<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

(Mark One)

[X]     Quarterly Report pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 for the quarterly period ended December 28, 1997

                                       OR

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


                         Commission File Number 0-21034

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


                               PROXIMA CORPORATION
             (Exact name of registrant as specified in its charter)

                  Delaware                              95-3740880
       (State or other jurisdiction of                (IRS Employer
       incorporation or organization)             Identification Number)

           9440 Carroll Park Drive
            San Diego, California                         92121
       (address of principal executive                  (zip code)
                  offices)


       Registrant's telephone number, including area code: (619) 457-5500

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

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                              Yes   [X]      No [ ]

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $.001
par value per share, 7,456,666 shares as of February 4, 1998.


<PAGE>   2


PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                               PROXIMA CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                               December 31,    March 31,
                                                                   1997          1997
                                                               ------------    --------
                                                               (unaudited)
<S>                                                             <C>            <C>     
ASSETS
    CURRENT ASSETS
       Cash and cash equivalents                                $  9,777       $  5,556
       Short-term investments                                     20,079         12,455
       Accounts receivable, net                                   31,526         32,701
       Inventories (note 2)                                       15,736         22,359
       Deferred income taxes                                       5,027          5,199
       Prepaid expenses and other                                    453            666
                                                                --------       --------
          Total current assets                                    82,598         78,936
                                                                --------       --------
    PROPERTY                                                       2,260          5,756
                                                                --------       --------

    OTHER ASSETS
       Investment in affiliate (note 3)                            1,307          1,201
       Deferred income taxes                                       1,747            714
       Patents                                                       317            378
       Other                                                          66            293
                                                                --------       --------
          Total other assets                                       3,437          2,586
                                                                --------       --------
    TOTAL                                                       $ 88,295       $ 87,278
                                                                ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
    CURRENT LIABILITIES
       Accounts payable                                         $ 16,402       $ 12,957
       Accrued expenses                                            7,219          8,683
       Income taxes payable                                           78            348
                                                                --------       --------
          Total current liabilities                               23,699         21,988
                                                                --------       --------

    COMMITMENTS AND CONTINGENCIES (NOTE 4)

    STOCKHOLDERS' EQUITY
       Preferred stock, authorized--5,000,000 shares,
          par value $.001, no shares issued or outstanding             -              -
       Common stock, authorized--40,000,000 shares,
          par value $.001, issued and outstanding--
          7,457,000 and 7,418,000 shares, respectively                 8              7
       Paid-in capital                                            41,943         41,857
       Treasury stock--281,000 shares held                        (2,548)        (2,548)
       Retained earnings                                          25,193         25,974
                                                                --------       --------
          Total stockholders' equity                              64,596         65,290
                                                                --------       --------
    TOTAL                                                       $ 88,295       $ 87,278
                                                                ========       ========
</TABLE>


See notes to consolidated financial statements.




                                       2
<PAGE>   3

                               PROXIMA CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands except per share data)


<TABLE>
<CAPTION>
                                                         Three months ended         Nine months ended
                                                             December 31,              December 31,
                                                       ----------------------    -----------------------
                                                          1997        1996         1997          1996
                                                       ---------    ---------    ---------     ---------
                                                      (unaudited)  (unaudited)  (unaudited)   (unaudited)
<S>                                                    <C>          <C>          <C>           <C>      
SALES                                                  $  38,076    $  47,365    $  97,297     $ 118,625
COST OF SALES                                             30,213       33,658       78,755        83,410
                                                       ---------    ---------    ---------     ---------
     Gross profit                                          7,863       13,707       18,542        35,215
                                                       ---------    ---------    ---------     ---------

OPERATING EXPENSES
     Selling and marketing                                 4,672        6,192       13,535        18,138
     Research and development                              1,049        3,245        4,614        11,870
     General and administrative                            1,152        1,719        4,232         5,093
     Restructuring charge (note 7)                             -            -       (1,528)            -
                                                       ---------    ---------    ---------     ---------
          Total                                            6,873       11,156       20,853        35,101
                                                       ---------    ---------    ---------     ---------

INCOME (LOSS) FROM OPERATIONS                                990        2,551       (2,311)          114
                                                       ---------    ---------    ---------     ---------

OTHER INCOME (EXPENSE)
     Interest and other income                               313          242          820           915
     Equity in income (loss) of affiliate (note 3)             -           31          105          (245)
     Gain on sale of subsidiary's assets (note 6)              -            -            -         2,779
     Write-down of investment in affiliate (note 3)            -            -            -        (3,905)
                                                       ---------    ---------    ---------     ---------
          Total                                              313          273          925          (456)
                                                       ---------    ---------    ---------     ---------

INCOME (LOSS) FROM CONTINUING
     OPERATIONS BEFORE INCOME TAXES                        1,303        2,824       (1,386)         (342)
PROVISION (BENEFIT) FOR INCOME TAXES                         514          986         (602)        1,351
                                                       ---------    ---------    ---------     ---------


NET INCOME (LOSS)                                      $     789    $   1,838    $    (784)    $  (1,693)
                                                       =========    =========    =========     =========


INCOME (LOSS) PER SHARE DATA (NOTE 1)
     Basic earnings (loss) per share                   $    0.11    $    0.26    $   (0.11)    $   (0.24)
                                                       =========    =========    =========     =========

     Diluted earnings (loss) per share                 $    0.11    $    0.25    $   (0.11)    $   (0.24)
                                                       =========    =========    =========     =========

     Common shares outstanding                             7,173        7,104        7,161         7,004
                                                       =========    =========    =========     =========

     Common shares outstanding
          assuming dilution                                7,391        7,324        7,161         7,004
                                                       =========    =========    =========     =========
</TABLE>


See notes to consolidated financial statements.




                                       3
<PAGE>   4

                               PROXIMA CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                             Nine months ended
                                                                                December 31,
                                                                          ----------------------- 
                                                                            1997           1996
                                                                          --------       -------- 
                                                                         (unaudited)    (unaudited)
<S>                                                                       <C>            <C>      
OPERATING ACTIVITIES
  Net loss                                                                $   (784)      $ (1,693)
  Adjustments to reconcile net loss to net cash
    provided by (used for) operating activities:
      Depreciation and amortization                                          2,610          2,756
      Provision for allowance for doubtful accounts                            260            (80)
      Benefit from deferred income taxes                                      (861)            58
      Tax benefit from stock option exercises                                    -            373
      Gain on sale of subsidiary's assets                                        -         (2,779)
      Write-down of investment in affiliate                                      -          3,905
      Changes in assets and liabilities, net of effects from sale of
        subsidiary's assets:
           Accounts receivable                                                 915        (15,049)
           Income taxes payable                                               (270)          (374)
           Inventories                                                       6,623         (5,152)
           Prepaid expenses and other assets                                   180             69
           Accounts payable and accrued expenses                             1,981         11,266
                                                                          --------       --------
               Net cash provided by (used for) operating activities         10,654         (6,700)
                                                                          --------       --------

INVESTING ACTIVITIES
  Proceeds from sale of subsidiary's assets                                  1,400          7,259
  Acquisition of property                                                     (507)        (3,494)
  Short-term investments decrease (increase)                                (7,624)         8,525
  Investment in affiliate                                                        -           (666)
  Other                                                                        208            134
                                                                          --------       --------
              Net cash provided by (used for) investing activities          (6,523)        11,758
                                                                          --------       --------

FINANCING ACTIVITIES
  Sale of common stock                                                          90          1,047
                                                                          --------       --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                    4,221          6,105

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             5,556          2,389
                                                                          --------       --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                $  9,777       $  8,494
                                                                          ========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Income taxes paid                                                       $    253       $  1,306
                                                                          ========       ========
</TABLE>


See notes to consolidated financial statements.




                                       4
<PAGE>   5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      BASIS OF PRESENTATION

The accompanying consolidated financial information has been prepared by Proxima
Corporation (the "Company"), without audit, in accordance with the instructions
to Form 10-Q and therefore does not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in accordance with generally accepted accounting principles.

In the opinion of management, the unaudited consolidated financial statements
for the interim periods presented reflect all adjustments (solely of a normal
recurring nature) which are necessary for a fair presentation of the financial
position and results of operations as of and for the periods indicated. These
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 1997.

Earnings (loss) per share is presented in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (EPS). This statement requires the presentation of EPS
to reflect both "Basic EPS" and "Diluted EPS" on the face of the statement of
operations. In general, Basic EPS excludes dilution created by common stock
equivalents and is a function of the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution created
by common stock equivalents using the treasury stock method, in which any shares
that could have been purchased on the open market with the funds received from
the exercise of options or warrants are not considered additional outstanding
stock and have no dilutive effect on earnings per share. Stock options are
considered to be common stock equivalents. For the nine month periods ended
December 31, 1996 and December 31, 1997, when the inclusion of common stock
equivalents would be antidilutive, loss per share is computed based on the
weighted average number of common shares outstanding excluding common stock
equivalents. All periods presented herein have been adjusted to reflect the
calculation of EPS in accordance with SFAS No. 128.

Common stock equivalents consisted of stock options for all periods presented.
A reconciliation of the numerators and denominators for the Basic and Diluted
EPS calculations follows:

<TABLE>
<CAPTION>
                                        Three months ended              Nine months ended
                                           December 31,                    December 31,
                                     -------------------------      ---------------------------
                                        1997           1996            1997            1996 
                                     ----------     ----------      -----------     -----------
<S>                                  <C>            <C>              <C>            <C>
Numerator
  Net income (loss)                  $  789,000     $1,838,000       $ (784,000)    $(1,693,000)

Denominators:
  Denominator for basic EPS
  (weighted average common
  shares outstanding)                 7,173,000      7,104,000        7,161,000       7,004,000

  Effect of dilutive stock options      218,000        220,000               --              --
                                     ----------     ----------       ----------      ----------
  Denominator for diluted EPS         7,391,000      7,324,000        7,161,000       7,004,000
                                     ==========     ==========       ==========      ==========
</TABLE>

At December 31, 1997, 232,000 options to purchase shares of the Company's
common stock at prices ranging from $7.38 to $36.88 per share were outstanding
but were not included in the computation of diluted EPS for the three months
ended December 31, 1997 because the options' exercise prices were greater than
the average market price of the common shares and therefore, the effect would
be antidilutive.

For ease of presentation, the Company has indicated its fiscal year as ending on
March 31 and its third fiscal quarter as ending on December 31, whereas the
Company operates and reports on a 52-53 week fiscal year ending on the Sunday
closest to March 31. Each fiscal quarter presented herein included 13 weeks, and
each nine month period presented herein included 39 weeks.

Results for the interim periods presented herein are not necessarily indicative
of results which may be reported for any other interim period or for the entire
fiscal year.


2.      INVENTORIES:

<TABLE>
<CAPTION>
                                                  December 31,    March 31,
                                                      1997          1997
                                                  ------------  ------------
                                                  (unaudited)
                <S>                               <C>           <C>
                Raw materials                     $  2,534,000  $  5,515,000
                Work-in-process                      2,911,000     9,501,000
                Finished goods                      10,291,000     7,343,000
                                                  ------------  ------------
                     Total                        $ 15,736,000  $ 22,359,000
                                                  ============  ============
</TABLE>

                                       5
<PAGE>   6

3.      OTHER ASSETS--INVESTMENT IN AFFILIATE

In May 1993 the Company purchased 125,000 shares of Laser Power Corporation
("LPC") common stock for $255,000 and has purchased, through December 31, 1997,
1,611,000 shares of LPC Series A Preferred Stock for $6,444,000 for a total
investment of $6,699,000. In June 1997 the Company converted its 1,611,000
shares of LPC Series A Preferred Stock and 125,000 shares of LPC common stock to
a total of 1,277,000 shares of LPC common stock upon the completion of LPC's
initial public offering and reverse stock split. In 1994, the Company entered
into agreements providing for technology licenses between the Company and LPC
and the cooperative development of new technologies.

At December 31, 1997, the Company owned approximately 21% of the outstanding
voting stock of LPC. The Company accounts for its investment under the equity
method. The Company's share of the net income of LPC of $105,000 for the first
nine months of fiscal 1998 is presented as "Equity in income (loss) of
affiliate" in the accompanying Consolidated Statements of Operations. The
investment balance of $1,307,000 shown on the accompanying balance sheet as of
December 31, 1997 reflects the Company's equity in the net assets of LPC. LPC
completed an initial public offering in June 1997. Through February 6, 1998, LPC
common shares have traded on the open market at prices ranging from $4.31 to
$9.75.

The Company will continue to recognize its share of the net income or loss of
LPC under the equity method. In accordance with Accounting Principles Board
Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock," the Company recognizes its share of the net income or loss of LPC from
the most recent available financial statements. LPC has changed its accounting
year end from August 31 to September 30 effective for the quarter ended December
31, 1997. Consequently, in each fiscal quarter, the Company will now recognize
its share of the net income or loss of LPC from LPC's previous fiscal quarter.
On January 27, 1998, subsequent to the Company's public release of its results
for the quarter ended December 31, 1997, LPC announced that for the same period
it experienced a net loss of $809,000. The Company's share of that loss of
approximately $169,000, or 2 cents per share, will be recognized in the fourth
quarter of fiscal 1998.


4.      COMMITMENTS AND CONTINGENCIES

Litigation

The Company has been named as a defendant in two class action lawsuits filed in
the U.S. District Court for the Southern District of California on August 16,
1996, and in the California Superior Court for San Diego County on August 27,
1996. Certain current and former executive officers and directors of the Company
are also named as defendants. In one of the cases, the plaintiffs represent a
class of all persons who purchased the Company's common stock between July 26,
1994 and August 17, 1995. In the other case, the plaintiffs purport to represent
a class of all persons who purchased the Company's common stock between October
21, 1995 and June 24, 1996. The complaints allege that the defendants violated
various federal securities laws and California statutes through material
misrepresentations and omissions during the class periods, and seek unspecified
monetary damages.

The Company maintains directors' and officers' insurance primarily to provide
coverage for the type of lawsuits described above. The Company and its insurance
carrier, Evanston Insurance Company ("Evanston"), have been involved in a
dispute over such coverage. On June 11, 1997, Evanston filed an action for
declaratory relief and breach of contract in the U.S. District Court for the
Southern District of California against the Company and certain of its current
and former executive officers and directors, alleging that any insurance claims
arising from the foregoing class action lawsuits would not be covered. The
Company and the individual defendants have not been served with the complaint.




                                       6
<PAGE>   7

The outcome of the lawsuits cannot be determined. However, management believes
that the suits are without merit and intends to defend them vigorously. No
amounts have been recorded in the financial statements for any losses which may
result from these lawsuits.


5.      LINE OF CREDIT

At December 31, 1997, the Company had available a line of credit arrangement
providing for a $13.0 million revolving line of credit, secured by accounts
receivable, inventories and equipment, at an interest rate equal to the bank's
prime rate, with $3.0 million of the line available for the purchase of fixed
assets, at an interest rate of one-half percent over the bank's prime rate. The
line of credit arrangement contained standard covenants relating to financial
ratios. The Company is in compliance with all such covenants. No borrowings were
made under this or any previous credit arrangement during fiscal year 1997 or
during the first nine months of fiscal 1998. The credit arrangement expires on
July 31, 1998.


6.      SALE OF SUBSIDIARYS' ASSETS

On June 28, 1996, the Company entered into an agreement to sell the assets of
its wholly-owned power protection subsidiary, Newpoint Corporation, in a cash
transaction totaling approximately $7.3 million. Newpoint accounted for less
than 10% of the Company's revenues during the nine month period ended December
31, 1996. The operating results of Newpoint Corporation for the three months
ended June 30, 1996 are reflected in the accompanying Consolidated Statements of
Operations. The gain on sale of assets of $2,679,000 was recognized in the
Consolidated Statement of Operations for the three-month period ended June 30,
1996, under "Gain on sale of subsidiary's assets." An additional gain on sale of
assets of $100,000 was recognized in the Consolidated Statement of Operations
for the three-month period ended September 30, 1996, under "Gain on sale of
subsidiary's assets," reflecting an adjustment in the reserve for certain
liabilities that the Company retained relating to Newpoint Corporation.

Subsequent to the end of the second quarter of fiscal 1998, on September 29,
1997, the Company entered into an agreement to sell the assets of its
wholly-owned manufacturing subsidiary, Transferencia Mexicana de Tijuana, S.A.
de C.V. (a Mexican corporation), in a cash transaction totaling approximately
$1.4 million. Transferencia Mexicana de Tijuana accounted for less than 10% of
the Company's revenues during the nine month period ended December 31, 1997. The
operating results of Transferencia Mexicana de Tijuana through September 29,
1997 are reflected in the accompanying Consolidated Statements of Operations. An
immaterial amount for loss on sale of assets was recognized in the Consolidated
Statement of Operations for the three-month period ended December 31, 1997.


7.   RESTRUCTURING CHARGE

In the second quarter of fiscal 1998, the Company reversed a $1,528,000
restructuring charge taken during the fourth quarter of fiscal 1997. The
restructuring charge consisted primarily of fixed asset write-downs and
severance costs related to the planned relocation of all manufacturing
operations from the Company's Tijuana, Mexico, facilities. Subsequent to the end
of the second quarter of fiscal 1998, on September 29, 1997, the Company entered
into an agreement to sell its Tijuana manufacturing operation. This agreement
rendered the restructuring charge unnecessary.




                                       7
<PAGE>   8

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

OVERVIEW

        The Company offers broad lines of data and video projection products,
including multimedia projectors capable of supporting full-motion video,
animation, and sound directly from a computer or VCR, as well as interactive
command and control systems and meeting room tools.

RESULTS OF OPERATIONS

        The following table sets forth certain data as a percentage of sales:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED       NINE MONTHS ENDED
                                                           DECEMBER 31,            DECEMBER 31,
                                                        -----------------       ------------------ 
                                                         1997        1996        1997         1996
                                                        -----       -----       -----        ----- 
        <S>                                             <C>         <C>         <C>          <C>   
        Sales                                           100.0%      100.0%      100.0%       100.0%
                                                        -----       -----       -----        ----- 
        Cost of sales                                    79.3        71.1        80.9         70.3
                                                        -----       -----       -----        ----- 
           Gross profit                                  20.7        28.9        19.1         29.7
                                                        -----       -----       -----        ----- 

        Operating expenses
           Selling and marketing                         12.3        13.1        13.9         15.3
           Research and development                       2.8         6.8         4.8         10.0
           General and administrative                     3.0         3.6         4.4          4.3
           Restructuring charge                           -           -          (1.6)         -
                                                        -----       -----       -----        ----- 
                    Total                                18.1        23.5        21.5         29.6
                                                        -----       -----       -----        ----- 

        Income (loss) from operations                     2.6         5.4        (2.4)         0.1
                                                        -----       -----       -----        ----- 

        Other income (expense)
           Interest and other income                      0.8         0.5         0.9          0.8
           Equity in income (loss) of affiliate           -           0.1         0.1         (0.2)
           Gain on sale of subsidiary's assets            -           -           -            2.3
           Write-down of investment in affiliate          -           -           -           (3.3)
                                                        -----       -----       -----        ----- 
                    Total                                 0.8         0.6         1.0         (0.4)
                                                        -----       -----       -----        ----- 

        Income (loss) before income taxes                 3.4         6.0        (1.4)        (0.3)
        Provision (benefit) for income taxes              1.3         2.1        (0.6)         1.1
                                                        -----       -----       -----        ----- 

        Net income (loss)                                 2.1%        3.9%       (0.8)%       (1.4)%
                                                        =====       =====       =====        ===== 
</TABLE>



NOTICE REGARDING FORWARD-LOOKING STATEMENTS

        This report contains forward-looking statements (denoted with an
asterisk *) within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below.




                                       8
<PAGE>   9

THIRD QUARTER FISCAL 1998 COMPARED TO THIRD QUARTER FISCAL 1997

Sales

        The Company's sales decreased 20% from $47.4 million in the third
quarter of fiscal 1997 to $38.1 million in the third quarter of fiscal 1998.
Sales of LCD projection panels and VGA-resolution projectors were $19.5 million
lower in the third quarter of fiscal 1998 than in the comparable quarter of
fiscal 1997, whereas sales of higher-resolution SVGA and XGA projectors
increased by $11.0 million. In addition, the Company has experienced increased
pricing pressures as a result of both the entry of new competitors into the
projection market and an increase in the number of competitive new products
available to the channels of distribution in which the Company competes. The
increasing number of competitive products is due primarily to the growth in
resources dedicated to product development by the Company's competitors. These
pricing pressures have negatively impacted the Company's sales and market share.
The Company believes that competition in the form of continued pricing pressures
and the introduction of new product offerings will intensify in the future*. See
"Risk Factors." The Company's international sales in the third quarter of fiscal
1998 were also lower than in the third quarter of fiscal 1997, due in part to
reduced sales to the Company's major private label customer.

Gross Profit

        Gross profit declined from $13.7 million in the third quarter of fiscal
1997 to $7.9 million in the third quarter of fiscal 1998, primarily due to price
reductions and reduced sales of manufactured products, partially offset by
increased sales of sourced products. Contributing to the reduction in gross
profit were gross losses realized on the sale of certain obsolete and
slow-moving inventories during the third quarter of fiscal 1998. Gross profit as
a percentage of sales decreased from 28.9% in the third quarter of fiscal 1997
to 20.7% in the comparable quarter of fiscal 1998. The decrease in gross profit
as a percentage of sales for the quarter ended December 31, 1997 was due
primarily to price reductions on older products and promotional discounts
offered by the Company. The increasing downward pressure on the average selling
prices of the Company's products, discussed in "Sales" above, also serves to
reduce gross profit margins*. See "Risk Factors."

Operating Expenses

        Operating expenses include selling and marketing, research and
development, and administrative expenses, which are individually discussed
below. Total operating expenses were $6,873,000 during the third quarter of
fiscal 1998, compared to $11,156,000 in the same period a year ago. The $4.3
million reduction in operating expenses in the third quarter of fiscal 1998
versus the third quarter of fiscal 1997 is primarily attributable to cost
reduction measures undertaken at the end of fiscal 1997 and at the beginning of
fiscal 1998, including a significant reduction in staffing.

        Selling and marketing expenses decreased from $6,192,000 in the third
quarter of fiscal 1997 to $4,672,000 in the third quarter of fiscal 1998. As a
percentage of sales, selling and marketing expenses decreased from 13.1% in the
third quarter of fiscal 1997 to 12.3% in the third quarter of fiscal 1998.
Selling and marketing expenses were lower in dollar amount and as a percentage
of sales primarily due to product promotion expenses incurred during the third
quarter of fiscal 1997 related to the introduction of the Company's new line of
integrated projectors.

        Research and development expenses decreased from $3,245,000 in the third
quarter of fiscal 1997 to $1,049,000 in the third quarter of fiscal 1998. As a
percentage of sales, research and development expenses were 6.8% in the third
quarter of fiscal 1997 and 2.8% in the third quarter of fiscal 1998. The
decrease in absolute dollars and as a percentage of sales for the third quarter
of fiscal 1998 as compared to the third quarter of fiscal 1997 reflects the
effects of cost reduction measures as the Company de-emphasized its own internal
product development efforts in favor of increased sourcing of products from
other manufacturers*. See "Risk Factors."




                                       9
<PAGE>   10

        General and administrative expenses were $1,152,000 in the third quarter
of fiscal 1998 versus $1,719,000 in the third quarter of fiscal 1997. As a
percentage of sales, general and administrative expenses decreased from 3.6% in
the third quarter of fiscal 1997 to 3.0% in the third quarter of fiscal 1998.
The decrease in general and administrative expenses in absolute dollars and as a
percentage of sales was due primarily to reduced expenditures on business
consultants and reduced staffing in the three months ended December 31, 1997 as
compared to the same period a year ago. The Company expects legal expenses to
increase due to the defense of shareholder litigation, although the timing of
such expenses is uncertain*. See "Risk Factors."

Interest Income

        Interest income increased from $242,000 in the third quarter of fiscal
1997 to $313,000 in the third quarter of fiscal 1998. The increase in interest
income in the third quarter of fiscal 1998 compared to the same period a year
ago is attributable primarily to higher average cash balances during the three
months ended December 31, 1997.

Income Taxes

        The Company's effective tax rate was 39.5% in the third quarter of
fiscal 1998 compared 34.9% in the third quarter of fiscal 1997. The effective
tax rate was higher in the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997 primarily because the Company does not expect to benefit
from the credit for increasing research expenditures during fiscal 1998 due to
declining research expenditures in fiscal 1998 as compared to prior years*. See
"Risk Factors." The Company has not recognized any tax effect from its equity in
gain or loss of affiliate or from the write-down of its investment in affiliate.


NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 1996

Sales

        The Company's sales decreased 18% from $118.6 million in the first nine
months of fiscal 1997 to $97.3 million in the first nine months of fiscal 1998.
Sales of LCD projection panels and VGA-resolution projectors were $62.8 million
lower in the first nine months of fiscal 1998 than in the comparable period of
fiscal 1997, whereas sales of higher-resolution SVGA and XGA projectors
increased by $46.3 million. In addition, the Company has experienced increased
pricing pressures as a result of both the entry of new competitors into the
projection market and an increase in the number of competitive new products
available to the channels of distribution in which the Company competes. The
increasing number of competitive products is due primarily to the growth in
resources dedicated to product development by the Company's competitors. These
pricing pressures have negatively impacted the Company's sales and market share.
The Company believes that competition in the form of continued pricing pressures
and the introduction of new product offerings will intensify in the future*. See
"Risk Factors." The Company's international sales in the first nine months of
fiscal 1998 were also lower than in the first nine months of fiscal 1997, due in
part to reduced sales to the Company's major private label customer.




                                       10
<PAGE>   11

Gross Profit

        Gross profit declined from $35.2 million in the first nine months of
fiscal 1997 to $18.5 million in the first nine months of fiscal 1998, primarily
due to price reductions and reduced sales of manufactured products, partially
offset by increased sales of sourced products. Gross profit as a percentage of
sales decreased from 29.7% in the first nine months of fiscal 1997 to 19.1% in
the comparable period of fiscal 1998. The decrease in gross profit as a
percentage of sales for the nine months ended December 31, 1997 was due
primarily to price reductions on older products and promotional discounts
offered by the Company. The increasing downward pressure on the average selling
prices of the Company's products, discussed in "Sales" above, also serves to
reduce gross profit margins*. See "Risk Factors."

Operating Expenses

        Operating expenses include selling and marketing, research and
development, and administrative expenses, which are individually discussed
below. Total operating expenses were $20,853,000 during the first nine months of
fiscal 1998, compared to $35,101,000 of operating expenses during the first nine
months of fiscal 1997. The $14.2 million reduction in operating expenses in the
first nine months of fiscal 1998 versus the first nine months of fiscal 1997 is
primarily attributable to cost reduction measures undertaken at the end of
fiscal 1997 and at the beginning of fiscal 1998, including a significant
reduction in staffing. Approximately $1.5 million of the reduction in operating
expenses is due to the restructuring charge reversed in the second quarter of
fiscal 1998.

        Selling and marketing expenses decreased from $18,138,000 in the first
nine months of fiscal 1997 to $13,535,000 in the first nine months of fiscal
1998. As a percentage of sales, selling and marketing expenses decreased from
15.3% in the first nine months of fiscal 1997 to 13.9% in the first nine months
of fiscal 1998. Selling and marketing expenses were lower in both dollar amount
and as a percentage of sales primarily due to higher product promotion expenses
incurred during the first nine months of fiscal 1997 related to the introduction
of the Company's new line of integrated projectors. In addition, selling and
marketing expenses of the Company's Newpoint Corporation subsidiary through June
28, 1996 are included in the selling and marketing expenses for the first nine
months of fiscal 1997.

        Research and development expenses decreased from $11,870,000 in the
first nine months of fiscal 1997 to $4,614,000 in the first nine months of
fiscal 1998. As a percentage of sales, research and development expenses were
10.0% in the first nine months of fiscal 1997 and 4.8% in the first nine months
of fiscal 1998. The decrease in absolute dollars and as a percentage of sales
for the first nine months of fiscal 1998 as compared to the first nine months of
fiscal 1997 reflects the effects of cost reduction measures as the Company
de-emphasized it own internal product development efforts in favor of increased
sourcing of products from other manufacturers* (see "Risk Factors"), and also 
the wind-down of microlaser research during the second quarter of fiscal 1997.

        General and administrative expenses were $4,232,000 in the first nine
months of fiscal 1998 versus $5,093,000 in the first nine months of fiscal 1997.
As a percentage of sales, general and administrative expenses increased from
4.3% in the first nine months of fiscal 1997 to 4.4% in the first nine months of
fiscal 1998 due to lower sales volume in the first nine months of fiscal 1998.
The decrease in general and administrative expenses in absolute dollars was due
primarily to staff reductions resulting in lower personnel costs. The Company
expects legal expenses to increase due to the defense of shareholder litigation,
although the timing of such expenses is uncertain*. See "Risk Factors."

        In the second quarter of fiscal 1998, the Company reversed a $1,528,000
restructuring charge taken during the fourth quarter of fiscal 1997. The
restructuring charge consisted primarily of fixed asset write-downs and
severance costs related to the planned relocation of all manufacturing
operations from the Company's Tijuana, Mexico, facilities. Subsequent to the end
of the second quarter of fiscal 1998, on September 29, 1997, the Company entered
into an agreement to sell its Tijuana manufacturing operation. This agreement
rendered the restructuring charge unnecessary.




                                       11
<PAGE>   12

Interest Income

        Interest income decreased from $915,000 in the first nine months of
fiscal 1997 to $820,000 in the first nine months of fiscal 1998. The decrease in
interest income in the first nine months of fiscal 1998 compared to the same
period a year ago is attributable primarily to lower interest rates earned and
to lower average cash balances during the nine months ended December 31, 1997.

Write-down of Investment in Affiliate

        The Company recorded a write-down of $3,905,000 of its investment in LPC
during the quarter ended June 30, 1996. The remaining investment balance of
$1,307,000 shown on the accompanying balance sheet as of December 31, 1997
reflects the Company's equity in the net assets of LPC. Subsequent to the
Company's write-down of its investment in LPC, LPC completed an initial public
offering in June 1997.

Income Taxes

        The Company's tax provision was a benefit of $602,000 in the first nine
months of fiscal 1998 compared to a provision of $1,351,000 in the first nine
months of fiscal 1997. The Company does not expect to benefit from the credit
for increasing research expenditures during fiscal 1998 because research
expenditures are expected to decline in absolute dollar amount in fiscal 1998 as
compared to prior years*. See "Risk Factors." The Company has not recognized any
tax effect from its equity in gain or loss of affiliate or from the write-down
of its investment in affiliate.


LIQUIDITY AND CAPITAL RESOURCES

        The Company has generally funded its operations through cash flow
provided from operations. The net increase in cash and short-term investments
was $5.7 million in fiscal 1996. In fiscal 1997, the net decrease in cash and
short-term investments was $3.4 million. The net decrease in cash and short-term
investments in fiscal 1997 was primarily due to a $9.5 million net loss, a $5.4
million increase in accounts receivable, the acquisition of $3.5 million in
property, and a $2.2 million increase in deferred income tax assets, partially
offset by $7.3 million received on the sale of the assets of Newpoint
Corporation, a $6.6 million increase in accounts payable and accrued expenses,
and a $2.0 million positive cash flow from the sale of common stock related to
stock option exercises. The net increase in cash and short-term investments was
$11.8 million in the nine months ended December 31, 1997. The net increase in
cash and short-term investments in the first nine months of fiscal 1998 was due
primarily to a $6.6 million decrease in inventories, a $2.0 million increase in
accounts payable and accrued expenses, $1.4 million received on the sale of the
assets of Transferencia Mexicana de Tijuana, and a $1.2 million decrease in net
accounts receivable. Accounts receivable decreased during the nine months ended
December 31, 1997 primarily due to lower sales volume. Inventories were reduced
during the first nine months of fiscal 1998 through the sale of older products
in a specific effort to reduce inventory levels. Receivable days outstanding
were 78 at March 31, 1997 and 75 at December 31, 1997.

        As of December 31, 1997, the Company had $29.9 million in cash and
short-term investments and $58.9 million in working capital, compared to $18.0
million in cash and short-term investments and $56.9 million in working capital
as of March 31, 1997. The Company had no debt at March 31 or December 31 of
1997.

        The Company has an arrangement for a $13.0 million revolving line of
credit, secured by accounts receivable, inventories and equipment, at an
interest rate equal to the bank's prime rate, with $3.0 million of the line
available for the purchase of fixed assets, at an interest rate of one-half
percent over the bank's prime rate. The line of credit arrangement contains
standard covenants relating to financial ratios. The




                                       12
<PAGE>   13

Company is in compliance with all such covenants. No borrowings were made under
this or any previous credit arrangement during fiscal year 1997 or during the
first nine months of fiscal 1998. The credit arrangement expires on July 31,
1998.

        The Company believes that existing cash resources, together with cash
flow from operations and available lines of credit, will provide sufficient
funding for operations for the foreseeable future*. See "Risk Factors." The
effect of the two class action lawsuits on the Company's liquidity cannot be
determined. The plaintiffs are seeking unspecified monetary damages (see note 4
to the Consolidated Financial Statements).

        To date, inflation has not had a significant impact on the Company's
operating results.


                                         RISK FACTORS

        The following discussion of risk factors describes certain aspects of
the business environment in which the Company operates. Users of this report
should carefully consider these risk factors in addition to the other
information in this report. The risks faced by the Company are illustrated by
the volatility of the Company's reported sales and earnings per share over the
last eight quarters:

<TABLE>
<CAPTION>
                     FY96                    FY97                              FY98
                    ------     --------------------------------      ----------------------
<S>                 <C>        <C>       <C>      <C>    <C>         <C>       <C>    <C>  
                       Q4          Q1       Q2       Q3      Q4          Q1       Q2     Q3
Sales ($millions)    47.6        35.0     36.2     47.4    36.0        29.0     30.2   38.0
EPS                 $0.47      ($0.59)   $0.10    $0.25  ($1.10)     ($0.23)   $0.01  $0.11
</TABLE>

The Company believes that this volatility has been influenced by the occurrence
of one or more of the factors discussed below.

FORECASTS

        The Company prepares annual budgets and other confidential internal
projections that contain detailed forecasts of future sales and earnings. The
Company's forecasts may turn out to be inaccurate as a result of circumstances
described in certain of the risk factors below, including "Short Product Lives
and Technological Change," "Competition," "Sources of Supply," "Price
Reductions" and "Variability of Quarterly or Annual Results." Numerous
independent stock and market analysts prepare and publish their own financial
forecasts and projections about the Company. The Company believes that such
forecasts and projections are speculative estimates, which may or may not be
accurate, and disclaims responsibility for all such forecasts and projections.

        From time to time, the Company may announce one or more new products
with a subsequent availability date. Any such availability dates are merely good
faith estimates by the Company, and the Company may suffer delays in the
availability of new products at any time. Delays can occur where the Company
and/or its suppliers are unable to resolve various technical challenges that are
normal in any development process prior to the estimated availability date. The
Company expects that it and its suppliers will continue to face such challenges
and risks which may adversely impact the estimated availability dates and
production ramp-up periods for new products.

SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE

        The market for multimedia projection products is characterized by
rapidly evolving technology and short product lives, with new products
frequently capturing significant market share. Any time significant new products
are announced or introduced by the Company or others, the Company will likely
deem it necessary to substantially reduce prices on certain models. Further, if
such prices are reduced to less than the inventory carrying value, the Company
would be required to record a write-off




                                       13
<PAGE>   14

of the excess carrying value. In the fourth quarter of fiscal 1997, the Company
recorded a substantial write-down for certain inventory and may record other
write-downs of varying magnitudes from time to time in the future.

        The Company's future success depends on its ability to continue to
distribute under private label arrangements and/or develop competitive products
and services on an efficient and timely basis. Historically, many of the
Company's products have achieved peak sales within a few months after their
introduction with sales declining thereafter until the products are obsolete.
The Company's product line must be frequently refreshed with improved products
to maintain parity with competitors' products. The Company has increasingly
relied on various business alliances to source products manufactured by third
parties (these products are referred to as "sourced products"), rather than
manufacturing its own products. Notwithstanding the Company's prior success in
distributing sourced products, the Company may not be able to continue to
respond to the expected rapid product shifts with improved sourced products in
the future. See "Sources of Supply."

        There are several new and proprietary technologies currently under
development within the multimedia projection industry including reflective
silicon panels, higher resolution (SXGA) controllers, ultra-portable projectors
weighing substantially less than current industry offerings, and plasma display
technologies. The Company or one or more of its competitors may introduce
additional products based on new and proprietary technologies at any time. Since
the Company has materially reduced its investment in its own research and
development efforts, it must rely on third party business alliances to obtain
sourced products which incorporate these new and proprietary technologies.
Although the Company continues to investigate opportunities to distribute new
and improved sourced products, it may not be able to respond to the frequent
technological shifts in a timely manner. Any inability to respond could result
in an adverse impact to financial results and inventory write-downs on obsolete
products.

SOURCES OF SUPPLY

        Certain products and components which the Company resells or uses to
manufacture its products are available only from single sources. Although the
Company generally buys products and components under purchase orders and does
not have long-term agreements with its suppliers, the Company expects that its
suppliers will continue to attempt to meet the Company's requirements. For many
products and components, the process of qualifying a replacement supplier and
receiving replacement supplies could take several months. The Company does not
maintain sufficient inventory to allow it to fill customer orders without
interruption for more than a few weeks. Therefore, an extended interruption in
the supply of products or components would have a material adverse effect on the
Company's results of operations.

        Two of the Company's major suppliers, Sanyo and Hitachi, also compete
with the Company and, in the case of sourced products, the Company sells product
substantially similar to that of its suppliers. The sourced product suppliers
are in a position to sell product at a lower price than the Company. See
"Competition." For the third quarter of fiscal 1998, a substantial majority of
the Company's sales were derived from sourced products, with one sourced product
supplier accounting for 60% of the Company's revenue. The Company expects that
its purchases from each individual sourced product supplier will vary from
quarter to quarter depending on market demand for the given product(s) offered
by that supplier at the time; however, the Company's critical dependence on its
sourced product suppliers, collectively, will continue throughout fiscal year
1998 and beyond. The manufacturers of sourced products face significant
development, technological and supplier challenges in developing and
manufacturing complicated multimedia projection equipment. Although the Company
communicates regularly with its sourced product suppliers, the Company does not
have the same visibility into any delays or pending development or supplier
issues that it would have on its own internal development projects. Any delay,
discontinuance, constraint or reduction, for whatever reason,




                                       14
<PAGE>   15

in the supply of any sourced products would have an immediate and severe adverse
impact on the Company's financial results.

        The Company purchases many of its products and components from suppliers
located outside the United States. Policies adopted by the Company's suppliers,
trading policies adopted by the United States (such as anti-dumping or other
duties on imported components) or foreign governments, or fluctuations in
foreign exchange rates may at any time restrict the availability of products or
components or increase their cost. The Company expects that it could experience
product and component shortages in the future, particularly in the months
immediately following the introduction of new products.

COMPETITION

        The Company believes that new competitors will continue to enter the
market and that new or existing competitors will continue to introduce products
which directly compete with the Company's existing products on a performance and
price basis. The Company's insight into its competition and their development
plans/product introduction dates is limited and, therefore, it is generally
unable to forecast the impact of new competitive products. Anticipated product
releases (and particularly products incorporating new technology) by the Company
or its competitors often cause customers to delay purchases of existing products
until such new products are available. Any delays in purchases can significantly
impact the Company's results of operations.

        The Company competes against some of the largest electronics
manufacturers in the world (such as Epson, Hitachi, 3M, Polaroid, Matsushita,
Philips, NEC, Sanyo, Sharp, Sony, Toshiba and others). Many competitors have
greater financial, technical, manufacturing and marketing resources than the
Company and have lower cost and/or profit structures and may be in a position to
introduce products incorporating advanced technologies ahead of the Company.
Competition between the Company and its competitors in the market for multimedia
projectors has been and is expected to continue to be intense.

        Given the large number of competitors now in the market and the
Company's focus on distributing sourced products (rather than manufacturing its
own products), the Company believes that non-hardware offerings, such as
value-added service and support offerings, software, and a broad distribution
capability, will become important to the Company's future success. The Company
expects to invest significantly in one or more of these areas or other
complementary business areas, and any such investment may or may not be
successful.

PRICE REDUCTIONS

        The industry in which the Company competes is characterized by
continually falling prices. The Company expects price competition to continue to
be intense and, therefore, expects continued downward pressure on its gross
margins.

        The Company provides price protection to its dealers and distributors
such that, if the Company reduces the price of its products, dealers and
distributors are generally entitled to a credit for the difference between the
new, reduced price and the price of products purchased and still held in their
inventory at the time of the price reduction. Unless offset by a higher unit
sales volume, each significant price reduction and the associated price
protection will have a material adverse impact on sales and gross margins and,
therefore, on the Company's results of operations for the period in which the
price reduction occurs. In order to remain competitive, the Company is regularly
reducing its prices on a product-by-product basis. To date, these reductions
have not been offset by higher unit sales volume. Future price reductions are
expected and will likely have a similar adverse effect.

VARIABILITY OF QUARTERLY OR ANNUAL RESULTS




                                       15
<PAGE>   16

        A significant portion of the Company's shipments typically occur in the
last month of a quarter. Any delay in receiving orders or in the shipment of
orders can have a significant impact on the Company's quarterly or annual
results. These delays may be caused by customers' ordering patterns or business
cycles, product and component availability, technical challenges, constraints in
the Company's production capacity, or other issues. These kinds of factors are
expected to cause further volatility in future periods.

VOLATILITY OF STOCK PRICE

        The trading price of the Company's stock has been and is expected to
continue to be subject to immediate and wide fluctuations due to factors both
within and outside the Company's control, including but not limited to one or
more of the following: variations in operating results or financial position,
new product introductions or price reductions by the Company or its competitors,
changes in product mix, product reviews by trade publications, estimates or
statements made by analysts regarding the Company or its industry, perceptions
formed at major trade shows regarding the Company or its industry, stock market
price fluctuations, and litigation. Investors should expect that market
reactions to announcements of the Company's actual or expected results of
operations for a particular quarter or annual period could be immediate and
severe.

STOCKHOLDER LAWSUITS

        Two class action securities lawsuits are pending against the Company.
The lawsuits allege that the Company and certain of its officers and directors
engaged in a scheme to defraud investors by making a series of positive
statements about the Company that were allegedly known to be false and
misleading when made. The Company believes that the lawsuits are without merit,
and the Company is defending the lawsuits.

        Alleged damages in the lawsuits are unspecified, but an adverse verdict
could have a severe adverse impact on the Company's operations, liquidity and
financial results. The Company is expending significant financial and managerial
resources in defense of the lawsuits to protect its business interests and the
interests of its stockholders. Defense costs alone could have a material adverse
effect on future results. The Company is subject to Generally Accepted
Accounting Principles and to the rules of the Securities and Exchange
Commission, which do not permit the provision for any loss that may result from
the resolution of litigation whose outcome cannot presently be determined.

        The Company believes that the volatility of its business and of the
market for stocks of high technology companies makes it inevitable that the
Company's stock will continue to fluctuate substantially in price. In addition,
most or all of the Company's officers and directors have, as part of their
compensation packages, stock option arrangements with finite lives and which
expire ninety days after the termination of employment. As a result, the Company
expects that its directors, officers and other employees will from time to time
exercise stock options and subsequently lawfully sell the stock thus acquired in
the midst of continuing fluctuations in the price of the Company's stock. The
Company believes that its stock price volatility and the occasional lawful sale
of stock by its directors and officers may make it susceptible to meritless
stockholder lawsuits in the future.

CHANNELS OF DISTRIBUTION

        The Company sells its products primarily through independent
presentation specialists, personal computer dealers and distributors. These
presentation specialists, dealers and distributors ("resellers") may carry
competing product lines and could reduce or discontinue sales of the Company's
products at any time. These resellers may not devote the resources necessary to
provide effective sales and marketing support to the Company. Any reduction in
sales to resellers may have a material adverse effect.




                                       16
<PAGE>   17

        Many of the resellers are small organizations with limited capital. The
Company continuously monitors and manages the credit it extends to its
resellers; however, one or more of the resellers could become insolvent. In the
event of such insolvency, the Company could experience disruptions in its
distribution as well as a loss of some or all of any outstanding accounts
receivable. The Company's objective is to increase international sales,
including sales in emerging markets such as China and Latin America. The Company
believes that the credit risks associated with resellers in emerging markets are
materially greater than those associated with the U.S. and European markets.

        Shifts in pricing, end-user preferences or the entry of a major new
competitor (See "Competition") may alter the relative importance of the channels
of distribution discussed above or may create entirely new channels of
distribution. For example, as market prices decline on the Company's products,
it may become advantageous to promote and sell the products through new and
alternative channels of distribution. The Company may incur significant costs in
order to expand its presence in these new channels or in existing channels,
which could have a material adverse effect on the Company's results of
operations. Any investment to enter new channels or to expand existing
distribution channels may not be successful.

KEY PERSONNEL

        The Company believes that it is important to fill certain key positions
in its senior management team and to maintain continuity at that level. For
example, the Company is presently searching for a chief executive officer
("CEO"). The CEO position is presently held on an interim basis. Although the
Company is devoting substantial effort to recruiting for this position and
others, it may not be successful in these efforts.

INTELLECTUAL PROPERTY RIGHTS

        From time to time, certain companies have asserted patent, copyright and
other intellectual property claims relevant to the Company's business and the
Company expects that this will continue. The Company evaluates each claim
relating to its products and, if appropriate, seeks a license. If any legal
action were to arise in which the Company's products should be found to infringe
upon intellectual property rights, the Company could be enjoined from further
infringement and required to pay damages, which could have a material adverse
effect on the Company's results of operations.

YEAR 2000

        Many computer systems and software products used by the Company in its
day-to-day operations will not function properly in the year 2000 and beyond. As
a result, the Company will need to upgrade the affected computer systems and
software products in order to resolve the "year 2000" issue. There is
significant uncertainty in the software industry concerning the potential
effects of the century change, however, based on the best information available
to the Company at this point, the Company believes that it will be able to
upgrade its mission-critical computer systems and software products prior to the
century change. If the Company's upgrade program is not completed on a timely
basis, or if the Company's software suppliers fail to provide "year 2000"
compliant software as part of the Company's upgrade program, there could be a
material adverse effect on the Company's business and financial results.

DEPENDENCE ON EXPORT SALES

        For fiscal 1996, 1997 and the first three quarters of fiscal 1998, sales
outside the United States and Canada represented approximately 39%, 38% and 26%,
respectively, of the Company's total sales. Sales outside the United States are
subject to the normal risks of international business activities, such as
protective tariffs, export and import controls, transportation delays and
interruptions, and changes in demand resulting from fluctuations in exchange
rates. In light of recent economic uncertainty in Asia, the Company expects weak
sales in this region for the fourth quarter of fiscal 1998 and beyond. With
respect to exchange rates, virtually all of the




                                       17
<PAGE>   18

Company's products sold in international markets are denominated in U.S.
dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less price competitive in foreign
markets. Any increase in international sales may subject the Company to greater
currency fluctuation risk than it has faced in the past.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW; THE COMPANY'S CHARTER DOCUMENTS

        Certain provisions of Delaware law and the charter documents of the
Company may have the effect of delaying, deferring or preventing changes in
control or management of the Company. The Company is subject to the provisions
of Section 203 of the Delaware General Corporation Law, which has the effect of
restricting changes in control of a company. The Company's Board of Directors
has authority to issue up to 5,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
such shares without any further vote or action by the stockholders.
























                                       18

<PAGE>   19

PART II - OTHER INFORMATION


ITEM 1:  LEGAL PROCEEDINGS

         See Note 4 of the Notes to Consolidated Financial Statements herein and
also Item 3, Legal Proceedings, in Registrant's Form 10-K for the fiscal year
ended March 30, 1997. Subsequent to the filing of the Company's Form 10-K, the
Stielau Family Trust, et al. v. Proxima Corp., et al. case was dismissed on
August 12, 1997 by the California Superior Court for San Diego County at the
request of the plaintiffs.

ITEM 2:  CHANGES IN SECURITIES
         Not applicable.

ITEM 3:  DEFAULTS UPON SENIOR SECURITIES
         Not applicable.

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         Not applicable.

ITEM 5:  OTHER INFORMATION
         Not applicable.

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K
         a.  Exhibits:
               #27 - Financial Data Schedule (for EDGAR purposes only)

         b. No reports on Form 8-K were filed by the Company during the quarter
            ended December 31, 1997.




















                                       19

<PAGE>   20

                                   SIGNATURES


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



                                          PROXIMA CORPORATION




Dated:  February 10, 1998                 Kenneth E. Olson
                                          --------------------------------------
                                          KENNETH E. OLSON
                                          President and Chief Executive Officer




Dated:  February 10, 1998                 Dennis Whittler
                                          --------------------------------------
                                          DENNIS A. WHITTLER
                                          Vice President, Finance




















                                       20

<PAGE>   21


                                  EXHIBIT INDEX


Exhibit  No.                 Description                                Page No.
------------                 -----------                                --------
     27                Financial Data Schedule                             22



                                       21