<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the fiscal year 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   0-18114
                              ----------------------------------------

                        LASERMASTER TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)
 
             MINNESOTA                                      41-1612861
------------------------------------                 ------------------------
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                      Identification No.)
 
       7090 Shady Oak Road
       Eden Prairie, Minnesota                                55344
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(Address of principal executive offices)                    (Zip Code)
 
Registrant's telephone number, including area code        (612) 941-8687
                                                          -------------------
Securities registered pursuant to Section 12(b) of the Act:

     Title of each class            Name of each exchange on which registered

          None
--------------------------------    -----------------------------------------

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

Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $.01 per share
-----------------------------------------------------------------------------
                               (Title of Class)

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

                              [COVER PAGE 1 OF 2]

                                       1
<PAGE>
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 31, 1997 was $21,120,000 based on the last sale price
for the common stock as recorded by the National Association of Securities
Dealers on that date.

As of August 31, 1997, there were 14,532,462 shares of the registrant's common
stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE:

None.



                              [COVER PAGE 2 OF 2]

<PAGE>
 
                                    PART I
                                    ------

Item 1. BUSINESS.
-----------------

General

LaserMaster Technologies, Inc. (the "Company") designs, manufactures and markets
wide-format (up to 62" wide prints), high-resolution color inkjet printers,
chemical-free film imagers ("filmsetters"), and related image processing
equipment for professional printing applications through its newly renamed
operating subsidiary ColorSpan Corporation, LaserMaster Europe, Ltd. and
LaserMaster Asia/Pacific, Inc., to be known as ColorSpan Europe, Ltd. and
ColorSpan Asia/Pacific, Inc., respectively. In addition, the Company sells
related consumable products ("consumables") for its installed base of printers,
consisting primarily of ink, media (such as specialty papers, canvas, vinyl,
etc.), film, toner (ink-like powder) and process units (which facilitate
transfer of toner to the media surface). The Company's products combine advanced
computer technology with the Company's own sophisticated software, hardware and
proprietary printers ("engines") to produce professional-quality printed output
at an affordable cost.

The Company's HiRes 8-Color printer series (the newly introduced DisplayMaker
4000, 5000 and 6000) along with the DesignWinder/TM/ and the DisplayMaker/R/
Professional, DisplayMaker XL60 and DisplayMaker Express Big Color/R/ wide-
format, digital inkjet color printers, are designed to be cost-effective
solutions for the short-run digital computer printing of photo-realistic, wide-
format color posters, signs, and banners. The Company's Halon/R/ product
allows users to print digital files to various color laser copiers including
those produced by Canon, Kodak and Xerox. The PressMate/R/-FS, a proprietary
desktop chemical-free FilmSetter/TM/, is capable of film output generated
without the use of chemicals (dry film) typically associated with developing
film, with effective resolution of 2400 dots per inch. The ColorMark/R/ Pro 2000
Print Server is a raster image processor which is capable of supporting a
combination of DisplayMaker Professional, DesignWinder, DisplayMaker Express and
DisplayMaker HiRes 8-Color series printers, PressMate-FS Personal
FilmSetters/TM/, and Halon color laser copier interfaces simultaneously, as well
as offering time-saving features specifically designed for high-volume,
production environments. The RIPStation/TM/ is an entry-level print server
(raster image processor).

Until 1993, the Company's principal products were monochrome laser printers that
were based on printer hardware or "engines" manufactured by others but included
the Company's proprietary software (including "TurboRes/R/") and hardware
designed to generate significantly higher effective resolution. Print
resolution, commonly expressed in terms of "dots per inch" (the number of
digitally placed dots on a line), approached the resolution used in professional
typesetting previously dominated by photographic processes and was described as
"plain-paper typesetting." Although the Company believes that it was a market
leader in very high resolution laser printing and continued to enhance its
products, from 1991 through 1996, many of the Company's competitors, including
Hewlett-Packard/R/, increased the performance of their printer offerings,
impacting the volume and margins achieved on sales in the high resolution laser
printer marketplace. The Company focused its research and development efforts on
other sectors of the printing market during this period (specifically on the
development of proprietary printing hardware and related consumables) and ceased
actively promoting its plain-paper typesetting products entirely in the fourth
quarter of fiscal 1996, which resulted in a continuing decline in sales of 
plain-paper typesetting products over the next four quarters.

The bulk of the decline in sales from plain-paper typesetting products during
this period was replaced by sales of new, wide-format color ink jet printers
developed by the Company. The Company introduced its wide-format (36 inch),
photo-realistic color printer, the DisplayMaker Professional, in 1993. Although
still based on a printer "engine" developed by others, the DisplayMaker
Professional integrates a high performance computer print server and the
Company's own software with a proprietary ink delivery system ("Big Ink/TM/")
to enhance speed, functionality and the quality of output to generate photo-
realistic, poster sized prints and banners. As the market grew and demand
increased, competitors have licensed the printer "engines" from the Company's
supplier and have introduced their own competing product, which has negatively
impacted the Company's margins.

As part of its longer term strategy to reduce its susceptibility to new market
entrants, maintain product differentiation and lengthen its product life cycles,
the Company began development of several proprietary printer "engines" in 1993
and has continued with this strategy through the present. The first of these
products was targeted for a niche in the laser typesetting market by eliminating
the need for the use of photographic processes and chemicals in creating an
image on a photographic film used to create a metal printing plate. In 1994, the
Company introduced a proprietary printer engine and associated software,
PressMate, that uses heat-sensitive film rather than photosensitive film that
allows dry process imaging on the desk-top rather than chemical development in
the darkroom. The Company enhanced this printer and

                                       3
<PAGE>
 
introduced a reconfigured version as the "PressMate-FS" in August, 1995. During
the past three years, the Company has developed three new proprietary color
printer products using engine platforms to address the wide-format color
printing market. The first of these products, the DisplayMaker Express, is a 54
inch wide, photo-realistic roll-fed color printer that uses phase-change inks
(solid inks that are melted during the printing process), which was introduced
in 1995. The second color printer product developed during this time, the
DesignWinder, was introduced in September 1996. The DesignWinder is a drum-
based, 8 head, cut-sheet, printer that produces high-quality wide-format (36 by
48 inch) prints in as little as 6 minutes. Since 1994, the Company has also
introduced the ColorMark Pro Print Servers, RIPStations (raster image processing
stations), and the Halon copier interface to enhance and expand the utility,
functionality and applications for the color products.

In September 1997, the Company introduced its newest HiRes 8-Color proprietary
printing platform. The ColorSpan DisplayMaker 6000 was exhibited at the Print
'97 trade show in Chicago, Illinois and several other shows later that month.
The DisplayMaker 6000 is a 62" wide-format, roll-fed device with eight thermal
ink jet print heads. Also available in this series are the DisplayMaker 4000
(42" wide) and DisplayMaker 5000 (52" wide) printers with the same feature set.

In August 1997, the Company announced its intention to rename its primary
operating corporation. Effective August 1997, the Company renamed LaserMaster
Corporation (its primary operating subsidiary) to ColorSpan Corporation.
Subsequently, LaserMaster Europe Ltd. and LaserMaster Asia/Pacific, Inc. will
become ColorSpan Europe, Ltd. and ColorSpan Asia/Pacific, Inc., respectively.
The Company also intends to petition its shareholders during Fiscal 1998 to
change the name of the parent company, LaserMaster Technologies, Inc.

The name change is consistent with the Company's strategic business plan. As
early as June 1996 the Company had announced it intended to concentrate its
efforts in the wide-format color printing arena. The ColorSpan name change
reiterates the Company's focus on market opportunities in that area. In August
1997, the Company also announced it intended to sell wide-format inkjet media
for Encad, HP and other wide-format printers via the world wide web.

The primary users of the Company's products are commercial printers,
reprographic service bureaus, photo labs, quick printers, exhibit builders, in-
house print shops, printers, publishers, government and educational facilities,
and corporate marketing departments. Applications include point-of-purchase
signs, trade show exhibit graphics, banners, billboards, courtroom graphics, 
pre-press positional proofing (proofs or other quick output to demonstrate
concepts for advertising or graphics layouts), digital photo imaging and backlit
signage.

The products are sold through a network of domestic resellers and international
value-added distributors. In the U.S./Canada, the Company uses a factory sales
team to assist the resellers in closing business.

The Company's domestic offices are in Eden Prairie, Minnesota. The Company's
European sales subsidiary is headquartered in Hoofddorp, The Netherlands, and
the Company's Asia/Pacific sales and technical support facility is located in
San Jose, California.


Market

According to Wide-Format Digital Color Printing, a November 1996 market survey
conducted by IT Strategies, a research and consultancy firm serving the digital
printing markets, the Large-Format Digital Printing market for hardware and
consumables is projected to grow from annual sales of approximately $554 million
in 1996 to approximately $3.4 billion in 2000. The rapid growth in this market
is being driven primarily by the increasing desire and need for customized,
large-format color graphics, as well as significant advances in short-run
printing and desktop publishing technologies. Traditional graphics printing
methods, consisting of photographic, screen and offset printing, do not meet the
requirements for production of short-run print jobs due to the time consuming,
multi-step processes and set-up costs involved. As a result, digital printing
has developed to fulfill the unmet demand of short-run users by allowing
graphics to be printed directly from desktop publishing systems with dynamic
interchange of data to print onto a variety of media.

There are a number of digital printing technologies, including inkjet, (piezo
and thermal), pen, electrostatic, and photographic that allow users to produce
wide-format output. Each of these technologies has specific qualities that can
be critical to any given application, including resolution, speed, accuracy,
color fill capability, fade resistance, reliability and cost.


                                       4
<PAGE>
 
A combination of characteristics has made inkjet printing one of the fastest
growing technologies in the wide-format color printer market. The
characteristics of wide-format inkjet printers include relatively low cost, high
resolution, faster speed and the ability to print high-quality color. Inkjet
printers (using either thermal or piezo print head technology) typically form
images, lines and other characters by placing very small dots of ink as the
print head moves horizontally, called a raster scan, while the media is
typically scrolled vertically. Because inkjet print heads move above the media
and do not actually make contact with the media, there is less mechanical wear
and tear than experienced with other types of printing devices. Most inkjet
printers can print on a variety of media or other materials used for signage or
display.

Electrostatic printers generally are more expensive to purchase than inkjet
printers or thermal printers and require the use of special medias.  They offer
certain advantages to users requiring low cost per square foot and high speed
printing characteristics.  Thermal printer/plotters are similar to electrostatic
printers in that they require special paper, but also require ink ribbons to
take advantage of the thermal print head.  Thermal printers are typically more
costly than comparable-size inkjet printers.

Other technologies that can be adapted to wide-format use include photographic
output, electrophotographic output and dot matrix printers.  These printers have
disadvantages, including high costs, when compared to inkjet technology.

Strategy

The key elements of the Company's strategy are:

To maintain and enhance its position as a leading provider of affordable, high
quality, proprietary products and aftermarket consumables supplies to the
professional printing market.  A growing portion of  the Company's products are
proprietary printer architectures (the printer engine including ink and media
delivery systems)  which were designed, manufactured, and marketed by the
Company.  PressMate-FS and DisplayMaker Express were the first two proprietary
printer engines developed by the Company.  In September 1996, the Company
introduced the first member of its HiRes 8-Color printer platforms, the
DesignWinder.  The DesignWinder platform is also the basis for the Company's
first OEM partner.  Agfa-Gevaert commenced selling its product, the AgfaJet
Atlas in July 1997.  In September 1997, the Company, under its new ColorSpan
identity, introduced a family of HiRes 8-Color printers with printing widths
varying from 42" to 62".   The Company's family of products is expected to grow
with the changing marketplace while meeting the needs of professional printing
applications.

To develop and produce value-added software which distinguish its printer
solutions.  The Company has consistently taken market standards to a higher
level of performance.  Management  has been committed to continually enhancing
its products by adding features and options to its current family of devices
through software enhancements.  These enhancements continually evolve with
products over their lives through increasing print speeds, allowing use of
additional media and inks for various applications, improving color matching and
print quality and continuing compatibility with other vendor's software and
operating systems.

To continue to develop a global reseller channel which utilizes the Company's
sales expertise.  The Company has been successful developing its targeted
markets through direct mail and telemarketing efforts.  The Company intends to
continue to enhance its global third party distribution channels while
continuing to focus on its core direct market development and user education
approach in partnership with its new reseller focus in the U.S. and Canada.

To develop additional media, ink and film for use with the Company's proprietary
print engines to enhance printing applications and market expansion.  In
September 1996, the Company entered into a strategic alliance with Sihl-Zurich
Paper Mill on Sihl AG (Sihl), a leading European manufacturer of specialty paper
and related media, to enhance the development of unique and high-quality media
for use with the Company's print engines.  Sihl is a primary vendor in the
Company's "Print and Hang" media offerings for outdoor use released during 1997.
The Company added 21 new inkjet medias during the year.  Included in these
offerings are WaterFast Poly-Film, WaterFast Poster Paper and Banner Tyvek(R)
for outdoor applications.  The release of specialty media for use with the
Company's DesignWinder added Artist Gloss Canvas and Artist Matte Canvas
offerings, along with FirstLook Proofing Paper and FineArtArchival Paper for use
in the fine art reproduction market.  The Company also increased the number of
widths and lengths offered in a number of core media offerings.

These media are tuned to provide the highest quality output when used in
conjunction with LaserMaster/ColorSpan's ink and proprietary ColorMark color
matching capabilities available on the Company's hardware product line.

                                       5
<PAGE>
 
In addition, the Company released multi-density ink offerings for its HiRes 8-
Color DesignWinder products in both dye-based (Ultra Wide Gamut) and pigmented
(Lightfast) versions.

To increase international sales.  International sales have been a growing
percentage of LaserMaster/ColorSpan's core business.  The Company is committed
to increasing its market share in Europe, Asia, Africa, Central and South
America through its physical presence in Europe as well as by building ongoing
relationships with its Value Added Distributors (VADs) throughout the world.
The Company has opened a new technical support and sales office in San Jose,
California to enhance the support of its Pacific Rim operations going forward.

To develop original equipment manufacturing (OEM) customers for the Company's
proprietary products.  The Company announced the signing of its first
significant OEM relationship in August 1997.  The Agfa-Gevaert group began
selling its AgfaJet Atlas imaging system in July 1997.  The product is based on
the Company's HiRes 8-Color drum based DesignWinder platform.  The Company is
actively exploring relationships which would result in additional OEM customers
for its various product offerings.   The Company has plans to allow its
proprietary engines to be accessed by third-party print servers and color
management systems. Augmenting the Company's existing distribution channels with
high-quality OEMs could help gain market acceptance of the Company's products
and expand its customer base for after-market consumables sales.

To expand consumable sales by offering a line of consumables (primarily media)
to users of  printers manufactured by others.  In August 1997, the Company
announced the opening of its Media.By.Air business segment.  The internet sales
model will market a line of inexpensive, high quality, commodity media and will
rely on electronic commerce for marketing, order acceptance and shipment.  It
will partner with a number of third-party suppliers to offer overnight delivery
of printing supplies to inkjet supplies consumers.

ColorSpan Products

ColorSpan's five wide-format color inkjet printers, the DisplayMaker
Professional (initial shipments in June 1993), DisplayMaker Express (initial
shipments in December 1995), DesignWinder (introduced in September 1996), and
DisplayMaker XL60 (initial shipments in April, 1997) and the recently introduced
DisplayMaker HiRes 8-Color printer series (initial shipments in September 1997),
provide photo-realistic digital color output.  These products are designed to be
cost-effective solutions for short-run digital printing of photo-realistic wide-
format color output.  The printers work with most commercially available desktop
digital color manipulation and composition software applications.  Using third-
party graphics and page-layout software applications that allow printed pages to
be "tiled", the DisplayMaker products can be used to create virtually unlimited
image sizes.  The Company's Big Color products incorporate a number of
proprietary software advances, including ColorMark(R) color management and
SmoothTone image enhancement technologies.  The DisplayMaker HiRes 8-Color
series adds features like AutoSet calibration which automatically adjusts
cartridge positions, AutoJet mapping which makes adjustments for misfiring jets,
AutoTune  which allows users to calibrate in an unattended mode, and AutoInk
which allows users to switch between dye-based and pigment inks through
software.  These features utilize a CCD camera to make calibrating the printer,
changing ink cartridges and unattended printing easier and more reliable.
ColorMark is the Company's color management system that ensures accurate and
consistent color from print to print.  This technology allows the user to print
multiple copies of the same file and achieve near perfect matching of colors,
even after changing ink and media.  SmoothTone is an image-enhancement
technology that significantly boosts the apparent resolution of the printing
engine to provide output with near continuous-tone quality.

The Company's ThermalRes(R) technology, for which three United States patents
have issued with additional U.S. and foreign patents pending, accomplishes an
even higher degree of resolution enhancement for text and line art in monochrome
and four-color pre-press printing applications. ThermalRes technology is used in
the Company's desktop chemical-free filmsetter product, PressMate-FS.

DisplayMaker Professional and DisplayMaker XL60.  These Big Color printers are
4-head, 36-inch and 60-inch wide, photo-realistic, roll-fed, color inkjet
printers capable of printing poster-size images up to 36 inches wide and 60-
inches wide and, depending on the software application, up to 200 feet long.
The DisplayMaker Professional and the DisplayMaker XL60 are based on third-
party-supplied inkjet marking engines and the Company's patented Big Ink
Delivery System.  The ColorMark color management system incorporated into the
ColorMark print server ensures consistent color quality from print to print.

                                       6
<PAGE>
 
DisplayMaker Express.  The Company's second proprietary printer is a 54-inch
wide, photo-realistic, high-speed, roll-fed, 4-color inkjet printer which
utilizes phase-change inks together with piezo printhead technologies for which
the Company has special marketing rights for certain wide-format applications.
The DisplayMaker Express prints over 100 square feet per hour, or an E-size (34
inches by 44 inches) print in approximately six minutes.  DisplayMaker Express
is capable of producing prints 54 inches wide and in excess of 150 feet in
length.  The DisplayMaker Express uses specially formulated ColorMark solid
pigmented ink pucks, rather than dye-based aqueous inks used by other inkjet
printers, which provides improved UV stability and water resistance.  The
DisplayMaker Express requires the use of ColorMark qualified or certified media,
which ensures proper print functionality and quality.

DesignWinder.  LaserMaster's third proprietary printer and first of the HiRes 8-
Color printer platforms is a 36-inch wide, drum-based, cut-sheet, color inkjet
printer which utilizes a revolutionary eight printhead design to produce high-
quality signs, photos and digital art and sets a new five minute benchmark for
producing E-size prints.  The Company's first OEM supply agreement, signed in
August 1997, also uses this platform.  DesignWinder is capable of producing
apparent 1200 dpi (dots per inch) resolution prints up to 35.5 inches by 47.25
inches in size utilizing its patent-pending multi-density printing technique
which uses additional inks to address more discreet colors within the color
gamut.  The high-precision, spinning drum-based design provides superior dot
placement accuracy and repeatability, setting a new standard in Big Color print
quality, previously unattainable in traditional inkjet plotter devices (print
engines that use a moving print head traveling perpendicular to a moving web of
paper to attain print coverage).

PressMate-FS.  In March 1995, the Company began shipping production quantities
of its PressMate desktop chemical-free filmsetter.  PressMate, the Company's
first proprietary printer engine, is a desktop device that uses a dry process to
produce specially designed films necessary for making the printing plates used
in offset printing. Traditionally, these films were produced by photographic (or
wet process) type imagesetters or cameras, using chemicals and darkrooms to
develop the image to be reproduced. PressMate permits printing of text, line art
and images used for four-color separations, at resolutions considered by the
Company to be equivalent to 2400 dots per inch using a heat-sensitive, chemical-
free film.  This fidelity was previously unavailable in a plain-paper or thermal
printing device. PressMate shipments were suspended in August 1995 to improve
registration tolerance across multiple layers of film required for the highest
quality, four-color separations desired by the Company's customers.  In December
1995, the Company began shipping production quantities of PressMate-FS, which
incorporated these technical improvements.  The PressMate-FS is a desktop unit
that is easily integrated into just about any office or computer network
environment.

Halon(R).  The Halon Color Laser Copier interface provides users of the
ColorMark Pro color print server the option of printing their digital files to
any one of a variety of color laser copiers.

ColorMark Pro 2000.  The DesignWinder printer, DisplayMaker printers, PressMate
filmsetter and Halon color laser copier interface are all driven by the
Company's ColorMark Pro 2000 print server, a raster image processor that is
based on a 200 MHz, 32-bit superscalar microprocessor.  The ColorMark Pro 2000
features advanced file spooling (a queue method) for multiple users, "RIP
Saver/(R)/ (which stores processed files to avoid redundant rasterization), job
management and logging features that track ink and paper consumption for job-
costing, work-flow planning and other purposes.  This device has connectivity
capacity to handle several devices simultaneously including one DesignWinder, up
to two DisplayMaker Professionals or XL60's, one DisplayMaker Express, one
DisplayMaker HiRes 8-Color printer, up to two PressMate-FS's, or up to two color
laser copiers with Halon interfaces.

RIPStation.  The RIPStation is an entry-level color server alternative.  It is
based on a 200 MHz, 32-bit microprocessor. It functions similarly to the
ColorMark Pro 2000 without the added advanced and multiple engine connectivity
features offered by the ColorMark Pro 2000.

Consumables.  Color printing consumes significant quantities of inks and media.
ColorSpan products include a range of consumables, such as specialized dye-based
inks for indoor use and pigmented inks for outdoor use.  The Company performs
qualification testing on these consumables before releasing them for customer
shipment.  The specialized inks are created specifically for ColorSpan products
to optimize image quality and printer performance.  The Company currently offers
a variety of media for its wide-format inkjet printers that include recent
introductions such as WaterFast PolyFilm, WaterFast Poster Paper and Banner
Tyvek for outdoor use with its roll-fed aqueous inkjet products.  In the past
fiscal year, the Company has added specialty media for the DesignWinder product
that include Artist Gloss Canvas, Artist Matte Canvas, FineArt Archival Paper
and FirstLook Proofing Paper to take advantage of DesignWinder's unique printing
capabilities.

                                       7
<PAGE>
 
The Company sells the consumables (inks, media and film) required for optimum
use of the printing products it sells. The Company offers various ColorMark
consumables for its Big Color printers, including a dye-based version and a
waterfast, lightfast pigment-based versions of 500 ml Big Ink packs for use with
the DisplayMaker HiRes 8-Color printer series, the DisplayMaker Professional,
DisplayMaker XL60 and DesignWinder, and uniquely configured 150 ml ColorMark
solid ink pucks required for the DisplayMaker Express. The Company introduced
dye-based and pigment-based ColorMark multi-density inks for use with
DesignWinder during 1997. In addition to the basic media offered for
DisplayMaker Express in the past (ColorMark Bond, ColorMark Vinyl and ColorMark
WaterFast Removable Tyvek), during 1997 the Company introduced ColorMark
WaterFast Durabanner/TM/, ColorMark Laminate Bond, to be used when encapsulation
of the output is desired, and two lower priced versions of previously released
media; ColorMark EconoVinyl and ColorMark EconoBond. The Company also offers a
variety of print media in various widths and lengths such as Coated Gloss paper,
PolyGloss(R), FineArt Canvas, matte, ClearFilm/TM/, and TransWhite/(R)/
translucent backlit film (used on back-lighted signs) for use with the
DisplayMaker Professional, DesignWinder, DisplayMaker XL60, and the DisplayMaker
HiRes 8-Color series of products.

As part of the ColorMark system, the 500 ml Big Ink packs, and 150 ml ColorMark
ink pucks ship with ColorMark profilers  (recyclable circuit boards) that plug
into the printer, and provide information to ensure accurate, consistent color
output from print to print.  The domestic price per dye-based Big Ink pack is
$199 per color.  The price for pigment-based Big Ink packs is $299 per color.
The ColorSpan wide-gamut dye-based Big Ink packs sell for $249 each and the
pigmented versions sell for $299 each. The domestic price per ColorMark ink puck
is $175.  The domestic prices of the ColorMark paper and other media range from
$65 to $450 per 100- to 150-foot, 36-inch wide rolls and  from $119 to $1,159
per 40- to 175-foot, 60-inch wide rolls.

The Company's PressMate-FS Personal FilmSetter/TM/ requires specially developed
ThermalRes film rolls which are also supplied by the Company.  This unique
specialty film is manufactured to the Company's specifications.  The domestic
price is $295 for a 90-foot roll of ThermalRes film.

The Company's Unity/TM/ line of plain-paper typesetters require toner and 
process units for operation. The domestic price for toner is $69 per unit, and
process units list for $699 per unit.

The Company's hardware products, which have suggested US list prices of
approximately $5,995 to $49,995/(1)/, include:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Product                                 Distinguishing Features
----------------------------------------------------------------------------
<S>                        <C>
DisplayMaker HiRes 8-      Apparent resolution of 1200 DPI
 Color series              8-Color 500ml/color dual installable Big
                           Ink Delivery System
                           AutoSet calibration
                           AutoJet mapping
                           AutoTune unattended printing
                           42", 52", and 62" wide roll-fed output
----------------------------------------------------------------------------
DisplayMaker               500 ml/color Big Ink Delivery System
 Professional              36" wide roll-fed output
----------------------------------------------------------------------------
DisplayMaker Express       54" wide roll-fed output
                           150 ml ColorMark solid ink pucks
                           Print speed up to 6 inches per minute
----------------------------------------------------------------------------
DesignWinder               8-Color 500 ml/color Big Ink Delivery System
                           36" wide precision drum design
                           E-Size prints in as little as 6 minutes
                           Apparent resolution of 1200 dpi
----------------------------------------------------------------------------
DisplayMaker XL60          500 ml/color dual installable Big Ink Delivery
                           System
                           60" wide roll-fed output
----------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>
 
<TABLE>
<S>                        <C>
----------------------------------------------------------------------------
 PressMate-FS Personal
 FilmSetter                Apparent resolution of 2400 dpi
                           Chemical-free film processing
                           12" x 26" ThermalRes film output
                           500 MB Internal Storage
----------------------------------------------------------------------------
Halon Color Laser          Direct digital support for the Canon, Kodak
 Copier Interface          ColorEdge, Xerox MajestiK and Xerox Regal
                           color laser copiers.
----------------------------------------------------------------------------
ColorMark Pro 2000         200MHz, 32-bit processor
 Print Server              64 MB RAM
                           PostScript(R)-language compatible Level 2
                           3 GB storage
 
----------------------------------------------------------------------------
RIPStation Print Server    200MHz, 32-bit processor with floating
                           point unit
                           32 MB RAM
                           PostScript-language compatible Level 2
                           2 GB storage
----------------------------------------------------------------------------
</TABLE>
 
/(1)/ Effective September 1, 1997.

Product Development

The Company's continued success depends on making ongoing investments in product
development to ensure the timely introduction of high-performance products in
response to changes in technology, market demands and customer requirements.
For certain important additional cautionary factors, risks and uncertainties,
refer to Exhibit 99 of this form 10-K.  Accordingly, the Company is committed to
creating specialty printing products that yield performance superior to standard
marking engines, designing new engines and enhancing existing products to
achieve higher levels of performance.  The Company is also committed to
designing and enhancing products to increase the Company's after-market
consumables business.

As of June 30, 1997, the Company employed approximately 60 people in product
development activities.  The Company's product development organization consists
of multiple project teams based in three main product areas: drum-based
products, carriage-based products and consumable development and testing.
Staffing for these teams is flexible, allowing individual engineers to handle
multiple and sometimes overlapping development objectives. The Company's
software development group creates and enhances software technologies which
improve the usefulness, cost-effectiveness and productivity of printers offered
by the Company, and the quality of such printers' output. The Company's hardware
group works to enhance existing hardware components and products and works with
the software group to develop printer products for specialized applications and
markets. The consumables group creates and tests new product offerings for the
Company's installed base of printers.

Sales and Marketing

The Company sells its products primarily through its factory sales
professionals, partnered with its dealers in the U. S. and Canada, and value-
added distributors internationally. As of June 30, 1997, the Company employed a
67 person telemarketing sales force including sales professionals focused in
part on developing relationships with major national printing accounts and new
dealers and resellers.  The Company changed its domestic distribution model in
February 1997 and now sells its color hardware products only through its
reseller, VAD and OEM network. The Company's sales efforts are supported by a
direct mail marketing program designed to achieve frequent contact with its
potential customers, including PostScript and reprographic service bureaus,
photo labs, quick printers, sign shops, exhibit houses and corporate marketing
departments. The Company complements its direct mail efforts by advertising in
trade journals and by exhibiting regularly at industry trade shows.

The Company invests significant resources in developing and training its sales
professionals and has implemented computerized sales management and sales
communications systems. Sales representatives participate in continuous

                                       9
<PAGE>
 
training programs so that they understand product features and benefits as well
as customer applications and business requirements. Sales professionals are
compensated on a salary plus bonus and commission basis.

Domestic and Canadian Sales. The Company's domestic and Canadian sales and
marketing operations are based at its headquarters in Eden Prairie, Minnesota.
The products are sold through a network of domestic resellers and international
value-added distributors.  In the U.S./Canada, the Company uses a factory sales
team to assist the resellers in closing business.

For its Big Color products, the Company has also established relationships with
independent copy shops and local service printers that have purchased Big Color
products.  These Big Color Digital Printing Centers are provided cooperative
marketing support to promote Big Color printing services and products in their
area. The Company's  sales professionals refer potential customers to these
local Big Color Digital Printing Centers or resellers to observe the use of the
Company's Big Color products. From time to time, the Company pays a fee to the
showcasing center or reseller following a sale. The Company believes that this
marketing approach permits the Company to price its Big Color products at
competitive levels.

OEM Sales.  The Company signed its first significant OEM contract in August
1997. Pursuant to this agreement, the Company is selling its DesignWinder
product and Big Ink Deliery System for use with the DesignWinder to Agfa-Gevaert
for private labeling. Agfa began selling its AgfaJet Atlas imaging system in
July 1997. The Company is currently exploring other relationships which would
result in OEM customers for its various printer engines.  The Company desires to
expand the market acceptance of its proprietary products and widen its
distribution network for both hardware and after-market consumables.
Relationships with quality OEM partners are a method of attaining this goal. The
Company has plans to allow its proprietary engines to be accessed by third-party
print servers and color management systems. Expanding the installed base of
ColorSpan hardware products will allow the Company an opportunity to sell more
consumables products.

International Sales. The Company currently sells its products in all of the
Western European nations and in the principal Eastern European, Latin American,
Pacific and Asian markets. The Company's European sales, support and warehouse
facility is located near Amsterdam, The Netherlands. The Company conducts sales
operations for Europe, the Middle East and Africa from its European
headquarters. Pacific and Asian markets are managed from the new technical
support and sales office in San Jose, California. All other international sales
are managed from its headquarters in the United States.

In international markets, the Company sells its products through a network of
non-exclusive Value Added Distributors (VADs).  VADs are granted the right to
purchase ColorSpan products at discounted prices from list price and distribute
those products within a specified territory outside the United States.  VAD
agreements require the VAD to promote, market and support ColorSpan products and
are typically for a one year period with automatic one year renewals.  Either
party may terminate the agreement with or without cause, with a 30 day written
notice.  The Company may appoint other VADs and may sell directly to customers
inside these territories.  For the year ended June 30, 1997, sales to customers
outside of the United States accounted for approximately 46% of the Company's
total revenues.  See Note 14 of Notes to Consolidated Financial Statements for
additional information regarding international operations.

Service and Support

At June 30, 1997, the Company had 48 technical and customer support
representatives responding to telephone inquiries from customers and dealers.
The Company offers a limited warranty for all of the products it manufactures.
Under its limited warranty, the Company will repair or replace any defective
product on a factory-return or central depot basis for a period ranging from 90
days to one year following purchase. In addition to its factory warranty, the
Company offers its customers the option of on-site installation and maintenance
services in some markets, through third-party support organizations.

Manufacturing

The Company performs final assembly, functional testing and quality assurance
for essentially all of its products and related components, parts and
subassemblies at its facilities in Eden Prairie, Minnesota.  For some of its
products the Company currently purchases fully assembled printer marking engines
directly from manufacturers and other components, parts and subassemblies from
outside sources.  For its PressMate-FS, DisplayMaker Express, DesignWinder and
DisplayMaker HiRes 8-Color series products, the Company purchases components and
uses them to manufacture

                                       10
<PAGE>
 
the printer engine.  The Company designs controller boards and software for use
with these print engines and components. The Company utilizes a computerized
material requirements planning (MRP) and monitoring system to integrate its
purchasing, materials handling and inventory control functions.

Certain components used in the Company's products, including printer marking
engines, printheads and custom fabricated components, are currently available
only from sole sources, and certain other components are available from only a
limited number of sources. The Company has in the past experienced delays as a
result of the failure of certain suppliers to meet requested delivery schedules.
The Company sources ink cartridges from a supplier that also competes in the
wide-format digital printing market. Should the Company have problems obtaining
the inkjet cartridges for any reason, it will have a significant adverse impact
to the Company. In August 1996, the Company experienced a severe shortfall in
piezo head components due to a yield problem with one of its key vendors.  That
shortfall caused a reduction in revenues for the DisplayMaker Express product
line in the September 1996 quarter.  The Company worked through the process
problems with this vendor during the December 1996 quarter and is currently able
to obtain adequate supplies. The Company's potential inability to obtain
sufficient sole or limited source components, or to develop alternative sources,
could result in delays in product introductions, interruptions in product
shipments or the need to redesign products to accommodate substitute components,
any of which could have a material adverse effect on the Company's operating
results.  For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.

In fiscal 1994, the Company made the strategic decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties and to focus on engine products designed and manufactured by the
Company.  In fiscal 1995, the Company began active production of its first
proprietary print engine, PressMate, a chemical-free filmsetter.  A production
line was also established for DisplayMaker Express which was released in
December 1995.  The Company introduced another proprietary printer engine,
DesignWinder, in September 1996, and introduced its latest proprietary product
series, the DisplayMaker HiRes 8-Color 4000, 5000, and 6000 products in
September 1997. Production of proprietary engines has required the Company to
increase its inventory beyond historical levels, requiring the use of additional
working capital.  The Company has also experienced increases in production and
overhead costs which have had a significant, negative impact on the overall
gross margins of the Company.

A portion of the total manufacturing cost of the Company's filmsetter and Big
Color products is represented by certain components, particularly dynamic random
access memory chips ("DRAMs"), the prices of which have fluctuated significantly
in recent years. Significant fluctuations in price or availability of DRAMs or
other components could have a material adverse effect on the Company's operating
results.

Because the Company normally fills orders within a few days of receipt, it
usually carries less than one month's backlog. In addition, customers may
generally cancel or reschedule orders without significant penalty.  For these
reasons, the Company believes that backlog is not a meaningful indicator of
future sales. Manufacturing plans and expenditure levels are based primarily on
sales forecasts and historical trends where applicable. The absence of a
material backlog could contribute to unexpected fluctuations in operating
results.

Competition

The computer printer industry is intensely competitive and rapidly changing.
Some of the Company's existing competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than the
Company.  For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.

The Company's Big Color inkjet printing products compete in the short-run, wide-
format, photo-realistic color printing market with photographic methods,
electrostatic and inkjet digital printers. In past years, some of the competing
manufacturers and vendors in this market include Hewlett-Packard Co., ENCAD,
Inc., Raster Graphics, Inc., Xerox Corp., Electronics for Imaging, Inc., Iris
Graphics, Inc., CalComp, Inc., Roland, Mutoh, Epson, Tektronics, Inc. and a
variety of competitors who purchase ENCAD's printer engines on an OEM or systems
integration basis.  Xerox, Fuji and Canon are expected to or already have
released new products which will compete for market share in this industry this
year.  In September 1997, the Company released a new family of HiRes 8-Color
printers that combine the quality and increased color gamut of the popular
DesignWinder HiRes 8-Color printer with the features of widely-accepted roll-fed
inkjet printers. The DisplayMaker HiRes 8-Color series printers utilize 8 inkjet
print heads using ColorSpan multi-density inks that simulate continuous tone
printing with an apparent 1200 dpi image resolution.

                                       11
<PAGE>
 
Marketed as the DisplayMaker HiRes 8-Color series, this family of printers
includes three models: DisplayMaker 4000 for 42" wide prints, DisplayMaker 5000
for prints up to 52" wide, and DisplayMaker 6000 for prints up to 62" wide.
Competition in this market is generally based on equipment cost, printing
quality, production and printing speed, operating costs and the costs of
maintenance and upkeep.  The traditional photographic approach, employed to
produce photo-realistic output one page at a time, is expensive, time-consuming
and labor-intensive, especially when an image includes text. This approach also
requires skilled personnel and special production facilities and creates
chemical wastes. Digital printers, used with software that permits manipulation
of images and text, can create photo-realistic output without the use of the
photographic process, eliminating the need for chemical production facilities.

The electrostatic printers that compete with the Company's Big Color products
are expensive costing from $50,000 to over $200,000, and can involve significant
maintenance and operating costs. They can also require controlled environments
and sophisticated front-end processing systems. Although electrostatic printers
provide significantly faster printing speeds and lower per-square-foot
consumables costs than those of the Company's products, the Company believes it
competes favorably with such devices on the basis of lower initial purchase
price, easier operation, higher quality output and lower ongoing maintenance and
environmental requirements.

While other vendors have introduced wide-format printers based on engineering
plotter engines, at prices comparable to or below those of some of the Company's
products, the Company believes that its software and hardware technologies,
including SmoothTone image enhancement, ColorMark color management and the
newly-released features of the DisplayMaker HiRes 8-Color product line which
include AutoSet calibration, AutoJet mapping, AutoTune unattended printing and
AutoInk swapping, offer it a competitive advantage in terms of higher printing
quality, easier operation and lower ongoing operating costs. In particular, with
issued United States patents on its Big Ink Delivery System and other patents
pending in the US and elsewhere, the Company believes it has a competitive
advantage in high-capacity, wide-format, closed-loop color graphics printing
using a unitary system.

The Company's chemical-free filmsetter, PressMate, competes with
phototypesetting equipment produced by a variety of manufacturers such as
Varityper, Inc., Linotype-Hell, Inc. and Agfa-Gevaert.  Many of the competitive
imagesetting systems require a darkroom, other dedicated facilities for storing
chemicals required for processing the film, hazardous materials, special
insurance and  handling capabilities, and strict adherence to OSHA requirements.
The Company's PressMate is chemical-free and does not require a special
environment for operation.  This reduces the cost of operation for users as well
as time required to produce documents by allowing the user to control the film
production process without the use of chemicals.  PressMate competes on the
basis of price, speed, creative control, convenience and environmental concerns.

Proprietary Rights

The Company's ability to compete effectively depends, in part, on its ability to
maintain the proprietary nature of its technologies through patents, trademarks,
copyrights and trade secrets. Important features of the Company's products are
represented by proprietary software, some of which is licensed from others and
some of which is owned by the Company. The Company attempts to protect its
proprietary software with a combination of copyrights, trademarks and trade
secrets, employee and third-party nondisclosure agreements and other methods of
protection. Despite these precautions, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to reverse-
engineer or obtain and use information that the Company regards as proprietary.
In addition, there can be no assurance that others will not independently
develop software products similar or superior to those developed or planned by
the Company.  For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.

The Company has been granted three United States patents for inventions related
to its TurboRes approach to enhancing the vertical resolution of conventional
laser printer engines,  three United States patents relating to the Company's
Big Ink Delivery System, and three patents relating to its ThermalRes approach
to enhancing vertical resolution of printheads which use thermal marking
engines, and one patent for VideoNet which is a high-speed communications method
for connecting print engines to print servers.  Additional patent applications
are pending relating to the Company's TurboRes, FastPort, Big Ink Delivery, and
other imaging and image enhancement and wide-format print engine technologies
and techniques. There can be no assurance that patents will issue from any of
these pending applications. In addition, with regard to current patents or
patents that may issue, there can be no assurance that the claims allowed will
be sufficiently broad to protect the Company's technology or that issued patents
will not be challenged or invalidated. Applications to patent the basic
TurboRes, ThermalRes and Big Ink Delivery System approaches and related
technologies have been filed

                                       12
<PAGE>
 
in selected foreign countries. Patent applications filed in foreign countries
are subject to laws, rules and procedures which differ from those of the United
States and thus there can be no assurance that any foreign patents will issue as
a result of these applications. Furthermore, even if these patent applications
result in the issuance of foreign patents, some foreign countries provide
significantly less patent protection than the United States.
 
Licenses

The Company licenses Pipeline Associates, Inc.'s PowerPage/(R)/ printer-language
software for enhancement and use in its products to provide support for and
compatibility with the PostScript page description language. PowerPage is used
in the majority of typesetter and all Big Color products. The license agreement
provides for a per unit royalty on printers shipped by the Company, subject to
minimum quarterly requirements.

The Company has a license to remanufacture inkjet cartridges used in its Big
Color printer products. The Company pays a related royalty based on the number
of inkjet cartridges purchased from Hewlett-Packard Corporation for resale.

The Company has licensed operating software from Novell, Inc. and Microsoft
Corporation for use in its Unity typesetters and Big Color products.  These
license agreements provide for a per unit royalty on printers shipped by the
Company.

Employees

At June 30, 1997 the Company had a total of 350 employees.  None of the
Company's employees are represented by a labor organization and the Company has
never experienced a work stoppage or interruption due to a labor dispute.
Management believes its relationship with employees is good.

Environmental Matters

The Company believes that it is in compliance with all material aspects of
applicable federal, state and local laws regarding the discharge of materials
into the environment. The Company does not believe that it will be required to
spend any material amount in compliance.

Item 2. PROPERTIES.

As of August 31, 1997 the Company leases an aggregate of 301,364 square feet of
office and warehouse space in Eden Prairie, Minnesota of which 172,792  square
feet is from a related party (see Item 13), pursuant to leases expiring at
various times through December 2010.  The leases require payments of property
taxes, insurance and maintenance costs in addition to basic rent and contain
renewal options for periods ranging from one to three years.  Management expects
the current facilities to be sufficient for fiscal 1998.

The Company also leases approximately 14,850 square feet of office and warehouse
for its European headquarters in Hoofddorp, outside of Amsterdam, The
Netherlands and 2,387 square feet of office space in San Jose, California for
its Asian sales and technical support staff.

Item 3. LEGAL PROCEEDINGS.

In October 1995, a shareholder of the Company (Becker) filed an action against
the Company and four of its officers and directors alleging violations of the
Securities and Exchange Act of 1934.  In December 1995, two other similar suits
were filed by other shareholders and subsequently consolidated with the Becker
suit.  The Becker claims have been pled as a class action including all
purchasers of the Company's stock during the period of December 3, 1993 through
December 8, 1994.  In February 1996, one of the directors named in the suit was
dismissed from the case without prejudice. In August 1997, the Company announced
a settlement agreement with shareholder class representatives and preliminary
court approval of the settlement in the class action securities litigation.
Final court approval of the settlement is expected in October 1997. The Company
will contribute cash or stock, at its option, to the settlement valued at
$636,000. The settlement obligation is included in the special charges for the
quarter ended June 1997. Upon final approval of the

                                       13
<PAGE>
 
settlement, the shareholder class will dismiss all claims against the Company
and its officers and directors.  If the matter is not approved by the court in
October and a new settlement or final judgement within the limits and coverage
of the applicable Directors' and Officers' insurance reached, this litigation
could have a material adverse effect on the Company. See Exhibit 99 of this form
10-K for additional discussion of risk factors.

In October 1995, LaserMaster Corporation (LMC) filed suit against Sentinel
Imaging, a division of Sentinel Business System, Inc. The complaint alleges,
among other things, patent infringement, trademark infringement, Lanham Act
violations, misappropriation of trade secrets, and interference with contractual
relationships. This action is related to LaserMaster's Big Color product line
generally and, in particular, LaserMaster's Big Ink delivery system and
ColorMark color management system. Sentinel Imaging's counterclaims for false
advertising, patent misuse, and unfair competition by LaserMaster have been
dismissed. If the Company does not prevail in these proceedings, the outcome is
not expected to have a material adverse financial impact on the Company.

The Company is currently involved in a dispute regarding liability for the value
of certain components lost by a carrier prior to delivery to the Company.  At
this time the liability of the shipper, the carrier, or the insurers of the
shipper, the carrier and the Company has not been determined.

The Company is involved in legal proceedings related to customers credit and
product warranty issues in the normal course of business. In certain
proceedings, the claimants have alleged claims for exemplary or punitive damages
which may not bear a direct relationship to the alleged actual incurred damages,
and therefore could have a material adverse effect on the Company.  At this time
none of the proceedings is expected to have a material effect on the Company's
operations or financial condition.

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

The Annual Meeting of the shareholders of LaserMaster Technologies, Inc. was
held on April 24, 1997, pursuant to notice to all shareholders of record at the
close of business on March 18, 1997.  As of the notice of the meeting there were
14,333,907 common shares outstanding.

The Board of Directors did not present any matters to the shareholders for a
vote at that meeting. No matters were brought before the meeting and, as a
result, no voting was done.

                                       14
<PAGE>
 
                                    PART II
                                    -------

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS.

Dividends

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business and,
accordingly, does not anticipate paying any cash dividends in the foreseeable
future. Any payment of dividends in the future will depend upon the capital
requirements, earnings, and general business and financial condition of the
Company, as well as other factors which the Board of Directors may deem
relevant.

Market Information

Since July 17, 1990, the Company's Common Stock has traded on the Nasdaq
National Market System (Nasdaq symbol: LMTS).  The following table sets forth
the high and low sale prices reported in the Nasdaq National Market System:

<TABLE>
<CAPTION>
                                              Common Stock
                                              ------------
                                              High    Low
                                              -----  -----
<S>                                           <C>    <C>
Fiscal Year 1996                              
  First Quarter............................   $7.63  $5.13
  Second Quarter...........................    7.50   5.13
  Third Quarter............................    7.13   4.75
  Fourth Quarter...........................    6.88   3.63
 
Fiscal Year 1997
  First Quarter............................    5.75   3.25
  Second Quarter...........................    6.25   4.63
  Third Quarter............................    5.88   4.13
  Fourth Quarter...........................    4.25   1.63
 
Fiscal Year 1998
  First Quarter (through August 31, 1997)..    2.63   1.69
---------------------------
</TABLE>

As of August 31, 1997, the last reported sale price of the Common Stock was
$1.94 per share. As of such date, there were approximately 239 record holders
and 3,400 beneficial holders of the Common Stock.

                                      15
<PAGE>
 
Item 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial information has been derived from
the consolidated financial statements of the Company, which have been audited by
Deloitte & Touche, LLP, independent certified public accountants, for the years
ended June 30, 1997, 1996, 1995, 1994, and 1993. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and notes related thereto.
<TABLE>
<CAPTION>

                                                                  Fiscal Years Ended June 30,
                                                                  ---------------------------
(In thousands, except per share amounts)         1997          1996         1995         1994       1993
                                              ----------    ----------    ---------    ---------  ---------
<S>                                           <C>           <C>           <C>          <C>        <C>
Statement of Operations Data:
  Net sales...............................     $ 86,563      $ 93,592     $119,438     $105,849    $68,227
  Cost of goods sold......................       61,912(a)     64,379(b)    72,857       59,852     37,387
                                             ----------      --------     --------     --------    -------
     Gross profit.........................       24,651        29,213       46,581       45,997     30,840
 Operating expenses:
    Sales and marketing...................       18,131        21,109       27,091       21,810     19,360
    Research and development..............        6,387         6,149        6,210        3,335      1,890
    General and administrative............       10,097        11,310       11,552        9,634      8,813
    Restructuring and other special charges       4,936(a)      4,431(b)
                                             ----------      --------     --------     --------    -------
     Operating (loss) profit..............      (14,900)      (13,786)       1,728       11,218        777
  Other expenses (primarily interest).....       (1,011)       (1,823)      (1,433)      (1,160)    (1,776)
                                             ----------      --------     --------     --------    -------
(Loss) earnings before income taxes.......      (15,911)      (15,609)         295       10,058       (999)
Income tax (provision) benefit............       (1,289)(a)     5,147          (89)      (3,394)       289
                                             ----------      --------     --------     --------    -------
    Net (loss) earnings...................   $  (17,200)     $(10,462)    $    206     $  6,664    $  (710)
                                             ==========      ========     ========     ========    =======

Per common share:
   Net (loss) earnings....................   $    (1.25)     $  (0.93)    $   0.02     $   0.57    $ (0.07)
                                             ==========      ========     ========     ========    =======

Weighted average common and dilutive
common equivalent shares outstanding....         13,706        11,305       12,206       12,189      9,565

</TABLE>

/(a)/In June 1997,  the Company incurred special pre-tax charges of $8.4
million.  The charges were related to the phase out of two proprietary printer
products and settlement of litigation.  $3.5 million was charged to cost of
goods sold and $4.9 million to operating expenses.  In addition, the Company
recorded a special income tax provision charge of $6.5 million related to the
revaluation of deferred tax assets.

/(b)/In May 1996, the Company incurred special pre-tax charges of $9.9 million,
consisting of restructuring and other special charges of $4.4 million and a
special charge to cost of goods sold of $5.5 million related to a revised
business plan and technical problems in one of its products.

<TABLE>
<CAPTION>
                                                             June 30,
                                            -------------------------------------------
                                             1997     1996     1995     1994     1993
                                            -------  -------  -------  -------  -------
<S>                                         <C>      <C>      <C>      <C>      <C>
                                                           (In thousands)
Balance Sheet Data:
 Working capital..........................  $ 9,732  $ 2,580  $13,708  $13,973  $ 5,869
 Total assets.............................   32,631   46,545   59,161   47,401   29,008
 Current liabilities......................   18,298   30,087   30,933   21,042   12,898
 Long-term debt, less current maturities..      185      820    1,599    1,590    5,743
 Stockholders' equity.....................   11,915   15,638   25,293   23,139    9,817
</TABLE>

                                      16
<PAGE>
 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS FROM OPERATIONS

(Tabular information: dollars in thousands, except per share and percentage
amounts)

Cautionary Statement

The statements in this Management's Discussion and Analysis that are forward-
looking involve numerous risks and uncertainties and are based on current
expectations. Actual results may differ materially. Refer to exhibit 99 of this
form 10-K for certain important cautionary factors, risks and uncertainties
related to "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act").

Overview

In fiscal 1994, the Company made the long-term decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties to relying on products designed and manufactured by the Company. The
decision to progressively integrate the process of developing proprietary
engines in-house was made in an effort to better distinguish its products.
Because these proprietary engines require the use of specially designed or
configured media or inks and achieve optimum performance when using complete,
ColorSpan-branded systems, the effect of this strategy has been to generate a
continuous after-market stream of revenue from the sale of ColorSpan-branded
consumables. This consumables strategy is expected to build an increasing base
of revenues for the Company as well as enhance gross profit margins above those
expected from hardware and software sales alone.

The implementation of this engine design and manufacture process has taken
longer and has been more costly than the Company had originally anticipated. The
Company has experienced higher than expected production costs during this period
which were associated with the startup of its first two proprietary printer
engine manufacturing lines, PressMate and DisplayMaker Express. The start up
costs of both products required substantial resources and the corresponding use
of working capital. In addition, the Company was unable to accurately forecast
demand for these products and as a result, incurred substantial charges in
fiscal 1997 for excess quantities of inventory components, rework and
obsolescence.

During the fourth quarter of fiscal 1996, the Company incurred special pre-tax
charges of $9.9 million as a result of a revised business plan intended to
accelerate the Company's migration away from total reliance on integration of
third-party-supplied engines.

During the fourth quarter of fiscal 1997, the Company incurred special pre-tax
charges of $7.8 million for the revaluation of inventory and intellectual
property related to its first two proprietary printers as their estimated lives
are now believed to be shorter than originally expected. The Company also
incurred a special pre-tax charge of $636,000 for the settlement of litigation
and a special income tax provision of $6.5 million related to the revaluation of
deferred tax assets.

The Company has developed and manufactured additional printer products beyond
PressMate and DisplayMaker Express that are expected to replace the revenue from
these first two products as the marketing resources devoted to PressMate and
DisplayMaker Express diminish in fiscal 1998.

                                      17
<PAGE>
 
Results of Operations

The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
                                                                            Fiscal Years Ended June 30,
                                                                            ---------------------------
                                                                         1997            1996         1995
                                                                         ----            ----         ----
<S>                                                                      <C>            <C>           <C>

Net sales.........................................................       100.0%         100.0%        100.0%
Cost of goods sold................................................        71.5(a)        68.8(b)       61.0
                                                                         -----          -----         -----
Gross margin......................................................        28.5           31.2          39.0
Expenses:
     Sales and marketing..........................................        20.9           22.5          22.7
     Research and development.....................................         7.4            6.6           5.2
     General and administrative...................................        11.7           12.1           9.7
     Restructuring and other special charges......................         5.7(a)         4.7(b)        0.0
                                                                         -----          -----         -----
Total operating expenses..........................................        45.7           45.9          37.6
                                                                        ------          -----         -----
Operating (loss)profit............................................       (17.2)         (14.7)          1.4
Other (expense) income:
     Interest expense.............................................        (1.6)          (1.9)         (1.1)
     Other........................................................          .4           (0.1)         (0.1)
                                                                         -----          -----         -----
(Loss) earnings before income taxes...............................       (18.4)         (16.7)          0.2

Income tax (provision)benefit.....................................        (1.5)(a)        5.5           0.0
                                                                         -----          -----         -----

Net (loss) earnings...............................................       (19.9)%        (11.2)%         0.2%
                                                                         =====          =====         =====
</TABLE>

/(a)/In June 1997, the Company incurred special pre-tax charges of $8.4 million
related to the revised estimates of the net realizable value of certain assets
associated with the Company's first two proprietary printers along with the
Company's obligation for the settlement of litigation. In addition, the Company
incurred a special income tax provision of $6.5 million for the revaluation of
deferred tax assets. The impact of the special charges on cost of goods sold,
operating expenses and income tax provision was 4.0%, 5.7% and 7.5% of net
sales, respectively.

/(b)/In May 1996, the Company incurred special pre-tax charges of $9.9 million
related to the Company's revised business plan and technical problems in one of
its products. The impact on cost of goods sold and operating expenses was 5.9%
and 4.7% of net sales, respectively.

Net Sales

Net sales were $86.6 million, $93.6 million and $119.4 million in fiscal 1997,
1996 and 1995, respectively. The decrease in net sales of 7.5% in fiscal 1997
was the result of a 23.7% decrease in hardware sales, partially offset by a
15.5% increase in sales of consumables. The decrease in hardware sales included
a 64.1% decrease in plain-paper typesetting products, an 18.7% decrease in
PressMate, an 18.9% decrease in DisplayMaker Express and a 41.5% decrease in
DisplayMaker Professional. The decrease in sales of plain-paper typesetting
products and PressMate are primarily related to a reduction in marketing
resources devoted to these products. The decrease in sales of DisplayMaker
Express is primarily the result of lower average selling prices in fiscal 1997
as unit sales were only slightly lower in fiscal 1997 than fiscal 1996. The
decrease in sales of DisplayMaker Professional is due to the fiscal 1997
introduction of DesignWinder, the Company's third proprietary printer.
DesignWinder replaced DisplayMaker Professional as the Company's leader in
volume shipments. In fiscal 1997, the Company sold $44.6 million (52% of net
sales) of consumables consisting primarily of ink, media and film, along with
maintenance contracts and spare parts compared to $37.2 million (40% of net
sales) in 1996 and $27.1 million (23% of net sales) in 1995. The increase in
consumables sales is due to an increased installed base of Big Color printers
and expanded product lines of inks and media.

                                      18
<PAGE>
 
The decrease in total net sales of 21.6% in fiscal 1996 compared to fiscal 1995
was attributable to decreases in plain-paper typesetting products and price
competition in the Big Color printer market. These decreases were somewhat
offset by DisplayMaker Express (DME), which was introduced in fiscal 1996, and
increased consumables revenues.

The Company believes that the loss of revenues from products that have
experienced declines in sales over the past two years will be replaced with
revenues from future product releases expected in fiscal 1998, particularly the
Company's three new DisplayMaker HiRes 8-Color printers, and an increasing base
of consumables sales.

The following table sets forth net sales by product line expressed in thousands
and as a percent of net sales:

<TABLE>
<CAPTION>
                                       Fiscal Years Ended June 30,
                           --------------------------------------------------
Net Sales                        1997              1996            1995
                                 ----              ----            ----
<S>                        <C>       <C>    <C>       <C>    <C>        <C> 
Consumables..............  $44,566   51.5%  $37,174   39.7%  $ 27,148   22.7%
Big Color................   32,030   37.0    35,190   37.6     37,525   31.4
Plain-paper Typesetting..    4,951    5.7    13,834   14.8     41,123   34.4
PressMate................    4,871    5.6     6,028    6.4      7,375    6.2
WinPrint/OEM/Imaging.....      145    0.2     1,366    1.5      6,268    5.3
                           -------  -----   -------  -----   --------  -----
 
Total net sales..........  $86,563  100.0%  $93,592  100.0%  $119,439  100.0%
                           =======  =====   =======  =====   ========  =====
</TABLE>

International Sales

Japan, Asia/Pacific sales increased both as a percentage of total net sales and
in dollars from fiscal 1995 to fiscal 1997 as a result of increased penetration
of the Asian markets. The release of DesignWinder in fiscal 1997 and
DisplayMaker Express in fiscal 1996 generated significant sales in Asia.
Decreased sales in the European market in fiscal 1997 and 1996 are attributable
to increased competition in the plain-paper typesetting and Big Color product
lines as well as the Company's realignment of its European distribution
channels. These decreases in Europe were somewhat offset by sales of
DesignWinder and DME and also increases in consumables. The following table sets
forth international sales expressed as a percent of total net sales and in
thousands:

<TABLE>
<CAPTION>
                                       Fiscal Years Ended June 30,
                       -------------------------------------------------------
International Sales         1997                1996                1995
                            ----                ----                ----
<S>                    <C>      <C>        <C>      <C>        <C>      <C>  
Europe...............  $17,410  20.1%      $19,656  21.0%      $23,022  19.3%
Japan, Asia/Pacific..   14,382  16.6        13,235  14.1        12,235  10.2
Latin America........    6,184   7.1         5,146   5.5         5,118   4.3
Canada...............    2,118   2.5         2,892   3.1         2,496   2.1
                       -------  ----       -------  ----       -------  ----

Total net sales......  $40,094  46.3%      $40,929  43.7%      $42,871  35.9%
                       =======  ====       =======  ====       =======  ====
</TABLE>

Gross Margin

Gross margins, expressed as a percent of net sales, were 28.5% (32.5% excluding
special charges), 31.2% (37.1% excluding special charges) and 39.0% for fiscal
1997, 1996 and 1995, respectively.  Gross margin was negatively impacted
throughout fiscal 1997 from excess capacity related to lower than expected
hardware volumes on PressMate and DisplayMaker Express.  In addition, gross
margin during fiscal 1997 was negatively impacted by aggressive pricing of
DisplayMaker Express, as lower-priced alternative products offered by the
Company and its competitors became available.  Gross margin decreased in 1996
from 1995 primarily as a result of increased production costs associated with
the manufacture of proprietary engines.  The Company's gross margins during all
three fiscal years were negatively affected by aggressive pricing of its plain-
paper typesetting products and, in fiscal 1997 and fiscal 1996, aggressive
pricing of some of its Big Color products developed as a systems integrator, in
an attempt to maintain market share against heavy discounting generated by broad
distribution from its third-party OEM supplier of the platform used in the
DisplayMaker Professional printer.  In fiscal 1997, 1996 and 1995 the Company's
gross margins were favorably

                                       19
<PAGE>
 
impacted by increasing sales of after-market consumables which typically have
higher gross margins than hardware sales alone.

Included in fiscal 1997 cost of goods sold is a special charge of $3.5 million
related to the revaluation of PressMate and DisplayMaker Express inventory. This
charge is based on the Company's estimate of the net realizable value of the
related inventory as of the time the charge was incurred.

Included in fiscal 1996 cost of goods sold is a special charge of $5.5 million
consisting of $4.2 million in inventory revaluation associated with the
transition from certain product lines developed as a systems integrator and $1.3
million to cover replacement costs, product returns, and inventory revaluation
related to the Company's older model PressMate product. These charges are based
on the Company's estimates of net realizable value of the related inventory and
for expected returns of older model PressMates as of the time the charges were
incurred.

Also included in cost of goods sold is amortization of capitalized software
development costs of $2.5 million, $2.7 million and $3.1 million for fiscal
1997, 1996 and 1995, respectively. In June 1997, the Company incurred a special
charge of $3.2 million to operating expenses related to the revaluation of
capitalized software development costs. This charge will reduce the amortization
of capitalized software development costs and in effect, increase gross margins
going forward. The Company does not expect amortization of capitalized software
development costs to be material in fiscal 1998.

Sales and Marketing

Sales and marketing expenses were $18.1 million, $21.1 million and $27.1 million
in fiscal 1997, 1996 and 1995, respectively. The decrease in expense of $3.0
million in 1997 from 1996 included decreased expenses related to sales of $2.4
million and marketing of $918,000, offset by increases in technical support of
$331,000. The decrease in expense of $6.0 million in 1996 from 1995 included
decreased expenses related to sales of $3.6 million and marketing of $2.5
million, offset by increases in technical support of $100,000. The decrease in
sales and marketing expense in fiscal 1997 and 1996 is primarily from reductions
directly related to lower sales volumes. The increase in technical support
expenses in fiscal 1997 can be attributed to an increasing installed base of
more sophisticated printers, particularly DisplayMaker Express.

Research and Development

The Company capitalized software development costs of $1.6 million, $2.7 million
and $3.5 million in fiscal 1997, 1996 and 1995, respectively, as required by
FASB No. 86 (see Note 1 of Notes to Consolidated Financial Statements). The
decrease in capitalized software development in 1997 and 1996 from previous
years reflects the Company's focus on developing proprietary printer engines
compared to a much greater reliance on the systems integrator type of products
as was done in the past. Research and development expenditures, including
amounts expensed and capitalized, were $7.9 million, $8.8 million and $9.7
million in fiscal 1997, 1996 and 1995, respectively. As a percent of overall
sales, these expenditures represented 9.2%, 9.1% and 8.1% in fiscal 1997, 1996,
and 1995, respectively. The decrease in gross R&D expenditures in 1997 and 1996
compared to prior years is attributable to reductions in personnel and other
resources allocated to this area as a result of increased efficiency in the
Company's development activities and lower sales volume. The future success of
the Company depends on continually developing new and better products for the
markets it serves. As a result, the Company does not anticipate a material
change in the rate it invests in this area. Software development costs
capitalized during these periods relate primarily to DisplayMaker Professional,
DisplayMaker Express, PressMate, Unity, and DesignWinder. In June 1997, the
Company incurred a special charge of $3.2 million to operating expenses related
to the revaluation of capitalized software development costs. The Company does
not expect capitalized software development costs to be material in fiscal 1998
and as a result, although research and development expenditures as a percentage
of net sales are expected to remain relatively constant, the amount charged to
research and development expense is expected to increase as a percentage of net
sales.

General and Administrative

General and administrative expenses were $10.1 million, $11.3 million and $11.6
million in fiscal 1997, 1996 and 1995, respectively. The decreases in 1997 and
1996 from prior years are the result of reductions in the infrastructure
necessary to handle lower sales volumes, offset in part by costs associated with
the defense of the shareholder lawsuit (see "Legal Proceedings" for further
details) and higher than normal bad debt expense as a percent of net sales which
was in part, negatively impacted by product reliability issues related to new
engines.

                                      20

<PAGE>
 
Restructuring and Other Special Charges

In June 1997, the Company incurred special charges of $4.9 million consisting of
$4.3 million related to the revaluation of intellectual property and $636,000
related to the settlement of the shareholder's lawsuit. The revaluation of
intellectual property was primarily the result of a change in the estimated net
realizable value of capitalized software development costs associated with the
Company's proprietary products.

In May 1996, the Company incurred $4.4 million in restructuring and other
special charges as a result of its revised business plan which was intended to
accelerate the Company's migration from a systems integrator to a manufacturer
of proprietary printing engines. Included in the $4.4 million charge is $3.3
million for the revaluation of intellectual property tied to certain
technologies and contract rights and $282,000 for severance related to workforce
reductions. The charge also includes $443,000 for expected losses on the
disposal of property and equipment and $403,000 in commitments under non-
cancelable leases as a result of consolidating foreign sales offices and certain
domestic operations. At June 30, 1997, approximately $766,000 of the $4.4
million charge remains in current liabilities.

Interest Expense

Interest expense was $1.4 million, $1.8 million and $1.3 million in fiscal 1997,
1996 and 1995, respectively. The decrease in interest expense in 1997 is
attributable to a decrease in average debt levels with the addition of $12
million in equity in September 1996 and also as the Company's operations and
related borrowing capabilities have decreased. The increase in interest expense
in 1996 is attributable to an overall increase in average debt levels and costs
associated with obtaining new financing.

Income Taxes

The effective income tax rate was (8.1%), 33.0% and 30.1% in fiscal 1997, 1996
and 1995, respectively. In June 1997, the Company incurred a special charge to
income taxes of $6.5 million related to the revaluation of deferred tax assets.
The revaluation was done as a result of a change in the estimated net realizable
value of deferred tax assets. At June 30, 1997, after the revaluation, the
Company had approximately $4.8 million in net deferred tax assets. Realization
of $4.8 million in net deferred tax assets will require the Company to generate
future taxable income of approximately $14 million within the next 15 years to
receive full taxable benefit. See Note 12 of Notes to Consolidated Financial
Statements for further disclosures relating to income taxes.

Liquidity and Capital Resources

Liquidity needs during the year ended June 30, 1997 were satisfied primarily by
the issuance of common stock and warrants. Liquidity needs during the two years
ended June 30, 1996 were satisfied primarily by cash flows from operations and
short-term borrowings.

Operating activities consumed cash of $4.0 million in 1997 and provided cash of
$6.2 million and $4.4 million in 1996 and 1995, respectively. The decrease in
cash provided from operations in 1997 is the result of a $17.2 million net loss
incurred by the Company. The increase in cash provided from operations in 1996
compared to 1995 is due principally to lower levels of inventory resulting from
increased efficiencies in forecasting and planning. In addition, accounts
payable to suppliers increased in proportion to inventory levels compared to
prior years.

Cash used in investing activities was $3.0 million, $6.3 million and $8.0
million in fiscal 1997, 1996 and 1995, respectively. The decrease in cash used
in investing activities in 1997 compared to 1996 is the result of lower
expenditures for property and equipment, capitalized software development costs
and other intellectual property. The decrease in cash used in investing
activities in 1996 compared to 1995 consists of decreased expenditures on
property and equipment and capitalized software development costs offset
somewhat by increases in intellectual property. The Company does not expect
significant increases in expenditures for property and equipment or capitalized
software development costs in fiscal 1998.

                                      21
<PAGE>
 
Cash provided by financing activities was $7.4 million in 1997 compared to cash
used in financing activities of $365,000 in 1996 and cash provided by financing
activities of $2.0 million in 1995. In order to meet the cash shortfall in
September 1996, the Company privately placed 2,285,715 shares of its common
stock for a purchase price of $4.375 per share, together with warrants to
purchase an additional 2,285,715 shares with an exercise price of $7.00 per
share, for an aggregate consideration of $10 million. Of such shares, 1,371,429
shares were sold to Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation
("Sihl"), for $6 million. Sihl conditioned its investment on an investment of $4
million by the Company's Chief Executive Officer or an entity with which he is
affiliated. In satisfaction of such condition, TimeMasters Inc. and affiliates
(TMI or the "TimeMasters Group") purchased 914,286 shares for $4 million and
received warrants to purchase an additional 914,286 shares at $7.00 per share.
The warrants issued to TMI and Sihl have a term of eight years and may be
exercised at any time. The agreement pursuant to which such shares and warrants
were issued provides for both incidental and demand registration rights for a
period of ten years from the closing date of the transaction. Additionally, it
provides to Sihl, but not to the TimeMasters Group, a right of first refusal to
purchase a pro-rata portion (based on the ratio of number of shares Sihl owns or
has the right to purchase to all shares of the Company that are outstanding or
subject to options, warrants or convertible securities), of any securities
(subject to certain exceptions) that the Company proposes to issue until Sihl's
percentage ownership declines below 10%. A portion of the proceeds from the
private placement of common stock to TMI was offset against ColorSpan's
indebtedness to TMI for a demand note in the principal amount of $1.765 million,
as permitted by the subordination and forbearance agreement.

In September 1996, the Company also privately placed 410,256 shares of its
common stock for a purchase price of $4.875 per share, together with warrants to
purchase an additional 471,286 shares with an exercise price of $6.79 per share,
for an aggregate consideration of $2 million. The shares and warrants were
issued to General Electric Capital Corporation ("GE"), the Company's senior
lender. The Stock Purchase Agreement provides for both incidental and demand
registration rights. The GE investment does not carry with it the preemptive
stock purchase rights granted to Sihl as described above.

In September 1996, the Company also entered into a series of agreements with one
of its largest trade creditors and their supplier, converting approximately $1.7
million of trade payables and a promissory note of $859,516 into a $2.5 million
convertible subordinated debenture. The debenture contains voluntary, automatic
and mandatory conversion provisions. Under the voluntary conversion provision,
the debenture is convertible in whole or in part into common stock of the
Company at $6.00 per share at any time that the market price of the Company's
common stock is less than $6.00 per share. The debenture is automatically
converted at the rate of 30,000 shares a week at the market price of the common
stock at any time that the market price equals or exceeds $6.00 per share. The
automatic conversion provision contains limited price protection under certain
circumstances. Under the mandatory conversion provision, the debenture will be
converted on a quarterly basis at market prices and in share quantities equal to
specified threshold amounts, less any shares converted under the other
provisions. The mandatory provision is effective for the quarter ending March
31, 1997 and continues until the debenture is fully converted. The debenture
contains certain registration rights and also limits the number of shares that
may be sold in the open market in any one week. A related agreement required the
supplier to provide approximately $1.5 million in inventory to the Company in
resolution of quality issues with the product previously supplied by the trading
partner.

In the first quarter of fiscal 1996, ColorSpan Corporation borrowed $1,765,000
from TMI with a demand note to cover a short-term cash shortfall. In January
1996, ColorSpan replaced the operating line of credit that it maintained through
a commercial bank with a new, three-year credit agreement with a commercial
financing company. The new agreement allows ColorSpan to borrow up to $10
million based on availability equal to 60% of net eligible accounts receivable
and 25% of net eligible inventory. The agreement expires January 17, 1999 and
requires the borrower to meet various financial covenants involving capital
expenditures, additions to capitalized software and intellectual property,
minimum debt service coverage ratio, and maintenance of a minimum net worth. The
agreement also requires ColorSpan to meet various non-financial covenants. As
part of this agreement, the commercial finance company required that the loan
from TMI be subordinated to the rights and security interest of the lender, and
that a forbearance agreement restrict repayment of the TMI debt to permit
repayments of specified amounts only if certain financial conditions were met,
or upon the sale of common stock. In consideration for agreeing to such
subordination and forbearance, TMI was issued a warrant to purchase 277,953
shares of the Company's common stock at an exercise price of $6.35 per share.
The warrant and note to TMI were approved by shareholders at the Company's
annual meeting in May 1996.

Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.

                                      22
<PAGE>
 
The Company does not have any current significant commitments for capital
expenditures however, it does expect to incur substantial expenditures for the
ramp up of its new family of DisplayMaker HiRes 8-Color printers expected to be
in production quantities in October 1997. Management expects to finance the ramp
up of production and sales of these new printers through a reduction of
receivables, tighter controls over inventory, extension of credit from new and
existing vendors and/or the sale of certain lines of business. Management
expects to finance operations throughout the remainder of fiscal 1998 through
cash flow from profitable operating activities. If sales are less than expected
or reasonably priced sources of alternative financing are not available, the
Company may be required to accept less favorable terms for its planned sale of
certain lines of business or revise its business plan or further restructure its
capitalization.

The Company's Senior Debt Agreement, which is secured by substantially all of
the Company's assets, includes financial covenants which the Company must meet.
The financial performance of the Company in the period the Agreement has been in
place has made it necessary for the Company to renegotiate the financial
covenants prior to being declared in violation of the covenants by GE. If future
financial performance does not improve and the Company is unable to renegotiate
its loan covenants at that time, it could be forced to seek replacement
financing at prices which may not be favorable to the Company. If adequate
sources of financing are not available, the Company may be required to sell
certain product lines or technologies on less than favorable terms.

Foreign Currencies

In general, the impact of foreign currency gains/losses are immaterial to the
Company as a whole. LaserMaster Europe, Ltd. (LME) extends credit in the normal
course of business in five relatively stable European currencies. In addition,
LME's financing agreement allows it to factor those receivables and receive
Dutch Guilders in which it pays its expenses. The impact of this is to
effectively hedge the Company's exposure to foreign currency risk. Essentially
all other transactions are in U.S. dollars.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------- --------------------------------------------
 
See Financial Statements and Supplementary Data attached.


Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
        FINANCIAL DISCLOSURE.
        ---------------------
None

                                      23
<PAGE>
<TABLE> 
<CAPTION> 
 
                                    PART III
                                    --------

Item 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------        ---------------------------------------------------

The following table sets forth information, as of August 31, 1997, concerning
the directors of the Company:
                                                                                  Year
                                                                                Became
Name, Age, Positions, Principal Occupations, Directorships                      Director
----------------------------------------------------------------------------------------
<S>                                                                             <C> 
                     Directors whose terms expire in 1997

Lawrence J. Lukis; age 49; Mr. Lukis co-founded LaserMaster in February,          1989
1986 and was Chief Technical Officer of the Company from May 1989 to
September 1997.  Currently, Mr. Lukis has the title of Chief Engineer.  Mr.
Lukis
has indicated that he does not intend to stand for re-election to the board of
directors in 1998.

Jean-Louis Gassee; age 53; Since 1990, Mr. Gassee has been Chairman               1990
and Chief Executive Officer of Be, Inc. of Menlo Park, California.  That
company is involved in personal computer technology.  From August of
1988 until September, 1990, Mr. Gassee was President of the Apple Products
Division of Apple Computer, Inc.  Prior to that time he held the offices of
Senior Vice President of Research and Development (1987 to August 1988)
and Vice President of Product Development of Apple Computer, Inc. from
1985 to 1987.  Mr. Gassee is also a director of Electronics for Imaging of San
Bruno, California and 3COM, Sunnyvale, California.

                      Directors whose terms expire in 1998

Melvin L. Masters; age 43; Mr. Masters co-founded LaserMaster in February         1989
1986 and has been Chairman, Chief Executive Officer and President of the
Company since May 1989.  Mr. Masters also owns TimeMasters, Inc. a
company established for the purpose of property management which also
has investments in the fields of wireless voice and data communications
and in personal motorsports products.

Ralph D. Rolen; age 43; Mr. Rolen is Senior Vice President and Manager of         1989
the Retail Credit Division of First Tennessee National Bank of Memphis,
Tennessee, a position he has held since January, 1989.
</TABLE> 

The Board of Directors met two times during the fiscal year ended June 30, 1997.
All directors attended each meeting. The Board of Directors has: (i) an Audit
Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen, (ii) a Stock Option
Committee composed of Mr. Gassee and Mr. Rolen, and (iii) a Compensation
Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen.  The Board of
Directors has no standing nominating committee.


The following table sets forth information, as of August 31, 1997, regarding the
executive officers of the Company:
<TABLE>
<CAPTION>
 
Name                  Age  Positions
--------------------  ---  -------------------------------------------------------------
<S>                   <C>  <C>                                                           
 
Melvin L. Masters      43  Chief Executive Officer, President and Chairman of the Board
Lawrence J. Lukis      49  Chief Engineer
Robert J. Wenzel       46  Chief Operating Officer and President, ColorSpan Corporation
James E. Retterath     36  Secretary and Vice President, Research & Development
Timothy N. Thurn       41  Treasurer
</TABLE>

                                       24
<PAGE>
 
Thomas D. Ryan         39  Executive Vice President, LaserMaster Technologies, 
                           Inc., and  ColorSpan Corporation
James H. Horstmann     36  Chief Financial Officer

Mr. Wenzel has been Chief Operating Officer of the Company since October 1991
and President of ColorSpan Corporation, the Company's principal operating
subsidiary, since October 1989. He joined ColorSpan as General Manager of the PC
Division in May 1989 and became Executive Vice President shortly thereafter.
Prior to joining ColorSpan, Mr. Wenzel was employed by CPT Corporation, a
company specializing in the manufacture and sale of word processing systems,
where he served as General Manager of a computer products division from January
1988 through April 1989, and in other capacities before that time.

Mr. Retterath has been Secretary of the Company since March 1994. He joined the
Company in June 1990 and has held a variety of management positions in Research
and Development most recently serving as Vice President which position he has
held since December 1992. From July 1986 to June 1990, Mr. Retterath was a
Senior Design Engineer for Printware, Inc. of Mendota Heights, Minnesota.

Mr. Thurn has been Treasurer of the Company since June 1989 and of ColorSpan
Corporation since March 1987. Mr. Thurn has experience as both a public and
private accountant. Mr. Thurn is a Certified Public Accountant (CPA) and
Certified Management Accountant (CMA).

Mr. Ryan has been Managing Director of LaserMaster Europe, Ltd. since January
1995 and assumed the Executive Vice President position for the Company and
ColorSpan Corporation in May 1996. Prior to working for the Company, Mr. Ryan
worked for Mentor Corporation as Vice President and General Manager of its
Minnesota operations.

Mr. Horstmann has been Chief Financial Officer of the Company since May 1997. He
joined the Company in April 1994 as Controller. Prior to joining the Company Mr.
Horstmann worked for Boulay, Heutmaker, Zibell and Co. PLLP, a public accounting
firm in Minneapolis, Minnesota. Mr. Horstmann is a Certified Public Accountant
(CPA).

Officers of the Company are elected annually by the Board of Directors. All of
the current officers as of September 29, 1997 are expected to be re-elected to
serve in the same positions for the coming year.

                                      25
<PAGE>
 
Item 11.  EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth the cash and noncash compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and the four other most highly compensated executive officers of the
Company whose salary and bonus earned in the fiscal year ended June 30, 1997
exceeded $100,000 for services rendered.

<TABLE>
<CAPTION>
===============================================================================================================================
                                                Annual compensation          Long term compensation
                                  ------------------------------------------------------------------------
                                                                              Awards
                                                                     -----------------------
                                                              Other                            Payouts/        All other
                                                              annual    Restricted             LTIP            compen
Name and principal          Year   Salary ($)      Bonus      compens   stock       Options/   payouts         -sation
position                                            ($)       ation     award(s)    SARs (#)   ($)             ($)
                                                              ($)       ($)
-------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>    <C>              <C>        <C>       <C>         <C>        <C>            <C>
Melvin Masters              1997   $208,333                                                                    $ 7,536/1/
Chief Executive Officer     1996    246,875                                                                      6,736/1/
                            1995    250,000                                                                      6,016/1/
-------------------------------------------------------------------------------------------------------------------------------
Robert Wenzel               1997   $208,333
Chief Operating Officer     1996    203,125                                         220,000
                            1995    165,625       $35,000
-------------------------------------------------------------------------------------------------------------------------------
James E. Retterath          1997   $208,333
Secretary                   1996    203,125       $34,100/2/                        240,000
                            1995    161,667        35,000
-------------------------------------------------------------------------------------------------------------------------------
Larry Lukis                 1997   $177,083                                                                    $11,578/1/
Chief Engineer              1996    150,000                                                                     10,908/1/
                            1995    250,000                                                                      9,898/1/
-------------------------------------------------------------------------------------------------------------------------------
Thomas D. Ryan              1997   $175,000
Executive Vice              1996    131,458       $16,500                            40,000
 President                  1995          *
===============================================================================================================================
</TABLE>

*Became executive officer during fiscal 1996.
/1/Premiums for life insurance where the Company is not the beneficiary.
/2/Expenses paid by the Company on behalf of the employee.


Stock Options

The Company maintains a Stock Option Plan pursuant to which executive officers,
other employees and certain non-employees providing services to the Company may
receive options to purchase the Company's common stock.

There were no grants of stock options during fiscal 1997 to the Chief Executive
Officer and the Executive Officers named in the Summary Compensation Table.

                                      26
<PAGE>
 
The following table summarizes exercises of stock options during fiscal 1997 by
the Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table.


<TABLE>
<CAPTION>
      AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
==========================================================================================
                                                 Number of        Value of unexercised in-
                                                unexercised        the-money options/SARs
                                             options/SARs at FY-      at FY-end ($)
                  Shares acquired   Value    end (#) exercisable/        exercisable/
Name                    on         realized     unexercisable          unexercisable (1)
                   exercise (#)      ($) 
------------------------------------------------------------------------------------------
<S>                   <C>           <C>               <C>                                 
Melvin L. Masters       -0-           -0-           -0-                     -0-           
------------------------------------------------------------------------------------------
Robert J. Wenzel      20,000        83,400     36,250/228,750          $2,513/$10,050     
------------------------------------------------------------------------------------------
James E. Retterath    15,000        46,875     40,000/275,000              $0/$0          
------------------------------------------------------------------------------------------
Lawrence J. Lukis       -0-           -0-           -0-                     -0-           
------------------------------------------------------------------------------------------
Thomas D. Ryan          -0-           -0-       60,000/60,000              $0/$0          
==========================================================================================
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on June 30, 1997 and the exercise price of the options.

Long-Term Incentive Plan Awards

Other than the Stock Option Plan reported on above, the Company does not
maintain any long-term incentive plans.

Director Compensation

For fiscal year 1997, there was no plan for compensation to non-employee
directors. All directors were reimbursed for their expenses incurred in
attending meetings. Jean-Louis Gassee also acted as a consultant to the Company.
An additional $12,000 of consulting fees was incurred for services provided by
Mr. Gassee during fiscal 1997. Jean-Louis Gassee has significant expertise in
the personal computer industry and in the management of research and development
of hardware and software products. His expertise in the trends and issues in
this industry was not available within the Company and could only be obtained
through a relationship with a specialized consultant or highly compensated
employee, if one could be identified and retained. Mr. Gassee consulted with the
Company on a number of issues including industry trends, and product development
issues. The consulting fees paid to Mr. Gassee were determined and set based on
anticipated consulting services and the market cost therefor. The Company
believes that the consulting fees paid to Mr. Gassee represent the approximate
market value for the consulting services performed and that which might be
obtained from similar arrangements with non-affiliates.

Employment Agreements

At June 30, 1997, the Company had Employment Agreements with Messrs. Masters,
Lukis, Wenzel, Ryan and Retterath. Those agreements renew automatically on an
annual basis unless terminated by either party by written notice 60 days before
the renewal date. Mr. Lukis' agreement lapsed on July 1, 1997 and a revised
agreement was approved by the executive compensation committee. The agreements
provide for continuation payments equal to 36 months pay for Mr. Masters and 12
months pay for Mr. Wenzel, Mr. Ryan and Mr. Retterath, upon termination of
employment in certain circumstances, including change of control. As of June 30,
1997 minimum annual salary levels of $250,000 were set for each of Messrs.
Masters, Wenzel and Retterath. Mr. Ryan's minimum annual salary level is set at
$200,000. Mr. Lukis' salary, per his new employment agreement, is currently set
at the greater of the market value of his services or $175,000.

Effective May 1, 1996, Mr. Masters, Mr. Lukis, Mr. Wenzel and Mr. Retterath
voluntarily agreed to decrease their salaries by $25,000 each, and Mr. Ryan
agreed to a $19,000 salary decrease, until Company performance improved. On
March 12, 1997, Mr. Masters, Mr. Lukis, Mr. Wenzel and Mr. Retterath voluntarily
offered to decrease their salaries from $225,000 to $175,000 until Company
performance improved, or as may be agreed upon with the Executive Compensation

                                      27
<PAGE>
 
Committee. The compensation decreases were effective during the pay period in
which the offers to decrease salaries was made. The Company also has employment
agreements with other members of its management.


Compensation Committee Interlocks and Insider Participation

The Chief Executive Officer of the Company, Melvin L. Masters, is a member of
the Compensation Committee. Mr. Masters' compensation is set by the Board of
Directors as a whole with Mr. Masters abstaining.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth, as of August 31, 1997, certain information with
respect to beneficial share ownership by the directors, individually; by all
persons known to management to own more than 5% of the Company's outstanding
Common Stock, individually; and by all executive officers and directors as a
group. Except as otherwise indicated, the shareholders listed below have sole
investment and voting power with respect to their shares.

<TABLE>
<CAPTION>
 
                                             Number of
                                         Beneficially Owned  Percent of  Shares
Name of Beneficial Owner                       Shares            Outstanding
---------------------------------------  ------------------  -------------------
<S>                                      <C>                 <C>
 
Sihl-Zurich Paper Mill on Sihl AG (1)        2,742,858                15.8%
                                            
Melvin L. Masters (2)                        2,550,525                14.7%
3213 South Duluth Avenue                    
Sioux Falls, SD  57105                      
                                            
Lawrence J. Lukis (3)                        2,189,531               12.63%
3250 Fox Street                             
Long Lake, MN  55356                        
                                            
Jean-Louis Gassee (4)                           85,000                   *
                                            
Robert J. Wenzel (5)                            59,300                   *
                                            
James E. Retterath (6)                          40,000                   *
                                            
Thomas D. Ryan (7)                              67,000                   *
                                            
All officers and directors                  
as a group (10 persons) (8)                  5,017,045                29.3%
</TABLE>

*  Less than 1%

(1)  Includes warrants to purchase 1,371,429 shares.

(2)  Includes 411,428 shares and warrants to purchase 963,667 shares owned by
     TMI; 274,286 shares owned by GRAMPI; 228,572 shares and warrants to
     purchase 228,572 shares owned by GRAMPI #2.

(3)  Includes shares owned by Donna Lukis, Mr. Lukis' spouse. Includes 173,000
     shares held by the Lukis Foundation, of which Mr. Lukis is a director. Mr.
     Lukis disclaims beneficial ownership both of Ms. Lukis' shares and those
     held by the Lukis Foundation.

(4)  Includes 60,000 shares issuable to Mr. Gassee under options which are
     exercisable.

                                      28
<PAGE>
 
(5)  Includes 47,500 shares issuable to Mr. Wenzel under options which are
     exercisable or will become exercisable within 60 days. Also includes shares
     held as trustee for four education trusts.

(6)  Includes 40,000 shares issuable to Mr. Retterath under options which are
     exercisable or will become exercisable within 60 days.

(7)  Includes 60,000 shares issuable to Mr. Ryan under options which are
     exercisable or will become exercisable within 60 days.

(8)  Includes 243,900 shares issuable under options which are exercisable or
     will become exercisable within 60 days and warrants to purchase 1,192,239
     shares.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company has the following arrangements with certain of its directors,
executive officers or five percent shareholders;

(1)  The Company leases space it currently occupies in Shady View I & II, with
     Grandchildren's Realty Alternative Management Partnership I (GRAMPI), a
     Minnesota limited partnership. The general partner of GRAMPI is
     TimeMasters, Inc., a Minnesota corporation which is owned by Melvin L.
     Masters. One of the limited partners of GRAMPI is the Masters Trust I, of
     which Ralph Rolen, a director of the Company, was Trustee at the time of
     the negotiations. The Company retained the services of an outside law firm
     as well as an independent commercial real estate brokerage firm in
     negotiating the lease. The Company leases 172,792 square feet of space
     under this agreement which has a term of fifteen years and a monthly base
     rate as of August 31, 1997, of $89,694. The base rate escalates
     periodically over the term of the lease. The Company is also required to
     pay its pro-rata share of property taxes, utilities and essentially all
     other operating expenses. There is no renewal option. Rent expense under
     this lease was $1,525,000 in fiscal 1997 of which $178,388 had not been
     paid as of June 30, 1997.

(2)  Under a Use Indemnification Agreement and certain related Board of
     Directors' actions, the Company has the right to sponsor business and
     business-related occasions at facilities owned by Masters Trust I and/or
     Melvin L. Masters and/or TimeMasters, Inc and/or GRAMPI and/or GRAMPI #2.
     In addition, the Company occasionally uses an airplane that is owned by a
     Company controlled by Mr. Masters, for business-related travel. The Company
     indemnifies the owners against loss or damage, reimburses out-of-pocket
     expenses and pays a usage charge based on market rates. In the fiscal year
     ended June 30, 1997 charges totalled $88,240.

(3)  The Company has installed a campus-wide TimeMasters, Inc. wireless voice
     system in its Eden Prairie facility. There are no monthly call operating
     charges for unlimited use of that system. The system hardware was acquired
     in fiscal 1995 for $211,000 based on competitive proposals for two other
     comparable systems. Upgrades to the system amounted to $49,075 in fiscal
     1997. TimeMasters, Inc. is a Minnesota corporation wholly-owned by Melvin
     L. Masters.

(4)  During September and October 1995, ColorSpan Corporation's (CSC's) cash
     needs exceeded available cash. To cover short-term cash needs, CSC borrowed
     $1,765,000 under a demand note from TimeMasters, Inc. (TMI), a corporation
     controlled by the Company's Chief Executive Officer. The note had stated
     interest at prime rate plus 1.75% and was satisfied in full in December
     1996 through an offset of a note receivable from TMI arising from the sale
     of common stock by the Company (see item (5) below). In consideration for
     providing financing to CSC and executing a subordination and forbearance
     agreement with the Company's senior lender, TMI was issued a warrant for
     the purchase of 277,953 shares of the Company's common stock at an exercise
     price of $6.35 per share. This transaction was submitted to and approved by
     the shareholders at the Company's annual meeting in May 1996.

(5)  In September 1996, the Company issued 914,286 shares of restricted common
     stock in a private placement to TimeMasters, Inc., GRAMPI and GRAMPI #2
     (together as a group known as the TimeMasters group), which is controlled
     by Melvin L. Masters, the Company's CEO. The shares were issued at the
     market price of $4.375

                                      29
<PAGE>
 
         per share for a total of $4 million. The TimeMasters group was also
         issued a warrant for the purchase of an additional 914,286 shares at
         $7.00 per share with an expiration date of September 16, 2004. The
         TimeMasters group has the right to require the Company to effect up to
         five demand registrations under the Securities Act within ten years of
         the closing date of the transaction. The agreement also provides for
         incidental registration rights during this same period. In addition,
         shares acquired by TimeMasters upon the exercise of the warrant or
         conversion right, obtained pursuant to the $1,765,000 demand note
         discussed in item (4) above, have preferential incidental registration
         rights expiring September 2006. The Company offset a portion of the
         proceeds from this sale with CSC's indebtedness to TMI (see item (4)
         above).

(6)      In addition, Mel Masters, the Company's CEO, borrowed $585,000 from the
         Company in November 1996. The amount borrowed was repaid in December
         1996 together with interest at 10%.

Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.

(7)      The Company purchases certain inventory from Sihl-Zurich Paper Mill on
         Sihl AG, a greater than 5% shareholder of the Company. Total purchases
         in fiscal 1997 from Sihl were $1,569,844.

                                    PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
--------------------------------------------------------------------------

(a) 1.   Financial Statements
         --------------------

         Consolidated Financial Statements of LaserMaster Technologies, Inc. and
         Subsidiaries:

         Independent Auditors' Report

         Consolidated Balance Sheets as of June 30, 1997 and 1996

         Consolidated Statements of Operations for the fiscal years ended June
         30, 1997, 1996 and 1995

         Consolidated Statements of Stockholders' Equity for the fiscal years
         ended June 30, 1997, 1996 and 1995

         Consolidated Statements of Cash Flows for the fiscal years ended June
         30, 1997, 1996 and 1995

         Notes to Consolidated Financial Statements

(a) 2.   Financial Statement Schedules
         ------------------------------
         LaserMaster Technologies, Inc. and Subsidiaries

         Schedule I   --  Condensed Financial Information of the Registrant
         Schedule II  --  Valuation and Qualifying Accounts
 
         Schedules not listed above have been omitted because they are either
         not applicable or required information has been given in the
         consolidated financial statements or notes thereto.

(a) 3.   Listing of Exhibits
         --------------------
Exhibit
Number          Description
--------        -----------

10.1     Amendment  No. 2 to Credit Agreement dated January 31, 1997 between
         ColorSpan Corporation and General Electric Capital Corporation.

10.2     First Industrial, L.P., Industrial Building Lease.

                                       30
<PAGE>
 
11.1  Per share earnings calculation.

27.1  Financial Data Schedule.

99.   Cautionary Factors Under Private Securities Litigation Reform Act of 1995.

                                      31
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:  September 26, 1997


                                       LASERMASTER TECHNOLOGIES, INC.

                                       By    /s/ Melvin L. Masters
                                             ----------------------    
                                             Melvin L. Masters, President, 
                                             Chief Executive Officer and 
                                             Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

                                
/s/Melvin L. Masters            President, Chief Executive Officer
--------------------            and Chairman of the Board       
Melvin L. Masters               (Principal Executive Officer)     

/s/Lawrence J. Lukis            Director and Chief Engineer
--------------------                                       
Lawrence J. Lukis

/s/Ralph D. Rolen               Director
-----------------                  
Ralph D. Rolen

/s/Jean-Louis Gassee            Director
----------------------                        
Jean-Louis Gassee

/s/James H. Horstmann           Chief Financial Officer
---------------------                                        
James H. Horstmann

/s/Mark Pederson                Controller
----------------                       
Mark Pederson

                                      32
<PAGE>
 
INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
LaserMaster Technologies, Inc. and
    Subsidiaries
Eden Prairie, Minnesota

We have audited the consolidated balance sheets of LaserMaster Technologies,
Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997 and financial statement schedules
listed in the index at Item 14(a)(2). These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of LaserMaster
Technologies, Inc. and subsidiaries as of June 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements, taken as
a whole, present fairly in all material respects the information therein set
forth.



Deloitte & Touche, LLP
Minneapolis, Minnesota
August 8, 1997

                                      F-1
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  June 30, 1997   June 30, 1996
                                                                  --------------  -------------
ASSETS
<S>                                                               <C>             <C>
CURRENT ASSETS:
 Cash and cash equivalents                                        $    484,106      $    90,851
 Accounts receivable, less allowance for doubtful
 accounts and sales returns of $1,987,000 and
 $2,475,000, respectively (Note 5)                                  12,129,091       12,563,112
 Inventory (Notes 3 and 5)                                           9,184,671       13,524,314
 Income tax receivable                                                                  400,781
 Other current assets                                                2,158,833        2,783,784
 Deferred income taxes (Note 12)                                     4,073,000        3,304,000
                                                                  ------------      -----------
    TOTAL CURRENT ASSETS                                            28,029,701       32,666,842

PROPERTY AND EQUIPMENT, NET
  (Notes 4, 7 and 13)                                                3,570,662        5,099,560

CAPITALIZED SOFTWARE, less accumulated
 amortization of $3,636,979 in 1996 (Note 5)                                          4,150,913

DEFERRED INCOME TAXES (Note 12)                                        693,000        2,546,000

ACQUIRED TECHNOLOGY, PATENTS
 AND LICENSES, less accumulated amortization
 of $743,284 and $1,000,154, respectively (Note 5)                     337,570        2,081,649
                                                                  ------------      -----------
                                                                  $ 32,630,933      $46,544,964
                                                                  ============      ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Notes payable (Notes 5 and 13)                                   $  2,781,468      $ 5,381,037
 Note payable - related party (Note 6)                                                1,765,000
 Current maturities of long-term debt (Notes 7 and 13)                 636,665        1,248,267
 Accounts payable (Note 13)                                         10,232,865       16,682,191
 Accrued payroll and payroll taxes                                   1,623,558        1,915,908
 Other current liabilities (Note 13)                                 1,649,062        1,200,264
 Deferred revenue                                                    1,374,447        1,894,262
                                                                  ------------      -----------
    TOTAL CURRENT LIABILITIES                                       18,298,065       30,086,929

CONVERTIBLE SUBORDINATED DEBENTURE (Note 8)                          2,233,414

LONG-TERM DEBT, less current maturities (Notes 7 and 13)               184,729          820,095

COMMITMENTS AND CONTINGENCIES (Notes 11 and 16)

STOCKHOLDERS' EQUITY: (Notes 6, 8, 9, 10, 12 and 16)
 Common stock, $.01 par value; authorized
  30,000,000 shares; 14,432,462 and 11,426,134 shares issued
  and outstanding, respectively                                        144,325          114,261
 Preferred stock, $.01 par value; authorized
  5,000,000 shares; no shares issued or outstanding
 Additional paid-in capital                                         30,876,964       17,430,555
 Accumulated deficit                                               (19,106,564)      (1,906,876)
                                                                  ------------      -----------
    TOTAL STOCKHOLDERS' EQUITY                                      11,914,725       15,637,940
                                                                  ------------      -----------
                                                                  $ 32,630,933      $46,544,964
                                                                  ============      ===========
</TABLE>
                See notes to consolidated financial statements.

                                      F-2
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------------------------
                                                                                     Years Ended June 30,
                                                                     ----------------------------------------------------
                                                                         1997                1996                1995
                                                                     ------------        ------------        ------------
<S>                                                                  <C>                 <C>                 <C>
NET SALES (Note 14)                                                  $ 86,563,422        $ 93,592,044        $119,438,719

COSTS OF GOODS SOLD (Notes 2 and 13)                                   61,912,116          64,378,882          72,857,356
                                                                     ------------        ------------        ------------
  GROSS PROFIT                                                         24,651,306          29,213,162          46,581,363

OPERATING EXPENSES
 Sales and marketing                                                   18,131,483          21,108,559          27,091,414
 Research and development                                               6,387,642           6,148,919           6,210,006
 General and administrative (Note 13)                                  10,096,910          11,310,135          11,552,092
 Restructuring and other special charges (Notes 2 and 16)               4,935,563           4,431,273
                                                                     ------------        ------------        ------------
                                                                       39,551,598          42,998,886          44,853,512
                                                                     ------------        ------------        ------------
  OPERATING (LOSS) PROFIT                                             (14,900,292)        (13,785,724)          1,727,851

OTHER INCOME (EXPENSE)
 Interest expense (Note 13)                                            (1,388,247)         (1,784,365)         (1,331,139)
 Interest income (Note 13)                                                154,559              17,728              26,846
 Other income (expense)                                                   223,292             (56,173)           (128,084)
                                                                     ------------        ------------        ------------
                                                                       (1,010,396)         (1,822,810)         (1,432,377)
                                                                     ------------        ------------        ------------

(LOSS) EARNINGS BEFORE INCOME TAXES                                   (15,910,688)        (15,608,534)            295,474

INCOME TAX (PROVISION) BENEFIT (Note 12)                               (1,289,000)          5,147,000             (89,000)
                                                                     ------------        ------------        ------------

NET (LOSS) EARNINGS                                                  $(17,199,688)       $(10,461,534)       $    206,474
                                                                     ============        ============        ============

NET (LOSS) EARNINGS PER COMMON AND
 COMMON EQUIVALENT SHARE                                             $      (1.25)       $       (.93)       $        .02
                                                                     ============        ============        ============

Weighted average common shares in 1997 and
1996 and weighted average common and common
equivalent shares in 1995                                              13,705,609          11,305,232          12,206,280
                                                                     ============        ============        ============
</TABLE> 
                See notes to consolidated financial statements.

                                      F-3
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------

                                                                                  Retained
                                             Common Stock          Additional     Earnings
                                         ---------------------       Paid-In    (Accumulated
                                           Shares       Amount       Capital      Deficit)        Total
                                         ----------    --------    -----------  ------------    -----------
<S>                                      <C>           <C>         <C>          <C>             <C>
BALANCES, JUNE 30, 1994                  10,945,916    $109,459    $14,681,047    $8,348,184    $23,138,690

Issuance of common stock -
  Stock options exercised (Note 10)         230,466       2,305        410,906                      413,211
Stock option tax benefit (Note 12)                                   1,535,000                    1,535,000
Net earnings                                                                         206,474        206,474
                                        -----------    --------    -----------  ------------    -----------

BALANCES, JUNE 30, 1995                  11,176,382     111,764     16,626,953     8,554,658     25,293,375


Issuance of common stock -
  Stock options exercised (Note 10)         249,752       2,497        577,602                      580,099
Stock option tax benefit (Note 12)                                     226,000                      226,000
Net loss                                                                         (10,461,534)   (10,461,534)
                                        -----------    --------    -----------  ------------    -----------

BALANCES, JUNE 30, 1996                  11,426,134     114,261     17,430,555    (1,906,876)    15,637,940


Issuance of common stock -
  Private placements (Note 9)             2,695,971      26,960     11,810,376                   11,837,336
  Conversion of debentures (Note 8)         105,000       1,050        361,763                      362,813
  Stock options exercised (Note 10)         180,357       1,804        339,520                      341,324
  Services rendered                          25,000         250         99,750                      100,000
Litigation settlement (Note 16)                                        636,000                      636,000
Stock option tax benefit (Note 12)                                     199,000                      199,000
Net loss                                                                         (17,199,688)   (17,199,688)
                                        -----------    --------    -----------  ------------    -----------

BALANCES, JUNE 30, 1997                  14,432,462    $144,325    $30,876,964  $(19,106,564)   $11,914,725
                                        ===========    ========    ===========  ============    ===========

</TABLE>
                See notes to consolidated financial statements.

                                      F-4
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          Years Ended June 30,
                                                                -----------------------------------------
                                                                    1997           1996          1995
                                                                ------------   ------------   -----------
<S>                                                             <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) earnings                                          $(17,199,688)  $(10,461,534)  $   206,474           
   Adjustments to reconcile net (loss) earnings to net                                                              
       cash (used in) provided by operating activities:                                                             
      Depreciation and amortization                                5,526,593      5,859,577     6,302,444           
      Amortization of deferred financing costs                       221,385        240,335        96,127           
      Revaluation of acquired technology, patents and licenses     1,024,374      2,582,840                         
      Revaluation of capitalized software                          3,214,690        768,059                         
      Loss on sale of property and equipment                         149,395        528,840       131,113           
      Gain on settlement of product quality issues                (1,416,665)                                       
      Litigation settlement                                          636,000                                        
      Deferred income taxes                                        1,084,000     (4,318,000)   (1,606,000)          
      Stock option tax benefit                                       199,000        226,000     1,535,000           
   Change in current assets and current liabilities:                                                                
      Accounts receivable                                            415,306      4,541,241    (1,175,687)          
      Inventory                                                    5,789,962      8,085,173    (8,038,448)          
      Other current assets                                           403,566       (571,353)     (784,152)          
      Income tax receivable                                          400,781       (400,781)                        
      Accounts payable                                            (4,049,438)    (1,027,772)    6,342,131           
      Accrued payroll and payroll taxes                             (292,350)      (191,625)      221,415           
      Income taxes payable                                           273,273       (201,768)     (220,911)          
      Other current liabilities                                      175,525       (185,849)      703,858           
      Deferred revenue                                              (519,815)       698,622       638,591           
                                                                ------------   ------------   -----------
NET CASH (USED IN) PROVIDED BY                                                                                      
   OPERATING  ACTIVITIES                                          (3,964,106)     6,172,005     4,351,955           
                                                                                                                    
CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                              
   Notes receivable - related party                                 (585,000)                                       
   Collection of notes receivable - related party                    585,000                                        
   Additions to property and equipment                            (1,058,108)    (1,660,716)   (2,654,705)          
   Additions to capitalized software costs                        (1,557,931)    (2,660,717)   (3,535,312)          
   Proceeds from sale of property and equipment                       82,357         53,968        16,363           
   Additions to patents and other assets                            (500,596)    (2,056,156)   (1,793,993)          
                                                                ------------   ------------   -----------
NET CASH USED IN INVESTING ACTIVITIES                             (3,034,278)    (6,323,621)   (7,967,647)          
                                                                                                                    
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                               
   Net (payments) borrowing under revolving credit lines          (1,740,053)    (1,918,979)    2,002,144           
   Proceeds from note payable to related party                                    1,765,000                         
   Proceeds from notes payable                                                      271,149       111,345           
   Repayments of notes payable                                                     (293,550)     (103,429)          
   Proceeds from long-term debt                                                     307,514       470,938           
   Payments on long-term debt                                     (1,246,968)    (1,075,989)     (864,966)          
   Issuance of common stock                                       10,378,660        580,099       413,210           
                                                                ------------   ------------   -----------
NET CASH PROVIDED BY (USED IN)                                                                                      
   FINANCING ACTIVITIES                                            7,391,639       (364,756)    2,029,242           
                                                                ------------   ------------   -----------
                                                                                                                    
INCREASE (DECREASE) IN CASH AND                                                                                     
   CASH EQUIVALENTS                                                  393,255       (516,372)   (1,586,450)          
                                                                                                                    
CASH AND CASH EQUIVALENTS AT                                                                                        
   BEGINNING OF YEAR                                                  90,851        607,223     2,193,673           
                                                                ------------   ------------   -----------
                                                                                                                    
CASH AND CASH EQUIVALENTS AT                                                                                        
   END OF YEAR                                                  $    484,106   $     90,851   $   607,223           
                                                                ============   ============   ===========           
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1.   BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

     Business
     LaserMaster Technologies, Inc. (the Company) designs, manufactures, markets
     and sells wide-format color, chemical-free filmsetting, plain-paper
     typesetting, and direct-to-plate printing systems for graphic arts, pre-
     press, and desktop publishing professionals.

     Credit Risk
     The Company sells its products on a prepaid basis, on a COD basis, through
     nonrecourse third-party leasing arrangements and by extending credit in the
     normal course of business.  Its customer base is comprised primarily of
     resellers and end users in the graphic arts, prepress and desktop
     publishing industries throughout the world.  Credit risk is spread across a
     significant number of customers and geographic areas such that no material
     credit risk resides with one or a small number of customers or in a given
     geographic area.  The Company performs ongoing credit evaluations of its
     customers' financial condition and generally requires no collateral.

     Consolidation
     The consolidated financial statements include the accounts of LaserMaster
     Technologies, Inc. and its subsidiaries, Digital Typeface Corporation (DTC)
     and LaserMaster Corporation (LMC), and LMC's subsidiaries, LaserMaster
     Export Corporation, LaserMaster Europe, Ltd. (LME), LaserMaster
     Asia/Pacific (LMA), and ColorMasters, Inc. (CMI).  All significant
     intercompany balances and transactions have been eliminated in
     consolidation.

     Revenue recognition and warranties
     Product sales are recorded on shipment. Reserves are established for
     anticipated returns of product and bad debts. The Company offers extended
     maintenance agreements with revenue from these agreements  recognized
     ratably over the contract period. The Company provides a warranty for labor
     and materials on certain products sold. No other stock balancing programs
     or product rebate programs exist outside of the terms of the limited
     warranty.  The estimated warranty liability is included in other current
     liabilities in the consolidated balance sheets.

     Cash equivalents
     All highly liquid cash investments with a maturity of three months or less
     at the date of purchase are considered to be cash equivalents.

     Inventories
     Inventories are stated at the lower of cost or market, with cost determined
     using the first-in, first-out (FIFO) basis.

     Property and equipment
     Property and equipment are recorded at cost. Depreciation and amortization
     are computed using the straight-line method over the estimated useful lives
     of the assets of two to seven years.

     Capitalized software
     Software development costs incurred subsequent to establishment of the
     software's technological feasibility are capitalized. Capitalization ceases
     when the software is available for general release to customers. The
     recoverability of capitalized software development costs is continually
     evaluated, and provisions for estimated losses are recorded in the period
     such losses are determined. Amortization of capitalized software
     development costs is provided at the greater of the amount computed using
     (a) the ratio of current gross revenues from a product to the total of
     current and anticipated future gross revenues from the product or (b) the
     straight-line method over the remaining estimated economic life of the
     product. Generally, an original estimated economic life of three years is
     assigned to capitalized software development costs. Amortization of
     capitalized software development costs, included in cost of goods sold,
     aggregated $2,494,154, $2,732,829 and  $3,124,616 for the fiscal years
     ended June 30, 1997, 1996, and 1995, respectively.  Provisions for
     impairment losses totaled $3,214,690 and $768,059 for the years ended June
     30, 1997 and 1996, respectively.  These provisions reduced the Company's
     capitalized software costs to zero at June 30, 1997.

     Acquired technology, patents, and licenses
     Acquired technology, patents, and licenses are amortized using the
     straight-line method over the estimated useful lives of the assets,
     generally from three to five years.  Amortization of acquired technology,
     patents and

                                      F-6
<PAGE>
 
     licenses included in general and administrative expenses, aggregated
     $710,838, $596,277 and $371,903 for the fiscal years ended June 30, 1997,
     1996, and 1995, respectively. The recoverability of these assets is
     continually evaluated by comparing the remaining unamortized cost to the
     estimated future cash flows of the associated assets. Provisions for
     estimated losses are recorded in the period such losses are determined and
     totaled $1,533,837 and $2,582,840 for the years ended June 30, 1997 and
     1996, respectively.

     Accounts payable
     Accounts payable include $1,243,101 and $389,860 at June 30, 1997 and 1996,
     respectively, related to issued checks which had not cleared the Company's
     bank accounts reduced by deposits in transit and cash on deposit in the
     Company's depository banks.

     Fair value of financial instruments
     Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
     About Fair Value of Financial Instruments," requires disclosure of the fair
     value of certain financial instruments. Cash and cash equivalents, accounts
     receivable, short-term debt, accounts payable, and accrued liabilities are
     reflected in the financial statements at their estimated fair value. The
     carrying amount of the Company's long-term debt approximated its fair value
     at June 30, 1997 and 1996 due to the debt agreements containing market
     interest rates.

     Income taxes
     The Company utilizes the asset and liability method of accounting for
     income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."
     Under the asset and liability method, deferred tax assets and liabilities
     are recognized for the future tax consequences attributable to the
     differences between the financial statement and tax bases of existing
     assets and liabilities. Deferred tax assets and liabilities are measured
     using enacted tax rates expected to apply to taxable income in the years in
     which these temporary differences are expected to be recovered or settled.

     Research and development
     The Company is involved in the development of new products and improvement
     of existing products. Research and development costs are charged to expense
     as incurred.

     Advertising
     The Company expenses the costs of advertising the first time the
     advertising takes place, except for direct-response advertising, which is
     capitalized and amortized over its expected period of future benefits.
     Direct-response advertising consists of printing, postage, and mailing list
     costs relating to direct mail advertising.  The capitalized costs of the
     advertising are amortized over the period during which the benefits of the
     mailings are expected, up to two months following the mailing date.

     At June 30, 1997, $7,000 of advertising was included in other current
     assets as compared with $333,000 at June 30, 1996.  Advertising expense was
     $6,298,000, $7,343,000 and $9,519,000 for the fiscal years ended June 30,
     1997, 1996, and 1995, respectively.

     Net (loss) earnings per common share
     Net (loss) earnings per common share is based on the weighted average
     number of common and dilutive common equivalent shares outstanding.  Common
     stock equivalents included in the calculation reflect the dilutive effect
     of outstanding stock options and warrants.  During fiscal years 1997 and
     1996, common equivalent shares are excluded from the calculation because
     they are anti-dilutive.

     Stock-Based Compensation
     In October 1995, the Financial Accounting Standards Board issued SFAS No.
     123, "Accounting for Stock-Based Compensation."  The Company has elected to
     continue following the guidance of Accounting Principles Board Opinion No.
     25, "Accounting for Stock Issued to Employees," for measurement and
     recognition of stock-based transactions with employees and has adopted the
     disclosure provisions of SFAS No. 123 in fiscal year 1997.

     Liquidity
     During 1997 and 1996, the Company incurred losses and special charges
     aggregating $17.2 million and $10.5 million, respectively, and as of June
     30, 1997, had an accumulated deficit in stockholders' equity totaling $19.1
     million.  During this period, management has taken several steps to improve
     cash flows and return the Company to profitability.  These included
     reducing operating expenses through workforce reductions and consolidating
     international sales offices, transitioning out of certain products, and
     developing new products to be released during early fiscal 1998.
     Management believes these changes will allow the Company to meet its
     obligations and return to profitability in 1998.  If revenues from the new
     products expected to be released in fiscal 1998 are significantly less than
     planned, additional expense reductions will be necessary.

                                      F-7
<PAGE>
 
     Use of estimates

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     Significant Accounting Estimates

     The Company's reserves against inventories are based on the Company's best
     estimates of product sales prices and customer demand patterns, and/or its
     plans to transition its products. However, the Company participates in a
     highly competitive industry that is characterized by aggressive pricing
     practices, downward pressures on gross margins, frequent introductions of
     new products, short product life cycles, rapid technological advances, and
     continual improvement in product price/performance characteristics. As a
     result of the industry's ever-changing and dynamic nature, it is at least
     reasonably possible that the estimates used by the Company to determine its
     reserves against inventories will be materially different from the actual
     amounts or results. These differences could result in materially higher
     than expected inventory reserve costs, which could have a materially
     adverse effect on the Company's results of operations and financial
     condition in the near term.

     The Company's warranty and related accruals are based on the Company's best
     estimates of product failure rates and unit repair costs. However, the
     Company is continually releasing new and ever-more complex and
     technologically advanced products. As a result, it is at least reasonably
     possible that product could be released with certain unknown quality and/or
     design problems. Such an occurrence could result in materially higher than
     expected warranty and related costs, which could have a materially adverse
     effect on the Company's results of operations and financial condition in
     the near term.
 
     New Accounting Standards

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 128, "Earnings Per Share", which is
     effective for financial statements issued for the periods ending after
     December 15, 1997. The Company has not determined if adoption of the
     standard will have a material impact on the Company's financial position or
     results of operations.
 

2.   RESTRUCTURING AND OTHER SPECIAL CHARGES

     In June 1997, the Company incurred pre-tax charges of $7.8 million related
     to the revaluation of intellectual property and inventory and $636,000 for
     settlement of the shareholders' lawsuit (Note 16). Of this amount, $3.5
     million was charged to cost of sales and $4.9 million was charged to
     operating expenses. The special charges were incurred primarily as a result
     of a change in the estimated net realizable values of the Company's
     PressMate and DisplayMaker Express products. These two products represent
     the Company's first two proprietary printers developed and manufactured in-
     house.

     In May 1996, the Company incurred pre-tax charges of $9.9 million,
     consisting of restructuring and other special charges of $4.4 million and a
     special charge to cost of sales of $5.5 million related to its revised
     business plan and technical problems in one of its products. The revised
     business plan is intended to complete the Company's transition from a
     systems integrator to a manufacturer of proprietary printing engines which
     utilize the Company's consumable products.

     Included in the $4.4 million charge is $3.3 million for the revaluation of
     intellectual property tied to certain technologies and contract rights
     associated with the transition from a systems integrator to a manufacturer
     of printing engines. The charge also includes a $1.1 million provision for
     severance related to workforce reductions, expected losses on the sale of
     tangible assets and expenses under non-cancelable leases as a result of
     consolidating foreign sales offices and certain domestic operations. At
     June 30, 1996, approximately $1.3 million of the total $4.4 million charge
     remains in current liabilities. At June 30, 1997, approximately $766,000 of
     the total $4.4 million charge remains in current liabilities.

     Included in the $5.5 million charge to cost of sales is $4.2 million in
     inventory revaluation associated with the transition from certain product
     lines developed as a systems integrator. In addition, the charge includes
     $1.3 million to cover replacement costs, product returns, and inventory
     revaluation related to the Company's older model PressMate product.

                                      F-8
<PAGE>
 
3.   INVENTORY

     Inventory consists of the following: 
<TABLE>
<CAPTION>

                                  June 30, 1997    June 30, 1996
                                  -------------    -------------
     <S>                          <C>              <C>
                            
     Raw materials                $   4,178,139    $   9,518,033
     Work in process                    123,664          436,753
     Finished goods:        
         Consumables                  2,824,753        1,296,397
         Hardware                     2,058,115        2,273,131
                                  -------------    -------------
                                  $   9,184,671    $  13,524,314
                                  =============    =============
</TABLE>

4.   PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:
<TABLE>
<CAPTION>
 
                                                      Life Used
                                                   for Depreciation  June 30, 1997  June 30, 1996
                                                   ----------------  -------------  -------------
     <S>                                           <C>               <C>            <C>
 
     Computer equipment                                 2 - 5 years  $  10,416,254  $  10,358,217
     Trade show computer equipment                      2 - 5 years        470,007        600,475
     Capitalized tooling                                    3 years        263,693        234,206
     Furniture and fixtures                             5 - 7 years      4,359,607      4,245,907
     Purchased software                                     3 years      1,065,817        961,970
     Vehicles                                               5 years        264,171        420,706
     Leasehold improvements                                 5 years      2,918,862      2,577,253
                                                                     -------------  -------------
                                                                        19,758,411     19,398,734
     Accumulated depreciation and amortization                          16,187,749     14,299,174
                                                                     -------------  -------------
                                                                     $   3,570,662  $   5,099,560
                                                                     =============  =============
 
</TABLE>
     Property and equipment includes assets under capital leases as follows:
<TABLE>
<CAPTION>
 
                                                  June 30, 1997   June 30, 1996
                                                  -------------   -------------
<S>                                               <C>             <C>
 
     Computer equipment and purchased software    $     237,085   $     212,085
     Furniture and fixtures                             709,774         740,319
     Vehicles                                                            10,499
                                                  -------------   -------------
                                                        946,859         962,903
     Accumulated amortization                           426,308         248,368
                                                  -------------   -------------
                                                  $     520,551   $     714,535
                                                  =============   =============
</TABLE> 
 
5.   NOTES PAYABLE
 
     Notes payable consists of the following:
<TABLE>
<CAPTION>
 
                                                  June 30, 1997   June 30, 1996
                                                  -------------   -------------
<S>                                               <C>             <C>
 
     Note payable under revolving
     line of credit (1)                           $   1,708,956   $   3,529,459
 
     Note payable under revolving
     line of credit (2)                               1,072,512         972,977
 
     Promissory note from trading partner (3)                           859,516
 
     Other                                                               19,085
                                                  -------------   -------------
 
                                                  $   2,781,468   $   5,381,037
                                                  =============   =============
 
     Weighted average interest rate                        8.48%          10.15%
                                                  =============   =============
 
</TABLE>

                                      F-9
<PAGE>
 
     (1) On January 17, 1996, LMC entered into a credit agreement with a
     commercial finance company. The agreement allows LMC to borrow up to
     $10,000,000 based on availability equal to 60% of the net eligible accounts
     receivable and 25% of the net eligible inventory. Borrowings are secured by
     inventory, accounts receivable, and general intangibles and bear interest
     at a defined bank reference rate (prime) plus 2.0% (10.5% at June 30, 1997)
     with a 0.5% unused line fee. At June 30, 1997, approximately $2,606,000 of
     eligible financing was unused under this credit line. Availability under
     this credit line fluctuates daily. The agreement expires January 17, 1999
     and requires the borrower to meet various financial covenants involving
     capital expenditures, additions to capitalized software and intellectual
     property, minimum debt service coverage ratio, and maintenance of a minimum
     net worth. The agreement also requires LMC to meet various non-financial
     covenants (Note 13).

     (2) LME, a subsidiary of the Company's LMC subsidiary, maintains a
     receivables financing arrangement, which has no stated expiration, with a
     commercial finance company whereby LME may borrow up to 70% of eligible
     accounts receivable, with a maximum advance of $2,500,000. At June 30,
     1997, approximately $262,000 was unused under this credit line. Borrowings
     are due in Dutch Guilders on demand and bear interest at the Promissory
     Note Discount Rate of the Dutch Central Bank plus 2.5% (5.25% at June 30,
     1997). Borrowings in U.S. Dollars are due on demand and bear interest at a
     rate that fluctuates with the market (8.5% at June 30, 1997).

     (3) In November 1995, LaserMaster Corporation converted $859,516 of
     accounts payable into a promissory note. In September 1996, the promissory
     notes along with approximately $1.7 million in trade payables were
     converted into a $2.5 million convertible subordinated debenture (Note 8).


6.   NOTE PAYABLE - RELATED PARTY

     During September and October 1995, LMC borrowed $1,765,000 under a demand
     note from TimeMasters, Inc. (TMI), a corporation controlled by the
     Company's Chief Executive Officer. In January 1996, LMC obtained a new line
     of credit with a commercial finance company that required the indebtedness
     to TMI be subordinated to the line of credit and not be repaid unless
     certain financial covenants were achieved. In return for such subordination
     and for the significant restrictions on repayment, the Company issued to
     TMI a warrant to purchase 277,953 shares of common stock. The warrant is
     exercisable at $6.35 per share through January 17, 2002. In December 1996,
     the principal balance of $1,765,000, along with $53,715 in accrued
     interest, was offset against a similar amount due from TMI related to an
     equity investment in the Company (Note 9).


7.   LONG-TERM DEBT

     Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                June 30, 1997  June 30, 1996
                                                                -------------  -------------
<S>                                                             <C>            <C>

     Note payable to a finance company,  payments,
     including principal and interest at 8.53%, of $59,427
     due monthly through August 1997, secured by certain
     domestic property and equipment (Note 13)                       $117,599     $  789,260

     Notes payable to a finance company, with monthly
     payments aggregating $24,504, including interest at the
     "One-Month" Commercial Paper rate plus 4.0%
     (9.61% at June 30, 1997), expiring January 1998
     through May 1999, secured by certain domestic
     property and equipment (Note 13)                                 267,599        527,151

     Note payable to bank, with interest at prime
     plus .5% (9.0%  at June 30, 1997), final
     payment due December 1997                                          2,922          8,405

     Obligations under capital leases for equipment,
     payable in monthly installments (Note 11)                        433,274        743,546
                                                                     --------     ----------
                                                                      821,394      2,068,362
     Less current maturities                                          636,665      1,248,267
                                                                     --------     ----------
                                                                     $184,729     $  820,095
                                                                     ========     ==========

</TABLE>

                                     F-10
<PAGE>
 
     Maturities of long-term debt at June 30, 1997, excluding capital lease
     obligations, are as follows:
<TABLE>
<CAPTION>

Year ending June 30:
<S>                                   <C>
1998                                  $327,824
1999                                    60,296
                                      --------
                                      $388,120
                                      ========

</TABLE>
8.   CONVERTIBLE SUBORDINATED DEBENTURE

     In September 1996, the Company entered into a series of agreements with one
     of its largest trade creditors, converting approximately $1.7 million of
     trade payables and a promissory note of $859,516 into a $2.5 million
     convertible subordinated debenture. The debenture is due September 12, 1998
     together with accrued interest at an annual rate of 8.0%. The debenture
     contains voluntary, automatic and mandatory conversion provisions. Under
     the voluntary conversion provision, the debenture is convertible in whole
     or in part into common stock of the Company at $6.00 per share at any time
     that the market price of the Company's common stock is less than $6.00 per
     share. The debenture is automatically converted at the rate of 30,000
     shares a week at the market price of the common stock at any time that the
     market price equals or exceeds $6.00 per share. The automatic conversion
     provision contains limited price protection under certain circumstances.
     Under the mandatory conversion provision, the debenture will be converted
     on a quarterly basis at market prices and in share quantities equal to
     specified threshold amounts, less any shares converted under the other
     provisions. The mandatory provision is effective for the quarter ending
     March 31, 1997 and continues until the debenture is fully converted. The
     debenture contains certain registration rights and also limits the number
     of shares that may be sold in the open market in any one week. As of June
     30, 1997, 105,000 shares had been converted aggregating $362,813. The
     principal balance outstanding at June 30, 1997 is $2,233,414.


9.   STOCKHOLDERS' EQUITY

     In September 1996, the Company privately placed 2,695,971 shares of its
     common stock, together with warrants to purchase an additional 2,757,000
     shares, for $12 million ($11.8 million, net of transaction costs) to three
     separate groups. Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation,
     was issued 1,371,429 shares and warrants to purchase an additional
     1,371,429 shares, at an exercise price of $7.00 per share, for an aggregate
     $6 million. TimeMasters, Inc. and affiliates, which are controlled by the
     Company's Chief Executive Officer, were issued 914,286 shares and warrants
     to purchase an additional 914,286 shares, at an exercise price of $7.00 per
     share, for an aggregate $4 million. The Company received $2.2 million from
     TimeMasters and affiliates and offset the remaining $1.8 million against a
     note payable and accrued interest due to TimeMasters. General Electric
     Capital Corporation, the Company's senior lender, was issued 410,256 shares
     and warrants to purchase an additional 471,285 shares at an exercise price
     of $6.79 per share, for an aggregate $2 million.


10.  STOCK OPTIONS AND WARRANTS

     On May 23, 1996, the stockholders approved the adoption of the "LaserMaster
     Technologies, Inc. 1996 Stock Incentive Plan". The aggregate number of
     shares of the Company's common stock which may be issued pursuant to the
     plan is 1,500,000. Under the plan, incentive stock options and non-
     statutory stock options may be granted to key employees, directors, and
     consultants of the Company at exercise prices not less than 100 percent of
     the fair market value of the common stock at the date of grant and 110
     percent for incentive stock options granted to individuals owning 10
     percent or more of the Company's common stock. The plan is administered by
     a Stock Option Committee appointed by the Board of Directors. The committee
     establishes all terms and conditions of each grant, except that, in the
     case of incentive options, the term may not exceed 10 years. The Company
     also has a 1990 Restated Stock Option Plan with 3,513,309 shares
     authorized.

                                     F-11
<PAGE>

     Warrant activity and activity under the stock option plans is summarized as
     follows:
<TABLE>
<CAPTION>
                                                       Weighted Average                  Weighted Average
                                       Warrants          Warrant Price        Options      Option Price
                                     Outstanding           Per Share        Outstanding      Per Share
                                   ----------------     ----------------    -----------    ------------
<S>                                <C>                  <C>                 <C>            <C>
     Balance, June 30, 1994              15,000              $5.50           2,095,569         $ 2.76

     Granted                                                                   544,000           6.04
     Exercised                                                                (230,466)          1.81
     Forfeited                                                                (268,417)          5.06
                                      ---------                              ---------
     Balance, June 30, 1995              15,000               5.50           2,140,686           3.38

     Granted                            277,953               6.35           1,322,000           4.29
     Exercised                                                                (249,752)          2.32
     Forfeited                                                                (449,824)          4.18
     Repriced*                                                                                  (1.23)
                                      ---------                              ---------
     Balance, June 30, 1996             292,953               6.31           2,763,110           3.54

     Granted                          2,757,000               6.96             954,381           4.07
     Exercised                                                                (180,357)          1.89
     Forfeited                                                                (729,024)          4.37
     Repriced**                                                                                 (0.55)
                                      ---------                              ---------
     Balance, June 30, 1997           3,049,953               6.90           2,808,110           3.38
                                      =========                              =========

     Exercisable, June 30, 1997       3,049,953              $6.90             779,308         $ 2.65
                                      =========                              =========
</TABLE>
*The Company's Board of Directors approved the repricing of 249,250 non-
statutory stock options to the closing Nasdaq price on July 3, 1995 ($5.40 per
share). These options had original exercise prices ranging from $5.63 to $8.50
per share with an average exercise price of $6.75 per share. The Company's Board
of Directors approved the repricing of 210,000 non-statutory stock options to
the closing Nasdaq price on April 23, 1996 ($4.00 per share). These options had
original exercise prices ranging from $5.00 to $5.40 per share with an average
exercise price of $5.09 per share.

** The Company's Board of Directors approved the repricing of 929,250 non-
statutory stock options to the closing Nasdaq price on July 17, 1996 ($3.63 per
share). These options had original exercise prices ranging from $4.00 to $6.50
per share with an average exercise price of $4.18 per share.

Pro Forma Information:

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, since options have been issued with exercise prices at or
above market value of the Company's stock, no compensation expense has been
recognized for the stock option plans. Had compensation expense for the
Company's two stock option plans been determined based on the fair value at the
grant date for awards in fiscal 1997 and fiscal 1996 consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts reflected in the following table:
<TABLE>
<CAPTION>
                                               June 30, 1997      June 30, 1996
                                               --------------     --------------
<S>                                            <C>                <C>

     Reported net loss                          $(17,199,688)      $(10,461,534)
     Pro forma net loss                          (17,545,997)       (10,482,957)
     Reported net loss per share                       (1.25)              (.93)
     Pro forma net loss per share                      (1.28)              (.93)
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net income (loss) for future years
because options vest over several years and additional awards generally are made
each year.  The fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and fiscal 1996:

                                     F-12
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                  June 30, 1997        June 30, 1996
                                                                                  -------------        -------------
<S>                                                                               <C>                  <C>
     Expected dividend yield                                                             $   -                $   -
     Expected stock price volatility                                                        60%                  60%
     Risk-free interest rate                                                              6.22%                6.22%
     Expected life of options (years)                                                      4.5                  4.5
</TABLE>
The following table summarizes information about the Company's stock option
plans at June 30, 1997:
<TABLE>
<CAPTION>
          Range of             Number    Weighted Average            Weighted              Number           Weighted
          Exercise    Outstanding at            Remaining             Average      Exercisable at            Average
            Prices     June 30, 1997     Contractual Life      Exercise Price       June 30, 1997     Exercise Price
            ------     -------------     ----------------      --------------      --------------     --------------
<S>                   <C>                <C>                   <C>                 <C>                <C>
     $ .34 to 2.00            87,943            44 months               $1.18              52,693              $ .78
      2.01 to 3.00           763,317            74 months                2.28             490,765               2.30
      3.01 to 4.00         1,563,250           107 months                3.71             226,250               3.63
        above 4.00           393,600           109 months                4.69               9,600               7.42
                         -----------                                                    ---------
                           2,808,110                                                      779,308
</TABLE>
11.  COMMITMENTS

     Leases
     The Company leases certain equipment under leases which meet the criteria
     for capital lease classification. These agreements have been capitalized at
     the lesser of fair market value of the equipment or the present value of
     the future minimum lease payments. The Company also leases other equipment
     under operating leases. In addition, the Company leases its office and
     warehouse facilities under operating leases which expire at various dates
     through December 2010. The leases require payments of property taxes,
     insurance, and maintenance costs in addition to basic rent and contain
     renewal options for periods ranging from one to three years.

     Certain of the facilities leases are under a 15-year commercial lease with
     Grandchildren's Realty Alternative Management Program I ("GRAMPI"), a
     Minnesota limited partnership controlled by the Company's Chief Executive
     Officer, for space it currently occupies in Shady View I & II. The Shady
     View space is approximately 50% of all space leased by the Company. GRAMPI
     purchased the real estate in April 1995, after the Company's Board of
     Directors declined to do so. GRAMPI sold the property in October 1996 in a
     sale-leaseback transaction and remains the lessor to the Company. The
     Company's Board of Directors retained services of an outside commercial
     real estate brokerage firm and outside legal counsel to negotiate the lease
     with the landlord's outside legal counsel. Management and the outside
     brokerage firm and legal counsel believe that the lease is at market rate.

     Rent expense under all equipment and facilities operating leases (including
     property taxes, insurance, and maintenance costs) was as follows:
<TABLE>
<CAPTION>
                                          Year Ended June 30
                                 ------------------------------------
                                    1997         1996         1995
                                 ----------   ----------   ----------
<S>                              <C>          <C>          <C>

               GRAMPI            $1,525,000   $1,355,000   $  198,000(a)
               Other parties      1,104,000    1,211,000    1,996,000
                                 ----------   ----------   ----------
               Total             $2,629,000   $2,566,000   $2,194,000
                                 ==========   ==========   ==========
</TABLE>
(a) Two months rent following April 1995 purchase.

                                     F-13
<PAGE>
 
Future minimum lease payments under capital and operating leases in effect at
June 30, 1997 are as follows:
<TABLE>
<CAPTION>

                                                                           Operating Leases
                                                       Capital       ----------------------------
     Year ending June 30:                              Leases           GRAMPI            Other
                                                       --------      -----------       ----------
<S>                                                    <C>           <C>               <C>

     1998                                              $338,125      $ 1,076,000       $  874,000
     1999                                               126,211        1,076,000          724,000
     2000                                                 3,821        1,199,000          674,000
     2001                                                              1,321,000          339,000
     2002                                                              1,266,000          314,000
     Thereafter (2003 through 2010)                                   11,415,000        1,597,000
                                                       --------      -----------       ----------
                                                        468,157      $17,353,000       $4,522,000
                                                                     ===========       ==========

     Less interest                                      (34,883)
                                                       --------

     Present value of net minimum lease payments       $433,274
                                                       ========
</TABLE>
Employment agreements

The Company has employment agreements with eleven of its officers and executives
which renew automatically on an annual basis.  Three of the agreements provide
continuation payments equal to 36 months pay upon termination of employment in
certain circumstances, including change of control.  The other eight agreements
provide for 12 months notice of termination, other than for cause, or payment in
lieu of notice. Three of the agreements also provide for acceleration of option
vesting in the event of a change in control or termination without cause.  As of
June 30, 1997, minimum annual salary levels set for the eleven individuals was,
in aggregate, $3,280,000.

Employee benefit plan

The Company has a qualified defined contribution 401(k) plan covering
substantially all employees.  The plan offers an employee savings feature and
discretionary Company matching contributions.  There were no employer
contributions to the plan for the years ended June 30, 1997, 1996, and 1995.

12.INCOME TAXES

     The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                                 Year Ended June 30,
                                                       ----------------------------------------------
                                                           1997             1996              1995
                                                       -----------       ----------       -----------
<S>                                                    <C>               <C>              <C>
      Current:
       Federal                                         $  (193,000)      $  835,000       $(1,626,000)
       State                                               (12,000)          (6,000)          (69,000)
                                                       -----------       ----------       -----------
                                                          (205,000)         829,000        (1,695,000)
      Deferred, primarily federal                       (1,084,000)       4,318,000         1,606,000
                                                       -----------       ----------       -----------
                                                       $(1,289,000)      $5,147,000       $   (89,000)
                                                       ===========       ==========       ===========
</TABLE>
A reconciliation of the expected federal income tax (provision) benefit  at the
statutory rates of 35% with the (provision) benefit for income taxes is as
follows:
<TABLE>
<CAPTION>
                                                                   Year Ended June 30,
                                                       ---------------------------------------------
                                                           1997             1996             1995
                                                       -----------       ----------       ----------
<S>                                                    <C>               <C>              <C>
      Tax benefit (provision)
       computed at statutory rates                     $ 5,569,000       $5,463,000       $(103,000)
      State income tax, net of
       federal benefit                                     288,000          283,000          (6,000)
      Graduated tax bracket 
       (provision) benefit                                (159,000)        (156,000)          5,000
      Increase in valuation allowance                   (7,339,000)        (821,000)
      Other                                                352,000          378,000          15,000
                                                       -----------       ----------       ---------
                                                       $(1,289,000)      $5,147,000       $ (89,000)
                                                       ===========       ==========       =========

</TABLE>
                                     F-14
<PAGE>
 
     Under FAS No. 109, deferred tax assets and liabilities are classified as
     current and noncurrent on the basis of the classification of the related
     asset or liability for financial reporting. Deferred taxes are recorded for
     temporary differences between the bases of assets and liabilities for
     financial reporting purposes and tax purposes.
<TABLE>
<CAPTION>
 
     Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are            
     as follows:
    
                                                                June 30, 1997                   June 30, 1996
                                                  ------------------------------------------   ---------------
                                                    Assets        Liabilities       Total           Total
                                                  -----------     -----------    -----------   ---------------
<S>                                               <C>            <C>             <C>            <C>
           Allowance for doubtful
                accounts and sales returns        $   676,000                    $   676,000       $   773,000
           Inventory costs                          2,782,000                      2,782,000         2,383,000
           Acquired technology                        304,000                        304,000
           Litigation settlement                      216,000                        216,000
           Accrued vacation                           182,000                        182,000           228,000
           Other                                      208,000     $  (295,000)       (87,000)          (80,000)
                                                  -----------     -----------    -----------   ---------------
                Current                             4,368,000        (295,000)     4,073,000         3,304,000
         
           Research and development costs                                                           (1,411,000)
           Property and equipment basis               594,000                        594,000           343,000
           Net operating loss carryforwards         6,162,000                      6,162,000         2,646,000
           Research and development credit
                carryforwards                       1,773,000                      1,773,000         1,775,000
           Alternative minimum tax credits            225,000                        225,000           225,000
           Other                                       99,000                         99,000          (211,000)
                                                  -----------     -----------    -----------   ---------------
                Noncurrent                          8,853,000                      8,853,000         3,367,000
                                                  -----------     -----------    -----------   ---------------
                     Gross                         13,221,000        (295,000)    12,926,000         6,671,000
                Valuation allowance                (8,160,000)                    (8,160,000)         (821,000)
                                                  -----------     -----------    -----------   ---------------
                     Net                          $ 5,061,000     $  (295,000)   $ 4,766,000        $5,850,000
                                                  ===========     ===========    ===========   ===============       
</TABLE>

     The valuation allowance for deferred tax assets as of June 30, 1997 is
     $8,160,000. The net change in the total valuation allowance for the year
     ended June 30, 1997 was an increase of $7,339,000.

     At June 30, 1997, the Company has net operating loss carryforwards for
     federal income tax purposes of approximately $16.3 million which are
     available to offset future taxable income, if any, through 2012. The
     Company also has alternative minimum tax credit carryforwards of
     approximately $225,000 available to reduce future federal income taxes, if
     any, over an indefinite period and research and development credit
     carryforwards of approximately $1.3 million available to reduce future
     federal income tax, if any, through 2011.

     The Company recognized income tax benefits of $199,000, $226,000, and
     $1,535,000 in 1997, 1996, and 1995, respectively, pertaining to the
     exercise of stock options, which are reflected in additional paid-in
     capital.


13.  RELATED PARTY TRANSACTIONS

     The Company is involved in various transactions with TimeMasters, Inc., a
     corporation controlled by the Company's Chief Executive Officer. The
     Company also purchases certain inventory from a greater than 5% shareholder
     and maintains its employee 401(k) plan investments with an affiliate of its
     senior lender. The Company's senior lender is also a shareholder.
     Transactions with related parties are as follows:
 
                                     F-15
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                  Year Ended June 30,
                                                                     -----------------------------------------
                                                                        1997            1996           1995
                                                                     ----------      ----------     ----------
<S>                                                                  <C>             <C>            <C>
     Interest expense (Notes 5 and 7)                                $  513,226
     Interest expense (Note 6)                                           83,696      $  139,398
     Interest income (a)                                                 38,882
     Rent expense (Note 11)                                           1,525,000       1,355,000     $  198,000
     Operating expenses (b)                                              88,240          30,788         63,128
     Equipment purchases (c)                                             49,075          47,853        211,362
     Inventory purchases                                              1,569,844

     Balances outstanding with related parties are as follows:                    June 30, 1997  June 30, 1996
                                                                                  -------------  -------------
<S>                                                                               <C>            <C>
     Notes payable (Notes 5 and 7)                                                   $2,094,154
     Note payable (Note 6)                                                                          $1,765,000
     Accrued interest                                                                     2,722         14,507
     Accrued rent                                                                       178,388        119,765
     Accounts payable                                                                    67,667         35,845
</TABLE>
(a)  In September 1996, the Company issued 914,286 shares of common stock and
warrants to purchase an additional 914,286 shares of common stock to a group
affiliated with TimeMasters, Inc. in exchange for promissory notes aggregating
$4 million (Note 9).  In addition, Mel Masters, the Company's CEO, borrowed
$585,000 from the Company in November 1996.  The amount borrowed was repaid in
December 1996 together with interest at 10%.

(b)  Under a Use Indemnification Agreement and certain related Board of
Director's actions, the Company has the right to sponsor business and business-
related occasions at facilities owned by Masters Trust I and/or Melvin L.
Masters and/or TimeMasters, Inc.  In addition, the Company occasionally uses an
airplane that is owned by a Company controlled by Mr. Masters for business-
related travel.  The Company indemnifies the owners against loss or damage
beyond available insurance, reimburses out-of-pocket and operating expenses, and
pays a usage charge based on what management believes are market rates.

(c)  The Company has installed a campus-wide TimeMasters, Inc. wireless voice
system in its Eden Prairie facility.  There are no monthly call operating
charges for unlimited use of that system.  The system hardware was acquired in
1995 for $211,362 based on competitive proposals for two other comparable
systems.  The Company acquired additional hardware in 1997 and 1996.

14.  INTERNATIONAL OPERATIONS

     Financial information by geographic location is as follows:
<TABLE>
<CAPTION>
                                                                                 Year Ended June 30,
                                                                     -------------------------------------------
                                                                         1997            1996           1995
                                                                     ------------    ------------   ------------
<S>                                                                  <C>             <C>            <C>
     Sales:
     North America and other                                         $ 54,771,696    $ 60,701,808   $ 84,181,438
     Europe                                                            17,410,002      19,655,566     23,021,944
     Japan, Asia, Pacific                                              14,381,724      13,234,670     12,235,337
                                                                     ------------    ------------   ------------
     Total sales                                                     $ 86,563,422    $ 93,592,044   $119,438,719
                                                                     ============    ============   ============

     Operating (loss) profit:
     North America and other                                         $(20,396,052)   $(17,227,577)  $ (1,963,763)
     Europe                                                             2,115,152        (106,343)       303,028
     Japan, Asia, Pacific                                               3,380,608       3,548,196      3,388,586
                                                                     ------------    ------------   ------------
                                                                      (14,900,292)    (13,785,724)     1,727,851
     Interest expense and other                                        (1,010,396)     (1,822,810)    (1,432,377)
                                                                     ------------    ------------   ------------

     (Loss) earnings before
        income taxes                                                 $(15,910,688)   $(15,608,534)  $    295,474
                                                                     ============    ============   ============

     Assets:
     North America                                                   $ 23,195,621    $ 38,383,859   $ 49,641,247
     Europe                                                             4,589,271       4,828,561      7,901,241
     Japan, Asia, Pacific                                               4,846,041       3,332,544      1,618,784
                                                                     ------------    ------------   ------------
     Total assets                                                    $ 32,630,933    $ 46,544,964   $ 59,161,272
                                                                     ============    ============   ============
</TABLE>
                                     F-16
<PAGE>
 
15.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
     ACTIVITIES
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                                    ----------------------------------------
                                                                       1997           1996           1995
                                                                    ----------     ----------     ----------
<S>                                                                 <C>            <C>            <C>
     The Company paid cash for the following items:
       Interest paid                                                $1,246,358     $2,001,050     $1,243,051
       Income tax (received) paid, net                                (668,054)      (452,451)       380,911
 
     Financing transactions not affecting cash:
       Accounts payable converted to note payable                                     859,516
       Accounts payable converted to convertible
         subordinated debenture                                      1,668,314
       Note payable converted to convertible
         subordinated debenture                                        859,516
       Convertible subordinated debenture converted
         to common stock                                               362,813
       Note payable to related party offset against note
         receivable from related party                               1,765,000
       Accrued interest offset against note receivable
         from related party and interest receivable                     53,715
       Common stock issued for services                                100,000
       Litigation settlement in exchange for common stock              636,000
       Capital lease obligations                                                      228,374        599,236
</TABLE>
16.  LITIGATION

     In October 1995, a shareholder of the Company (Becker) filed an action
     against the Company and four of its officers and directors alleging
     violations of the Securities and Exchange Act of 1934. In December 1995,
     similar claims filed by other shareholders were consolidated into the
     Becker claim as a class action to include all purchasers of the Company's
     stock during the period of December 3, 1993 through December 8, 1994. In
     February 1996, one of the directors named in the suit was dismissed from
     the case without prejudice. The basic allegation is that the Company and
     the named defendants knew of material, negative, non-public information and
     withheld such information from the market so that they could personally
     benefit by selling shares of common stock at an inflated price. A
     preliminary settlement in this case has been reached between the Company
     and the plaintiffs. The proposed settlement includes an amount from the
     Company's insurance carrier and $636,000 from the Company. The Company's
     portion of the proposed settlement may be paid in cash or common stock at
     the Company's discretion and is due in January 1998. If the Company elects
     to pay its share in common stock then the number of shares issued will be
     determined based on the market price on the date payment is due. Final
     approval of the settlement is expected in October 1997. The Company has
     recorded its $636,000 share of the proposed settlement as expense and
     additional paid in capital as of June 30, 1997.

     In October 1995, LMC filed suit against Sentinel Imaging, a division of
     Sentinel Business Systems, Inc. The complaint alleges, among other things,
     patent infringement, trademark infringement, and other violations relating
     to the Company's Big Color product line. Sentinel Imaging's counterclaims
     for false advertising, patent misuse, and unfair competition by LaserMaster
     have been dismissed.

     In addition, in the ordinary course of its business the Company experiences
     various types of claims which sometimes result in litigation or other legal
     proceedings. The Company does not anticipate that any of these proceedings
     will have a material effect on the Company's operations or financial
     position.

                                     F-17
<PAGE>
 


17.    QUARTERLY RESULTS OF OPERATIONS
       (Unaudited) (in thousands, except per share data)
<TABLE>
<CAPTION>

                                                       Quarter Ended
                                 ----------------------------------------------------------          Fiscal
                                 Sept. 29       Dec. 29        Mar. 30          June 30               Year
                                 ---------     ----------      --------      --------------      --------------
<S>                              <C>           <C>             <C>           <C>                 <C>
Fiscal 1997:
Net sales                        $21,452       $24,597         $19,384       $ 21,130            $ 86,563
Gross profit                       7,930         7,849           5,102          3,770/(a)/         24,651/(a)/
Net (loss)                          (238)         (483)         (2,450)       (14,029)/(b)/       (17,200)/(b)/
Net (loss) per share                (.02)         (.03)           (.17)          (.97)              (1.25)

                                                       Quarter Ended
                                 ----------------------------------------------------------         Fiscal
                                 Sept. 30      Dec. 31         Mar. 31          June 30              Year
                                 --------      -------         -------       --------------     ---------------
Fiscal 1996:
Net sales                         $21,266      $25,340         $23,227       $ 23,759            $ 93,592
Gross profit                        8,539        9,898           7,426          3,350/(c)/         29,213/(c)/
Net earnings (loss)                  (921)          79          (2,230)        (7,390)/(d)/       (10,462)/(d)/
Net earnings (loss) per share        (.08)         .01            (.18)          (.65)               (.93)

</TABLE>
(a) Includes a special pre-tax charge to cost of sales of $3.5 million related
to the Company's revised estimates of net realizable value of two of its
products.

(b) Includes pre-tax special charges of $4.3 million and a special pre-tax
charge to cost of sales of $3.5 million related to the Company's revised
estimates of net realizable value of two of its products, $636,000 related to
the settlement of litigation, and a special provision for income taxes of $6.5
million related to the revaluation of deferred tax assets.

(c) Includes a special pre-tax charge to cost of sales of $5.5 million related
to the Company's revised business plan and technical problems in one of its
products.

(d)  Includes pre-tax restructuring and other special charges of $4.4 million
and a special pre-tax charge to cost of sales of $5.5 million related to the
Company's revised business plan and technical problems in one of its products.

                                     F-18
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES                       Schedule I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
 
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                                June 30,           June 30,
ASSETS                                                            1997               1996
                                                              ------------       -----------
<S>                                                           <C>                <C>
CURRENT ASSETS:
 Cash and cash equivalents                                    $    329,993       $    33,932
 Accounts receivable                                                 1,463            21,932
 Receivable from subsidiary                                      8,604,283         4,648,498
 Income tax receivable                                                               400,781
 Other current assets                                              112,981            60,030
                                                              ------------       -----------
   TOTAL CURRENT ASSETS                                          9,048,720         5,165,173

PROPERTY AND EQUIPMENT, NET                                        649,563           805,965

INVESTMENT IN SUBSIDIARIES                                       5,484,595        10,563,097
                                                              ------------       -----------

                                                              $ 15,182,878       $16,534,235
                                                              ============       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                             $    589,455       $   652,005
 Accrued payroll                                                   151,481           182,559
 Accrued expenses                                                    1,313            31,823
 Income taxes payable                                              273,273
 Current maturities of long-term debt                                8,830            10,691
                                                              ------------       -----------
   TOTAL CURRENT LIABILITIES                                     1,024,352           877,078

CONVERTIBLE SUBORDINATED DEBENTURE                               2,233,414

LONG-TERM DEBT, less current maturities                             10,387            19,217

STOCKHOLDERS' EQUITY:
 Common stock                                                      144,325           114,261
 Additional paid-in capital                                     30,876,964        17,430,555
 Accumulated deficit                                           (19,106,564)       (1,906,876)
                                                              ------------       -----------
   TOTAL STOCKHOLDERS' EQUITY                                   11,914,725        15,637,940
                                                              ------------       -----------
                                                              $ 15,182,878       $16,534,235
                                                              ============       ===========
</TABLE>
See notes to condensed financial information of registrant on page F-21.

                                     F-19
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES                      Schedule I
                                                                     (Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------
                                                                       Years ended June 30,
                                                            1997               1996             1995
                                                        ------------       ------------      ----------
<S>                                                     <C>                <C>               <C>
REVENUES (management fees from subsidiaries)            $  4,200,000       $  4,200,000      $4,200,000
 
OPERATING EXPENSES                                         5,418,186          4,653,138       4,547,489
                                                        ------------       ------------      ----------
 
(LOSS) BEFORE INCOME TAXES AND EQUITY
  IN (LOSS) EARNINGS OF SUBSIDIARIES                      (1,218,186)          (453,138)       (347,489)
 
EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES                 (9,844,502)       (10,157,396)        449,963
 
INCOME TAX (PROVISION) BENEFIT                            (6,137,000)           149,000         104,000
                                                        ------------       ------------      ----------
 
NET (LOSS) EARNINGS                                      (17,199,688)       (10,461,534)        206,474
 
(ACCUMULATED DEFICIT) RETAINED EARNINGS
  AT BEGINNING OF YEAR                                    (1,906,876)         8,554,658       8,348,184
                                                        ------------       ------------      ----------
 
(ACCUMULATED DEFICIT) RETAINED EARNINGS
  AT END OF YEAR                                        $(19,106,564)      $ (1,906,876)     $8,554,658
                                                        ============       ============      ==========
</TABLE>
See notes to condensed financial information of registrant on page F-21.

                                     F-20
<PAGE>
                                                                     (Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
 
CONDENSED STATEMENTS OF CASH FLOWS                        
<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------------
                                                                              Years Ended June 30,
                                                                      1997            1996           1995
                                                                  ------------    ------------    -----------
<S>                                                               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss) earnings                                              $(17,199,688)   $(10,461,534)   $   206,474
 Adjustments to reconcile net (loss) earnings to net
   cash used in operating activities:
 Equity in loss (earnings) of subsidiaries                           9,844,502      10,157,396       (449,963)
 Depreciation and amortization                                         345,493         368,828        504,519
 Litigation settlement                                                 636,000
 Stock option tax benefit                                              199,000         226,000      1,535,000
 (Gain) loss on sale of property and equipment                         (14,250)            402           (186)
 Net change in operating current assets
  and liabilities                                                   (3,714,392)       (712,331)    (1,843,912)
                                                                  ------------    ------------    -----------
   NET CASH USED IN OPERATING
    ACTIVITIES                                                      (9,903,335)       (421,239)       (48,068)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                                  (224,023)       (146,461)      (366,221)
 Proceeds from sale of property and equipment                           55,450                          2,629
                                                                  ------------    ------------    -----------
   NET CASH USED IN INVESTING ACTIVITIES                              (168,573)       (146,461)      (363,592)
                                                                      
CASH FLOWS FROM FINANCING ACTIVITIES:
 Issuance of common stock                                           10,378,660         580,099        413,210
 Payments on long-term debt                                            (10,691)         (8,466)        (4,571)
 Net (payments) borrowing under short-term debt                                        (41,485)         7,916
                                                                  ------------    ------------    -----------
   NET CASH PROVIDED BY FINANCING ACTIVITIES                        10,367,969         530,148        416,555
                                                                  ------------    ------------    -----------
 
INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                     296,061         (37,552)         4,895
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                          33,932          71,484         66,589
                                                                  ------------    ------------    -----------
 
CASH AND CASH EQUIVALENTS AT END OF YEAR                          $    329,993    $     33,932    $    71,484
                                                                  ============    ============    ===========
</TABLE>
NOTES:  See consolidated financial statements for details of and changes in
        stockholders' equity. See Note 8 to consolidated financial statements
        for information regarding the convertible subordinated debenture.

        Capital lease obligations of $25,000 were incurred during the year ended
        June 30, 1996.

        No cash dividends have been paid to LaserMaster Technologies, Inc. by
        the subsidiaries.

                                     F-21
<PAGE>
 
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES                      Schedule II

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996, AND 1995
<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------
                                            Balance      Charged                            Balance
                                           beginning     to costs            Accounts         at
                                              of           and               written         end of
Description                                 period       expenses              off           period
-----------                               ----------    ----------        ------------     ----------
<S>                                       <C>           <C>                <C>             <C>
1997:
Allowance for doubtful accounts
 and sales returns                        $2,475,479    $  764,333         $1,252,729      $1,987,083


1996:
Allowance for doubtful accounts
 and sales returns                        $2,051,485    $1,471,654/(a)/    $1,047,660      $2,475,479


1995:
Allowance for doubtful accounts
 and sales returns                        $1,890,000    $  441,006         $  279,521      $2,051,485
</TABLE> 
/(a)/ Includes special charge of $1 million to cover product returns related to
      the Company's older model PressMate product.

                                     F-22