<PAGE>
 
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  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 31, 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  000-21171
                                        
                           -------------------------

                       SPLASH TECHNOLOGY HOLDINGS, INC.
            (Exact name of registrant as specified in its charter)

          DELAWARE                                      94-2910085
(State or other jurisdiction of               (IRS Employer Identification No.)
 incorporation or organization)

              555 DEL REY AVENUE, SUNNYVALE, CA            94086
           (Address of principal executive offices)      (Zip Code)

      Registrant's telephone number, including area code:  (408) 328-6300


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 proceeding 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  [_]

The number of shares outstanding of the Registrant's Common Stock, $.001 per
value, as of January 31, 1997 was 12,044,750 shares.
<PAGE>
 
                       SPLASH TECHNOLOGY HOLDINGS, INC.
                          FORM 10-Q QUARTERLY REPORT


                               TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

  Item 1 - Consolidated Financial Statements                         3
 
  Item 2 - Management's Discussion and Analysis of Financial         8
             Condition and Results of Operations           
 
PART II - OTHER INFORMATION
 
  Item 1 - Legal Proceedings                                        18
 
  Item 2 - Changes in Securities                                    18
 
  Item 3 - Defaults Upon Senior Securities                          18
 
  Item 4 - Submission of Matters to a Vote of Security Holders      18
 
  Item 5 - Other Information                                        18
 
  Item 6 - Exhibits and Reports on Form 8-K                         18
 
SIGNATURES                                                          19
 
EXHIBIT 11.1                                                        20
 

                                       2
<PAGE>
 
                        SPLASH TECHNOLOGY HOLDINGS, INC.
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                    Splash Technology
                                                                      Holdings, Inc.
                                                              -----------------------------
                                                              December 31,    September 30,
                                                                  1996            1996
                                                              -----------     ------------
                         ASSETS
Current Assets:                                               (Unaudited)              
<S>                                                           <C>             <C>    
 Cash and cash equivalents                                    $19,053           $ 6,179
  Accounts receivable, net of allowance for doubtful                                   
   accounts of $156 and $299 as of December 31, 1996                                   
   and September 30, 1996, respectively                         2,253             6,582
  Inventories                                                   4,200             3,651
 Prepaid expenses and other current                               336               119
  assets                                                                               
 Deferred income taxes                                          3,962             3,962
                                                              -------           -------
    Total current assets                                       29,804            20,493
Property and equipment, net                                     1,097               913
Deferred income taxes                                           8,315             8,315
Other assets                                                    1,092             1,511
                                                              -------           -------
    Total assets                                              $40,308           $31,232
                                                              =======           =======
                                                                                       
                          LIABILITIES                                                                            
                                                                                       
Current Liabilities:                                                                   
 Trade accounts payable                                       $ 2,546           $ 1,239
 Other accrued liabilities                                      4,526             3,348
 Royalties payable                                              1,452             1,260
 Deferred revenue                                               3,200             4,150
 Income taxes payable                                           2,445             1,725
                                                              -------           -------
     Total current liabilities                                 14,169            11,722
Subordinated promissory notes payable                               -             8,600
 to stockholders                                              -------           -------
     Total liabilities                                         14,169            20,322
                                                              -------           ------- 
                    STOCKHOLDER'S EQUITY
 
Preferred stock:
 Authorized: 5,000,000 shares;
 Series A preferred stock, par value $.001 per share:
   Authorized, issued and outstanding: no shares and
    15,426 shares as of December 31, 1996 and 
    September 30, 1996, respectively.                              -                  1
 Series B preferred stock, par value $.001 per share:
   Authorized, issued and outstanding: no shares and 4,282
    shares as of December 31, 1996 and September 30, 1996, 
    respectively.                                                  -                  1
Common stock, par value $.001 per share:
   Authorized: 50,000,000 shares; issued and outstanding:
    12,044,750  shares and 7,603,123 shares as of 
    December 31, 1996 and September 30, 1996, respectively.        10                 8
Additional paid-in capital                                     31,516            19,826 
Retained earnings (accumulated deficit)                        (5,387)           (8,926)
                                                              -------           -------        
      Total stockholders' equity                               26,139            10,910 
                                                              -------           -------        
       Total liabilities and                                  $40,308           $31,232
        stockholders' equity                                  =======           =======         
</TABLE>

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

                                       3
<PAGE>
 
                        SPLASH TECHNOLOGY HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                     (in thousands, except per share data)
<TABLE>
<CAPTION>
 
                                                            Splash Technology
                                                             Holdings, Inc.      Predecessor Business
                                                           ------------------    ------------------
                                                           Three Months Ended     Three Months Ended
                                                              December 31,           December 31,
                                                                  1996                   1995
                                                           ------------------    ------------------
<S>                                                        <C>                   <C>       
Net revenue                                                    $15,372                $7,206  
Cost of revenue                                                  7,511                 4,847  
                                                               -------                ------  
       Gross profit                                              7,861                 2,359  
                                                               -------                ------  
                                                                                              
Operating expenses:                                                                           
  Research and development                                       1,140                 1,256  
  Sales, general and administrative                              1,693                   804  
                                                               -------                ------  
       Total operating expenses                                  2,833                 2,060  
                                                               -------                ------  
            Income from operations                               5,028                   299  
                                                                                              
Other non-operating income                                        (600)                    -  
Interest income, net                                               (83)                    -  
                                                               -------                ------  
            Income before provision for income taxes             5,711                   299  
                                                                                              
Provision for income taxes                                       2,170                   120  
                                                               -------                ------  
            Net income                                         $ 3,541                $  179  
                                                               =======                ======  
Net Income per share                                             $0.29                        
                                                               =======               
Shares used in per share calculation                            12,070
                                                               =======
</TABLE>

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

                                       4
<PAGE>
 
                        SPLASH TECHNOLOGY HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                            Splash Technology
                                                             Holdings, Inc.      Predecessor Business
                                                           ------------------    ------------------
                                                           Three Months Ended     Three Months Ended
                                                              December 31,           December 31,
                                                                  1996                   1995
                                                           ------------------    ------------------
<S>                                                        <C>                   <C>       
Cash flows from operating activities:
  Net income                                                 $  3,541                    $   179  
  Adjustments to reconcile net income to net cash                                                 
     provided by operating activities:                                                                        
    Depreciation and amortization                                 110                         77  
    Provision for doubtful accounts                              (143)                        17  
    Gain on repayment of subordinated                            (600)                            
     promissory notes                                                                             
    Changes in assets and liabilities:                                                            
      Accounts receivable                                       4,472                      1,640  
      Inventories                                                (549)                     1,807  
      Prepaid expenses and other current assets                  (217)                      (866) 
      Other assets                                                391                          -  
      Trade accounts payable                                    1,307                     (1,447) 
      Other accrued liabilities                                 1,178                       (649) 
      Royalties payable                                           192                        660  
      Deferred revenue                                           (950)                     1,009  
      Income taxes payable                                        720                        120  
                                                             --------                    -------  
          Net cash provided by operating activities             9,452                      2,547  
                                                             --------                    -------  
Cash flows from investing activities:                                                             
  Purchase of property and equipment                             (266)                       (63) 
                                                             --------                    -------  
          Net cash used in investing activities                  (266)                       (63) 
                                                             --------                    -------  
                                                                                                  
Cash flows from financing activities:                                                             
  Net proceeds from initial public offering                    27,114                          -  
  Redemption of Series A Preferred                            (14,700)                         -  
  Premium paid on Series A Preferred                             (726)                         -  
  Repayment of subordinated promissory notes                   (8,000)                         -  
  Net change in parent company                                      -                     (2,484) 
   investment                                                --------                    -------  
           Net cash provided by (used in) 
             financing activities                               3,688                     (2,484) 
                                                             --------                    -------  
Net increase in cash                                           12,874                          -  
                                                                                                  
Cash and cash equivalents at beginning of period                6,179                          -  
                                                             --------                    -------  
Cash and cash equivalents at end of period                   $ 19,053                    $     -  
                                                             ========                    =======   
</TABLE>

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

                                       5
<PAGE>
 
                        SPLASH TECHNOLOGY HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  REORGANIZATION AND BASIS OF PRESENTATION:
    ---------------------------------------- 

  Splash Technology Holdings, Inc. (the "Company"), through its wholly-owned
subsidiaries, Splash Technology, Inc., Splash Foreign Sales Corporation and
Splash Technology S.a.r.l., develops, produces and markets color servers that
provide an integrated link between desktop computers and digital color copiers
and enable such copiers to provide high quality, high speed networked color
printing and scanning.

  The business of the Company was previously operated as the unincorporated
Color Server Group ("CSG") of SuperMac Technologies, Corp. ("SuperMac") from
late 1992 until August 1994 when SuperMac merged with Radius Inc. ("Radius").
In January 1996, the assets and liabilities of the Color Server Group of Radius
were transferred by Radius into its newly created wholly-owned subsidiary,
Splash Technology, Inc.  In December 1995, Splash Technology Holdings, Inc. was
incorporated in Delaware and was capitalized by the sale of Series A preferred
stock and common stock and subordinated debt to an investor group.  In January
1996, Splash Technology, Inc. merged with a wholly-owned subsidiary of Splash
Technology Holdings, Inc. and as part of the consideration for the merger,
Splash Technology Holdings, Inc. issued Series B preferred stock to Radius.  The
surviving corporation in the merger was Splash Technology, Inc., a wholly owned
subsidiary of the Company.

  The Predecessor Business's financial statements presented herein include the
results of operations and cash flows for the three months ended December 31,
1995, as if the Color Server Group existed as a corporation separate from Radius
during such periods on a historical basis.

  The accompanying unaudited consolidated financial information has been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial statements and pursuant to the rules of the
Securities and Exchange Commission on Form 10Q.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities Exchange
Commission. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all normal, recurring adjustments
necessary to present fairly the Company's consolidated financial position as of
December 31, 1996 and the results of operations and cash flows for the three
months ended December 31, 1996 and 1995, which results are not necessarily
indicative of results on an annual basis.  Such consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Annual Report on Form 10-K for the
fiscal year ended September 30, 1996.

  Certain items in the consolidated balance sheet as of September 30, 1996 have
been reclassified to conform to the December 31, 1996 presentation.

2.  INVENTORIES  (in thousands):
    -----------                 
<TABLE>
<CAPTION>
 
                             December 31,   September 30,
                                 1996           1996
                             -----------    -------------
                             (Unaudited)
<S>                          <C>            <C>
        Raw materials             $2,438          $1,580
        Work in process                -               -
        Finished goods             1,762           2,071
                                  ------          ------
                                  $4,200          $3,651
                                  ======          ======
</TABLE>

                                       6
<PAGE>
 
3.  STOCKHOLDERS' EQUITY:
    -------------------- 

  In the three months ended December 31, 1996, the Company sold 2,700,500 shares
of its common stock for $11.00 per share in an initial public offering.  The
proceeds from the initial public offering were used to retire all subordinated
debt and to redeem the Company's Series A preferred stock.  In addition, the
Series B preferred stock was converted into the Company's common stock.

                                       7
<PAGE>
 
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties.  The Company's
actual results may differ materially from the results discussed in such forward-
looking statements.  Factors that may cause such a difference include, but are
not limited to, those discussed in "Factors Affecting Future Results."

OVERVIEW

     The Company operated as the CSG division of SuperMac from late 1992 to
August 1994 and, after the merger of SuperMac into Radius, as the CSG division
of Radius from August 1994 until January 1996.  In January 1996, Splash was
acquired by an investor group in a leveraged transaction.  References below to
the results of operations for the three months ended December 31, 1995 refer to
the results of operations of CSG and for the three months ended December 31,
1996 refer to the results of operations of the Company.

     The Company has achieved significant growth in net revenue and operating
income each year since fiscal 1994, before purchase accounting adjustments
arising from the acquisition in January 1996.  However, there can be no
assurance that the Company's revenue will continue to grow at similar rates in
the future, if at all.  In addition, the Company's overall expense level is
expected to continue to increase as the Company expands its operations.
Accordingly, the Company believes that period-to-period comparisons of its
financial results should not be relied upon as an indication of future
performance.  Although the Company was profitable in fiscal 1996 (pro forma and
before purchase accounting adjustments) and the first eleven months of
independent operations through December 31, 1996 (before purchase accounting
adjustments), there can be no assurance that the Company will continue to be
profitable on an annual or quarterly basis in the future.

     The Company establishes its expenditure levels for operating expenses based
on projected sales levels and margins, and expenses are relatively fixed in the
short term.  Moreover, the Company expects to expand its sales and marketing,
technical and customer support, research and product development and
administrative activities.  Accordingly, if sales are below expectations in any
given quarter, the adverse impact of the shortfall in revenues on operating
results may be increased by the Company's inability to adjust spending in the
short term to compensate for the shortfall.

                                       8
<PAGE>
 
RESULTS OF OPERATIONS

  The following table sets forth consolidated statement of operations data as a
percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
                                              SPLASH                          
                                            TECHNOLOGY   PREDECESSOR          
                                          HOLDINGS, INC.   BUSINESS           
                                          -------------- ------------         
                                           THREE MONTHS  THREE MONTHS         
                                               ENDED        ENDED             
                                           DECEMBER 31,  DECEMBER 31,         
                                                1996         1995             
                                           ------------- ------------         
<S>                                        <C>           <C>
Net revenue...................................   100%         100%
Cost of net revenue...........................    49           67
                                                 ---          ---
Gross margin..................................    51           33
                                                 ---          ---
Operating expenses:
     Research and development.................     7           18
     Sales, general and administrative........    11           11
                                                 ---          ---
         Total operating expenses.............    18           29
                                                 ---          ---
Income from operations........................    33            4
Other income, net.............................    (4)           -
                                                 ---          ---
Income before provision for income taxes......    37            4
Provision for income taxes....................    14            2
                                                 ---          ---
Net income....................................    23%           2%
                                                 ===          === 
</TABLE>

  Net Revenue.   The Company's net revenue increased 114% to $15.4 million in
the three months ended December 31, 1996  from $7.2 million in the three months
ended December 31, 1995. This increase was primarily attributable to higher unit
sales of systems and color server kits due to increasing market acceptance of
our PCI Series products and the sales of the new DC Series products. In
addition, the Company has experienced a shift toward higher priced, pre-
configured color server systems from lower priced color server kits.  Any sales
mix shift toward kits would result in lower average selling prices and adversely
impact net revenue.  Net revenue has also been and may continue to be impacted
by the Company's sales mix of systems and kits in greater or lesser memory
configurations.

  The Company sells pre-configured color server systems and board-level server
kits to two original equipment manufacturers ("OEM") customers, Xerox and Fuji
Xerox, which integrate the Company's color servers with their color copiers and
sell such connected systems on a worldwide basis.  The Company expects that
sales to Xerox and Fuji Xerox will continue to account for all or a substantial
portion of its net revenue for the foreseeable future.  As a result, sales of
the Company's products have been and will continue to be heavily influenced by
the market acceptance of the Xerox and Fuji Xerox color copiers with which the
Company's products operate and the sales efforts of Xerox and Fuji Xerox with
respect to Splash products.

  Through April 1996, the Company derived substantially all of its revenue from
color server products designed for NuBus-based Apple Macintosh computers,
including the Power Series product line originally introduced in fiscal 1995 and
the Company's original Splash color server kit products introduced in fiscal
1993. Beginning in mid-calendar 1995, Apple began to transition from a NuBus
architecture in its high end Power Macintosh products to a PCI bus architecture.
Accordingly, Splash developed its initial PCI bus-based product line, the PCI
Series, and commenced shipment of such product line in May 1996.  During the
product transition to the PCI Series, Xerox informed Splash that it held in its
inventory substantial quantities of Power Series products accumulated since
January 1996.  As a result of Xerox's accumulation of inventory of these
products and the Company's product transition, sales of Power Series products
shipped to Xerox between January and April 1996 are recorded as net revenue when
Xerox sells these products to end users.  All other product sales are recorded
as net revenue upon shipment to the 

                                       9
<PAGE>
 
OEM customer. The Company does not expect that sales of Power Series products
will represent any material portion of net revenue in the future other than any
net revenue recognized from the sale to end users of the remaining Power Series
products held by Xerox.

  All sales to Fuji Xerox are international sales. Although all sales to Xerox
are U.S. sales, Xerox has a significant international customer base and the
Company believes that a significant portion of Splash products purchased by
Xerox are resold outside the United States. The Company expects that direct and
indirect international sales will continue to represent a substantial portion of
its net revenue for the foreseeable future. While the Company's international
sales are presently denominated in U.S. dollars, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to pressure to reduce
the U.S. dollar denominated price to the Company's OEM customers, which could in
turn result in a reduction in net revenue and profitability.

  Gross Margin. Gross margins increased to 51% in the three months ended
December 31, 1996 from 33% in the three months ended December 31, 1995. The
increases in gross margin were primarily due to economies of scale derived from
higher sales volumes and reductions in component costs achieved through new
product designs and favorable component pricing, partially offset by a sales
shift toward certain lower margin pre-configured server models. The Company
expects that gross margins will fluctuate from period to period and may decrease
in future periods. Gross margin is affected by a number of factors, including
product mix, product pricing and manufacturing and component costs. The Company
expects to be required to reduce prices in response to competitive pressure. Any
decline in average selling prices of a particular product which is not offset by
a reduction in production costs or by sales of other products with higher gross
margins would decrease the Company's overall gross margin and adversely affect
the Company's operating results.

  Research and Development.   Research and development expenses decreased 15% to
$1.1 million in the three months ended December 31, 1996 from $1.3 million in
the three months ended December 31, 1995.  The decrease in research and
development expenditures is related to the method of allocation of overhead of
the Predecessor Business by Radius during the three months ended December 31,
1995.  In view of current projects under development and contemplated, research
and development expenses are expected to increase in absolute dollars in future
periods, although they may vary as a percentage of net revenue.

  Sales, General and Administrative.  Sales, general and administrative expenses
increased 111% to $1.7 million in the three months ended December 31, 1996 from
$804,000 in the three months ended December 31, 1995.  The increase in the
absolute dollar amount of these expenditures was primarily related to expansion
of the Company's sales support and marketing staff and associated costs,
primarily to increase the Company's level of support for Xerox's sales
organization; and enhancement of the Company's corporate infrastructure to
replace services provided by Radius prior to the acquisition and to support
expansion of the Company's operations and the Company's status as a public
company.  The Company intends to continue to increase sales and marketing
expenses in an effort to enhance sales support capabilities and to pursue
promotional programs designed to improve name and product recognition in the end
user community. In addition, the Company believes that its general and
administrative expenses will increase in absolute dollars in the foreseeable
future as it continues to implement additional management and operational
systems, and incurs additional costs relating to being a public company.

     Other Income.  The acquisition of Splash was recorded under the purchase
method of accounting.  Concurrent with the acquisition, the Company issued
subordinated promissory notes payable to stockholders, with face values of $8.0
million.  The valuation of the subordinated debt by an independent third party
resulted in an assigned value of $8.6 million.  In October 1996, the Company
utilized $8.0 million of the proceeds of its initial public offering to repay
the subordinated promissory notes 

                                       10
<PAGE>
 
payable and recorded $600,000 of other income to eliminate the face value of the
subordinated debt from the consolidated balance sheet.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1996, the Company had $19.1 million of cash and cash
equivalents and had no borrowings under its $5,000,000 bank line of credit.
Borrowings will bear interest at prime rate and are available under the line of
credit based on a percentage of eligible accounts receivable. The line of credit
expires on January 1, 1998.

  The Company's operating activities provided $9.5 million in cash in the three
months ended December 31, 1996, primarily due to increases in accounts payable,
other accrued liabilities, royalties payable and income taxes payable and
decreases in accounts receivable, offset in part by an increase in inventories
and a decrease in deferred revenue.  For the three months ended December 31,
1995, the Company's operating activities provided $2.6 million primarily from a
decrease in accounts receivable and inventory, an increase in royalties payable
and deferred revenue, partially offset by an increase in prepaid assets and a
decrease in trade payable and other accrued liabilities.

  Financing activities provided $3.7 million in the three months ended December
31, 1996. Financing activities included the Company's initial public offering,
of which the net proceeds were $27.1 million.  From these proceeds, the Company
redeemed its Series A Preferred Stock for $15.4 million and repaid outstanding
subordinated promissory notes payable to stockholders of $8.0 million. The
remaining net proceeds from the initial public offering will be used for working
capital and general corporate purposes. The Company has no material financing
commitments other than obligations under operating leases.  For the three months
ended December 31, 1995, financing activities used $2.5 million, primarily
relating to  cash transfers to Radius

  The Company believes that it will be able to satisfy its cash requirements for
at least the next twelve months from a combination of the proceeds of its
initial public offering, cash flow from operations and the Company's bank line
of credit.  However, the Company will continue to have limited capital resources
and may require additional financing as needed on acceptable terms or at all.

FACTORS AFFECTING FUTURE RESULTS

  Short Period of Independent Operations; No Assurance of Future Profitability.
Prior to the Acquisition in January 1996, the business of the Company had been
operated as a division of Radius and, prior to the merger of SuperMac into
Radius, as a division of SuperMac. Moreover, Splash was dependent on Radius
through May 1996 for certain financial and administrative services and related
support functions. Accordingly, the Company has had limited experience operating
as an independent entity, and there can be no assurance that the Company will be
able to operate effectively as an independent company. Moreover, the Company
only began implementing independent accounting systems, financial, operational
and management controls, and reporting systems and procedures in February 1996.
The Company believes that further improvements in financial, management and
operational controls will continue to be needed to manage any expansion of the
Company's operations. The failure to implement such improvements could have a
material adverse effect upon the Company's business, operating results and
financial condition.

  Although the Company's net revenue has increased each year since fiscal 1994,
the Company's limited history of operations as an independent entity make
reliable predictions of future operating results difficult or impossible. In
particular, the Company's recent revenue growth should not be considered
indicative of future results. There can be no assurance that any of the
Company's business strategies will be successful or that the Company will be
able to sustain growth on a quarterly or annual basis. Although the Company was
profitable for fiscal 1996 (pro forma and before purchase accounting
adjustments) and the first eleven months of independent operations through
December 31, 1996 (before purchase 

                                       11
<PAGE>
 
accounting adjustments), there can be no assurance that the Company will
continue to be profitable on an annual or quarterly basis in the future.

  Fluctuations in Operating Results; Seasonal Purchasing Patterns.   The
Company's operating results have fluctuated and will likely continue to
fluctuate in the future on a quarterly and annual basis as a result of a number
of factors, many of which are outside the Company's control. These fluctuations
are in part due to the purchasing patterns of the Company's two customers, Xerox
and Fuji Xerox. These customers have historically made, and are expected to
continue to make, a significant portion of their purchases of the Company's
products in the second half of the Company's fiscal year. As a result, the
Company's sales have historically been significantly lower, and are expected to
continue to be lower, in the first quarter of the Company's fiscal year than in
the immediately preceding fourth quarter. In addition, any increases in
inventories by the Company's customers could also result in variations in the
timing of purchases by such customers. For example, in May 1996, as the Company
transitioned from its Power Series line of products to its PCI Series line of
products, Xerox informed Splash that it held in its inventory a substantial
quantity of Power Series products accumulated since January 1996. As a result of
the Company's product transition and Xerox's accumulation of inventory of these
products, sales of Power Series products shipped to Xerox between January 1996
and April 1996 are recorded as net revenue when Xerox sells these products to
end users. All other Power Series and PCI Series product sales are recorded as
net revenue upon shipment to the OEM customer. There can be no assurance that
the Company will receive sufficient inventory information from its OEM customers
over time or that the Company will be able to prevent a recurrence of a similar
problem in the future. In addition, announcements by the Company or its
competitors of new products and technologies could cause customers to defer
purchases of the Company's existing products. In the event that anticipated
orders from end users fail to materialize, or delivery schedules are deferred or
canceled as a result of the above factors or other unanticipated factors, it
would materially and adversely affect the Company's business, operating results
and financial condition.

  Results in any period could also be affected by changes in market demand,
competitive market conditions, sales promotion activities by the Company, its
OEM customers or its competitors, market acceptance of new or existing products,
sales of color copiers with which the Company's products are compatible, the
cost and availability of components, the mix of the Company's customer base and
sales channels, the amount of any third party funding of development expenses,
the mix of products sold, the Company's ability to effectively expand its sales
and marketing organization, the Company's ability to attract and retain key
technical and managerial employees, and general economic conditions. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicative of future performance. Due to all of the foregoing factors, the
Company's operating results in one or more future periods may be subject to
significant fluctuations. In the event this results in the Company's financial
performance being below the expectations of public market analysts and
investors, the price of the Company's Common Stock would be materially and
adversely affected.

  The Company's gross margin is affected by a number of factors, including
product mix, product pricing, and manufacturing and component costs. The Company
expects to be required to reduce prices in response to competitive pressure and
increase spending to pursue new market opportunities. In this regard, in the
event of significant price competition in the market for color copier servers or
competitive systems, the Company could be at a significant disadvantage compared
to its competitors, many of which have substantially greater resources (and, in
the case of the Company's principal competitor, EFI, lower product costs) than
the Company and therefore could more readily withstand an extended period of
downward pricing pressure. Any decline in average selling prices of a particular
product which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and adversely affect the Company's operating results. The Company
establishes its expenditure levels for product development and other operating
expenses based on projected sales levels and margins, and expenses are
relatively fixed in the short term. Moreover, the Company's overall expense
level is expected to increase as the Company builds corporate infrastructure to
replace services previously provided by Radius and to support expansion of
operations. Accordingly, if 

                                       12
<PAGE>
 
sales are below expectations in any given period, the adverse impact of the
shortfall on the Company's operating results may be increased by the Company's
inability to adjust spending in the short term to compensate for the shortfall.

  Emerging Color Server Market.   The market for the Company's color server
products has only recently begun to develop. Because the markets for digital
color copiers and connected color servers are relatively new, and because
current and future competitors are likely to continue to introduce competing
solutions, it is difficult to predict the rate at which these markets will grow,
if at all. If the color server market fails to grow, or grows more slowly than
anticipated, the Company's business, operating results and financial condition
will be adversely affected. The Company intends to continue to spend resources
educating potential customers about color servers. However, there can be no
assurance that such expenditures will enable the Company's products to achieve
any additional degree of market acceptance. Moreover, the Company has
historically focused on certain segments of the market (the prepress and graphic
arts segments) and has had only limited penetration to date into the broader
office segment or other market segments. There can be no assurance the Company
will be able to maintain or increase its presence in its existing market
segments or to successfully penetrate such additional market segments.

  Dependence on Xerox and Fuji Xerox.   The Company's products operate only with
certain color laser copiers offered by Xerox and Fuji Xerox, and the Company
currently sells its products solely to Xerox and Fuji Xerox, which resell the
Company's products on an OEM basis to their color copier end users. As a result,
sales of the Company's products have been and will continue to be heavily
influenced by the market acceptance of the Xerox and Fuji Xerox color copiers
with which the Company's products operate and the sales efforts of Xerox and
Fuji Xerox with respect to Splash products. Xerox and Fuji Xerox face
substantial competition from other manufacturers of color copiers, including
Canon Inc. (''Canon''), which the Company believes has the largest share of the
worldwide market for color copiers. If sales of the color copiers of Xerox and
Fuji Xerox with which Splash's products are compatible decrease, the Company's
business, operating results and financial condition would be materially and
adversely affected. Similarly, if Xerox or Fuji Xerox were to introduce color
copiers that are not compatible with the Company's products, or if Xerox or Fuji
Xerox were to introduce color copiers that already contain a significant portion
of the functionality of the Company's products so as to render the Company's
products unnecessary, the Company's business, operating results and financial
condition would be materially and adversely affected. In addition, Fuji Xerox
color copiers are produced in a single location in Japan, and any disruption of
production at such facility could materially and adversely affect the Company's
business, operating results and financial condition.

  As a result of its reliance on Xerox and Fuji Xerox, the Company currently has
a very small sales and marketing organization and has limited experience with
direct sales efforts. Any change in the sales and marketing efforts of Xerox or
Fuji Xerox with respect to Splash's products, including any reduction in the
size or effectiveness of the Xerox or Fuji Xerox sales and marketing forces, or
changes in incentives for Xerox or Fuji Xerox salespersons to sell Splash
products or color servers produced by competitors of Splash, could have a
material adverse effect on the Company's business, operating results and
financial condition.

  Xerox currently sells a substantial number of color servers made by companies
other than Splash, including those of the Company's principal competitor, EFI,
and Fuji Xerox has recently commenced sales of EFI color servers. Either Xerox
or Fuji Xerox may choose to promote the use of color servers manufactured by
competitors of the Company to the detriment of sales of the Company's products,
may choose to manufacture color servers themselves, may choose to manufacture
only color copiers that are not compatible with Splash products, or may
otherwise reduce or cease purchases and sales of Splash color servers. The
Company does not have contracts with Xerox and Fuji Xerox with respect to its
PCI Series products and is currently operating on a purchase order basis with
these customers. Although the Company is currently negotiating an agreement with
Xerox and Fuji Xerox for its PCI Series products, there can be no assurance that
any such agreement will be completed or that the Company will continue to
receive orders from Xerox or Fuji Xerox. Any decrease in the level of sales to
Xerox or Fuji Xerox 

                                       13
<PAGE>
 
would have a material adverse effect on the Company's business, operating
results and financial condition.

  Inventory Risks.   Xerox and Fuji Xerox may from time to time carry excess
inventory of Splash color servers, inaccurately project future demand for Splash
products or fail to optimally manage their ordering of Splash products, any of
which could result in a significant decrease in orders from such customers in
subsequent periods. For example, in May 1996, as the Company transitioned from
its Power Series line of products to its PCI Series line of products, Xerox
informed Splash that it held in its inventory a substantial quantity of Power
Series products accumulated since January 1996. Xerox has indicated to Splash
that, to eliminate this inventory and to permit Xerox to introduce the new PCI
Series products, Xerox substantially reduced the selling prices of the Power
Series products beginning in June 1996. Sales by Xerox of the Power Series
products at a discount may have resulted or could result in reduced sales of the
Company's PCI Series products and Xerox may not be able to continue to sell
Splash products at historical levels once it returns to a policy of not
discounting Splash products. Further, the reduced margin that Xerox will
experience as a result of its efforts to sell off its inventory of the Power
Series products may impair Splash's relationship with Xerox and thus could
result in reduced future sales of Splash products by Xerox. Xerox may have
difficulty selling color server kits for the Power Series products, which do not
include a computer platform, because these units require the use of an Apple
Power Macintosh based upon the NuBus architecture no longer used in Apple Power
Macintosh computers. Thus, a purchaser of the earlier generation color server
kit must either already possess a NuBus based Apple Power Macintosh or purchase
one used. Moreover, although Xerox has no commercial right of return with
respect to the Company's products, there can be no assurance that the Company
will not elect to make accommodations to Xerox in light of its status as a
significant customer. Reduced sales of Splash products by Xerox or any financial
or other accommodation made to Xerox could have a material adverse effect on the
business, operating results and financial condition of Splash. There can be no
assurance that the Company will receive sufficient inventory information from
Xerox or other customers over time or that the Company will in any event be able
to prevent recurrence of a similar problem in the future, which could have a
material adverse effect on the Company's business, operating results and
financial condition.

  Dependence on Adobe Systems Incorporated.   The Company's products depend on
the PostScript page description language software developed by Adobe and
licensed by the Company from Adobe on a non-exclusive basis. Any delay in the
release of future versions of PostScript by Adobe or in the upgrade of the
Company's products to be compatible with future versions of PostScript, or any
material defects in any future versions of PostScript software, could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company is required to pay a royalty for each copy of
PostScript that is incorporated in Splash products, which royalty constitutes a
substantial portion of the total manufactured cost of the Company's products. In
addition, the Company is required to permit testing by Adobe of the beta release
version of the Company's products, and the Company cannot begin shipping any
version until such version meets Adobe's quality standards. The license
agreement between the Company and Adobe expires in September 1997, subject to
renewal upon mutual consent. There can be no assurance that Adobe will continue
to enjoy its leadership position in the market, renew the current license at the
end of its term or license future versions of PostScript to Splash on terms
favorable to Splash or at all. If the license agreement between Adobe and the
Company is terminated for any reason or the Company's relationship with Adobe is
impaired, the Company could be required to change to an alternative page
description language which would require the expenditure of significant
resources and time and could significantly limit the marketability of the
Company's products. Any increase in royalties payable to Adobe also could have a
material adverse effect on the Company's operating results. In addition, the
Adobe PostScript software is incorporated in the products of certain of the
Company's competitors. The Company's business could be materially and adversely
affected if Adobe were to make available to the Company's competitors future
versions of Adobe PostScript software that include enhancements to the Adobe
PostScript software that were originally developed or implemented by Splash.

                                       14
<PAGE>
 
  Dependence on Apple Computer, Inc.   All of the Company's current products
require the use of an Apple Power Macintosh computer as a computer platform.
Apple has recently experienced significant financial difficulties and losses in
market acceptance, and its products have particularly low levels of market
acceptance in the office color printing market into which the Company is seeking
to expand. If Apple were to discontinue production of the Power Macintosh models
with which Splash products operate or were unable to provide or otherwise cease
to provide an acceptable level of end user customer support, the Company's
business, operating results and financial condition would be materially and
adversely affected. For example, Apple phased out the manufacture of Power
Macintosh products based on the NuBus architecture in the second half of
calendar 1995 in favor of Power Macintosh products based on the PCI bus
architecture. As a result, the Company had to expend significant resources and
faced substantial risk of technological failure or lack of market acceptance in
developing and introducing its PCI-based products. Any efforts of the Company to
migrate its products to a different computer platform would require a
substantial expenditure of resources and time, and there can be no assurance
that any such products can be successfully developed or introduced in a timely
fashion and at competitive cost or otherwise achieve widespread market
acceptance.

  Dependence on Single Product Line.   Substantially all of Splash's current
shipments consist, and are expected to continue to consist, of the Company's PCI
Series of color server products. Because of this product concentration, a
decline in demand for or pricing of these products would have a material adverse
effect on the Company's business, operating results and financial condition,
whether as a result of a decline in sales of complementary Xerox and Fuji Xerox
copiers; a further decline in the market for Apple Power Macintosh computers;
increased sales by Xerox or Fuji Xerox of color servers offered by competitors
of the Company or developed internally by Xerox or Fuji Xerox; new product
introductions by competitors; price competition; or technological change. Any
decline in the market for this product line or any failure to timely produce new
and enhanced products would have a material adverse effect on the Company's
business, financial condition and results of operations.

  Rapid Technological Change; Dependence on New Product Introductions.   The
graphics and color reproduction, color processing and personal computing markets
are characterized by rapid changes in customer requirements, frequent
introductions of new and enhanced products, and continuing and rapid
technological advancement. To compete successfully, the Company must continue to
design, develop, manufacture and sell new products that provide increasingly
higher levels of performance and reliability, take advantage of technological
advancements and changes and respond to new customer requirements. The Company's
success in designing, developing, manufacturing and selling new products will
depend on a variety of factors, including the identification of market demand
for new products, product selection, timely implementation of product design and
development, product performance, cost-effectiveness of current products and
products under development, effective manufacturing processes and the success of
promotional efforts.

  The Company has recently transitioned its product offerings from its Power
Series products to its PCI Series products, and there can be no assurance that
the PCI Series or any future products will achieve widespread market acceptance.
In addition, the Company has in the past experienced delays in the development
of new products and the enhancement of existing products, and such delays may
occur in the future. If the Company is unable, due to resource constraints or
technological or other reasons, to develop and introduce new products or
versions in a timely manner, or if such new products or releases do not achieve
timely and widespread market acceptance, it would have a material adverse effect
on the Company's business, operating results and financial condition.

  Management of Expanding Operations.   The growth in the Company's business has
placed, and any further expansion would continue to place, a significant strain
on the Company's limited personnel, management and other resources. The
Company's ability to manage any future expansion effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate new
management and employees into its overall operations and to continue to improve
its operational, financial and management systems. The Company currently does
not have and has been searching for a 

                                       15
<PAGE>
 
Vice President, Sales and Marketing. Moreover, the Company expects to increase
significantly the size of its domestic and international sales support staff and
the scope of its sales and marketing activities, and to hire additional research
and development personnel. The Company's failure to manage any expansion
effectively, including any failure to integrate new management and employees or
failure to continue to implement and improve financial, operational and
management controls, systems and procedures, could have a material adverse
effect on the Company's business, operating results and financial condition.

  Need for Additional Capital.   The Company believes that in order to remain
competitive it may require additional financial resources over the next several
years for working capital, research and development, expansion of sales and
marketing resources, and capital expenditures. The Company believes that it will
be able to fund planned expenditures for at least the next twelve months from a
combination of the proceeds of its initial public offering, cash flow from
operations and existing cash balances. Upon completion of its initial public
offering  and the application of $23.4 million of the net proceeds therefrom for
repayment of the subordinated notes and redemption of the Series A Preferred
Stock, the Company had as of December 31, 1996 approximately $15.6 million in
working capital, including approximately $19.1 million in cash and cash
equivalents. The Company believes that it will be able to satisfy its cash
requirements for at least the next twelve months from a combination of the
proceeds of its initial public offering, cash flow from operations and the
Company's bank line of credit. However, the Company will continue to have
limited capital resources and may require additional capital sooner. There can
be no assurance that the Company will be able to obtain additional financing as
needed on acceptable terms or at all.

  Risk of Product Defects.   The Company's products consist of hardware and
software developed by Splash and others. Products such as those of the Company
may contain undetected errors when first introduced or when new versions are
released, and the Company has in the past discovered software and hardware
errors in certain of its new products after their introduction. Although the
Company has not experienced material adverse effects resulting from any errors
to date, there can be no assurance that errors would not be found in new
versions of Splash products after commencement of commercial shipments, or that
any such errors would not result in a loss of or delay in market acceptance and
have a material adverse effect upon the Company's business, operating results
and financial condition. In addition, errors in the Company's products
(including errors in licensed third party software) detected prior to new
product release could result in delay in the introduction of new products and
incurring of additional expense, which also could have a material adverse effect
upon the Company's business, operating results and financial condition.

  International Sales.   All sales to Fuji Xerox are international sales. In
addition, although all sales to Xerox are U.S. sales, Xerox has a significant
international customer base, and the Company believes that a significant portion
of Splash products purchased by Xerox are resold outside the United States. The
Company expects that direct and indirect international sales will continue to
represent a substantial portion of its net revenue for the foreseeable future.
While the Company's international sales are presently denominated in U.S.
dollars, fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to end users in a particular
country, leading to pressure to reduce the U.S. dollar denominated price to the
Company's OEM customers, which could in turn result in a reduction in net
revenue and profitability. The Company's business, operating results and
financial condition would be materially adversely affected if foreign markets do
not continue to develop.

  Dependence on Key Personnel.   Because of the nature of the Company's
business, the Company is highly dependent on the continued service of, and on
its ability to attract and retain, qualified technical, marketing, sales and
managerial personnel, including senior members of management. The competition
for such personnel is intense, and the loss of any of such persons, as well as
the failure to recruit additional key technical and sales personnel in a timely
manner, would have a material adverse effect on the Company's business and
operating results. There can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. 

                                       16
<PAGE>
 
The Company currently does not have employment contracts with any of its
employees and does not maintain key person life insurance policies on any of its
employees.

  Risks Associated with Acquisitions.  The Company frequently evaluates
potential acquisitions of complementary businesses, products and technologies.
As part of the Company's expansion plans, the Company may acquire companies that
have an installed base of products not yet offered by the Company, have
strategic distribution channels or customers relationships, or otherwise present
opportunities which management believes enhance the Company's competitive
positions.  Such acquisitions would subject the Company to numerous risks,
including risks associated with integration into the Company of new employees
and technology.  Moreover, such transactions involve the diversion of
substantial  management resources and evaluation of such opportunities requires
substantial diversion of engineering and technological resources.  In addition,
such transactions could result in large one-time write-offs or the creation of
goodwill or other intangible assets that would result in amortization expenses.
To date, the Company has not consummated an acquisition transaction.  The
failure to successfully evaluate, negotiate and effect acquisition transactions
could have a material adverse effect on the Company's  business, operating
results and financial condition.

                                       17
<PAGE>
 
                                    PART II
                               OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

          None

ITEM 2.   CHANGES IN SECURITIES

          In October 1996, the Company sold 2,700,500 shares of its common stock
          for $11.00 per share in an initial public offering.  The Company used
          the proceeds from the initial public offering to redeem its Series A
          preferred stock.  In addition, the Series B preferred stock was
          converted into the Company's common stock.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None

ITEM 5.   OTHER INFORMATION

          None

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)   Exhibits:
                11.1     Computation of Earnings Per Share

          (b)   Reports on Form 8-K
                None

                                       18
<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of the Securities Act of 1934, this Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunder duly authorized.

 
                                    SPLASH TECHNOLOGY HOLDINGS, INC.


  Date:     February 14, 1997       By:     /s/ Joan P. Platt
        -----------------------         ----------------------------
                                            Joan P. Platt
                                            Vice President, Finance &
                                            Administration,
                                            Chief Financial Officer

                                       19