ACCENT COLOR SCIENCES INC, 424B4, 1996-12-18

ACCENT COLOR SCIENCES INC
424B4, 1996-12-18
COMPUTER PERIPHERAL EQUIPMENT, NEC

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RULE NO. 424(b)(4)
REGISTRATION NO. 333-14043

3,000,000 Shares

[LOGO]

ACCENT COLOR SCIENCES, INC.

COMMON STOCK

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All of the 3,000,000 shares of Common Stock offered hereby are being sold by
Accent Color Sciences, Inc.

Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"ACLR."

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

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 7 OF THIS PROSPECTUS.

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

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

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $8.00 $0.56 $7.44
Total(3)................................ $24,000,000 $1,680,000 $22,320,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses, estimated to be $1,000,000, payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 450,000
additional shares of Common Stock at the Price to Public less Underwriting
Discounts and Commissions to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $27,600,000
$1,932,000 and $25,668,000, respectively. See "Underwriting."

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

The Common Stock is being offered by the several Underwriters named herein
when, as and if received and accepted by them, and subject to their right to
reject orders in whole or in part and subject to certain other conditions. It
is expected that delivery of certificates for such shares will be made at the
offices of Cowen & Company, New York, New York on or about December 23, 1996.

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

COWEN & COMPANY
JANNEY MONTGOMERY SCOTT INC.

December 18, 1996
<PAGE>

(ART)

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

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<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus gives effect to (i) a 3-for-1
Common Stock split which was effected on October 8, 1996, (ii) the conversion
of all outstanding shares of Series A Convertible Voting Preferred Stock (the
"Series A Preferred Stock") of Accent Color Sciences, Inc. ("Accent Color" or
the "Company") into 1,362,312 shares of Common Stock as of the date of this
Prospectus and (iii) the conversion of the Company's outstanding 8.00%
Convertible Subordinated Debentures (the "Series III Debentures"), including
accrued interest thereon, into approximately 607,626 shares of Common Stock
upon the closing of this offering. Unless otherwise indicated, all information
contained in this Prospectus assumes no exercise of the Underwriters' over-
allotment option. An investment in the shares of Common Stock offered hereby
involves a high degree of risk. See "Risk Factors."

THE COMPANY

Accent Color designs, manufactures and sells innovative, high-speed, spot
color printing systems ("Truecolor Systems") for integration with digital,
high-speed, black-on-white printers and sells related consumables. Spot color
printing involves the use of color to enhance traditional black-on-white
documents by accenting critical information, such as a balance due on a billing
statement, or by printing graphics, such as a company logo. The Company
believes its Truecolor Systems are the first, and only, printers capable of
cost-effectively printing or highlighting variable data (text or graphics which
may vary from page to page) in multiple standard and custom colors with the
speed and functionality of existing high-speed (more than 80 pages per minute),
black-on-white printers. Truecolor Systems are designed to address what the
Company believes is a substantial, unfulfilled demand for spot color printing
in the production printing and production publishing segments of the digital
printing market. Accent Color's strategy is to rapidly penetrate these global
markets through strategic relationships with major original equipment
manufacturers ("OEMs"), including Xerox Corporation ("Xerox"), International
Business Machines Corporation ("IBM") and Oce Printing Systems USA, Inc.
("Oce").

Truecolor Systems are designed to print spot color in high-speed, high-volume
applications at a low incremental cost per page without diminishing the speed
or performance of the high-speed, black-on-white host printer or affecting the
end user's existing operational methods. Truecolor Systems are capable of
printing up to 310 pages per minute, utilizing up to eight different colors,
including custom colors, to print or highlight fixed or variable data.
Truecolor Systems combine the Company's proprietary paper handling technology
with patented ink jet technology from Spectra, Inc. ("Spectra"). The Company
holds an exclusive right to supply products which include Spectra ink jet
printheads to print color on the black-on-white output from specified high-
speed printers from Xerox, IBM, Oce and certain other parties through the year
2002. In connection with their arrangements with the Company, Xerox and IBM are
adapting their existing high-speed, black-on-white printers for integration
with the Company's Truecolor Systems.

The Company intends to market its Truecolor Systems to OEMs of high-speed,
black-on-white printers. According to CAP Ventures, Inc. ("CAP Ventures"), a
printing industry market research firm, the 1995 year-end installed base of
digital, high-speed, black-on-white printers in the U.S. was approximately
22,400 and the installed base of these printers is projected to grow at a five-
year compounded annual growth rate ("CAGR") of approximately 11% to 37,100
systems by the year 2000. In addition, approximately 4,800 digital, high-speed,
black-on-white printers were sold in the U.S. in 1995. Revenue from new system
sales, supplies and service exceeded $3.6 billion in 1995 and is expected to
grow at a five-year CAGR of approximately 12% to $6.4 billion by the year 2000.
This growth is further driven by the number of pages printed per year, which is
projected to grow at a five-year CAGR of approximately 13% by the year 2000.

3
<PAGE>

To facilitate access to its target markets, the Company has entered into
agreements with Xerox and IBM, and has entered into a memorandum of
understanding with Oce, which the Company expects to result in an agreement
during early 1997. Xerox, IBM and Oce intend to market, sell and service
Truecolor Systems under their respective corporate logos and product
identifications. Accent Color expects to substantially reduce or eliminate the
cost and time required to develop and maintain a direct sales and service
organization or distribution channel of its own by using the existing sales and
distribution channels of Xerox, IBM and Oce. According to Dataquest, a market
research firm, Xerox (excluding its DocuTech systems), IBM and Oce accounted
for approximately 80% of the high-speed, black-on-white printing systems sold
in the U.S. during 1994 and 1995. In addition, according to Xerox, there are
over 10,000 DocuTech printers installed with which Truecolor Systems are
designed to be integrated. See "Business--Strategic Relationships."

The Company also sells consumables comprised of standard and custom color
wax-based inks, as well as spare parts used with Truecolor Systems. The Company
expects that consumables will generate recurring revenue which the Company
believes will increase as the installed base and usage of Truecolor Systems
increase. According to CAP Ventures, typical high-speed, black-on-white
printers servicing the production printing and production publishing market
segments produce approximately 1.7 million and 975,000 pages per month,
respectively.

The Company was incorporated in Connecticut in May 1993. The Company's
principal executive offices are located at 800 Connecticut Boulevard, East
Hartford, Connecticut 06108, and its telephone number is (860) 610-4000. The
Company's Internet address is www.accentcolor.com. The information contained in
the Company's World Wide Web site should not be considered a part of this
Prospectus.

INTERIM FINANCING

On October 11, 1996, the Company sold to a group of accredited investors an
aggregate principal amount of $3.45 million of its 8.70% notes (the "Interim
Notes"), together with warrants to purchase 45,000 shares of Common Stock (the
"Interim Financing"). The net proceeds to the Company in the amount of $2.78
million will be used for working capital and general corporate purposes. The
Interim Notes will be fully repaid with a portion of the proceeds from this
offering.

4
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered.............. 3,000,000 shares
Common Stock to be outstanding
after this offering.............. 9,689,778 shares(1)
Use of proceeds................... For (i) the repayment of the Interim Notes
and (ii) working capital and general
corporate purposes, including the expansion
of the Company's manufacturing,
development, engineering and customer
support capabilities, the commercial
production of additional Truecolor Systems,
the further enhancement of the Company's
products and possible further debt
reduction
Nasdaq National Market symbol..... ACLR
</TABLE>

- --------
(1) Excludes as of November 15, 1996 (i) 1,159,503 shares of Common Stock
issuable upon the exercise of outstanding warrants, with a weighted average
exercise price of $3.55 per share, all of which are currently exercisable,
(ii) 45,000 shares of Common Stock issuable upon the exercise of
outstanding warrants issued in connection with the Interim Financing
exercisable at $8.00 per share and (iii) 1,289,850 shares of Common Stock
issuable upon the exercise of stock options outstanding under the Company's
1995 Stock Incentive Plan, with a weighted average exercise price of $3.53
per share, of which options to purchase 398,750 shares are currently
exercisable. See "Management--1995 Stock Incentive Plan," "Description of
Capital Stock," and Notes 5, 6 and 7 of Notes to Financial Statements.

5
<PAGE>

SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
------ ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $1,406 $ 4,186 $22,056
Working capital (deficit) ................. (2,793) (2,669) 19,899
Total assets............................... 7,687 10,687 28,215
Short-term debt............................ 2,663 5,539 500
Long-term debt, less current portion....... 1,759 1,759 1,759
Total shareholders' (deficit) equity....... (2,373) (2,249) 20,318
</TABLE>
- --------
(1) See Note 11 of Notes to Financial Statements for information concerning
related party transactions.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per common share.
(3) See "Business--Backlog."
(4) Gives pro forma effect to the Interim Financing completed on October 11,
1996.
(5) Pro forma as adjusted to give effect to (i) the conversion as of September
30, 1996 of all outstanding shares of the Series A Preferred Stock and the
Company's outstanding Series III Debentures, including accrued interest
thereon, and (ii) the sale of 3,000,000 shares of Common Stock offered
hereby at the initial public offering price of $8.00 per share, less
underwriting discounts and commissions and estimated offering expenses, and
the application of the net proceeds for repayment of the Interim Notes. See
"Use of Proceeds" and "Capitalization."

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

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."

Accent Color(TM) and Truecolor(TM) are trademarks of the Company. All other
trademarks or trade names referred to in this Prospectus are the property of
their respective owners.

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<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. This Prospectus contains certain forward-looking statements.
Actual results could differ materially from those projected in the forward-
looking statements as a result of certain of the risk factors set forth below
and elsewhere in this Prospectus. In addition to the other information in this
Prospectus, prospective investors should carefully consider the following risk
factors in evaluating an investment in the Company and its business before
purchasing any shares of Common Stock offered hereby.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE FINANCIAL
RESULTS; AUDITORS' GOING CONCERN OPINION

The Company was formed in May 1993 and is a development stage company with a
limited operating history. The Company incurred net losses of $45,000,
$1,154,000, $4,217,000 and $8,807,000 for the period from inception to
December 31, 1993, the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996, respectively. These losses primarily were due
to the substantial research and development costs associated with the
development of Truecolor Systems, all of which costs were expensed as
incurred. Through September 30, 1996, no revenue had been recognized from the
sale of its products. As a result of these losses, as of September 30, 1996,
the Company had an accumulated deficit of $14,223,000 and total shareholders'
deficit of $2,373,000. It is expected that quarterly net losses will continue
through at least the fourth quarter of 1997 and that the Company will incur a
net loss for 1997. There can be no assurance that the Company will be
profitable thereafter or that profitability, if achieved, will be sustained.
In order to support the anticipated growth of its business, the Company
expects to expand its manufacturing and administrative capabilities, technical
and other customer support functions, and research and product development
activities. The anticipated increase in the Company's operating expenses
caused by this expansion could have a material adverse effect on the Company's
operating results if revenue does not increase at an equal or greater rate.
Also, the Company's expenses for these and other activities are based in
significant part on its expectations regarding future revenue and are fixed to
a large extent in the short term. The Company may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfalls.

The Company's independent accountants have included in their report an
explanatory paragraph relating to the Company's ability to continue as a going
concern. This explanatory paragraph includes the following language: "The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is a development stage company and has a net working
capital and shareholders' deficit due to recurring net losses which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company's plans in regard to these matters are also described in Note 1.
The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty." There can be no assurance
regarding the Company's ability to continue as a going concern. The report of
the Company's independent accountants on the Company's financial statements
for the year ending December 31, 1996 may also contain an explanatory
paragraph relating to the Company's ability to continue as a going concern.
See "Potential Need for Additional Funding For Operating and Capital
Requirements," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements.

UNCERTAINTY OF MARKET DEVELOPMENT; ACCEPTANCE OF ACCENT COLOR'S PRODUCTS

The digital, high-speed printing market has traditionally relied mainly on
black-on-white print. There can be no assurance that a market for high-speed,
variable data color printing will develop or achieve significant growth. The
failure of such market to develop or achieve significant growth would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's products are currently designed for the digital, high-speed
production printing and production publishing market segments. There can be no
assurance that the Company will be successful in

7
<PAGE>

developing or marketing its existing or future products or that, if any such
products achieve market acceptance, such acceptance will be sustained. The
Company also plans to further enhance its products and is investing
substantial capital and other resources in the development of such
enhancements. The Company plans to devote substantial resources to improve
technology in the areas of ink jet printhead width and higher print
resolution. In addition, the Company's customers have requested advanced paper
handling functionality, particularly duplex printing (the ability to print on
both sides of a page). There can be no assurance that the Company's Truecolor
Systems or enhancements will be a preferable alternative to existing products
or that they will not be rendered obsolete or noncompetitive by products
offered by other companies. Any quality, durability or reliability problems
with the Company's products, regardless of materiality, or any other actual or
perceived problems with any Company products, could have a material adverse
effect on market acceptance of such products. There can be no assurance that
such problems or perceived problems will not arise or that, even in the
absence of such problems, the Company's products will achieve market
acceptance. A failure of any of the Company's products to achieve market
acceptance for any reason could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the announcement by the Company or its OEM customers or competitors
of new products and technologies could cause customers to defer purchases of
the Company's existing products, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business."

DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; REVENUE CONCENTRATION

The Company anticipates that sales of its Truecolor Systems and consumables
to a limited number of customers will account for substantially all of the
Company's revenue. As of September 30, 1996, the Company had contracts with
only two customers, Xerox and IBM, and was negotiating a contract with Oce.
Generally, the Company's customers are required to provide non-binding
forecasts of future orders. There can be no assurance that these customers
will purchase a significant volume of the Company's products. A substantial
difference between forecast orders and actual orders by any one of its
customers, or the failure of its customers to purchase a significant volume of
the Company's products, could have a material adverse effect on the business,
financial condition and results of operations of the Company. There can be no
assurance that the Company's OEM customers, including Xerox, IBM and Oce, will
not compete with the Company in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Marketing, Product Support, Service and Training."

DEPENDENCE ON THIRD PARTY MARKETING, DISTRIBUTION AND SUPPORT

A significant element of the Company's marketing strategy is to form
alliances with third parties for the marketing and distribution of its
products. To this end, the Company has recently entered into multi-year
agreements with Xerox (the "Xerox Agreement") and IBM (the "IBM Agreement"),
and is currently negotiating an agreement with Oce, for the marketing,
distribution and support of the Company's products. The Company's contracts
with Xerox and IBM are for terms of three years with each of Xerox and IBM
having the right to terminate its contract in certain circumstances, such as a
material breach of the contract by Accent Color or the Company's bankruptcy or
insolvency. For a further description of the terms of these contracts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Strategic Relationships." There can be no
assurance that (i) the Company will be successful in maintaining such
alliances or forming and maintaining other alliances, (ii) the Company will be
able to satisfy its contractual obligations with its OEM customers or (iii)
the Company's OEM customers will devote adequate resources to market and
distribute the Company's products successfully. Any disruption in the
Company's relationships with Xerox, IBM or Oce, or any future customer of the
Company, may have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Accent Color's
Strategy," "--Strategic Relationships" and "--Marketing, Product Support,
Service and Training."

As a result of its relationships with its OEM customers, the Company's
ability to interact with end users of Truecolor Systems and observe their
experience with the Company's products may be limited. The Company also does
not have control over the marketing, distribution and support efforts of its
OEM customers. This may

8
<PAGE>

result in a delay by the Company in the recognition and correction of any
problems experienced by the OEM customers or the end users. Failure of the
Company to respond to customer and end-user preferences or experience with its
products, or a failure by the Company's OEM customers to market and support
the Company's products successfully, could have a material adverse effect on
the business, financial condition and results of operations of the Company. In
addition, the Company's OEM customers will control the timing of the
introduction of the Company's products, including its existing products.
Consequently, the timing of the introduction of the Company's products may be
delayed for reasons unrelated to the Company and its products, such as delays
in the introduction of products offered by the OEM customers with which the
Company's products are integrated. Further, before introducing the Company's
products, the Company's OEM customers require that those products complete and
satisfy extensive testing requirements. The Company's products are still
undergoing testing by IBM and Xerox. Any failure in completing and satisfying
those testing requirements may delay introduction of the Company's products.
Delays in the introduction of the Company's products could have a significant
adverse effect on the Company's business, financial condition and results of
operations. To date, none of the Company's OEM customers has introduced the
Company's products and there can be no assurance as to whether or when such
introductions will be made. Further, third-party distribution provides the
Company with less information regarding the amount of inventory that is in the
process of distribution. This lack of information may reduce the Company's
ability to predict fluctuations in revenue resulting from a surplus or a
shortage in its distribution channels and contribute to volatility in the
Company's financial results, cash flow and inventory. See "Business--
Marketing, Product Support, Service and Training."

DEPENDENCE ON SPECTRA

The Company is dependent on Spectra, a wholly owned subsidiary of Markem
Corporation ("Markem"), as its sole source supplier of ink jet printheads and
the hot melt, wax-based inks included in and used by Truecolor Systems.
Spectra has agreed to supply the Company with ink jet printheads and wax-based
inks under a supply agreement, subject to a number of conditions. The
Company's reliance on Spectra involves several risks, including a potential
inability to obtain an adequate supply of required printheads or inks, and
reduced control over the quality, pricing and timing of delivery of these
items. Because the production of printheads is specialized and requires long
lead times, there can be no assurance that delays or shortages of printheads
will not occur. To date, Spectra has only produced a limited number of ink jet
printheads. Accordingly, there can be no assurance that Spectra will be able
to provide a stable source of supply of these components. As the Company
increases the production of Truecolor Systems, it will become more reliant
upon Spectra's ability to manufacture and deliver ink jet printheads as
required. In May 1996, Spectra was acquired by Markem, a manufacturer and
marketer of printing systems, some of which utilize Spectra printheads, for
use in industrial marking applications. There can be no assurance that
Markem's requirements for Spectra printheads will not materially interfere
with the Company's ability to obtain Spectra printheads. Any interruption in
the Company's ability to obtain Spectra printheads could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, the Company and Spectra are devoting substantial
resources to improve technology in the areas of ink jet printhead width and
print resolution. There can be no assurance that, if such improvements are
made, Spectra will be able to produce printheads embodying such improvements
for the Company in sufficient quantities at an acceptable price, or at all.
Any inability to incorporate such improvements or produce printheads embodying
them could have a material adverse effect on the Company's business, financial
condition and results of operations.

Spectra, itself, is also reliant upon licenses granted to it by third
parties. The Spectra agreement allows, in certain instances, the Company to
utilize Spectra's technology to either manufacture wax-based inks or ink jet
printheads itself or arrange for their manufacture by third parties utilizing
such technology. There can be no assurance, however, that, if necessary, the
Company would be able to manufacture ink jet printheads and wax-based inks
itself or negotiate with third parties for the timely manufacture of ink jet
printheads or supply of wax-based inks on acceptable terms or at all.
Furthermore, the use of Spectra's technology may require the consent of
certain other licensors to Spectra, and there is no assurance that the Company
will be able to obtain any such consents on acceptable terms or at all.

Spectra has granted the Company the exclusive right to supply products
including Spectra printheads in the worldwide market for printing color on the
output from specified high-speed, black-on-white printers from

9
<PAGE>

Xerox, IBM, Oce and certain other parties through December 31, 2002. To
maintain such exclusive rights, the Company is required to purchase a minimum
number of ink jet printheads each year, to continue to purchase its wax-based
ink requirements from Spectra and to make certain payments. There can be no
assurance that the Company will be able to meet the minimum purchase
requirements or make these payments. The Company's agreement with Spectra
requires quarterly payments of $250,000 through 1997 to maintain the
exclusivity rights. These specified payments, together with similar payments
from other Spectra customers (which vary in amount from customer to customer),
are used by Spectra to fund ink jet printhead development, the results of
which are available to participating customers. After 1997, the Company must
make additional quarterly payments of $250,000 to continue to benefit from the
development efforts funded by Spectra's customers. There is no assurance that
the Company will be able to continue such required payments or that the
research and development will be beneficial to the Company. The Company is
also negotiating an agreement with Spectra to aid in the funding of the
expansion of Spectra's manufacturing of ink jet printheads for the Company.
Any disruption in the Company's relationship with Spectra, or in Spectra's
relationship with its licensors, may have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing and Assembly" and "--Subcontractor and Supplier
Arrangements."

DEPENDENCE ON MAJOR SUBCONTRACTORS AND SUPPLIERS

The Company relies on subcontractors and suppliers to manufacture,
subassemble and perform certain testing of some modules and parts of Truecolor
Systems. Currently, the Company's ink jet printheads are manufactured solely
by Spectra. The Company currently performs the final assembly and testing of
various Truecolor System components and of each complete Truecolor System. The
Company plans to eventually outsource the full assembly and testing of
Truecolor Systems. The inability to develop relationships with, or the loss
of, subcontractors or suppliers, or the failure of its subcontractors or
suppliers to meet the Company's price, quality, quantity and delivery
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Dependence on Spectra,"
"Business--Manufacturing and Assembly" and "--Subcontractor and Supplier
Arrangements."

DEVELOPMENT RISKS

The Company is at an early stage of development. The Company's products are
in various stages of development, and no revenue has been recognized from the
sale of its products. The Company has developed and plans to market new
products and new applications of technology and, accordingly, is subject to
risks associated with such ventures. The Company has delivered prototype and
pre-production Truecolor Systems and is entering the production phase for
these systems. Truecolor Systems are currently undergoing extensive testing by
Xerox and IBM. The probability of success of the Company must be considered in
light of the expenses and delays frequently encountered in connection with the
operation of a new business, the development and production of new products
and the development of practical production techniques for the products. See
"Limited History of Product Manufacturing" and "Business--Manufacturing and
Assembly."

The Company considers the enhancement of its present products to be the
Company's first development priority. Many of these enhancements are
contemplated in the Company's contracts with Xerox and IBM. The Company plans
to devote substantial resources to improve its technology in the areas of
printhead width and print resolution. In addition, the Company's customers
have requested advanced paper handling functionality, particularly duplex
printing (the ability to print on both sides of a page). There can be no
assurance, however, that the Company will be successful in developing
enhancements for its products or that these enhancements will prove to be
desirable to end users or that the Company will be able to obtain the
necessary components for contemplated product enhancements. Failure to develop
enhancements to its existing products, particularly the enhancements
contemplated by the agreements with Xerox and IBM, could have a material
adverse effect on the market acceptance of the Company's products and could
result in the termination of the Company's relationship with Xerox or IBM. As
a result, any such failures could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Accent Color's Strategy."

10
<PAGE>

LIMITED HISTORY OF PRODUCT MANUFACTURING

To date, the Company has manufactured only limited quantities of Truecolor
Systems for evaluation in commercial applications. To be profitable, the
Company's products must be manufactured in sufficient quantities and at
acceptable costs. Future production in sufficient quantities may pose
technical and financial challenges for the Company. The Company has limited
manufacturing history, and no assurance can be given that the Company will be
able to reduce its current product costs to an acceptable level and to make a
successful transition to high-volume production. The failure to manufacture
its products at acceptable costs and to make such a successful transition
could have a material adverse effect on the business, financial condition and
results of operations of the Company. See "Dependence on Major Subcontractors
and Suppliers" and "Business--Manufacturing and Assembly."

SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly operating results are likely to vary significantly
in the future based upon a number of factors, including the volume, timing,
delivery and acceptance of customer orders, the introduction and market
acceptance of new products offered by the Company and its OEM customers or
competitors, changes in the pricing policies of the Company or its OEM
customers or competitors, the level of product and price competition, the
relative proportion of printer and consumables sales, the timely availability
of sufficient volume of sole source components, fluctuations in research and
development expenditures, the availability of financing arrangements for
certain of the Company's customers, general economic conditions, as well as
other factors. Additionally, because the purchase of a printing system and
peripherals involves a significant capital commitment, the sales cycle for the
Company's products is susceptible to delays and lengthy acceptance procedures
associated with large capital expenditures. Historically, there has existed
seasonality in the purchase of major equipment such as the Company's Truecolor
Systems, with many companies experiencing higher sales in the fourth calendar
quarter. The Company expects such seasonality to apply to the purchase of its
systems and has already seen such seasonality reflected in forecasts provided
by Xerox and IBM. Furthermore, due to the Company's high average sales price
and low unit volume, a delay in the sale of, or the recognition of revenue
from the sale of, a few units could have a material adverse effect on the
results of operations for a fiscal quarter.

Quarterly revenue and operating results depend primarily on the volume,
timing, shipping and acceptance of orders during the quarter, which are
difficult to forecast due to the length of the sales cycle. To date, the
Company has not recognized any revenue from the sale of its products. Further,
none of the Company's OEM customers has introduced the Company's products and
there can be no assurance as to whether or when such introductions will be
made. The Company also has not produced or shipped any production versions of
its Truecolor Systems. Consequently, the Company has no experience with the
rate of customer and end-user acceptance of its products or the volume or
nature of warranty claims relating to its products. The Company's current
policy is to recognize revenue upon customer acceptance. Until such time that
the Company gains sufficient experience regarding customer acceptance of, and
warranty claims regarding, its products, the Company intends to recognize
revenue at the expiration of the applicable warranty periods. Currently, the
Company warrants its Truecolor Printers to be free of defects in workmanship
and materials for 90 days from installation at the location of the end user.
As a result, the Company expects a difference between timing of shipments and
the recognition of related revenue, which may be substantial and inconsistent.
There can be no assurance that the timing of revenue recognition will not
result in significant fluctuations in the Company's quarterly operating
results. A significant portion of the Company's operating expenses are
relatively fixed in the short term, and planned expenditures are based on
sales forecasts. Sales forecasts by the Company's customers are generally not
binding. If revenue levels are below expectations, operating results may be
disproportionately affected because only a small portion of the Company's
expenses vary with revenue in the short term, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will experience or
sustain any revenue growth or profitability. Further, it is possible that in
some future quarters the Company's revenue or operating results will be below
the expectations of securities analysts and investors. In such event, the
price of the Common Stock could be materially adversely affected.

NEED FOR ADDITIONAL FUNDING FOR OPERATING AND CAPITAL REQUIREMENTS

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<PAGE>

Based on its current operating plan, the Company anticipates that additional
financing will be required to finance its operations, debt repayments and
capital expenditures during the second half of 1997. The Company's currently
anticipated levels of revenue and cash flow are subject to many uncertainties
and cannot be assured. Further, the Company's business plan may change, or
unforeseen events may occur, requiring the Company to raise additional funds.
The amount of funds required by the Company will depend on many factors,
including the extent and timing of sales of Truecolor Systems, future product
costs, the timing and cost associated with the expansion of the Company's
manufacturing, development, engineering and customer support capabilities, the
timing and cost of the Company's product development and enhancement
activities, the amount of funds raised in this offering and the Company's
operating results. Until the Company generates cash flow from operations which
(together with the net proceeds from the sale of Common Stock offered hereby,
the Company's existing cash resources and availability under the Xerox Loan)
will be sufficient to satisfy its cash requirements, the Company will need to
seek alternative means for financing its operations, capital expenditures and
debt repayments or postpone or eliminate certain investments or expenditures.
Potential alternative means for financing may include leasing capital
equipment, obtaining a line of credit, or obtaining additional debt or equity
financing. If additional financing is required, the Company's current
intention is to lease, rather than purchase, capital equipment and to obtain a
line of credit or other debt financing. There can be no assurance that, if and
when needed, additional financing will be available, or available on
acceptable terms. The inability to obtain additional financing or generate
sufficient cash from operations could require the Company to reduce or
eliminate expenditures for capital equipment, research and development,
production or marketing of its products, or otherwise to curtail or
discontinue its operations, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, if the Company raises funds through the sale of additional equity
securities, the Common Stock offered hereby may be further diluted. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

PRODUCT WARRANTY; LIMIT ON PRICES FOR SPARE PARTS

The Company warrants its Truecolor Systems to be free of defects in
workmanship and materials for 90 days from installation at the location of the
end user. Furthermore, under the IBM Agreement, the Company has agreed to
provide spare parts for its products to IBM at prices which will yield a
monthly parts cost per Truecolor System not to exceed a specified amount.
There can be no assurance that the Company will not experience warranty claims
or parts failure rates in excess of those which it has assumed in pricing its
products and spare parts. Any such excess warranty claims or spare parts
failure rates could have a material adverse effect on the Company's business,
financial condition or results of operations. Moreover, pursuant to the terms
of the Xerox Agreement, the Company is obligated to repurchase from Xerox any
Xerox inventory of spare parts and consumables which become obsolete as a
result of changes to Truecolor Systems. There can be no assurance that the
Company's obligations to repurchase such obsolete inventory will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The Company has not produced or shipped any production
versions of its Truecolor Systems. Consequently, the Company currently has no
experience with the volume or nature of warranty claims relating to its
products. See "Significant Fluctuations in Quarterly Results" and "Business--
Strategic Relationships."

DEPENDENCE ON A SINGLE PRODUCT LINE

The Company anticipates that it will derive substantially all of its revenue
in the foreseeable future from sales of Truecolor Systems, related consumables
and spare parts. If the Company is unable to generate sufficient sales of
Truecolor Systems due to market conditions, manufacturing difficulties or
other reasons, it may not be able to continue its business. Similarly, if
purchasers of Truecolor Systems were to purchase wax-based ink or spare parts
from suppliers other than the Company, the Company's business, results of
operations and financial condition could be materially adversely affected.
Dependence on a single product line makes the Company particularly vulnerable
to the successful introduction of competitive products. See "Rapid
Technological Change Requires Ongoing Product Development Efforts" and
"Business--Competition."

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<PAGE>

RAPID TECHNOLOGICAL CHANGE REQUIRES ONGOING PRODUCT DEVELOPMENT EFFORTS

The high-speed printer industry is characterized by evolving technology and
changing market requirements. The Company's future success will depend on a
number of factors, including its ability to continue to develop and
manufacture new products and to enhance existing products. Consequently, the
Company considers the enhancement of its products to be a development
priority. Certain enhancements of its existing products are required by the
Company's contracts with Xerox and IBM. Additionally, in a new and evolving
market, customer preferences can change rapidly and new technology could
render existing technology obsolete. Failure by the Company to respond
adequately to changes in its target market, to develop or acquire new
technology or to successfully conform to market preferences could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The failure by the Company to anticipate or respond
adequately to competitive and technological changes could have a material
adverse effect on the business, financial condition and results of operations
of the Company. See "Business--Research and Development" and "--Competition."

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY AND RISKS OF THIRD-PARTY CLAIMS

The Company's ability to compete effectively will depend, in part, on the
ability of the Company to maintain the proprietary nature of its technology.
The Company relies, in part, on proprietary technology, know-how and trade
secrets related to certain aspects of its principal products and operations
but there can be no assurance that others, including the Company's OEM
customers, may not independently develop the same or similar technology or
otherwise obtain access to the Company's proprietary technology. To protect
its rights in these areas, the Company generally requires its OEM customers,
suppliers, employees and independent contractors to enter into nondisclosure
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information. If the Company is unable to maintain the
proprietary nature of its products through nondisclosure agreements or other
protection, its business could be materially adversely affected. The U.S.
Patent and Trademark Office has issued a Notice of Allowance with respect to
an initial patent application filed by the Company related to the Company's
color printing apparatus and the government issue fee has been paid. In
addition, the Company has filed applications for two additional patents
related to certain enhancements of the Truecolor Systems. The Company has also
filed foreign patent applications seeking patent protection in several foreign
countries. There can be no assurance, however, as to the degree of protection
offered by the U.S. patent which will be issued on the initial application, or
as to the likelihood that the other pending U.S. and foreign patent
applications will be approved and that patents will issue. There can be no
assurance that potential competitors, many of which may have substantially
greater resources than the Company and may have made substantial investments
in competing technologies, do not currently have or will not obtain patents
that will prevent, limit or interfere with the Company's ability to make, use
or sell its products or will not intentionally infringe on the Company's
patents if and when issued. Moreover, no assurance can be given that Accent
Color's technology does not conflict with existing enforceable patents of
others. Although patents may be issued to Accent Color as a result of patent
applications it has filed, Accent Color's technology may fall within the scope
of existing enforceable patents of others. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
to prevent misappropriation of its technology or independent development by
others of similar technology. In addition, U.S. patents which may be obtained
by the Company will have no effect outside the United States and, to the
extent the Company obtains foreign patent protection, the laws of foreign
countries may not protect the Company's proprietary rights to the same extent
as do the laws of the U.S. There can be no assurance that these protections
will be adequate.

The Company has an exclusive right to supply products including Spectra's
ink jet printheads in the worldwide market for printing color on the output
from specified high-speed, black-on-white printers marketed by Xerox, IBM, Oce
and certain other parties through December 31, 2002. To the extent that wax-
based inks and ink jet printheads purchased from Spectra are covered under
patents or licenses, the Company relies on Spectra's rights under such patents
and licenses and Spectra's willingness and ability to enforce its patents and
maintain its licenses. There can be no assurance that Spectra will be willing
or able to enforce its patents and maintain its licenses and any such
unwillingness or inability could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Dependence on Spectra."

13
<PAGE>

Although the Company believes that its products and technology do not
infringe any existing proprietary rights of others, there can be no assurance
that third parties will not assert such claims against the Company in the
future or that such future claims will not be successful. The Company could
incur substantial costs and diversion of management resources with respect to
the defense of any claims relating to proprietary rights, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block the Company's ability to make,
use, sell, distribute or market its products and services in the U.S. or
abroad. Such a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event a claim
relating to proprietary technology or information is asserted against the
Company, the Company may seek licenses to such intellectual property. There
can be no assurance, however, that such a license could be obtained on
commercially reasonable terms, if at all, or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture or
distribution of the Company's products and, therefore, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The cost of responding to any such claim may be material, whether
or not the assertion of such claim is valid. See "Business--Intellectual
Property."

DIFFICULTIES IN MANAGING RAPID GROWTH

Since inception, the Company has experienced rapid growth, which has placed
a significant strain on the Company's (i) administrative, operational and
financial personnel, (ii) management information systems, (iii) manufacturing
operations and (iv) other resources. Certain of the Company's senior managers
have recently joined the Company, and the Company may increase the number of
its senior managers. In addition, the Company's future development plans
anticipate additional management, operating and financial resources. For
example, the Company intends to significantly increase production capacity,
create new marketing programs, hire additional personnel and develop further
enhancements to the Company's products. The Company has recently hired
additional accounting and finance personnel and has made improvements to its
operating, accounting, financial control and reporting systems. However,
further improvements in these systems are needed and will continue to be
needed in order to manage anticipated growth in revenue and assets, including
receivables and inventories. There can be no assurance that the Company will
be able to successfully implement its business strategy, that operations will
generate sufficient cash flow, or that adequate financing will be available on
acceptable terms to fund continuing growth, or that management will
successfully manage continued growth. The failure to manage growth effectively
may have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Accent Color's Strategy."

DEPENDENCE ON KEY PERSONNEL

The business of the Company is substantially dependent on the capabilities
and services of a number of key technical and managerial personnel, including
Richard J. Coburn, its Chairman, and Norman L. Milliard, its President and
Chief Executive Officer. Mr. Coburn has an employment agreement with the
Company which has a term that expires in 1998. Mr. Milliard entered into a
three-year contract with the Company in 1994 which is automatically extended
each year for one year unless Mr. Milliard or the Company gives notice prior
to the year end. Messrs. Coburn and Milliard may terminate the employment
relationship with the Company at any time with no penalty other than the loss
of future compensation. The loss of the services of Messrs. Coburn or Milliard
or other key personnel could have a material adverse effect on the business of
the Company. The Company maintains, and is the named beneficiary of, keyman
life insurance policies on Messrs. Coburn and Milliard in the amount of
$1,000,000 each. There can be no assurance, however, that the Company will
continue such insurance coverage or that such amount is sufficient. The
Company's future success will further depend on both its ability to retain key
personnel and its ability to attract qualified personnel. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will be successful in hiring or retaining them. The inability of the Company
to retain key personnel or attract qualified personnel may have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Personnel" and "Management."

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<PAGE>

COMPETITION

The Company expects to encounter varying degrees of competition in the
markets in which it intends to compete. The Company competes, in significant
part, on the basis of advanced proprietary technology in the areas of paper
handling, ink jet color printing and interface software which allows the
Company's products to print variable data, in multiple standard and custom
colors at high speeds.

Competition in the markets for the Company's products is highly fragmented.
The Xerox 4890 (a similar product is also marketed by Xerox as the DocuTech
390HC) is a spot color printer which prints in black and one color per job
(out of a limited palette). It is capable of printing 92 pages per minute but
does not offer custom colors. BESTE Bunch Systems markets a color offset press
used as a downstream add-on to an Oce or IBM high-speed, black-on-white
printer. While providing color logos and fixed data, it does not offer
variable data, requires longer time to set up, and is more labor intensive. It
also requires additional processes of negative production and plate making.
There are full-process color printers available which have relatively high per
page print costs and operate at much lower speeds than those required by
typical production printing, making them impractical for high-speed print
jobs. In addition, many of the companies that may compete with the Company in
the future have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition than the Company.

Products or product improvements based on new technologies could be
introduced by other companies with little or no advance notice. Manufacturers
of high-speed, black-on-white printers may also, in time, develop comparable
or more effective color capability within their own products which may render
the Company's products obsolete. There can be no assurance that the Company
will be able to compete against future competitors successfully or that
competitive pressures faced by the Company will not have a material adverse
effect upon its business, financial condition and results of operations. See
"Business--Competition."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after this offering or that purchasers of the Common Stock will
be able to resell their Common Stock at prices equal to or greater than the
initial public offering price. The initial public offering price of the Common
Stock was determined through negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of market prices
of the Common Stock after this offering. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
The trading price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors,
including quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its OEM customers
or competitors, changes in general economic conditions or financial estimates
by securities analysts and other events or factors. In addition, the stock
market has experienced large price and volume fluctuations that often have
been unrelated to the operating performance of specific companies or market
sectors. These broad market fluctuations may adversely affect the market price
of the Common Stock. See "Underwriting."

IMMEDIATE AND FUTURE DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial ($5.90 per share) dilution in net tangible book value per share of
the Common Stock from the initial public offering price. Additional dilution
will occur upon the exercise of outstanding stock options and warrants.
Furthermore, the Company may issue additional shares of its capital stock from
time to time in such amounts and for such consideration as it deems
appropriate. Such issuance could also be dilutive to investors in the Common
Stock offered hereby. See "Dilution" and "Description of Capital Stock."

15
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE

Sales of a substantial number of shares of Common Stock into the public
market following this offering could adversely affect the prevailing market
price of the Common Stock and the Company's ability to raise capital in the
future. Upon completion of this offering, the Company will have a total of
9,689,778 shares of Common Stock outstanding, of which the 3,000,000 shares
offered hereby will be freely tradeable without restriction under the
Securities Act of 1933 (the "Securities Act") by persons other than
"affiliates" of the Company, as defined under the Securities Act. The
remaining 6,689,778 shares of Common Stock outstanding are "restricted
securities" as that term is defined by Rule 144 and Rule 701 as promulgated
under the Securities Act (the "Restricted Shares"). Of the 6,689,778
Restricted Shares, 414,738 shares may be currently sold under Rule 144(k). An
additional 2,745,312 shares will become eligible for sale 90 days after
completion of this offering pursuant to Rule 144. The remaining 3,529,728
shares will be eligible for sale upon the expiration of their respective two-
year holding periods subject to the conditions of Rule 144. The Securities and
Exchange Commission has proposed certain amendments to Rule 144 that would
reduce by one year the holding periods required for shares subject to Rule 144
to become eligible for resale in the public market. This proposal, if adopted,
would permit earlier resale of shares of Common Stock currently subject to
holding periods under Rule 144. No assurance can be given concerning whether
or when the proposal will be adopted. Furthermore, substantially all of the
6,689,778 Restricted Shares are subject to lock-up agreements expiring 180
days following the date of this Prospectus. Such agreements provide that Cowen
& Company may, in its sole discretion and at any time without notice, release
all or a portion of the shares subject to these lock-up agreements. Upon the
expiration of the lock-up agreements, 3,418,216 of the 6,689,778 Restricted
Shares may be sold pursuant to Rule 144, subject in some cases to certain
volume restrictions imposed thereby. Certain existing stockholders have rights
to include shares of Common Stock owned by them in future registrations by the
Company for the sale of Common Stock or to request that the Company register
their shares under the Securities Act. On a date after 180 days following the
date of this Prospectus, the Company intends to register on one or more
registration statements on Form S-8 approximately 1,500,000 shares of Common
Stock issued or issuable under its 1995 Stock Incentive Plan. Of the 1,500,000
shares issuable under its 1995 Stock Incentive Plan, 1,289,850 shares were
subject to outstanding options as of November 15, 1996, of which 584,000
options were exercisable within 180 days following the date of this
Prospectus. Shares covered by such registration statements will be eligible
for sale in the public market after the effective date of such registration.
See "Management--1995 Stock Incentive Plan" and "Shares Eligible for Future
Sale."

MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS

The principal purposes of this offering are to repay certain indebtedness,
to increase the Company's equity capital, to create a public market for the
Common Stock and to facilitate future access by the Company to public equity
markets. As of the date of this Prospectus, the Company has no specific plans
for the use of a substantial portion of the net proceeds of this offering. The
Company expects to use such unallocated proceeds for working capital and other
general corporate purposes. Consequently, the Board of Directors and
management of the Company will have significant flexibility in applying the
net proceeds of this offering. See "Use of Proceeds."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company intends to have its products marketed worldwide and therefore
may enter into contracts with foreign companies. International sales are
subject to certain inherent risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, fluctuations in exchange
rates, credit risks, government controls, political instability, longer
payment cycles, increased difficulties in collecting accounts receivable and
potential adverse tax consequences. There can be no assurance that these
factors will not have a material adverse effect on the Company's business,
financial condition and results of operations.

ENVIRONMENTAL REGULATION

The Company is subject to regulation under various federal, state and local
laws relating to the environment and to employee safety and health. These
environmental regulations relate to the generation, storage,

16
<PAGE>

transportation, disposal and emission of various substances into the
environment. The Company cannot predict the environmental legislation or
regulations that may be enacted in the future or how existing or future laws
or regulations will be administered or interpreted. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies
of the regulatory agencies or stricter interpretation of existing laws, may
require additional expenditures by the Company, some or all of which may be
material. The Company believes it is currently in compliance in all material
respects with applicable regulations relating to the environment and to
employee safety and health.

POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS ON MARKET PRICE OF SHARES

The Company's Restated Certificate of Incorporation contains provisions that
could discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company's Common Stock. The Restated Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only upon the affirmative vote of holders of
at least two-thirds of the shares of capital stock of the Company issued and
outstanding and entitled to vote. In addition, the Board of Directors is
authorized to issue shares of Common Stock and Preferred Stock which, if
issued, could dilute and adversely affect various rights of the holders of
shares of Common Stock and, in addition, could be used to discourage an
unsolicited attempt to acquire control of the Company.

The Company is subject to the Connecticut Stock Corporation Act (the
"Connecticut Act"), some provisions of which prohibit a publicly held
Connecticut corporation from engaging in a "business combination" (including
the issuance of equity securities which have an aggregate market value of 5%
or more of the total market value of the outstanding shares of the Company)
with an "interested shareholder" (as defined in the Connecticut Act) for a
period of five years from the date of the shareholder's purchase of stock
unless approved in a prescribed manner. The application of this statute could
prevent a change of control of the Company. Generally, approval is required by
the Board of Directors and by a majority of the non-employee directors of the
Company and by 80% of the outstanding shares of the Company and two-thirds of
the voting power of shares other than shares held by the interested
shareholder. There can be no assurance that these provisions will not prevent
the Company from entering into a business combination that otherwise would be
beneficial to the Company. The Connecticut Act also requires that any action
of the stockholders of the Company taken by written consent without a meeting
must be unanimous. See "Description of Capital Stock."

DIFFICULTY OF SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENT

Peter Teufel, a director of the Company who does not reside in the U.S., may
not be subject to service of process within the U.S. Furthermore, since many
of the assets of this director are located outside the U.S., any judgment
obtained against him in the U.S. may not be enforceable outside the U.S.

BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS

The completion of the offering made by this Prospectus will provide
significant benefits to the current shareholders of the Company, including
certain of its directors and officers. The Company intends to use
approximately $3.5 million of the net proceeds of this offering to repay
indebtedness, including accrued interest, outstanding under promissory notes
held by certain persons who hold warrants to purchase shares of Common Stock
of the Company. See "Use of Proceeds." The completion of this offering will
also create a public market for the Common Stock and thereby is expected to
increase the market value of the investment by current shareholders in the
Company. Upon the closing of this offering, at the initial public offering
price of $8.00 per share, the difference between the aggregate purchase price
paid or payable by the Company's current securityholders for shares of Common
Stock held by them or subject to options or warrants held by them and the
aggregate market value of such shares will be approximately $49.3 million. See
"Dilution."

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<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$21.3 million ($24.7 million if the Underwriters' over-allotment option is
exercised in full), based on the initial public offering price of $8.00 per
share. The principal purposes of this offering are to repay certain
indebtedness, to increase the Company's equity capital, to create a public
market for the Common Stock and to facilitate future access by the Company to
the public equity markets.

The Company intends to use approximately $3.5 million to repay all of the
indebtedness, including accrued interest, outstanding under its Interim Notes,
which were issued in the Interim Financing. These notes bear interest at the
rate of 8.70% per annum (excluding any debt discount) and are required to be
repaid upon the closing of this offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The Company intends to use the remainder of the net proceeds from this
offering for working capital and general corporate purposes, including the
expansion of the Company's manufacturing, development, engineering and
customer support capabilities, the commercial production of additional
Truecolor Systems and the further development and enhancement of the Company's
products, including enhancements in the areas of printhead width, print
resolution and paper handling capabilities. The Company may also use a portion
of the remaining net proceeds to further repay outstanding indebtedness.
Except as stated above, the Company has not determined the amounts it plans to
expend with respect to each of the expected uses or the timing of such
expenditures. As a consequence, management will have the discretion to
allocate the net proceeds from this offering to such uses. The amounts
actually expended for each use may vary significantly depending on a number of
factors, including the amount and timing of future revenue, the amount of cash
generated or used by the Company's operations, the progress of the Company's
product development efforts and technological advances.

Pending applications of the proceeds as described above, the Company intends
to invest the net proceeds from this offering in short-term, investment-grade,
interest bearing securities.

DIVIDEND POLICY

The Company has never declared nor paid any cash dividends on its Common
Stock or Preferred Stock. The Company currently intends to retain all earnings
to finance operations and therefore does not anticipate declaring or paying
cash dividends in the foreseeable future.

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CAPITALIZATION

The following table sets forth, as of September 30, 1996, the capitalization
of the Company (i) on an actual basis, (ii) on a pro forma basis to give
effect to the Interim Financing and (iii) on a pro forma as adjusted basis to
give effect to the conversion as of September 30, 1996 of all outstanding
shares of Series A Preferred Stock and the Company's outstanding Series III
Debentures, including accrued interest thereon, and the sale of 3,000,000
shares of Common Stock offered hereby at the initial public offering price of
$8.00 per share, less underwriting discounts and commissions and estimated
offering expenses, and the application of the net proceeds for repayment of
the Interim Notes. This table should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, net of debt discount of $28,
$602 and $0(1).................................. $ 2,663 $ 5,539 $ 500
======= ======= =======
Long-term debt, less current portion............. 1,759 1,759 1,759
------- ------- -------
Shareholders' equity:
Preferred Stock, no par value, 500,000 shares
authorized, 324,360 (actual), 324,360 (pro
forma) and 0 (pro forma as adjusted) shares
issued and outstanding........................ 1,431 1,431 --
Common Stock, no par value, 25,000,000 shares
authorized, 4,719,840 (actual), 4,719,840 (pro
forma), and 9,679,758
(pro forma as adjusted) shares issued and
outstanding(2)................................ 10,419 10,543 35,334
Accumulated deficit.............................. (14,223) (14,223) (15,016)
------- ------- -------
Total shareholders' (deficit) equity............. (2,373) (2,249) 20,318
------- ------- -------
Total capitalization............................. $ (614) $ (490) $22,077
======= ======= =======
</TABLE>
- --------
(1) Includes accrued interest expense of $194,000, $194,000 and $0 for actual,
pro forma and pro forma as adjusted, respectively.
(2) Excludes as of September 30, 1996 (i) 1,159,503 shares of Common Stock
issuable upon the exercise of outstanding warrants, all of which are
currently exercisable, and (ii) 1,289,850 shares of Common Stock issuable
upon the exercise of stock options outstanding under the Company's 1995
Stock Incentive Plan, of which options to purchase 388,750 shares are
currently exercisable. Also excludes (i) 45,000 shares of Common Stock
issuable upon the exercise of outstanding warrants issued in connection
with the Interim Financing exercisable at $8.00 per share. See
"Management--1995 Stock Incentive Plan," "Description of Capital Stock,"
and Notes 5, 6 and 7 of Notes to Financial Statements.

19
<PAGE>

DILUTION

The Company had a net negative tangible book value of ($3,807,000), or
($0.81) per share of Common Stock, as of September 30, 1996. Net tangible book
value per share is defined as the amount of total tangible assets less total
liabilities, less the carrying value of the Series A Preferred Stock, divided
by the number of shares of Common Stock outstanding. Without taking into
account any changes in net tangible book value after September 30, 1996, other
than to give effect to (i) this offering (at the initial public offering price
of $8.00 per share), after deduction of the underwriting discounts and
commissions and estimated offering expenses, (ii) the conversion of all
outstanding shares of the Series A Preferred Stock into Common Stock and (iii)
the conversion of the Series III Debentures, including accrued interest
thereon, into Common Stock, the adjusted net tangible book value per share
after this offering as of September 30, 1996 would have been $20,314,000, or
$2.10 per share. This amount represents an increase in net tangible book value
of $2.15 per share to existing shareholders and dilution of $5.90 per share to
new investors. Dilution is determined by subtracting adjusted net tangible
book value per share after this offering from the amount of cash paid by a new
investor for a share of Common Stock in this offering. The following table
illustrates this per share dilution.

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $8.00
Net negative tangible book value per common share as of
September 30, 1996............................................ ($0.81)
Increase attributable to the conversion of Series A Preferred
Stock and the conversion of Series III Debentures, including
accrued interest thereon...................................... 0.76
Increase per common share attributable to this offering........ 2.15
------
Adjusted net tangible book value per common share after this
offering........................................................ 2.10
-----
Dilution per share to new investors.............................. $5.90
=====
</TABLE>

The following table summarizes, on a pro forma as adjusted basis as of
September 30, 1996, the number of shares of Common Stock purchased from the
Company (after giving effect to the conversion of all outstanding shares of
the Series A Preferred Stock into Common Stock and the conversion of the
Series III Debentures, including accrued interest thereon, into Common Stock),
the total consideration paid, and the average price per share paid by existing
shareholders and to be paid by the new investors, at the initial public
offering price of $8.00 per share, before deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company.

<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 6,679,758 69% $15,086,000 39% $2.26
New investors..................... 3,000,000 31 24,000,000 61 8.00
--------- --- ----------- ---
Total........................... 9,679,758 100% $39,086,000 100%
========= === =========== ===
</TABLE>

The foregoing computations exclude (i) 1,159,503 shares of Common Stock
issuable upon the exercise of outstanding warrants, with a weighted average
exercise price of $3.55 per share, all of which are currently exercisable,
(ii) 45,000 shares of Common Stock issuable upon the exercise of outstanding
warrants issued in connection with the Interim Financing exercisable at $8.00
per share and (iii) 1,289,850 shares of Common Stock issuable upon the
exercise of outstanding stock options under the Company's 1995 Stock Incentive
Plan with a weighted average exercise price of $3.53 per share, of which
options to purchase 398,750 shares are currently exercisable as of
November 15, 1996. To the extent that such options and warrants are exercised
in the future, there will be further dilution to new investors. See
"Management--1995 Stock Incentive Plan," "Description of Capital Stock" and
Note 6 of Notes to Financial Statements.

The issuance of any additional shares of Common Stock or other securities of
the Company would have a dilutive effect upon the percentage security
ownership in the Company which any holder of shares of Common Stock has
currently or could attain by purchase of shares in this offering. Depending
upon the consideration received by the Company for issuance of any additional
securities, such issuance also may have a dilutive effect on the shareholders'
equity in the Company.

20
<PAGE>

SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth selected financial data of the Company. The
data should be read in conjunction with the Financial Statements of the
Company, including the Notes thereto, and other financial information included
herein. The statements of operations data for the period ended December 31,
1993, the years ended December 31, 1994 and December 31, 1995, the nine months
ended September 30, 1996 and the related balance sheet data are derived from
the audited financial statements of the Company, which financial statements
have been audited and reported upon by Price Waterhouse LLP, independent
accountants. The statement of operations data for the nine months ended
September 30, 1995 is derived from unaudited financial statements, which in
the opinion of the Company's management reflect all the adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Earnings per share data are
presented on a pro forma basis only.

<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION FOR THE FOR THE INCEPTION
(MAY 21, 1993) YEAR ENDED NINE MONTHS ENDED (MAY 21, 1993)
THROUGH DECEMBER 31, SEPTEMBER 30, THROUGH
DECEMBER 31, ---------------------- ---------------------- SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
-------------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $ -- $ -- $ -- $ -- $ -- $ --
Costs and expenses:
Costs of production.... -- -- -- -- 570 570
Research and
development........... 19 805 3,051 2,455 5,089 8,964
Marketing, general and
administrative........ 26 336 1,003 641 2,870 4,236
Related party
administrative
expense(1)............ -- -- 80 -- 25 105
----------- ---------- ---------- ---------- ---------- ----------
45 1,142 4,134 3,096 8,554 13,875
----------- ---------- ---------- ---------- ---------- ----------
Other (income) expense:
Interest expense....... -- 12 83 36 322 417
Interest income........ -- -- -- -- (69) (69)
----------- ---------- ---------- ---------- ---------- ----------
-- 12 83 36 253 348
----------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (45) $ (1,154) $ (4,217) $ (3,132) $ (8,807) $ (14,223)
=========== ========== ========== ========== ========== ==========
Pro forma net loss per
common share(2)........ $ (.66) $ (1.28)
========== ==========
Pro forma weighted
average common shares
outstanding(2)......... 6,163,341 6,670,152
========== ==========
OTHER DATA:
Number of prototype and
pre-production units
shipped................ -- -- 3 -- 11 14
Units in backlog
(as of period end)(3).. -- -- -- -- 30 30
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ -- $ 165 $ 1 $ 1,406
Working capital (deficit)......................... (24) (86) (1,862) (2,793)
Total assets...................................... 1 246 728 7,687
Short-term debt................................... -- -- 50 2,663
Long-term debt, less current portion.............. -- -- 2,020 1,759
Total shareholders' deficit....................... (24) (57) (3,164) (2,373)
</TABLE>
- --------
(1) See Note 11 of Notes to Financial Statements for information concerning
related party transactions.
(2) See Note 2 of Notes to Financial Statements for the computation of pro
forma net loss per common share.
(3) See "Business--Backlog."

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. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
whenever they appear in this Prospectus. This Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as
well as those discussed elsewhere herein.

OVERVIEW

Accent Color was formed in 1993 initially to develop a high-speed, color
printer to attach to a Xerox 4135 or Xerox 4635 cut sheet, high-speed, black-
on-white production printer. Development and testing of a prototype began in
January 1994 and was first announced at the On-Demand Trade Show (a major
printing industry trade show) in May 1994. In November 1994, a "proof-of-
concept" Truecolor System was shown at the Xplor International Global
Electronic Document Systems Conference ("Xplor") (the primary production
printing industry trade show). After Xplor in November 1994, IBM approached
the Company and requested that the Company develop a version of its Truecolor
System to work in conjunction with the IBM 3900 continuous form production
printing system.

During 1995, the Company began negotiations with Xerox, IBM and Siemens
Nixdorf Printing Systems USA, Inc. (which was acquired by an affiliate of Oce
in 1996) to enter into formal development relationships. During the same
period, the Company accelerated its engineering and development activities as
its efforts were focused on designing and building the next generation
prototypes which were demonstrated at Xplor in November 1995 in the Xerox, IBM
and Accent Color exhibits and in the Xerox DocuTech Print Center. In March
1995, the Company and IBM entered into a letter of intent for the purchase of
three prototype systems, which were delivered in September 1995 (one system)
and February 1996 (two systems). Subsequently, the Company agreed to upgrade
two of the prototypes at no additional cost to IBM. One of the upgraded
prototypes was delivered during the three months ended September 30, 1996, and
the second upgraded prototype is currently anticipated to be delivered in the
fourth quarter of 1996. In August 1995, the Company and Xerox entered into a
memorandum of understanding for the purchase of two prototype systems, which
were delivered in October and November 1995. In November 1995, the Company and
Oce (then Siemens Nixdorf Printing Systems USA, Inc.) entered into a
memorandum of understanding for the purchase of two prototype systems which
were delivered in June 1996. Through September 30, 1996, the Company had
received $1.5 million from the delivery of seven prototype systems to Xerox,
IBM and Oce. Through September 30, 1996, $914,000 had been offset against
research and development expense, with respect to such prototype systems.

During 1996, the Company has focused on refining the Truecolor System design
and preparing for the commencement of commercial production in the first half
of 1997. In February 1996, a Product Development and Distribution Agreement
was signed with Xerox, and in April 1996, the Company entered into a Product
Purchase Agreement with IBM. During the three months ended September 30, 1996,
the Company shipped seven pre-production systems to its customers, one of
which was an upgrade for a prior prototype. At Xplor in October 1996, the
Company demonstrated its Truecolor Systems, as well as certain enhancements
planned for production in 1997.

Pursuant to the Xerox Agreement and IBM Agreement, Xerox and IBM are
expected to submit purchase orders for shipments of production systems
approximately four to six months prior to the expected shipment date. The
Company expects most orders will be shipped within four months of the receipt
of purchase orders. As a result, the Company believes that backlog cannot be
considered a meaningful indicator of future financial performance. Revenue is
expected to be recognized upon customer acceptance. Through September 30,
1996, the Company had received approximately $787,400 in deposits from Xerox
and IBM for future deliveries of Truecolor Systems.

22
<PAGE>

Accent Color also sells related consumables and spare parts. Currently, the
only consumables sold by the Company are wax-based inks, which it acquires
from Spectra. The sale of consumables is expected to generate recurring
revenue which the Company believes will continue to increase as the installed
base and usage of Truecolor Systems increase. Accent Color does not expect to
derive significant revenue from maintenance of installed Truecolor Systems
because maintenance typically will be provided by its OEM customers. See "Risk
Factors--Uncertainty of Market Development; Acceptance of Accent Color's
Products," "--Dependence on Spectra" and "--Competition."

Accent Color expenses all research and development costs as they are
incurred, including costs associated with the manufacture of prototypes.
Accent Color produced the proof-of-concept and prototype Truecolor Systems
principally during 1994, 1995 and the first six months of 1996, which resulted
in significant research and development expenses for those periods. In July
1996, the Company began manufacturing pre-production Truecolor Systems for
delivery to customers. As a result, it began to allocate to costs of
production the manufacturing and other expenses associated with the production
of pre-production Truecolor Systems. Accent Color expects increases in
research and development expenses due to further enhancements to current and
new products, although such increases will be offset during the remainder of
1996 and 1997 by the absence of costs associated with the manufacture of
prototype and pre-production systems which had previously been expensed. See
"Business--Research and Development."

Accent Color's marketing, general and administrative expenses have increased
to support the Company's anticipated revenue growth and manufacturing
activities. In 1996, in anticipation of the production and sale of Truecolor
Systems, the Company expanded its accounting and other administrative
functions to support its manufacturing activities. The Company's strategy is
to distribute its products solely through its OEM customers. Accordingly,
marketing expense is attributable primarily to the development and support of
the OEM customers and is anticipated to be lower, in both dollar amounts and
as a percentage of revenue, than it would be if the Company established and
maintained a direct sales force. The Company incurs marketing expenses in
connection with product promotional activities and certain indirect marketing
activities in conjunction with its OEM customers. As a result, the Company
believes that marketing, general and administrative expenses will continue to
increase.

As of September 30, 1996, the Company had approximately $13.8 million in
federal net operating loss carryforwards which may be utilized by the Company
to offset any taxable profits in future periods. These carryforwards expire in
years 2008 through 2010. In December 1994, a change in ownership of the
Company occurred which limits the annual amount of certain federal net
operating loss carryforwards which may be used by the Company. The change in
ownership of the Company that may result from this offering may further limit
the Company's ability to use its net operating loss carryforwards. See Note 9
of Notes to Financial Statements.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995

The Company recognized no revenue for the nine months ended September 30,
1996 (the "1996 Period") and for the nine months ended September 30, 1995 (the
"1995 Period"). During the 1996 Period, the Company's efforts were directed at
designing, developing, testing and manufacturing prototype and pre-production
systems. During the 1995 Period, the Company's efforts were directed at
designing, developing, testing and manufacturing prototype systems.

Costs of production of $570,000 incurred during the 1996 Period consist of
the start-up manufacturing expenses related to the Company's preparation for
commercial production of its Truecolor Systems.

Research and development expenses primarily consist of the cost of personnel
and equipment needed to conduct the Company's research and development
efforts, including manufacturing prototype systems. Research and development
expenses for the 1996 Period increased by $2.6 million, or approximately 104%,
to $5.1 million from $2.5 million for the 1995 Period. This increase in
research and development expenses reflects additional expenses associated with
the development, manufacturing and testing of prototype systems, the increase
in engineering and production personnel, and purchases of components for pre-
production systems.

23
<PAGE>

Marketing, general and administrative expenses primarily consist of (i) the
marketing cost in connection with product promotional activities and certain
indirect marketing activities in conjunction with the Company's OEM customers
and (ii) general and administrative costs related to the salaries of the
Company's executive, administrative and financial personnel, and associated
costs. Marketing, general and administrative expenses for the 1996 Period
increased by $2.3 million to $2.9 million from $641,000 for the 1995 Period.
This increase in marketing, general and administrative expenses was primarily
attributable to the hiring of additional service, marketing and administrative
personnel to support the Company's anticipated revenue growth and
manufacturing activities.

Related party administrative expense reflects financial advisory fees paid
to an investment banker who was a director of the Company. The Company had
$25,000 and $0 for the 1996 Period and 1995 Period, respectively.

Interest expense for the 1996 Period increased by $286,000 to $322,000 from
$36,000 for the 1995 Period. This increase in interest expense for the 1996
Period was primarily attributable to increased indebtedness outstanding in the
1996 Period resulting from the issuance of the Series III Debentures in
October 1995 and the 8.00% Subordinated Debentures (the "Series IV
Debentures") in February 1996 and borrowings under the Xerox Loan beginning in
1996. See "Liquidity and Capital Resources." Interest income for the 1996
Period was $69,000, and the Company had no interest income for the 1995
Period.

Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December
31, 1994

The Company generated no revenue for 1995 and 1994.

Research and development expenses for 1995 increased by $2.2 million to $3.0
million from $805,000 for 1994. This increase in research and development
expenses for 1995 primarily reflects additional expense associated with the
development, manufacturing and testing of prototype systems and the related
increase in research and development personnel. Research and development
expenses were offset by $614,000 and $0 for 1995 and 1994, respectively,
resulting from customer payments under research and development agreements.

Marketing, general and administrative expenses for 1995 increased by
$664,000 or approximately 198% to $1.0 million from $336,000 for 1994. This
increase in marketing, general and administrative expenses was primarily the
result of adding personnel as the Company expanded overall operations and
support functions.

Related party administrative expense was $80,000 for 1995 and $0 for 1994,
reflecting payment of financial advisory fees to an investment banker who was
a director of the Company.

Interest expense for 1995 increased by $71,000 to $83,000 from $12,000 for
1994. Interest expense in 1995 related to the Series III Debentures. Interest
expense in 1994 related to the Series I and Series II Debentures. See
"Liquidity and Capital Resources." The Company had no interest income for 1995
and 1994.

Fiscal Year Ended December 31, 1994 Compared to the Period Ended December 31,
1993

The Company generated no revenue for 1994 and for the period from inception
of the Company on May 21, 1993 through December 31, 1993 (the "1993 Period").

Research and development expenses for 1994 increased by $786,000 to $805,000
from $19,000 for the 1993 Period. This increase in research and development
expenses for 1994 primarily reflects additional expense associated with the
increase in the number of research and development personnel as the Company's
efforts to design and develop its prototype systems increased. The 1993 Period
research and development expenses were primarily due to the purchases of molds
and components for prototype systems.

24
<PAGE>

Marketing, general and administrative expenses for 1994 increased by
$310,000 to $336,000 from $26,000 for the 1993 Period. This increase in
marketing, general and administrative expenses was primarily attributable to
the hiring of additional personnel to support the Company's expanded
development and marketing operations.

The Company had no related party administrative expense for the 1994 and
1993 Periods.

Interest expense for 1994 was $12,000 and the Company had no interest
expense for the 1993 Period. The Company had no interest income for 1994 and
for the 1993 Period.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary capital needs have been to fund the design,
development and production of "proof-of-concept," prototype and pre-production
models of the Truecolor System. The Company's primary sources of funding have
been private placements of equity and debt securities, borrowings and customer
sponsored research and development payments.

In January and August 1994, the Company issued approximately $360,000 in
principal amount of 8.00% Convertible Subordinated Debentures (the "1994
Debentures"). The 1994 Debentures bore interest at the annual rate of 8.00%
(excluding debt discount).

Between September 1994 and February 1995, the Company sold 235,000 shares of
its Series A Preferred Stock for an aggregate purchase price of $1,175,000. In
September 1994, at the time of the first closing of the private placement of
Series A Preferred Stock, all 1994 Debentures, including accrued interest
thereon, were converted into shares of Series A Preferred Stock.

Between April 1995 and October 1995, the Company sold the Series III
Debentures, together with warrants to purchase an aggregate of 530,919 shares
of Common Stock, for net proceeds of $1,668,443. During 1995, the Company
converted $50,000 of accounts payable, which arose in 1995, to Series III
Debentures together with warrants to purchase 13,635 shares of Common Stock.
The Series III Debentures have a term of two years and bear interest at the
annual rate of 8.00% (excluding debt discount). At the closing of this
offering, the Series III Debentures, including accrued interest thereon, will
convert automatically into shares of Common Stock.

In February 1996, the Company sold the Series IV Debentures, together with
warrants to purchase 110,454 shares of Common Stock, for total proceeds of
$405,000. The Series IV Debentures had a term of six months and bore interest
at the annual rate of 8.00% (excluding debt discount). On August 29, 1996, the
Company repaid all principal of and accrued interest on the Series IV
Debentures.

In March 1996, the Company entered into a loan and security agreement (the
"Xerox Loan") with Xerox pursuant to which Xerox agreed to lend the Company up
to $3,000,000 (including $500,000 advanced in January 1996 under a short term
promissory note). Borrowing availability under the Xerox Loan is based on the
Company's achievement of certain development and manufacturing milestones. The
Xerox Loan bears interest at the annual rate of 8.00%, with interest payable
quarterly, and terminates on April 1, 1998. As part of the Xerox Loan, Xerox
received warrants to purchase 375,000 shares of Common Stock. As of September
30, 1996, the Company had borrowed $2,350,000 under the Xerox Loan, the
maximum amount then available. The currently outstanding principal on the
Xerox Loan is required to be repaid in installments of $500,000 on July 1,
1997, $500,000 on October 1, 1997, $1,000,000 on January 2, 1998 and $350,000
on April 1, 1998. See "Business--Strategic Relationships."

From April through June 1996, the Company sold an aggregate of 2,625,000
shares of Common Stock for gross proceeds of $10,500,000.

As of September 30, 1996, the Company had $1,406,000 in cash and cash
equivalents and a working capital deficit of $2,793,000. The Company invests
cash in excess of its short-term requirements in short-term, investment-grade,
interest bearing securities.

25
<PAGE>

On October 11, 1996, the Company sold an aggregate principal amount of $3.45
million of its 8.70% notes (the "Interim Notes"), together with warrants to
purchase 45,000 shares of Common Stock (the "Interim Financing"). The net
proceeds to the Company of approximately $2.78 million will be used for
working capital and general corporate purposes. The Interim Notes will be
repaid with a portion of the proceeds from this offering.

Under the Spectra Agreement, the Company is obligated to pay $250,000 per
calendar quarter through 1997 in order to maintain certain exclusive rights.
After 1997, the Company must continue to make quarterly payments to continue
to benefit from the development efforts funded by Spectra's customers. The
Company currently anticipates making such payments over the term of the
Spectra Agreement. See "Business--Subcontractor and Supplier Arrangements."

The Company's capital expenditures for the nine months ended September 30,
1996 were approximately $2.1 million. The Company has currently budgeted
approximately $1.5 and $6.6 million for capital expenditures for the last
three months of 1996 and for the fiscal year ending December 31, 1997,
respectively. The Company's currently planned capital expenditures are
primarily for expansion of the Company's manufacturing capabilities.

The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its existing cash resources, availability under
the Xerox Loan and cash from operations, will be sufficient to finance its
operations, repayment of indebtedness and capital expenditures through the
third quarter of 1997. Based on the Company's current operating plan, the
Company's primary requirements for cash through 1997 will be for the repayment
of indebtedness, the expansion of its manufacturing, development, engineering
and customer support capabilities, the commercial production of additional
Truecolor Systems and the further development and enhancement of the Company's
products. As part of its expansion during 1997, the Company currently expects
(i) to hire approximately 50 additional manufacturing, development,
engineering and customer support employees, (ii) to acquire inventories of
modules, components and wax-based inks for Truecolor Systems and (iii) to
invest in additional printhead manufacturing capacity. The Company's currently
planned research and development activities are focused on developing (i)
wider ink jet printheads for greater color coverage per page, (ii) advanced
paper handling functionality particularly duplex printing (the ability to
print on both sides of the page) and (iii) higher resolution ink jet
printheads. There can be no assurance, however, that the Company will be
successful in developing enhancements for its products or that these
enhancements will prove to be desirable to end users. Failure to develop
enhancements to its existing products, particularly the enhancements
contemplated by the agreements with Xerox and IBM, could have a material
adverse effect on the market acceptance of the Company's products and could
result in the termination of the Company's relationship with Xerox or IBM. As
a result, any such failures could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Accent Color's Strategy."

26
<PAGE>

when needed, additional financing will be available, or available on
acceptable terms. The inability to obtain additional financing or generate
sufficient cash from operations could require the Company to reduce or
eliminate expenditures for capital equipment, research and development,
production or marketing of its products, or otherwise to curtail or
discontinue its operations, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, if the Company raises funds through the sale of additional equity
securities, the Common Stock offered hereby may be further diluted. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

INFLATION

Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.

27
<PAGE>

BUSINESS

THE COMPANY

Accent Color designs, manufactures and sells innovative, high-speed, spot
color printing systems ("Truecolor Systems") for integration with digital,
high-speed, black-on-white printers and sells related consumables. Spot color
printing involves the use of color to enhance traditional black-on-white
documents by accenting critical information, such as a balance due on a
billing statement, or by printing graphics, such as a company logo. The
Company believes its Truecolor Systems are the first, and only, printers
capable of cost-effectively printing or highlighting variable data in multiple
standard and custom colors with the speed and functionality of existing high-
speed, black-on-white printers. Truecolor Systems are designed to address what
the Company believes is a substantial, unfulfilled demand for spot color
printing in the production printing and production publishing segments of the
digital printing market. Accent Color's strategy is to rapidly penetrate these
global markets through strategic relationships with major OEMs, including
Xerox, IBM and Oce.

Truecolor Systems are designed to print spot color in high-speed, high-
volume applications at a low incremental cost per page without diminishing the
speed or performance of the high-speed, black-on-white host printer or
affecting the end user's existing operational methods. Truecolor Systems are
capable of printing up to 310 pages per minute, utilizing up to eight
different colors, including custom colors, to print or highlight fixed or
variable data. Truecolor Systems combine the Company's proprietary paper
handling technology with patented ink jet technology from Spectra. The Company
holds an exclusive right to supply products which include Spectra ink jet
printheads to print color on the black-on-white output from specified high-
speed printers from Xerox, IBM, Oce and certain other parties through the year
2002. In connection with their arrangements with the Company, Xerox and IBM
are adapting their existing high-speed, black-on-white printers for
integration with the Company's Truecolor Systems.

The Company intends to market its Truecolor Systems to OEMs of high-speed,
black-on-white printers. According to CAP Ventures, a printing industry market
research firm, the 1995 year-end installed base of digital, high-speed, black-
on-white printers in the U.S. was approximately 22,400 and the installed base
of these printers is projected to grow at a five-year CAGR of approximately
11% to 37,100 systems by the year 2000. In addition, approximately 4,800
digital, high-speed, black-on-white printers were sold in the U.S. in 1995.
Revenue from new system sales, supplies and service exceeded $3.6 billion in
1995 and is expected to grow at a five-year CAGR of approximately 12% to $6.4
billion by the year 2000. This growth is further driven by the number of pages
printed per year, which is projected to grow at a five-year CAGR of
approximately 13% by the year 2000.

To facilitate access to its target markets, the Company has entered into
agreements with Xerox and IBM, and has entered into a memorandum of
understanding with Oce, which the Company expects to result in an agreement
during early 1997. Xerox, IBM and Oce intend to market, sell and service
Truecolor Systems under their respective corporate logos and product
identifications. Accent Color expects to substantially reduce or eliminate the
cost and time required to develop and maintain a direct sales and service
organization or distribution channel of its own by using the existing sales
and distribution channels of Xerox, IBM and Oce. According to Dataquest, a
market research firm, Xerox (excluding its DocuTech systems), IBM and Oce
accounted for approximately 80% of the high-speed, black-on-white printing
systems sold in the U.S. during 1994 and 1995. In addition, according to
Xerox, there are over 10,000 DocuTech printers installed with which Truecolor
Systems are designed to be integrated. See "Strategic Relationships."

The Company also sells consumables comprised of standard and custom color
wax-based inks, as well as spare parts used with Truecolor Systems. The
Company expects that consumables will generate recurring revenue which the
Company believes will increase as the installed base and usage of Truecolor
Systems increase. According to CAP Ventures, typical high-speed, black-on-
white printers servicing the production printing and production publishing
market segments produce approximately 1.7 million and 975,000 pages per month,
respectively.

28
<PAGE>

INDUSTRY OVERVIEW

The proliferation of computer technology and information in digital form
continues to be the primary driver behind the growing market for digital,
high-speed printing systems. Convenient, flexible and cost-efficient, digital
printing systems receive textual and graphical computer-generated images,
including information that may vary from page to page, and print those images
directly without any of the pre-production steps associated with conventional
printing technologies.

Speed of printed output and color capabilities segment the digital printing
systems market. According to CAP Ventures, the 1995 year-end installed base of
digital, high-speed (more than 80 pages per minute), black-on-white printers
in the U.S. was approximately 22,400 and the installed base of those printers
is projected to grow at a five-year CAGR of approximately 11% to approximately
37,100 systems by the year 2000. In addition, approximately 4,800 digital,
high-speed, black-on-white printers were sold in the U.S. in 1995. Revenue
from new system sales, supplies and service exceeded $3.6 billion in 1995 and
is expected to grow at a five-year CAGR of approximately 12% to $6.4 billion
by the year 2000. Total pages printed by high-speed, black-on-white printers
in the U.S. was 366 billion in 1995 and is projected to grow at a five-year
CAGR of approximately 13% to 687 billion by the year 2000.

Digital, high-speed, black-on-white printing systems are generally used in
the production printing and production publishing market segments. CAP
Ventures estimates that the installed base of digital, high-speed, black-on-
white printing systems and new printer sales with respect to these market
segments were as follows:

<TABLE>
<CAPTION>
U.S. INSTALLED U.S. NEW U.S. PAGES
BASE SALES PRINTED
(DECEMBER 1995) (1995) (1995)(1)

(UNITS) (UNITS) (BILLIONS)
<S> <C> <C> <C>
High-Speed, Black-on-White
Systems
Production Printing 13,168 3,251 265.3
Production Publishing 9,270 1,594 100.7
------ ----- -----
Total 22,438 4,845 366.0
====== ===== =====
</TABLE>

-----------------------------------------------------------------------
(1) One page equals one 8 1/2^ x 11^ image.

The production printing segment is characterized by corporate data centers
and commercial printers which process large print runs from computer database
applications. Production printing customers are typically grouped by
application such as (i) billing (banks, credit card companies, utilities,
telecommunications companies), (ii) statements and policy documents (insurance
companies, banks, financial institutions) and (iii) marketing documents
(direct mail houses, commercial printers, quick printers). A typical
installation will have several high-speed, black-on-white printers connected
to a mainframe or a networked system of computers. According to CAP Ventures,
the typical high-speed, black-on-white printer servicing this segment produces
approximately 1.7 million pages per month. In addition to high-speed and high-
volume printing capability, low cost per page is a key driver for this
segment. The Company believes that this segment is dominated by the Xerox
4635, the IBM 3900 and the Oce Pagestream printing systems.

Production publishing systems are widely located in industrial, educational
and commercial organizations, as well as in commercial printing firms and
"quick printers," all of which require traditional publishing capabilities
combined with quick turnaround time for lower volume applications. Production
publishing systems are able to print, collate and assemble complete documents
and are used for producing short-run periodicals, journals, booklets and
reports without the delay and set-up costs associated with traditional offset
printing. According to CAP Ventures, the typical high-speed, black-on-white
printer servicing this segment produces approximately 975,000 pages per month.
Print-on-demand, characterized by fast response, cost effectiveness and
limited run lengths, is a key driver for this segment. The Company believes
that the Xerox DocuTech has a major portion of this market segment.

29
<PAGE>

Research has shown that the use of color in printed communications can lead
to substantial benefits including increased response rates (direct mail),
shorter response times (billing) and reduced error rates (billing). Color
helps organize and differentiate information, resulting in better recognition,
retention and recall. This often results in reduced service calls and a higher
level of customer satisfaction for end users employing color in documents. To
obtain these benefits, spot color typically is used for logos, highlight bars,
signatures, personalization and identifying critical data, such as the amount
owed and due date on a billing statement. Today, pre-printed forms are used to
provide some of these document features. However, there is an associated cost,
inflexibility and inconvenience related to the procurement, storage, handling
and use of pre-printed forms.

Despite the potential benefits of color in these applications and the
general trend toward increased color usage on lower-speed printers in the
overall market for digital printing systems, CAP Ventures estimates that less
than 10% of these production markets are currently served by solutions
offering spot color printing capability of any kind. The Company believes that
this is due primarily to the lack of existing solutions which meet the
requirements of both cost and performance, including the ability to add
variable color data, provide custom color capability and use multiple colors
per print run. Existing spot color solutions are limited by one or more of the
following factors: (i) the ability to print only a single color per print run,
(ii) the lack of custom color capability, (iii) slow print speed, (iv) the
lack of variable data capability, (v) the high cost per page and (vi) large
physical space requirements. As a result, the Company believes that there is a
substantial, unfulfilled demand for spot color printing in a wide range of
applications for both high-speed production printing systems and high-speed
production publishing systems.

THE ACCENT COLOR SOLUTION

Accent Color develops and manufactures its Truecolor Systems for integration
with high-speed, black-on-white printers. Truecolor Systems are designed to
address the spot color printing needs of the high-speed production printing
and production publishing markets. The Company believes its Truecolor Systems
are the first, and only, printers capable of cost-effectively adding variable
data in multiple standard or custom colors with the speed and functionality of
existing high-speed, black-on-white printers. Key benefits of Truecolor
Systems include:

High Performance. High-speed, black-on-white printers currently utilized in
the production printing and production publishing markets operate at speeds
generally more than 80 pages per minute and in many cases exceeding 300 pages
per minute. The Company's proprietary paper handling system enables Truecolor
Systems to operate at or above the operating speed of the printers with which
they are integrated. Truecolor Systems are designed to operate in demanding
printing environments which typically require high reliability, high speeds
and high volumes over long periods of time.

Integration with Major OEM Systems. Truecolor Systems are designed to be
integrated with existing high-speed, black-on-white printing systems. In
connection with their arrangements with the Company, Xerox and IBM are
adapting their existing high-speed, black-on-white printers for integration
with the Company's Truecolor Systems. The Company currently expects that its
arrangement with Oce will require similar adaptations to Oce's printing
systems. According to Dataquest, Xerox (excluding its DocuTech systems), IBM
and Oce accounted for approximately 80% of the high-speed, black-on-white
printing systems sold in the U.S. during 1994 and 1995. In addition, according
to Xerox, there are over 10,000 DocuTech printers installed with which
Truecolor Systems are designed to be integrated.

Variable Data Capability. Truecolor Systems are designed to print or
highlight text and print graphics either of which may vary from page to page
(variable data), such as names, numerical data, dates or other critical
information, in up to eight standard or custom colors per page. This variable
data color capability has the potential added benefit of reducing or
eliminating the cost and inconvenience associated with the procurement,
storage, handling and use of pre-printed forms.

Low Incremental Cost. The Company estimates that the incremental cost to the
end user of a Truecolor System, including equipment cost, consumables and
service, will be approximately $0.005 per page, assuming

30
<PAGE>

approximately 1.4 square inches of color coverage per page. Truecolor Systems
also provide the potential benefit of reducing or eliminating the cost and
inconvenience associated with the procurement, storage, handling and use of
pre-printed forms. Moreover, Truecolor Systems are designed to accept a wide
range of standard print media, including inexpensive papers chosen from a
range of weights (and some labels), without adversely affecting print quality.

Standard and Custom Color Capability. The Company believes that its ability
to provide the end user with a palette of 14 standard colors and a wide
spectrum of user specified custom colors to match the end-user's logo and
other color requirements will address a largely unfulfilled demand in the
digital, high-speed production printing and production publishing market
segments.

Wax-based Ink Advantages. Each Truecolor System incorporates eight drop-on-
demand, ink jet printheads which use hot melt, wax-based inks. The use of wax-
based inks is an important feature of Accent Color's solution in that the
print quality of wax-based inks does not vary with paper absorbency or other
paper characteristics. In contrast, the print quality of printers using water-
based and oil-based inks may vary with different paper characteristics.
Moreover, wax-based inks used in Truecolor Systems are sold in blocks which
are non-toxic and easy to handle.

ACCENT COLOR'S STRATEGY

The Company's objective is to become the leading provider of spot color
printing solutions to the digital, high-speed production printing and
production publishing market segments. The Company believes there is a
substantial, unfulfilled demand for spot color printing in a wide range of
applications for both production market segments. The Company's strategy
combines the following key elements:

Leverage Strategic Relationships. A cornerstone of the Company's strategy is
to establish relationships with the principal OEMs in the Company's target
markets. The goals of these relationships are to (i) rapidly penetrate the
market represented by both the existing installed base and new sales of high-
speed, black-on-white printers, (ii) substantially reduce or eliminate the
cost and time required for the Company to develop and maintain a direct sales
and service organization of its own, (iii) quickly gain credibility and market
acceptance by meeting the technical requirements set by Xerox, IBM, Oce and
other OEM customers and (iv) integrate the Company's Truecolor Systems with
certain hardware and supporting software marketed by these OEMs. To that end,
the Company has entered into agreements with Xerox and IBM and has entered
into a memorandum of understanding with Oce for the resale and service of
Truecolor Systems and related products. According to Dataquest, Xerox
(excluding its DocuTech systems), IBM and Oce accounted for approximately 80%
of the high-speed, black-on-white printing systems sold in the U.S. during
1994 and 1995. In addition, according to Xerox, there are over 10,000
installed DocuTech printers with which Truecolor Systems are designed to be
integrated. See "Strategic Relationships."

Capitalize on Technology. The Company has identified patented, ink jet
technology developed or licensed by Spectra as being capable of providing
critical performance characteristics for its high-speed, spot color solution.
The Company has an exclusive right to supply products which include Spectra
ink jet printheads to print color on the black-on-white output from specified
high-speed printers marketed by Xerox, IBM, Oce and certain other parties
through the year 2002. Truecolor Systems also incorporate the Company's
proprietary paper handling technology and proprietary communications software
developed by the Company in conjunction with Xerox and IBM. See "Business--
Subcontractor and Supplier Arrangements--Spectra."

Continue Product Innovation. The Company intends to strengthen its
competitive position by continually enhancing the capabilities of its
products, focusing primarily on (i) increasing color coverage on a page using
wider ink jet printheads, (ii) enhancing dots-per-inch image resolution and
(iii) providing duplex printing (the ability to print on both sides of a
page). These enhancements are designed to address identified end-user demand
for systems that enable the development of applications that incorporate more
color on a page. In addition, the

31
<PAGE>

Company intends to leverage its technological expertise to expand the breadth
of applications of its color printing process and to develop new product
offerings.

Generate Recurring Revenue from the Installed Base of Truecolor Systems. A
key element of the Company's strategy is to generate revenue from the sale of
consumables, principally wax-based ink, and spare parts for Truecolor Systems.
The Company expects that consumables will generate recurring revenue which the
Company believes will increase as the installed base and usage of Truecolor
Systems increase. In addition, the Company expects that routine service and
maintenance provided by OEM customers will result in sales of spare parts for
Truecolor Systems. Accent Color expects that such consumables and spare parts
will be purchased exclusively through the Company.

Leverage Manufacturing Expertise. The Company intends to leverage
manufacturing expertise by combining the benefits of outsourcing with the
quality assurance of internal final assembly and testing. The Company intends
to utilize subcontractors and suppliers to subassemble and perform certain
testing of major modules of Truecolor Systems. The Company currently performs
final assembly and testing to complete the manufacturing process, including
extensive print quality testing on a variety of papers and applications. The
Company plans to eventually outsource the full assembly and testing of
Truecolor Systems. This strategy will allow the Company to rapidly increase
production while reducing the cost of large capital investments and hiring
additional skilled labor.

TRUECOLOR SYSTEMS

Truecolor Systems are designed to provide spot color printing capability in
high-speed, high-volume applications at a low incremental cost per page
without diminishing the speed or performance of the high-speed, black-on-white
host printer or affecting the end user's existing operational methods. The
Company has approached spot color printing as a post-processing step to the
existing high-speed, black-on-white printing systems. Working together with
each of Xerox and IBM, the Company designed its Truecolor Systems to be
integrated with Xerox and IBM printers. Both Xerox and IBM are adapting their
existing high-speed, black-on-white printers for integration with the
Company's Truecolor Systems.

Truecolor Systems are designed to attach to the output side of high-speed,
black-on-white printers and to connect via interface hardware and software
being jointly developed by Accent Color and each of its OEM customers. These
interfaces will allow the host printer to control all print job operations,
including the processing of images ultimately printed by Truecolor Systems.

32
<PAGE>

Shown below are graphical illustrations of typical configurations for both
cut sheet and continuous form versions of the Truecolor Systems attached to
the respective high-speed, black-on-white host printers. The Truecolor 135 is
a cut sheet system that attaches directly to either the Xerox 4635 production
printing system or the DocuTech 135 production publishing system. Shown below
is the Truecolor 135 attached to the DocuTech 135 Production Publisher.

[GRAPHIC APPEARS HERE]
DocuTech 135 Truecolor 135

The Truecolor 390 is a continuous form system that attaches directly to the
IBM 3900 printing system:

[GRAPHIC APPEARS HERE]
Truecolor 390 IBM 3900 Paper Source

The Company's Truecolor Systems consist of a proprietary paper handling
system, ink jet printhead assemblies utilizing standard and custom color wax-
based inks, ink reservoirs and a control system. Accent Color has designed and
developed most of the hardware and interface software for Truecolor Systems.

33
<PAGE>

Paper Handling System. The paper handling system is a critical component of
Truecolor Systems. The system receives cut sheet pages or continuous form paper
from the high-speed, black-on-white printer, registers and aligns the pages or
forms in the transport and, after printing, forwards color accented pages to
appropriate finishing equipment. An advanced capability of the paper handling
system used in a Truecolor System is the ability to move and position
continuous form paper at high printing speeds without using tractor holes to
constrain the paper. Truecolor Systems are currently able to print faster than
the high-speed, black-on-white printers with which they are integrated.

[GRAPHIC APPEARS HERE]

Truecolor 135 Truecolor 390
Cut Sheet Paper Handling System Continuous Form Paper Handling System

Ink Jet Printheads. Truecolor Systems contain eight drop-on-demand, ink jet
printheads. These printheads have the ability to accurately place hot melt,
wax-based ink droplets onto specified locations on paper at densities of 240 or
300 dots per inch. Each printhead is supplied by an off-head ink reservoir
module containing one color of ink which is maintained at a precise
temperature. The ink jet printheads are positioned automatically by commands
from the host printer at the start of a job. Printheads may be aligned to print
larger images.

Currently, Truecolor ink jet printheads are each capable of printing color up
to a width of 0.4 inches, allowing the system's eight ink jet printheads to
cover up to 29% of a page. At Xplor in October 1996, Accent Color demonstrated
ink jet printheads each capable of printing color up to a width of
approximately 1.1 inches allowing the system to cover up to 78% of a page.

Wax-based Inks. The ink jet printheads in Truecolor Systems use hot melt,
wax-based inks, which offer three primary advantages over water-based or oil-
based inks. First, wax-based inks do not dry, but rather immediately change
from a liquid to a solid state without emitting by-products into the air. In
contrast, water-based or oil-based inks, which have relatively long drying
times, are generally less suitable for high-speed printing. Second, wax-based
inks do not distort the paper, while water-based and oil-based inks sometimes
dry differently, distorting the paper, particularly when there is significant
ink coverage. Third, the print quality of wax-based inks does not vary with
paper characteristics (such as absorbency), while print quality using water-
based and oil-based inks may vary.

Ink Reservoirs. Truecolor Systems, in their standard configuration, contain
four wax-based ink reservoirs. Each reservoir contains only one standard or
custom color wax-based ink. A single reservoir can supply up to four ink jet
printheads and is designed to hold enough wax-based ink for eight hours of
normal operation. If a sensor detects a low level of ink, the operator is
notified and is able to refill the reservoir while the Truecolor System
continues to operate, thus minimizing downtime. The number of reservoirs within
the system may optionally be increased to eight. Larger configurations are
feasible with external reservoir modules.

34
<PAGE>

Paper Options and Print Quality. Truecolor Systems are designed to accept a
wide range of print media, including standard and inexpensive papers and some
labels, chosen from a range of weights without adversely affecting print
quality. In contrast, many process color digital printing systems require
relatively expensive special papers. Current versions of Truecolor Systems
print at 240 or 300 dots per inch to provide compatibility with existing high-
speed, black-on-white printers and their supporting software systems.

The Control System. The control system consists of three integrated
computers which use software developed by Accent Color. The first computer
operates the user interface. The second computer receives image data from the
high-speed, black-on-white printer, and prepares this data for printing. The
third computer controls the paper handling system, manages the temperature
control and the position of the ink jet printheads and receives data from all
system sensors.

The Truecolor System's control system is directly linked to and operates in
coordination with a computer within the host high-speed, black-on-white
printer. The control system receives image data and control signals from the
host printer which initiate the print cycle and regulate paper motion and
image positioning. The Truecolor/host printer software interface enables
Truecolor Systems to accurately print fixed and variable, color text and
graphic images at speeds up to 310 pages per minute.

TRUECOLOR PRODUCT LINE

The Company offers both cut sheet and continuous form versions of Truecolor
Systems which are currently expected to be marketed under the corporate logos
and product identifications of the Company's customers. The current versions
of Truecolor Systems include the Truecolor 135 and the Truecolor 390. The
Company expects that Truecolor Systems will be priced to the Company's OEM
customers in the range of $75,000 to $105,000, depending on model and options.

The Truecolor 135 attaches directly to either the Xerox 4635 cut sheet
production printing system or the Xerox DocuTech 135 production publishing
system. Although the Truecolor 135 is designed to print at higher speeds, it
is currently configured to print at the speed of the Xerox 4635 and DocuTech
135 (up to 135 pages per minute) in as many as eight colors at 300 dots per
inch resolution. The Truecolor 135 is designed to print up to 3,240,000 pages
per month and can handle paper sizes from 7.0 to 14.0 inches wide, 6.0 to 17.0
inches long and paper weights from 16 to 42 pound bond.

The Truecolor 390 attaches directly to the IBM 3900 continuous form
production printing system. Although the Truecolor 390 is designed to print at
higher speeds, it is currently configured to print at the speed of the IBM
3900 (up to 310 pages per minute) in as many as eight colors at 240 dots per
inch resolution. The Truecolor 390 is designed to print up to 5,600,000 pages
per month and can handle paper sizes from 6.5 to 18.0 inches wide, 6.0 to 17.0
inches long and paper weights from 16 to 42 pound bond.

35
<PAGE>

TRUECOLOR SYSTEM FEATURES

<TABLE>
<CAPTION>
FEATURES TRUECOLOR 135 TRUECOLOR 390

<S> <C> <C>
Host
Printer Xerox 4635 or IBM 3900
Xerox DocuTech 135
Paper
Handling Cut sheet Continuous form
Speed 135 pages per minute 310 pages per minute
Resolution 300 dots per inch 240 dots per inch
Ink
Reservoirs 4 standard, 8 optional 4 standard, 8 optional
Paper Width 7.0 to 14.0 inches 6.5 to 18.0 inches
Paper
Length 6.0 to 17.0 inches 6.0 to 17.0 inches
Paper
Weights 16 to 42 pound bond 16 to 42 pound bond
Paper Type Pre-printed or blank sheets, Pre-printed or blank, fanfold
some labels or roll-fed forms, some labels
Maximum
Usage 3.2 million pages per month 5.6 million pages per month
</TABLE>

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

CONSUMABLES AND SPARE PARTS

The Company's product offering includes consumables, such as standard and
custom color wax-based ink, and spare parts. Spot color printing with
Truecolor Systems requires the consumption of significant quantities of wax-
based ink and the replacement of certain parts that are subject to normal wear
and tear. The Company expects that sales of consumables will generate
recurring revenue which the Company believes will increase as the installed
base and usage of Truecolor Systems increase.

Consumables. The wax-based ink used in the Truecolor Systems is sold in six
kilogram packages containing 60 individual wax-based ink blocks to the
Company's OEM customers. The Company purchases its wax-based ink from Spectra.
As long as the Company purchases its wax-based inks exclusively from Spectra,
Spectra is prohibited, through its agreement with the Company, from knowingly
supplying the wax-based ink directly to the Company's customers. Similarly,
Xerox and IBM are currently prohibited from purchasing wax-based ink from
sources other than the Company, subject to certain conditions, such as the
Company's inability to supply the necessary amount of wax-based ink or
maintain competitive pricing. See "Strategic Relationships."

Spare Parts. The Company expects that periodic preventive maintenance and
repair will need to be performed on Truecolor Systems and will include the
replacement of damaged or worn parts which are expected to be supplied
exclusively by Accent Color to the OEM customer. These replacement parts are
produced by subcontractors and suppliers according to the Company's design
specifications. See "Manufacturing and Assembly" and "Subcontractor and
Supplier Arrangements."

STRATEGIC RELATIONSHIPS

The Company has entered into agreements with Xerox, covering both Xerox's
High End Systems Printing Group and its Production Publishing Systems Group
(which markets the DocuTech family of products), and with IBM. The Company has
also entered into a memorandum of understanding with Oce. Under these
arrangements, Xerox, IBM and Oce intend to market, distribute and support
Truecolor Systems under their respective brand names. These agreements are
significant in several respects. First, according to Dataquest, Xerox
(excluding its DocuTech systems), IBM and Oce accounted for approximately 80%
of the high-speed, black-on-white printers sold in the U.S. during 1994 and
1995. Second, the Company's products are designed to be fully integrated with
certain hardware and supporting software products marketed by Xerox, IBM and
Oce. Third, Accent Color expects that market acceptance of its Truecolor
Systems will be accelerated since sales and service will be provided by the
large, well-established sales and service organizations of Xerox, IBM and Oce.

Xerox Corporation. In February 1996, the Company and Xerox, on behalf of
itself and its international affiliates, Rank Xerox Limited, Fuji Xerox Co.,
Ltd. and Xerox Canada, Inc., entered into a Product Development

36
<PAGE>

and Distribution Agreement. The Xerox Agreement has a three-year term with
successive 12-month renewals unless one party gives six months notice not to
renew. The Xerox Agreement will allow the Company to leverage what it believes
is the largest sales and service operation in the digital printing industry.
Xerox's High End System Printing Group has a major market position for cut
sheet, high-speed printers. The Company has been informed that Xerox's
Production Publishing Systems Printing Group intends to utilize Truecolor
Systems to provide spot color printing to the Production Publishing market
segment. During the initial term of the agreement, Xerox is obligated to
purchase all of its requirements for consumables (standard and custom color
wax-based inks) and spare parts from the Company. If the Company is unable to
perform its obligations under the agreement, after a cure period, the Xerox
Agreement affords Xerox certain backup manufacturing rights, including the
right to have Truecolor Systems manufactured by a third party using the
Company's intellectual property and know-how, provided that, once the Xerox
Loan has been paid in full, Xerox would be required to pay a royalty to the
Company for the right to manufacture the systems. The Xerox Agreement also
requires the Company to warrant its products against manufacturing defects for
90 days after initial installation.

In addition to the Xerox Agreement, the Company has entered into a loan
agreement with Xerox which provides for advancements of up to $3.0 million
based on the achievement of certain milestones and subject to certain
conditions, of which approximately $2.35 million was outstanding as of
September 30, 1996. The Xerox Agreement contains clauses imposing limitations
on the Company's right to develop cut sheet systems for a third party as long
as the Xerox Loan is outstanding or for the initial term of the Xerox
Agreement whichever term is longer. In addition, as long as the Xerox Loan is
outstanding or for the initial term of the Xerox Agreement whichever term is
longer, Xerox will enjoy certain exclusive distribution rights with respect to
the sale of the Truecolor 135 and any other cut sheet Truecolor Systems for
use with printers with speeds of 30 pages per minute or more, or copiers with
speeds of 50 copies per minute or more. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note 5 of Notes to Financial Statements.

International Business Machines Corporation. IBM's products are used in
corporate data centers and other high-speed printing applications. In April
1996, the Company and IBM entered into the IBM Agreement. This agreement is
for a term of three years with IBM having the right to renew it for two
additional one-year terms. The Company has been informed that Truecolor
Systems will be IBM's first product targeted at spot color applications in
high-speed printing. The integration of color into IBM's AFP (Advanced
Function Printing) protocol and the use of the Truecolor System as an
integrated post-processing device attached to the IBM 3900 high-speed, black-
on-white printer are expected to be marketed worldwide by IBM's international
operations.

Under the IBM Agreement, IBM has committed to purchase consumables from the
Company for one year from the date of general availability of Truecolor
Systems to IBM customers and, if certain conditions concerning competitive
pricing are met, thereafter as well. The IBM Agreement also requires the
Company to warrant its products against manufacturing defects for 90 days
after initial installation. Furthermore, under the IBM Agreement, the Company
has agreed to provide spare parts for its products to IBM at prices which will
yield a monthly parts cost per Truecolor System not to exceed a specified
amount. There can be no assurance that the Company will not experience
warranty claims or parts failure rates in excess of those which it has assumed
in pricing its products and spare parts. Any such excess warranty claims or
spare parts failure rates could have a material adverse effect on the
Company's business, financial condition or results of operations. See "Risk
Factors--Product Warranty; Limit on Prices for Spare Parts." If the Company is
unable to perform its obligations under the agreement, after a cure period,
the IBM Agreement affords IBM certain backup manufacturing rights, including
the right to manufacture, or have a third party manufacture, the Company's
Truecolor Systems. This right to manufacture is limited to the specific types
of units not properly delivered and may be terminated if the Company is
thereafter able to deliver the units in question in compliance with the terms
of the IBM Agreement. In consideration of favorable payment terms, including
the payment of a 20% deposit upon orders, the Company has granted to IBM a
second priority lien against the Company's inventory in an amount not to
exceed the total deposits received.

Oce Printing Systems USA, Inc. In 1996, Oce van der Grinten N.V., purchased
the high-speed printing systems business from Siemens Nixdorf
Informationssysteme AG. At that time, the Company had already

37
<PAGE>

established an initial relationship with Siemens Nixdorf Printing Systems L.P.
to provide Truecolor Systems for Siemens' high-speed printing products. In
October 1996, the Company entered into a memorandum of understanding with Oce.
The Company is currently negotiating a definitive contract for the development
and production of Truecolor Systems to be integrated with Oce's Printing
Systems. There can be no assurance that a definitive contract will be executed
or that Oce will become a customer. See "Risk Factors--Dependence on a Limited
Number of Customers; Revenue Concentration."

MARKETING, PRODUCT SUPPORT, SERVICE AND TRAINING

Accent Color has adopted a third-party distribution strategy that employs
OEM customers to address the global market. OEM customers purchase Truecolor
Systems for integration with their high-speed, black-on-white printing systems
and currently expect to market them for both installed printers and new
printers under their corporate logos and product identifications. The goals of
these relationships are to (i) rapidly penetrate the market represented by
both the existing installed base and new sales of high-speed, black-on-white
printers, (ii) substantially reduce or eliminate the cost and time required
for the Company to develop a direct sales and service organization of its own,
(iii) quickly gain credibility and market acceptance by meeting the technical
requirements set by Xerox, IBM, Oce and other OEM customers and (iv) integrate
the Company's Truecolor Systems with certain hardware and supporting software
marketed by these OEM customers. The Company may enter into relationships with
other OEM customers covering additional segments of the digital, high-speed
printing market.

The Company generally expects to receive monthly or quarterly, non-binding,
rolling forecasts of future orders for its products from its OEM customers.
The forecasts will usually cover the subsequent 12 months. The Company will
plan its future activities, in part, on the basis of these forecasts, but
there can be no assurance that the OEM customers will, in fact, place orders
corresponding to these forecasts. OEM customers are expected to place actual
orders by submitting purchase orders, generally on a monthly basis, which
cover product requirements from four to six months from the date of the
purchase order.

Accent Color intends to provide support for the sales and marketing
activities of its OEM customers including Xerox, IBM and Oce. This will
include technical advice, as required, regarding the optimal use of Truecolor
Systems in demanding applications, and participation in the formulation of
marketing initiatives to position and promote Accent Color's products against
any perceived or emerging competitors. The Company expects to benefit from
this interaction by receiving timely feedback on end-user needs and desires
which will drive product enhancement and new product development. Xerox and
IBM will also distribute wax-based inks provided by Accent Color through their
existing supply channels. Accent Color currently expects to provide sales
support to meet the end user requests to create custom colors using the
Company's wax-based inks.

Xerox and IBM will also distribute spare parts provided by Accent Color for
Truecolor Systems and will provide field service through their established
service organizations. This will provide end users with the first three levels
of customer support coverage, consisting of on site field service for
installation and maintenance, central technical support at a national and
international level and extensive stocking of spare parts to ensure adequate
responsiveness. In exceptional circumstances, Accent Color's technical support
group will assist Xerox and IBM to resolve unusual maintenance situations,
should the need arise via 7-day/24-hour telephone coverage. In addition, Xerox
and IBM will also provide training for their internal organizations and end
users. To support this activity, Accent Color has undertaken training course
development and will provide a limited number of initial training classes to
the education and training organizations of Xerox and IBM.

MANUFACTURING AND ASSEMBLY

The Company's manufacturing strategy has been to design a product based upon
a relatively small number of discrete modules that can be subassembled and
tested by other parties. Other than the patented ink jet printheads supplied
by Spectra, the Company believes these modules can be readily procured on
competitive terms. Approximately 75% of these modules are common across the
continuous form and cut sheet versions of

38
<PAGE>

Truecolor Systems in order to achieve economies of scale while reducing design
time, expediting time-to-market and minimizing support requirements.
Initially, final assembly and testing, including extensive print quality
testing on a variety of papers and applications, will be done by the Company
prior to shipment until the product reaches full production. The Company's
strategy is to begin to subcontract the full assembly and final testing to
turnkey manufacturers once full production is reached.

The Company is currently in discussions with two large manufacturing
companies to be the primary turnkey manufacturers of the Truecolor Systems.
The Company believes that these companies have both the manufacturing and
quality assurance capabilities to satisfy the Company's supplier qualification
process which initially qualifies and monitors ongoing performance to the
Company's cost, quality and schedule requirements. The Company expects to
implement a formal quality control program to inspect parts received from
subcontractors to determine whether they comply with Company specifications.
The Company intends to monitor adherence to these procedures through site
visits and direct supervision.

The Company has made product assurance and quality a priority in its
business strategy. In pursuit of this goal, the Company intends to apply for
ISO 9001 registration in 1997. In preparation for this, the Company has
adopted a formal approach to documentation control, manufacturing and business
process definition and is implementing an integrated business system software
package to manage key processes. Accent Color also subjects the component
modules and each complete Truecolor System to extensive testing during
assembly. An important part of the testing involves printing tests in which
the Company uses a variety of paper grades and test patterns designed to
verify accuracy, color and other quality characteristics.

SUBCONTRACTOR AND SUPPLIER ARRANGEMENTS

The Company has many suppliers, subcontractors and subassemblers who
participate in the manufacture, subassembly and testing of various parts and
modules of Truecolor Systems. Accent Color's arrangements with its
subcontractors and suppliers generally provide for the purchase of modules or
parts on a purchase order basis with the provision of purchase forecasts by
the Company. The Company believes that, with the exception of the ink jet
printheads, alternative subcontractors and suppliers are available for the
manufacture and supply of the components of Truecolor Systems. The Company's
principal criteria for the selection of subcontractors includes product
quality, production and testing capacity, and cost. Accent Color also
considers the financial strength, size and experience of potential
subcontractors.

Spectra. The Company has contracted with Spectra for its supply of ink jet
printheads, associated equipment and wax-based ink for use in Truecolor
Systems. Spectra currently supplies and licenses hot melt, wax-based ink jet
printing products to several companies for different applications in non-
competing discrete markets. Spectra has granted the Company an exclusive right
to supply products which include Spectra printheads to print color on the
black-on-white output from specified high-speed printers marketed by Xerox,
IBM, Oce and certain other OEM customers. Spectra, in turn, holds licenses for
the use of certain related patented technology. The Spectra agreement allows
the Company, in certain instances, to utilize Spectra's technology to either
manufacture wax-based inks or ink jet printheads itself or arrange for their
manufacture by third parties utilizing such technology. There can be no
assurance, however, that, if necessary, the Company would be able to
manufacture ink jet printheads and wax-based inks itself or negotiate with
third parties for the timely manufacture of ink jet printheads or supply of
wax-based inks on acceptable terms or at all. Furthermore, the use of
Spectra's technology may require the consent of certain other licensors to
Spectra, and there is no assurance that the Company will be able to obtain any
such consents on acceptable terms or at all.

The Company's agreement with Spectra establishes the terms for the
development and supply of Spectra's ink jet printheads and associated
equipment for use in the Company's products. This agreement restricts Spectra
from knowingly selling wax-based inks or ink jet printheads to customers of
the Company for use in the Company's products and from knowingly working with
any other company on the development of a color printing module for the
markets in which the Company operates. This agreement expires December 2002,
with the Company holding an option to renew for an additional seven years. To
maintain the exclusive rights to such

39
<PAGE>

products which include Spectra printheads, the Company is required to purchase
a minimum number of ink jet printheads each year, to continue to purchase its
wax-based ink requirements from Spectra and to make certain payments. There is
no assurance that the Company will be able to meet the minimum purchase
requirements or make these payments. The Company's agreement with Spectra
requires quarterly payments of $250,000 through 1997 to maintain the
exclusivity rights. These specified payments, together with similar payments
from other Spectra customers (which vary in amount from customer to customer),
are used by Spectra to fund ink jet printhead development, the results of
which are available to participating customers. After 1997, the Company must
make additional quarterly payments of $250,000 to continue to benefit from the
development efforts funded by Spectra's customers. There is no assurance that
the Company will be able to continue such required payments or that the
research and development will be beneficial to the Company. The Company is
also negotiating an agreement with Spectra to aid in the funding of the
expansion of Spectra's manufacturing of ink jet printheads for the Company.
Any disruption in the Company's relationship with Spectra, or in Spectra's
relationship with its licensors, may have a material adverse effect on the
Company's business, financial condition and results of operations.

RESEARCH AND DEVELOPMENT

The Company considers the enhancement of its present products to be its
research and development priority. Consequently, the Company currently devotes
a significant portion of its resources to product development. The Company
plans to commit substantial resources to enhance its technology in the areas
of (i) wider ink jet printheads for greater color coverage per page, (ii)
advanced paper handling functionality, particularly duplex printing (the
ability to print on both sides of a page) and (iii) higher resolution ink jet
printheads. Certain enhancements are required under the Company's contracts
with Xerox and IBM. The Company also plans to devote resources to assure the
quality and performance of its Truecolor Systems. The Company anticipates it
will need to increase its research and development spending and hire
additional personnel as the Company's business expands in the future.

Accent Color considers its on-going efforts in engineering, research and
development to be a key component of its strategy. The Company believes that
its future success will depend in part on its ability to continue to enhance
its existing products and to develop new products. The Company's research and
development activities consist of both long-term efforts to develop and
enhance products and services and short-term projects to make modifications to
respond to the immediate needs of its OEM customers.

The Company spent approximately $805,000, $3.1 million and $5.1 million on
engineering, research and development in the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1996, respectively. As of
November 14, 1996, Accent Color had 44 employees engaged in engineering,
research and development.

BACKLOG

The Company measures backlog based on purchase orders for Truecolor Systems
that have not yet been shipped. A substantial amount of the Company's backlog
can be modified or cancelled prior to 30 days before shipment without penalty,
except for the recovery of the Company's actual costs. Any failure of the
Company to meet an agreed-upon schedule could lead to the cancellation of the
related order. The timing of purchase orders and modifications to such
purchase orders may result in substantial fluctuations in backlog from period
to period. Accordingly, the Company believes that backlog cannot be considered
a meaningful indicator of future financial performance.

As of September 30, 1996, the Company's backlog was approximately $3.1
million. Approximately 2% of the Company's backlog is expected to be shipped
to OEM customers during the current fiscal year. As of September 30, 1995, the
Company had no backlog.

COMPETITION

The Company believes there is no other product currently marketed that is
capable of cost-effectively printing variable data in multiple standard or
custom colors with the functionality of existing high-speed, black-

40
<PAGE>

on-white printers. At the present time, there exist digital, low-speed color
printers, offset color presses and high-speed printers that can print in only
one color at a time.

Suppliers to the market compete on the basis of speed, print quality,
functionality, reliability, cost per page and color variety. The Company
competes, in significant part, on the basis of advanced proprietary technology
in the areas of paper handling, ink jet color printing and interface software
which allows the Company's products to print variable data, in multiple
standard or custom colors at high speeds. Products or product improvements
based on new technologies could be introduced by other companies with little
or no advance notice.

Competition in the markets for the Company's products is highly fragmented.
The Xerox 4890 (a similar product is also marketed by Xerox as the DocuTech
390HC) is a spot color printer which prints in black and one color per job
(out of a limited palette). It is capable of printing 92 pages per minute but
does not offer custom colors. BESTE Bunch Systems markets a color offset press
used as a downstream add-on to Oce or IBM high-speed, black-on-white printers.
While it is capable of providing color logos, it does not print variable data,
requires a longer time to set up and requires specialized skills. The use of
this offset press also requires additional processes of negative production
and plate making. Fully installed, the footprint can exceed 30 square feet,
making it impractical for many existing data center installations. In
addition, there are production full process color systems available which
operate at print speeds of up to 70 pages per minute, including the Xeikon
DCP-1 and the Xerox DocuColor 40. These systems have relatively high print
costs per page and operate at much lower speeds than typical production
printing requires, making them impractical for high-speed print jobs.

In addition to direct competition from other firms utilizing high-speed
color technologies, there exists potential direct competition from firms
improving technologies used in low-speed to medium-speed color printers and
indirect competition from firms producing pre-printed forms. Manufacturers of
high-speed, black-on-white printers may also, in time, develop comparable or
more effective color capability within their own products which may render the
Company's products obsolete.

INTELLECTUAL PROPERTY

The Company's ability to compete effectively will depend, in part, on the
ability of the Company to maintain the proprietary nature of its technology.
The Company relies, in part, on proprietary technology, know-how and trade
secrets related to certain aspects of its principal products and operations,
but there can be no assurance that others, including the Company's OEM
customers, may not independently develop the same or similar technology or
otherwise obtain access to the Company's proprietary technology. To protect
its rights in these areas, the Company generally requires its OEM customers,
its suppliers and its employees to enter into nondisclosure agreements. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information. If the Company is unable to maintain the proprietary nature of
its products through nondisclosure agreements or other protection, its
business could be materially adversely affected. The U.S. Patent and Trademark
Office has issued a Notice of Allowance with respect to an initial patent
application relative to the Company's color printing apparatus and the
government issue fee has been paid. In addition, the Company has filed
applications for two additional patents relative to certain enhancements of
Truecolor Systems. The Company has also filed foreign patent applications
seeking patent protection in several foreign countries. There can be no
assurance, however, as to the degree of protection offered by the U.S. patent
which will be issued on the initial application, or as to the likelihood that
the other pending U.S. and foreign patent applications will be approved and
that patents will issue. There can be no assurance that potential competitors,
many of which may have substantially greater resources than the Company and
may have made substantial investments in competing technologies, do not
currently have or will not obtain patents that will prevent, limit or
interfere with the Company's ability to make and sell its products or will not
intentionally infringe on the Company's patents if and when issued. Moreover,
no assurance can be given that Accent Color's technology does not conflict
with existing enforceable patents of others. Although patents may issue to
Accent Color as a result of patent applications it has filed, Accent Color's
technology may fall within the scope of existing enforceable patents of
others. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
its technology or

41
<PAGE>

independent development by others of similar technology. In addition, U.S.
patents which may be obtained by the Company will have no effect outside the
United States and, to the extent the Company obtains foreign patent
protection, the laws of foreign countries may not protect the Company's
proprietary rights to the same extent as do the laws of the U.S. There can be
no assurance that these protections will be adequate.

The Company has an exclusive right to supply products which include
Spectra's ink jet printheads to print color on the black-on-white output from
specified high-speed printers marketed by Xerox, IBM, Oce and certain other
parties. To the extent that wax-based inks and ink jet printheads purchased
from Spectra are covered under patents or licenses, the Company relies on
Spectra's rights under such patents and licenses and Spectra's willingness and
ability to enforce its patents and maintain its licenses. There can be no
assurance that Spectra will be willing or able to enforce its patents and
maintain its licenses and any such unwillingness or inability could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Although the Company believes that its products and technology do not
infringe on any existing proprietary rights of others, there can be no
assurance that third parties will not assert such claims against the Company
in the future or that such future claims will not be successful. The Company
could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief, which
could effectively block the Company's ability to make, use, sell, distribute
or market its products and services in the U.S. or abroad. Such a judgement
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event a claim relating to
proprietary technology or information is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that such a license could be obtained on commercially
reasonable terms, if at all, or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain the necessary licenses or
other rights could preclude the sale, manufacture or distribution of the
Company's products and, therefore, could have a material adverse effect on the
Company's business, financial condition and results of operations. The cost of
responding to any such claim may be material, whether or not the assertion of
such claim is valid. See "Business--Intellectual Property."

FACILITIES

The Company's facilities are located at 800 Connecticut Boulevard in East
Hartford, Connecticut and presently consist of approximately 51,000 square
feet. The Company presently intends to exercise an option to lease an
additional 15,000 square feet at this facility. The Company believes that,
with the exercise of this option, these facilities will meet the Company's
needs for the next 12 months. The Company leases this facility under a lease
that expires in 2000.

PERSONNEL

As of November 14, 1996, the Company employed 118 individuals, of whom 44
employees were engaged in engineering and research, 29 employees in
manufacturing and operations, 11 employees in marketing and sales efforts, 15
employees in quality assurance, and 19 employees were working in an
administrative capacity. In addition, the Company had also engaged 11
independent contractors, of which three were engaged in engineering and
research, six in manufacturing and operations and two in administration. The
Company's employees are not represented by a collective bargaining
organization, and the Company has never experienced a work stoppage. The
Company believes that its relationship with its employees is good.

The Company's future success will further depend on both its ability to
retain key personnel and its ability to attract qualified personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be successful in hiring or retaining them. The inability
of the Company to retain key personnel or attract qualified personnel may have
an adverse effect on the Company's business financing conditions and results
of operations. See "Risk Factors--Dependence on Key Personnel."

42
<PAGE>

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings. The Company
has received a claim asserted by a former investment banker for the Company
for compensation in the form of commissions and warrants to purchase Common
Stock. The Company estimates that its liability regarding this matter would
not exceed approximately $162,000 and warrants to purchase approximately
35,000 and 600 shares of Common Stock at exercise prices of $4.40 per share
and the lesser of $11.00 per share or 110% of the initial public offering
price set forth on the cover page hereof, respectively. While the Company
intends to contest certain aspects of this claim, it does not, in any event,
believe that this claim will have any material adverse effect on its financial
position.

43
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS(1)
---- --- -------- --------
<S> <C> <C> <C>
Richard J. Coburn.............. 65 Chairman of the Board 3
Norman L. Milliard............. 54 President, Chief Executive 3
Officer and Director
Stephen K. Henn................ 33 Vice President, Chief Financial
Officer and Treasurer
Martyn R. Jones................ 40 Vice President
Richard Hodgson(2)............. 79 Director 2
Willard F. Pinney, Jr.(3)...... 53 Secretary and Director 3
Raymond N. Smith(2)............ 66 Director 2
Robert H. Steele(2)(3)......... 57 Director 1
Peter Teufel(3)................ 46 Director 1
</TABLE>
- --------
(1) The Company's Board of Directors is divided into three classes. One class
of directors is elected each year at the annual meeting of stockholders
for a term of office expiring after three years. Each director will serve
until the expiration of his term and thereafter until his successor is
duly elected and qualified.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation Committee.

Richard J. Coburn has been Chairman of the Board since May 1996 and is a co-
founder of the Company. Mr. Coburn served as President of the Company from May
1993 until May 1996 and served as Chief Executive Officer of the Company from
May 1993 until August 1996. From 1991 until 1993, Mr. Coburn worked as an
independent consultant to development stage companies. Mr. Coburn was a co-
founder of KCR Technology, Inc., a manufacturer of high-speed, black-on-white
printers, and served in various roles, both consulting and managerial,
including President from 1977 to 1991. Mr. Coburn was also the founder of
Coburn Technology, Inc., a developer of a xerographic printer product for word
processing, the rights to which were sold to Wang Laboratories, Inc., and
served as its President from 1974 to 1977. From 1968 to 1974, Mr. Coburn was
President of Scan-Optics, Inc., a manufacturer of data capture equipment.
Prior to 1968, Mr. Coburn had served in various engineering management
positions in aerospace over a 14 year period. Mr. Coburn is also a director
and co-founder of Scan-Optics, Inc. Mr. Coburn received his degree in
engineering from Yale University.

Norman L. Milliard has been President of the Company since May 1996, has
been Chief Executive Officer of the Company since August 1996 and was elected
a director of the Company in 1995. Mr. Milliard served as Vice President of
the Company from January 1994 until May 1996. From 1988 through 1993, Mr.
Milliard served as head of the Special Product Group at AEG Schneider
Automation, Inc. (formerly Modicon, Inc.), an industrial automation company,
and as the Director of Engineering and Operations for KCR Technology, a
manufacturer of high-speed, black-on-white printers, from 1982 to 1988. Mr.
Milliard founded two companies in the electronic music field and holds a
number of patents in both the printing and electronic music fields. Mr.
Milliard received his degree in physics, with honors, from The Citadel, the
Military College of South Carolina.

Stephen K. Henn has been Chief Financial Officer and Treasurer of the
Company since September 1995 and has been Vice President since May 1996. From
1993 to 1995, Mr. Henn was an attorney at Murtha, Cullina, Richter and Pinney.
From 1992 to 1993, Mr. Henn was Chief Financial Officer and Manager of Finance
and Administration at Chester Precision Company, a precision parts
manufacturer for the auto industry. From 1991 to 1992, Mr. Henn was
Controller, Treasurer and Chief Financial Officer of the Schiavone
Corporation, a real estate and transportation firm. From 1988 to 1991, Mr.
Henn served as Vice President and Treasurer of CompuDyne Corporation, an
engineering services company, and Treasurer of Corcap, Inc., a diversified
holding company and the parent corporation of CompuDyne. Mr. Henn was a member
of the Board of Directors of

44
<PAGE>

Corcap, Inc. from 1989 to 1994. Mr. Henn received his degree in economics from
the University of Chicago and his JD from the University of Connecticut.

Martyn R. Jones has been Vice President of the Company in charge of Sales,
Marketing and Service since May 1996. He served as Director of Marketing from
November 1995 to May 1996. From 1993 to 1995, Mr. Jones served as Director of
Strategic Planning and Industry Marketing for AEG Schneider Automation, Inc.,
an industrial automation company. Mr. Jones held a variety of marketing and
sales support positions within AEG Schneider's U.S. and European operations
from 1984 to 1992. Mr. Jones received his degree in electrical engineering and
electronics from the University of Manchester Institute of Science and
Technology (UK).

Richard Hodgson became a director of the Company in 1996 and is Chairman of
the Audit Committee. Since 1980, Mr. Hodgson has been a director of McCowan
Associates, Inc., an investment management firm, where he is currently in
charge of technology investment strategies. Mr. Hodgson had previously been
Corporate Senior Vice President of ITT Corporation, a hotels, gaming,
entertainment and information publishing company, where he was worldwide
Product Group Manager for the Engineered Products Group. Prior to joining ITT
in 1968, Mr. Hodgson was President and CEO of Fairchild Camera, where he
initiated Fairchild's entry into the semiconductor industry. Mr. Hodgson is a
co-founder and a Director Emeritus of Intel Corporation, a manufacturer of
microprocessor, communications and semiconductor products, and is also a
director of IBIS Technology Corp., I-Stat Corp., the Aegis Fund and
Continental Capital Corp. Mr. Hodgson received his degree in engineering from
Stanford University and his MBA from Harvard University.

Willard F. Pinney, Jr. has been Secretary of the Company since December 1993
and became a director of the Company in 1996. Mr. Pinney has been a partner
since 1973 in the Connecticut law firm of Murtha, Cullina, Richter and Pinney,
which serves as counsel to the Company. He received his degree in political
science from Yale University and his JD, with honors, from the University of
Michigan Law School.

Raymond N. Smith, a co-founder of the Company, has been a director since its
inception and was Chairman from its inception through April 1996. Mr. Smith,
currently retired, was involved in a variety of sales and management roles in
various real estate development concerns from 1971 to 1992. Mr. Smith was
President of FMS Properties of Naples, Florida, a developer and builder of
retirement communities, from 1983 to 1992. From 1966 to 1970, Mr. Smith was
National Sales Manager, Professional Services Division of Control Data
Systems, Inc., a global systems integrator, and from 1960 to 1965, was an
account manager for IBM. Mr. Smith attended the United States Military Academy
at West Point and the Executive MBA Program at the University of Chicago.

Robert H. Steele became a director of the Company in 1996 and is Chairman of
the Executive Compensation Committee. Since 1992, Mr. Steele has been Senior
Vice President of John Ryan Company, a banking services company, and director
of Merlin Retail Banking Center since 1992. Mr. Steele was President of RHS
Consulting, Inc., a business consulting firm, in 1991. From 1985 to 1990, Mr.
Steele was Chairman and Chief Executive Officer of Dollar Dry Dock Bank of New
York, for which a receiver was appointed in 1992. Mr. Steele also served as
President and CEO of Norwich Savings Society. Mr. Steele is a former U.S.
Congressman from the State of Connecticut and currently serves as a director
of Moore Medical Corp., a pharmaceutical distributor, Scan-Optics, Inc., a
manufacturer of data capture equipment and NLC Insurance Companies. Mr. Steele
received his undergraduate degree from Amherst College and his Master's Degree
from Columbia University and holds an honorary Doctor of Laws from Sacred
Heart University.

Peter Teufel became a director of the Company in 1994. Mr. Teufel is
Managing Director of The Kaizen Institute of Europe, a management consulting
firm, which he co-founded in 1992. From 1979 through 1992, Mr. Teufel was
employed with Canon Inc., a manufacturer of cameras, business machines and
precision optical equipment, where he served as Vice President from 1989 to
1992. Mr. Teufel is a mechanical engineering graduate of the Technical
Institute at Giessen and an industrial engineering graduate of the Technical
Institute at Darmstadt.

The Board of Directors has appointed a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
executive officers of the Company, and an Audit Committee,

45
<PAGE>

which reviews the results and scope of any audits and other services provided
by the Company's independent auditors.

Executive officers of the Company are elected annually by the Board of
Directors and serve at its discretion or until their successors are duly
elected and qualified.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee currently consists of Messrs. Pinney,
Steele and Teufel. Decisions concerning executive compensation are made by the
Board of Directors, primarily upon the recommendation of the Compensation
Committee. During the year ended December 31, 1995, none of the executive
officers of the Company served on the compensation committee of any other
entity. There are no family relationships among executive officer or directors
of the Company. Messrs. Pinney, Smith and Teufel have been parties to certain
transactions with the Company. See "Certain Transactions."

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities to the Company for the fiscal year
ended December 31, 1995 of (i) the chief executive officer and (ii) the
Company's other most highly compensated executive officers whose total salary
and bonus for the year ended December 31, 1995 exceeded $100,000 (the "Named
Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
--------------- -------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(2) SALARY ($) OPTIONS/ SARS (#)
--------------------------- ------- --------------- -------------------
<S> <C> <C> <C>
Richard J. Coburn................... 1995 108,958 --
Chairman 1994 71,042 --
1993 -- --
Norman L. Milliard.................. 1995 133,958 120,000
President and Chief 1994 86,042 --
Executive Officer 1993 -- --
Raymond N. Smith(3)................. 1995 108,958 --
1994 71,042 --
1993 -- --
</TABLE>
- --------
(1) The aggregate amount of Other Annual Compensation in the form of
perquisites and other personal benefits for each of the Named Executive
Officers did not equal or exceed the lesser of $50,000 or 10% of such
individual's total salary and bonus for the fiscal year.
(2) The Company was formed in May 1993 and commenced operations in January
1994. Messrs. Coburn and Smith received no salary in 1993. Mr. Milliard
joined the Company in January 1994.
(3) Until April 30, 1996, Mr. Smith was Chairman of the Company.

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in fiscal 1995. No stock
appreciation rights were granted during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
-------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ------------------
GRANTED FISCAL YEAR BASE PRICE(1) DATE 5%($) 10%($)
---------- ------------ ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Coburn....... -- 0% $ -- -- -- --
Norman L. Milliard...... 75,000(3) 18% 1.19 2/28/05 56,129 142,242
45,000(4) 11% 3.67 10/9/00 45,586 100,734
Raymond N. Smith........ -- 0% -- -- -- --
</TABLE>

46
<PAGE>

- --------
(1) All options were granted at the fair market value on the date of grant as
determined by the Board of Directors.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
reflect the Company's estimates or projections of future Common Stock
prices. There can be no assurance provided to any executive officer or any
other holder of the Company's securities that the actual stock price
appreciation over the term will be at the assumed 5% and 10% levels or at
any other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
(3) Represents incentive stock options that vest ratably on each of February
28, 1996, 1997 and 1998.
(4) Represents non-qualified stock options which are currently exercisable.

AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR AND OPTION VALUES AS OF DECEMBER
31, 1995

None of the Named Executive Officers exercised stock options during the year
ended December 31, 1995. The following table provides information regarding
the number of shares underlying both exercisable and unexercisable stock
options as of December 31, 1995 and the values of unexercised "in-the-money"
options as of that date. An option is "in-the-money" if the per share fair
market value of the underlying share exceeds the option exercise price per
share.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard J. Coburn........... -- -- $ -- $ --
Norman L. Milliard.......... 70,000 50,000 365,100 340,500
Raymond N. Smith............ -- -- -- --
</TABLE>
- --------
(1) There was no public market for the Common Stock at December 31, 1995.
Accordingly, these values have been calculated based on the initial public
offering price of $8.00, less the applicable exercise price.

DIRECTORS' REMUNERATION; ATTENDANCE

Members of the Board of Directors of the Company received no compensation
for their service as directors in 1995. The Company adopted a directors'
compensation package in May 1996, whereby all outside directors receive a
monthly retainer of $500 and a per meeting fee of $500 for each meeting of the
Board of Directors and any committee meetings attended in person by such
director. The Company also reimburses directors for reasonable travel expenses
incurred in order to attend meetings.

Under its 1995 Stock Incentive Plan, the Company established a stock
incentive program for non-employee directors, whereby each received an initial
option to purchase 30,000 shares of Common Stock and will receive an option to
purchase an additional 5,000 shares of Common Stock on the date of the annual
meeting of the Board each year for four years beginning in 1997 as long as the
director remains in office. These options are exercisable at the fair market
value of the shares on the date of grant. Under this program, on May 3, 1996,
the following directors each received options to purchase 30,000 shares at an
exercise price of $4.00 per share: Richard Hodgson, Willard F. Pinney, Jr.,
Raymond N. Smith, Robert H. Steele and Peter Teufel.

The Board of Directors met two times during the previous fiscal year and
acted by the unanimous written consent of its members on three occasions. No
director attended fewer than 75% of the total number of meetings of the Board.

EMPLOYMENT AGREEMENTS

Richard J. Coburn and Norman L. Milliard have entered into employment
agreements (the "Employment Agreements") with the Company effective January
1994. Mr. Coburn's agreement has a five-year term that

47
<PAGE>

expires at the end of 1998. Mr. Milliard's agreement has a three-year term
which is automatically extended each year for an additional one year, subject
to termination before the extension by either party. If the Employment
Agreements are terminated by the Company without "cause" as defined therein,
Mr. Coburn would be entitled to receive his base salary and payment of health
benefits for a period of one year and Mr. Milliard would be entitled to
receive his base salary and payment of health benefits for a period of two
years and would become fully vested in any outstanding options. Mr. Coburn's
current base salary is $120,000, and Mr. Milliard's current base salary is
$140,000.

The Employment Agreements restrict Messrs. Coburn and Milliard from directly
or indirectly competing with the Company through the participation in the
development of any product related to the Company's product or processes
during the term of the agreement and for a period of two years thereafter. The
Employment Agreements do not otherwise restrict Messrs. Coburn and Milliard
from pursuing other business interests that do not directly compete with the
Company.

1995 STOCK INCENTIVE PLAN

In January 1995, the Board of Directors and shareholders of the Company
adopted the 1995 Stock Incentive Plan (the "Stock Plan"). Pursuant to the
Stock Plan, the Board of Directors or a committee thereof may grant options or
other awards for up to 1,500,000 shares of Common Stock. The Stock Plan is
designed to give directors, officers and employees of the Company and other
persons an expanded opportunity to acquire Common Stock in the Company or
receive other long-term incentive remuneration in order that they may
participate in the Company's growth and be motivated to remain with the
Company and promote its further development and success.

The Plan includes provisions for granting both "incentive stock options"
intended to qualify for certain federal tax advantages and "non-statutory
options" which do not qualify for such tax advantages. Qualified incentive
stock options may be granted only to eligible persons who are full-time
employees of the Company while non-statutory options may be granted to any
persons, including directors, consultants and advisors of the Company who, in
the sole opinion of the Board of Directors or a committee thereof are, from
time to time, responsible for the management or growth of all or part of the
business of the Company.

The purchase price under each incentive stock option shall be as determined
by the Board of Directors or a committee thereof but shall not be less than
100% of the fair market value of the shares subject to such option on the date
of grant, provided that such option price shall not be less than 110% of such
fair market value in the case of any stock option granted to a principal
shareholder. The purchase price per share of Common Stock deliverable upon the
exercise of non-statutory options shall be determined by the Committee, but
shall not be less than 85% of the fair market value of the Common Stock on the
date of grant.

Each option granted under the Stock Plan shall become exercisable on such
date or dates and in such amount or amounts as the Board of Directors or a
committee thereof shall determine. To date, all incentive stock options
granted to employees are exercisable with respect to not more than one-third
of the shares subject thereto after the expiration of one year following the
date of its grant, and are exercisable as to an additional one-third of such
shares after the expiration of each of the succeeding two years, on a
cumulative basis, so that such option, or any unexercised portion thereof,
shall be fully exercisable on the third anniversary of the date of its grant.
To date, all non-statutory options are exercisable immediately upon grant.

As of November 15, 1996, incentive stock options to purchase 942,600 shares
of Common Stock and non-statutory options to purchase 347,250 shares of Common
Stock have been granted. All such options have been granted to full-time
employees of the Company, except for (i) options granted to non-employee
directors, as described above, (ii) an option granted in January 1995 to
Murtha, Cullina, Richter and Pinney, counsel to the Company, entitling it to
purchase 30,000 shares of the Company's Common Stock for a period of five
years at an exercise price of $1.19 per share (the fair market value per
share) and (iii) an option granted in April 1996 to a consultant of the
Company entitling him to purchase 2,250 shares of Common Stock of the Company
for five years at an exercise price of $4.00.

48
<PAGE>

CERTAIN TRANSACTIONS

On May 1, 1996, Raymond N. Smith, a director of the Company, entered into a
consulting agreement with the Company under which he will perform services for
the Company in consideration for a quarterly retainer of $21,250. The
consulting agreement requires, among other things, that Mr. Smith be available
for up to 25 hours per month to provide general business and management
advice. In addition to general advisory services, the Company anticipates
using Mr. Smith in certain sales and marketing capacities.

Willard F. Pinney, Jr. is a partner at the law firm of Murtha, Cullina,
Richter and Pinney. Mr. Pinney is also Secretary, director and a shareholder
of the Company. Murtha, Cullina, Richter and Pinney received an option to
purchase 30,000 shares of Common Stock of the Company in 1995 prior to Mr.
Pinney becoming a director. This option was granted to Murtha, Cullina,
Richter and Pinney in recognition of its willingness to modify its traditional
billing practices in order to accommodate the Company's ability to pay for
legal services provided during its formative stage.

Walter R. Keay served as a director of the Company from 1993 through 1995.
Mr. Keay is a principal in the investment banking firm of Knickerbocker
Securities, Inc. ("Knickerbocker"). The Company and Knickerbocker entered into
a Letter Agreement dated January 11, 1994 and a Sales Agency Agreement in
April 1994, both relating to a private offering of Preferred Stock of the
Company. The Company also entered into a Corporate Finance Consulting
Agreement with Knickerbocker in September 1994 and a Sales Agency Agreement
relating to the Company's Series III Debentures. Lastly, the Company entered
into a Termination Agreement dated March 29, 1996 which terminated all of the
above agreements. In 1995, Knickerbocker received a warrant to purchase 15,500
shares of the Company's Series A Preferred Stock exercisable at $5.50 per
share, which will be converted into a warrant to purchase 65,100 shares of
Common Stock at $1.31 per share. In 1996, Knickerbocker received $275,000 and
a warrant to purchase 15,000 shares of the Company's Common Stock, exercisable
at $3.67 per share, pursuant to the above relationships.

During February 1996, the Company completed a private placement of 8.00%
subordinated debentures (the "Series IV Debentures") for net proceeds of
$405,000, of which $240,000 was issued to Peter Teufel. The Series IV
Debentures are non-convertible and bear interest at 8.00% (excluding debt
discount), due August 31, 1996. In addition, each holder received detachable
warrants (the "Series IV Warrants") to purchase Common Stock equal to the
Series IV Debentures' principal amount divided by $3.67. The Series IV
Warrants issued to Mr. Teufel are exercisable into 65,454 shares of Common
Stock at an exercise price of $3.67 per share and expire on February 28, 2001.

Richard Hodgson, a director of the Company, invested $250,000 in the Interim
Financing, for which he received a note in the aggregate principal amount of
$287,500 and a warrant to purchase 3,750 shares of Common Stock.

Elizabeth Steele, the wife of Robert H. Steele, a director of the Company,
invested $100,000 in the Interim Financing and received a note in the
aggregate principal amount of $115,000 and a warrant to purchase 1,500 shares
of Common Stock.

49
<PAGE>

PRINCIPAL SHAREHOLDERS AND KEY PERSONNEL

The following table sets forth certain information as of November 15, 1996
regarding the beneficial ownership of the Company's Common Stock by (i) each
person (or group of affiliated persons) known by the Company to own more than
5% of the outstanding shares of Common Stock, (ii) each of the directors of
the Company, (iii) each of the Named Executive Officers and (iv) all directors
and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES ------------------
BENEFICIALLY PRIOR TO AFTER THE
NAME AND ADDRESS(1) OWNED(2) OFFERING OFFERING
------------------- ------------ -------- ---------
<S> <C> <C> <C>
Peter Teufel(3)(4)............................ 661,713 9.8% 6.8%
Raymond N. Smith(3)........................... 615,969 9.2% 6.3%
Dr. Klaus Werding(5).......................... 585,981 8.6% 6.0%
73 Langasse Strasse
Wetzlar, Germany 6330
Richard J. Coburn............................. 441,969 6.6% 4.6%
Orbis Pension Trustees, Ltd................... 375,000 5.6% 3.9%
1 Connaught Place
London, W2 2DY, England
Norman L. Milliard(6)......................... 205,000 3.0% 2.1%
Willard F. Pinney, Jr.(3)(7).................. 74,796 1.1% *
Robert H. Steele(3)(8)........................ 47,109 * *
Richard Hodgson(3)............................ 30,000 * *
All directors and officers of the Company as a
group (9 persons)(9)......................... 2,161,556 30.5% 21.4%
</TABLE>
- --------
* Less than 1%.
(1) The address of all persons who are executive officers or directors of the
Company is in care of the Company, 800 Connecticut Boulevard, East
Hartford, Connecticut 06108.
(2) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to such shares, subject to
community property laws where applicable. Shares not outstanding but
deemed beneficially owned by virtue of the right of a person or group to
acquire them within 60 days of November 15, 1996 ("currently exercisable
options") are treated as outstanding only for purposes of determining the
amount and percent owned by such person or group. The number of shares of
Common Stock deemed outstanding prior to this offering consists of (i)
4,719,840 shares of Common Stock outstanding as of November 15, 1996, (ii)
1,362,312 shares of Common Stock issuable upon the conversion of all
outstanding shares of Series A Preferred Stock as of the date of this
Prospectus and (iii) 607,626 shares of Common Stock issuable upon the
conversion of the Company's outstanding Series III Debentures upon the
closing of this offering.
(3) Includes 30,000 shares of Common Stock subject to currently exercisable
options granted pursuant to the 1995 Stock Incentive Plan.
(4) Includes 65,454 shares of Common Stock subject to currently exercisable
warrants.
(5) Includes 156,003 shares of Common Stock subject to currently exercisable
warrants.
(6) Includes 70,000 shares of Common Stock subject to currently exercisable
options granted pursuant to the 1995 Stock Incentive Plan.
(7) Includes 30,000 shares of Common Stock subject to currently exercisable
options granted to Murtha, Cullina, Richter and Pinney, counsel to the
Company, of which Mr. Pinney is a partner.
(8) Includes 8,184 shares of Common Stock owned by Mr. Steele's spouse, as to
which he disclaims beneficial ownership.
(9) Includes 335,000 shares of Common Stock subject to currently exercisable
options granted pursuant to the 1995 Stock Incentive Plan and 65,454
shares of Common Stock subject to currently exercisable warrants.

50
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, no par value, and 500,000 shares of Preferred Stock, no par
value. The following statements are brief descriptions of the securities of
the Company, including summaries of certain provisions in the Company's
Restated Certificate of Incorporation, its Bylaws and the laws of the State of
Connecticut and are qualified in their entirety by reference to such
documents, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.

COMMON STOCK

As of November 15, 1996 there are 6,689,778 shares of Common Stock
outstanding (including 1,362,312 shares of Common Stock issuable upon the
automatic conversion of 324,360 outstanding shares of Series A Preferred Stock
as of the date of this Prospectus and 607,626 shares of Common Stock issuable
upon the automatic conversion of outstanding Series III Debentures and accrued
interest thereon as of the closing of this offering). In addition, 1,204,503
shares of Common Stock are reserved for issuance upon exercise of certain
outstanding warrants, all of which are currently exercisable, and 1,289,850
shares of Common Stock are reserved for issuance upon exercise of stock
options granted under the Company's 1995 Stock Incentive Plan.

Holders of Common Stock are entitled to receive ratably such dividends as
may be declared on the Common Stock by the Company's Board of Directors out of
funds legally available therefor, subject to the prior rights of holders of
Preferred Stock. See "Dividend Policy." All of the outstanding shares of
Common Stock are, and the shares to be issued pursuant to this offering will
be, when issued, fully paid and non-assessable. Holders of Common Stock are
entitled to one vote for each share held of record with respect to the
election of directors and other matters submitted for a vote of shareholders.
Holders of shares of Common Stock are not entitled to cumulative voting. In
the event that any shares of Preferred Stock are issued and outstanding,
holders of Preferred Stock are entitled to one vote for each share of Common
Stock into which such Preferred Stock may be convertible and such holders of
Preferred Stock vote together with holders of Common Stock as a single class
on the election of directors and all other matters submitted for a vote of
shareholders, except as otherwise provided by law. Accordingly, subject to the
voting rights of holders of Preferred Stock, as such rights may exist from
time to time, shareholders casting a plurality of the votes cast by
shareholders entitled to vote in an election of directors may elect all of the
directors standing for election.

Upon the liquidation, dissolution or winding up of the Company, the
shareholders of Common Stock are entitled to receive ratably the net assets of
the Company available after the payment of all debts and other liabilities and
subject to the prior rights of any class of Preferred Stock outstanding from
time to time. Shareholders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
shareholders of Common Stock are subject to the rights of the shareholders of
Preferred Stock.

PREFERRED STOCK

There are no shares of Preferred Stock outstanding as of the date of this
prospectus and no outstanding rights to acquire shares of Preferred Stock. All
shares of Preferred Stock previously issued by the Company have been converted
automatically upon the date hereof into shares of Common Stock and any
previously outstanding rights to acquire Preferred Stock shall, hereafter,
constitute rights to purchase only shares of Common Stock. All such converted
shares of Preferred Stock are deemed to be authorized and unissued and may be
reissued. Consequently, the Board of Directors is authorized to issue up to
500,000 shares of Preferred Stock in one or more series and to fix the rights,
preferences, voting rights, privileges and restrictions of each such series,
including dividend rights, conversion rights, redemption rights and
liquidation preferences, all without further vote or action by the
stockholders of the Company. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the shareholders and may adversely affect the voting
and other rights of holders of Common Stock. Holders of

51
<PAGE>

any series of Preferred Stock which shall have the right to convert into
shares of Common Stock, shall have as many votes for each share of Preferred
Stock held as the number of shares of Common Stock into which such share of
Preferred Stock may be converted with respect to all matters submitted to
shareholders. Such holders shall vote together with the holders of Common
Stock, as a single class, except as otherwise provided by law. Pursuant to
Connecticut law, the holders of Preferred Stock and the holders of Common
Stock are entitled to vote as separate classes with respect to certain
mergers, sales of all or substantially all of the assets of the Company and
certain amendments to the Restated Certificate of Incorporation of the Company
which affect or are detrimental to the particular class.

ANTI-TAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation contains provisions that
could discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company's Common Stock. The Restated Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only upon the affirmative vote of holders of
at least two-thirds of the shares of capital stock of the Company issued and
outstanding and entitled to vote. In addition, since the Board of Directors is
authorized to issue shares of Common Stock and Preferred Stock any such
issuance could dilute and adversely affect various rights of the holders of
shares of Common Stock and, in addition, could be used to discourage an
unsolicited attempt to acquire control of the Company.

The Company is subject to the Connecticut Stock Corporation Act (the
"Connecticut Act"), some provisions of which prohibit a publicly held
Connecticut corporation from engaging in a "business combination" (including
the issuance of equity securities which have an aggregate market value of 5%
or more of the total market value of the outstanding shares of the Company)
with an "interested shareholder" (as defined in the Connecticut Act) for a
period of five years from the date of the shareholder's purchase of stock
unless approved in a prescribed manner. The application of this section could
prevent a change of control of the Company. Generally, approval is required by
the Board of Directors and by a majority of the non-employee directors of the
Company and by 80% of the outstanding shares of the Company and two-thirds of
the voting power of shares other than shares held by the interested
shareholder. There can be no assurance that these provisions will not prevent
the Company from entering into a business combination that otherwise would be
beneficial to the Company. The Connecticut Act also requires that any action
of the stockholders of the Company taken by written consent without a meeting
must be unanimous.

TRANSFER AGENT AND REGISTRAR

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

52
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 9,689,778 shares of
Common Stock outstanding. Of these shares, the 3,000,000 shares to be sold in
this offering will be freely tradeable in the public market without
restriction under the Securities Act, unless they are purchased by an
"affiliate" of the Company, as that term is defined in Rule 144 promulgated
under the Securities Act.

SALES OF RESTRICTED SHARES

The remaining 6,689,778 shares are "restricted securities" as defined by
Rules 144 or 701 (the "Restricted Shares"). Restricted securities may be sold
in the public market only if they are registered under the Securities Act or
if they qualify for an exemption from registration under Rules 144, 144(k) or
701 under the Securities Act. Of the 6,689,778 Restricted Shares, 414,738
shares may be currently sold under Rule 144(k). An additional 2,745,312 shares
will become eligible for sale 90 days after completion of this offering
pursuant to Rule 144. The remaining 3,529,728 shares will be eligible for sale
upon the expiration of their respective two-year holding periods subject to
the conditions of Rule 144. Substantially all of the Restricted Shares are
subject to the lock-up agreements described below. Upon the expiration of the
lock-up agreements, 3,418,216 of the 6,689,778 Restricted Shares may be sold
pursuant to Rule 144, subject in some cases to certain volume restrictions
imposed thereby.

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
for at least two years is entitled to sell, within any three-month period, a
number of such securities that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 96,898 shares, based on the
number of shares to be outstanding after this offering) or the average weekly
trading volume in the public market during the four calendar weeks preceding
the filing of the seller's Form 144, provided certain requirements regarding
availability of public information concerning the Company, manner of sale and
notice of sale are satisfied. A person who is not an affiliate, has not been
an affiliate within three months prior to the sale and has beneficially owned
the restricted securities for at least three years is entitled to sell such
shares under Rule 144(k) without regard to any of the limitations described
above. Rule 144 also provides that affiliates who are selling shares that are
not restricted securities must nonetheless comply with the same restrictions
applicable to restricted securities with the exception of the holding period
requirement. The two- and three-year holding periods described above do not
begin to run until the full purchase price or other consideration is paid by
the person acquiring the restricted securities from the issuer or an affiliate
of the issuer and may include the holding period of a prior owner who is not
an affiliate of the issuer. The Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 to become eligible for resale in the public market. This
proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate resale following expiration of the lock-up agreements
described below. No assurance can be given concerning whether or when the
proposal will be adopted by the Securities and Exchange Commission.

Securities issued in reliance on Rule 701 are also Restricted Shares and,
beginning approximately 90 days after the date of this Prospectus, may be
resold by persons other than affiliates of the Company subject only to the
manner of sale provisions of Rule 144 and may be resold by affiliates under
Rule 144 without compliance with its two-year holding period requirement.
Outstanding options to purchase 398,750 shares of Common Stock were fully
vested as of November 15, 1996, substantially all of which are subject to 180-
day lock-up agreements.

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock issued or
issuable under the Stock Plan. The registration statements are expected to be
filed as soon as practicable after the period ending 180 days after the date
of this Prospectus and will become effective immediately upon filing. Shares
covered by the registration statements will be eligible for resale in the
public market after the effective date of the registration statements.

53
<PAGE>

As of the consummation of this offering, holders of 4,892,778 shares of
Common Stock will have rights to require the Company in certain circumstances
to register such shares for sale under the Securities Act. See "--Registration
Rights."

Prior to this offering there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that
market sales or the availability for sale of such shares will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial numbers of shares in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through a sale of its equity securities. See "Risk
Factors--No Prior Public Market; Possible Volatility of Stock Price."

LOCK-UP AGREEMENTS

The executive officers and directors of the Company and certain stockholders
and option holders, who, upon the closing of this offering, will beneficially
own an aggregate of 5,571,409 shares of Common Stock and options and warrants
to purchase 2,342,784 shares of Common Stock have agreed that they will not,
without the prior written consent of Cowen & Company, sell, offer, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for any shares of Common Stock for a period
of 180 days after the date of this Prospectus.

REGISTRATION RIGHTS

The Company has granted several registration rights applicable, as of the
date hereof, to an aggregate of 4,892,778 shares of Common Stock. These rights
apply to (i) shares of Common Stock received by former holders of Preferred
Stock on the automatic conversion of their shares of Preferred Stock on the
date of this Prospectus, (ii) shares of Common Stock held by former holders of
the Company's Series III Debentures converted automatically upon the closing
of this offering, (iii) shares of Common Stock received upon the exercise of
warrants initially issued to the holders of Series III Debentures, the holders
of Series IV Debentures, former placement agents to the Company and the
holders of the Interim Notes, (iv) shares of Common Stock which may be
acquired by Xerox Corporation upon the exercise of its warrant to purchase
Common Stock and (v) shares of Common Stock sold by the Company to certain
investors. In general, each of these registration rights is set forth in and
governed by a registration rights agreement which provides the holders of such
rights with the opportunity to require the Company, on one occasion, (and for
certain shareholders, two occasions) to register their shares for public sale
(a "required registration right"). However, no registration is permitted for
at least six months following this offering or within six months of any other
registration of shares for sale by the Company or its stockholders. These
registration rights agreements also provide for certain incidental or "piggy-
back" rights entitling holders of such rights to request the registration of
their shares for public sale together with shares of Common Stock for which
the Company may elect to file a registration statement. Each required
registration right may only be exercised by holders of a majority of the
shares then entitled to registration pursuant to such right and the Company
would then be required to use its best efforts to effect any such
registration. In addition, if the Company proposes to register any of its
Common Stock either for its own account or for the account of other
shareholders, the Company is required to notify the holders of piggy-back
rights and, subject to certain limitations, to include in such registration
shares of Common Stock requested to be included therein by such holders. The
Company is generally obligated to bear the expenses, other than underwriting
discounts and sales commissions, of all of these registrations.

54
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of the Underwriters, for whom Cowen & Company and Janney Montgomery Scott Inc.
are acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite the name of such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Cowen & Company................................................. 1,170,000
Janney Montgomery Scott Inc. ................................... 780,000
Bear, Stearns & Co. Inc. ....................................... 70,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 70,000
A.G. Edwards & Sons, Inc. ...................................... 70,000
Hambrecht & Quist LLC........................................... 70,000
Lehman Brothers Inc. ........................................... 70,000
Montgomery Securities........................................... 70,000
J.P. Morgan Securities Inc. .................................... 70,000
Oppenheimer & Co., Inc. ........................................ 70,000
Prudential Securities Incorporated.............................. 70,000
Robertson, Stephens & Company LLC............................... 70,000
Advest, Inc. ................................................... 35,000
Coburn & Meredith Inc. ......................................... 35,000
Crowell, Weedon & Co. .......................................... 35,000
Dain Bosworth Incorporated...................................... 35,000
Gerard Klauer Mattison & Co., LLC............................... 35,000
Gruntal & Co., Incorporated..................................... 35,000
McDonald & Company Securities, Inc. ............................ 35,000
Punk, Ziegel & Knoell........................................... 35,000
Tucker Anthony Incorporated..................................... 35,000
Unterberg Harris................................................ 35,000
---------
Total......................................................... 3,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
closing certificates, opinions and letters from the Company and its counsel
and independent auditors. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the shares of Common Stock being
offered hereby (other than those covered by the over-allotment option
described below) if any of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain dealers at such price
less a concession not in excess of $0.31 per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $0.10 per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Representatives.

The Company has granted the Underwriters an option exercisable for up to 30
days after the date of this Prospectus to purchase up to an aggregate of
450,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of

55
<PAGE>

shares to be purchased by each of them as shown in the foregoing table bears
to the 3,000,000 shares of Common Stock offered hereby. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the 3,000,000 shares of Common Stock offered hereby.

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act and to contribute
to payments the Underwriters may be required to make in respect thereof.

The Company, the Company's executive officers and directors and certain
other stockholders and option holders of the Company have agreed that they
will not, without the prior written consent of Cowen & Company, sell, offer,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale--Lock-up Agreements."

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of the shares offered hereby to any account over which
they exercise discretionary authority.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined by
negotiation among the Company and the Representatives. Among the factors
considered in such negotiations were the prevailing market conditions, the
market prices of securities of publicly traded companies engaged in activities
similar to those of the Company, the Company's financial and operating history
and condition, estimates of the business potential of the Company, the present
state of the Company's development, and other factors deemed relevant.

LEGAL MATTERS

The validity of the shares offered hereby and certain other legal matters
will be passed upon for the Company by Murtha, Cullina, Richter and Pinney of
Hartford and New Haven, Connecticut. Certain legal matters will be passed upon
for the Underwriters by Testa, Hurwitz and Thibeault, LLP of Boston,
Massachusetts.

Willard F. Pinney, Jr., a partner of Murtha, Cullina, Richter and Pinney, is
Secretary and Director and a shareholder of the Company. Mr. Pinney holds
14,796 shares of Common Stock of the Company and, as a director of the
Company, options to purchase 30,000 shares of Common Stock. Murtha, Cullina,
Richter and Pinney holds an option to purchase 30,000 shares of Common Stock
of the Company. See "Certain Transactions" for a description of each of these
options.

EXPERTS

The financial statements of the Company as of September 30, 1996, December
31, 1995 and 1994 and for the period ended September 30, 1996, the two years
ended December 31, 1995 and 1994 and for the period from inception (May 21,
1993) through December 31, 1993 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

56
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (together with all
amendments, exhibits, annexes and schedules thereto, the "Registration
Statement") under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and to which reference is hereby made. For
further information with respect to the Company and such Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as part of the Registration Statement. Statements contained in
this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance
to the copy of such contract or document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
such reference to such exhibits. The Registration Statement, including
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661. Copies also may be obtained from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Company is
required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.

The Company intends to furnish to its shareholders annual reports containing
consolidated Financial Statements audited by an independent public accounting
firm. In addition, the Company intends to furnish stockholders quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.

57
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1994, 1995 and September 30, 1996 and
pro forma September 30, 1996 (unaudited)................................. F-3
Statements of Operations for the period from inception (May 21, 1993)
through December 31, 1993 and for the years ended December 31, 1994 and
1995, for the nine months ended September 30, 1995 (unaudited), for the
nine months ended September 30, 1996 and for the period from inception
(May 21, 1993) through September 30, 1996................................ F-4
Statements of Cash Flows for the period from inception (May 21, 1993)
through December 31, 1993 and for the years ended December 31, 1994 and
1995, for the nine months ended September 30, 1995 (unaudited), for the
nine months ended September 30, 1996 and for the period from inception
(May 21, 1993) through September 30, 1996................................ F-5
Statement of Changes in Shareholders' Deficit for the period from incep-
tion (May 21, 1993) through December 31, 1995 and for the nine months
ended September 30, 1996................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Accent Color Sciences, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in shareholders' deficit present
fairly, in all material respects, the financial position of Accent Color
Sciences, Inc. (a development stage company) at September 30, 1996, December
31, 1995 and 1994, and the results of its operations and its cash flows for
the nine months ended September 30, 1996, the years ended December 31, 1995
and 1994, the period from inception (May 21, 1993) through December 31, 1993,
and for the period from inception (May 21, 1993) through September 30, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company and has a net
working capital and shareholders' deficit due to recurring net losses which
raises substantial doubt about the Company's ability to continue as a going
concern. The Company's plans in regard to these matters are also described in
Note 1. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Price Waterhouse LLP

Hartford, CT
November 1, 1996

F-2
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
---------------------- SEPTEMBER 30, 1996
1994 1995 1996 (NOTE 2)
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................... $ 164,881 $ 967 $ 1,406,053 $ 1,406,053
Accounts receivable...... -- -- 651,854 651,854
Due from officer (Note
11)..................... -- -- 25,500 25,500
Inventories (Notes 2 and
4)...................... -- -- 2,301,021 2,301,021
Prepaid expenses and
other assets (Note 2)... 52,390 8,857 843,158 721,464
---------- ---------- ----------- -----------
Total current assets... 217,271 9,824 5,227,586 5,105,892
Fixed assets, net (Notes 2
and 3).................... 25,306 488,060 2,455,149 2,455,149
Other assets, net (Note
2)........................ 3,260 230,231 4,027 4,027
---------- ---------- ----------- -----------
Total assets........... $ 245,837 $ 728,115 $ 7,686,762 $ 7,565,068
========== ========== =========== ===========
LIABILITIES AND SHAREHOLD-
ERS' DEFICIT
Current liabilities:
Notes payable (Note 5)... $ -- $ 50,000 $ 500,000 $ 500,000
Series III Debentures,
net of discount (Note
5)...................... -- -- 1,968,284 --
Obligation under capital
leases (Note 8)......... -- -- 47,253 47,253
Accounts payable......... 123,638 916,517 2,460,249 2,460,249
Accrued expenses......... 156,188 334,820 756,947 562,460
Due to officers (Note
11)..................... 23,068 20,711 -- --
Customer advances and de-
posits (Note 2)......... -- 550,000 1,387,400 1,387,400
Deferred revenue (Note
2)...................... -- -- 900,000 900,000
---------- ---------- ----------- -----------
Total current liabili-
ties.................. 302,894 1,872,048 8,020,133 5,857,362
---------- ---------- ----------- -----------
Obligation under capital
leases (Note 8)........... -- -- 135,688 135,688
Long-term debt, net of dis-
count (Note 5)............ -- -- 1,758,577 1,758,577
Series III Debentures, net
of discount (Note 5)...... -- 1,945,117 -- --
Other long-term liabili-
ties...................... -- 74,911 145,144 145,144
---------- ---------- ----------- -----------
Total non-current lia-
bilities.............. -- 2,020,028 2,039,409 2,039,409
---------- ---------- ----------- -----------
Commitments and
contingencies (Notes 8,
11, 12 and 13)
Shareholders' deficit
(Notes 6 and 14):
Preferred stock, no par
value, 500,000 shares
authorized, 249,360,
324,360, 324,360 and
0 shares issued and
outstanding............. 1,090,574 1,430,634 1,430,634 --
Common stock, no par
value, 25,000,000 shares
authorized, 1,797,000,
2,094,840, 4,719,840 and
6,679,758 shares issued
and outstanding......... 51,300 821,291 10,419,367 13,891,078
Deficit accumulated dur-
ing the development
stage................... (1,198,931) (5,415,886) (14,222,781) (14,222,781)
---------- ---------- ----------- -----------
Total shareholders'
deficit............... (57,057) (3,163,961) (2,372,780) (331,703)
---------- ---------- ----------- -----------
Total liabilities and
shareholders' deficit
...................... $ 245,837 $ 728,115 $ 7,686,762 $ 7,565,068
========== ========== =========== ===========
</TABLE>

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

F-3
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(MAY 21, 1993) FOR THE YEAR FOR THE NINE MONTHS (MAY 21, 1993)
THROUGH ENDED DECEMBER 31, ENDED SEPTEMBER 30, THROUGH
DECEMBER 31, ------------------------ ------------------------ SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
-------------- ----------- ----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ -- $ -- $ -- $ -- $ -- $ --
Costs and expenses:
Costs of production.... -- -- -- -- 570,301 570,301
Research and
development........... 19,000 805,357 3,050,534 2,454,708 5,088,646 8,963,537
Marketing, general
and administrative.... 26,398 336,368 1,002,869 641,426 2,870,058 4,235,693
Related party
administrative expense
(Note 11)............. -- -- 80,260 -- 25,000 105,260
-------- ----------- ----------- ----------- ----------- ------------
45,398 1,141,725 4,133,663 3,096,134 8,554,005 13,874,791
-------- ----------- ----------- ----------- ----------- ------------
Other (income) expense:
Interest expense....... -- 11,808 83,292 35,561 322,362 417,462
Interest income........ -- -- -- -- (69,472) (69,472)
-------- ----------- ----------- ----------- ----------- ------------
-- 11,808 83,292 35,561 252,890 347,990
-------- ----------- ----------- ----------- ----------- ------------
Net loss................ $(45,398) $(1,153,533) $(4,216,955) $(3,131,695) $(8,806,895) $(14,222,781)
======== =========== =========== =========== =========== ============
Unaudited pro forma net
loss per common share
(Note 2)............... $ (.66) $ (1.28)
=========== ===========
Unaudited pro forma
weighted average common
shares outstanding
(Note 2)............... 6,163,341 6,670,152
=========== ===========
</TABLE>

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

F-4
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MAY 21, (MAY 21,
1993) FOR THE YEAR FOR THE NINE MONTHS 1993)
THROUGH ENDED DECEMBER 31, ENDED SEPTEMBER 30, THROUGH
DECEMBER 31, ------------------------ ------------------------ SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
------------ ----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(45,398) $(1,153,533) $(4,216,955) $(3,131,695) $(8,806,895) $(14,222,781)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 72 3,116 111,127 38,123 520,049 634,364
Write-off of deferred offering
costs............................... -- -- 47,264 47,264 -- 47,264
Options granted for services......... -- -- 18,400 18,400 -- 18,400
Debenture issued for services........ -- -- 50,000 50,000 -- 50,000
Compensation expense related to
options issued...................... -- -- -- -- 16,285 16,285
Loss on disposal of fixed assets..... -- -- 9,378 738 72,564 81,942
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable and amount due
from officer........................ -- -- -- (150,000) (677,354) (677,354)
Inventories.......................... -- -- -- -- (2,301,021) (2,301,021)
Prepaid expenses and other assets.... -- (5,126) (3,731) (12,241) (712,607) (721,464)
Accounts payable and accrued
expenses............................ 18,269 261,557 793,990 772,307 1,965,859 3,039,675
Due to officers...................... 6,082 16,986 (2,357) (2,357) (20,711) --
Customer advances and deposits....... -- -- 550,000 450,000 837,400 1,387,400
Deferred revenue..................... -- -- -- -- 900,000 900,000
Other long-term liabilities.......... -- -- 74,911 35,571 53,947 128,858
-------- ----------- ----------- ----------- ----------- ------------
Net cash used in operating
activities.......................... (20,975) (877,000) (2,567,973) (1,883,890) (8,152,484) (11,618,432)
-------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets... -- -- -- -- 5,524 5,524
Purchases of fixed assets............ (538) (27,857) (525,718) (267,607) (2,147,810) (2,701,923)
Cost of patent....................... -- (3,359) (1,207) (1,207) -- (4,566)
-------- ----------- ----------- ----------- ----------- ------------
Net cash used in investing
activities.......................... (538) (31,216) (526,925) (268,814) (2,142,286) (2,700,965)
-------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease
obligations......................... -- -- -- -- (60,188) (60,188)
Proceeds from issuance of
debentures.......................... -- -- 1,789,333 1,549,184 393,218 2,182,551
Proceeds from issuance of warrants... -- -- 56,631 48,978 138,032 194,663
Proceeds from issuance of common
stock............................... 21,800 29,500 -- -- 9,460,044 9,511,344
Proceeds from exercise of warrants... -- -- 694,960 -- -- 694,960
Net proceeds from issuance of
preferred stock through offerings
and conversion of debt.............. -- 1,090,574 340,060 340,060 -- 1,430,634
Increase (decrease) in notes
payable............................. -- -- 50,000 50,000 (50,000) --
Increase in long-term debt........... -- -- -- -- 2,223,750 2,223,750
Deferred offering costs.............. -- (47,264) -- -- -- (47,264)
Repayment of debentures.............. -- -- -- -- (405,000) (405,000)
-------- ----------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities.......................... 21,800 1,072,810 2,930,984 1,988,222 11,699,856 15,725,450
-------- ----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................... 287 164,594 (163,914) (164,482) 1,405,086 1,406,053
Cash and cash equivalents at
beginning of period................. -- 287 164,881 164,881 967 --
-------- ----------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of
period.............................. $ 287 $ 164,881 $ 967 $ 399 $ 1,406,053 $ 1,406,053
======== =========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE
CASH PAID FOR:
Interest............................. $ -- $ -- $ -- $ -- $ 86,824 $ 86,824
Income taxes......................... -- 250 250 250 250 750
NON-CASH INVESTING ACTIVITIES:
Capital lease obligations of $243,129
were incurred during the nine months
ended September 30, 1996,
reflecting new equipment leases
</TABLE>

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

F-5
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING
COMMON STOCK PREFERRED STOCK THE
--------------------- ------------------ DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STAGE TOTAL
--------- ----------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sale...... 3,900 $ 21,800 -- $ -- $ -- $ 21,800
Net loss................ -- -- -- -- (45,398) (45,398)
--------- ----------- ------- ---------- ------------ -----------
December 31, 1993....... 3,900 21,800 -- -- (45,398) (23,598)
Stock split (Note 6).... 1,751,100 -- -- -- -- --
Conversion of debentures
(Note 5)............... -- -- 74,360 371,804 -- 371,804
Proceeds from sale...... -- -- 160,000 643,770 -- 643,770
Conversion of promissory
notes (Note 11)........ 42,000 50,000 -- -- -- 50,000
Reclassification........ -- (20,500) -- -- -- (20,500)
Shares issued for
services (Note 6)...... -- -- 15,000 75,000 -- 75,000
Net loss................ -- -- -- -- (1,153,533) (1,153,533)
--------- ----------- ------- ---------- ------------ -----------
December 31, 1994....... 1,797,000 51,300 249,360 1,090,574 (1,198,931) (57,057)
Proceeds from sale (Note
6)..................... -- -- 75,000 340,060 -- 340,060
Exercise of warrants
(Note 5)............... 297,840 694,960 -- -- -- 694,960
Options granted to
service provider....... -- 18,400 -- -- -- 18,400
Warrants issued with
debt (Note 5).......... -- 56,631 -- -- -- 56,631
Net loss................ -- -- -- -- (4,216,955) (4,216,955)
--------- ----------- ------- ---------- ------------ -----------
December 31, 1995....... 2,094,840 821,291 324,360 1,430,634 (5,415,886) (3,163,961)
Warrants issued with
debt (Note 5).......... -- 138,032 -- -- -- 138,032
Proceeds from sale (Note
6)..................... 2,625,000 9,460,044 -- -- -- 9,460,044
Net loss................ -- -- -- -- (8,806,895) (8,806,895)
--------- ----------- ------- ---------- ------------ -----------
September 30, 1996...... 4,719,840 $10,419,367 324,360 $1,430,634 $(14,222,781) $(2,372,780)
========= =========== ======= ========== ============ ===========
</TABLE>

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

F-6
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

1. FORMATION AND OPERATIONS OF THE COMPANY

Accent Color Sciences, Inc. (the "Company") was incorporated in Connecticut
in May 1993. The Company was initially formed to design, develop, test and
manufacture high-speed, color printers to attach to high-speed, black-on-white
printers. The Company is considered a development stage company as defined in
Statement of Financial Accounting Standards No. 7.

Development and testing of a prototype began in January 1994, with a "proof-
of-concept" system developed in November 1994. During 1995, the Company began
negotiations with major original equipment manufacturers ("OEMs") to enter
into formal development relationships. At the same time, the Company
accelerated its engineering and development activities as its efforts were
focused on designing and building the next generation prototypes which were
completed in 1995. Also in 1995, the Company and IBM entered into a letter of
intent for the development of three prototype systems, and in August 1995, the
Company and Xerox entered into a memorandum of understanding for the
development of two prototype systems. In November 1995, the Company and Oce
(then Siemens Nixdorf Printing Systems) executed a memorandum of understanding
for the development of two prototype systems. Through September 30, 1996, the
Company had received $1.5 million for the delivery of prototype machines.
Through September 30, 1996, $914,000 had been offset against research and
development expense.

Management's plans for funding future operations include a private financing
completed in October 1996 (Note 5) and a planned initial public offering of
common stock. Additionally, the Company believes it will be successful in the
sale of production units to the OEMs. The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company is a development stage company and has a net working capital and
shareholders' deficit due to recurring net losses which raises substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies followed in the preparation of these
financial statements are as follows:

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.

Revenue Recognition

Revenue is recognized upon customer acceptance. Until such time that the
Company has adequate information to estimate future returns and customer
acceptance, revenue will be deferred from the date of product shipment until
final customer acceptance, which will be at the end of the warranty period. As
of September 30, 1996, the Company has deferred revenue of $900,000 related to
products shipped.

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks, as well as
investments with original maturities of less than 90 days.

F-7
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Inventories

Costs of materials purchased for specific research and development projects
have been charged to research and development expense as incurred. Inventories
purchased for the production of printer systems which will be sold to
customers have been capitalized. Inventories are carried at the lower of cost
or market, determined by the first-in, first-out method.

Vendor Deposits

Included in prepaid expenses and other assets at September 30, 1996 are
deposits of $359,728 which represent payments in advance of receipt of goods.

Fixed Assets

Fixed assets are stated at cost and are depreciated on a straight-line basis
over the estimated useful lives of the assets, which are between three and
five years. Leasehold improvements are amortized over the shorter of the term
of the lease or the useful life of the asset.

Patent

Patent costs of $3,359, $4,566 and $4,566 at December 31, 1994, 1995 and
September 30, 1996, respectively, are capitalized as incurred and are
amortized on a straight-line basis over the shorter of the legal term or
estimated useful life. Accumulated amortization was $99, $338 and $539 at
December 31, 1994, 1995 and September 30, 1996, respectively.

Deferred Offering Costs

Included in prepaid expenses and other assets at December 31, 1994 are
$47,264 of offering costs which were deferred in contemplation of a Common
Stock offering. The offering was not completed and such costs were expensed in
1995. At September 30, 1996, offering costs of $295,640 have been accrued and
deferred in anticipation of an initial public offering of Common Stock.

Deferred Debt Issuance Costs

Included in other assets are deferred debt issuance costs of $0, $278,157
and $278,157 at December 31, 1994, 1995 and September 30, 1996, respectively,
which are being amortized using the effective interest method over the term of
the related debt. Accumulated amortization was $0, $52,154 and $156,463 at
December 31, 1994, 1995 and September 30, 1996, respectively.

Income Taxes

The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.

Research and Development Expenditures

Research and development expenditures are charged to expense as incurred.

F-8
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Customer Advances and Deposits

Customer Advances Under Research and Development Agreements

Amounts advanced pursuant to customer sponsored research and development
agreements are recognized as a liability until certain obligations (as
defined in the agreements, including delivery and acceptance of certain
test units) under the agreements have been met. Advances of $0, $550,000
and $600,000 have been deferred as of December 31, 1994, 1995 and September
30, 1996, respectively. When the obligations are met, the amounts are
offset against research and development expense. Amounts offset against
research and development expense were $0, $0 and $614,000 for the period
ended December 31, 1993 and for the years ended December 31, 1994 and 1995,
respectively, and $0 (unaudited) and $300,000 for the nine months ended
September 30, 1995 and 1996, respectively.

Customer Deposits

Based on the Company's sales contracts with certain customers, the
Company is entitled to a percentage of the sales price upon receipt of
certain firm purchase orders. Customer deposits of $0, $0 and $787,400 have
been deferred at December 31, 1994, 1995 and September 30, 1996,
respectively.

Stock-Based Compensation

The Company applies APB Opinion 25 and related interpretations in accounting
for its Stock Incentive Plan. Additional disclosures required under Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation," are
included in Note 7, Stock Incentive Plan.

Unaudited Pro Forma Financial Data

The outstanding 8.00% Convertible Subordinated Debentures (the "Series III
Debentures"), including accrued interest (see Note 5), will convert upon the
closing of a planned initial public offering of Common Stock and the Series A
Convertible Voting Preferred Stock (the "Series A Preferred Stock," see Note 6
) will convert to Common Stock upon the effectiveness of a planned initial
public offering of Common Stock. The unaudited pro forma net loss per common
share data included in the statements of operations for the year ended
December 31, 1995 and for the nine months ended September 30, 1996 give effect
to this conversion as if the shares were outstanding at the beginning of the
respective periods, and as if the interest, amortization of discount and
amortization of deferred debt financing expenses associated with the Series
III Debentures were not incurred.

In determining pro forma weighted average common shares outstanding, common
share equivalents are excluded from the computation as their effect is anti-
dilutive, except that, pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, Common Stock options and warrants issued and
Common Stock, convertible debt and convertible preferred stock sold in the
twelve months preceding the initial filing date of the public offering and
through the effective date have been included in the calculation as if
outstanding for all periods presented using the treasury stock method and at
the initial public offering price of $8.00 per share.

The unaudited pro forma balance sheet at September 30, 1996 includes the
conversion of the outstanding Series III Debentures, including accrued
interest and the conversion of the Series A Preferred Stock and the following:
(i) reduction in Common Stock carrying value for the amount of discount
included in the carrying value of the Series III Debentures, and (ii)
reduction of Common Stock carrying value for the write-off of the unamortized
portion of the deferred debt issuance costs.

Interim Financial Statements

The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1996.

F-9
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. FIXED ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
<S> <C> <C> <C>
Equipment................................... $11,177 $172,160 $ 560,030
Computers................................... 9,873 164,435 777,986
Furniture and fixtures...................... 6,498 95,850 354,137
Leasehold improvements...................... 742 54,563 594,509
Purchased software.......................... 105 57,725 311,767
Capital leases--equipment................... -- -- 243,129
------- -------- ----------
28,395 544,733 2,841,558
Less: accumulated depreciation and
amortization............................... 3,089 56,673 386,409
------- -------- ----------
$25,306 $488,060 $2,455,149
======= ======== ==========
</TABLE>

Amortization expense for capital leases amounted to $0, $0 and $0 for the
period ended December 31, 1993 and for the years ended December 31, 1994 and
1995, respectively, and $0 (unaudited) and $26,786 for the nine months ended
September 30, 1995 and 1996, respectively.

Depreciation expense was $72, $3,017 and $53,586 for the period ended
December 31, 1993 and for the years ended December 31, 1994 and 1995,
respectively, and $23,579 (unaudited) and $318,976 for the nine months ended
September 30, 1995 and 1996, respectively.

4. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Raw materials and components................................. $1,433,949
Work-in-process.............................................. 522,602
Finished goods............................................... 344,470
----------
$2,301,021
==========
</TABLE>

No inventories were on hand at December 31, 1994 and 1995.

5. DEBT

Convertible Subordinated Debentures

On January 25, 1994, the Company issued $200,030 of 8.00% convertible
subordinated debentures (the "Series I Debentures"). On August 15, 1994, the
Company issued an additional $160,000 of the 8.00% convertible subordinated
debentures (the "Series II Debentures"). On September 20, 1994, all of the
debentures, including accrued interest of $11,774, were converted into 74,360
shares of the Company's Series A Preferred Stock at a rate of $5.00 per share.

Notes Payable

The Company issued a $50,000 note payable in May 1995. The note, which was
due in July 1995, was deferred and paid in January 1996. Interest on the note
accrued at 10.00%.

F-10
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Series III Debentures

On October 31, 1995, the Company completed an offering of Series III
Debentures for net proceeds of $1,668,443. The entire principal balance and
accrued interest is payable on August 15, 1997. During 1995, the Company
converted $50,000 of accounts payable, which arose in 1995, to Series III
Debentures. The Series III Debentures are convertible into Common Stock at a
rate of $3.67 per share, subject to adjustment pursuant to a Common Stock
offering at a lower price. The Series III Debentures are subject to mandatory
conversion upon (i) the closing of an initial public offering provided such
offering provides minimum net proceeds of $5,000,000 and the price at which
the shares are offered is not less than 1.5 times the conversion rate, or (ii)
the cumulative conversion of 70% of the outstanding debentures into Common
Stock. Each holder of a Series III Debenture received a detachable warrant
(the "Series III Warrants") to purchase Common Stock for an amount of shares
equal to the Series III Debentures' principal amount divided by the conversion
rate. Total Series III Warrants issued are exercisable into 544,554 common
shares at an exercise price of $3.67 per share and expire on August 15, 1997.
The Series III Warrants were valued at $56,631, and accordingly this amount
was allocated to Common Stock with an equivalent discount recorded on the
Series III Debentures. The discount is being amortized over the term of the
debentures and amounted to $51,483 and $28,316 at December 31, 1995 and
September 30, 1996, respectively.

Series IV Debentures

During February 1996, the Company completed a private placement of 8.00%
subordinated debentures (the "Series IV Debentures") for net proceeds of
$405,000, of which $240,000 was issued to a director of the Company. The
Series IV Debentures are non-convertible and bear interest at 8.00%. The
Series IV Debentures were due on August 31, 1996, and were repaid by the
Company on August 29, 1996. In addition, each holder received detachable
warrants (the "Series IV Warrants") to purchase Common Stock equal to the
Series IV Debentures' principal amount divided by $3.67. The Series IV
Warrants were valued at $0.11 per warrant. Accordingly, $11,782 was allocated
to Common Stock, with an equivalent discount recorded on the Series IV
Debentures. The Series IV Warrants issued are exercisable into 110,454 shares
of Common Stock at an exercise price of $3.67 per share and expire on February
28, 2001.

Xerox Loan

In December 1995, the Company received a commitment from a customer to lend
the Company up to $3,000,000 subject to the successful completion of an OEM
production agreement and satisfactory negotiations of loan terms. On January
2, 1996, the Company received $500,000 under this commitment. On February 16,
1996, the Company and the customer executed an OEM production agreement and on
February 28, 1996, the Company and the customer finalized the terms of the
loan. The loan provides for a maximum commitment of $3,000,000 through April
1, 1998, at an annual interest rate of 8.00%. As part of the inducement to
extend such commitment, the Company agreed to issued detachable warrants up to
a maximum of 375,000 shares of Common Stock at an exercise price of $3.67 per
share, of which the warrant to purchase 125,000 shares expires on February 28,
1999 and the warrant to purchase 250,000 shares expires on April 19, 1999.

As of September 30, 1996, the Company has received $2,350,000 in loan
proceeds and issued detachable warrants for 375,000 shares of Common Stock.
Accordingly, $126,250 was allocated to Common Stock with an equivalent
discount recorded on the note. Principal installments are due as follows:
$500,000 on July 1, 1997; $500,000 on October 1, 1997; $1,000,000 on January
1, 1998; and $350,000 on April 1, 1998.

F-11
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Private Financing

On October 11, 1996, the Company completed a private financing (the "Interim
Financing") resulting in net proceeds to the Company of $2.78 million upon the
issuance of the Company's discounted notes in an aggregate principal amount of
$3.45 million bearing interest at a rate of 8.70% per annum (excluding debt
discount). Holders of the Interim Financing also received warrants to purchase
an aggregate of 45,000 shares of Common Stock at an exercise price which is
the lesser of $10.00 per share or the initial public offering price per share
of the Common Stock offered in a planned initial public offering. The Interim
Financing is repayable upon the closing of the offering contemplated hereby or
otherwise on June 30, 1997. See Note 11.

The following is a summary of the Company's debt:

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 2)
------------------ SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Notes payable................ $ -- $ 50,000 $ 500,000 $ 500,000
Series III Debentures, net of
unamortized discount of
$51,483 and $28,316......... -- 1,945,117 1,968,284 --
Long-term debt, net of
unamortized discount of
$91,423..................... -- -- 1,758,577 1,758,577
------- ---------- ---------- ----------
-- 1,995,117 4,226,861 2,258,577
------- ---------- ---------- ----------
Less: current portion...... -- 50,000 2,468,284 500,000
------- ---------- ---------- ----------
$ -- $1,945,117 $1,758,577 $1,758,577
======= ========== ========== ==========
</TABLE>

6. SHAREHOLDERS' EQUITY

Capital Stock Transactions

On September 15, 1994, the following changes in the Company's capital
structure occurred: (i) the Company's Board of Directors declared a 450-for-1
split of the Common Stock, effective upon the amendment of the Company's
Certificate of Incorporation, (ii) the authorized number of common shares was
increased to 1,000,000 (unadjusted for 1996 stock split--see Note 13) and
(iii) the par value of the Common Stock was changed from $.01 to no par value.

In January 1995, the Company's Board of Directors amended the articles of
incorporation to increase the authorized shares of Common Stock from 1,000,000
to 2,000,000. In April 1996, under the consent of the Board of Directors, the
number of authorized shares of Common Stock was increased from 2,000,000
shares to 25,000,000 shares and the authorized shares of Preferred Stock was
increased from 350,000 shares to 500,000 shares.

Series A Preferred Stock

From a class of preferred stock with 500,000 authorized shares, the
Company's Board of Directors designated a series consisting of 300,000 of such
shares as Series A Preferred Stock. In 1994, pursuant to a

F-12
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

private placement offering (the "Preferred Stock Offering"), the Company
issued 160,000 shares of Series A Preferred Stock, with net proceeds of
$643,770. In February 1995, the Board of Directors increased the authorized
shares of Series A Preferred Stock from 300,000 shares to 350,000 shares. In
1995 the Company issued an additional 75,000 shares of Series A Preferred
Stock, with net proceeds of $340,060 (See Note 5).

In September 1994, the Company issued to a third party vendor 15,000 shares
of Series A Preferred Stock as partial payment for services rendered pursuant
to a development agreement between the third party vendor and the Company. The
fair market value of the stock was recorded as $75,000.

The Series A Preferred Stock is nonredeemable, convertible and voting, with
no par value. The holders shall be entitled to receive noncumulative cash
dividends when and as declared by the Board of Directors. In the event of any
voluntary or involuntary liquidation of the Company, the preferred
shareholders shall be entitled to all unpaid dividends at the time of
liquidation and $5.00 per share as a liquidating distribution prior to any
liquidating distribution to the common shareholders. At the option of the
preferred shareholders, their shares may be converted at any time to Common
Stock at the rate of 4.2 shares of Common Stock for one share of Series A
Preferred Stock. The holdings of the preferred shareholders shall
automatically convert into shares of Common Stock upon the affirmative vote of
holders of 70% or more of the outstanding shares of Preferred Stock or upon
the effectiveness of a registration statement registering the sale by the
Company of shares of Common Stock pursuant to which the Common Stock is
offered publicly at a price of at least $5.00 per share and the gross proceeds
to the Company and/or selling shareholders are at least $5 million.

Warrants

As of September 30, 1996, the Company had outstanding Common Stock purchase
warrants for an aggregate of 1,060,803 shares. Stock purchase warrants for
246,714 common shares expiring August 15, 1997 are held by the Series III
Debenture holders. Stock purchase warrants for 110,454 common shares expiring
February 28, 2001 are held by the Series IV Debenture holders. A stock
purchase warrant for 375,000 shares of Common Stock expiring on February 28,
1999, is held by a noteholder. Stock purchase warrants for 300,000 common
shares expiring on June 28, 2001 are held by a placement agent and were issued
in connection with the June 1996 private placement offering. The following
summarizes the activity of outstanding warrants:

<TABLE>
<CAPTION>
SHARES EXERCISE
UNDER PRICE WARRANTS
WARRANT (PER SHARE) EXERCISABLE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1994........ -- $ -- --
- ------------------------------------------------------------------------------
Granted to employees.................. 112,500 3.67
Granted to Series III Debenture hold-
ers.................................. 544,554 3.67
Exercised (Note 5).................... (297,840) 2.33
- ------------------------------------------------------------------------------
Outstanding at December 31, 1995........ 359,214 $3.67 359,214
- ------------------------------------------------------------------------------
Granted to Series IV Debenture hold-
ers.................................. 110,454 3.67
Granted to noteholder................. 375,000 3.67
Granted to service providers.......... 28,635 3.67
Granted to placement agent............ 300,000 4.00
Warrants surrendered.................. (112,500) 3.67
- ------------------------------------------------------------------------------
Outstanding at September 30, 1996....... 1,060,803 $3.67-$4.00 1,060,803
- ------------------------------------------------------------------------------
</TABLE>

F-13
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Additionally, there are outstanding and exercisable stock purchase warrants
for 8,000, 23,500 and 23,500 shares of Series A Preferred Stock at December
31, 1994, 1995 and September 30, 1996, respectively, of which a warrant to
purchase 8,000 shares of Common Stock expires on September 2000 and the
warrant to purchase 15,500 shares of Common Stock expires on February 22,
2001. These warrants convert to Common Stock warrants at the rate of 4.2
Common Stock warrants for one Series A Preferred Stock warrant upon the
effectiveness of a registration statement as discussed above.

In early December 1995, in order to raise cash for operations, the Company
reduced the exercise price of the Series III detachable warrants from $3.67
per share to $2.33 per share (a revised fair market value as of such date) for
a limited period of time (through December 15, 1995). Warrant holders
exercised 297,840 shares of Common Stock for $694,960.

Common Stock

The Company has reserved shares of Common Stock as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Conversion of Series III Debentures, including
accrued interest.............................. 564,958 597,606
Conversion of Series A Preferred Stock......... 1,362,312 1,362,312
Exercise of Common Stock warrants.............. 359,214 1,060,803
Exercise of Series A Preferred Stock warrants.. 98,700 98,700
Exercise of options............................ 750,000 1,500,000
--------- ---------
3,135,184 4,619,421
========= =========
</TABLE>

In June 1996, pursuant to a private placement offering, the Company issued
2,625,000 shares of Common Stock for $4.00 per share. This offering resulted
in net proceeds of $9,460,044 to the Company.

7. STOCK INCENTIVE PLAN

In January 1995, the Company's Board of Directors adopted and approved the
1995 Stock Incentive Plan (the "Plan") for directors, officers, key employees
and other persons. The Plan permits the granting of incentive stock options,
non-statutory stock options, stock appreciation rights and restricted stock
awards to purchase up to 300,000 shares of Common Stock. In April 1996, the
number of shares increased to 1,500,000. Such shares have been authorized and
reserved.

Initially, options vested 20% each year, so that the options, or any
unexercised portion thereof, would be fully exercisable after a period of five
years following the date of their grant. Pursuant to the April 9, 1996 Board
of Directors meeting, the original vesting period of five years was modified
to three years with options vesting 33% each year following the date of their
grant. All options previously granted are subject to this modification.
Certain options granted in 1996 (347,250 included in the table below) are
exercisable immediately upon their issuance. Stock options under the Plan have
terms ranging from five to ten years.

F-14
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The 1995 Stock Incentive Plan activity is summarized as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------------- --------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 301,500 $ 2.58
Granted............... 328,500 2.47 1,016,850 3.80
Exercised............. -- -- -- --
Canceled.............. (27,000) 1.19 (28,500) 3.01
------- --------------
Outstanding at period
end.................... 301,500 2.58 1,289,850 3.53
======= ==============
Options exercisable at
period end............. -- -- 388,750 3.37
======= ==============
Weighted average fair
value of options
granted during the pe-
riod................... $1.62 $2.87
======= ==============
</TABLE>
The following summarizes additional information about stock options
outstanding at September 30, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES SEPTEMBER 30, 1996 CONTRACTUAL LIFE EXERCISE PRICE SEPTEMBER 30, 1996 EXERCISE PRICE
--------------- ------------------ ---------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$1.19 154,500 7.42 $1.19 71,500 $1.19
3.67 502,500 7.95 3.67 127,500 3.67
4.00 632,850 8.20 4.00 189,750 4.00
--------- -------
1,289,850 388,750
========= =======
</TABLE>

Had compensation expense been recognized based on the fair value of the
options at their grant dates, as prescribed in Financial Accounting Standard
No. 123, the Company's net loss and net loss per share would have been as
follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Net loss:
As reported.............................. $(4,216,955) $(8,806,895)
Pro forma under FAS 123.................. (4,420,205) (9,367,798)
Pro forma net loss per share:
As reported (unaudited).................. $ (.66) $ (1.28)
Pro forma under FAS 123 (unaudited)...... (.70) (1.37)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: dividend yield of 0% for both periods;
risk-free interest rates ranging from 5.47% to 7.80% for options granted
during the year ended December 31, 1995 and 5.26% to 6.96% for options granted
during the nine months ended September 30, 1996; expected volatility factors
ranging from 40% to 45% for the year ended December 31, 1995 and 45% to 50%
for the nine months ended September 30, 1996; and an expected option term
ranging from 5 to 10 years for both periods.

F-15
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Compensation of approximately $550,725 has been attributed to Common Stock
options granted in August 1996. Compensation expense will be recognized over
the three year vesting period, of which $16,285 was recognized as of September
30, 1996.

8. LEASES

Operating Leases

At September 30, 1996, the Company was committed under operating leases for
equipment, vehicles and office space with initial terms of more than one year
which extend through September 1998. The vehicle lease contains a fair value
purchase option at the end of the lease term. During 1996, the Company entered
into a new facilities lease extending through July 2000. The lease agreement
provides for escalation of the lease payments over the term of the lease,
however, rent expense is recognized under the straight-line method.

Minimum lease payments under the noncancelable leases are as follows:

<TABLE>
<S> <C>
1996............................................................. $ 137,985
1997............................................................. 452,184
1998............................................................. 502,217
1999............................................................. 598,016
2000............................................................. 348,843
----------
Total minimum obligations........................................ $2,039,245
==========
</TABLE>

Rent expense was $0 for the period from inception (May 21, 1993) through
December 31, 1993, $11,315 in 1994, $108,800 in 1995 and $62,888 (unaudited)
and $312,727 for the nine months ended September 30, 1995 and 1996,
respectively.

Capital Lease Obligations

The Company is obligated under capital leases for certain office equipment
which expire on various dates through 2000. Future minimum lease payments
under these leases are as follows:

<TABLE>
<S> <C>
1996............................................................... $ 17,684
1997............................................................... 67,326
1998............................................................... 65,712
1999............................................................... 59,699
2000............................................................... 18,206
--------
Total Minimum Obligations........................................ 228,627
Less: amount representing interest............................... 45,686
--------
Present value of minimum lease payments.......................... 182,941
Less: current portion............................................ 47,253
--------
$135,688
========
</TABLE>

F-16
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9. INCOME TAXES

Deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C> <C>
Gross deferred tax assets:
Carryforwards:
Research tax credits........... $ 60,000 $ 157,000 $ 183,000
Net operating losses........... 503,000 2,133,000 5,665,000
Other............................ 15,000 55,000 99,000
--------- ----------- -----------
Gross deferred tax assets...... 578,000 2,345,000 5,947,000
--------- ----------- -----------
Gross deferred tax liabilities..... -- (9,000) (26,000)
--------- ----------- -----------
Valuation allowance................ (578,000) (2,336,000) (5,921,000)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>

The Company has provided a valuation allowance for the full amount of
deferred tax assets in excess of deferred tax liabilities since the
realization of these future benefits cannot be reasonably assured as of the
end of each related period. If the Company achieves profitability, the
deferred tax assets may be available to offset future income taxes.

At September 30, 1996, the Company had approximately $13.8 million of
federal net operating loss carryforwards that expire in years 2008 through
2010, approximately $13.8 million of state net operating loss carryforwards
that expire in years 1998 through 2000 and research and development tax credit
carryforwards of approximately $183,000 that expire in years 2009 through
2010.

As defined in the Internal Revenue Code, certain ownership changes limit the
annual utilization of federal net operating loss and tax credit carryforwards.
The Company experienced such an ownership change in December 1994 which limits
the amount of federal net operating loss carryforwards and research tax
credits that can be utilized in any one taxable year as follows:

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE RESEARCH APPROXIMATE SECTION 382
LOSS CARRYFORWARD TAX CREDIT CARRYFORWARD ANNUAL LIMITATION
----------------- ----------------------- -----------------------
<S> <C> <C>
$1,100,000 $60,000 $225,000
</TABLE>

10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash, prepaid expenses, current notes payable,
accounts payable, accrued expenses, accrued interest, amounts due to officers,
customer advances and deposits and deferred revenue approximates fair value
because of the short-term nature of those instruments.

F-17
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The fair value of long-term debt is estimated based upon the current
interest rates that would be offered to the Company on similar debt. The
estimated fair value of the Company's debt (see Note 5) is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Xerox Loan....................... $ -- $ -- $2,258,577 $2,258,577
Series III Debentures............ 1,945,117 1,945,117 -- --
</TABLE>

11. RELATED PARTY TRANSACTIONS

In connection with the debt and equity offerings described in Notes 5 and 6,
the Company engaged Knickerbocker Securities, Inc. ("Knickerbocker"), whose
president is a shareholder and was a director of the Company during 1994 and a
portion of 1995, as their investment banker. Amounts attributed to debt and
equity offerings in 1993, 1994 and 1995 for Knickerbocker's services were $0,
$88,000 and $214,126, respectively. The amount attributed to debt and equity
offerings for the nine months ended September 30, 1995 was $231,946
(unaudited).

The Company entered into an agreement with Knickerbocker on September 20,
1994, in which Knickerbocker would advise the Company with regard to financial
matters and methods of financing for a three year period commencing on January
1, 1996 for a fee of $1,000 per month. In March 1996, the Company terminated
this agreement as well as all previous agreements with Knickerbocker. Amounts
expensed relating to the advisory agreement and the termination of all
existing agreements were $80,260 and $25,000 for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively.

On July 31, 1994, two officers of the Company loaned $50,000 to the Company
in exchange for promissory notes. The notes were converted into 42,000 shares
of the Company's Common Stock on December 16, 1994.

Amounts recorded as "Due to officers" represent compensation owed to
officers for services rendered to the Company. Amounts recorded as "Due from
officer" represent an advance for relocation costs.

A member of the Company's Board of Directors is a partner with the Company's
primary legal firm.

In connection with the Interim Financing (see Note 5), a director and a
director's spouse purchased $250,000 and $100,000 of the notes, and received
3,750 and 1,500 of the related warrants, respectively.

12. COMMITMENTS AND CONTINGENCIES

On January 8, 1996, the Company signed a seven year agreement with a vendor
for the supply of inks and printheads. The agreement provides the Company with
worldwide rights, as defined. The Company must pay the vendor royalties and
license fees upon achieving certain volume purchase levels. The agreement also
includes certain exclusivity features which benefit the Company. To maintain
the exclusivity rights, quarterly payments of $250,000 are required beginning
January 1, 1996 and ending on October 1, 1997, and the Company must purchase
all ink and printhead requirements from the vendor and purchase specified
minimum amounts each year. The Company has the option to terminate the
exclusive rights leaving all other aspects of the agreement unchanged.
Currently, it is the Company's intent to maintain the rights.

Effective January 1994, the Company entered into employment agreements with
two of its executive officers reflecting a five year term and a three year
term with an automatic three year renewal period, respectively. These
agreements are subject to termination by either party, and provide for salary
continuation and benefits for a

F-18
<PAGE>

ACCENT COLOR SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

specified period under certain circumstances including a change in control (as
defined) of the Company. As of December 31, 1995 and September 30, 1996, if
all of the employees under contract were to be terminated by the Company
without cause (as defined), the Company's liability would be approximately
$440,000 and $400,000, respectively.

During 1996, the Company negotiated a product purchase agreement with a
major customer. In consideration of favorable payment terms, including the
payment of a 20% deposit upon orders, the Company has granted a second
priority lien against its inventory up to an amount equal to deposits
received.

13. LITIGATION

In August 1996, the Company was notified of a claim by a former advisor of
the Company for compensation in the form of cash and warrants. While the
Company believes it has meritorious defenses against certain aspects of the
claim, the ultimate resolution of the matter could result in a maximum
liability of $125,000 and the issuance of warrants to purchase 35,000 shares
of Common Stock at a exercise price of $4.40 per share. Management has accrued
for the estimated liability.

14. STOCK SPLIT

On October 8, 1996, as authorized by the Board of Directors, the Company
split its Common Stock 3-for-1. All shares and per share conversion amounts
(unless otherwise indicated) in the accompanying financial statements have
been restated to reflect the 3-for-1 split.

F-19
<PAGE>

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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, IN ANY JURISDICTION WHERE, 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 OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
OR ANY OF THE UNDERWRITERS SINCE SUCH DATE.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Financial Data................................................... 6
Risk Factors............................................................. 7
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................................................................. 28
Management............................................................... 44
Certain Transactions..................................................... 49
Principal Shareholders and Key Personnel................................. 50
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
</TABLE>

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UNTIL JANUARY 12, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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3,000,000 Shares

[LOGO]

ACCENT COLOR SCIENCES, INC.

COMMON STOCK

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PROSPECTUS
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COWEN & COMPANY

JANNEY MONTGOMERY SCOTT INC.

December 18, 1996

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