<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 29, 1996

                                       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 offices)                     (zip code)



       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, 7,415,145 shares as of February 3, 1997.
<PAGE>   2
PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                              PROXIMA CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  ------------  ---------
                                                  December 31,  March 31,
                                                     1996         1996
                                                  ------------  ---------
                                                  (unaudited)
<S>                                               <C>           <C>
ASSETS
  CURRENT ASSETS
    Cash and cash equivalents                       $  8,494      $ 2,389
    Short-term investments                            10,507       19,032
    Accounts receivable, net                          40,263       27,255
    Inventories (note 2)                              27,421       24,416
    Deferred income taxes                              2,886        2,864
    Prepaid expenses and other                           711          809
                                                    --------      -------
      Total current assets                            90,282       76,765
                                                    --------      -------
  PROPERTY                                             7,277        7,189
                                                    --------      -------
  OTHER ASSETS
    Investment in affiliate (note 3)                   1,143        4,485
    Deferred income taxes                                794          874
    Patents                                              485          497
    Other                                                316          448
                                                    --------      -------
      Total other assets                               2,738        6,304
                                                    --------      -------
  TOTAL                                             $100,297      $90,258
                                                    ========      =======

LIABILITIES AND STOCKHOLDERS' EQUITY
  CURRENT LIABILITIES
    Accounts payable                                $ 19,290      $ 9,469
    Accrued expenses                                   6,314        5,555
    Income taxes payable                               1,690        2,064
                                                    --------      -------
      Total current liabilities                       27,294       17,088
                                                    --------      -------
  COMMITMENTS AND CONTINGENCIES (NOTE 4)

  STOCKHOLDERS' EQUITY (NOTE 5)
    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--
      7,407,000 and 7,120,000 shares, respectively         7            7
    Paid-in capital                                   41,723       39,399
    Treasury stock--281,000 shares held               (2,548)      (1,750)
    Retained earnings                                 33,821       35,514
                                                    --------      -------
      Total stockholders' equity                      73,003       73,170
                                                    --------      -------
  TOTAL                                             $100,297      $90,258
                                                    ========      =======
</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,
                                                 --------------------------      ---------------------------
                                                    1996          1995             1996            1995
                                                 ----------     -----------      -----------     -----------
                                                 (unaudited)    (unaudited)      (unaudited)     (unaudited)
<S>                                              <C>            <C>              <C>             <C>
SALES                                               $47,365      $44,216         $118,625        $112,206
COST OF SALES                                        33,658       27,387           83,410          71,934
                                                    -------      -------         --------        --------
           Gross profit                              13,707       16,829           35,215          40,272
                                                    -------      -------         --------        --------
OPERATING EXPENSES
           Selling and marketing                      6,192        5,576           18,138          15,080
           Research and development                   3,245        3,402           11,870           8,955
           General and administrative                 1,719        2,268            5,093           5,412
                                                    -------      -------         --------        --------
                      Total                          11,156       11,246           35,101          29,447
                                                    -------      -------         --------        --------
INCOME FROM OPERATIONS                                2,551        5,583              114          10,825
                                                    -------      -------         --------        --------
OTHER INCOME (EXPENSE)
           Interest and other income                    242          261              915             632
           Equity in income (loss) of
               affiliate (note 3)                        31         (258)            (245)           (737)
           Gain on sale of subsidiary's
               assets (note 7)                            -            -            2,779               -
           Write-down of investment in
               affiliate (note 3)                         -            -           (3,905)              -
                                                    -------      -------         --------        --------
                      Total                             273            3             (456)           (105)
                                                    -------      -------         --------        --------

INCOME (LOSS) FROM CONTINUING
           OPERATIONS BEFORE INCOME TAXES             2,824        5,586             (342)         10,720
PROVISION FOR INCOME TAXES                              986        2,357            1,351           4,488
                                                    -------      -------         --------        --------

NET INCOME (LOSS)                                   $ 1,838      $ 3,229         ($ 1,693)       $  6,232
                                                    =======      =======         ========        ========

EARNINGS (LOSS) PER SHARE DATA (NOTE 1)
           Earnings (loss) per share                $  0.25      $  0.46         ($  0.24)       $   0.89
                                                    =======      =======         ========        ========
           Weighted average common and common
                equivalent shares (note 1)            7,324        7,026            7,004           6,983
                                                    =======      =======         ========        ========
</TABLE>

See notes to consolidated financial statements.

                                       3
<PAGE>   4
                              PROXIMA CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                   Nine months December,
                                                                 -------------------------
                                                                    1996          1995
                                                                 -----------    ----------
                                                                 (unaudited)    (unaudited)
<S>                                                              <C>            <C>
OPERATING ACTIVITIES
  Net income (loss)                                               ($ 1,693)      $ 6,232
  Adjustments to reconcile net income (loss) to net cash
    provided by (used for) operating activities:
    Depreciation and amortization                                    2,756         2,032
    Provision for allowance for doubtful accounts                      (80)          903
    Benefit from deferred income taxes                                  58          (284)
    Tax benefit from stock option exercises                            373           981
    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                                          (15,049)       (1,578)
      Income taxes payable                                            (374)        1,302
      Inventories                                                   (5,152)        1,407
      Prepaid expenses and other assets                                 69         1,375
      Accounts payable and accrued expenses                         11,266        (5,322)
                                                                   -------       -------
          Net cash provided by (used for) operating activities      (6,700)        7,048
                                                                   -------       -------
INVESTING ACTIVITIES
  Proceeds from sale of subsidiary's assets                          7,259             -
  Acquisition of property                                           (3,494)       (3,376)
  Short-term investments decrease                                    8,525          (882)
  Investment in affiliate                                             (666)       (1,385)
  Other                                                                134            (9)
                                                                   -------       -------
         Net cash provided by investing activities                  11,758        (5,652)
                                                                   -------       -------
FINANCING ACTIVITIES
  Sale of common stock                                               1,047           947
                                                                   -------       -------
NET INCREASE IN CASH AND CASH EQUIVALENTS                            6,105         2,343

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                     2,389         3,304
                                                                   -------       -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                         $ 8,494       $ 5,647
                                                                   =======       =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Income taxes paid                                                $ 1,306       $ 1,175
                                                                   =======       =======
</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, 1996.

Earnings (loss) per share is computed based on the weighted average number of
common and common equivalent shares outstanding during each period 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 (see note 5). Stock options are considered to be common stock
equivalents. For the nine months ended December 31, 1996, when the inclusion of
common stock equivalents would be antidilutive, earnings (loss) per share is
computed based on the weighted average number of common shares outstanding
excluding common stock equivalents. Primary earnings (loss) per share is not
significantly different from fully diluted earnings (loss) per share for any of
the periods indicated.

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,
                                     1996                1996
                                 (unaudited)
<S>                              <C>                <C>
    Raw materials                $13,206,000        $ 3,974,000
    Work-in-process                5,166,000         10,887,000
    Finished goods                 9,049,000          9,555,000
                                 -----------        -----------

         Total                   $27,421,000        $24,416,000
                                 ===========        ===========
</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 subsequently purchased, through
December 31, 1996, 1,611,000 shares of LPC Series A Preferred Stock for
$6,444,000. The Company has also entered into agreements providing for
technology licenses between the Company and LPC and the cooperative development
of new technologies. At December 31, 1996, the Company owned 125,000 shares of
LPC common stock and 1,611,000 shares of LPC Series A Preferred Stock for a
total investment of $6,699,000.

At December 31, 1996, the Company owned approximately 29% of the outstanding
voting stock of LPC. The Company accounts for its investment under the equity
method. The Company's share of the net losses of LPC of $245,000 for the first
nine months of fiscal 1997 is presented as "Equity in income (loss) of
affiliate" in the accompanying Consolidated Statements of Operations. This
balance includes approximately $195,000 for the amortization of the excess of
the cost of the investment over the underlying equity in net assets of LPC.

The Company recorded a write-down of $3,905,000 against its investment in LPC
during the quarter ended June 30, 1996. The remaining investment balance of
$1,143,000 shown on the accompanying balance sheet as of December 31, 1996
reflects the Company's equity in the net assets of LPC, less a valuation
reserve. The write-down and balance of the Company's investment in LPC is the
result of an analysis of discounted and undiscounted estimated cash flows from
the investment. The Company deemed it necessary to review its investment in LPC
because of information obtained upon the completion of the first engineering
model of a microlaser projector in July 1996. That engineering model
demonstrated that the microlaser projector development would take more time and
be more costly than anticipated, and that component costs would exceed earlier
expectations. The Company now believes that microlaser technology will initially
be suited for the higher-cost specialty projector market, which offers lower
unit volumes than originally contemplated.

The Company will continue to recognize its share of the net income or loss of
LPC under the equity method.

The Company has entered into an equipment line of credit agreement with LPC to
provide up to $1,000,000 to LPC for the acquisition of equipment for projector
development. The line of credit carries interest at 1.5% over the prime rate for
a term of 48 months. The line of credit is secured by the equipment acquired and
is guaranteed by a principal of LPC. At December 31, 1996, the total amount
borrowed pursuant to the line of credit was $230,000. This amount is included in
"Other" assets in the accompanying balance sheets.


4.       COMMITMENTS AND CONTINGENCIES

Litigation

During the second quarter of fiscal 1997, the Company was named as a defendant
in three putative shareholder class action lawsuits. Certain current and former
executive officers and directors are also named as defendants. In Stielau Family
Trust, et. al. v. Proxima Corp., et. al. (#702845), filed on August 15, 1996 in
the California Superior Court for San Diego County, and in Robert Powers, et.
al. v. Proxima Corp., et. al. (#961431), filed on August 16, 1996 in the U.S.
District Court for the Southern District of California, the plaintiffs purport
to represent a class consisting of all persons who purchased the Company's
common stock between July 26, 1994 and August 17, 1995. In Richard Strausz, et.
al. v. Proxima Corp, et. al. (#703166), filed on August 27, 1996 in the
California Superior Court for San Diego County, the plaintiffs purport to
represent a class consisting 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. The
plaintiffs are seeking unspecified compensatory and punitive damages. The
Company believes that it has good defenses to the claims alleged in the lawsuits
and is defending itself vigorously against these actions.




                                       6
<PAGE>   7



5.       STOCKHOLDERS' EQUITY

Treasury Stock

On August 27, 1996, the Company received approximately 58,000 shares of the
Company's common stock in connection with the exercise of stock options. The
shares received had a fair market value of $798,000 at the time of receipt. The
shares are shown as Treasury Stock in the accompanying balance sheets. The
Company may receive or repurchase additional shares of its issued and
outstanding common stock in the future.

6.       LINE OF CREDIT

At December 31, 1996, 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 contains 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 1996 or
during the first nine months of fiscal 1997. The credit arrangement expires on
July 31, 1997.


7.       SALE OF SUBSIDIARY'S 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 first nine months of fiscal years
1996 and 1997, and during the three month periods ended December 31, 1995 and
1996. The operating results of Newpoint Corporation for the nine months ended
December 31, 1995 and 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." The Company also retained certain liabilities related to
Newpoint Corporation. 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, reflecting an adjustment in the reserve for
these liabilities. The asset sale agreement provided for an independent audit of
the assets within 60 days from the date of the agreement, which was completed
during the three months ended September 30, 1996. The agreement also provides
for adjustments in the final sales price up to one year after the date of the
agreement based on such factors as collectability of receivables and inventory
obsolescence. The Company has established reserves that it considers sufficient
to cover any such adjustments, liabilities or contingencies.



                                       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. All of the Company's
products are designed for interactivity and ease of use.

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,
                                               ------------------     -----------------
                                                1996      1995          1996       1995
                                                ----      ----          ----       ----
<S>                                            <C>       <C>          <C>          <C>
Sales                                          100.0%    100.0%        100.0%     100.0%
Cost of sales                                   71.1      61.9          70.3       64.1
                                               -----     -----         -----      -----
    Gross profit                                28.9      38.1          29.7       35.9
                                               -----     -----         -----      -----

Operating expenses
    Selling and marketing                       13.1      12.6          15.3       13.4
    Research and development                     6.8       7.7          10.0        8.0
    General and administrative                   3.6       5.1           4.3        4.8
                                               -----     -----         -----      -----
                  Total                         23.5      25.4          29.6       26.2
                                               -----     -----         -----      -----

Income from operations                           5.4      12.6           0.1        9.6
                                               -----     -----         -----      -----

Other income (expense)
    Interest and other income                    0.5       0.6           0.8        0.6
    Equity in  income (loss) of affiliate        0.1      (0.6)         (0.2)      (0.7)
    Gain on sale of subsidiary's assets           --        --           2.3        --
    Write-down of investment in affiliate         --        --          (3.3)       --
                                               -----     -----         -----      -----
                  Total                          0.6        --          (0.4)      (0.1)
                                               -----     -----         -----      -----

Income (loss) before income taxes                6.0      12.6          (0.3)       9.6
Provision for income taxes                       2.1       5.3           1.1        4.0
                                               -----     -----         -----      -----

Net income (loss)                                3.9%      7.3%         (1.4)%      5.6%
                                               =====     =====         =====      =====
</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 1997 COMPARED TO THIRD QUARTER FISCAL 1996

Sales

         The Company's sales increased 7% from $44.2 million in the third
quarter of fiscal 1996 to $47.4 million in the third quarter of fiscal 1997. The
increase in sales was primarily attributable to sales of LCD integrated
projector products sourced from other companies, partially offset by the loss of
sales of the Company's Newpoint Corporation subsidiary, which was sold during
the first quarter of fiscal 1997. The Company's older product lines suffered
from lower average selling prices attributable to price reductions and
promotional discounts. The Company has experienced increased pricing pressures
as a result of the entry of new competitors into the projection market. In
addition, the increase in the number of competitive new products available to
the channels of distribution in which the Company competes is negatively
impacting the Company's sales and market share. The increasing number of
competitive products is due primarily to the growth in resources dedicated to
product development by the Company's competitors. The Company believes that
competition in the form of continued pricing pressures and the introduction of
new product offerings will intensify in the future*. The Company also expects
that its international sales as a percentage of total sales will be lower in the
fourth quarter of fiscal 1997 versus the comparable period of fiscal 1996,
primarily due to expected reduced sales to the Company's major private label
customer*. See "Risk Factors."

Gross Profit

         Gross profit declined from $16,829,000 in the third quarter of fiscal
1996 to $13,707,000 in the third quarter of fiscal 1997, primarily due to price
reductions and reduced sales of older products, partially offset by increased
sales of sourced products and by component cost reductions. Gross profit as a
percentage of sales decreased from 38.1% in the third quarter of fiscal 1996 to
28.9% in the comparable quarter of fiscal 1997. The decrease in gross profit as
a percentage of sales for the quarter ended December 31, 1996 was due primarily
to price reductions on older products, promotional discounts offered by the
Company, and an increase in sales of products sourced from other companies. The
decline in gross profit as a percentage of sales was partially offset by
component cost reductions. 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. The Company's goal is to maintain operating expenses at levels comparable
to those experienced during the fourth quarter of fiscal 1996, when total
operating expenses were $12,372,000, adjusted for inflation at an assumed rate
of 5% per year, and excluding legal costs to be incurred during fiscal 1997 for
shareholder litigation*. See "Risk Factors." Actual operating expenses were
$12,990,000, $10,955,000 and $11,156,000 during the first, second and third
quarters of fiscal 1997, respectively. The reduction in operating expenses in
the second and third quarters of fiscal 1997 versus the first quarter of fiscal
1997 is primarily attributable to the absence of operating expenses of the
Company's Newpoint Corporation subsidiary, the assets of which were sold at the
end of the first quarter of fiscal 1997.

         Selling and marketing expenses increased from $5,576,000 in the third
quarter of fiscal 1996 to $6,192,000 in the third quarter of fiscal 1997. As a
percentage of sales, selling and marketing expenses increased from 12.6% in the
third quarter of fiscal 1996 to 13.1% in the third quarter of fiscal 1997.
Selling and marketing expenses were higher both in dollar amount and as a
percentage of sales primarily due to product promotion expenses related to the
introduction of the Company's new line of integrated projectors and sales
expenses required to support the higher sales volumes. 

         Research and development expenses decreased from $3,402,000 in the
third quarter of fiscal 1996 to $3,245,000 in the third quarter of fiscal 1997.
As a percentage of sales, research and development expenses were 7.7% in the
third quarter of fiscal 1996 and 6.8% in the third quarter of fiscal 1997. The
decrease in absolute dollars and as a percentage of sales for the third quarter
of fiscal 1997 as compared to the third quarter of fiscal 1996 reflects the
wind-down of microlaser research during the second quarter of fiscal 1997.


                                       9
<PAGE>   10
         General and administrative expenses were $1,719,000 in the third
quarter of fiscal 1997 versus $2,268,000 in the third quarter of fiscal 1996. As
a percentage of sales, general and administrative expenses decreased from 5.1%
in the third quarter of fiscal 1996 to 3.6% in the third quarter of fiscal
1997.The decrease in general and administrative expenses in absolute dollars and
as a percentage of sales was due primarily to lower recruiting and relocation
expenses, in addition to lower bad debt expense. The Company expects legal
expenses to increase due to the defense of shareholder litigation*. See "Risk
Factors."

Interest Income

         Interest income was nearly unchanged, decreasing from $261,000 in the
third quarter of fiscal 1996 to $242,000 in the third quarter of fiscal 1997.
Average cash balances and rates of interest earned on cash balances were
relatively unchanged in the third quarter of fiscal 1997 versus the third
quarter of fiscal 1996.

Income Taxes

         The Company's effective tax rate was 34.9% in the third quarter of
fiscal 1997 compared to a provision of 42.2% in the third quarter of fiscal
1996. The Company's effective tax rate in the third quarter of fiscal 1997 was
lower than the effective tax rate in the comparable period of the preceding year
primarily due to increased benefit from the Company's Foreign Sales Corporation
(FSC) and the reinstatement of the R&D tax credit effective July 1, 1996.

NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995

Sales

         The Company's sales increased 6% from $112.2 million in the nine months
ended December 31, 1995 to $118.6 million in the nine months ended December 31,
1996. The increase in sales was primarily attributable to sales of LCD
integrated projector products sourced from other companies, partially offset by
the loss of sales of the Company's Newpoint Corporation subsidiary, which was
sold during the first quarter of fiscal 1997. Overall, an increase in unit sales
was partially offset by a decrease in average selling prices attributable to
price reductions and promotional discounts. The Company has experienced
increased pricing pressures as a result of the entry of new competitors into the
projection market. In addition, the increase in the number of competitive new
products available to the channels of distribution in which the Company competes
is negatively impacting the Company's sales and market share. The increasing
number of competitive products is due primarily to the growth in resources
dedicated to product development by the Company's competitors. The Company
believes that competition in the form of continued pricing pressures and the
introduction of new product offerings will intensify in the future*. The Company
also expects that its international sales as a percentage of total sales will be
lower in the fourth quarter of fiscal 1997 versus the comparable period of
fiscal 1996, primarily due to expected reduced sales to the Company's major
private label customer*. See "Risk Factors."

Gross Profit

         Gross profit declined from $40,272,000 in the first nine months of
fiscal 1996 to $35,215,000 in the first nine months of fiscal 1997, primarily
due to price reductions and reduced sales of older products, partially offset by
increased sales of sourced products and by component cost reductions. Gross
profit as a percentage of sales decreased from 35.9% in the nine months ended
December 31, 1995 to 29.7% in the comparable period of fiscal 1997. The decrease
in gross profit as a percentage of sales for the nine months ended December 31,
1996 was due to price reductions, associated price protection, promotional
discounts offered by the Company, inventory adjustments to reflect standard cost
changes, and an increase in sales of products sourced from other companies. The
decline in gross profit as a percentage of sales was partially offset by
component cost reductions. 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."


                                       10
<PAGE>   11
Operating Expenses

         Operating expenses include selling and marketing, research and
development, and administrative expenses, which are individually discussed
below. The Company's goal is to maintain operating expenses at levels comparable
to those experienced during the fourth quarter of fiscal 1996, when total
operating expenses were $12,372,000, adjusted for inflation at an assumed rate
of 5% per year, and excluding legal costs to be incurred during fiscal 1997 for
shareholder litigation*. See "Risk Factors." Actual operating expenses were
$12,990,000, $10,955,000 and $11,156,000 during the first, second and third
quarters of fiscal 1997, respectively. The reduction in operating expenses in
the second and third quarters of fiscal 1997 versus the first quarter of fiscal
1997 is primarily attributable to the absence of operating expenses of the
Company's Newpoint Corporation subsidiary, the assets of which were sold at the
end of the first quarter of fiscal 1997.

         Selling and marketing expenses increased from $15,080,000 in the nine
months ended December 31, 1995 to $18,138,000 in the nine months ended December
31, 1996. As a percentage of sales, selling and marketing expenses increased
from 13.4% in the first nine months of fiscal 1995 to 15.3% in the first nine
months of fiscal 1997. Selling and marketing expenses were higher in both dollar
amount and as a percentage of sales primarily due to costs associated with
expanding overseas sales and marketing operations, product promotion expenses
related to the introduction of the Company's new line of projectors, and sales
expenses required to support the higher sales volumes.

         Research and development expenses increased from $8,955,000 in the nine
months ended December 31, 1995 to $11,870,000 in the nine months ended December
31, 1996. As a percentage of sales, research and development expenses were 8.0%
in the nine months ended December 31, 1995 and 10.0% in the nine months ended
December 31, 1996. The increase in both absolute dollars and percentage of sales
for the first nine months of fiscal 1997 as compared to the first nine months of
fiscal 1996 reflects higher staffing levels and preproduction costs associated
with the introduction of new products.

         General and administrative expenses decreased from $5,412,000 in the
first nine months of fiscal 1996 to $5,093,000 in the first nine months of
fiscal 1997. As a percentage of sales, general and administrative expenses
decreased from 4.8% in the first nine months of fiscal 1996 to 4.3% in the first
nine months of fiscal 1997. Decreases in general and administrative expenses in
absolute dollars and as a percentage of sales in the first nine months of fiscal
1997 versus the comparable period of fiscal 1996 were due primarily to decreases
in reserves for accounts receivable, partially offset by higher staffing levels.
The Company expects legal expenses to increase due to the defense of shareholder
litigation*. See "Risk Factors."

Interest and Other Income

         Interest income increased from $632,000 in the nine months ended
December 31, 1995 to $915,000 in the nine months ended December 31, 1996. The
increase is attributable to higher average balances of cash and short-term
investments during the first nine months of fiscal 1997 as compared to the
comparable period of fiscal 1996.

Write-down of Investment in Affiliate

         The Company took a write-down of $3,905,000 against its investment in
LPC during the quarter ended June 30, 1996. The remaining investment balance of
$1,143,000, shown on the accompanying balance sheet as of December 31, 1996,
reflects the Company's equity in the net assets of LPC, less a valuation
reserve. The Company deemed it necessary to review its investment in LPC because
of information obtained upon the completion of the first engineering model of a
microlaser projector in July 1996. That engineering model demonstrated that the
microlaser projector development would take more time and be more costly than
anticipated, and that component costs would exceed earlier expectations. The
Company now believes that microlaser technology will initially be suited for the
higher-cost specialty projector market, which offers much lower unit volumes
than originally contemplated.


                                       11
<PAGE>   12
Income Taxes

         The Company's effective tax rate was 41.9% in the first nine months of
fiscal 1996. The Company had a provision of $1,351,000 in the first nine months
of fiscal 1997. The Company has not recognized any tax benefit from the equity
in loss of affiliate or from the write-down of its investment in LPC.


TREASURY STOCK

         On August 27, 1996, the Company received approximately 58,000 shares of
the Company's common stock in connection with the exercise of stock options. The
shares received had a fair market value of $798,000 at the time of receipt. The
shares are shown as Treasury Stock in the accompanying balance sheets. The
Company may receive or repurchase additional shares of its issued and
outstanding common stock in the future.


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. The net increase in cash and short-term
investments in fiscal 1996 was primarily due to $9.7 million of earnings, a $2.0
million positive cash flow from the sale of common stock, and a $2.0 million tax
benefit from stock option exercises, partially offset by the acquisition of $5.0
million in property, a $3.3 million decrease in accounts payable and accrued
expenses, and a $2.0 million investment in LPC. The net decrease in cash and
short-term investments was $2.4 million in the nine months ended December 31,
1996. The net decrease in cash and short-term investments in the first nine
months of fiscal 1997 was due primarily to a $13.0 million increase in accounts
receivable, the acquisition of $3.5 million in property, and a $3.0 million
increase in inventories, partially offset by a $10.6 million increase in
accounts payable and accrued expenses, and $7.3 million received on the sale of
the assets of Newpoint Corporation. Accounts payable and accrued expenses
increased during the first nine months of fiscal 1997 due to the acquisition of
components for new products late in the period. Accounts receivable increased
during the same period because of increased sales near the end of the period,
and also due to sales incentive programs with extended payment terms. Receivable
days outstanding were 52 at March 31, 1996 and 78 at December 31, 1996.

         As of December 31, 1996, the Company had $19.0 million in cash and
short-term investments and $63.0 million in working capital, compared to $21.4
million in cash and short-term investments and $59.7 million in working capital
as of March 31, 1996. The Company had no debt at March 31 or December 31 of
1996.

         The Company has renewed its line of credit arrangement to provide 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
company is in compliance with all such covenants. No borrowings were made under
this or any previous credit arrangement during fiscal year 1996 or during the
first nine months of fiscal 1997. The credit arrangement expires on July 31,
1997. The Company expects to be able to obtain a new credit arrangement under
favorable terms*. See "Risk Factors."

         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."

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



                                       12
<PAGE>   13
                                  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>

                                   FY95                       FY96                             FY97
                                  -----       -----------------------------------   -------------------------
<S>                               <C>         <C>       <C>       <C>       <C>     <C>       <C>       <C>
                                     Q4          Q1        Q2        Q3        Q4       Q1       Q2        Q3
Sales ($millions)                  40.7        33.0      35.0      44.2      47.6     35.0     36.2      47.4
EPS                               $0.56       $0.24     $0.20     $0.46     $0.47   ($0.59)   $0.10     $0.25
</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 for
existing products as well as forecasts for products still in development. The
Company believes that inaccuracies in its forecasting result from factors in the
highly dynamic market in which it competes as described in certain of the risk
factors below, including "Short Product Lives and Technological Change,"
"Competition," "Development Risk," "Sources of Supply," "Price Reductions" and
"Variability of Quarterly or Annual Results." In the past eight quarters, for
example, actual quarterly earnings results have varied from internal forecasts
by amounts ranging from only a few percentage points to well over 100%, with
most of the large variances being negative. Further, as of the date of this
filing, the Company now believes that there will be a negative deviation from
its internal forecasts prepared at the beginning of the fourth fiscal quarter of
1997, primarily due to uncertainty regarding demand for its LightbookTM line of
products and, more generally, due to downward pricing pressures and a slowness
in demand and order rates across the Company's entire product line. These
factors are impacting the Company and, as a result, the Company now expects that
a material adverse impact on financial results will occur. It is the Company's
policy not to publicly disclose its detailed internal forecasts. Numerous
independent stock analysts and market analysts prepare and publish financial
forecasts and projections about the Company. The Company disclaims
responsibility for all such forecasts and projections. The Company believes that
forecasts and projections prepared by these independent stock analysts and
market analysts have frequently been inaccurate in the past and are, therefore,
highly speculative and should be used only with extreme caution.

         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 based on an assessment of all information
available at the time of the estimate. In the past, the Company has suffered
substantial delays in the availability of new products. These delays have
occurred either because the Company has been unable to resolve certain technical
challenges and supplier issues that are normal in any development process prior
to the estimated availability date, or because of unforeseen technical and
manufacturing challenges and supplier issues arising after the announcement of
an availability date. See "Development Risk" and "Sources of Supply." The
Company expects that it will continue to face such challenges and risks which
may adversely impact the estimated availability dates and production ramp-up
periods for its 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. 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. 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 the then-present models.
Further, if such prices are reduced to less than the inventory carrying value,
the Company would be required to record a write-off of the excess carrying
value. In the fourth fiscal quarter of 1997, the Company has written down
certain inventory and is likely to do so again in the future.



                                       13
<PAGE>   14
         The Company's future success depends on its ability to continue to
develop and manufacture, or to distribute under private label arrangements,
competitive products on a timely basis, particularly enhancements to and new
generations of multimedia projectors. For example, in the third quarter of
fiscal 1997, the majority of the Company's sales were generated by products
introduced within the preceding nine months. 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 increasing number of large competitors in
the multimedia projection industry has made it more difficult to foresee the
successive waves of product introductions in the industry. See "Competition."
Although the Company has released six new projector products over the last nine
months, it does not have the internal resources necessary to be first to market
in calendar 1997 with improved products and features. Therefore, the Company
must increasingly rely on its evolving business alliances to supplement products
developed and produced internally by the Company.

         Many of the Company's competitors currently offer projectors that
directly compete with the Company's existing projector products on a
price/performance, feature and/or availability basis. The Company believes that
the sale of such products by the Company's competitors adversely affected sales
of the Company's projectors during the first and second quarters of fiscal 1996
and the first and second quarters of fiscal 1997. Although the Company continues
to introduce enhanced versions and new generations of its projector products,
the Company has continued to lose market share. See "Competition." The Company's
new products released over the last nine months are expected to continue to
account for the majority of the Company's sales into fiscal 1998. As of the date
of this filing, these new products have begun to experience some slowness in
demand. See "Forecasts." The Company may not be in a position to transition to
improved sourced products, and will not be in a position to transition to
improved manufactured products, in response to competitors' subsequent product
introductions which are expected during the remainder of fiscal 1997 and into
fiscal 1998.

         In addition to the evolutionary changes in products and technologies
described above, several new technologies are currently in production or under
development by the Company or its competitors, including reflective silicon
panels, higher resolution (XGA and EWS) controllers, and ultra-portable
projectors weighing substantially less than current industry offerings. The
Company or one or more of its competitors may introduce additional products
based on new technologies from time to time. The Company believes that
polysilicon LCD technology, which has been developed and is owned by numerous
Japanese companies, and digital micromirror technology, which has been developed
and is owned by one U. S. company, will both continue to improve on a
price/performance basis. See "Competition." Further, the Company believes that
demand will continue to increase for higher resolution (SVGA and XGA resolution)
projectors, and that there will continue to be a significant reduction in demand
for VGA resolution projectors. The Company may not be able to respond to these
technological shifts in a timely manner. In the past, the company or companies
that first introduce new features or technologies into the marketplace have
gained significant market share. The Company has lost market share in this way
in the past and may do so again in the future.

DEVELOPMENT RISK

         The Company currently designs, manufactures and distributes its own
products, and also distributes products designed and manufactured by others. The
design, manufacture and marketing of multimedia projector products is
complicated by rapidly evolving light valve technologies, lamp technologies,
electronic control circuitry and optics. As projection products become smaller,
the Company faces extraordinarily complex engineering challenges in integrating
electrical, mechanical, optical, thermal, and software designs into a compact
unit. Further, the Company must repeatedly make complex choices regarding which
technologies to pursue, product make versus buy determinations, and the
development of differentiating product features. As a result, in developing its
new products, the Company exposes itself to enormous technical and financial
risks. In the past, the Company has discontinued certain development efforts
based on changing expectations of the respective products' marketability or
producability and may do so again in the future. Many of the challenges faced by
the Company in developing new products involve key components produced by
vendors who themselves face engineering or procurement challenges that the
Company has little or no ability to anticipate or resolve.



                                       14
<PAGE>   15
         The Company continues to face the development risks described above and
expects to face other unforeseen development risks which may cause substantial
delays in the development and introduction of new 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
certain of these items, the process of qualifying a replacement supplier and
receiving replacement supplies could take several months. For example, should a
mold for plastic componentry break or become unusable, repair or replacement
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.
Three of the Company's major suppliers, Sanyo, Sharp and Hitachi, also compete
or have competed with the Company. See "Competition." 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 has experienced product and component shortages in the past and expects
that it could again experience product and component shortages in the future,
particularly in the months immediately following the introduction of new
products. See "Development Risk." In addition, for the third fiscal quarter of
1997, almost one-half of the Company's sales were derived from sourced products,
which are designed and manufactured by third party suppliers. Any delay or
constraint, for whatever reason, in the supply of any of these sourced products
to the Company would have an immediate and severe adverse impact on the
Company's financial results.

COMPETITION

         The Company's ability to compete in the highly competitive multimedia
projection products market depends on factors both within and outside its
control, including the success and timing of product introductions by the
Company and its competitors, product price, performance and features,
availability, product distribution and customer support. The Company believes
that new competitors will enter the market and that new or existing competitors
will 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/dates is extremely limited and,
therefore, it is generally unable to forecast the impact of new competitive
products. However, the Company is aware that a large Japanese manufacturer has
announced a polysilicon-based projector purportedly offering excellent
performance and size characteristics. The Company is also aware that this
manufacturer has agreed to sell certain key components of this projector to
certain of the Company's competitors, and at least one of these competitors has
announced a projector based on these components. The Company believes that these
announcements are presently impacting order rates on the Company's products,
which will adversely affect the Company's results.

         Some of the Company's current or potential 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. A number of
large electronics and computer manufacturers such as Apple, Hewlett-Packard,
Compaq, Kyocera, Samsung and Texas Instruments, among others, have the resources
to enter the projection products market in direct competition with the Company,
employing potentially superior technologies and/or cost structures.
Announcements by one or more of the large manufacturers (including the
announcement of the new polysilicon projector described in the preceding
paragraph) can cause customers to delay or cease altogether purchases of the
Company's products, which would have a material adverse effect on the Company's
results of operations. For example, since the beginning of 1995, Epson, Fujitsu,
Hitachi, 3M, IBM, Matsushita, Philips, NEC, Sanyo, Sony and Toshiba have each
introduced or announced new products addressing the same markets as certain of
the Company's products. Competition between the Company and its competitors in
the market for multimedia projectors has been and is expected to continue to be
intense.


                                       15
<PAGE>   16
PRICE REDUCTIONS

         The Company has in the past significantly reduced prices on its product
lines and expects to do so again in the future in response to competitive
pricing pressures. The Company expects price competition to continue to be
intense and, therefore, expects continued downward pressure on its gross
margins. The Company believes that certain of its competitors have the financial
resources to, and may, sell competitive products at cost or potentially below
cost in an effort to gain market share.

           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 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. Any significant price reduction
and the associated price protection would 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, unless such price reduction were
offset by higher unit volume resulting from the price reduction. For example, in
order to meet competition, the Company is regularly reducing its prices on a
product by product basis. To date, these reductions have not been offset by
higher unit volumes. Future price reductions are expected and will likely have a
similar material adverse effect.

VARIABILITY OF QUARTERLY OR ANNUAL RESULTS

         A significant portion of the Company's shipments typically occur in the
last month of a quarter. Although the Company attempts to ship products to its
customers as promptly as practicable upon receipt of a purchase order, minor
timing differences between the receipt of customer purchase orders and the
Company's shipments to fill such orders can have a significant impact on the
Company's quarterly or annual results. These timing differences may be caused by
customers' ordering patterns or business cycles, or by the Company's production
capacity, component availability or technical challenges. When, as often
happens, significant variations occur between forecasts and actual orders (see
"Forecasts"), the Company is often unable to reduce its fixed short-term
expenses proportionately and in a timely manner, which at times has had an
adverse effect on operating results and could have a similar effect in the
future. For example, during fiscal 1996, the Company and its suppliers
encountered technological barriers and manufacturing process problems on several
of its new integrated projector products. The Company was, therefore, unable to
obtain enough components to meet the initial demand for certain of its newer
products. When breakthroughs were made on some of these new products, the
Company was able to ship a large volume of products to fill past due orders.
Component availability, quality control, production yield, and technological
factors have caused variations in quarterly and annual results in the past, and
are expected to cause further volatility in future periods. The Company's new
projector products introduced during fiscal 1997 are, and any future products
will be, subject to similar technical challenges and are also critically
dependent on the availability of supplier products and/or key components such as
LCD panels, light valves, power supplies and molded plastic. See "Development
Risk" and "Sources of Supply."

         The Company's rate of year-over-year revenue growth slowed
significantly in the first three quarters of fiscal 1997 compared to the year
earlier period. The Company does not expect to achieve in the future either the
rates of growth experienced by the Company in fiscal years 1992 through 1996 or
the rates of growth projected for the multimedia projection products industry as
a whole. The Company believes that the projections by third parties of total
unit demand growth in the multimedia projection products industry will be
partially or entirely offset by continued price erosion in the industry. See
"Price Reductions."

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 changes 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. As is the case with many other technology
companies,


                                       16
<PAGE>   17
fluctuations in the market price of the Company's stock have resulted in class
action stockholder lawsuits against the Company. See "Stockholder Lawsuits." The
defense of such lawsuits could have a material adverse effect on the Company's
results of operations, whether or not any such lawsuits are meritorious.

         The Company believes that the variability of its quarterly and annual
operating results contributes to the volatility of the price of the Company's
common stock in the public market. As a result, 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. For example, during each of the first two quarters of fiscal 1996 and
during the first quarter of fiscal 1997, the Company announced that it expected
to experience a decline in revenues and/or earnings due to the effect of new
products introduced by competitors and limited availability of certain of the
Company's new products and related components. Each of these announcements
caused a sudden drop in the price of the Company's stock. Consistent with the
prior announcement during the first quarter of fiscal 1997, the Company
subsequently reported a loss from operations for the first quarter of fiscal
1997. The Company expects that future transitions to new products and
technologies by the Company and/or others may also result in a loss from
operations in one or more fiscal quarters in the future thereby likely causing a
sudden drop in the price of the Company's stock at those times.

STOCKHOLDER LAWSUITS

         Three putative 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 vigorously defending the lawsuits.

         Alleged damages in the lawsuits are unspecified, but theoretically an
adverse verdict could bankrupt the Company and result in a total loss of each
stockholder's investment. 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 (90) 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 will make it susceptible to
meritless shareholder class action lawsuits in the future.

CHANNELS OF DISTRIBUTION

         The Company sells its products primarily through independent
presentation specialists, personal computer dealers and distributors, and
through private label and OEM arrangements. 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. In addition, to the extent that private label
and OEM customers do not purchase products as anticipated or switch to a
different supplier on short notice, the Company may be holding customized
inventories which are not salable to other customers and inventory write-downs
may result. The Company's major private label customer is currently phasing out
purchases of certain of the Company's products. In fiscal 1996, private label
sales represented approximately 15% of the Company's business. Any further
phase-out of sales to this private label customer or phase-out of sales to any
other private label or OEM customers, or any reduction in sales to presentation
specialists, dealers and distributors, may have a material adverse effect.

                                       17
<PAGE>   18
         Shifts in end-user preferences or the entry of a major new competitor
(see "Competition," above) may alter the relative importance of the channels of
distribution discussed above or may create entirely new channels of
distribution. The Company may incur significant costs in order to expand its
presence in existing channels of distribution or establish a presence in new
channels, which could have a material adverse effect on the Company's results of
operations.

CREDIT RISKS

         Many of the resellers discussed above 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.

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.

DEPENDENCE ON EXPORT SALES

         For fiscal 1995, 1996, and in the first nine months of fiscal 1997,
sales outside the United States and Canada represented approximately 38%, 39%
and 30%, 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. With respect to exchange rates, virtually all of the 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 Consolidated Financial Statements.

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, 1996.



                                       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 11, 1997                 JOHN E. REHFELD
                                          _____________________________________
                                          JOHN E. REHFELD
                                          President and Chief Executive Officer



Dated:  February 11, 1997                 DENNIS WHITTLER
                                          _____________________________________
                                          DENNIS A. WHITTLER
                                          Vice President, Finance



                                       20
<PAGE>   21
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit  No.           Description                                Page No.
------------           -----------                                --------
<S>                    <C>                                        <C>
27                     Financial Data Schedule                    22

</TABLE>


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