1990 and July 1991 and approved by the Company's stockholders in August 1990
and August 1991. A total of 300,000 shares of Common Stock were reserved for
issuance under the 1989 Plan. By its terms the 1989 Plan terminated in May
1992. As of May 1, 1997, 164,599 shares had been issued upon the exercise of
stock options granted under the 1989 Plan and 63,910 shares were subject to
outstanding options. Options granted under the 1989 Plan generally vest over a
four year period of time with 1/4 of the shares subject to the option vesting
one year after the vesting commencement date and 1/48th of the shares subject
to the option vesting monthly thereafter, and must be exercised within five
years of the date of grant.

1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted
by the Board of Directors in December 1995 and amended in September 1996 and
approved by the Company's stockholders in October 1996. The 1995 Plan was
further amended in February 1997 and March 1997 by the Board of Directors and
such amendments were approved by the stockholders in March 1997. A total of
3,400,000 shares of Common Stock have been reserved for issuance under the
1995 Plan. As of May 1, 1997, no shares had been issued upon the exercise of
stock options granted under the 1995 Plan, 1,096,725 shares were subject to
outstanding options and 2,303,275 shares remained available for future grant.
No stock purchase rights are outstanding under the

49
<PAGE>

1995 Plan. The 1995 Plan is presently administered by a committee of at least
two members of the Board of Directors, and such committee may consist of the
entire Board. Following this Offering, the committee administering the 1995
Plan must consist of at least two outside directors. Under the 1995 Plan,
options and stock purchase rights may be granted to officers and employees,
including directors who are employees or consultants. Only employees may
receive "incentive stock options," which are intended to qualify for certain
favorable tax treatment. The exercise price of incentive stock options under
the 1995 Plan must at least equal the fair market value of the Common Stock on
the date of grant. The exercise price of options granted to a ten-percent
stockholder must be at least 110% of the fair market value on the date of
grant and would be non-statutory stock options. Options granted under the 1995
Plan generally vest over a four year period, with 1/4 of the shares subject to
the option vesting one year after the vesting commencement date and 1/48th of
the shares subject to the option vesting monthly thereafter. Options granted
under the 1995 Plan must be exercised within ten years of the date of grant
(five years in the case of an incentive stock option granted to a ten-percent
stockholder).

Stock purchase rights may be granted alone or in tandem with options under
the 1995 Plan and a purchaser shall have not more than 120 days in which to
accept the offer. The purchase price of a stock purchase right shall be no
less than 85% of fair market value on the date of grant (100% of fair market
value in the case of stock purchase rights granted to a ten-percent
stockholder). In the event of a proposed dissolution or liquidation of the
Company or a merger in which the successor corporation does not agree to
assume the options or substitute equivalent options then the Board shall give
optionees and purchasers at least 15 days prior notice of the proposed action.
To the extent such options or stock purchase rights have not been exercised
the options and stock purchase rights will terminate immediately prior to the
consummation of such proposed action. The Board may amend or modify the 1995
Plan at any time. The 1995 Plan will terminate in December 2005, unless
terminated sooner by the Board.

1997 Director Option Plan. The Company's 1997 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in March 1997 and was
approved by the stockholders in March 1997. A total of 270,000 shares of
Common Stock have been authorized for issuance under the Director Plan. Each
nonemployee director who is a director on the date of this Prospectus and each
director who becomes a director after the date of this Prospectus will
automatically be granted a nonqualified option to purchase 20,000 shares of
Common Stock on the date on which such person first becomes a director (an
"Initial Grant") and 5,000 shares of Common Stock on the date of the annual
meeting of stockholders each year thereafter (an "Annual Grant"). The exercise
price of each of these options will be equal to the fair market value of the
Common Stock on the date of grant. One-fourth of each Initial Grant will vest
on each year over a four-year period and the Annual Grants will vest in full
on the four year anniversary of the date of grant. All such options will
expire ten years from the date of grant unless terminated sooner pursuant to
the provisions of the Director Plan. The Director Plan will terminate in March
2007 unless terminated earlier in accordance with the provisions of the
Director Plan.

1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
February 1997 and was approved by the stockholders in March 1997. A total of
500,000 shares of Common Stock have been authorized for issuance under the
Purchase Plan. No shares have been issued under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"), will be administered by the
Board of Directors of the Company or by a committee appointed by the Board of
Directors. Under the Purchase Plan, the Company will withhold a specified
percentage (not to exceed 10%) of each salary payment to participating
employees over certain offering periods. Any employee who is currently
employed for at least 20 hours per week and for at least five consecutive
months in a calendar year, either by the Company or by a majority-owned
subsidiary of the Company, will be eligible to participate in the Purchase
Plan. As of May 1, 1997, approximately 90 employees met the Purchase Plan's
eligibility requirements. Unless the Board of Directors or its committee
determines otherwise, each offering period will run for twelve months and will
be divided into two consecutive purchase periods of approximately six months.
The first offering period and the first purchase period will commence on the
date of this Prospectus and continue until December 31, 1997. New

50
<PAGE>

twelve-month offering periods will commence every six months thereafter. In
the event of a change in control of the Company, including a merger or sale of
substantially all of the Company's assets, each option under the Purchase Plan
may be assumed by any successor corporation, or the offering periods then in
progress may be shortened and all options automatically exercised. The price
at which Common Stock will be purchased under the Purchase Plan is equal to
85% of the fair market value of the Common Stock on the first day of the
applicable offering period or the last day of the applicable purchase period,
whichever is lower. Employees may end their participation in the offering at
any time during the offering period, and participation ends automatically on
termination of employment with the Company. The maximum number of shares that
a participant may purchase on the last day of any purchase period is
determined by dividing the payroll deductions accumulated during the purchase
period by the purchase price. However, no person may purchase shares under the
Purchase Plan to the extent such person would own 5% or more of the total
combined value or voting power of all classes of the capital stock of the
Company or of any of its subsidiaries, or to the extent that such person's
rights to purchase stock under all employee stock purchase plans would accrue
at a rate that exceeds $25,000 worth of stock for any calendar year.

LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS

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

51
<PAGE>

CERTAIN TRANSACTIONS

In March 1997, the Company entered into an agreement with Rudy Prince,
President, Chief Executive Officer and Chairman of the Board of the Company,
and Lon B. Radin, Vice President of Engineering and a director of the Company,
granting each of them piggy-back registration rights with respect to the
shares of the Company's Common Stock held by them.

In connection with the Crandell Acquisition in July 1996, the Company
acquired substantially all of the assets of the Crandell Group in exchange for
a cash payment of $250,000, a non-interest bearing promissory note of the
Company in the amount of $250,000 payable in July 1997 and an agreement to
make certain ongoing royalty payments to the Crandell Group. Payment of the
promissory note and the ongoing royalty payments were secured pursuant to the
terms of a Security Agreement. In addition, the Company entered into
employment agreements with Michael Crandell and Larry Crandell, the principals
of the Crandell Group. The Company also issued options to purchase an
aggregate of 280,000 shares of the Company's Common Stock to certain former
employees of the Crandell Group who were hired by the Company, including
187,500 shares to Michael Crandell and 62,500 shares to Larry Crandell, at an
exercise price of $0.30 per share (the estimated fair market value of the
Company's Common Stock at the grant date), subject to vesting over 4 year
periods (except for a 2 year vesting period as to Larry Crandell). In December
1996, the Company and the Crandell Group entered into an amendment agreement
(the "Amendment Agreement") providing that the obligation of the Company to
make certain ongoing royalty payments would terminate upon the Company's
initial public offering in exchange for a single lump sum payment provided
such offering occurs prior to July 31, 1998. Pursuant to the Amendment
Agreement, the Company issued warrants, exercisable at $1.75 per share (the
estimated fair market value of the Company's Common Stock at the grant date),
to Michael Crandell and to Larry Crandell to purchase 75,000 shares and 25,000
shares of the Company's Common Stock, respectively, such warrants exercisable
upon the effectiveness of the Company's initial public offering. Michael
Crandell is the Company's Vice President of Software.

In March 1996, pursuant to a Series F Convertible Preferred Stock Purchase
Agreement, the Company issued an aggregate of 3,445,690 shares of its Series F
Convertible Preferred Stock for aggregate consideration of $9.5 million at a
purchase price of $2.75 per share to a group of investors, including Talkot
Partners II, LLC ("Talkot Partners") (1,534,545 shares), Poly Ventures II,
L.P. (371,905 shares) and Douglas Y. Bech (10,000 shares). Thomas B. Akin, a
director of the Company, is a Managing Partner of Talkot Partners, a principal
stockholder of the Company. Shelley A. Harrison, a director of the Company, is
one of the general partners of Poly Ventures, Limited Partnership, the General
Partner of Poly Ventures II, Limited Partnership, and Mr. Bech is a director
of the Company.

As of March 1996, the Company issued options, exercisable at $1.72 per
share, to Steven J. Carnevale to purchase 260,265 shares of the Company's
Common Stock and to Thomas B. Akin to purchase 33,472 shares of the Company's
Common Stock, pursuant to the terms of the Company's letter agreement of
December 15, 1993 with Endeavor Capital Management ("Endeavor"), as amended.
Such options, along with a cash finders fee of $459,535, were paid for
services rendered with respect to the Company's Series F Convertible Preferred
Stock financing. From December 1993 until December 1996, Endeavor received
$124,000 for financial consulting services performed for the Company. Mr.
Carnevale, a director of the Company, was a General Partner of Endeavor. Mr.
Akin is a director of the Company.

In March 1996, in order to comply with certain provisions of California law,
the Company made a recision and repurchase offer to all employees and
consultants granted options under the Company's 1989 Stock Plan from and after
May 5, 1992. Such recision and repurchase offer provided that those who
accepted such offer were to receive $0.04 for each option and $0.20 (plus
interest at 7% per annum) for each share rescinded and repurchased. None of
the Company's employees or consultants accepted the rescission and repurchase
offer.

Pursuant to a promissory note dated March 1, 1992, the Company owed Lon B.
Radin, Vice President of Engineering and a director of the Company, the
principal amount of $50,140 for the transfer of certain technology from a
company of which Mr. Radin was a principal. An aggregate of $66,289 in
principal and accrued interest was paid in full by the Company in May 1996.

52
<PAGE>

In December 1994, pursuant to an Inkjet License and Supply Agreement (the
"Inkjet Agreement"), the Company granted certain licenses and sublicenses to
Ailicec (B.V.I.) Limited, an affiliate of Ailicec International Enterprises
Limited ("Ailicec International"), with respect to certain technology
developed by the Company and by Xerox Corporation in connection with an inkjet
product and agreed to supply Ailicec (B.V.I.) Limited with such products and
related components and consumables. Ailicec (B.V.I.) Limited purchased
products, components and consumables from the Company under the Inkjet
Agreement in an aggregate amount of approximately $503,000 during the
Company's fiscal years ended March 31, 1995 and March 31, 1996, and the nine
months ended December 31, 1996. Ailicec International is a principal
stockholder of the Company. Chung Chiu, a director of the Company, is the
Managing Director of Ailicec International.

In August 1994, January 1995 and October 1995, pursuant to a Note Purchase
Agreement, a Security Agreement and an Intercreditor Agreement, the Company
issued its 10% senior secured notes in an aggregate principal amount of $3.0
million (the "Bridge Notes") and warrants to purchase an aggregate of 675,156
shares of Common Stock at $2.15 per share (the "Bridge Warrants") to a group
of investors, including Thomas and Karen Akin ($500,000 in Bridge Notes and
106,511 shares of Bridge Warrants), Poly Ventures II, Limited Partnership,
($500,000 in Bridge Notes and 141,860 shares of Bridge Warrants) and Curtis J.
Pabst ($100,000 in Bridge Notes and 19,069 shares of Bridge Warrants). If not
previously exercised, the Bridge Warrants will automatically net exercise upon
the closing of the Offering. Mr. Akin, a director of the Company, is a
Managing Partner of Talkot Partners, Shelley A. Harrison, a director of the
Company, is one of the general partners of Poly Ventures, Limited Partnership,
the General Partner of Poly Ventures II, Limited Partnership, and Mr. Pabst is
a Managing Partner of Talkot Partners. All of the Bridge Notes have been
either converted into the Company's Series F Convertible Preferred Stock or
repaid by the Company.

In August 1994, the Company entered into a Purchase and Debt Restructuring
Agreement (the "Restructuring Agreement"), a Security Agreement and an
Intercreditor Agreement with Ailicec International. Ailicec International is a
principal stockholder of the Company. Chung Chiu, a director of the Company,
is the Managing Director of Ailicec International. Under the Restructuring
Agreement, in exchange for the conversion of debt of the Company in the
aggregate principal amount of $2.6 million, the Company issued Ailicec
International 344,350 shares of the Company's Series P Redeemable Preferred
Stock. In addition, a warrant to purchase 388,500 shares of the Company's
Series E Convertible Preferred Stock (the "Series E Warrant") was issued to
Ailicec International pursuant to the Restructuring Agreement. The Series E
Warrant has an exercise price of $2.75 per share and expires on October 4,
1999. The Company's Series P Redeemable Preferred Stock bears 6% cumulative
dividends, may be converted into the Company's Common Stock, at the option of
the holder, upon the closing of the Company's initial public offering at a
rate equal to 75% of the value of a share of Common Stock in such public
offering and, unless so converted, is to be redeemed by the Company (at the
original purchase price plus accrued but unpaid dividends) upon the closing of
such offering. Such Series P Redeemable Preferred Stock will be redeemed by
the Company upon the closing of this Offering for an aggregate amount of
approximately $2.7 million.

In October 1991, pursuant to a Manufacturing Agreement (the "Manufacturing
Agreement"), the Company granted Ailicec International a right of first
refusal with respect to the manufacture and sale of products to the Company
through October 1998, with any payments due Ailicec International subject to a
security agreement. The Company purchased products from Ailicec International
under the Manufacturing Agreement in an aggregate amount of $913,000 during
the Company's fiscal year ended March 31, 1995 and none during the fiscal year
ended March 31, 1996 and the nine months ended December 31, 1996. In February
1997, the Manufacturing Agreement was amended to terminate upon the closing of
the Offering. Ailicec International is a principal stockholder of the Company.
Chung Chiu, a director of the Company, is the Managing Director of Ailicec
International.

The Company has entered into indemnification agreements with its directors
and executive officers. The Company has also entered into certain stock
purchase and subscription agreements with the Selling Stockholders pursuant to
which the Company will indemnify the Selling Stockholders for certain
liabilities and costs incurred in connection with this Offering and the
Selling Stockholders will indemnify the Company and its officers and directors
for certain liabilities incurred in connection with this Offering.

53
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to the Company with respect
to the beneficial ownership of the Company's Common Stock as of May 1, 1997
and as adjusted to reflect the sale of Common Stock offered hereby, for (i)
each person who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) each of the
Selling Stockholders, (iv) each Named Executive Officer and (v) all directors
and executive officers as a group.

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING (1) TO BE OFFERING (1)
----------------- SOLD IN -----------------
NAME AND ADDRESS (2) NUMBER PERCENT OFFERING NUMBER PERCENT
- -------------------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Thomas B. Akin (3)................. 2,174,582 27.2% -- 2,174,582 20.3%
c/o Talkot Partners II, LLC
2400 Bridgeway, Suite 200
Sausalito, CA 94965
Talkot Partners II, LLC (4)........ 2,131,110 26.8 -- 2,131,110 19.9
2400 Bridgeway, Suite 200
Sausalito, CA 94965
Ailicec International Enterprises
Ltd. (5).......................... 918,732 11.0 -- 918,732 8.3
2nd Floor Kaiser Estate Phase 1 41
Man Yue Street
Hunghom, Kowloon Hong Kong
Chung Chiu (6)..................... 928,732 11.1 -- 928,732 8.4
c/o Ailicec International
Enterprises Ltd.
2nd Floor Kaiser Estate Phase 141
Man Yue Street
Hunghom, Kowloon Hong Kong
Poly Ventures II, Limited
Partnership (7)................... 489,813 6.2 125,000 364,813 3.4
c/o Polytechnic University Office
901 Route 110
Farmingdale, NY 11735
Shelley A. Harrison (8)............ 499,813 6.3 125,000 374,813 3.5
c/o Polytechnic University Office
901 Route 110
Farmingdale, NY 11735
Rudy Prince (9).................... 396,666 5.0 50,000 346,666 3.2
Steven J. Carnevale (10)........... 333,831 4.1 -- 333,831 3.0
Lon B. Radin (11).................. 229,166 2.9 25,000 204,166 1.9
John H. Harris (12)................ 137,916 1.7 15,000 122,916 1.1
Douglas Y. Bech (13)............... 110,492 1.4 20,000 90,492 *
Edward R. Prince, Jr. (14)......... 98,833 1.2 7,500 91,333 *
Hansgregory C. Hartmann (15)....... 44,916 * -- 44,916 *
All directors and executive
officers as a group,
(12 persons) (16)................. 5,074,947 57.3 242,500 4,832,447 41.6
</TABLE>

54
<PAGE>

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING (1) TO BE OFFERING (1)
--------------- SOLD IN ---------------
NAME AND ADDRESS (2) NUMBER PERCENT OFFERING NUMBER PERCENT
- -------------------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS
Prism Partners (17)................... 378,451 4.8% 97,070 281,381 2.6%
Granite Capital LP (18)............... 206,556 2.6 52,817 153,739 1.4
Virginia Snyder....................... 200,000 2.5 25,000 175,000 1.6
Strome Family Living Trust (19)....... 145,212 1.8 37,232 107,980 1.0
Marshall Oman Exploration Inc......... 100,000 1.3 25,574 74,426 *
Alan M. Craft......................... 96,000 1.2 20,459 75,541 *
WSB Trust 10/12/82 FBO
Grandchildren (20)................... 90,043 1.1 23,007 67,036 *
Leo R. Schlinkert..................... 88,851 1.1 22,723 66,128 *
Antaeus Enterprises Inc............... 78,950 1.0 20,178 58,772 *
Other Selling Stockholders each owning
less than 1% of the Common Stock
before the Offering (46 parties)..... 763,494 9.6 183,440 580,054 5.4
</TABLE>
- --------
* Less than 1%.

(1) Percentage ownership is based on (i) before the Offering, 7,940,312
shares of Common Stock outstanding as of May 1, 1997 (reflects the
conversion of each of the outstanding shares of convertible preferred
stock, except the Series P Redeemable Preferred Stock, upon the closing
of the Offering, the issuance of 470,079 shares upon the automatic net
exercise in full of certain warrants upon the closing of the Offering the
issuance of 162,703 shares upon the conversion of cumulative unpaid
dividends on the Series F Convertible Preferred Stock upon the closing of
the Offering) plus any shares issuable pursuant to the options held by
the person or group in question which may be exercised within 60 days of
May 1, 1997; and (ii) after the Offering, an additional 2,750,000 shares
of Common Stock to be issued by the Company in the Offering.

(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.

(3) Includes options and warrants to purchase an aggregate of 43,472 shares
of Common Stock exercisable within sixty days of May 1, 1997, includes
59,526 shares of Common Stock held by his minor children and includes
2,131,110 shares of Common Stock held by Talkot Partners II, LLC. Mr.
Akin is a Managing General Partner of Talkot Partners II, LLC and
disclaims beneficial ownership of these shares except as to the pecuniary
interest that he will derive from these shares.

(4) Mr. Akin is a Managing General Partner of Talkot Partners II, LLC and
disclaims beneficial ownership of these shares except as to the pecuniary
interest he will derive from these shares.

(5) Excludes 344,350 shares of Series P Redeemable Preferred Stock to be
redeemed at the Closing and includes a warrant to purchase 388,500 shares
of Common Stock.

(6) Includes an option to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997 and also includes a warrant to purchase
388,500 shares of Common Stock and 530,232 shares of Common Stock held by
Ailicec International Enterprises, Ltd. Mr. Chiu is the Managing Director
of Ailicec International Enterprises, Ltd. and disclaims beneficial
ownership of these shares.

(7) Dr. Harrison is one of the general partners of Poly Ventures, Limited
Partnership, the General Partner of Poly Ventures II, Limited
Partnership. Dr. Harrison disclaims beneficial ownership of these shares
except as to the pecuniary interest he will derive from these shares.

55
<PAGE>

(8) Includes an option to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997 which is held by Dr. Harrison for the
benefit of Poly Ventures II, Limited Partnership, and 489,813 shares of
Common Stock held by Poly Ventures II, Limited Partnership. Dr. Harrison
is one of the general partners of Poly Ventures, Limited Partnership, the
General Partner of Poly Ventures II, Limited Partnership. Dr. Harrison
disclaims beneficial ownership of these shares except as to the pecuniary
interest he will derive from these shares.

(9) Includes options to purchase 29,166 shares of Common Stock exercisable
within sixty days of March 1, 1997.

(10) Includes options and warrants to purchase an aggregate of 270,265 shares
of Common Stock exercisable within sixty days of May 1, 1997 and includes
30,233 shares of Common Stock held by Mr. Carnevale's wife.

(11) Includes options to purchase 29,166 shares of Common Stock exercisable
within sixty days of May 1, 1997.

(12) Includes options to purchase 14,583 shares of Common Stock exercisable
within sixty days of May 1, 1997.

(13) Includes options to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997.

(14) Includes options to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997.

(15) Includes options to purchase 22,916 shares of Common Stock exercisable
within sixty days of May 1, 1997.

(16) Includes options and warrants in the aggregate of 913,068 shares of
Common Stock exercisable within sixty days of May 1, 1997.

(17) Jerald Weintraub is the Managing General Partner of Prism Partners.

(18) Walter F. Harrison III is the General Partner of Granite Capital LP.

(19) Mark Strome is the trustee of the Strome Family Living Trust.

(20) Sarah Beinecke Richardson, Joseph M. Santarella and William McIlwanie
Thompson, Jr. are the trustees of the WSB Trust 10/12/82 FBO
Grandchildren.

56
<PAGE>

DESCRIPTION OF CAPITAL STOCK

At the closing of the Offering, the authorized capital stock of the Company
will consist of 35,000,000 shares of Common Stock, $0.01 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value, after giving effect to
the amendment of the Company's Certificate of Incorporation authorizing an
increase in the authorized number of shares of Common Stock to 35,000,000 and
a decrease in the authorized number of shares of Preferred Stock to 5,000,000,
and deleting references to Series A, Series B, Series C, Series D, Series E,
Series F Convertible Preferred Stock and Series P Redeemable Preferred Stock
following the conversion, or, with respect to the Series P Redeemable
Preferred Stock, the redemption, of such Preferred Stock (including the
automatic net exercise in full of certain warrants to purchase shares of
Common Stock upon the closing of the Offering and the conversion of cumulative
unpaid dividends on the Series F Convertible Preferred Stock upon the closing
of the Offering).

COMMON STOCK

As of May 1, 1997, there were 7,940,312 shares of Common Stock outstanding
(after giving effect to (i) the conversion, or, with respect to the Series P
Redeemable Preferred Stock, the redemption, of all Preferred Stock, (ii) the
issuance of shares of Common Stock upon the automatic net exercise in full of
certain warrants and (iii) the conversion of cumulative unpaid dividends on
the Series F Convertible Preferred Stock) held of record by 146 stockholders.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
liquidation rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are fully paid and non-
assessable, and the shares of Common Stock to be outstanding upon closing of
the Offering will be fully paid and non-assessable.

PREFERRED STOCK

As of the closing of the Offering, 5,000,000 shares of Preferred Stock will
be authorized and no shares will be outstanding. The Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Although it
presently has no intention to do so, the Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 7,371,713 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of the respective Preferred Stock Purchase Agreements
and Subscription and Stock Purchase Agreements, the Series E Preferred Stock
Purchase Agreement, the Series F Preferred Stock Purchase Agreement, the Note
Purchase Agreement, Warrants and a Registration Rights Agreement. Upon
consummation of the Offering and subject to certain limitations in the
applicable agreements, holders of 5,820,904 shares of Registrable Securities
may request registration under the Securities Act of all or part of their
Registrable Securities, six months after the effective date of the Offering.
If the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of 6,417,215 shares of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. All registration expenses must

57
<PAGE>

be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being registered. In
addition, certain holders of Registrable Securities may request registration
under the Securities Act of all or part of their Registrable Securities on
Form S-3 when use of such form becomes available to the Company.

DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS

Certain provisions of Delaware law and the Company's Restated Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest, or otherwise, and the
removal of incumbent officers and directors. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of the
Company to first negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals
could result in an improvement of their terms.

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years prior, did own) 15% or more of the corporation's voting
stock. The Company has waived the right to "elect out" of application of
Section 203.

The Company's Restated Certificate of Incorporation also provides that if at
any time the Company shall have a class of stock registered pursuant to the
Securities Exchange Act of 1934, as amended, for so long as such class is so
registered, stockholder action can be taken only at an annual or special
meeting of stockholders and may not be taken by written consent. The Bylaws
provide that special meetings of stockholders can be called only by the
Chairman of the Board, the President or the Board of Directors. Stockholders
are not permitted to call a special meeting or to require that the Board of
Directors call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the Chairman of the Board, the
President or the Board of Directors. The Bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors and with
regard to business to be brought before an annual meeting of stockholders of
the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

58
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
10,690,312 shares of Common Stock, assuming no exercise of options or warrants
after December 31, 1996. Of these shares, the 3,500,000 shares offered hereby
(4,025,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration
under the Securities Act, unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act ("Rule 144")
described below. The remaining 7,190,312 shares of Common Stock outstanding
upon closing of the Offering are "restricted securities" as that term is
defined in Rule 144. Of the remaining 7,190,312 shares, 7,016,148 shares are
subject to lock-up agreements (described below).

Upon completion of the Offering, 10,000 shares will become eligible for
immediate sale pursuant to Rule 144(k) and, beginning 90 days after
commencement of the Offering, 7,162,359 shares will become eligible for sale
pursuant to Rule 144 or Rule 701 under the Securities Act ("Rule 701"). Upon
expiration of the lock-up agreements, an aggregate of 2,326,962 shares will
become immediately eligible for sale without restriction pursuant to Rule
144(k) or Rule 701 (described below), and approximately 4,835,397 additional
shares will be eligible for sale subject to the timing, volume, and manner of
sale restrictions of Rule 144. The 17,953 remaining shares held by existing
stockholders will become eligible for sale at various times over a period of
less than one year. In addition, 1,319,573 additional shares of Common Stock
subject to outstanding warrants and vested stock options could also be sold,
subject in some cases to compliance with certain volume limitations as
described below.

In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "brokers' transactions" or
to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater
of (i) one percent of the number of shares of Common Stock then outstanding
(approximately 106,903 shares immediately after the completion of the
Offering) or (ii) generally, the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form
144 with respect to such sale. Sales under Rule 144 are generally subject to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner other than an affiliate from whom such shares were
purchased), is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Under Rule 701, persons who purchase shares upon exercise of options
granted prior to the effective date of the Offering are entitled to sell such
shares 90 days after the effective date of the Offering in reliance on Rule
144, without having to comply with the holding period requirements of Rule 144
and, in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.

Pursuant to the lock-up agreements, all of the Company's officers and
directors and certain stockholders, including the Selling Stockholders, owning
upon completion of the Offering, in the aggregate, 7,016,148 shares of Common
Stock, have executed agreements pursuant to which each has agreed that they
will not, for a period of 180 days from the date of this Prospectus, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, pledge, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters. In addition, certain other
stockholders of the Company holding an aggregate of 111,000 shares are subject
to 90 day lock-up agreements with the Company and stockholders holding an
aggregate of 53,164 shares are subject to 180 day lock-up agreements with the
Company. Further, holders of outstanding warrants and vested stock options
for, in the aggregate, an additional 1,319,573 shares of Common Stock are
subject to 180 day lock-up agreements with the Company and/or Prudential

59
<PAGE>

Securities Incorporated. The Company has agreed that it will not, for a period
of 180 days from the date of this Prospectus, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock, or other capital stock of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except that such agreement does not prevent the Company from
granting additional options under the 1995 Plan or the Director Plan or from
issuing shares under the Purchase Plan. Prudential Securities Incorporated may
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.

Approximately 180 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering an aggregate of
approximately 4,233,910 shares of Common Stock (including the 1,160,635 shares
subject to outstanding options as of May 1, 1997) that have been reserved for
issuance under its stock option and stock purchase plans, thus permitting the
resale of such shares in the public market without restriction under the
Securities Act.

The holders of an aggregate of 7,371,713 shares of Common Stock (including
shares issuable upon exercise of outstanding warrants) or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights of Certain Holders."

Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market prices and impair the
Company's ability to raise capital through the sale of equity securities.

60
<PAGE>

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated................................. 1,300,000
Cowen & Company.................................................... 1,300,000
Alex. Brown & Sons Incorporated.................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 80,000
Hambrecht & Quist LLC.............................................. 80,000
Montgomery Securities.............................................. 80,000
J.P. Morgan Securities Inc. ....................................... 80,000
Robertson, Stephens & Company LLC.................................. 80,000
Crowell, Weedon & Co............................................... 40,000
Furman Selz LLC.................................................... 40,000
Raymond James & Associates, Inc.................................... 40,000
The Robinson-Humphrey Company, Inc................................. 40,000
Soundview Financial Group, Inc..................................... 40,000
Sutro & Co. Incorporated........................................... 40,000
Unterberg Harris................................................... 40,000
Volpe, Welty & Company LLC......................................... 40,000
Wedbush Morgan Securities.......................................... 40,000
Hanifen, Imhoff Inc................................................ 20,000
The Seidler Companies Incorporated................................. 20,000
The Williams Capital Group, L.P.................................... 20,000
---------
Total........................................................... 3,500,000
=========
</TABLE>

The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.

The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the initial public offering price set forth on the cover page of
this Prospectus; that the Underwriters may reallow to selected dealers a
concession of $0.33 per share; and that such dealers may re-allow a concession
of $0.10 per share to certain other dealers. After the initial public
offering, the offering price and the concessions may be changed by the
Representatives.

The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 525,000 additional shares
of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to
3,500,000.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.

The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.

61
<PAGE>

The Company, its officers and directors, the Selling Stockholders and
certain other beneficial owners of the Company's Common Stock and holders of
warrants or options to purchase Common Stock have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock or any securities convertible into or exercisable or exchangeable for
any shares of Common Stock or other capital stock of the Company, for a period
of 180 days after the date of this Prospectus without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters.
Prudential Securities Incorporated may in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-
up agreements.

Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined through negotiations between the Company and the
Representatives. Among the factors considered in making such determination
will be the prevailing market conditions, the Company's financial and
operating history and condition, its prospects and the prospects for its
industry in general, the management of the Company and the market prices of
securities for companies in businesses similar to that of the Company.

In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company and the Selling
Stockholders, and in such case may purchase Common Stock in the open market
following the closing of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 525,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, Prudential
Securities Incorporated, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by General Counsel Associates LLP,
Mountain View, California. Clifford S. Robbins, a partner of General Counsel
Associates LLP, owns 10,000 shares of the Common Stock of the Company. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.

EXPERTS

The financial statements of JetFax, Inc. as of March 31, 1996 and December
31, 1996 and for the years ended March 31, 1995 and March 31, 1996 and for the
nine months ended December 31, 1996, appearing in this Prospectus and the
related financial statement schedule appearing elsewhere in this Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.

62
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedule thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedule filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission maintains a World
Wide Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the website is http://www.sec.gov.

63
<PAGE>

JETFAX, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficiency)............................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
JetFax, Inc.:

We have audited the accompanying balance sheets of JetFax, Inc. as of March
31, 1996 and as of December 31, 1996, and the related statements of
operations, stockholders' equity (deficiency) and cash flows for the years
ended March 31, 1995 and 1996 and for the nine-month period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of JetFax, Inc. at March 31, 1996 and
December 31, 1996, and the results of its operations and its cash flows for
the years ended March 31, 1995 and 1996 and for the nine-month period ended
December 31, 1996 in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

San Jose, California
February 7, 1997
(March 18, 1997 as to Note 15)

F-2
<PAGE>

JETFAX, INC.

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

<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1996 1997 1997
--------- ------------ --------- ---------
UNAUDITED
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,452 $ 106 $ 16 $ 16
Trade receivables, net of
allowances of: March 31, 1996,
$310; December 31, 1996, $396;
March 31, 1997, $383.............. 1,919 2,434 3,198 3,198
Receivable from the sale of the
Series F Preferred Stock.......... 650 -- -- --
Inventories........................ 3,387 2,339 3,241 3,241
Prepaid expenses................... 12 61 113 113
-------- -------- -------- --------
Total current assets............ 9,420 4,940 6,568 6,568
Property--net....................... 174 615 686 686
Other assets........................ 25 566 766 766
-------- -------- -------- --------
Total assets........................ $ 9,619 $ 6,121 $ 8,020 $ 8,020
======== ======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 4,169 $ 1,857 $ 3,023 $ 3,023
Accrued liabilities................ 1,410 619 638 638
Line of credit..................... -- 200 1,000 1,000
Current portion of long-term note
payable........................... -- 302 313 313
Related party notes payable and
advances--current portion......... 61 -- -- --
-------- -------- -------- --------
Total current liabilities....... 5,640 2,978 4,974 4,974
-------- -------- -------- --------
Long-term note payable less current
portion............................ -- 198 181 181
Redeemable preferred stock, $0.01
par value; 500,000 shares
authorized, none pro forma; shares
outstanding: March 31, 1996, none
(344,350 shares issuable); December
31, 1996, 344,350 shares; March 31,
1997 actual and pro forma 344,350
shares (liquidation preference of
$2,764)............................ 2,610 2,726 2,764 2,764
Stockholders' equity:
Convertible preferred stock, $0.01
par value; 9,000,000 shares
authorized, 5,000,000 shares pro
forma; shares outstanding: March
31, 1996, December 31, 1996 and
March 31, 1997, 6,293,978; March
31, 1997 pro forma, none
(liquidation preference of
$14,404).......................... 63 63 63 --
Common stock, $0.01 par value;
13,500,000 shares authorized,
35,000,000 shares pro forma;
shares outstanding: March 31,
1996, 954,474; December 31, 1996,
995,599; March 31, 1997,
1,013,552; March 31, 1997, pro
forma 7,940,312................... 9 10 10 79
Additional paid-in capital......... 13,160 13,880 14,670 14,664
Accumulated deficit................ (11,863) (13,734) (14,642) (14,642)
-------- -------- -------- --------
Total stockholders' equity...... 1,369 219 101 101
-------- -------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity............................. $ 9,619 $ 6,121 $ 8,020 $ 8,020
======== ======== ======== ========
</TABLE>

See notes to financial statements.

F-3
<PAGE>

JETFAX, INC.

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

<TABLE>
<CAPTION>
QUARTERS
YEARS ENDED NINE MONTHS ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31,
--------------- ------------------- --------------
1995 1996 1995 1996 1996 1997
------ ------- ----------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $6,413 $11,143 $ 7,336 $10,205 $3,807 $4,250
Development fees....... 1,200 699 466 1,416 233 743
Software and technology
license fees.......... 139 1,345 667 1,241 678 223
------ ------- ------- ------- ------ ------
Total revenues...... 7,752 13,187 8,469 12,862 4,718 5,216
------ ------- ------- ------- ------ ------
Costs and expenses:
Cost of product
revenues.............. 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development........... 1,118 1,249 919 1,709 330 1,477
Selling and marketing.. 1,325 2,710 1,745 2,785 965 972
General and
administrative........ 746 750 500 823 250 352
------ ------- ------- ------- ------ ------
Total costs and
expenses........... 8,438 15,811 10,957 13,812 4,854 5,780
------ ------- ------- ------- ------ ------
Loss from operations.... (686) (2,624) (2,488) (950) (136) (564)
Other income (expense):
Interest expense....... (70) (287) (200) (9) (87) (7)
Interest income........ 2 14 7 31 7 --
Other income (expense). -- 3 1 (9) 2 (20)
------ ------- ------- ------- ------ ------
(68) (270) (192) 13 (78) (27)
------ ------- ------- ------- ------ ------
Loss before
extraordinary item and
income taxes........... (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes.................. -- 35 35 105 -- 45
------ ------- ------- ------- ------ ------
Loss before
extraordinary item..... (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item--gain
on exchange of
stockholder debt and
receivables for notes
payable................ 349 -- -- -- -- --
------ ------- ------- ------- ------ ------
Net loss................ $ (405) $(2,929) $(2,715) (1,042) $ (214) (636)
====== ======= ======= ======
Series P Redeemable
Preferred Stock
dividends.............. (116) (38)
------- ------
Net loss applicable to
common stockholders.... $(1,158) $ (674)
======= ======
Pro forma net loss per
share.................. $ (0.14) $(0.08)
======= ======
Common and common
equivalent shares used
in computing pro forma
net loss per share .... 8,454 8,474
======= ======
</TABLE>

See notes to financial statements.

F-4
<PAGE>

JETFAX, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1994. 2,848,288 $ 29 867,105 $ 9 $ 3,936 $ (8,432) $ (4,458)
Exercise of Common Stock
options................ -- -- 31,609 -- 4 -- 4
Net loss................ -- -- -- -- -- (405) (405)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1995................... 2,848,288 29 898,714 9 3,940 (8,837) (4,859)
Exercise of Common Stock
options................ -- -- 55,760 -- 5 -- 5
Issuance of Series F
Convertible Preferred
Stock for cash of
$7,547 and conversion
of debt of $1,929, net
of issuance costs of
$675................... 3,445,690 34 -- -- 8,766 -- 8,800
Additional paid in
capital from conversion
of debt into Series P
Redeemable Preferred
Stock, net of issuance
costs of $13........... -- -- -- -- 379 -- 379
Cumulative dividends on
Series F Convertible
($70) and Series P
Redeemable ($27)
Preferred Stock........ -- -- -- -- 70 (97) (27)
Net loss................ -- -- -- -- -- (2,929) (2,929)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1996................... 6,293,978 63 954,474 9 13,160 (11,863) 1,369
Exercise of Common Stock
options................ -- -- 41,125 1 7 -- 8
Cumulative dividends on
Series F Convertible
($713) and Series P
Redeemable ($116)
Preferred Stock........ -- -- -- -- 713 (829) (116)
Net loss................ -- -- -- -- -- (1,042) (1,042)
--------- ---- --------- --- -------- --------- --------
Balances, December 31,
1996................... 6,293,978 63 995,599 10 13,880 (13,734) 219
Exercise of Common Stock
options*............... -- -- 4,000 -- 1 -- 1
Exercise of Common Stock
warrant*............... -- -- 13,953 -- 30 -- 30
Cumulative dividends on
Series F Convertible
($234) and Series P
Redeemable ($38)
Preferred Stock*....... -- -- -- -- 234 (272) (38)
Warrant compensation
expense (Note 3)*...... -- -- -- -- 525 -- 525
Net loss*............... -- -- -- -- -- (636) (636)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1997*.................. 6,293,978 $ 63 1,013,552 $10 $ 14,670 $ (14,642) $ 101
========= ==== ========= === ======== ========= ========
</TABLE>

* Unaudited

See notes to financial statements.

F-5
<PAGE>

JETFAX, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED QUARTERS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
---------------- ------------------- ---------------
1995 1996 1995 1996 1996 1997
------- ------- ----------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (405) $(2,929) $(2,715) $(1,042) $ (214) $ (636)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization.......... 115 250 136 143 74 52
Warrant compensation
expense............... -- -- -- -- -- 525
Provision for
(reversal of)
inventory reserves
and purchase
commitment............ -- 760 760 (280) -- --
Extraordinary gain on
debt restructuring.... (349) -- -- -- -- --
Changes in assets and
liabilities:
Trade receivables..... (1,082) (392) 362 (515) (630) (764)
Inventories........... (644) (1,912) (1,671) 1,048 (441) (902)
Prepaid expenses...... -- (12) (4) (49) (8) (52)
Accounts payable...... 1,822 1,771 2,718 (2,312) (871) 1,166
Accrued liabilities... (400) 53 (49) (511) 56 19
------- ------- ------- ------- ------- ------
Net cash used for
operating
activities......... (943) (2,411) (463) (3,518) (2,034) (592)
------- ------- ------- ------- ------- ------
Cash flows from
investing activities:
Purchase of property... (217) (154) (85) (515) (30) (123)
Increase in other
assets................ (1) (10) (174) (55) 164 (200)
Acquisition of Crandell
Group................. -- -- -- (305) -- --
------- ------- ------- ------- ------- ------
Net cash used for
investing
activities......... (218) (164) (259) (875) 134 (323)
------- ------- ------- ------- ------- ------
Cash flows from
financing activities:
Proceeds from sale of
common stock.......... 4 5 5 8 -- 31
Repayment of notes
payable............... (5) (1,362) -- -- (1,175) (6)
Repayment of related
party notes payable... (609) (70) -- (61) -- --
Line of credit
borrowings, net....... -- -- -- 200 -- 800
Equipment term note
borrowings............ -- -- -- 250 -- --
Proceeds from issuance
of notes payable...... 1,990 1,010 800 -- -- --
Proceeds from Series F
Convertible Preferred
Stock--net............ -- 6,222 -- 650 6,222 --
Restricted investments. (100) 100 100 -- -- --
------- ------- ------- ------- ------- ------
Net cash provided by
financing
activities......... 1,280 5,905 905 1,047 5,047 825
------- ------- ------- ------- ------- ------
Increase (decrease) in
cash and cash
equivalents............ 119 3,330 183 (3,346) 3,147 (90)
Cash and cash
equivalents, beginning
of year................ 3 122 122 3,452 305 106
------- ------- ------- ------- ------- ------
Cash and cash
equivalents, end of
year................... $ 122 $ 3,452 $ 305 $ 106 $ 3,452 $ 16
======= ======= ======= ======= ======= ======
Supplemental cash flow
information:
Interest paid.......... $ 37 $ 211 $ 202 $ 9 $ 9 $ 7
======= ======= ======= ======= ======= ======
Taxes paid--foreign
withholding........... $ -- $ 35 $ 35 $ 105 $ -- $ 45
======= ======= ======= ======= ======= ======
Supplemental noncash
investing and financial
information:
Accounts receivable--
stockholder, offset
against accounts
payable--stockholder.. $ 1,141 $ 75
======= =======
Restructuring of
accounts payable--
stockholder, to long-
term debt--
stockholder........... $ 2,505
=======
Restructuring of
advances from
stockholder, to long-
term debt--
stockholder........... $ 1,730
=======
Conversion of note
payable to
stockholder, to Series
P Redeemable Preferred
Stock issuable........ $ 675 $ 2,287 $ 2,287
======= ======= =======
Conversion of
convertible notes
payable into Series F
Convertible Preferred
Stock................. $ 1,929 $ 1,929
======= =======
Receivable--Series F
Convertible Preferred
Stock................. $ 650 $ 650
======= =======
Cumulative dividends on
Series F Convertible
and Series P
Redeemable Preferred
Stock................. $ 97 $ 9 $ 829 $ 90 $ 272
======= ======= ======= ======= ======
Acquisition of Crandell
Group (Note 3):
Fair value of assets
acquired (includes
intangibles of $540
and property of $15).. $ 555
Cash paid.............. (305)
-------
Note payable to
seller................ $ 250
=======
</TABLE>
See notes to financial statements.

F-6
<PAGE>

JETFAX, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)

1.NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

JetFax, Inc. (the Company) was incorporated in Delaware in August 1988 and
since that time has engaged in the development, manufacture and sale of its
branded multifunction products (MFPs) and entered into agreements with a
number of manufacturers (OEMs) of MFPs for the customization and integration
of the Company's embedded system technology and desktop software in several
OEM products.

FISCAL PERIOD END

Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4, 1997 is
referred to herein as the nine months ended December 31, 1996 and the 13-week
period from January 5, 1997 through April 5, 1997 is referred to as the
quarter ended March 31, 1997. For presentation purposes, the Company refers to
its reporting year ended January 4, 1997 and the quarter ended April 5, 1997
as ending on December 31, 1996 and March 31, 1997, respectively.

CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates include the level of the allowance for potentially uncollectible
accounts receivable, reserves for inventories, accrued losses on purchase
commitments, accrued OEM licensing revenues, product development revenues
recognized on the percentage-of-completion basis, accrued warranty costs, and
a valuation allowance for net deferred tax assets.

The Company sells and licenses its products and technology primarily to end
users (through independent dealers) and OEMs in the United States, Canada,
Asia and Europe. In addition, the Company performs development services for
certain of its OEMs. The Company performs ongoing credit evaluations of its
customers' financial condition and limits its exposure to losses from bad
debts by limiting the amount of credit extended whenever deemed necessary and
generally does not require collateral.

The Company operates in a very dynamic industry. The Company believes that
changes in any of the following areas could have a negative impact on the
Company's future financial position and results of operation: the timing of
introductions of new products or product enhancements by the Company, its OEMs
and their competitors; initiation or termination of arrangements between the
Company and its existing and potential significant OEM customers or
distributors or dealers; the size and timing of and fluctuations in end user
demand for the Company's branded products and OEM products incorporating the
Company's technology; inventories of the Company's branded products or
products incorporating the Company's technology carried by the Company, its
distributors and dealers, its OEMs or the OEMs' distributors that exceed
current or projected end user demand; the phase-out or early termination of
the Company's branded products or OEM products incorporating the Company's
technology; the amount and timing of development agreements, one-time software
licensing transactions and recurring license fees; non-performance by the
Company, its supplier or its OEM customers pursuant to their plans and
agreements; seasonal trends; competition and pricing; customer order deferrals
and cancellations in anticipation of new products or product enhancements;
industry and technology developments; changes in the Company's operating
expenses; software and hardware defects; product delays or product quality
problems; currency fluctuations; and general economic conditions.

F-7
<PAGE>

JETFAX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)

The Company recognized net losses of approximately $405,000, $2.9 million,
$1.0 million and $636,000 for the fiscal years ended March 31, 1995 and 1996,
the nine months ended December 31, 1996, and the quarters ended March 31,
1997, respectively. The Company's historical losses and $1.2 million of
preferred stock cumulative dividends through March 31, 1997 have resulted in
an accumulated deficit of approximately $14.6 million at March 31, 1997.
Management plans to enhance the Company's cash flows from operations by
obtaining license and development fees from OEMs, and increasing its product
sales; however, no assurance can be given that the Company will be successful
in such efforts.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash equivalents and accounts receivable. Cash is
primarily on deposit at a financial institution. Credit risk with respect to
the trade receivables is spread over a number of geographically diverse
customers, who make up the Company's customer base. At December 31, 1996 and
March 31, 1997, one customer accounted for 12% and 14% of total accounts
receivable, respectively.

CASH EQUIVALENTS

Cash equivalents are highly liquid debt instruments acquired with an
original maturity of three months or less. The recorded carrying amounts of
the Company's cash and cash equivalents approximate their fair market value.

ACCOUNTS RECEIVABLE

Accounts receivable includes unbilled amounts of $364,000 and $611,000
relating to development revenues at December 31, 1996 and March 31, 1997,
respectively (see "Revenue Recognition" below).

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.
The Company's products typically experience short life cycles, and the Company
estimates the market value of its inventory based on the anticipated selling
prices adjusted for completion and selling costs. Should the Company
experience a substantial unanticipated decline in the selling price of its
products and/or demand thereof, a material valuation adjustment and
corresponding charge to operations could result. In addition, the Company uses
subcontractors for the manufacture of certain of its products and/or
components and occasionally enters into purchase commitments for such
purchases. Consequently, the Company evaluates its exposure relative to such
contracts and the estimated selling prices of the related products, adjusted
for completion and selling costs, and accrues for losses, if anticipated (see
Note 6).

PROPERTY

Property is stated at cost or, for items under capital lease, at the present
value of future minimum lease payments at the lease inception. Depreciation
and amortization are computed using the straight-line method over estimated
useful lives of one to five years or the lease term, whichever is appropriate.

INCOME TAXES

The Company accounts for income taxes under an asset and liability approach.
Deferred tax liabilities are recognized for future taxable amounts and
deferred tax assets are recognized for future deductions net of a valuation
allowance to reduce deferred tax assets to amounts that are more likely than
not to be realized.

REVENUE RECOGNITION

Revenues from product sales are generally recognized upon shipment.
Estimated future warranty costs are accrued at the time of the sale.

F-8
<PAGE>

JETFAX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996 , NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996 AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997
(UNAUDITED)

The Company enters into development agreements with OEM customers for which
it receives development fees with certain payments contingent upon attaining
contract milestones. The Company generally retains ownership of the product
technology developed under the agreements; however, some agreements limit the
Company's ability to sell its products incorporating the technology. The
agreements typically provide for license and royalty payments to the Company
based on the OEM customers' subsequent use of the technology in their
products.

Revenues from product development agreements is recognized using the
percentage of completion method. Estimates are reviewed and revised
periodically throughout the lives of the contracts. Any revisions are recorded
in the accounting period in which the revisions are made. Royalties are
recognized as earned, and include OEM product licensing revenues which are
primarily determined based on the number of OEM units sold. Such revenues are
initially recorded based on an estimate of such number of units and are
adjusted upon the receipt of actual unit sales data from OEMs in the
accounting period in which the information is received.

RESEARCH AND DEVELOPMENT

Research and development costs include costs and expenses associated with
the design and development of new products. To the extent that such costs
include the development of computer software, the Company follows the working
model approach to determine technological feasibility of the software product.
Costs incurred subsequent to establishing technological feasibility have been
immaterial and, accordingly, all software development costs have been included
in research and development expense for the periods presented herein.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share is based on the reported net loss adjusted for
cumulative dividends on Series P Redeemable Preferred Stock, to arrive at net
loss applicable to common stock. Pro forma net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include (i)
convertible preferred stock, except Series P Redeemable Preferred Stock,
(using the "if converted" method) and (ii) stock options and warrants (using
the treasury stock method). Common equivalent shares are excluded from the
computation if there is a net loss as their effect is anti-dilutive, except
that, pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the initial filing
date as if they were outstanding for all periods presented. In addition, all
outstanding preferred stock and cumulative dividends that convert into common
stock in connection with the proposed offering are included in the computation
as common equivalent shares even when the effect is anti-dilutive.

UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited interim financial information for the nine months ended
December 31, 1995 and for the quarters ended March 31, 1996 and 1997 have been
prepared on the same basis as the audited financial statements. In the opinion
of management, such unaudited information includes all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of this
interim information.

F-9
<PAGE>

JETFAX, INC.

UNAUDITED PRO FORMA INFORMATION

Upon the closing of the initial public offering as contemplated by this
Prospectus (i) each of the outstanding shares of Series A through F
Convertible Preferred Stock will convert into one share of Common Stock,
(ii) 470,079 shares of Common Stock will be issued upon the net exercise of
outstanding warrants to purchase 661,193 shares of Common Stock (see Note 10),
(iii) 162,703 shares of Common Stock will be issued upon the conversion of
cumulative dividends on Series F Convertible Preferred Stock (see Note 10) and
(iv) the authorized number of shares of Preferred Stock and Common Stock will
be 5,000,000 and 35,000,000, respectively (see Note 15). The unaudited pro
forma information included in the accompanying balance sheet gives effect to
such conversions, issuances and authorizations.

RECENT ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 replaces the presentation of primary earnings per share (EPS) with a
presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. SFAS 128 also requires,
among other things, dual presentation of basic EPS and diluted EPS on the face
of the income statement for all entities with complex capital structures.
Assuming SFAS 128 had been adopted, basic and diluted EPS for the nine months
ended December 31, 1996 and the quarter ended March 31, 1997 would not have
differed significantly from the Company's reported pro forma net loss per
share.

2.SIGNIFICANT TRANSACTIONS

In August 1994, the Company entered into an agreement with a preferred
stockholder, who was also a supplier, which provided, among other things, that
the Company's receivable from the stockholder of $1,141,141 be applied to
reduce the amount due to the stockholder of $5,376,437. With respect to the
remainder due to the stockholder:

. $667,000 was converted to a note which was repaid during the fiscal
years ended March 31, 1996 and 1995. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," the note was recorded at
the amount of the future principal and interest payments of $684,164.

. $2,582,621 was converted to a 6% note with interest payable annually
with the principal due in five years. In accordance with SFAS No. 15,
the note was recorded at the amount of the future principal and interest
payments of $3,357,407. Upon the receipt of $400,000 of bridge
financing, which occurred in fiscal 1995, $675,000 of the note was
required to be converted into 90,000 shares of a new class of redeemable
preferred stock (Series P) at a conversion rate of $7.50 per share (see
Note 10). Accordingly, the note was reduced by $830,250 (including
$155,250 of related future interest recognized as additional
extraordinary gain). In March 1996, additional equity financing was
raised and, pursuant to the terms of the note, $1,907,621 of the face
value of the note was required to be converted into 254,350 shares of
redeemable preferred stock (Series P) at a conversion rate of $7.50 per
share. Accordingly, the note was reduced by its recorded amount of
$2,286,948 (including $379,327 of related future interest recognized as
additional paid in capital).

In accordance with SFAS No. 15, the above restructuring resulted in an
extraordinary gain of $348,975 in the year ended March 31, 1995. In addition,
a warrant to purchase 388,500 shares of Series E Convertible Preferred Stock
at a purchase price of $2.75 per share was issued to the stockholder. The
warrant is exercisable for five years. The estimated fair value of these
warrants is immaterial and, accordingly, no amount has been recorded in the
financial statements for their issuance.

F-10
<PAGE>

JETFAX, INC.

3. BUSINESS COMBINATION

In July 1996, the Company acquired the assets of the Crandell Group, Inc.
(the Crandell Group), a company in the business of developing and marketing
software products, including certain products used in fax applications, some
of which have previously been licensed by and used in JetFax products. The two
principals of the Crandell Group (the Principals) have also entered into two
year employment agreements with JetFax. The primary terms of the acquisition,
which has been accounted for as a purchase transaction, are as follows:

. The Company paid $250,000 upon the closing, issued a non-interest
bearing promissory note for $250,000 that is due July 1997 and incurred
$55,000 of related acquisition costs for a total purchase price of
$555,000. $540,000 of the purchase price was allocated to proprietary
software, licensing contracts and covenants not to compete, and is being
amortized over five years. Accumulated amortization at December 31, 1996
is $54,302. The remaining $15,000 of the purchase price represents the
fair value of computer equipment and furniture acquired and has been
included in fixed assets.

. The Company is obligated to make monthly royalty payments to the
Crandell Group equal to 25% and 33% of revenues generated by sales of
products incorporating the acquired software technology (as defined
contractually) in the first and second twelve month periods after the
closing, respectively. These payments are contingent upon the continued
employment of the former majority shareholder/employee by the Company.
Accordingly, the Company has recorded $228,000 of such payments through
December 31, 1996 as compensation within research and development
expense.

. An amendment to the purchase agreement provides that upon an initial
public offering of the Company's stock (IPO) prior to July 31, 1998, the
Company's obligation to make further royalty payments in excess of those
already earned as of the end of the month prior to the month of the IPO,
will terminate. However, the Company will be obligated to make a payment
of $1,250,000 to the Principals within 60 days after the end of the
month in which the IPO takes place. If the IPO occurs after April 30,
1997, the $1,250,000 payment will be reduced by royalty amounts earned
by the Principals subsequent to April 30, 1997 and the $250,000 note
payable. The amount of the payment to the Crandell Group pursuant to
this provision (excluding the $250,000 note payable), if any, will be
accrued as compensation within research and development expense at the
time of the IPO.

The amendment to the purchase agreement also provides that the Principals
receive warrants to acquire a total of 100,000 shares of the Company's common
stock at an exercise price of $1.75 per share, the fair market value at the
time of the grant. These warrants will become exercisable only in the event of
an IPO prior to July 31, 1998. In addition, should the $1,250,000 payment be
reduced to zero pursuant to the provisions referred to above, the number of
the warrants that will be exercisable in the event of an IPO prior to July 31,
1998 will be decreased based on a formula that is designed to reduce the total
value of these warrants by the amount of the total payments paid to the
Principals under the terms of this agreement in excess of $1,250,000. As all
of the terms of these warrants will not be fixed until an IPO occurs, they are
accounted for as a variable equity award to employees for which increases in
the fair value of the Company's common stock subject to the warrants result in
additional compensation expense. Accordingly, the Company recognized $525,000
of compensation expense for the quarter ended March 31, 1997.

The results of operations for the Crandell Group prior to its acquisition by
the Company are not material and, accordingly, pro forma information is not
disclosed.

F-11
<PAGE>

JETFAX, INC.

4.INVENTORIES

Inventories consist of (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Materials and supplies...................... $ 2,851 $ 1,276 $1,477
Work-in-process............................. 307 235 242
Finished goods.............................. 229 828 1,522
------- ------- ------
Total....................................... $ 3,387 $ 2,339 $3,241
======= ======= ======

5.PROPERTY

Property consists of (in thousands):

<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Furniture and fixtures...................... $ 568 $ 570 $ 668
Manufacturing tools and tooling............. 209 187 190
Software.................................... -- 341 363
Leasehold improvements...................... 56 56 56
------- ------- ------
Total....................................... 833 1,154 1,277
Accumulated depreciation and amortization... (659) (539) (591)
------- ------- ------
Property-net................................ $ 174 $ 615 $ 686
======= ======= ======
</TABLE>

6.ACCRUED LIABILITIES

Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Compensation and related benefits........... $ 340 $ 220 $329
Product warranty............................ 147 140 172
Estimated loss on purchase commitment....... 649 -- --
Other....................................... 274 259 137
------- ------ ----
Total....................................... $ 1,410 $ 619 $638
======= ====== ====
</TABLE>

During the year ended March 31, 1996, the Company recorded an estimated loss
of $649,000 (charged to cost of product revenues) on a firm purchase
commitment with a supplier representing the estimated difference between the
product cost and the estimated selling price, adjusted for completion and
selling costs. In September 1996, the Company recorded a $280,000 recovery to
cost of product revenues of such amount based on the result of a negotiated
settlement.

F-12
<PAGE>

JETFAX, INC.

7.LINE OF CREDIT AND NOTES PAYABLE

Line of credit and notes payable consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Line of credit........................................ $ 200 $1,000
===== ======
Equipment term loan................................... $2250 $ 244
Note payable.......................................... 250 250
----- ------
Total notes payable................................. 500 494
Current portion....................................... (302) (313)
----- ------
Long-term portion..................................... $ 198 $ 181
===== ======
</TABLE>

The Company has a line of credit agreement under which it may borrow up to
$1,500,000 at the bank's prime rate (8.25% at January 4, 1997) plus 1%.
Borrowings are limited to 75% on eligible domestic receivables, and secured by
all assets of the Company and are subordinate to shareholder notes and lien
positions. The line expires in August 1997.

The Company has $250,000 outstanding at December 31, 1996 under a $250,000
equipment term loan that expires in August 2000 and bears interest at the
bank's prime rate (8.25% at January 4, 1997) plus 1.50%. Interest is payable
in monthly installments during the six month draw period and principal
payments are to be amortized over 36 months plus interest payments. Borrowings
are secured by all assets of the Company and are subordinate to stockholder
notes and lien positions.

The line of credit and equipment term loan contain certain covenants which,
among other things, require the Company to maintain tangible net worth (as
defined) of $2,500,000, quarterly net income, a quick ratio of 0.8 to 1.0, a
maximum debt to net worth ratio (as defined) of 2.0 to 1.0 (1.5 to 1.0 after
December 31, 1996) and certain minimum liquidity and debt service coverage. In
addition, the agreement prohibits the payment of cash dividends. At December
31, 1996, the Company was not in compliance with the quarterly net income
covenant and subsequently received a waiver of this covenant through June 30,
1997 from the lender (see Note 15).

The Company has $250,000 outstanding at December 31, 1996 as part of the
payment associated with the acquisition of the Crandell Group. The note
expires July 31, 1997.

Future minimum payments for the notes payable at December 31, 1996 are:
1997, $302,000; 1998, $68,000; 1999, $75,000; and 2000, $55,000.

8.LEASE COMMITMENTS

The Company leases its primary facility under an operating lease expiring
through February 1998. Rent expense is recognized on a straight-line basis
over the term of the lease. The lease agreement requires the Company to pay
property taxes and maintenance costs. For the years ended March 31, 1995 and
1996 and the nine months ended December 31, 1996, rent expense was $147,500,
$149,900 and $146,122, respectively. Future minimum annual rental payments for
facilities leases are: 1997, $167,000 and 1998, $13,000.

F-13
<PAGE>

JETFAX, INC.

9.REDEEMABLE PREFERRED STOCK

Pursuant to its August 1994 agreement with a preferred stockholder (see Note
2), the Company has 344,350 shares of Series P Redeemable Preferred Stock
(Series P) outstanding at December 31, 1996 and March 31, 1997. As discussed
in Note 2, 90,000 shares and 344,350 shares of the Series P were issuable at
March 31, 1995 and 1996, respectively. The Company received stockholder
approval for the Series P during October 1995 and completed the issuance of
the shares during March 1996.

The Series P is entitled to cumulative dividends of 6% per year and may be
redeemed by the Company anytime prior to an IPO or certain changes in control.
At the time of an IPO or such change in control, the Company is required to
redeem the outstanding Series P plus cumulative dividends up to the greater of
15% of the IPO or such change in control proceeds, or $1,125,000; unless the
stockholder elects to convert all or any part of the Series P into Common
Stock. Such conversion would occur at a conversion price equal to 75% of the
then fair value of the Common Stock. Accordingly, the Company has recorded
cumulative dividends of $27,000, $116,000 and $38,000 in the year ended March
31, 1996, the nine months ended December 31, 1996 and the quarter ended March
31, 1997, respectively (for an aggregate of $143,000 at December 31, 1996 and
$181,000 at March 31, 1997). The Series P has voting rights based on the
number of shares outstanding and JetFax is required to use 10% of its net
income, if any, in excess of $1,000,000 in any fiscal year to redeem the
Series P.

The Company has received notice from the Series P stockholder that it does
not intend to exercise its conversion rights and, accordingly, the Company
will be required to redeem the Series P from the proceeds of the offering
contemplated by the Prospectus.

10.STOCKHOLDERS' EQUITY

The Company has reserved or otherwise committed to issue shares of Common
Stock as follows (see Note 15):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Conversion of Convertible Preferred Stock
outstanding........................................ 6,293,978 6,293,978
Issuance under stock option plans................... 1,467,910 3,733,910
Exercise of Common Stock warrants................... 675,156 661,203
Employee stock purchase plan........................ -- 500,000
Other stock options................................. 401,999 401,999
Conversion of Series E Convertible Preferred Stock
issuable upon exercise of warrants (Note 2)........ 388,500 388,500
Conversion of Redeemable Preferred Stock (Note 9)... 344,350 344,350
Conversion of cumulative dividends on Series F
Convertible Preferred Stock........................ 115,833 162,703
Crandell Common Stock warrants (Note 3)............. 100,000 100,000
--------- ----------
Total............................................... 9,787,726 12,586,643
========= ==========
</TABLE>

CONVERTIBLE PREFERRED STOCK

In March 1996, certain convertible note holders and other investors
purchased 3,445,690 shares of Series F Preferred Stock in exchange for the
cancellation of convertible notes payable totaling $1,929,000 (including
$59,000 of related interest) and cash of $7,547,000 (of which $650,000
receivable at March 31, 1996 was

F-14
<PAGE>

JETFAX, INC.

collected in April 1996). Warrants to purchase 675,156 shares of Common Stock
at $2.15 per share were issued to the convertible note holders (warrants to
purchase 661,203 shares of Common Stock were outstanding at March 31, 1997).
Such warrants are exercisable and expire from January 2000 through February
2001. The warrants are net exercised automatically upon the closing of an
initial public offering of the Company's Common Stock meeting specified
criteria. The net exercise is a cashless exercise whereby the number of shares
received is equal to the difference between the number of shares under the
warrant and the number of shares equal to the aggregate exercise price of the
warrant divided by the initial public offering price per share, net of
underwriting commissions. In connection with the Series F Convertible
Preferred Stock financing, the Company issued the investment banker an option
to purchase 401,999 shares of common stock at $1.72 per share. The option is
exercisable and expires in March 2004. The estimated fair values of the above
warrants and option are immaterial and, accordingly, no amounts have been
recorded in the financial statements.

Convertible preferred stock at December 31, 1996 and March 31, 1997 consists
of:

<TABLE>
<CAPTION>
LIQUIDATION PREFERENCE
------------------------
DECEMBER 31, MARCH 31,
DESIGNATED OUTSTANDING 1996 1997
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Series A........................ 1,000,000 750,996 $ 563,247 $ 563,247
Series B........................ 1,000,000 533,974 533,974 533,974
Series C........................ 600,000 564,834 706,043 706,043
Series D........................ 100,000 67,890 109,982 109,982
Series E........................ 2,500,000 930,594 2,000,777 2,000,777
Series F........................ 3,500,000 3,445,690 10,256,419 10,490,065
--------- --------- ----------- -----------
Total........................... 8,700,000 6,293,978 $14,170,442 $14,404,088
========= ========= =========== ===========
</TABLE>

Significant terms of the convertible preferred stock are as follows:

. Each share is convertible into one share of Common Stock (subject to
adjustments for events of dilution) and has the same voting rights as
Common Stock. Shares will automatically be converted upon a public
offering of common stock meeting specified criteria.

. A majority of each of the issued and outstanding Series A and F
Convertible Preferred Stock has the right to elect two directors,
respectively. A majority of the issued and outstanding Series E
Converible Preferred Stock and certain affiliates of Poly Ventures II,
Limited Partnership each have a right to elect one director,
respectively.

. Dividends are at the discretion of the Board of Directors and are
noncumulative for Series A through E Convertible Preferred Stock. Series
F Convertible Preferred Stock is entitled to a 10% annual, cumulative
dividend when declared by the Board, in preference to all other
Preferred and Common Stock. Dividends on Series F have preference over
cumulative dividends on Series P. No dividends have been declared. In
the event the Series F Convertible Preferred Stock is converted into
Common Stock as a result of a public offering or other event requiring
conversion prior to March 1998, any cumulative and unpaid dividends
thereon shall be converted into shares of Common Stock. The conversion
price is equal to 75% of the value of the Common Stock on the closing of
the event requiring the conversion of the Series F Convertible Preferred
Stock. The Company has recorded cumulative dividends of $70,000,
$713,000 and $234,000 in the fiscal year ended March 31, 1996, the nine
months ended December 31, 1996, and the quarter ended March 31, 1997,
respectively (for an aggregate of $783,000 at December 31, 1996 and $1.0
million at March 31, 1997).

F-15
<PAGE>

JETFAX, INC.

. Shares may be redeemed at the option of the Board of Directors and with
the affirmative vote of 66.67% of the outstanding preferred
stockholders, for $1.13 per share of Series A, $1.50 per share of Series
B and Series C, $1.62 per share of Series D, and $2.15 per share of
Series E, plus all accrued but unpaid dividends.

STOCK OPTION PLAN

Under the Company's stock option plan, at December 31, 1996 options may be
granted to purchase a total of 1,400,000 shares of common stock at fair market
value as determined by the Board of Directors at the date of grant (see Note
15). At December 31, 1996 and March 31, 1997, 433,125 and 2,573,275 shares,
respectively, remain available for further option grants under the Company's
stock option plans (see Note 15). Terms for exercising options are determined
by the Board of Directors and options expire at the earlier of ten years and
one month or such shorter terms as may be provided in each stock option
agreement.

Stock option activity and balances are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance, April 1, 1994................................ 169,000 $0.14
Granted............................................... 82,519 0.20
Canceled.............................................. (38,000) 0.16
Exercised............................................. (31,609) 0.13
---------
Balance, March 31, 1995............................... 181,910 $0.16
Granted............................................... 31,000 0.20
Canceled.............................................. (27,500) 0.20
Exercised............................................. (55,760) 0.10
---------
Balance, March 31, 1996............................... 129,650 $0.19
Granted............................................... 1,009,000 0.55
Canceled.............................................. (62,740) 0.27
Exercised............................................. (41,125) 0.20
---------
Balance, December 31, 1996............................ 1,034,785 $0.54
Granted............................................... 148,100 5.92
Canceled.............................................. (18,250) 5.47
Exercised............................................. (4,000) 0.20
---------
Balance, March 31,1997................................ 1,160,635 $1.22
=========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ -----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
-------- -------------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.20 - $0.30 617,285 8.67 $0.29 94,507 $0.24
0.50 235,500 9.75 0.50 -- --
1.25 - 1.75 182,000 9.86 1.42 -- --
- ------------- --------- ---- ----- ------ -----
$0.20 - $1.75 1,034,785 9.13 $0.54 94,507 $0.24
============= ========= ==== ===== ====== =====
</TABLE>

F-16
<PAGE>

JETFAX, INC.

The Company uses the intrinsic value method specified by Accounting
Principles Board Opinion No. 25 to calculate compensation expense associated
with issuing stock options and, accordingly, has recorded no such expense
through December 31, 1996 and March 31, 1997, respectively, as such issuances
have been at the fair value of the Company's common stock at the date of
grant.

Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended March 31, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life, 12 months following vesting; no stock volatility; risk free
interest rates, 6.29% for options granted during the nine months ended
December 31, 1996 and 6.02% for options granted during the year ended March
31, 1996; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values for the fiscal year
ended March 31, 1996 and for the nine months ended December 31, 1996 awards
had been amortized to expense over the vesting period of the awards, pro forma
net loss would not change for the year ended March 31, 1996 and would have
been $1,055,000 ($0.14 per share) for the nine months ended December 31, 1996.
However, the impact of outstanding non-vested stock options granted prior to
April 1, 1995 has been excluded from the pro forma calculation; accordingly,
the pro forma adjustments for the nine months ended December 31, 1996 and for
the year ended March 31, 1996 are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.

11.INCOME TAXES

No federal and state income taxes were provided for the years ended March
31, 1995 and 1996, the nine months ended December 31, 1996 and the quarter
ended March 31, 1997 due to the Company's net losses. Foreign withholding
taxes of approximately $35,000, $105,000 and $45,000 were paid during the year
ended March 31, 1996, the nine months ended December 31, 1996 and the quarter
ended March 31, 1997, respectively. The Company's effective tax rate differs
from the federal statutory rate as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED
--------------------- DECEMBER 31,
1995 1996 1996
---------- ----------- ------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate
of 35%................................... $ (264) $ (1,013) $(365)
Change in valuation allowance............. 264 1,013 365
Foreign withholding taxes................. -- 35 105
--------- ----------- ------
Total provision........................... $ -- $ 35 $ 105
========= =========== ======
</TABLE>

F-17
<PAGE>

JETFAX, INC.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss and tax credit carryforwards. Significant components of the Company's net
deferred income tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
<S> <C> <C> <C>
Deferred tax asset:
Net operating loss carryforwards................ $ 2,430 $ 2,290 $ 3,989
Tax credit carryforwards........................ 240 207 264
Accounts receivable allowances.................. 50 110 142
Depreciation.................................... -- 43 91
Inventory valuation............................. 43 177 78
Nondeducted expense accrual..................... -- 1,354 74
Warranty reserve................................ 69 42 40
Capitalized research and development............ -- 60 41
Vacation accrual................................ 23 19 37
Other........................................... 2 32 106
------- ------- -------
Total deferred tax assets........................ 2,857 4,334 4,862
Valuation allowance.............................. (2,857) (4,334) (4,862)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>

As a result of the Company's history of operating losses, management
believes that the recognition of the deferred tax asset is considered less
likely than not. Accordingly, the Company has recorded a valuation allowance
of approximately $4.9 million against its net deferred tax assets.

At December 31, 1996, net operating loss carryforwards of approximately
$11.1 million and $6.3 million were available to offset future Federal and
state taxable income, respectively and research and development tax credits of
$108,000 and $156,000 were available to offset future Federal and state income
taxes, respectively. Current Federal and California tax law includes certain
provisions limiting the annual use of net operating loss carryforwards in the
event of certain defined changes in stock ownership. The annual use of the
Company's net operating loss carryforwards could be limited according to these
provisions. Management believes such limitation will not result in the loss of
carryforward benefits during the carryforward period; however, use of loss
carryforwards is dependent upon the Company's ability to achieve
profitability. These carryforwards expire from 2003 through 2011.

12.EMPLOYEE BENEFIT PLAN

The Company has a 401(k) tax deferred savings plan for all eligible
employees. Participants may contribute a percentage of their compensation,
which may be limited by the plan administrator or applicable tax laws. The
Company may make discretionary matching contributions. Such matching
contributions were immaterial for the years ended March 31, 1995 and 1996 and
the nine months ended December 31, 1996.

F-18
<PAGE>

JETFAX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)

13.CUSTOMER AND GEOGRAPHIC INFORMATION

Two customers accounted for 21% and 10%, respectively, of total revenues for
the nine months ended December 31, 1996, one customer accounted for 13% and
two customers accounted for 11% each of total revenues for the year ended
March 31, 1996 and one customer accounted for 17% of total revenues for the
year ended March 31, 1995. The following is a summary of revenues by
geographic region (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1996 1996
---------- -----------------
<S> <C> <C>
United States................................... $ 8,031 $ 9,466
Europe.......................................... 3,885 1,808
Asia............................................ 839 1,311
Other........................................... 432 277
------- -------
Total........................................... $13,187 $12,862
======= =======
</TABLE>

International revenues, principally from Europe, were $1,683,000 for the
year ended March 31, 1995.

14. RELATED PARTY TRANSACTIONS

Related party transactions and balances not otherwise disclosed herein were
as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
--------- DECEMBER 31,
1995 1996 1996
---- ---- ------------
<S> <C> <C> <C>
Sales to related party................................ $215 $225 $ 63
Purchases from related party.......................... 913 -- --
Accounts payable...................................... 85 14 --
6% note payable to an officer of the Company.......... 61 61 --
</TABLE>

The Company has also granted a stockholder a nonexclusive royalty free
license to utilize certain of its intellectual property.

15.SUBSEQUENT EVENTS

On February 19, 1997, the Board of Directors adopted the following
resolutions which were subsequently approved by the stockholders:

. The 1997 Employee Stock Purchase Plan and reserved 500,000 shares of
Common Stock for sale to employees at 85% of the lower of fair market
value of the Common Stock at the beginning of the six-month offering
period or the end of each six-month purchase period.

. An increase in the number of shares of Common Stock reserved for the
grant of options by 2,000,000 shares to 3,400,000 shares.

. An amendment to the Company's Certificate of Incorporation to be
effective upon the closing of the Company's anticipated initial public
offering of its Common Stock authorizing a class of Preferred Stock
consisting of 5,000,000 shares and authorizing an increase in the
authorized number of shares of common stock to 35,000,000.

On March 11, 1997, the Company received a waiver of the quarterly net income
covenant in its bank line of credit through June 30, 1997.

On March 18, 1997, the Board of Directors approved the 1997 Director Option
Plan and reserved 270,000 shares of common stock for grants of options to
nonemployee directors to purchase Common Stock of fair market value as of the
grant date. The resolution was subsequently approved by the stockholders.

F-19
<PAGE>

GLOSSARY

In this Prospectus, the following terms have the meanings indicated below,
unless the context otherwise requires:

Proprietary ASIC: A custom-designed "proprietary" semiconductor chip which
performs specific hardware functions for the intended application of the chip.

Firmware: Programming instructions that are stored in a read-only memory
unit and typically responding on a real-time basis.

Controller: A printed circuit board containing all of the circuitry, ASICs
and embedded systems software necessary to enable a device to interpret and
execute instructions for the operation of the device.

Modular controller circuit board: A controller circuit board design in which
the software programs that control the device are organized into modules,
which may operate independently or jointly.

Embedded system: A controller circuit board on which proprietary ASICs,
software and firmware reside.

Integrated embedded system technology: A combination of proprietary ASICs,
software and firmware that reside together on a controller circuit board and
perform a number of functions in one design.

ASIC: Application specific integrated circuit.

DMA: Direct memory access.

OCR: Optical character recognition.

PCL: Printer control language.

G-1
<PAGE>

[LEFT SIDE OF PAGE:]

FAMILY OF AWARD WINNING PRODUCTS

[Pictures of the awards mentioned in the body text.]

JETFAX M5
PICK OF THE YEAR
BUYER'S LABORATORY (1996)
- -------------------------

JETFAX M5/M5 SST
EDITOR'S CHOICE '96
PREMIUM LASER FAX
BETTER BUYS FOR BUSINESS (1996)
- -------------------------------

JETFAX M5
TOP RATED "SEHR GUT" AWARD
FACTS MAGAZINE (1996)
- ---------------------

JETFAX M5
WIN 100 AWARD/HARDWARE
WINDOWS MAGAZINE (1996)
- -----------------------

JETFAX 4
TOP RATED "SEHR GUT" AWARD
FACTS MAGAZINE (1996)
- ---------------------

JETFAX 8000-D
PICK OF THE YEAR
BUYER'S LABORATORY (1993)
- -------------------------

JETFAX 8000-D
AWARD OF MERIT
BYTE MAGAZINE (1992)
- --------------------

[RIGHT SIDE OF PAGE:]

[JETFAX LOGO]

[Picture of JetFax M5]

JETFAX M5
JetFax's most recent product, JetFax M5
---------
is a high-volume multifunction product
with plain paper print, fax, copy
and scan capabilities.

The JetFax M5 also enables simultaneous sending
- -------------
and receiving of faxes with its two-line upgrade
or faster transmission with a 33.6 Kbps modem upgrade.

<PAGE>

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

UNTIL JULY 5, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 32
Management................................................................ 44
Certain Transactions...................................................... 52
Principal and Selling Stockholders........................................ 54
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 61
Legal Matters............................................................. 62
Experts................................................................... 62
Additional Information.................................................... 63
Index to Financial Statements............................................. F-1
Glossary.................................................................. G-1
</TABLE>

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

3,500,000 Shares

[LOGO OF JETFAX]

Common Stock

---------------
PROSPECTUS
---------------

PRUDENTIAL SECURITIES INCORPORATED

COWEN & COMPANY

June 10, 1997

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