<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  JUNE 30, 1997

                                    OR

[_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.
         FOR THE TRANSITION PERIOD FROM  _____  TO  ______

                       COMMISSION FILE NUMBER 000-21171

                                  -----------

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

          DELAWARE                                           77-0418472
(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 preceeding 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 par
value, as of August 11, 1997 was 12,147,850 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
            Condition and Results of Operations............................  9

PART II - OTHER INFORMATION
                                                                            
   Item 1 - Legal Proceedings.............................................. 23 
                                                                              
   Item 2 - Changes in Securities.......................................... 23

   Item 3 - Defaults Upon Senior Securities................................ 23

   Item 4 - Submission of Matters to a Vote of Security Holders............ 23

   Item 5 - Other Information.............................................. 23

   Item 6 - Exhibits and Reports on Form 8-K............................... 23

SIGNATURE  ................................................................ 24


                                       2
<PAGE>
 
                       SPLASH TECHNOLOGY HOLDINGS, INC.
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)


                                                            Splash Technology
                                                              Holdings, Inc.
                                                           --------------------
                                                              June    September 
                                                               30,        30,
                                                              1997       1996
                                                            -------     -------
                                                          (Unaudited)
                          ASSETS
Current Assets:
  Cash and cash equivalents                                 $ 6,601     $ 6,179
  Accounts receivable, net of allowance for
    doubtful accounts of $304 and $299 as of 
    June 30, 1997 and September 30, 1996, respectively       11,713       6,582
  Inventories                                                 3,112       3,651
  Prepaid expenses and other current assets                     321         119
  Deferred income taxes                                       3,962       3,962
                                                            -------     -------
      Total current assets                                   25,709      20,493
  Property and equipment, net                                 1,270         913
  Deferred income taxes                                      11,615       8,315
  Other assets                                                1,457       1,511
                                                            -------     -------
      Total assets                                          $40,051     $31,232
                                                            =======     =======

                     LIABILITIES

Current Liabilities:
  Trade accounts payable                                    $ 3,226     $ 1,239
  Other account liabilities                                   6,377       3,348
  Royalties payable                                           1,950       1,260
  Deferred revenue                                            2,068       4,150
  Income taxes payable                                        2,078       1,725
                                                            -------     -------
      Total current liabilities                              15,699      11,722
  Subordinated promissory notes payable to stockholders           -       8,600
  Other long term liabilities                                   400           -
                                                            -------     -------
      Total liabilities                                      16,099      20,322
                                                            -------     -------

                STOCKHOLDERS' EQUITY

Preferred stock:
  Authorized: 5,000,000 shares;
  Series A preferred stock, par value, $.001 per share:
    Issued and outstanding; no shares and 15,426 shares
    as of June 30, 1997 and September 30, 1996, 
    respectively                                                  -           1
  Series B preferred stock, par value $.001 per share:
    Issued and outstanding; no shares and 4,282 shares
    of June 30, 1997 and September 30, 1996, respectively         -           1
  Common stock, par value $.001 per share:
    Authorized: 50,000,000 shares; Issued and outstanding:
    12,108,561 shares and 7,603,123 shares as of June
    30, 1997 and September 30, 1996, respectively                13           8
  Additional paid-in capital                                 33,048      19,826
  Retained earnings (accumulated deficit)                    (9,109)     (8,926)
                                                            -------     -------
      Total stockholders' equity                             23,952      10,910
                                                            -------     -------
          Total liabilities and stockholders' equity        $40,051     $31,232
                                                            =======     =======

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

                                       3
<PAGE>
 
                       SPLASH TECHNOLOGY HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE> 
<CAPTION> 

                                                       Splash Technology          Splash Technology      Predecessor 
                                                         Holdings, Inc.             Holdings, Inc.         Business
                                                     ----------------------     -----------------------  -----------
                                                        Three        Three        Nine          Five         Four      
                                                       Months      Months        Months        Months       Months     
                                                        Ended        Ended        Ended        Ended         Ended     
                                                      June 30,     June 30,     June 30,      June 30,    January 31,  
                                                        1997         1996         1997          1996         1996       
                                                     ---------    ---------     ---------     ---------     --------
                                                    (Unaudited)  (Unaudited)  (Unaudited)
<S>                                                  <C>          <C>           <C>           <C>           <C> 
Net revenue                                          $  19,802    $  13,337     $  51,227     $  18,326     $ 13,008
Cost of revenue                                          9,671        8,164        24,864        11,455        8,427
                                                     ---------    ---------     ---------     ---------     --------
     Gross profit                                       10,131        5,173        26,363         6,871        4,581
                                                     ---------    ---------     ---------     ---------     --------
Operating expenses:
  Research and development                               1,687          982         3,972         1,624        1,498
  Sales, general and administrative                      2,248        1,019         6,071         1,474          975
  Amoritization and write off of technology             11,039        1,702        11,039        22,729            _
                                                     ---------    ---------     ---------     ---------     --------
     Total operating expenses                           14,974        3,703        21,082        25,827        2,473
                                                     ---------    ---------     ---------     ---------     --------
       Income (loss) from operations                    (4,843)       1,470         5,281       (18,956)       2,108

Other non-operating income                                   -            -           600             -            -
Interest income (expense), net                             145         (209)          379          (388)         (18)  
                                                     ---------    ---------     ---------     ---------     --------
       Income (loss) before taxes                       (4,698)       1,261         6,260       (19,344)       2,090

Provision for (benefit from) income taxes                2,283          501         6,447        (7,765)         836
                                                     ---------    ---------     ---------     ---------     --------
       Net income (loss)                             $  (6,981)   $     760     $    (187)    $ (11,579)    $  1,254
                                                     =========    =========     =========     =========     ========

Net Income (loss)  per share                         $   (0.58)   $    0.04     $   (0.02)    $   (1.25)
                                                     =========    =========     =========     =========     
Shares used in per share calculation                    12,089        9,549        11,903         9,580
                                                     =========    =========     =========     =========     
</TABLE> 

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

                                       4
<PAGE>
 
                       SPLASH TECHNOLOGY HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE> 
<CAPTION> 
                                                                          Splash Technology          Predecessor 
                                                                           Holdings, Inc.              Business  
                                                                    -----------------------------   -------------
                                                                     Nine Months      Five Months    Four Months 
                                                                        Ended            Ended          Ended    
                                                                       June 30,        June 30,      January 31, 
                                                                         1997            1996            1996     
                                                                     ------------     -----------    -----------
                                                                      (unaudited)
<S>                                                                  <C>               <C>              <C> 
Cash flows from operating activities:
  Net income (loss)                                                  $    (187)        $ (11,579)       $ 1,254
  Adjustments to reconcile net income to net
     cash provided by operating activities:
    Depreciation and amortization                                          381                57            102
    Provision for doubtful accounts                                       (143)              199             17
    Purchased and in-process technology                                 11,039            22,729              -
    Deferred income tax                                                      -           (11,014)           622
    Gain on repayment of subordinated promissory notes                    (600)                -              -
    Changes in assets and liabilities:
      Accounts receivable                                               (4,772)            5,059         (4,597)
      Inventories                                                          740            (2,211)         2,231
      Prepaid expenses and other current assets                           (158)             (119)             -
      Other assets                                                         120              (118)             -
      Trade accounts payable                                             3,444             2,008         (2,391)
      Other accrued liabilities                                             27            (1,042)         1,986
      Royalties payable                                                    690            (2,302)         1,434
      Deferred revenue                                                  (2,323)            2,157            905
      Income taxes payable                                                 353             1,974           (559)
                                                                      --------         ---------     ----------
          Net cash provided by operating activities                      8,611             5,798          1,004
                                                                      --------         ---------     ----------
Cash flows from investing activities:
  Purchase of property and equipment                                      (633)             (306)           (63)
   Acquisition of businesses (net of cash)                             (11,196)          (23,421)             -
                                                                      --------         ---------     ----------
          Net cash used in investing activities                        (11,829)          (23,727)           (63)
                                                                      --------         ---------     ----------
Cash flows from financing activities:
  Proceeds from initial public offering                                 26,620                 -              -
  Proceeds from Series A preferred stock                                     -            14,700              -
  Proceeds from common stock                                                 -               206              -
  Redemption of Series A preferred stock                               (14,700)                -              -
  Premium paid on Series A preferred stock                                (726)                -              -
  Proceeds from subordinated debt                                            -             8,600              -
  Repayment of subordinated debt                                        (8,000)                -              -
  Proceeds from exercise of options for cash                                 -                95              -
  Exercise of stock options/repurchase of
  common stock/proceeds of employee
  stock purchase plan                                                      446                 -              -
  Net change in parent company investment                                    -                 -            (12)
                                                                      --------         ---------     ----------
       Net cash provided by (used in) financing activities               3,640            23,601            (12)
                                                                      --------         ---------     ----------
Net increase in cash                                                       422             5,672            929

Cash and cash equivalents at beginning of period                         6,179               929              -
                                                                      --------         ---------     ----------
Cash and cash equivalents at end of period                            $  6,601         $   6,601     $      929
                                                                      ========         =========     ==========
</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, Splash
Technology S.a.r.l., and Splash-Quintar Corporation, 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. ("Splash Acquisition") 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 four months ended January 31, 1996,
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 and Exchange Commission.
The September 30, 1996 balance sheet was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. 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
June 30, 1997 and the results of operations and cash flows for the three and
nine months ended June 30, 1997, the four months ended January 31, 1996, and the
three months and five months ended June 30, 1996, 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 Company's 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 June 30, 1997 presentation.

                                       6
<PAGE>
 
2.    INVENTORIES  (in thousands):
      -----------
                                     June 30,           September 30,
                                       1997                 1996 
                                  -------------         -------------   
                                   (unaudited)
         Raw materials               $  2,253              $  1,580
         Finished goods                   859                 2,071
                                     --------              --------  
                                     $  3,112              $  3,651
                                     ========              ========


3.    STOCKHOLDERS' EQUITY:
      --------------------

  In the nine months ended June 30, 1997, 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.

  On July 28, 1997, the Company filed a registration statement relating to a
proposed public offering of 3,250,000 shares of common stock with the Securities
and Exchange Commission (the "Offering"). Of the total, 1,250,000 shares will
be offered by the Company and 2,000,000 shares will be offered by selling
stockholders. There can be no assurance that the Offering will be consummated.

4.    QUINTAR ACQUISITION  (Unaudited):
      -------------------

  On May 28, 1997, the Company acquired the shares of Quintar Holdings
Corporation ("Quintar") for an aggregate purchase price of $13,532,000 plus
contingent earn-out payments of up to $3,200,000, subject to achieving certain
net revenue and operating income targets. The purchase price was comprised of a
cash payment of $11,519,000, issuance of Company stock options valued at
$1,588,000 in exchange for Quintar stock options, and net acquisition costs of
$425,000.

  The acquisition was accounted for using the purchase method of accounting and
the results of Quintar were included in the Company's results from the date of
acquisition. The purchase price was allocated to the tangible and intangible
assets and liabilities acquired based on their estimated fair values at May 28,
1997, as follows (in thousands):

          Current assets..........................   $      784
          Other assets............................          170
          Deferred tax asset......................        3,300
          Liabilities.............................       (1,761)
          In-process research and development.....       11,039
                                                         ------
                                                     $   13,532
                                                         ======

  Summary unaudited pro forma information for the combined results of operations
of Quintar and the Company for the year ended September 30, 1996 and the nine
months ended June 30, 1997 is presented below. The pro forma information assumes
the acquisition occurred on October 1, 1995 and presents the combined results of
companies, excluding the $11,039,000 nonrecurring write-off of in process
research and development activities for which there were no alternative future
uses and technological feasibility had not been established.

                                                September 30,       June 30,
                                                    1996              1997 
                                                -------------     ------------- 
                                           (in thousands, except per share data)
   
   Net revenue                                  $     53,104       $   53,822
   Operating income (loss)                      $    (12,541)      $   14,872
   Net income (loss)                            $     (8,530)      $    9,388
   Net income (loss) per share                  $      (0.89)      $     0.77
   Shares used in computing per share amounts          9,583           12,251
       

                                       7
<PAGE>
 
5.    RECENT PRONOUNCEMENTS:
      ---------------------

  During February 1997, the Financial Accounting Standards Board issued
Statement 128, Earnings Per Share (SFAS 128), which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 will
become effective for the Company's first quarter of 1998. The impact of adopting
SFAS 128 on the Company's financial statements has not yet been determined.

  In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of financial
statements. The impact of adopting SFAS No. 130, which is effective for the
Company in fiscal 1999 has not been determined.

  In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in fiscal 1999 and the impact of adoption has not been
determined.

                                       8
<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. Forward looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth 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, which acquisition is
referred to herein as the "Splash Acquisition". References below to the results
of operations for the nine months ended June 30, 1996 refer to the results of
operations of CSG for the four months ended January 31, 1996 plus the results of
operations of the Company for the five months ended June 30, 1996.

         On May 28, 1997, the Company acquired the shares of Quintar Holdings
Corporation ("Quintar"). Quintar designs, manufactures and markets embedded
controllers for desktop color printers, as well as proprietary servers for
high-speed, multifunction monochrome and color printers and copiers. For fiscal
year 1997, Splash does not expect Quintar to have a material impact on net
revenue or net income (excluding the related write-off in process research and
development). Pursuant to the acquisition agreement, Splash paid to Quintar
shareholders an aggregate of approximately $11.5 million in cash at closing,
assumed Quintar's outstanding stock options valued at $1.6 million and agreed to
pay aggregate contingent earn-out payments of up to $3.2 million, subject to
achieving certain net revenue and operating income targets. Splash wrote off
$11.0 million of the purchase price as in-process research and development in
the third quarter of fiscal 1997 in connection with the Quintar acquisition.

         The Company has achieved significant growth in net revenue and
operating income each year since fiscal 1994, before purchase accounting
adjustments. However, there can be no assurance that the Company will continue
to grow at similar rates in the future, if at all. In addition, the Company's
overall expense level is expected to increase as the Company continues to build
corporate infrastructure and expand 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 for the eight months of independent operations through September 30,
1996 and the first nine months of fiscal 1997, 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 continue 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.

  On July 28, 1997, the Company filed a registration statement relating to a
proposed public offering of 3,250,000 shares of common stock with the Securities
and Exchange Commission. Of the total, 1,250,000 shares will be offered by the
Company and 2,000,000 shares will be offered by selling stockholders. There
can be no assurance that the Offering will be consummated.

                                       9
<PAGE>
 
RESULTS OF OPERATIONS

     The following table sets forth consolidated statement of operations data as
a percentage of net revenue for the periods indicated.

<TABLE> 
<CAPTION> 
                                                                     Splash Technology                   Splash Technology    
                                                                       Holdings, Inc.                      Holdings, Inc.    
                                                               -----------------------------     --------------------------------
                                                               Three Months     Three Months      Nine Months         Nine Months 
                                                                   Ended           Ended             Ended               Ended 
                                                                 June 30,         June 30,          June 30,           June 30, 
                                                                  1997            1996               1997               1996 
                                                                 -----            -----             -----              -----
                                                                                                                       Pro-Forma 
                                                                (Unaudited)     (Unaudited)       (Unaudited)         (Unaudited) 
<S>                                                             <C>             <C>               <C>                  <C> 
Net revenue...............................................         100%             100%              100%               100%
Cost of net revenue.......................................          49               61                49                 63
                                                                 -----            -----             -----              -----
Gross margin..............................................          51               39                51                 37
                                                                 -----            -----             -----              -----
Operating expenses:
     Research and development.............................           8                7                 8                 10
     Sales, general and administrative....................          12                8                12                  8
          Amortization and write off of technology........          56               13                21                 73
                                                                 -----            -----             -----              -----
          Total operating expenses........................          76               28                41                 91
                                                                 -----            -----             -----              -----
Income (loss) from operations.............................         (25)              11                10                (54)
Other income (expense), net...............................           1               (1)                2                 (1)
                                                                 -----            -----             -----              -----
Income (loss) before income taxes.........................         (24)              10                12                (55)
Provision for (benefit from) income taxes.................          11                4                12                (22)
                                                                 -----            -----             -----              -----
Net income (loss).........................................         (35)%              6%                0%               (33)%
                                                                 =====            =====             =====              =====
</TABLE> 

     Net Revenue.  The Company's net revenue increased 49% to $19.8 million in 
     -----------
the three months ended June 30, 1997 from $13.3 million in the three months
ended June 30, 1996. Net revenue increased 64% to $51.2 million in the nine
months ended June 30, 1997 from $31.3 million in the nine months ended June 30,
1996. These increases were primarily attributable to higher unit sales of
systems and color server kits due to increasing market acceptance of the
Company's PCI Series products and the sales of the new DC Series products (first
introduced in September 1996). 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 the Company's 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 were generally recorded as net revenue when
Xerox sold these products to end users. In addition, the Company evaluated the
carrying value of the 

                                       10
<PAGE>
 
Power Series product inventory and the related deferred revenue on a quarterly
basis and as of June 30, 1997, net revenue relating to the Power Series products
was fully recognized. All other product sales are recorded as net revenue upon
shipment to the OEM customer.

     All sales to Fuji Xerox are international sales. Although substantially all
sales to Xerox are accounted for as 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 generally 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 June
     ------------
30, 1997 from 39% in the three months ended June 30, 1996. Gross margins
increased to 51% in the nine months ended June 30, 1997 from 37% in the nine
months ended June 30, 1996. 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 average selling price of the Company's
products has decreased in the past primarily as a result of competitive market
pressures, the introduction of lower priced products and, in certain cases, in
response to new product introductions by the Company's customers. The Company
expects this trend to continue in the future. In this regard, the Company has
lowered pricing for new versions of its products which were introduced in June,
1997. 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.  All research and development costs to date have
     ------------------------
been expensed as incurred. Research and development expenses increased 70% to
$1.7 million in the three months ended June 30, 1997 from $1.0 million in the
three months ended June 30, 1996. Research and development expenses increased
29% to $4.0 million in the nine months ended June 30, 1997 from $3.1 million in
the nine months ended June 30, 1996. The increases in research and development
were primarily attributable to increased staffing and associated support
required to enhance the Company's product line and to introduce the Company's DC
Series product line. In addition, the increase reflects the addition of
Quintar's engineering resources. In view of current projects under development
and contemplated, research and development expenses are expected to increase in
future periods.

     Sales, General and Administrative.  Sales, general and administrative
     ---------------------------------
expenses increased 120% to $2.2 million in the three months ended June 30, 1997
from $1.0 million in the three months ended June 30, 1997. Sales, general, and
administrative expenses increased 144% to $6.1 million in the nine months ended
June 30, 1997 from $2.5 million for the nine months ended June 30, 1996. The
increases in these expenditures were 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 Splash Acquisition and 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 further 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 the foreseeable future as it continues to implement additional
management and operational systems, expands its administrative staff and incurs
additional costs relating to being a public company.

                                       11
<PAGE>
 
     Acquisition-Related and Non-Operating Expenses.  In fiscal 1996, the 
     ----------------------------------------------
Company recorded certain costs related to the Splash Acquisition, including a
write-off of $19.3 million of in-process research and development, and the
amortization in full through May 1996 of $3.4 million of purchased technology.
These in-process research and development projects were related to the
development of the Company's PCI Series product line. Substantially all the
research and development costs incurred from the Splash Acquisition through May
1996 (the time of the PCI Series product launch) were for the development of the
PCI Series products. Through September 30, 1996 the Company had incurred
interest costs pursuant to the subordinated notes and the line of credit
established in connection with the Splash Acquisition, offset in part by
interest earned on short-term investments.

     In the nine months ended June 30, 1997, the Company acquired Quintar and
wrote-off approximately $11.0 million of in-process research and development in
connection with such acquisition. These in-process research and development
activities, related to projects for the development of Quintar's embedded
controllers and low-end servers, have no alternative future use and have not
reached technological feasibility.

     Other Income.  The Splash Acquisition was recorded under the purchase 
     ------------
method of accounting. Concurrent with the Splash Acquisition, the Company issued
subordinated promissory notes with an aggregate face value 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 payable and recorded $600,000 of other income to eliminate the
face value of the subordinated debt from the consolidated balance sheet.

     Provision for Income Taxes.  The Company accounts for income taxes in
     --------------------------
accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes". For the
nine months ended June 30, 1996, the Company estimated a provision for income
taxes as if CSG had been operating as a separate company. In addition, as a
result of the Splash Acquisition (a taxable event), the Company recorded a
deferred tax asset of approximately $9.1 million and realized a corresponding
credit to the provision for income taxes, arising from the difference in
treatment of acquired intangible assets for tax and financial reporting
purposes. In connection with the Quintar acquisition (a non-taxable event for
the Company), the Company recorded $3.3 million of deferred tax assets relating
to Quintar's net operating loss carryforwards. These net operating loss
carryforwards are subject to certain limitations. The Company has not reduced
the deferred tax assets by a valuation allowance as it is more likely than not
that all of the deferred tax assets will be realized through future taxable
income. The Company's effective tax rate (excluding the purchase accounting
adjustments relating to the Quintar acquisition) was 36% and 37% for the three
months and nine months ended June 30, 1997 respectively.

     Recent Pronouncements.  During February 1997, the Financial Accounting
     ---------------------
Standards Board issued Statement 128, Earnings Per Share (SFAS 128), which
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS 128 will become effective for the Company's first quarter of
1998. The impact of adopting SFAS 128 on the Company's financial statements has
not yet been determined.

     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
financial statements. The impact of adopting SFAS No. 130, which is effective
for the Company in fiscal 1999 has not been determined.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in fiscal 1999 and the impact of adoption has not been
determined.

                                       12
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 1997, the Company had $6.6 million of cash and cash
equivalents and had no borrowings under its $5.0 million bank line of credit.
Borrowings under the line of credit bear interest at the 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 $8.6 million in cash in the
nine months ended June 30, 1997, primarily due to increases in accounts payable
and offset in part by an increase in accounts receivable and a decrease in
deferred revenue. For the nine months ended June 30, 1996, the Company generated
$6.8 million in cash operations, primarily due to decreases in accounts
receivable and increases in other accrued liabilities, deferred revenue and
income taxes payable, partially offset by decreases in royalties payable.

     Investing activities used $11.8 million in cash in the nine months ended
June 30, 1997 and $23.8 million in the nine months ended June 30, 1996. These
amounts resulted primarily from $11.2 million in cash used in the Quintar
Acquisition and $23.4 million in cash used in connection with the Splash
Acquisition.

     Financing activities provided $3.6 million in the nine months ended June
30, 1997. Financing activities included the Company's initial public offering,
of which the net proceeds were approximately $26.6 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 are being
used for working capital and general corporate purposes. The Company has no
material financing commitments other than obligations under operating leases.
For the nine months ended June 30, 1996, financing activities provided $23.6
million, consisting primarily of financing related to the Splash Acquisition.

     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.

FACTORS AFFECTING FUTURE RESULTS

     Short Period of Independent Operations; No Assurance of Future
     --------------------------------------------------------------
Profitability.  Prior to the Splash 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. 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 makes
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 the first eight months of independent operations through
September 30, 1996 and for the first nine months of fiscal 1997, 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.

                                       13
<PAGE>
 
     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 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 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. However, in the
event that these customers change their purchasing patterns in the future, this
seasonality may change which could affect the Company's quarterly operating
results. 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 Professional Color Imaging ("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 were generally recorded as net revenue when Xerox sold these
products to end users. All other 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 average
selling price of the Company's products has decreased in the past primarily as a
result of competitive market pressures, the introduction of lower priced
products and, in certain cases, in response to new product introductions by the
Company's customers. The Company expects this trend to continue. In this regard,
the Company lowered pricing for new versions of its products which were
introduced in June 1997. 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 or 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 continues to build corporate infrastructure and to
support expansion of operations. Accordingly, if sales are below expectations in
any 

                                       14
<PAGE>
 
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 that 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.
Sales to Xerox in fiscal 1994, 1995 and 1996 accounted for approximately 40%,
41% and 43%, respectively, of the Company's net revenue, and sales to Fuji Xerox
in such periods accounted for approximately 60%, 59% and 57%, respectively, of
net revenue. 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 relatively 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, Electronics for Imaging, Inc. ("EFI"). The Company is the principal
supplier of color servers to Fuji Xerox. However, Fuji Xerox has increased the
number of color servers sold to end users that were manufactured by companies
other than Splash, including EFI. In addition, the Company is required to permit
testing by Xerox and Fuji Xerox of the beta release of the Company's products
and cannot begin shipping any version to Xerox or Fuji Xerox until such version
meets their respective quality standards. 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, delay or cease
purchases and sales of Splash color servers. The Company does not have contracts
with Xerox and Fuji Xerox with 

                                       15
<PAGE>
 
respect to its products and is currently operating on a purchase order basis
with these customers. There can be no assurance 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 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 indicated to Splash that,
to eliminate this inventory and to permit Xerox to introduce the 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 in reduced sales of the Company's PCI Series
products. Moreover, Xerox had 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 was required to purchase or already own a NuBus
based Apple Power Macintosh. There can be no assurance that the Company will
receive sufficient information from Xerox, Fuji Xerox or other customers over
time or that the Company will in any event be able to prevent the recurrence of
a similar problem in the future. As a result, Splash's customers, among other
things, may be required to discount excess inventory, may experience difficulty
in selling excess inventory, may experience reduced sales of new products or may
become dissatisfied with their relationship with Splash. Although customers have
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
significant customers. Reduced sales of Splash products by Xerox or Fuji Xerox
or any financial or other accommodation made to Xerox or Fuji Xerox could have a
material adverse effect on the business, operating results and financial
condition of Splash.

     Dependence on Adobe Systems Incorporated.  The Company's products depend on
     ----------------------------------------
the PostScript page description language software developed by Adobe Systems
Incorporated ("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 current or future
versions of PostScript, or any material defects in any versions of PostScript
software (including defects identified in connection with upgrades of the
Company's products), 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.

     Dependence on Apple Computer, Inc.  Substantially all of the Company's
     ---------------------------------
current products require the use of an Apple Power Macintosh computer as a
computer platform. Apple has experienced, and 

                                       16
<PAGE>
 
continues to experience, 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.
In addition, Apple has experienced significant changes in management. 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. In addition, the Company has experienced sourcing difficulties related
to Apple's delay in the release of new models. There can be no assurance that
the Company will not experience similar difficulties in the future. Any extended
delay between the discontinuation of an existing model and the release of an
enhanced model by Apple could have a material adverse effect on the Company's
business, financial condition and results of operations. 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
color server products. Because of this product concentration, a significant
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.

     There can be no assurance that any of the Company's 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.

     Competition.  The markets for the Company's products are characterized by
     -----------
intense competition and rapid change. The Company competes directly with other
independent manufacturers of color servers and with copier manufacturers, and
indirectly with printer manufacturers and others. The Company has a number of
direct competitors for color server products, the most significant of which is
EFI. Splash also faces competition from copier manufacturers that offer
internally developed color server products, such as a non-PostScript color
server offered by Fuji Xerox, or that incorporate color server features into
their 

                                       17
<PAGE>
 
copiers. In addition, the Company faces competition from desktop color laser
printers that offer increasing speed and color server capability. As component
prices decrease and the processing power and other functionality of copiers,
printers and computers increases, it becomes more likely that copier, printer
and computer manufacturers will continue to add color server functionality to
their systems, which could reduce the market for the Company's existing line of
products.

     The Company also competes indirectly with manufacturers of electronic color
prepress systems, which offer similar functionality for the short-run and
commercial printing market as is provided by the Company's products. The Company
also competes indirectly with providers of color separation, color editing and
page layout software. While such software typically is complementary to the
Company's systems, such software can also be competitive with the Company's
systems and may become increasingly competitive to the extent that the providers
of such software extend the functionality of their products in future releases.

     Many of the Company's current and potential direct and indirect competitors
have longer operating histories, are substantially larger, and have
substantially greater financial, technical, manufacturing, marketing and other
resources than Splash. A number of these current and potential competitors also
have substantially greater name recognition and a significantly larger installed
base of products than the Company, which could provide leverage to such
companies in their competition with Splash. The Company expects competition to
increase to the extent the color server market grows, and such increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. As a result of their
greater resources, many of such competitors are in a better position than Splash
to withstand significant price competition or downturns in the economy. There
can be no assurance that Splash will be able to continue to compete effectively,
and any failure to do so would have a material adverse effect upon the Company's
business, operating results and financial condition.

     Risks Associated with Quintar Acquisition; General Risks Associated with
     ------------------------------------------------------------------------
Acquisitions.  On May 28, 1997, the Company acquired Quintar. In addition to the
------------
risks generally associated with an acquisition (including those specified in the
following paragraph), there are specific risks associated with the Quintar
acquisition, including those specified below. First, Quintar's technology is
currently under development. There can be no assurance that Quintar's technology
can be successfully developed on a timely basis or at all, or that products
based on this technology will receive widespread market acceptance. Moreover,
there can be no assurance that the Company can successfully integrate Quintar's
technology. Second, Quintar has experienced net losses in the past, including
the last three years. There can be no assurance that Quintar will not continue
to incur net losses, which the Company would be required to fund. Third,
Quintar's target market, the low-end and mid-range market for color servers, is
characterized by intense competition and rapid change. Quintar's principal
competitor is EFI, the Company's most significant competitor. Fourth, the
Company is currently planning to distribute Quintar's low-end color servers, if
successfully developed, through the reseller channel. Neither Quintar nor the
Company has previously sold into the reseller channel or has a sales and
marketing force capable of servicing this channel. There can be no assurance
that the Company will be able to successfully sell products into this
distribution channel or that it will be able to develop the sales and marketing
force required to service this channel.

     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 customer
relationships, or otherwise present opportunities which management believes may
enhance the Company's competitive position. The success of any acquisition could
depend not only upon the ability of the Company to acquire such businesses,
products and technologies on a cost-effective basis, but also upon the ability
of the Company to integrate the acquired operations or technologies effectively
into its organization, to retain and motivate key personnel of the acquired
businesses, and to retain the significant customers of the acquired businesses.
Any acquisition, depending upon its size, could result in the use of a
significant portion of the Company's cash, or if such acquisition is made
utilizing the Company's securities, could result in significant dilution to the
Company's stockholders. Moreover, such transactions involve the diversion of
substantial management resources and evaluation of such opportunities requires

                                       18
<PAGE>
 
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.
For example, in connection with the Quintar acquisition, Splash recorded an
expense related to purchased in-process research and development of
approximately $11.0 million. To date, other than the Splash Acquisition, the
Company's only acquisition transaction has been the Quintar acquisition. 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.

     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. In this regard, the Company
currently does not have, but is seeking to identify and recruit, a Vice
President, Sales and Marketing. Moreover, the Company expects to continue to
increase 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.

     Dependence on Third Party Manufacturers.  The Company outsources the
     ---------------------------------------
manufacture of its products to third party subcontract manufacturers including
Manufacturing Services, Ltd. ("MSL"), located in Sunnyvale, California and
Logistix Incorporated ("Logistix") located in Fremont, California. MSL purchases
the components used in Splash boards from its component suppliers and performs
double-sided active surface mount assembly, in-circuit test, functional test and
system test of the printed circuit boards used in the Company's products, on a
turnkey basis. MSL also performs in-warranty and out-of-warranty repair of
failed boards for the Company's products. The Company directly purchases Apple
Power Macintosh computers, monitors and memory, and furnishes these components,
as well as the MSL-assembled boards, to Logistix for final assembly. Logistix
directly purchases a small portion of the components used in Splash color
servers and does all final assembly and system configuration.

     While the Company's subcontract manufacturers conduct quality control and
testing procedures specified by the Company, the Company has from time to time
experienced manufacturing quality problems. Although the Company does not
believe any such problem had a material adverse effect on the Company's
business, there can be no assurance that quality problems will not occur again
in the future or that any such problem would not have a material adverse effect
on the Company's business, operating results and financial condition.

     If the Logistix, MSL or other third party manufacturing facilities utilized
by the Company become unavailable to the Company, or if the manufacturing
operations at these facilities are slowed, interrupted or terminated, the
Company's business, operating results and financial condition could be adversely
affected. Although the Company believes that there are a variety of companies
available with the capability to provide the Company with such services, there
can be no assurance that the Company would be able to enter into alternative
third party manufacturing arrangements on terms satisfactory to the Company, in
a timely fashion, or at all.

     Dependence on Component Availability and Cost.  The Company purchases
     ---------------------------------------------
components comprising a significant portion of the total cost of its color
servers. The balance of the inventory required to manufacture the Company's
products is purchased by Logistix. The Company currently sources most of its
Power Macintosh computers that serve as the platforms for its color servers from
Apple. The Company is currently operating on a purchase order basis with Apple.

     Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers. These include
Apple Power Macintosh computers, certain 

                                       19
<PAGE>
 
ASICs and other semiconductor components. The Company does not maintain any 
long-term agreements with any of its suppliers of components. Because the
purchase of certain key components involves long lead times, in the event of
unanticipated increases in demand for the Company's products, the Company could
be unable to manufacture certain products in a quantity sufficient to meet end
user demand. The Company has experienced difficulties related to Apple's delay
in the release of new systems. There can be no assurance that the Company will
not experience similar difficulties in the future. The Company also purchases
memory modules from a single supplier. Although other sources are available, a
change in memory supplier could require time to effect and could impact
production. This risk would be exacerbated in times of memory supply shortages.
Any inability to obtain adequate deliveries of any of the components or any
other circumstance that would require the Company to seek alternative sources of
supply could affect the Company's ability to ship its products on a timely
basis, which could damage relationships with current and prospective customers
and could therefore have a material adverse effect on the Company's business,
financial condition and operating results. Moreover, there can be no assurance
that alternative sources of supply would be available on reasonably acceptable
terms, on a timely basis, or at all. The Company has from time to time
experienced shortages in deliveries of ASICs from Toshiba Corporation, which
shortages have impacted production volume capabilities. In order to attempt to
mitigate the risk of such shortages in the future, the Company has increased its
inventory of components for which the Company is dependent upon sole or limited
source suppliers. As a result, the Company is subject to an increasing risk of
inventory obsolescence, which could materially and adversely affect its
operating results and financial condition.

     The market prices and availability of certain components, particularly
memory, other semiconductor components and Apple Power Macintosh computers,
which collectively represent a substantial portion of the total manufactured
cost of the Company's products, have fluctuated significantly in the past.
Significant fluctuations in the future could have a material adverse effect on
the Company's operating results and financial condition.

     Dependence on Proprietary Technology; Reliance on Third Party Licenses. The
     ----------------------------------------------------------------------
Company relies in part on trademark, copyright and trade secret law to protect
its intellectual property in the United States and abroad. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection and there can be
no assurances that the steps taken by the Company will prevent misappropriation
of its technology. The Splash software included as a part of the Company's
products is sold pursuant to "shrink wrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. The Company does not own any issued patent. There can be no
assurance that any trademark or copyright owned by the Company, or any patent,
trademark or copyright obtained by the Company in the future, will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. Thus, effective intellectual property protection may
be unavailable or limited in certain foreign countries. There can be no
assurance that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that others will not independently
develop technologies that are similar or superior to the Company's technology,
duplicate the Company's technology or design around any patent of the Company.
Moreover, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on the
Company's business, operating results and financial condition.

     There have been substantial amounts of litigation in the computer and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. In particular, EFI filed suit against Radius in
November 1995, alleging infringement of an EFI patent by Splash's predecessor,
CSG, and requesting unspecified monetary damages and injunction relief. The
technology which is the subject of the patent claim was acquired in the Splash
Acquisition, and EFI could add Splash as a defendant to this suit at any time.

                                       20
<PAGE>
 
Although a portion of the purchase price in the Splash Acquisition was placed in
escrow pending resolution of the EFI litigation, there can be no assurance that
any such litigation against Splash would not have a material adverse effect on
the Company's business, operating results and financial condition. The addition
of Splash as a defendant in the EFI suit or any other claims that the Company is
infringing on proprietary rights of others, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, and cause product shipment delays. If the Company were
found to be infringing on the intellectual property rights of any third party,
the Company could be subject to liabilities for such infringement, which
liabilities could be material, and could be required to seek licenses from other
companies or to refrain from using, manufacturing or selling certain products or
using certain processes. Although holders of patents and other intellectual
property rights often offer licenses to their patent or other intellectual
property rights, no assurance can be given that licenses would be offered or
that the terms of any offered license would be acceptable to the Company. Any
need to redesign the products or enter into any royalty or licensing agreement
could have a material adverse effect on the Company's business, operating
results and financial condition.

     The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms. The loss of, or inability to maintain, existing licenses could
result in shipment delays or reductions until equivalent software or suitable
alternative products could be developed, identified, licensed and integrated,
and the inability to license key new software that may be developed, on
commercially reasonable terms, would have a material adverse effect on the
Company's competitive position. Any such event would materially adversely affect
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, capital expenditures and potential acquisitions. Although
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 the Offering,
cash flow from operations, existing cash balances and the Company's bank line of
credit, there can be no assurance that the Company will be able to obtain any
additional financing which may be required in the future 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. As a
     -------------------
result, international sales accounted for approximately 60%, 59%, and 57% of net
revenue in fiscal 1994, 1995 and 1996, respectively. In addition, although
substantially all sales to Xerox are accounted for as 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 generally
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 

                                       21
<PAGE>
 
denominated price to the Company's OEM customers, which could in turn result in
a reduction in net revenue and profitability. In addition, to the extent that an
increased portion the Company's sales are denominated in foreign currencies, the
Company could be exposed to currency exchange risks. The Company's business,
operating results and financial condition would be materially adversely affected
if foreign markets do not continue to develop.

     Financial Difficulties of a Certain Stockholder; Potential Sales of Common
     --------------------------------------------------------------------------
Stock.  Radius, which currently beneficially own 14.4% of the outstanding 
-----
shares of the common stock and which will beneficially own approximately 6.5% 
of the outstanding shares of the Common Stock immediately following the
Offering, if consummated, has faced, and continues to face, significant
financial difficulties. Radius has certain rights to demand that the Company
register Radius' shares of Common Stock under the Securities Act of 1933, as
amended (the "Securities Act"), which registration would permit the sale by
Radius of the shares registered in the public market. In addition, under
certain circumstances, IBM Credit Corporation may require Radius to use its
best efforts to dispose of its Splash Common Stock. If Radius were to
voluntarily or involuntarily enter bankruptcy, Radius might have the ability
to sell a substantial portion of its holdings of Common Stock in the public
market without regard to requirements for registration of such shares under
the Securities Act or the requirements of Rule 144 promulgated under the
Securities Act and may have the ability to avoid its obligations under the
lock-up agreement with respect to Common Stock held by it. Sales of
substantial amounts of the shares of Common Stock held by Radius in the public
market or the prospect of such a sale could adversely affect the market price
of the Company's Common stock.

     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.

     Stock Price Volatility.  The trading price of the Common Stock has been
     ----------------------
subject to significant fluctuation to date, and could be subject to wide
fluctuations in the future in response to quarterly variations in operating
results, announcements of new products by the Company or its competitors,
general conditions in the markets for the Company's products or the color server
industry, changes in earnings estimates by analysts, general economic or stock
market conditions or other events or factors. In addition, the public stock
markets have experienced extreme price and trading volume volatility in recent
months. This volatility has significantly affected the market prices of
securities of many companies, in particular technology companies, for reasons
frequently unrelated to operating performance. The broad market fluctuations may
adversely affect the market price of the Company's Common Stock.

                                       22
<PAGE>
 
                                    PART II
                               OTHER INFORMATION


ITEM 1.           LEGAL PROCEEDINGS

                  None

ITEM 2.           CHANGES IN SECURITIES

                  None

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
                       27.0      Financial Data Schedule

                  (b)  Reports on Form 8-K
                       The Company filed a Form 8-K on May 30, 1997 for
                       matters related to the acquisition of Quintar
                       Corporation.

                       The Company filed a Form 8-K/A on August 11, 1997 to
                       amend the Form 8K filed on May 30, 1997. The Form 8-K/A 
                       included the following:

                       Report of Independent Auditors
                       Balance Sheets as of December 31, 1995 and 1996
                       Consolidated Statements of Operations for the years
                        ended December 31, 1995 and 1996
                       Consolidated Statements of Shareholders' Equity for the
                        years ended December 31, 1995 and 1996
                       Consolidated Statements of Cash Flows for the years
                        ended December 31, 1995 and 1996
                       Notes to Consolidated Financial Statements
                       Condensed Consolidated Balance Sheet as of March 31, 1997
                        (unaudited)
                       Condensed Consolidated Statements of Operations for the
                        three months ended March 31, 1996 and 1997 (unaudited)
                       Condensed Consolidated Statements of Cash Flows for the
                        three months ended March 31, 1996 and 1997 (unaudited)
                       Notes to Condensed Consolidated Financial Statements
                       Introductory paragraph to Pro Forma Combined Condensed 
                        Statements of Operations (unaudited)
                       Pro Forma Combined Condensed Statement of Operations for 
                        the year ended September 30, 1996 (unaudited)
                       Pro Forma Combined Statement of Operations for the nine
                        months ended June 30, 1997 (unaudited)
                       Notes to Unaudited Pro Forma Information


      
                                      23
<PAGE>
 
                                  SIGNATURE

     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.
                                          (Registrant)

Date:     August 13, 1997                 By:    /s/ Joan P. Platt
      -----------------------                 --------------------------------
                                              Joan P. Platt
                                              Vice President, Finance & 
                                              Administration,
                                              Chief Financial Officer

                                       24