AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MAGINET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA (PRIOR TO 4841 77-0407677
REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
DELAWARE (AFTER INDUSTRIAL IDENTIFICATION NUMBER)
REINCORPORATION) CLASSIFICATION CODE
NUMBER)
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR
ORGANIZATION)
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KENNETH B. HAMLET
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAGINET CORPORATION
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

----------------
COPIES TO:
THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------

CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
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Common Stock, $.001 par
value................. 5,750,000 $14.00 $80,500,000 $27,758.62

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(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) promulgated under the Securities
Act of 1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 17, 1996

PROSPECTUS

5,000,000 SHARES
(PASTE-UP LOGO OF MAGINET)

COMMON STOCK

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

Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
4,000,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 1,000,000 shares are being
offered initially outside the United States and Canada by the International
Managers (the "International Offering"). Such offerings are referred to
collectively as the "Offerings."

Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MGNT."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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Per Share.................................. $ $ $
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Total(3)................................... $ $ $

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(1) The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offerings estimated at
$1,050,000 payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to 600,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
The International Managers have been granted a similar option to purchase
up to 150,000 additional shares solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

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

The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain other conditions. It is expected that delivery
of such shares will be made at the offices of Lehman Brothers Inc., New York,
New York, on or about , 1996.

------------
________________________________________________
LEHMAN BROTHERS HAMBRECHT & QUIST

, 1996

[INSIDE FRONT COVER]

[GRAPHIC: MAGINET LOGO]

Interactive on-demand entertainment and information to guests of the world's
leading hotels.

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

IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND INTERNATIONAL
MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE
MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED
ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

[GATEFOLD--FIRST PAGE]
MagiNet is the largest provider of in-room on-demand video entertainment and
information systems outside North America.

[Graphic: Underneath the above caption on both the first and second page of
the gatefold is a map of the continents outside of North and South America
America with the countries where there are MagiNet installations indicated]

[Graphic: Two images of a television screen showing the Company's welcome
channel.]

Currently being tested in Australia, our new Welcome Channel introduces the
quality and impact of network broadcasting to the MagiNet systems when guests
turn on their TV. The Welcome Channel is designed to feature Hollywood movie
trailers, advertising commercials, promotions and instructions in five
languages.

MagiNet guests are senior level business professionals, sophisticated
leisure travelers with some of the highest disposable incomes in the world.
Full-service offices provide local support.

[Graphic: One image of a television screen showing casino-style gaming, and
two images of a television screen showing Bloomberg Information TV.]

In an exclusive agreement with InterGame, MagiNet will be able to provide
in-room, interactive casino-style gaming in hotel rooms worldwide where
jurisdictions allow. MagiNet also expects to distribute Bloomberg Information
Television, a 24-hour financial news program to hotels, starting with a test
in Israel in late 1996.

[GATEFOLD-SECOND PAGE]

[Graphic: Three images of a television screen: one showing a welcome screen;
one showing a movie menu; and one showing text describing a movie.]

MagiNet's mainstay is on-demand entertainment, such as Hollywood
blockbusters and adult theme movies. Plus, hotel information and guest
services such as in-room check out and folio review. Providing guests as many
choices as possible is MagiNet's formula for winning the world's leading
hotels.

MagiNet has over 50,000 rooms installed with on-demand systems

250% annualized growth in rooms since 1993

[Graphic: Three images of a television screen showing an information
directory known as iLook.]

iLook is an interactive information and resource directory for travelers
that can provide hotel guests immediate and easy access to thousands of
businesses, services, restaurants, shops and cultural information. iLook is
expected to be launched in Thailand in early 1997, and is one of several
products being developed as additional revenue sources.

The world's best hotels have selected MagiNet for their interactive
entertainment and information systems.

Sheraton On The Park, australia Yokohama Grand Inter-Continental
Hotel, japan

Inter-Continental Sydney, australia Regent Auckland, new zealand

Guam Hilton, Guam The Orchard Hotel, Singapore

Mandarin Oriental, Hong Kong Sandton Sun & Towers, South Africa

JW Marriott, Hong Kong Durban Crowne Plaza, South Africa

Island Shangri-La, Hong Kong Hotel Lotte, South Korea

Regent Hong Kong, Hong Kong Hotel Shilla, South Korea

Hilton Tel Aviv, Israel Grand Formosa Regent, Taiwan

Sheraton Tel Aviv, Israel Grand Hyatt Taipei, Taiwan

Hotel Inter-Continental Tokyo Bay, Shangri-La Hotel, Thailand
Japan

Hotel Okura Tokyo, Japan Regent Bangkok, Thailand

Grand Hyatt Fukuoka, Japan

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.

THE COMPANY

To date, the Company has focused principally on leading hotels in the Pacific
Rim. Recently, the Pacific Rim has been experiencing a higher rate of economic
expansion and hotel construction than any other region in the world. Leading
hotels in this region are generally characterized by high occupancy and room
rates. The Company currently has operations and installations in Thailand,
Australia, Japan, Taiwan, Guam/Saipan, Hong Kong, Singapore, South Korea, South
Africa, Israel, New Zealand and France, and plans to expand its presence in the
Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its
systems in 1993 and, between 1993 and 1995, increased its installed base of
rooms from 2,087 to 39,122 and increased revenue from $395,000 to $8.7 million.
As of June 30, 1996 MagiNet served 138 hotels having 49,683 rooms, with an
additional 20,868 rooms in backlog. There are approximately two million hotel
rooms in MagiNet's current and targeted markets.

The Company's installed base includes certain hotels in the Hilton
International, Hyatt International, Inter-Continental, Mandarin Oriental,
Marriott, Okura, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific
Hotel Corporation, Westin and other hotel chains. The Company has preferred
vendor status for future installations in hotels within the Hyatt
International, Shangri-La and Southern Pacific Hotel Corporation chains. In
addition, the Company believes there is a substantial opportunity to penetrate
the mid-market hotel sector in its target markets.

The Company holds an exclusive license to provide the on-demand interactive
video system developed by On Command Video Corporation in more than 30
countries outside of North America, and a license to provide the on-demand
interactive video system developed by Guestserve Development Group to all
countries outside of North America. MagiNet installs its systems in hotels at
the Company's cost and receives revenue from guest usage pursuant to five-to-
seven year contracts giving MagiNet the exclusive right to provide the hotel
with in-room on-demand video entertainment and information services. To date,
the Company's principal on-demand video entertainment services have provided a
reasonably predictable stream of recurring revenue during the term of these
exclusive contracts. The Company believes its new services will appeal to a
broader group of hotel guests than traditional purchasers of in-room video
entertainment and should increase revenue per installed room.

Beginning in early 1996, the Company added several key members to its
management team, including Kenneth B. Hamlet, its Chief Executive Officer, and
Gordon E. (Ned) Druehl, Jr., its Chief Operating Officer, both having over
twenty years of experience in the hospitality industry. Mr. Hamlet and Mr.
Druehl, as part of their executive responsibilities at Holiday Inns, Inc.,
managed a division known as HiNet which provided free-to-guest scheduled
broadcast and on-demand video entertainment to Holiday Inns hotels. This
management team further defined the Company's strategy to expand its installed
room base by (i) leveraging its strong market position to obtain contracts with
other leading hotels, (ii) penetrating existing or new target markets, directly
or through acquisition, and (iii) offering services to mid-market hotels in
target regions. In addition, this management team was influential in
establishing strategic relationships with Bloomberg for information and news
television programming, with InterGame for in-room casino-style gaming, and
with Trinity Group for in-room advertising.

The Company incorporated in California in July 1991, changed its name from
Pacific Pay Video Limited to MagiNet Corporation in August 1995 and will
reincorporate into Delaware prior to the completion of the Offerings. Unless
the text otherwise requires, references in this Prospectus to "MagiNet" and the
"Company" refer to MagiNet Corporation, a California corporation, and its
Delaware successor, together with their subsidiaries. The Company's principal
executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089,
and its telephone number at that address is (408) 752-1000.

THE OFFERINGS

Common Stock initially offered in:
The U.S. Offering.................. 4,000,000 shares
The International Offering......... 1,000,000 shares
Total Common Stock offered........ 5,000,000 shares
----------
Common Stock to be outstanding after 18,435,436 shares(1)
the Offerings......................
Use of proceeds..................... System installations, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market MGNT
symbol.............................

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER
DATA)

CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue.................. $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923

Direct costs............. 294 1,156 3,731 1,687 3,854
Depreciation and
amortization............ 171 957 3,682 1,510 3,149
Operations expenses...... 464 2,876 3,108 1,213 1,016
Selling, general and
administrative.......... 1,497 4,294 8,420 3,563 4,652
Research and
development............. 1,320 856 1,247 571 937
------- ------- -------- -------- --------
Operating loss........... (3,351) (7,797) (11,499) (5,242) (5,685)
Interest income
(expense), net.......... (28) (253) (991) 4 (1,382)
------- ------- -------- -------- --------
Loss before income taxes
and minority interest in
net losses of
consolidated
subsidiaries............ (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income
taxes .................. -- -- (554) (300) (383)
Minority interest in net
losses of consolidated
subsidiaries............ -- 124 248 153 124
------- ------- -------- -------- --------
Net loss................. $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326)
======= ======= ======== ======== ========
Pro forma net loss per
share(2)................ $ (1.03) $ (0.59)
======== ========
Shares used in
computation of pro forma
net loss per share(2)... 12,392 12,407
OTHER DATA:
EBITDA (In
thousands)(3)........... $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536)
EBITDA margin............ (805)% (292)% (90)% (113)% (32)%
New rooms installed...... 2,087 10,929 26,106 14,632 10,561
Total rooms served(4).... 2,087 13,016 39,122 27,648 49,683
Rooms in backlog......... -- 10,941 12,194 10,574 20,868
Average monthly gross
video revenue per room.. -- $ 32.39 $ 29.10 $ 30.05 $ 29.60

JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 14,772 $ 74,172
Working capital....................................... 13,571 72,971
Total assets.......................................... 52,185 111,585
Long-term debt........................................ 25,403 25,403
Accumulated deficit................................... (32,800) (32,800)
Total stockholders' equity............................ 20,163 79,563

(1) Based on shares outstanding as of June 30, 1996. Excludes as of June 30,
1996, an aggregate of 1,487,394 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1992 Key Personnel
Stock Option Plan and 1992 Stock Option Plan at a weighted average exercise
price of $1.55. See "Management--Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of Notes to Consolidated
Financial Statements. Also excludes an aggregate of 2,560,528 shares
reserved for issuance after June 30, 1996 under the 1992 Key Personnel
Stock Option Plan, the 1996 Director Stock Option Plan and the 1996
Employee Stock Purchase Plan. See "Management--Stock Plans."
(2) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net loss per share.
(3) Indicates earnings (loss) before interest expense, income taxes,
depreciation and amortization, and minority interest in net losses of
consolidated subsidiaries and is not intended to represent an alternative
to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance. Management of the
Company believes that EBITDA provides an additional perspective on the
Company's operating results and its ability to service its long-term debt
and fund its operations.
(4) Includes all rooms installed with Company-owned systems.
(5) Adjusted to reflect the net proceeds of the sale of Common Stock offered by
the Company hereby at an assumed initial public offering price of $13.00
per share and the application thereof. See "Use of Proceeds."

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

Except as set forth in the Consolidated Financial Statements or otherwise
indicated herein, all information in this Prospectus (i) reflects the
reincorporation of the Company into Delaware which will be effected prior to
the effectiveness of the registration statement covering the Offerings, (ii)
reflects the conversion of all the Company's outstanding shares of Preferred
Stock into 10,908,878 shares of Common Stock, which will occur automatically
upon the closing of the Offerings, (iii) reflects the filing, upon the closing
of the Offerings, of the Company's Restated Certificate of Incorporation
authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the
net exercise of warrants to acquire up to an aggregate maximum of 3,704,840
shares of Common Stock and Preferred Stock into 2,045,800 shares of Common
Stock in connection with the Offerings at an assumed fair market value of
$13.00 per share, and (v) assumes that the U.S. Underwriters' and International
Managers' over-allotment options are not exercised. See "Description of Capital
Stock," "Underwriting" and Note 5 of Notes to Consolidated Financial
Statements.

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

MagiNet and iLook are trademarks of the Company. This Prospectus also
contains trademarks and tradenames of other companies.

RISK FACTORS

This Prospectus contains forward-looking statements relating to future
events or the future financial performance of the Company, which involve risks
and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. In addition to the
other information contained in this Prospectus, the following factors should
be carefully considered in evaluating the Company and its business before
purchasing the Common Stock offered hereby.

DEPENDENCE ON HOTEL INDUSTRY AND GUEST VIEWING PATTERNS

MagiNet's business is closely linked to the performance of the hotel
industry in the Company's targeted geographic markets. A decline in hotel
occupancy from current levels or changes in the mix of hotel business and
leisure guests as a result of general business, economic, seasonal or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. MagiNet's performance is also
dependent on the frequency with which hotel guests purchase its services ("buy
rates"). Buy rates are subject to a variety of factors including censorship of
adult theme movies, pricing of the movies, availability of popular titles,
general guest preferences and general economic conditions. MagiNet's
performance is also dependent on the relative buy rates of major motion
pictures to adult theme movies. For major motion pictures, the Company
generally pays ongoing licensing royalties equal to a percentage of the film's
gross revenue to the Company. For most adult theme movies, from which the
Company currently derives a majority of its revenue, the Company generally
pays a comparatively small, one-time fee. As a result, a shift in viewing
patterns away from these movies, or any limitation imposed on the offering of
such movies (including censorship by governmental authorities, unavailability
of titles, or restrictions imposed by customer hotels), would adversely affect
the Company's business, financial condition and results of operations. For
example, the Company has experienced significantly lower buy rates in censored
markets than in uncensored markets. Free-to-guest services such as HBO and
other cable stations compete directly with the Company's services. Such
alternative viewing choices available to hotel guests may reduce the buy rate
in the rooms installed with MagiNet's systems. Any change in guest viewing
patterns that reduces the buy rate of the Company's services could have a
material adverse effect on the Company's business, financial condition and
results of operations.

HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES

MagiNet has recorded cumulative net losses of approximately $32,800,000
since its inception, including a loss of approximately $7,326,000 for the six
months ended June 30, 1996. MagiNet's business requires substantial investment
on a continuing basis for the installation of MagiNet's systems in additional
hotel rooms and the upgrading of existing installations. Capital expenditures
expected to be incurred by the Company will likely exceed cash flows from its
operating activities for the foreseeable future. The Company intends to use
the net proceeds of the Offerings and may use other secured and/or unsecured
borrowings to expand its installed base of rooms and support its projected
growth. If the Company cannot obtain sufficient funds to support installations
of rooms, the Company may have to reduce the rate of room installations.
Whether or when the Company can achieve cash flow levels from operations
sufficient to support its projected growth cannot be accurately predicted, and
unless and until such cash flow levels are achieved, the Company may require
additional borrowings or the sale of additional equity securities, or some
combination thereof. There can be no assurance that the Company will be able
to borrow additional amounts or sell additional equity on terms acceptable to
the Company, or at all.

RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS

MagiNet's future growth will depend principally on its ability to obtain
contracts with new hotels and to install systems in such hotels in a timely
manner. The timing of obtaining new contracts is dependent upon the level of
competition in a particular market, the length of the negotiating process with
each individual hotel, and the amount of the Company's local personnel
resources allocated to obtaining contracts as opposed to servicing

existing hotel customers. To the extent new contracts are not obtained in
future periods at the rate anticipated by the Company, there could be a
significant shortfall in the Company's anticipated growth in installed rooms.
The timing of system installations has historically been reasonably
predictable after a contract has been executed, although, for certain prior
installations, technical and other issues have delayed installations in
specific hotels. Under the Company's master hotel contracts, the Company must
install the interactive video entertainment and information system specified
in the contract with the hotel chain. The inability to provide the particular
system specified could delay installations of such systems in the individual
hotels within such chain, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
inability of the Company to obtain new contracts and install systems at the
rate it currently anticipates for these or other reasons could have a material
adverse effect on the Company's future results of operation.

FLUCTUATIONS IN OPERATING RESULTS

MagiNet's operating results have historically been, and will continue to be,
subject to quarterly and annual fluctuations due to a variety of factors,
including: the time required to obtain new contracts and install systems;
timely introduction, enhancement and market acceptance of new services;
changes in the pricing policies by the Company or its competitors; increased
competition; the gain or loss of contracts with hotels or hotel chains; the
introduction of new products, product enhancements or new services by
competitors; currency fluctuations and other uncertainties related to
operating in multiple jurisdictions; hotel occupancy, buy rates, availability
of programming and the ability to anticipate changing hotel or guest
preferences. A significant portion of MagiNet's installations are in tropical
climates where occupancies are generally higher in the first and fourth
quarters of the year, and buy rates are typically lower in the third quarter
of each year. As a consequence, revenue per room is generally lowest in the
third quarter. There can be no assurance that new contracts can be obtained in
a timely manner, or at all, or that systems can be installed in a timely
manner after contracts are obtained. The Company's operating results will also
be affected by general economic and other conditions affecting the timing of
contracts and installations, capital spending, and order cancellations or
rescheduling.

SUBSTANTIAL FIXED COMMITMENTS

Funds generated by existing operations are not sufficient to enable the
Company to meet its debt service obligations on the Senior Secured Notes due
2000 (the "Notes"), together with other fixed charges. Net proceeds from the
Offerings will be used by the Company primarily to install new systems. If
sufficient revenue is not generated from these installations, the Company's
ability to make necessary payments with respect to the Notes would be
impaired, and the Company's ability to service the Notes would then depend
upon the Company's ability to secure additional funds from other sources.
There can be no assurance that the Company will be able to obtain such
additional funds on favorable terms, if at all. Further, the instruments
governing the Company's debt obligations contain or will contain financial
covenants, and no assurance can be given that the Company's operating results
in the future will be sufficient to comply with such covenants. Failure to
comply with the covenants could result in acceleration of the maturity of the
Company's borrowings, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's debt obligations will be subject to acceleration in the event that
the Company does not meet its principal and interest payments or comply with
its other covenants.

IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE

MagiNet's strategy includes developing new applications and markets for its
interactive entertainment and information systems. This strategy presents the
risks inherent in assessing the value of development opportunities and
committing capital to unproven markets. The Company expects that its future
performance will be dependent on usage of additional services such as in-room
casino-style gaming and advertising provided over the Company's systems to
hotel guests. There can be no assurance that the Company's new products will
generate additional revenue or earnings for the Company or that the Company
will successfully penetrate these additional markets. In addition, any new
services provided by the Company could induce guests to change their viewing
patterns away from an existing service of the Company and toward a new service
resulting in either no additional revenue or decreased actual revenue from the
installed base of rooms, depending upon the pricing of the new

services and the change in guest viewing patterns that may result. MagiNet
will devote resources to developing such services through licensing agreements
and other arrangements and marketing such services to hotels and to hotel
guests. To the extent that such services are not attractive to hotels and
hotel guests, that hotel guests do not utilize such services to the extent
necessary to generate a sufficient return on the Company's development and
marketing expenditures, or that governmental regulation prohibits the
provision of these services, the Company's business, financial condition and
results of operations would be adversely affected.

EXPANSION OF BUSINESS THROUGH ACQUISITIONS

Part of MagiNet's business strategy is to pursue acquisitions that will
complement its existing business. The Company has had preliminary discussions
with, or has evaluated the potential acquisition of, several companies.
Although no such transaction is being considered at this time, the Company is
unable to predict whether or when any prospective acquisition candidates will
become available or the likelihood of a material transaction being completed
should any negotiations commence. There can be no assurance that any
acquisitions will occur, that the Company can be successful in integrating the
operations and personnel of an acquired entity into the Company's business,
incorporating any acquired product lines into the Company's business,
establishing and maintaining uniform standards, controls, procedures and
policies, avoiding the impairment of relationships with employees and
management as a result of changes in management, or overcoming other problems
that may be encountered in connection with the integration of acquired
businesses. To the extent MagiNet proceeds with such a transaction, and if
such transaction is relatively large and consideration is in the form of cash,
a substantial portion of the Company's available cash, including the net
proceeds of the Offerings, could be used in order to consummate any such
acquisition. The Company may also seek to finance any such acquisition through
issuances of equity or debt financings, which could be dilutive to, or have an
adverse impact on, the Company's earnings. There can be no assurance that any
such financings will be available on acceptable terms or at all.

SYSTEM RELIABILITY

MagiNet has experienced and continues to experience problems with certain
equipment, including converters and remote control units. The Company has had
to replace equipment at some hotels to correct problems that affected the
delivery of the Company's services to the hotel guests. It is possible that
the Company's systems may be found to be unreliable after installation at a
hotel or hotels. Such occurrences could result in the Company devoting
substantial resources to maintenance services for the systems, and could
result in a substantial number of installed rooms not having the Company's
services available for an extended period of time. Because substantially all
of the Company's revenue is derived from use of the Company's on-demand
services, system unreliability could result in reduced revenue for the Company
and/or dissatisfaction among hotels because of reduced commission revenue to
the hotel and disruption of certain hotel operations, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS

All of MagiNet's revenue is generated outside of the United States,
subjecting the Company to a variety of risks that, individually or in the
aggregate, may adversely affect the Company's business, financial prospects
and results of operations. These risks include changes in political and
economic conditions; the availability and reliability of local independent
contractors for installation and maintenance services; differing legal and
business practices, particularly in regard to interpretation and
enforceability of contracts; changes in taxes, tariffs, freight rates and
foreign exchange regulations; foreign currency fluctuations; censorship by
governmental authorities or restrictions imposed by hotels; and changes in the
regulatory environment relating to the telecommunications and media industries
in any of the Company's target markets. The Company has entered into joint
ventures or similar arrangements in certain of its markets with local
businesses and individuals believed by the Company to be familiar with local
laws, customs and practices and to be otherwise advantageous to the Company's
business prospects in that market. The Company believes that its success in
penetrating markets for its products depends in large part on its ability to
maintain these relationships, to cultivate additional relationships and to
cultivate alternative relationships if distribution channels change. Despite
these efforts, there can be no assurance that the Company will be successful
in avoiding or minimizing such risks or that such arrangements, if successful,
will

continue to provide significant benefits to the Company and will not expose
the Company to potential liability as a consequence of actions taken by the
Company's local joint venture partners.

Most of MagiNet's revenue is denominated in foreign currencies. The Company
has not historically attempted to reduce the risk of currency fluctuations by
hedging except in certain limited circumstances. The Company may attempt to
reduce these risks by hedging in the future. Changes in the exchange rates of
foreign currencies or exchange controls may adversely affect the Company's
results of operations. There can be no assurance that the Company's current or
any future currency exchange strategy will be successful in avoiding exchange
related losses or that any of the factors listed above will not have a
material adverse effect on the Company's future international revenue and,
consequently, on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

DEPENDENCE UPON SUPPLIERS; SOLE SOURCES OF SUPPLY

MagiNet currently subcontracts the manufacture of its systems, including
head-ends, converters and remote controls. The Company's remote controls for
the OCV-based systems are manufactured by one company in Hong Kong, the remote
controls for the Guestserve-based systems are manufactured by one company in
China and the Company's converters are manufactured by three companies, one in
each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently
available solely from OCV, and the Guestserve-based head-ends are available
solely from Guestserve. OCV is a majority-owned subsidiary of Ascent
Entertainment Group, Inc., which has recently acquired the assets of
SpectraVision, Inc. ("SpectraVision"), a competitor of the Company in the
Pacific Rim. MagiNet believes that similar contract manufacturing can be
obtained from other vendors, including those located in the Pacific Rim,
although no assurance can be given that such manufacturing resources will
continue to be available on reasonable terms, or at all. The Company will
pursue such alternative manufacturing arrangements when and if it appears
likely that significant cost savings or quality improvements can be achieved.
At present, the Company has no plans for alternative sourcing of the system or
major system sub-assemblies.

The Company has experienced delays in receiving converters for installations
planned for the Guestserve-based systems, and these delays caused an
approximately three to four month delay in installing certain hotels. Delays
in receiving products could delay a large number of planned room
installations. There can be no assurance that the Company will not face such
difficulties or delays in the future. An inability of the Company to obtain
sole-sourced or other components in a timely manner could significantly delay
installations of systems, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, any increase in cost to manufacture the system components from
existing or alternative sources could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."

DEPENDENCE ON KEY PERSONNEL

MagiNet's success depends upon the continued contributions of certain senior
corporate managers and key employees, the loss of whose services could have a
material adverse effect on the Company. The Company also depends on its
continued ability to attract and retain other highly skilled and qualified
personnel, and there can be no assurance that the Company will be successful
in attracting and retaining such personnel. See "Management."

COMPETITION

MagiNet competes with a number of companies, including SpectraVision,
Movielink Corporation Limited ("Movielink") and LodgeNet Entertainment
Corporation ("LodgeNet"), that specialize in providing in-room video services.
Certain of these competitors have greater financial, technical, sales and
marketing resources to devote to the development, promotion and sale of their
products, and may have longer operating histories, greater name recognition,
and greater market acceptance for their products and services compared to
those of the

Company. SpectraVision was one of the earliest entrants into the hotel
entertainment market, and has developed its GuestChoice technology which
allows for guests to choose movies to watch on demand. Movielink, a privately-
held Australian company, represents the Company's primary competition in the
Pacific Rim. Movielink, which recently introduced an on-demand system, has a
large base of free-to-guest systems in Australia and in Singapore and has a
small number of installations in Hong Kong and Thailand. Although LodgeNet
markets its systems primarily in the United States, LodgeNet has recently
entered certain of the Company's markets.

The Company also experiences separate competition in certain specific
countries. For example, in Japan certain large international corporations,
such as Toshiba Corporation, Pioneer Electronic Corp., Hitachi, Ltd., and
Matsushita Electric Industrial Co., Ltd., which supply the Japanese
hospitality industry with master antenna television systems, sometimes offer a
scheduled broadcast, pay-per-view movie capability. In addition, Gosoh, Ltd.
competes in Hong Kong with a scheduled broadcast, pay-per-view system.

In Europe the Company faces competition from PRODAC Prozebdatentechnik GmbH,
Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc, which
have installed mainly free-to-guest and scheduled systems. The Company
believes that penetration of the European market with on-demand video systems
by these or other competitors is fairly low.

The Company could also face competition in the future from existing and
emerging cable, direct broadcast satellite and other communications companies
providing entertainment and other in-room services to hotels and hotel guests.
Certain of these potential competitors have greater financial, managerial and
marketing resources than the Company. There can be no assurance that the
Company will continue its current level of success in obtaining new contracts
with hotels or that the Company will be able to retain contracts with the
hotels it serves when those contracts expire. The loss of one or more of its
major hotel chains could have a material adverse impact on the Company's
business, financial condition and results of operations. As competition
increases, the Company anticipates that system life cycles may shorten and
hotel commissions may increase resulting in reduced operating margins for the
Company.

The Company's ability to compete successfully depends on many factors,
including the success of competitors' systems and services, the ability to
interface directly with hotel property management systems, the ability to
provide appropriate programming for an international audience, obtaining
leading hotel contracts and name recognition among hotels, the quality of its
programming and services, the reliability of its systems, general economic
conditions, and protection of Company and third-party licensor products by
effective utilization of intellectual property laws. In particular,
competitive pressures from existing or new competitors who offer lower prices
or other incentives or introduce new systems could result in price reductions
which would adversely affect the Company's profitability. There can be no
assurance that the Company's current or other new competitors will not develop
enhancements to, or future generations of, competitive systems and services
that offer superior price or performance features, that the Company will be
able to compete successfully in the future, or that the Company will not be
required to incur substantial additional investment costs in connection with
its development, marketing and customer service efforts in order to meet any
competitive threat. The Company expects competition in its markets to
intensify. See "Business--Competition."

RISK OF OBSOLESCENCE

The markets for MagiNet's systems and services are characterized by changing
technologies, varying customer requirements in different markets, significant
new system designs, frequent new service introductions and changes in customer
requirements. The Company believes that its future success will depend upon
its ability to license on commercially acceptable terms and market systems and
services which meet changing user needs, to continue to enhance its systems
and services and to develop and introduce in a timely manner new systems and
services that take advantage of technological advances, keep pace with
emerging industry standards, and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be
successful in developing, licensing and marketing, on a timely basis, new
systems and services that respond

to technological change or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
installation and introduction of these systems or services, or that any such
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. The Company's failure or inability to license new
technology, adapt its systems and services to technological changes or to
develop new products and services successfully would have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the introduction or
announcement of new systems and services by the Company or one or more of its
competitors will not cause hotels to defer installation of systems or that the
Company will successfully manage the transition from older systems to new or
enhanced systems in order to minimize disruption in customer installations.
Such deferment of installations or inability to manage the transition of
installations could have a material adverse effect on the Company's business,
financial condition and results of operations.

TECHNOLOGY AND PROPRIETARY RIGHTS

MagiNet's success and ability to compete is dependent in part upon its own
proprietary technology. The Company relies primarily on a combination of
patent, copyright and trademark laws, trade secrets, software security
measures, and nondisclosure agreements to protect its proprietary technology.
There can be no assurance, however, that such protection will be adequate to
deter misappropriation of or deter unauthorized third parties from copying
aspects of, or otherwise obtaining and using, the Company's proprietary
technology. Moreover, the Company licenses from OCV and Guestserve the right
to install and operate on-demand video systems incorporating proprietary
technology of such companies. If for any reason the Company's rights under
such license agreements were to be successfully challenged by these or other
companies, the Company's business, financial condition and results of
operations would be materially adversely affected. Furthermore, there can be
no assurance that any confidentiality agreements between the Company and its
employees or any agreements with third parties will provide meaningful
protection for the Company's proprietary information or the technology
licensed from others in the event of any unauthorized use or disclosure of
such proprietary information. A substantial amount of the Company's sales are
in international markets, and the laws of the other countries may afford the
Company little or no effective protection of its intellectual property or the
intellectual property of its licensors.

While MagiNet believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communication from third parties asserting
that the Company's products infringe, or may infringe, on the proprietary
rights of third parties. The Company's trademark registration of the name
"MagiNet" has been initially challenged by the U.S. Patent and Trademark
Office. Any infringement claims, with or without merit, could be time
consuming, result in costly litigation and diversion of technical and
management personnel, require the Company to develop non-infringing technology
or enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all. In the event of
a successful claim of product infringement against the Company or similar
adversarial proceeding and failure or inability of the Company to develop non-
infringing technology, license the infringed or similar technology, or require
the Company to cease the marketing or use of certain products there could be a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Technology and Proprietary Rights."

CONTROL BY CURRENT STOCKHOLDERS

MagiNet's officers, directors and principal stockholders and their
affiliates totaling 11 stockholders will in the aggregate beneficially own
approximately 46.3% of the Company's outstanding shares of Common Stock

after the Offerings. As a result, these stockholders, acting together, would
be able to effectively control most matters requiring approval by the
stockholders of the Company, including the election of directors and any
merger, consolidation or sale of all the Company's assets. See "Principal
Stockholders" and "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of shares by existing stockholders could adversely affect the
prevailing market price of the Common Stock. Upon completion of the Offerings,
approximately 5,005,000 shares of Common Stock, including the 5,000,000 shares
offered hereby, will be eligible for immediate sale in the public market
without restriction. Ninety days after the date of this Prospectus,
approximately 31,000 additional shares will be eligible for sale pursuant to
Rule 144 or Rule 701 under the Securities Act of 1933. Following expiration or
release from 180-day lock-up agreements, approximately 9,448,000 additional
shares will be eligible for immediate sale, subject in some cases to
compliance with Rule 144. Thereafter, approximately 3,977,000 shares held by
existing stockholders will become eligible for sale at various times over a
period of less than two years and could be sold earlier if the holders
exercise registration rights. See "Description of Capital Stock--Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."

NO PRIOR PUBLIC MARKET

Prior to the Offerings, there has been no public market for MagiNet's Common
Stock. There can be no assurance that an active trading market will develop
and continue upon the completion of the Offerings or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Underwriters, in conformity with
Schedule E of the By-Laws of the National Association of Securities Dealers,
Inc. As such, the initial public offering price is not necessarily related to
the Company's net worth or any other established criteria of value and may not
bear any relationship to the market price of the Common Stock following the
completion of the Offerings. See "Underwriting."

MARKET VOLATILITY

The market prices for securities of companies such as the Company have
historically been highly volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments concerning
proprietary rights, including patents and litigation matters, and publicity
regarding actual or potential results with respect to products under
development by the Company or others may have a significant impact on the
market price of the Common Stock. Further, it is likely that in some future
quarters the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
See "Selected Consolidated Financial and Other Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

ANTITAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
DELAWARE LAW

Certain provisions of MagiNet's Certificate of Incorporation and Bylaws may
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing
to pay in the future for shares of the Company's Common Stock. Certain of
these provisions eliminate the right of stockholders to act by written consent
without a meeting and specify procedures for director nominations by
stockholders and submission of other proposals for consideration at
stockholder meetings. In addition, the Company's Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights,

preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The Company
has no present plans to issue shares of Preferred Stock. Certain provisions of
Delaware law applicable to the Company could also delay or make more difficult
a merger, tender offer or proxy contest involving the Company, including
Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions
are met. Additionally, the issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at
a premium over the market price of the Common Stock and may adversely affect
the market price of and the voting and other rights of the holders of the
Common Stock. Such provisions could have the effect of delaying, deferring or
preventing a change in control of the Company, including without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. See "Description of Capital Stock--
Preferred Stock," "--Antitakeover Effects of Provisions of Certificate of
Incorporation and Bylaws" and "--Effect of Delaware Antitakeover Statute."

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate,
substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price. See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
in the Offerings are estimated to be approximately $59,400,000 (approximately
$68,467,500 if the U.S. Underwriters' and International Managers' over-
allotment options are exercised in full) assuming an initial public offering
price of $13.00 per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.

The Company currently anticipates that the net proceeds of the Offerings
will be used for system installations, working capital and for general
corporate purposes. The Board of Directors has broad discretion in determining
how the net proceeds of the Offerings will be applied. In the event
opportunities arise, net proceeds of the Offerings also may be used to acquire
businesses, technologies or products that complement MagiNet's business.
However, the Company is not currently in negotiations regarding any such
acquisitions. Although the Company believes the net proceeds of the Offerings,
together with its existing resources will be adequate to satisfy its capital
needs until at least December 1997, the timing and amount of spending of such
capital resources cannot be accurately determined at this time and will depend
upon several factors, including the availability of acquisition candidates,
installation costs, costs associated with penetrating new markets, competing
technological and market developments, and market acceptance and demand for
the Company's products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing investment grade securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. A note agreement entered in
connection with the issuance of the Company's Senior Secured Notes due 2000
contains a restrictive covenant which limits the Company's ability to pay cash
dividends or make stock repurchases. See Note 3 of Notes to Consolidated
Financial Statements.

CAPITALIZATION

The following table sets forth as of June 30, 1996 the total capitalization
of the Company and the total capitalization as adjusted to reflect (i) the
reincorporation of the Company into Delaware which will be effected prior to
the effectiveness of the registration statement covering the Offerings, (ii)
the conversion of all the Company's outstanding shares of Preferred Stock into
10,908,878 shares of Common Stock, which will occur automatically upon the
closing of the Offerings, (iii) the filing, upon the closing of the Offerings,
of the Company's Restated Certificate of Incorporation authorizing 5,000,000
shares of undesignated Preferred Stock and 45,000,000 shares of Common Stock,
(iv) the net exercise of warrants to acquire up to an aggregate maximum of
3,704,840 shares of Common Stock and Preferred Stock into 2,045,800 shares of
Common Stock in connection with the Offerings, at an assumed fair market value
of $13.00 per share, (v) that the U.S. Underwriters' and International
Managers' over-allotment options are not exercised and (vi) the sale by the
Company of 5,000,000 shares of Common Stock in the Offerings at an assumed
offering price of $13.00 per share and the application of the net proceeds
therefrom. The capitalization information set forth in the table below is
qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.

JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)

Long-term debt(1)........................................ $ 25,403 $ 25,403
Stockholders' equity:
Preferred Stock, no par value; 12,121,788 shares
authorized, 10,908,878 shares issued and outstanding,
actual; $.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding, as adjusted.......... 53,241 --
Common Stock, no par value; 20,000,000 shares
authorized, 480,758 shares issued and outstanding,
actual; $.001 par value, 45,000,000 shares authorized,
18,435,436 shares issued and outstanding, as
adjusted(2)............................................ 255 18
Additional paid in capital.............................. -- 112,979
Warrants to purchase Common Stock....................... 101 --
Accumulated deficit..................................... (32,800) (32,800)
Cumulative translation adjustment....................... (634) (634)
-------- --------
Total stockholders' equity............................. 20,163 79,563
-------- --------
Total capitalization................................... $ 45,566 $104,966
======== ========

- --------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes an aggregate of 1,487,394 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1992 Key Personnel
Stock Option Plan and 1992 Stock Option Plan as of June 30, 1996 at a
weighted average exercise price of $1.55. Also excludes an aggregate of
2,560,528 shares reserved for issuance after June 30, 1996 under the 1992
Key Personnel Stock Option Plan, the 1992 Stock Option Plan, the 1996
Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. See
"Management--Stock Plans," "Description of Capital Stock" and Note 5 of
Notes to Consolidated Financial Statements.

DILUTION

The net tangible book value of the Company at June 30, 1996 was
approximately $19,070,000 or $1.42 per share of Common Stock. Net tangible
book value per share represents the Company's total tangible assets less total
liabilities, divided by the number of outstanding shares of Common Stock then
outstanding (assuming the conversion of all then outstanding Preferred Stock
into Common Stock and the net exercise of certain warrants to acquire an
aggregate of 3,704,840 shares of Common Stock into 2,045,800 shares of Common
Stock and Preferred Stock assuming, for purposes of such net exercises, a fair
market value of $13.00 per share of Common Stock). Dilution per share
represents the difference between the amount per share paid by investors in
the Offerings and the net tangible book value per share after the Offerings.
After giving effect to the sale of 5,000,000 shares in the Offerings (at an
assumed initial public offering price of $13.00 per share and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company), the Company's net tangible book value as of June 30,
1996 would have been $78,470,000 or $4.26 per share of Common Stock. This
represents an immediate increase in net tangible book value of $2.84 per share
to existing stockholders and an immediate dilution in net tangible book value
of $8.74 per share to new investors. The following table illustrates this per
share dilution:

Assumed initial public offering price per share................... $13.00
Net tangible book value per share as of June 30, 1996........... $1.42
Increase in net tangible book value per share attributable to
new investors.................................................. 2.84
-----
Net tangible book value per share after offering.................. 4.26
------
Dilution per share to new investors............................... $ 8.74
======

The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock, including Common Stock issuable upon the
net exercise of warrants and the shares into which the outstanding Preferred
Stock (including the Preferred Stock issuable upon net exercise of the
warrants) will convert, purchased from the Company, the total consideration
paid and the average price per share paid by the existing stockholders and by
new investors purchasing shares in the Offerings (at an assumed initial public
offering price of $13.00 per share and before deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company).

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------

Existing stockholders......... 13,435,436 72.9% $ 56,758,000 46.6% $ 4.22
New investors................. 5,000,000 27.1 65,000,000 53.4 13.00
---------- ----- ------------ -----
Total....................... 18,435,436 100.0% $121,758,000 100.0%
========== ===== ============ =====

The foregoing computations assume no exercise of stock options after June
30, 1996 and the net exercise of outstanding warrants to acquire up to an
aggregate of 3,704,840 shares of Common Stock and Preferred Stock into
2,045,800 shares of Common Stock, assuming, for purposes of such net
exercises, a fair market value of $13.00 per share of Common Stock. The
foregoing net exercises are anticipated to occur upon either the effectiveness
of the registration statement covering the Offerings, the closing of the
Offerings, or the tenth business day following such closing as set forth in
the applicable warrant agreement. As of June 30, 1996, there were outstanding
options to purchase 1,487,394 shares of Common Stock under the Company's 1992
Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted
average price of $1.55 per share. After June 30, 1996 (i) an additional
1,800,000 shares of Common Stock were reserved for issuance under the
Company's 1992 Key Personnel Stock Option Plan, (ii) 200,000 shares were
reserved for issuance under the Company's 1996 Director Stock Option Plan and
(iii) 200,000 shares of Common Stock were reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan. To the extent that any shares are
issued upon exercise of options, warrants or rights that are presently
outstanding or granted in the future, or reserved for future issuance under
the Company's stock plans, there will be further dilution to new investors.
See "Management--Stock Plans," "Description of Capital Stock" and Note 5 of
Notes to Consolidated Financial Statements.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated statement of operations and balance sheet data
presented below for, and as of the end of, each of the years in the five-year
period ended December 31, 1995, and for the six-month period ended June 30,
1996 are derived from the Consolidated Financial Statements of MagiNet
Corporation and its subsidiaries, which financial statements have been audited
by Ernst & Young LLP, independent auditors. The Consolidated Financial
Statements as of December 31, 1995 and 1994, and as of June 30, 1996, and for
each of the years in the three-year period ended December 31, 1995, and for
the six-month period ended June 30, 1996 and the report thereon of Ernst &
Young LLP, independent auditors, are included elsewhere in this Prospectus.
The selected consolidated statement of operations data set forth below for the
six months ended June 30, 1995 were derived from unaudited consolidated
financial statements, which are included elsewhere in this Prospectus, and
include, in the opinion of the Company, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
Company's financial position at that date and results of operations for those
periods. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results for any future period. The selected
consolidated financial and other data set forth below is qualified by, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in the Prospectus. The Company
has never declared or paid cash dividends on its capital stock.

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)

CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue................ $ -- $ -- $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923
Direct costs........... -- -- 294 1,156 3,731 1,687 3,854
Depreciation and
amortization.......... -- 2 171 957 3,682 1,510 3,149
Operations expenses.... -- -- 464 2,876 3,108 1,213 1,016
Selling, general and
administrative........ 149 514 1,497 4,294 8,420 3,563 4,652
Research and
development........... -- 665 1,320 856 1,247 571 937
----- ------- ------- ------- -------- -------- --------
Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (5,242) (5,685)
Interest income
(expense), net........ -- (43) (28) (253) (991) 4 (1,382)
----- ------- ------- ------- -------- -------- --------
Loss before income
taxes and minority
interest in net losses
of consolidated
subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income
taxes................. -- -- -- -- (554) (300) (383)
Minority interest in
net losses of
consolidated
subsidiaries.......... -- -- -- 124 248 153 124
----- ------- ------- ------- -------- -------- --------
Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326)
===== ======= ======= ======= ======== ======== ========
Pro forma net loss per
share(1).............. $ (1.03) $ (0.59)
======== ========
Shares used in
computation of pro
forma net loss per
share(1).............. 12,392 12,407
OTHER DATA:
EBITDA (In
thousands)(2)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536)
EBITDA margin.......... -- -- (805)% (292)% (90)% (113)% (32)%
New rooms installed.... -- -- 2,087 10,929 26,106 14,632 10,561
Total rooms served(3).. -- -- 2,087 13,016 39,122 27,648 49,683
Rooms in backlog....... -- -- -- 10,941 12,194 10,574 20,868
Average monthly gross
video revenue per
room.................. -- -- -- $ 32.39 $ 29.10 $ 30.05 $ 29.60

DECEMBER 31, JUNE 30, 1996
---------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(4)
---- ------ ------ -------- -------- -------- --------------
(IN THOUSANDS)

CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments........... $ 1 $ 77 $ 315 $ 10,961 $ 18,823 $ 14,772 $74,172
Working capital........ (24) (386) (1,652) 7,751 14,542 13,571 72,971
Total assets........... 2 1,458 4,711 23,999 46,540 52,185 111,585
Long-term debt......... 125 349 1,400 -- 24,900 25,403 25,403
Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (32,800) (32,800)
Total stockholders'
equity (net deficit).. (149) 648 1,208 19,924 14,611 20,163 79,563

- --------
(1) Reflects the assumed conversion of the Company's outstanding Preferred
Stock into 10,908,878 shares of Common Stock upon the closing of the
Offerings. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the computation of net loss per share.
(2) Indicates earnings (loss) before interest expense, income taxes,
depreciation and amortization, minority interest in net losses of
consolidated subsidiaries and is not intended to represent an alternative
to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance. Management of the
Company believes that EBITDA provides an additional perspective on the
Company's operating results and its ability to service its long-term debt
and fund its operations.
(3) Includes all rooms installed with Company-owned systems.
(4) Adjusted to reflect the net proceeds of the sale of Common Stock offered
by the Company hereby at an assumed initial public offering price of
$13.00 per share and the application thereof.

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

Since its inception in 1991, MagiNet has focused on developing its in-room
on-demand video entertainment systems, signing contracts with hotels,
installing systems and servicing its installed base of rooms. As of June 30,
1996, the Company had 49,683 rooms installed with its systems in 138 hotels
and had an installation backlog of 20,868 rooms in 58 hotels. In addition,
MagiNet has instituted a focused expansion plan that includes direct entry or
acquisition in attractive existing and new markets. The Company's revenue
consists primarily of fees paid by guests for viewing MagiNet's on-demand
video programming on a pay-per-view basis.

The Company is actively developing, with its partners, several new in-room
video services to be provided through its installed systems. These new
interactive entertainment and information services include video games,
casino-style gaming, financial news and advertising. In addition, MagiNet is
exploring the possibility of providing other services, including in-room
shopping, news and Internet access. MagiNet believes that these new services
will appeal to a broader group of users than the traditional purchasers of in-
room video entertainment and should increase monthly revenue per installed
room.

MagiNet operates according to a financial model similar to the cable
television, cellular telephone and paging industries. Following an initial
capital expenditure for system installation in hotels, the Company derives
reasonably predictable, recurring revenue from system usage for the term of
each hotel contract, which is on an exclusive basis typically for five-to-
seven years. Since inception, the Company's installation costs have averaged
approximately $525 per room, including a video server in each hotel, in-room
converter and remote control, upgrade of the hotel's master antenna television
network, system installation, shipping, duties and taxes.

Revenue generated from on-demand movies are dependent upon four factors at
each hotel (i) the number of rooms in each hotel, (ii) the occupancy rate at
the hotel, (iii) the "buy rate" or percentage of occupied rooms that buy
movies and (iv) the price of the movie. Occupancy rates vary by hotel and
region based on the hotel's competitive position within its marketplace, on
seasonal factors and general economic conditions. Buy rates generally reflect
the hotel's guest mix profile, the popularity of the motion pictures available
to the Company in each country and the availability of other entertainment
alternatives. Buy rates also vary over time with general economic conditions.

Costs and expenses include (i) direct costs such as royalties and fees paid
for programming and licensed technology, hotel commissions, video materials,
maintenance expenses and cost of equipment and systems sold, (ii) depreciation
and amortization, (iii) operations activities such as purchasing, programming
and headquarters technical support, (iv) selling, general and administrative
expenses consisting of headquarters and foreign office expenses and (v)
research and development of the Company's systems. The Company currently has
systems installed in twelve countries, all outside of North America. The
Company operates through subsidiary offices in ten countries and through
representatives in two countries. In addition, MagiNet sells systems directly
to hotel owners and to distributors in certain other countries. Costs and
expenses other than direct costs are expected to grow at a slower rate than
revenue as the Company spreads its overhead costs over a larger installed base
of rooms.

The Company has incurred net losses since inception as a result of (i) costs
associated with establishing its headquarters and foreign subsidiaries
infrastructure, (ii) depreciation and amortization associated with its
investment in installed systems and acquired technology licenses and (iii)
research and development costs associated with the Company's systems. All of
the Company's systems are installed outside of North America. To date, MagiNet
has not experienced material foreign exchange transaction gains or losses but
has $634,000 in accumulated translation losses which are reflected in
stockholders' equity as of June 30, 1996. A significant change in exchange
rates could give rise to material translation or transaction gains or losses
in the future.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of revenue, items from the
Company's consolidated statement of operations for the periods indicated.

SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------
1993 1994 1995 1995 1996
------- ------- ------- ----- -----

Revenue.......................... 100% 100% 100% 100% 100%
Costs and expenses
Direct costs.................... 74 49 43 51 49
Depreciation and amortization... 43 41 42 46 40
Operations expenses............. 118 123 36 37 13
Selling, general and administra-
tive........................... 379 183 97 108 59
Research and development........ 334 37 14 17 12
------- ------- ------- ----- ----
Total costs and expenses....... 948% 433% 232% 259% 173%
------- ------- ------- ----- ----
Operating loss................... (848) (333) (132) (159) (73)
Interest income (expense), net... (7) (11) (11) -- (17)
Provision for income taxes....... -- -- (6) (9) (5)
Minority interest in net losses
of consolidated subsidiaries.... -- 5 3 5 2
------- ------- ------- ----- ----
Net loss......................... (855)% (339)% (146)% (163)% (93)%
======= ======= ======= ===== ====
EBITDA........................... (805)% (292)% (90)% (113)% (32)%
======= ======= ======= ===== ====

SIX MONTHS ENDED JUNE 30, 1995 AND 1996

SIX MONTHS ENDED JUNE 30,
--------------------------
1995(1) 1996(1)
------------ ------------

Revenue............................................. $3,302,000 $7,923,000
Average monthly gross video revenue per room........ $ 30.05 $ 29.60
Average movie price................................. $ 11.17 $ 10.85
Average movie buy rate.............................. 12.1% 12.2%
Average hotel occupancy............................. 74% 73%
Installed base of rooms............................. 27,648 49,683

- --------
(1) Other than revenue and installed base of rooms, the numbers in this table
were derived in part from information that is reported to the Company by
hotels installed with the Company's systems. The Company believes that
such information is accurate.

Revenue Analysis

During the six months ended June 30, 1996, the Company installed its systems
in an additional 10,561 hotel rooms, bringing the total number of installed
rooms to 49,683. The Company's revenue for the first six months of 1996
increased 140% to $7,923,000 compared to $3,302,000 for the same period in
1995. The increase was principally attributed to the increase in the number of
rooms receiving one or more of the Company's services in 1996.

During the six months ended June 30, 1996, overall average monthly gross
video revenue per room has declined approximately one-and-one-half percent
compared to that of the same period in 1995, principally as a result of price
decreases in certain countries and currency fluctuations affecting average
movie prices. Average monthly gross video revenue per room is the product of
buy rates, movie price, occupancy and the number of days in the month. Movie
buy rates have remained relatively constant principally as a result of
installations in new countries and improved buy rates in certain existing
countries, offset by lower buy rates in other existing countries.

Expense Analysis

The following table sets forth information regarding the Company's costs and
expenses for the six months ended June 30, 1995 and 1996.

SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1995 1996
--------------------- ----------------------
% OF % OF
AMOUNT REVENUE AMOUNT REVENUE
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)

Costs and expenses
Direct costs..................... $ 1,687 51% $ 3,854 49%
Depreciation and amortization.... 1,510 46 3,149 40
Operations expenses.............. 1,213 37 1,016 13
Selling, general and
administrative.................. 3,563 108 4,652 59
Research and development......... 571 17 937 12
---------- ------- ----------- -------
Total costs and expenses.......... $ 8,544 259% $ 13,608 173%
========== ======= =========== =======

Direct costs. Direct costs increased by $2,167,000 for the first six months
of 1996 compared to the same period in 1995 but declined marginally as a
percentage of revenue, due principally to lower film royalty and licensing
fees resulting from greater efficiencies achieved through expanded operations
and direct management of film contracts rather than relying on Comsat
Corporation. Prior to July 1995, the Company obtained substantially all of its
programming through Comsat Corporation. As a percentage of revenue, these
reduced royalty and licensing fees have been partially offset by increased
maintenance expenses associated with repairing or replacing faulty equipment
installed in hotel rooms during the first half of 1996 and transitioning
MagiNet's in-room converters and remote controls to higher quality devices.
Although the failure rates experienced with this equipment have declined since
the second quarter of 1996, there can be no assurance that the Company will
not experience similar technical problems or equipment failures in the future,
the occurrence of which could have a material adverse effect on the Company's
results of operations.

Depreciation and amortization. Depreciation and amortization consists of
depreciation of installed video systems, equipment and office furniture, and
amortization of prepaid royalties related to licensed technologies. These
expenses increased by $1,639,000 for the first six months of 1996 compared to
the same period in 1995 as a result of additional video system installations
in hotels. Depreciation and amortization expense represented a smaller
percentage of revenue in 1996 as a result of lower cost of installed systems
achieved in late 1995 and equipment and system sales in the 1996 period for
which there was no depreciation expense. The lower installed costs were
principally the result of using lower cost converters manufactured by a new
supplier to the Company as well as lower average installation costs. The
Company has taken a more direct role in managing hotel

installation projects and performing certain installations using its own
employees, resulting in lower costs and improved quality. In prior periods,
most installations were performed by outside contractors.

Operations expenses. Operations expenses decreased by $197,000 for the first
six months of 1996 compared to the same period in 1995 due to write-downs of
certain video system equipment taken in the first six months of 1995,
partially offset by increased headquarters personnel expenses in 1996
necessary to provide programming services for expanded operations. Operations
expenses, as a percentage of revenue, fell from 37% for the first six months
of 1995 to 13% for the same period in 1996 as the Company's investment in
headquarters operational support was leveraged over a larger installed base of
rooms.

Selling, general and administrative. Selling, general and administrative
expenses increased by $1,089,000 for the first six months of 1996 compared to
the same period in 1995 due to significant increases in local country
activities to support the Company's larger base of installed rooms. A new
office was opened in South Africa in 1996, and the offices in Israel and South
Korea, which opened in 1995, were fully staffed in the 1996 period. Overall,
employment in the Company's local country activities increased from 51
employees at June 30, 1995 to 107 employees at June 30, 1996. Headquarters
marketing expenses increased to support promotion and merchandising
initiatives as well as to provide leadership for new product development.
Headquarters administrative expenses in 1996 increased as a result of the
hiring of new members of senior management and the expansion of the accounting
and finance staff. Selling, general and administrative expenses decreased as a
percentage of revenue from 108% for the first six months of 1995 to 59% for
the same period in 1996. Selling, general and administrative expenses are
expected to decline as a percentage of revenue in the future as a result of
leveraging the Company's infrastructure over a larger installed base of rooms.

Research and development. Research and development expenses increased by
$366,000 for the first six months of 1996 compared to the same period in 1995
due to increases in engineering personnel, materials and related expenses.
Research and development decreased as a percentage of revenue from 17% for the
first six months of 1995 to 12% for the same period in 1996. The new
engineering personnel are focused on new product development and integration,
enhancements to existing systems, including technology and products licensed
from others, and quality improvements. All research and development personnel
are located at the Company's headquarters.

Interest income (expense), net. During the first half of 1996, the Company
incurred net interest expense of $1,382,000 as a result of the issuance in
August 1995 of its Senior Secured Notes due 2000 with an aggregate principal
amount of $24.9 million. During the first half of 1995, the Company earned net
interest income from short-term investments of excess cash.

Provision for income taxes. The Company has not incurred U.S. federal or
state income taxes. However, most of the Company's foreign subsidiaries and
branches are required to withhold local country income taxes relating to
payments of royalties and inter-company charges. As a result, a provision for
local country income taxes is accrued at the time the royalty or inter-company
charge is accrued. Following the utilization of the parent company's net
operating loss carryforward, the parent company may offset the withheld local
country income taxes against any U.S. federal income taxes payable. However,
there can be no assurance that the parent company will be able to fully
utilize its loss carryforwards or to offset U.S. federal income taxes payable
by the withheld local country income taxes.

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Revenue Analysis

The following table sets forth information regarding revenue, average
monthly gross video revenue per room, average movie price, average movie buy
rate, average hotel occupancy and the installed base of rooms for the years
ended December 31, 1994 and 1995. Certain of this information was not
available for the year ended December 31, 1993, as the Company's limited
number of installed rooms during that year did not provide a meaningful year-
to-year comparison.

YEAR ENDED DECEMBER 31,
------------------------
1994(1) 1995(1)
----------- -----------

Revenue............................................... $ 2,342,000 $ 8,689,000
Average monthly gross video revenue per room.......... $ 32.39 $ 29.10
Average movie price................................... $ 11.74 $ 10.96
Average movie buy rate................................ 12.6% 11.7%
Average hotel occupancy............................... 72% 75%
Installed base of rooms............................... 13,016 39,122

The Company's revenue for the years ended December 31, 1995, 1994 and 1993
were $8,689,000, $2,342,000, and $395,000 respectively, representing year-to-
year increases of 271% between 1994 and 1995 and 493% between 1993 and 1994.
The growth of revenue in each of these periods is attributable to increases in
the Company's installed base of rooms and rooms installed in the prior period
generating revenue for a complete fiscal year. Prior to 1994, the Company had
installed its systems only in Guam. Average monthly gross video revenue per
room and average movie price declined between 1994 and 1995 principally as a
result of a broader mix of hotels and countries served in 1995 compared to the
small installed base of rooms in 1994. On an individual country basis, average
monthly gross video revenue per room increased between 1994 and 1995 in all
countries except Hong Kong and Taiwan, where the limited number of installed
rooms in 1994 compared to 1995 do not permit a meaningful comparison. Buy
rates in Guam declined from 12.3% in 1994 to 10.5% in 1995 although gross
revenue per room increased slightly because occupancy rates increased in Guam.
Average movie prices in U.S. dollars increased between 1994 and 1995 in all
countries except Australia and Taiwan. Australian prices have since recovered.
However, the overall average movie price declined as a result of increased
installations in countries with lower average movie prices.

Expense Analysis

The following table sets forth information regarding the Company's costs and
expenses for the years ended December 31, 1993, 1994 and 1995:

YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
-------------- --------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)

Costs and expenses
Direct costs................... $ 294 74% $ 1,156 49% $ 3,731 43%
Depreciation and amortization.. 171 43 957 41 3,682 42
Operations expenses............ 464 118 2,876 123 3,108 36
Selling, general and
administrative................ 1,497 379 4,294 183 8,420 97
Research and development....... 1,320 334 856 37 1,247 14
------ --- ------- --- ------- ---
Total costs and expenses........ $3,746 948% $10,139 433% $20,188 232%
====== === ======= === ======= ===

Direct costs. Direct costs increased by $2,575,000 in 1995 compared to 1994
and by $862,000 in 1994 compared to 1993 due to the increase in installed
rooms. Direct costs as a percentage of revenue declined from 74% in 1993 to
49% in 1994 and 43% in 1995 principally due to lower programming costs,
particularly in the second half of 1995, and greater efficiencies achieved by
servicing the increasingly larger installed base of rooms.

Depreciation and amortization. Depreciation and amortization increased by
$2,725,000 in 1995 compared to 1994, due primarily to depreciation of video
systems and other property and equipment added in 1995 as well as 1994
installations that were depreciated for a full year in 1995. Such increases
were substantially in line with revenue growth achieved by the Company as
lower depreciation resulting from lower per-room installation costs were
offset by increased depreciation on office furniture and equipment and
computer equipment. Between 1993 and 1994, depreciation and amortization
increased by $786,000 due primarily to depreciation of video systems and other
property and equipment added in 1994 and 1993 installations that were
depreciated for a full year in 1994.

Operations expenses. Operations expenses increased by $232,000 in 1995
compared to 1994, but declined as a percentage of revenue from 123% to 36%
year-to-year. The modest increase in spending was attributed to additional
personnel in technical services and video programming, offset by a reduction
in operations management personnel and lower materials expenses. Between 1993
and 1994, operations expenses increased by $2,412,000 as a result of the
creation of an installation support department, increased spending in customer
support services and video programming to support the expanded number of rooms
installed during 1994. Operations headcount increased from five employees at
December 31, 1993, to 13 employees at December 31, 1994, and to 15 employees
at December 31, 1995. As a percentage of revenue, operations expenses rose
from 118% in 1993 to 123% in 1994. Prior to 1994, installation support was
performed by research and development personnel.

Selling, general and administrative. Selling, general and administrative
expenses increased by $4,126,000 in 1995 compared to 1994 due to significant
spending increases in foreign offices that resulted from the creation of new
offices in Israel and South Korea and continuing selling, general and
administrative costs incurred for a full fiscal year by country offices that
opened in 1994. Foreign office headcount increased from 31 employees at
December 31, 1994 to 81 employees at December 31, 1995. Selling, general and
administrative expenses as a percentage of revenue decreased from 183% in 1994
to 97% in 1995, as the Company leveraged its expenses over the larger
installed base of rooms.

Selling, general and administrative expenses increased by $2,797,000 from
1993 to 1994 due to the establishment of new offices in Australia, Hong Kong,
Japan, New Zealand, Singapore, Taiwan and Thailand and an increase from seven
to 12 employees in the Company's headquarters. Selling, general and
administrative expenses as a percentage of revenue decreased from 379% in 1993
to 183% in 1994 as a result of economies of scale associated with an
increasing installed base of rooms.

Research and development. Research and development expenses increased by
$391,000 in 1995 compared to 1994 due to increases in employee compensation
and materials expenses. From December 1994 to December 1995, one additional
employee was added to the department, but 1995 expenses reflect a full year of
compensation expense for employees hired in 1994. Significant projects
completed during 1995 included development of new versions of the Company's
in-room converter and remote control unit and enhancing the system operating
software and screens, including enhancements to support additional foreign
languages.

Research and development expenses decreased by $464,000 from 1993 to 1994,
while engineering personnel increased from three employees to ten employees
over the same period. The decrease in spending is the result of significant
expenditures incurred in 1993 in connection with hiring outside contractors
and consultants, which enabled the Company to complete the major portions of
its development on the first generation of its proprietary room equipment and
the conversion of licensed technology to meet local market conditions. In
particular, the Company completed new versions of its in-room converter to
allow installations in countries not using the video standard employed in the
United States.

Interest income (expense), net. Net interest expense increased by $738,000
in 1995 compared to 1994 and represented primarily interest accrued on $24.9
million of Senior Secured Notes due 2000, which the Company issued in August
1995. Between 1993 and 1994, net interest expense increased by $225,000
representing interest on bridge financing prior to the Company's issuance of
Series C Preferred Stock in September 1994.

Provision for Income Taxes. In 1995, the Company began accruing income tax
expense relating principally to foreign withholding of taxes relating to
inter-company charges for the provision of headquarters services and
programming and system royalties due third parties. No provision for foreign
or domestic income taxes was made during either 1994 or 1993.

SEASONALITY

The Company's quarterly operating results are subject to fluctuation
depending upon hotel occupancy and buy rates, and foreign currency exchange
rates as well as other factors. Although the Company generally believes that
such fluctuations are partially mitigated by operations in both the Northern
and Southern Hemispheres as well as by the breadth of its operations across
multiple economies, revenue per room has historically been lowest in the third
quarter because a significant portion of MagiNet's installations are in
tropical climates where occupancies are generally higher in the first and
fourth quarters of the year and buy rates are typically lower in the third
quarter of each year.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated financial
information for the six quarters ended June 30, 1996, as well as such data
expressed as a percentage of the Company's total revenue for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Company's
audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter and
any quarter-to-quarter trends are not necessarily indicative of the results to
be expected for any future period.

QUARTER ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)

Revenue................. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374
Costs and expenses
Direct costs........... 700 987 899 1,145 1,827 2,027
Depreciation and
amortization.......... 646 864 1,054 1,118 1,388 1,761
Operations expenses.... 665 548 948 947 468 548
Selling, general and
administrative........ 1,524 2,039 2,084 2,773 2,074 2,578
Research and
development........... 314 257 319 357 421 516
------- ------- ------- ------- ------- -------
Total costs and
expenses............... 3,849 4,695 5,304 6,340 6,178 7,430
------- ------- ------- ------- ------- -------
Operating loss.......... (2,562) (2,680) (2,951) (3,306) (2,629) (3,056)
Interest income
(expense), net......... 77 (73) (383) (612) (667) (715)
Provision for income
taxes.................. (148) (152) (123) (131) (213) (170)
Minority interest in net
losses of consolidated
subsidiaries........... 67 86 51 44 78 46
------- ------- ------- ------- ------- -------
Net loss................ $(2,566) $(2,819) $(3,406) $(4,005) $(3,431) $(3,895)
======= ======= ======= ======= ======= =======
EBITDA.................. $(1,916) $(1,816) $(1,897) $(2,188) $(1,241) $(1,295)
======= ======= ======= ======= ======= =======

QUARTER ENDED
------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------

Revenue................. 100% 100% 100% 100% 100% 100%
Costs and expenses
Direct costs........... 55 49 38 38 52 46
Depreciation and
amortization.......... 50 43 45 37 39 40
Operations expenses.... 52 27 40 31 13 13
Selling, general and
administrative........ 118 101 89 91 58 59
Research and
development........... 24 13 14 12 12 12
----- ----- ----- ----- ---- ----
Total costs and
expenses............... 299 233 226 209 174 170
----- ----- ----- ----- ---- ----
Operating loss.......... (199) (133) (126) (109) (74) (70)
Interest income
(expense), net......... 6 (4) (16) (20) (19) (16)
Provision for income
taxes.................. (12) (8) (5) (4) (6) (4)
Minority interest in net
losses of consolidated
subsidiaries........... 5 4 2 1 2 1
----- ----- ----- ----- ---- ----
Net loss................ (200)% (141)% (145)% (132)% (97)% (89)%
===== ===== ===== ===== ==== ====
EBITDA.................. (149)% (90)% (81)% (72)% (35)% (30)%
===== ===== ===== ===== ==== ====

Revenue Analysis

The following table sets forth, for each quarter presented, information
regarding revenue, average monthly gross video revenue per room, average movie
price, average movie buy rate, average hotel occupancy, for each of the
quarterly periods presented, and the installed base of rooms at the end of
each period presented.

QUARTER ENDED(1)
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------

Revenue (in thousands).. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374
Average monthly gross
video revenue per
room................... $ 29.56 $ 30.16 $ 27.03 $ 30.08 $ 30.00 $ 29.24
Average movie price..... $ 11.16 $ 11.18 $ 10.85 $ 10.83 $ 10.83 $ 10.88
Average movie buy rate.. 11.6% 12.3% 11.0% 11.9% 12.0% 12.5%
Average hotel
occupancy.............. 76% 72% 73% 75% 76% 71%
Installed base of
rooms.................. 18,424 27,648 31,091 39,122 42,940 49,683

During the six quarters ended June 30, 1996, the Company installed an
average of 6,111 rooms per quarter, with installations varying principally
upon the rate at which new contracts have been signed with hotels. Average
monthly gross video revenue per room has remained relatively constant as
improvements in certain countries have been offset by declines in others.
Increases in buy rates in the first two quarters of 1996, compared to the
first two quarters of 1995, have been offset by modest declines in average
hotel occupancy and average movie price in these same periods. Generally,
occupancies in the tropical climates, which represent the majority of the
Company's current installed base of rooms, are lower during the summer
quarters and higher in the first and fourth quarters, except during holidays.
Buy rates have been a function of the quality of movies available, the quality
of installed equipment, alternative entertainment available to guests and
other factors.

The U.S. dollar equivalent of foreign denominated average movie prices
declined during the last two quarters of 1995 principally as a result of an
increasing proportion of installed rooms in countries with lower average movie
prices than historical averages and the strengthening U.S. dollar as foreign
currency denominated

prices in most countries have remained relatively constant. The Company is
instituting a program of multiple price points for movies installed in each
hotel in an effort to increase overall prices and revenue in each country.

Expense Analysis

Direct costs. Direct costs, as a percentage of revenue, declined quarter
over quarter during the first three quarters of 1995, from 55% to 38%, before
increasing to 52% in the first quarter of 1996. The decline was principally
the result of reductions in programming costs and greater efficiencies
achieved by servicing the increasingly larger installed base of rooms.
Starting in the fourth quarter of 1995 the Company began to experience
significant quality problems resulting in increased maintenance expenses for
labor and materials to fix in-room equipment. Direct costs declined to 46% of
revenue in the second quarter of 1996 reflecting a decrease in maintenance
expense.

Depreciation and amortization. The Company amortized a larger portion of
prepaid royalties during the first quarter of 1995 reflecting minimum annual
royalties required to maintain an exclusive technology license. Amortization
of prepaid royalties has remained relatively constant as a percentage of
revenue during the five quarters ended June 30, 1996. Depreciation expense has
trended downwards, as a percentage of revenue over the last six quarters,
reflecting marginally lower installed costs of rooms during these periods.

Operations expenses. Operations expenses, as a percentage of revenue,
fluctuated from an average of 37% in 1995 to 13% in the first half of 1996.
The quarterly variances, as a percentage of revenue, are primarily attributed
to reserves taken against video systems throughout 1995, and to a lesser
extent, to other operations expenses spread over increased revenue.

Selling, general and administrative. Selling, general and administrative
expenses, as a percentage of revenue, declined from 118% in the first quarter
of 1995 to 89% in the third quarter of 1995. These expenses increased slightly
to 91% in the fourth quarter of 1995 before decreasing to 58% and 59% in the
first two quarters of 1996. The decreases as a percentage of revenue are
primarily attributed to subsidiary and headquarters expenses spread over a
larger revenue base. Selling, general and administrative expenses have
increased in foreign subsidiaries and at the Company's headquarters but at a
lesser rate than revenue increases.

Research and development. Research and development expenses declined, as a
percentage of revenue, from 24% in the first quarter of 1995 to 13% and 14% in
the second and third quarters of 1995. The decrease, as a percentage of
revenue, between the first and second quarter of 1995 is attributed to a
combination of increased revenue and a decrease in research and development
spending. Research and development, as a percentage of revenue, has stayed
constant at 12% over the three quarters ended June 30, 1996 as increases in
research and development expenses were proportional to revenue increases.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations and funded its
capital expenditure requirements primarily through private issuances of
Preferred Stock, bank lines of credit, debt securities and capital equipment
leases. From inception through June 30, 1996, the Company raised an aggregate
of $53.2 million from the sale of Preferred Stock, net of related expenses. In
August 1995, the Company issued its Senior Secured Notes due 2000 (the
"Notes") with an aggregate principal amount of $24.9 million to New York Life
Insurance Company, Mutual Life Insurance Company of New York and two other
investors. The Notes currently bear interest at an annual rate of 11.5%,
subject to certain adjustments. In connection with the issuance of the Notes,
the Company also issued to the purchasers of such Notes warrants to acquire up
to an aggregate of 1,622,857 shares of Common Stock at an exercise price of
$7.00 per share, subject to adjustments of the number of shares and exercise
price as set forth in the applicable warrants. The Notes are secured by a
pledge of the stock of each of the Company's subsidiaries.

The continued expansion of the Company's business will require significant
capital investments to finance the installation of equipment in hotel rooms.
Historically, cash flow generated from the Company's operations

has not been sufficient to fund the costs associated with expanding the
Company's business. The Company believes that the net proceeds from the
Offerings, together with cash flow from operations, will be sufficient to
support the Company's focused expansion plans and capital expenditures as well
as working capital requirements until at least December 1997. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
capital requirements, the Company may be required to raise additional funds.
No assurance can be given that additional financing will be available or that,
if available, that such financing could be obtained by the Company on terms
favorable to the Company and its stockholders. If the Company cannot obtain
sufficient funds to support installations of rooms, the Company may have to
reduce the rate of room installations. To the extent the Company raises
additional capital by issuing equity or convertible debt securities, ownership
dilution to the Company's stockholders will result.

The Company used cash from operating activities totaling $6,975,000 for the
six months ended June 30, 1996, $7,619,000 in 1995, $6,137,000 in 1994, and
$1,753,000 in 1993. The increased use of cash in 1995 as compared to 1994 and
1993 was primarily attributable to expansion into new geographic markets and
the expansion of headquarters and local country offices. The Company used
$10,145,000 for the six months ended June 30, 1996, $14,477,000 in 1995,
$8,932,000 in 1994 and $3,091,000 in 1993 to fund capital expenditures,
consisting principally of video systems in hotels. For the six months ended
June 30, 1996, financing activities provided $13,984,000. Financing activities
provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and 1993,
respectively.

BUSINESS

The following Business section contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

THE COMPANY

MagiNet is the leading supplier of on-demand interactive video entertainment
and information services to the hospitality industry outside of North America.
The Company installs integrated video systems that allow hotel guests to order
pay-per-view movies on-demand. MagiNet has recently expanded these systems
into entertainment and information gateways that offer an increasingly varied
range of services, such as on-demand billing summaries, express checkout,
personalized messaging, guest surveys and room service ordering. To date, the
Company's principal on-demand video entertainment services have provided a
reasonably predictable stream of recurring revenue during the term of its
exclusive five to seven year contract. The Company expects to implement
additional revenue enhancing services such as in-room casino-style gaming,
advertising, video games, financial news, Internet access and in-room shopping
in selected markets beginning in 1997. To date, the Company has focused
principally on leading hotels in the Pacific Rim. Recently, the Pacific Rim
has been experiencing a higher rate of economic expansion and hotel
construction than any other region in the world. The Company currently has
operations and installations in Thailand, Australia, Japan, Taiwan,
Guam/Saipan, Hong Kong, Singapore, South Korea, South Africa, Israel, New
Zealand, and France, and plans to expand its presence in the Pacific Rim,
Europe, the Middle East and Africa. MagiNet began installing its systems in
1993 and as of June 30, 1996 served 138 hotels having 49,683 rooms with an
additional 20,868 rooms in backlog.

Beginning in early 1996, the Company added several key members to its
management team, including its current Chief Executive Officer and Chief
Operating Officer, both having over twenty years of experience in the
hospitality industry. This management team further defined the Company's
strategy to expand its installed room base by (i) leveraging its strong market
position to obtain contracts with other leading hotels, (ii) penetrating
existing or new target markets, directly or through acquisition and (iii)
offering services to mid-market hotels in target regions. In addition, this
management team was influential in establishing strategic relationships with
Bloomberg for information and news television programming, with InterGame for
in-room casino-style gaming, and with Trinity Group for in-room advertising.

INDUSTRY BACKGROUND

Pacific Rim Hospitality Industry

The Pacific Rim has recently been experiencing a higher rate of economic
expansion and hotel construction than any other region in the world. As the
number of business and leisure travelers visiting the region has grown, most
of the leading hotel chains including Accor, Choice International, Conrad,
Hilton International, Holiday Inn Worldwide, Hyatt International, Marriott,
Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation
and Westin have focused their efforts on expanding in the Pacific Rim. The
growth in business and leisure travel has contributed to occupancy rates and
average daily room rates higher than those in the United States. In addition,
there has been a significant expansion of mid-market hotels, which offer less
expensive rooms and fewer services than leading hotels. The travel and tourism
industry in the Pacific Rim as a whole generated $804 billion of goods and
services and employed 134 million people in 1995 and is expected to generate
$2.0 trillion of goods and services and employ 239 million people in 2005.

Video Entertainment and Information Services

Leading hotels throughout the Pacific Rim have become increasingly focused
on providing the same high caliber of guest amenities, including on-demand
video entertainment and information services, typically found in

leading hotels in the United States. Mid-market hotels also are increasingly
providing on-demand video entertainment and information services as guests in
these hotels are becoming accustomed to such hotel amenities.

Video entertainment services first appeared in the U.S. hospitality industry
over 20 years ago. Originally, "free-to-guest" video entertainment was
provided by broadcasting a limited selection of movies to every room in a
hotel on fixed schedules for a fee paid by the hotel. In the 1980s, a new
service was developed that offered a limited selection of movies available at
scheduled intervals on a pay-per-view basis, transferring the expense of the
offerings to hotel guests and generally providing hotel operators with a
commission based on revenue from these pay-per-view services. Typically, four
to eight movies would be offered, each of which would be shown once every two
to four hours.

The subsequent development of on-demand video technology enabled providers
of in-room services to offer scheduling flexibility to guests for movie
viewing on a pay-per-view basis. The convenience of on-demand video technology
increased average buy rates significantly, increased revenue and related hotel
commissions and made on-demand video entertainment the leading segment of the
hotel interactive video market. Technological advances have allowed providers
of video entertainment and information services to offer other interactive
services to hotels and hotel guests including room billing summaries, express
checkout, personalized messaging, interactive guest surveys, and room service
ordering. New guest pay services such as in-room video games, shopping,
advertising, news, Internet access, and casino-style gaming are under
development in order to provide new amenities to guests and offer additional
revenue sources per installation to the system providers and hotels.

Today, free-to-guest services and on-demand video entertainment services
have become standard amenities offered by most U.S. hotels serving all but the
budget hotel market. Leading hotels internationally are now adopting new
interactive video technologies. Hotels in the Pacific Rim are installing new
on-demand video entertainment and information systems at a rapid rate, and the
new international hotels being constructed in this region are expected to
install the most current on-demand systems available. Some leading hotels in
South Africa and Israel have free-to-guest systems, and a number of these
hotels are now converting to the Company's in-room interactive on-demand video
systems. The remainder of the rooms in Africa and the Middle East are largely
unpenetrated. In Europe, interactive video systems have been installed in only
a few leading hotels, and a number of major hotel chains are beginning to
convert to interactive video technology.

The Company targets high-growth markets outside of North America, Central
America and South America. The following table illustrates the size and the
growth of the Company's target markets:

REGION TOTAL MARKET HOTELS WITH 100+ ROOMS
------ ------------------------- ----------------------
# OF ROOMS 9-YEAR CAGR(1) # OF ROOMS # OF HOTELS
---------- -------------- ---------- -----------

Pacific Rim................ 1,700,000 7.1% 670,000 2,412
Middle East and Africa..... 600,000 3.9% 288,000 1,272
Europe..................... 5,500,000 4.0% 1,108,000 5,637
The Americas(2)............ 4,500,000 2.9% N/A N/A

--------
(1) Compound Annual Growth Rate, 1985-1994.
(2) Includes North America, Central America and South America.

MAGINET'S OPPORTUNITIES

MagiNet provides in-room interactive video entertainment and information
services to leading business and resort hotels located in underpenetrated and
underserved international markets. The Company installs integrated video
systems that allow hotel guests to order pay-per-view movies on demand.
MagiNet has recently expanded these systems into entertainment and information
gateways that offer an increasingly varied range of services, such as on-
demand billing summaries, express checkout, personalized messaging, guest
surveys and room service ordering. The Company expects to implement additional
revenue-enhancing services such as in-room casino-style gaming, advertising,
video games, financial news, Internet access and in-room shopping in selected
markets beginning in 1997. The Company believes that by continuing to partner
with leading international hotels in each of its targeted markets and
subsequently focusing on mid-market hotels in these markets, it can further
exploit its leadership position.

STRATEGY

The Company's objective is to be the leading provider of in-room video
entertainment and information services to hotels in its target markets. Key
elements of the Company's strategy to achieve this objective are as follows:

Expand Installed Base of Rooms. The Company, which already has the largest
number of installed on-demand video rooms in the Pacific Rim, believes there
is a significant opportunity to expand its installed base of rooms in the
underpenetrated Pacific Rim, European and other targeted international markets
through the following three-pronged approach:

. Leverage industry leading position. The Company has entered into anchor
contracts with leading hotels in each of its target markets and leverages
the success of these installations to encourage installations in
competing hotels in those markets. The Company intends to continue to
capitalize on its strong market position by aggressively marketing the
breadth of its programming, new interactive entertainment and information
services and high-level of local customer service to leading business and
resort hotels in the Company's targeted international markets.

. Penetrate target markets directly or through acquisition. The Company has
instituted a focused expansion plan that includes direct entry or
acquisition in attractive existing and new markets. Historically, the
Company has entered target markets in the Pacific Rim, Africa, Europe and
the Middle East directly; however, the Company also intends to evaluate
potential acquisitions in order to further penetrate its target markets.
The Company believes that growth through acquisition will be part of the
Company's growth strategy.

. Offer services to mid-market hotel sector. Mid-market hotels, which have
lower room rates and fewer services than do leading hotels, represent an
opportunity for the Company to expand its installed base of rooms in its
target markets by leveraging the reputation it has established with
leading hotels. To date, penetration of on-demand video systems into mid-
market hotels has been limited. The Company believes that mid-market
hotels represent an attractive additional source of revenue.

Implement New Interactive Entertainment and Information Revenue Sources. The
Company's current system provides a full range of interactive video
entertainment and information services including movies, on-demand billing
summaries, express check-out services, personalized messaging, guest surveys
and room service ordering. Currently, the Company is in the process of
enabling hotels to further maximize guest revenue and differentiate hotel
services by offering new interactive entertainment and information services,
including in-room casino-style gaming, video advertising, video games,
financial news, Internet access and in-room shopping. The Company believes
that these new services will appeal to a broader group of users than the
traditional purchaser of in-room videos and will serve to increase revenue per
installed room.

Increase Revenue Per Room by Effectively Merchandising Available
Services. The Company is promoting the MagiNet brand name and awareness of the
Company's product and service offerings. A key element to the

Company's marketing strategy is to work closely with hotels to develop an
effective campaign for increasing the use of video-based services. These
strategies include in-room advertising and entertainment packages that
highlight the Company's services and feature films. The Company also assists
hotels in marketing hotel services to their guests through the Company's
systems.

Employ Cost-Effective, Proven Technology. The Company seeks to minimize
technology risk and rapidly incorporate technological enhancements by
licensing and purchasing cost-effective, leading-edge equipment and software
in addition to developing equipment and software in-house. Currently, the
Company utilizes the successful on-demand video technologies developed by OCV
and Guestserve. The Company has also developed its own proprietary technology
which enables its systems to operate with a number of different television
standards that exist in its target markets, and to increase functionality and
reduce the cost of existing systems. The Company is continuously evaluating
new technologies to enable the provision of a wide variety of services at a
cost-effective price. For example, the Company is evaluating the use of
digital server technology to increase system capacity and allow for the
provision of additional interactive services when such technology is proven to
be reliable and cost effective.

Utilize Relationships with Local Partners. To facilitate the marketing,
installation and maintenance of the Company's system in certain of its
markets, the Company has entered into joint ventures or similar arrangements
with local businesses and individuals believed by the Company to be familiar
with local customs and practices and to be otherwise advantageous to the
Company's business prospects in such markets. The Company has established such
joint ventures in Japan, South Korea, Taiwan, and Thailand, and expects to
establish further ventures with local partners as and when the need and
opportunity arise.

Establish Strategic Relationships. The Company establishes strategic
relationships to facilitate the introduction of new interactive entertainment
and information services. The Company has signed a license agreement with
InterGame, Ltd. to provide in-room casino-style gaming in certain countries
where such services are permitted. The Company has also established a
relationship with Trinity Group in Thailand to sell advertising for display on
its iLook interactive information directory being introduced on MagiNet's
systems in Thailand, the country which represents the Company's largest
installed base of rooms. In addition, MagiNet has entered into a letter of
intent with Bloomberg L.P. to distribute Bloomberg Information Television, a
24-hour financial news program, to hotels in the Pacific Rim, Europe and
Israel.

PRODUCTS AND SERVICES

Current Products and Services

To date, MagiNet has focused primarily on providing in-room on-demand video
entertainment systems. The Company has recently expanded its systems into
entertainment and information gateways that offer an increasingly varied range
of services to hotel guests.

On-Demand Video. The Company's video entertainment and information systems
consist of a microprocessor controlling the converter and the television in
each room, a handheld remote control, and a central "head-end" video storage
unit and system computer located elsewhere in the hotel. The in-room terminal
unit may be integrated within, or located behind, the television. These
systems allow each hotel guest to use the remote control to choose, at their
own convenience, from a large selection of pay-per-view major motion pictures
(including new releases), independent motion pictures for adult audiences, as
well as free-to-guest broadcast, cable, or satellite programming. Generally,
guests can choose from approximately 30 to 60 video titles on-demand,
depending on the size of the hotel and the capacity of the installed system.

Hotel Video Information Services. Pursuant to contracts with each individual
hotel, the Company currently offers a variety of interactive information
services, including on-demand billing summaries, express check-out services,
personalized messaging, interactive guest surveys and room service ordering as
well as information screens to enable hotels to promote their facilities. The
Company provides these hotel services in selected languages as appropriate for
the hotel market. The Company also contracts with third parties to provide
information services such as on-line airline schedules and weather reports to
certain hotels. These services allow

the hotel to increase the productivity of its staff by automating certain
hotel services that would otherwise require additional personnel.

Future Products and Services

The Company intends to begin implementation of a number of interactive
entertainment and information services beginning in 1997 in selected markets.
MagiNet believes these services will further differentiate the Company from
competitors and enhance revenue per installed room.

In-room Casino-style Gaming. The Company has an exclusive, worldwide license
from InterGame, Ltd. to provide its casino-style gaming for use in the
hospitality industry. The hotel guest will be charged through standard credit
card verification, and the Company will receive a share of the net guest
losses. The initial market for this service will be certain hotels the Company
expects to install in the Pacific Rim, and if successful the Company intends
to offer this service to hotels in countries where allowed by local law, and
will enter into arrangements with local gaming authorities as necessary.

Advertising. The Company has executed an agreement to provide its "yellow
page" style iLook advertising directory to guests in hotels utilizing the
Company's system. The Company will initiate this service in Thailand and later
identify local partners to assist the Company in soliciting advertisers for
the system in other markets. With this service, MagiNet's local partner in
Thailand will market the advertising space, and the Company will provide the
advertising to the hotel guest on its systems. The Company expects
restaurants, travel agencies, airlines, hotels in other destinations, and
local stores and general services, which an international traveler may desire,
to subscribe for this service. The Company has also developed the Welcome
Channel, currently being tested in Australia. The Welcome Channel has been
designed to accommodate 30-second commercials as well as Hollywood-studio
movie previews, corporate identity advertising and hotel promotions.

Financial News and Information. MagiNet has entered into a letter of intent
with Bloomberg L.P. ("Bloomberg") to distribute Bloomberg Information
Television, a 24-hour financial news program, to hotels in the Pacific Rim,
Europe and Israel. The hotel providing this service to its guests will pay the
Company a monthly per-room charge to receive this service, and MagiNet and
Bloomberg will share in the revenue received from the hotels. This service is
expected to be provided on a free-to-guest basis.

Other. The Company has under development or under discussion with potential
partners the provision of video games, in-room shopping and Internet access to
hotel guests.

ON-DEMAND VIDEO PROGRAMMING

The Company obtains first-run motion pictures and other programming through
distribution agreements with the authorized distributors of the major movie
studios in the United States (including Columbia, HBO, MGM, Miramax,
Paramount, TriStar, Twentieth Century Fox, United Artists and Universal) and
other countries, along with other studios and movie production companies. The
Company prepares monthly line-ups for video titles, arranges the ordering and
duplication of those titles and changes actual video cassettes for new movies
monthly. In recent months, the Company has been successful in acquiring major
theatrical films from European sources, enhancing its capability to serve
various hotel clientele. The Company obtains French, German, Japanese,
Chinese, Thai and Korean language programming from distributors in those
countries, and plans to establish similar arrangements with additional local
suppliers.

The distribution agreements relating to first-run motion pictures generally
provide for a specified license period and percentage of revenue of each
motion picture that are negotiated separately, with the studio receiving a
percentage generally ranging from 30% to 45% of the Company's gross revenue
from a major motion picture. For recently released motion pictures, the
Company typically obtains rights to exhibit the picture in a specific country
after the motion picture has been released in theaters in that country, but
prior to its release to the video rental market or exhibition on cable
television in that country.

In addition to first-run motion pictures, most of the Company's
installations also offer programming independent of the major motion picture
studios originating in the United States, Europe and the Pacific Rim including
titles considered appropriate for adult audiences only. Access to such titles
may be blocked from either the front desk or in-room remote control. The
Company typically obtains such programming for a one-time fee, with no ongoing
royalty obligation. Such films provide higher operating margins because of the
relatively low acquisition cost. Such programming can therefore account for a
significant portion of the Company's operating income in certain of its
markets.

INSTALLED BASE AND BACKLOG

MagiNet's installed base consists of rooms installed in hotels that have
signed five-to-seven year contracts for the Company to provide hotel guests
with its interactive entertainment and information services. The Company's
backlog consists of rooms not yet installed with the Company's systems at
hotels that have signed such contracts or, in Japan, have signed a memorandum
of understanding. The Company does not include in backlog the rooms in
individual hotels within hotel chains that have signed master contracts with
the Company until the Company executes a contract with an individual hotel in
that chain.

The Company's installed base of rooms and backlog as of June 30, 1996 are
set forth below:

ROOMS INSTALLED BACKLOG
------------------ ------------------
COUNTRY ROOMS # OF HOTELS ROOMS # OF HOTELS
------- ------ ----------- ------ -----------

Australia.............................. 6,356 27 2,480 8
France................................. 377 1 11 --
Guam/Saipan............................ 4,310 14 -- --
Hong Kong.............................. 3,885 7 1,473 3
Israel................................. 2,507 9 3,227 9
Japan.................................. 6,121 15 2,156 6
New Zealand............................ 1,794 7 -- --
The Philippines........................ -- -- 1,502 3
Singapore.............................. 3,115 6 830 1
South Africa........................... 2,630 8 3,996 19
South Korea............................ 2,974 6 2,964 5
Taiwan................................. 4,822 12 150 --
Thailand............................... 10,792 26 2,079 4
------ --- ------ ---
Total................................ 49,683 138 20,868 58
====== === ====== ===

SALES, DISTRIBUTION AND MARKETING

The Company currently targets leading hotels generally in excess of 100
rooms in the Pacific Rim, the Middle East, Africa and in Europe. The Company
markets its system as requiring no capital investment by the hotel and then
pays the hotel a monthly commission based on gross revenue derived from its
interactive video entertainment and information services. Except in smaller
markets, where the Company utilizes local distributors or representatives, the
Company markets its products through controlled subsidiaries located in each
market and generally uses its own personnel to supervise installation and
provide maintenance services. The Company currently maintains offices and
personnel in the metropolitan areas of Auckland, Bangkok, Hong Kong,
Johannesburg, Seoul, Singapore, Sydney, Taipei, Tel Aviv and Tokyo. The
Company's worldwide headquarters in Sunnyvale, California provides strategic
direction, management, finance and accounting, research and development, as
well as support for the local offices in programming, marketing, sales,
installations and maintenance.

The Company provides service for its installed systems. Pursuant to a five-
to-seven year contract, the Company installs at its own cost its system in the
hotel and retains ownership of, and responsibility for, all equipment utilized
in providing interactive entertainment and information services.
Traditionally, the hotel

provides and owns the televisions. The Company undertakes a significant
investment when it installs its system in a hotel, sometimes requiring
significant changes to be made to a hotel's master antenna television system.
The Company's contract with each hotel provides that the Company will be the
exclusive provider of interactive entertainment and information services to
hotel guests and generally permits the Company to set the price for each pay-
per-view event. The hotels collect viewing charges from their guests and
retain a commission equal to a percentage of the total pay-per-view revenue.
Some contracts also require the Company to upgrade its system to the extent
that new technologies and features are introduced during the term of the
contract. Based upon contracts entered into as of June 30, 1996, contracts for
approximately 6% of the Company's installed rooms expire on or before December
31, 1998, 21% of the Company's installed rooms expire during 1999, and 28% of
the Company's installed rooms expire during 2000.

The Company has signed master contracts with Hyatt International-Asia
Pacific Limited and Hyatt Chain Services Limited, Shangri-La and the Southern
Pacific Hotel Corporation. These master contracts establish the Company as a
preferred vendor of certain of MagiNet's interactive entertainment and
information systems and services without guaranteeing any commitments from
individual hotels within the chain. The Company must sign agreements with
individual hotels within the chain to install its systems in such hotels. The
Company also has individual hotel contracts with other hotels within
recognized chains with which the Company does not have master contracts such
as the Mandarin Oriental, Marriott, Sheraton, Regent/Four Seasons, Hilton
International, Inter-Continental, Westin and Okura.

The Company is currently developing additional marketing strategies and
obtaining and analyzing market data to promote the MagiNet brand name and the
awareness of the Company's product and service offerings. A key element to the
Company's marketing strategy is to work closely with the hotels to develop an
effective campaign for increasing the use of video-based services. These
strategies include in-room advertising and entertainment packages that
highlight the Company's services and feature films. The Company also assists
the hotels in marketing hotel services to their guests through the Company's
systems.

REGIONAL AND STRATEGIC RELATIONSHIPS

Local Partners

The Company's markets reflect a variety of different business cultures and
legal environments. To facilitate the marketing, installation and maintenance
of the Company's systems in certain of its markets, the Company has entered
into joint ventures or similar arrangements with local businesses and
individuals believed by the Company to be familiar with local customs and
practices and to be otherwise advantageous to the Company's business prospects
in such markets. The Company has established such joint ventures in Japan,
South Korea, Taiwan and Thailand, and expects to establish further ventures
with local partners as and when the need and opportunity arise.

In Australia, Hong Kong, Israel, New Zealand, Singapore and South Africa,
the Company operates through its local country subsidiaries and provides
sales, installations, service and maintenance through its own local employees
and independent contractors. The Company believes that the existing
familiarity its local employees and independent contractors have with the
business cultures of these countries will enable the Company to further
penetrate these markets successfully without assistance of a joint venture or
similar arrangement.

Distributors and Representatives

The Company installs and services hotels in Guam and Saipan through one
distributor and one representative. In addition, the Company has retained a
distributor to install and service the Company's Guestserve-based systems in
Malaysia, Singapore, Indonesia and Brunei. The representative installs and
services systems owned by the Company, in exchange for a monthly fee and a
percentage of revenue. The distributors purchase, install and service the
systems and pay the Company a royalty based on rooms installed or revenue.

Strategic Relationships

On Command Video. Pursuant to a Technology License Agreement dated April 15,
1992 (the "OCV License"), OCV has granted the Company an exclusive,
transferable license in 30 countries outside North America to manufacture,
modify, market and sell products incorporating OCV's proprietary technology.
Following an initial term of ten years, the OCV License is automatically
renewable for an indefinite number of five-year periods. Although the Company
is not required to use OCV technology, it is currently incorporated into most
of the Company's installed systems. Pursuant to the OCV License, the Company
pays OCV certain royalties based on the Company's revenue derived from OCV
patented technology. The Company has paid OCV, in advance, a license fee which
is credited against its future royalty obligation to OCV under the OCV
License. These prepaid royalties are expected to be fully amortized before
December 1996, at which time the Company will begin to incur a monthly cash
payment in order to fulfill its continuing royalty obligations to OCV.

Guestserve. Pursuant to a Technology License Agreement dated December 20,
1995 (the "Guestserve License"), Guestserve has granted the Company a
transferable license to manufacture, modify, market, and sell products
incorporating Guestserve's technology in all countries outside of North
America. The Guestserve License is exclusive for the hospitality industry and
non-exclusive for apartments serviced by hospitality providers. Following an
initial term of ten years, the Guestserve License is automatically renewable
for an indefinite number of five-year periods. Guestserve has granted the
Company a license to future technological improvements along with the right to
purchase hardware on favorable terms and the Company has granted Guestserve a
license to all technological improvements to the Guestserve system engineered
by the Company. Pursuant to the Guestserve License, the Company pays
Guestserve certain royalties, payable in installments upon the Company's
acceptance of specified Guestserve technology and on a per-room basis. The
royalties are capped and payable over a seven-year period.

InterGame, Ltd. The Company has entered into an agreement (the "InterGame
Agreement"), effective as of July 8, 1996, with InterGame, Ltd. ("InterGame"),
a company engaged in designing, implementing and operating electronic video
gaming programs for use with interactive PC and other platform-based systems.
Pursuant to the InterGame Agreement, InterGame will deliver its network
systems and software to MagiNet, develop an interface for the system to
operate on MagiNet's interactive video systems, and grant to MagiNet an
exclusive worldwide license to provide casino-style gaming in hotels, as
permitted by law. The Company will bear the capital costs of the equipment
necessary to deliver the gaming services, and net revenue from the operation
of the system (after certain payments are made) are to be divided between the
Company and InterGame. MagiNet has exclusivity for the hospitality industry
with respect to the technology, provided certain installation milestones are
achieved. The InterGame Agreement will remain in force until July 8, 2001, and
thereafter is automatically renewable for an indefinite number of one-year
periods. To the extent the Company engages third parties to assist the Company
in installing and operating the casino-style gaming systems, the Company may
share with such parties a percentage of the revenue from the system.

Trinity Group. The Company has entered into an agreement with the Trinity
Group ("Trinity"), the Company's partner in Thailand, for Trinity to sell
advertising to be displayed to hotel guests using the Company's iLook service.
iLook is a service developed by the Company, which will display video
advertising directories on MagiNet systems installed in Thailand. MagiNet has
agreed to install the technology on the Company's systems in Thailand to allow
guests to interactively search the iLook system for businesses and services,
and to provide training to the Trinity sales force. MagiNet will retain
control over the content of the advertising. MagiNet will receive
approximately one-half of the gross iLook revenue. The agreement will remain
in force until December 31, 2002, and thereafter automatically renew annually,
unless terminated by either party.

Bloomberg. The Company has entered into a letter of intent dated as of
September 6, 1996 with Bloomberg L.P. ("Bloomberg") to distribute Bloomberg
Information Television, a 24-hour financial news program, to hotels in the
Pacific Rim, Europe and Israel. The Company will sell the service to the
hotels for a monthly per-room fee to be divided between the Company and
Bloomberg. Pursuant to this agreement, MagiNet is to ensure that the Bloomberg
service is to be provided on a free-to-guest basis. MagiNet may, subject to
the

consent of Bloomberg, offer to install a Bloomberg terminal in a hotel's
business center or a concierge floor, subject to certain conditions.

MANUFACTURING

Although under its technology agreements the Company has the right to
manufacture the components and sub-assemblies of its systems, the Company
currently subcontracts the manufacture of its systems including head-ends,
converters and remote controls. The Company's remote controls for the OCV-
based systems are manufactured by one company in Hong Kong, the remote
controls for the Guestserve-based systems are manufactured by one company in
China and the Company's converters are manufactured by three companies, one in
each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently
available solely from OCV, and the Guestserve-based head-ends are available
solely from Guestserve. OCV is a majority-owned subsidiary of Ascent
Entertainment Group, Inc., which has recently acquired the assets of
SpectraVision, Inc. ("SpectraVision"), a competitor of the Company in the
Pacific Rim. MagiNet believes that similar contract manufacturing can be
obtained from other vendors, including those located in the Pacific Rim,
although no assurance can be given that such manufacturing resources will
continue to be available on reasonable terms, or at all. The Company will
pursue such alternative manufacturing arrangements when and if it appears
likely that significant cost savings or quality improvements can be achieved.
At present, the Company has no plans for alternative sourcing of the system or
major system sub-assemblies.

The Company has experienced delays in receiving converters for installations
planned for the Guestserve-based systems, and these delays caused an
approximately three to four month delay in installing certain hotels. Delays
in receiving products could delay a large number of planned room
installations. The Company believes that the delays in receiving converters
for the Guestserve systems have been resolved, however, there can be no
assurance that the Company will not face such difficulties or delays in the
future. An inability of the Company to obtain sole-sourced or other components
in a timely manner could significantly delay installations of systems, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, any increase in cost to
manufacture the system components from existing or alternative sources could
have a material adverse effect on the Company's business, financial condition
and results of operations.

MAINTENANCE AND SUPPORT

The Company believes that high quality and consistent systems support and
maintenance are essential to competitive success in its industry. As of June
30, 1996, the Company's installation and service organization consists of 41
installation and service personnel in 11 countries. The Company emphasizes the
use of Company- employed installation and service personnel but also uses
Company-supervised subcontractors in areas where there is not a sufficient
concentration of systems to warrant a full-time installation and service
representative. Currently, the Company's in-house service organization is
responsible for a substantial majority of the Company's installed base of
rooms. Installation and service personnel are responsible for systems
maintenance and distribution and collection of video cassettes. In addition,
the Company's installation employees prepare site surveys to determine the
type of equipment to be installed at each particular hotel, install the
Company's systems or supervise third-party installers, train the hotel staff
and perform quality auditing in each country.

MagiNet receives on-line data daily through modem connections to its
systems, enabling the Company to track the status of all of its installed
systems. The on-line diagnostic capability of the Company's systems enable
MagiNet to identify and resolve a number of the reported system malfunctions
from the Company's service control center without visiting the hotel property.
When a service visit is required, the modular design of the Company's systems
permits installation and service personnel to replace defective components at
the hotel site. The Company generally maintains a fully-trained technical
support staff in each country, which is available on a 24 hour-a-day basis.
The Company also maintains a toll-free technical support line at its
headquarters, used by country service personnel.

COMPETITION

The Company competes with a number of companies that specialize in providing
in-room video services, and such competitors may have greater financial,
technical, sales and marketing resources to devote to the development,
promotion and sale of their products, and may have longer operating histories,
greater name recognition, and greater market acceptance for their products and
services compared to those of the Company. The Company could also face
competition in the future from existing and emerging cable, direct broadcast
satellite and other communications companies providing entertainment and other
in-room services to hotels and hotel guests.

The Company's primary competitors in the on-demand video systems market are
SpectraVision, Movielink, and LodgeNet. SpectraVision was one of the earliest
entrants into the hotel entertainment market, and has developed its
GuestChoice technology which allows for guests to choose movies to watch on
demand. Movielink, a privately-held Australian company, represents the
Company's primary competition in the Pacific Rim. Movielink, which recently
introduced an on-demand system, has a large base of free-to-guest customers in
Australia and in Singapore and has a small number of installations in Hong
Kong and Thailand. Although LodgeNet markets its systems primarily in the
United States, it has recently entered certain of the Company's markets.

In Europe, the Company faces competition from PRODAC Prozebdatentechnik
GmbH, Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc,
which have installed mainly free-to-guest and scheduled systems. The Company
believes that penetration of the European market with on-demand video systems
by these or other competitors is fairly low.

The Company's ability to compete successfully depends on many factors,
including the success of competitors' systems and services, the ability to
interface directly with hotel property management systems, the ability to
provide appropriate programming for an international audience, obtaining
leading hotel contracts and name recognition among hotels, the quality of its
programming and services, the reliability of its systems, general economic
conditions and protection of Company and third-party licensor products by
effective utilization of intellectual property laws. In particular,
competitive pressures from existing or new competitors who offer lower prices
or other incentives or introduce new systems could result in price reductions
which would adversely affect the Company's profitability. There can be no
assurance that the Company's current or other new competitors will not develop
enhancements to, or future generations of, competitive systems and services
that offer superior price or performance features, that the Company will be
able to compete successfully in the future, or that the Company will not be
required to incur substantial additional investment costs in connection with
its development, marketing and customer service efforts in order to meet any
competitive threat. The Company expects competition in its markets to
intensify.

TECHNOLOGY AND PROPRIETARY RIGHTS

The patents to the basic architecture of the Company's system are held by
the Company's licensors in the United States and corresponding patent
applications for the OCV technology have been filed in Japan, the United
Kingdom and under the European Patent Cooperation Treaty. The Company has
engineered, and filed patent applications for, further improvements to the
system to increase its cost-efficiency and flexibility. Hardware enhancements
to the system include engineering new single-channel modulators, compatibility
with television standards in other countries, and a universal television
controller/interface to reduce the need for custom interfaces. The Company has
also designed eight different television formats, frequency plans and AC
voltage requirements for 11 different countries. Software enhancements include
foreign language prompts and menus, hotel information services, hotel
maintenance programs, as well as simplified systems configuration and

management. OCV has incorporated certain of the Company's enhancements in its
system installations in the United States.

MagiNet's success and ability to compete is dependent in part upon its own
proprietary technology. The Company relies primarily on a combination of
patent, copyright and trademark laws, trade secrets, software security
measures, and nondisclosure agreements to protect its proprietary technology.
There can be no assurance, however, that such protection will be adequate to
deter misappropriation of or deter unauthorized third parties from copying
aspects of, or otherwise obtaining and using, the Company's proprietary
technology. Moreover, the Company licenses from OCV and Guest Serve the right
to install and operate on-demand video systems incorporating proprietary
technology of such companies. If for any reason the Company's rights under
such license agreements were to be successfully challenged by these or other
companies, the Company's business, financial condition and results of
operations would be materially adversely affected. Furthermore, there can be
no assurance that any confidentiality agreements between the Company and its
employees or any agreements with third parties will provide meaningful
protection for the Company's proprietary information or the technology
licensed from others in the event of any unauthorized use or disclosure of
such proprietary information. A substantial amount of the Company's sales are
in international markets, and the laws of the other countries may afford the
Company little or no effective protection of its intellectual property or the
intellectual property of its licensors.

While MagiNet believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communication from third parties asserting
that the Company's products infringe, or may infringe, on the proprietary
rights of third parties. The Company's trademark registration of the name
"MagiNet" has been initially challenged by the U.S. Patent and Trademark
Office based on the use of similar names by other companies in the
entertainment industry. However, the Company has used such name since August
1995 and intends to continue to use such name. Any infringement claims, with
or without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, require the Company to
develop non-infringing technology or enter into royalty or licensing
agreements, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim of product
infringement against the Company or similar adversarial proceeding and failure
or inability of the Company to develop non-infringing technology, license the
infringed or similar technology, or require the Company to cease the marketing
or use of certain products there could be a material adverse effect on the
Company's business, financial condition and results of operations.

EMPLOYEES

As of June 30, 1996, the Company had 164 employees, of which 107 are located
in offices in the Company's local markets. The Company believes its
relationships with its employees are good.

FACILITIES

The Company's administrative, sales, marketing and product development
headquarters are located in Sunnyvale, California, where the Company leases
approximately 28,000 square feet under a lease expiring in March 1997. The
Company anticipates that it will be necessary to obtain a larger facility upon
the termination of its headquarters lease but believes that suitable
additional or substitute facilities will be available in the future as needed
on commercially reasonable terms. The Company also leases office space in the
metropolitan areas of Auckland, Bangkok, Hong Kong, Johannesburg, Seoul,
Singapore, Sydney, Taipei, Tel Aviv and Tokyo.

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information concerning the directors,
executive officers and certain other key employees of the Company as of August
30, 1996.

NAME AGE POSITION
---- --- --------

Kenneth B. Hamlet....... 52 Chairman of the Board, President and Chief Executive Officer
Robert R. Creager....... 51 Founder, Executive Vice President, Corporate Development, and Director
James A. Barth.......... 53 Executive Vice President and Chief Financial Officer
Gordon E. (Ned) Druehl,
Jr. ................... 54 Executive Vice President and Chief Operating Officer
Pang T. Ho, Ph.D........ 50 Vice President of Engineering
Stuart J. Ellman(1)(2).. 29 Director
Michael D. Granoff(1)... 38 Director
Michael Ramsay(2)....... 44 Director
James D. Robinson
IV(2).................. 34 Director

- --------
(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.

Kenneth B. Hamlet has served as the Company's President and Chief Executive
Officer and as a member of its Board of Directors since January 1996 and as
Chairman of the Board since September 1996. Between 1991 and 1995, Mr. Hamlet
was Chairman and Chief Executive Officer of Hamlet & Associates, a private
investment banking and consulting firm. During such period, Mr. Hamlet
provided management consulting services to a number of companies, including
serving as Director, Chairman and Chief Executive Officer of Caretenders
Healthcorp, a health care company, and Director and Co-Chairman of NTN
Communications, Inc., a telecommunications equipment company. From March 1984
to January 1991, Mr. Hamlet served as President and Chief Executive Officer
for Holiday Inns, Inc., a wholly-owned subsidiary of Holiday Corporation that
owned, operated and franchised 1,750 hotels worldwide. From 1975 to 1984, Mr.
Hamlet served in numerous executive capacities within Holiday Inns Inc. Mr.
Hamlet holds a B.S. in hotel administration from the Cornell University School
of Hotel Administration.

Robert R. Creager founded the Company and has served as Executive Vice
President, Corporate Development, since September 1996 and as a member of the
Company's Board of Directors since the Company's inception. From January 1996
to September 1996, Mr. Creager served as Chairman of the Board of Directors.
From July 1991 to January 1996, Mr. Creager served as President and Chief
Executive Officer of the Company. From 1988 to 1990, Mr. Creager was Vice
President, Corporate Development, and General Counsel of Arix Corporation, a
UNIX minicomputer manufacturer. Mr. Creager holds a B.A. in Business
Administration from Pacific Union College and a J.D. from the University of
California, Hastings College of Law.

James A. Barth has served as the Company's Executive Vice President and
Chief Financial Officer since September 1995. From October 1994 to September
1995, Mr. Barth was Vice President of Finance and Chief Financial Officer of
the Company. From March 1994 to October 1994, Mr. Barth was Vice President and
Chief Financial Officer of ACC Microelectronics Corporation, a semiconductor
company. From 1982 to March 1994, he served as Vice President and Chief
Financial Officer of Rational Software Corporation, a developer of object-
oriented software engineering tools. Mr. Barth is a certified public
accountant and holds a B.S. in business administration from University of
California at Los Angeles.

Gordon E. (Ned) Druehl, Jr. has served as the Company's Executive Vice
President and Chief Operating Officer since August 1996. From January 1992 to
July 1996, he served as Chairman and Chief Executive Officer of Sandusky
Cabinets Manufacturing, Inc., a metal cabinet manufacturing company. From 1990
through October 1991, Mr. Druehl founded and operated NKI Hospitality, a hotel
management company, and subsequently worked as Vice President of RFS Real
Estate, Inc., a diversified property management company, which acquired

NKI Hospitality. From 1975 to 1990, Mr. Druehl held various management
positions at Holiday Corporation, including President of the Hotel Services
Division and Senior Vice President of U.S. Operations. Mr. Druehl holds a B.S.
in hotel administration from the Cornell University School of Hotel
Administration.

Pang T. Ho, Ph.D. has served as the Company's Vice President of Engineering
since August 1994. From February 1994 until August 1994, Dr. Ho served as
Chairman of Spectrum, Inc., a cable television equipment distributor in
Taiwan. From December 1991 until January 1994, Dr. Ho was President of Po-Hsin
Entertainment, Inc., a cable television system operator located in Taiwan.
From 1985 to 1991, Dr. Ho served as Vice President of Commercial Products for
Pacific Monolithics Inc., a wireless communications equipment company. Dr. Ho
holds a B.S. in electrical engineering from National Taiwan University, an
M.S. in electrical engineering from Princeton University and a Ph.D. in
electrical engineering from Rutgers University.

Stuart J. Ellman has served as a member of the Company's Board of Directors
since October 1994. Since August 1994, he has served as a Managing Director of
RRE Investors, L.L.C., a venture capital investment firm. From August 1992 to
August 1994, he was Vice President of Advisory Capital Partners, an investment
firm. From June 1988 to July 1990, Mr. Ellman was an associate at Dillon, Read
& Co. Inc., an investment banking firm. Mr. Ellman holds a B.A. from Wesleyan
University and an M.B.A. from Harvard University.

Michael D. Granoff has served as a member of the Company's Board of
Directors since October 1994. Since January 1994, Mr. Granoff has served as
Chief Executive Officer of Pomona Capital, L.P., a private investment company.
From October 1988 to December 1993, Mr. Granoff was President of Golodetz
Ventures and a member of the Board of Directors of Golodetz Corporation. From
March 1981 to January 1985, Mr. Granoff served on the staff of the U.S. House
of Representatives Appropriations Subcommittee on Foreign Operations and was a
member of the 1992 Presidential Transition Team. Mr. Granoff holds a B.A. from
the University of Pennsylvania and a J.D. from Georgetown University Law
Center.

Michael Ramsay has served as a member of the Company's Board of Directors
since September 1993. Since April 1996, he has served as a Senior Vice
President of Silicon Desktop Group of Silicon Graphics, Inc., a developer and
manufacturer of computer workstations. From August 1994 to March 1996, he
served as President of Silicon Studio, Inc., a subsidiary of Silicon Graphics,
Inc. From July 1992 to August 1994, he served as Senior Vice President of
Silicon Graphics' Visual System Group, from February 1987 to July 1992, he
served as Senior Vice President of Silicon Graphics' Entry Systems Division,
and from May 1986 to July 1991, he served as Director of Engineering, Vice
President, and Senior Vice President of various Silicon Graphics divisions.
Mr. Ramsay received his B.S. degree in electrical engineering from the
University of Edinburgh in Scotland.

James D. Robinson IV has served as a member of the Company's Board of
Directors since October 1994. Since December 1994, he has served as Managing
Director of RRE Investors, L.L.C., a venture capital investment firm. From
September 1992 to December 1994, he served as Vice President of Hambrecht &
Quist Venture Partners, a venture capital firm. From July 1986 to March 1990,
he was an associate at J.P. Morgan & Co. Incorporated, a commercial and
investment banking firm. From January 1984 to June 1986, he was President of
IV Systems, Inc., a software consulting firm. Mr. Robinson holds a B.A. from
Antioch College and an M.B.A. from Harvard University.

DIRECTOR COMPENSATION

The Company reimburses each member of the Company's Board of Directors for
out-of-pocket expenses incurred in connection with attending Board meetings.
No member of the Company's Board of Directors currently receives any
compensation for serving as a Director. The Company's 1996 Director Option
Plan (the "Director Plan") provides that options will be granted to non-
employee directors of the Company pursuant to an automatic nondiscretionary
grant mechanism. On the effective date of the Offerings, each of the Company's
non-employee directors who is neither the beneficial owner nor an affiliate of
a beneficial owner of more than 3% of the Company's outstanding Common Stock
will automatically be granted an option to purchase 25,000 shares of the
Company's Common Stock at an exercise price equal to the initial public
offering price. In addition,

upon joining the Board of Directors, each new non-employee director will
automatically be granted an option to purchase 25,000 shares of Common Stock.
Each non-employee director will subsequently be granted an option to purchase
5,000 shares of Common Stock at each annual meeting of stockholders beginning
with the 1997 Annual Meeting of Stockholders. Each such option will be granted
at the fair market value of the Common Stock on the date of grant. The initial
options granted to non-employee directors will vest at a rate of 25% on the
first anniversary of the date of grant and at a rate of 1/48 of the shares per
month thereafter, and subsequent options granted to non-employee directors
will become exercisable at a rate of 1/48 of the shares subject to such
additional options on the monthly anniversary of the date of grant subject to
continued Board service. See "Stock Plans--1996 Director Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee currently consists of Stuart J.
Ellman, Michael Ramsay, and James D. Robinson IV. During 1995, the
Compensation Committee consisted of Michael Ramsay, Michael D. Granoff, James
D. Robinson III and James D. Robinson IV. Kenneth B. Hamlet, President, Chief
Executive Officer and a director of the Company, participates in all
discussions and decisions regarding salaries and incentive compensation for
all employees and consultants of the Company, except that he is excluded from
discussions regarding his own salary and incentive compensation. No
interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during the fiscal year ended December 31, 1995 by
(i) the Company's Chief Executive Officer as of the end of fiscal year 1995,
(ii) the Company's next four most highly compensated executive officers whose
salary and bonus for such fiscal year exceeded $100,000 and who were serving
as an officer of the Company as of the end of such fiscal year, (iii) Kenneth
B. Hamlet, who became the Company's President and Chief Executive Officer in
January 1996, and (iv) Gordon E. (Ned) Druehl, Jr., who became the Company's
Executive Vice President and Chief Operating Officer in August 1996
(collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

FISCAL 1995
------------
LONG-TERM
COMPENSATION
FISCAL 1995 AWARDS
------------------------------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS
--------------------------- ----------- ------------------------

Current Executive Officers
Kenneth B. Hamlet (3)..................... $ -- $ -- --
Chairman of the Board, President and
Chief Executive Officer
Robert R. Creager (4)..................... 175,000 -- 349,500
Founder and Executive Vice President,
Corporate Development
James A. Barth............................ 131,245 7,219 150,000
Executive Vice President and Chief
Financial Officer
Gordon E. (Ned) Druehl, Jr. (5)........... -- -- --
Executive Vice President and Chief
Operating Officer
Pang T. Ho, Ph.D.......................... 125,683 12,870 81,800
Vice President of Engineering
Former Executive Officers
Jeffrey A. Bixler (6)..................... 96,708 134,875 75,000
Vice President of Sales and Marketing
Eric S. Hass(7)........................... 147,406 -- 169,000
Executive Vice President and Chief
Operating Officer

- --------
(1) Other than salary and bonus described herein, the Company did not pay the
persons named in the Summary Compensation Table any fringe benefits,
perquisites or other compensation in excess of 10% of such executive
officer's salary and bonus.
(2) Except as otherwise indicated, bonus compensation consists of performance
or contractually based cash incentive payments.
(3) Mr. Hamlet succeeded Robert R. Creager as President and Chief Executive
Officer of the Company in January 1996. In connection with Mr. Hamlet's
employment, the Company agreed to pay him an annual salary of $250,000. In
addition, Mr. Hamlet is entitled to receive a cash bonus, and a
corresponding stock bonus, based on performance. See "--Employment
Agreements and Change in Control Arrangements" and "Certain Transactions."
In January 1996, the Company granted Mr. Hamlet an option expiring January
2001 to acquire 654,324 shares of the Company's Common Stock at an
exercise price of $2.00 per share, with vesting to occur ratably over 36
months.
(4) Mr. Creager resigned as President and Chief Executive Officer in January
1996. The Company and Mr. Creager are parties to an agreement governing
Mr. Creager's employment with the Company under which Mr. Creager's salary
is set at $175,000. See "--Employment Agreements and Change in Control
Arrangements" and "Certain Transactions."
(5) Mr. Druehl became the Company's Executive Vice President and Chief
Operating Officer in August 1996. In connection with Mr. Druehl's
employment, the Company agreed to pay him an annual salary of $155,000 and
a cash bonus equal to 33% of his salary, based on performance. See "--
Employment Agreements and Change in Control Arrangements" and "Certain
Transactions." In August 1996, the Company granted Mr. Druehl an option
expiring August 2001 to acquire 150,000 shares of the Company's Common
Stock at an exercise price of $5.25 per share, with 25% of the shares
vesting in July 1997, and the remaining shares vesting ratably over the
succeeding 36 months of service.
(6) Mr. Bixler resigned from the Company effective in December 1995. Bonus for
Mr. Bixler includes $39,375 in severance payments, a bonus of $67,500 paid
pursuant to an employment agreement with the Company, a $25,000 signing
bonus and a $3,000 housing allowance.
(7) Mr. Hass resigned from the Company effective in March 1996.

OPTION GRANTS IN FISCAL YEAR 1995

The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1995. All such options were awarded under the Company's 1992 Key Personnel
Stock Option Plan. No stock appreciation rights were granted to the Named
Executive Officers during the fiscal year ended December 31, 1995.

INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL 1995 SHARE(2)(3) DATE(4) 5% 10%
---- ---------- ------------- ----------- ---------- ---------- -----------

Current Executive Officers
Kenneth B. Hamlet(5)............ -- -- % $ -- -- $ -- $ --
Robert R. Creager............... 349,500 36.7 1.00 1/30/00 96,560 213,373
James A. Barth.................. 100,000 10.5 1.00 1/30/00 27,628 61,051
50,000 5.3 2.00 9/18/00 27,628 61,051
Gordon E. (Ned) Druehl, Jr.(6).. -- -- -- -- -- --
Pang T. Ho, Ph.D................ 61,800 6.5 1.00 1/30/00 17,074 37,730
20,000 2.1 2.00 9/18/00 11,051 24,420
Former Executive Officers
Jeffrey A. Bixler(7)............ 75,000 7.9 1.00 4/18/00 20,721 45,788
Eric S. Hass(8)................. 169,000 17.8 1.00 1/30/00 46,692 103,176

- --------
(1) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the five year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant.
(3) Exercise price may be paid in cash, by check, by delivery of already-owned
shares of the Company's Common Stock subject to certain conditions, or
pursuant to a cashless exercise procedure under which the optionee
provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
(4) Twenty-five percent (25%) of the option shares vest on the first
anniversary of the date of grant, and the balance vests at the rate of
1/48 of the total option shares for each month of service thereafter,
except for Mr. Robert R. Creager's option, which vests ratably over 36
months.
(5) Mr. Hamlet became President and Chief Executive Officer of the Company in
January 1996. In January 1996, the Company granted Mr. Hamlet an option
expiring January 2001 to acquire 654,324 shares of the Company's Common
Stock at an exercise price per share of $2.00 with vesting to occur
ratably over 36 months.
(6) In August 1996, the Company granted Mr. Druehl an option to acquire
150,000 shares of the Company's Common Stock at an exercise price of $5.25
per share, with 25% of the shares vesting in July 1997 and the remaining
shares subject to the option vesting ratably over the succeeding 36 months
of service.
(7) Mr. Bixler resigned from the Company effective in December 1995. No shares
subject to the option had vested as of the date of Mr. Bixler's
resignation, and the option terminated.
(8) Mr. Hass resigned from the Company effective in March 1996. In connection
with his resignation, Mr. Hass exercised the option with respect to 66,895
shares. The option expired with respect to all unvested shares on the
effective date of Mr. Hass' resignation.

AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

No Named Executive Officer exercised a stock option during fiscal 1995. The
following table sets forth certain information regarding stock options held as
of December 31, 1995 by the Named Executive Officers.

NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Current Executive Officers
Kenneth B. Hamlet (2)...... -- -- $ -- $ --
Robert R. Creager ......... 135,917 213,583 1,631,004 2,562,996
James A. Barth............. 32,292 117,708 384,379 1,365,621
Gordon E. (Ned) Druehl,
Jr.(3).................... -- -- -- --
Pang T. Ho, Ph.D. ......... 29,583 75,417 353,746 886,254
Former Executive Officers
Jeffrey A. Bixler(4)....... -- -- -- --
Eric S. Hass(5)............ 73,000 146,000 876,000 1,752,000

- --------
(1) Based on an initial public offering price of $13.00 per share minus the
exercise price of outstanding options.
(2) Mr. Hamlet became President and Chief Executive Officer of the Company in
January 1996 and, accordingly, held no outstanding options as of December
31, 1995. In January 1996, the Company granted Mr. Hamlet an option
expiring January 2001 to acquire 654,324 shares of the Company's Common
Stock at an exercise price per share of $2.00 with vesting to occur
ratably over 36 months.
(3) Mr. Druehl became Executive Vice President and Chief Operating Officer in
August 1996 and, accordingly, held no outstanding options as of December
31, 1995. In August 1996, the Company granted Mr. Druehl an option
expiring August 2001 to acquire 150,000 shares of the Company's Common
Stock at an exercise price per share of $5.25 with 25% of the shares
vesting in July 1997 and the remaining shares vesting ratably over the
succeeding 36 months of service.
(4) Mr. Bixler resigned from the Company effective in December 1995. No shares
subject to the option granted to Mr. Bixler had vested as of the date of
his resignation, and the option terminated as of such date. Accordingly,
Mr. Bixler held no outstanding options as of December 31, 1995.
(5) Mr. Hass resigned from the Company effective in March 1996. In connection
with his resignation. Mr. Hass exercised two outstanding options for
19,791 and 66,895 shares, respectively. All remaining shares subject to
options held by Mr. Hass were unvested and terminated on the effective
date of his resignation.

STOCK PLANS

1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key
Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the
Board of Directors in December 1992 and approved by the Company's stockholders
in December 1993. The Board of Directors approved the amendment and
restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of
Common Stock, less the number of shares issued under and not returned to the
Company's now-terminated 1992 Stock Option Plan, has been reserved for
issuance under the 1992 Plan. The 1992 Plan provides for the grant to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and
for the grant to employees and consultants of nonstatutory stock options.
Unless terminated sooner, the 1992 Plan will terminate automatically in
December 2002.

The 1992 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the

options granted, including the exercise price, the number of shares subject to
each option, the exercisability thereof, and the form of consideration payable
upon such exercise. In addition, the Committee has the authority to amend,
suspend or terminate the 1992 Plan, provided that no such action may affect
any share of Common Stock previously issued and sold or any option previously
under the 1992 Plan.

Options granted under the 1992 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the 1992 Plan must generally be
exercised within three months of the end of optionee's status as an employee
or consultant of the Company, or within twelve months after the optionee's
termination by death or disability, but in no event later than the expiration
of the option's term. The exercise price of all incentive stock options
granted under the 1992 Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory
stock options granted under the 1992 Plan is determined by the Committee, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must be at least equal to the fair market value of
the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the date
of grant, and the term of such incentive stock option may not exceed five
years. The term of all other options granted under the 1992 Plan may not
exceed ten years.

The 1992 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, the Committee shall provide for the Optionee to have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If the Committee makes an
option exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice,
and the option will terminate upon the expiration of such period. Certain
options outstanding under the 1992 Plan contain a provision providing for
accelerated vesting of options following an assumption by the successor
corporation in the event the optionee's employment is terminated within
certain time periods after the consummation of the merger. The Committee may,
in its discretion, include such provision in the vesting arrangement for
future option grants.

1992 Stock Option Plan. The Company's now-terminated 1992 Stock Option Plan
(the "1992 Stock Option Plan") provided for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and for the granting to employees and consultants of nonstatutory
stock options. The 1992 Stock Option Plan was approved by the Board of
Directors and stockholders in December 1992. A total of 2,000,000 shares of
Common Stock were originally reserved for issuance pursuant to the 1992 Stock
Option Plan. The Board terminated the 1992 Stock Option Plan in August, 1996,
although shares of Common Stock previously issued and sold and any option
previously granted under the 1992 Stock Option Plan will not be affected by
the termination of this plan. No further grants will be made under the 1992
Stock Option Plan.

Options granted under the 1992 Stock Option Plan are not generally
transferable by the optionee, and each option is exercisable during the
lifetime of the optionee only by such optionee. Options granted under the 1992
Stock Option Plan must generally be exercised within three months of the end
of optionee's status as an employee or consultant of the Company, within six
months after such optionee's termination by disability or within twelve months
after such optionee's termination by death (but in no event later than the
expiration of the option's ten year term). The exercise price of all incentive
stock options granted under the 1992 Stock Option Plan was at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options granted under the 1992 Stock Option Plan
was at least equal to 85% of the fair market value of the Common Stock on the
date of grant. With respect to any participant who owned stock possessing

more than 10% of the voting power of all classes of the Company's outstanding
capital stock at the date of grant, the exercise price of any option granted
was at least 110% of the fair market value on the date of grant, and the term
of such option did not exceed five years. The term of all other options
granted under the 1992 Stock Option Plan did not exceed ten years.

The 1992 Stock Option Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of the
Company's assets or a like transaction involving the Company, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted for as
described in the preceding sentence, the Committee shall notify the optionee
that the option shall be exercisable to the extent it has vested for a period
of fifteen (15) days from the date of such notice, and the option shall
terminate upon the expiration of such period.

1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
September 1996 but will not become effective until the effectiveness of the
Registration Statement related to the Offerings. A total of 200,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, is implemented by consecutive and overlapping twenty-four month
offering periods beginning on the first trading day on or after May 1 and
November 1 each year, except for the first such offering period which
commences on the first trading day on or after the effective date of the
Offerings and ends on the last trading day on or before October 31, 1998. Each
offering period contains four intervening purchase periods of approximately
six months duration, during which payroll deductions of participants are
accumulated and, at the end of which, shares of Common Stock are purchased.
The Purchase Plan is administered by the Board of Directors or by a committee
appointed by the Board. Employees are eligible to participate if they are
customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions of up to 15% of an employee's compensation (excluding
commissions, overtime and other bonuses and incentive compensation). The price
of stock purchased under the Purchase Plan is 85% of the lower of the fair
market value of the Common Stock at the beginning of the offering period or
the end of the purchase period. Employees may end their participation at any
time during an offering period, and they will be paid their payroll deductions
to date. Participation ends automatically upon termination of employment with
the Company.

Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the
event of a merger of the Company with or into another corporation or a sale of
substantially all of the Company's assets, the Board of Directors shall
shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The Purchase Plan will terminate in September 2006. The Board of
Directors has the authority to amend or terminate the Purchase Plan, except
that no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.

1996 Director Stock Option Plan. The Company's 1996 Director Stock Option
Plan (the "Director Plan") was adopted by the Board of Directors in September
1996 but will not become effective until the date of the effectiveness of the
Registration Statement relating to the Offerings. Non-employee directors are
entitled to participate in the Director Plan. The Director Plan has a term of
ten years, unless terminated sooner by the Board. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Director Plan.

The Director Plan provides for the grant of 25,000 shares of Common Stock
(the "First Option"), to each non-employee director on the earlier of (i) the
effective date of the Director Plan or (ii) the date on which the person first
becomes a non-employee director. The Board of Directors may, in its
discretion, grant a First Option covering a different number of shares of
Common Stock. No non-employee director will be granted a First Option if
either (i) immediately prior to becoming a non-employee director, such person
was a director of the Company or (ii) such individual is the direct or
indirect beneficial owner or an affiliate of a direct or indirect

beneficial owner of 3% or more of the Company's outstanding Common Stock. Each
non-employee director, including non-employee directors not entitled to
receive a First Option, will also be granted an option to purchase 5,000
shares of Common Stock (a "Subsequent Option") each year on the date of the
annual shareholder's meeting of the Company, if on such date he or she shall
have served on the Board for at least six months. The First Option shall have
a term of 10 years and the shares subject to each such option shall vest as to
25% of the shares of Common Stock subject to the option one year after its
date of grant, and as to 1/48th of the shares subject to the option each month
thereafter, and each Subsequent Option will become exercisable at a rate of
1/48 of the shares subject to such additional options on the monthly
anniversary of the date of grant. The exercise prices of the First Option and
each Subsequent Option shall be 100% of the fair market value per share of the
Common Stock, generally determined with reference to the closing price of the
Common Stock as reported on the Nasdaq National Market on the date of grant.

In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or
substituted for, it shall continue to vest as provided in the Director Plan.
If a non-employee director's status as a director of the Company or the
successor corporation, as applicable, is terminated other than upon a
voluntary resignation by the non-employee director, each option granted to
such non-employee director shall become fully vested and exercisable. If the
successor does not agree to assume or substitute the option, each option shall
also become fully vested and exercisable for a period of thirty days, after
which period the option shall terminate. Options granted under the Director
Plan must be exercised within three months of the end of the optionee's tenure
as a director of the Company, or within twelve months after termination of the
director's tenure by death or disability, but in no event later than the
expiration of the option's ten year term. No option granted under the Director
Plan is transferable by the optionee other than by will or the laws of descent
and distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.

401(k) Plan. The Company maintains the MagiNet Corporation 401(k) Savings
Plan (the "401(k) Plan") which covers all of the Company's full-time U.S.
employees who have completed one month of service. Pursuant to the 401(k)
Plan, eligible employees may elect to defer their current compensation by up
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan on their behalf as an elective deferral
contribution. The 401(k) Plan is intended to qualify under Section 401 of the
Internal Revenue Code of 1986, as amended, so that contributions to the 401(k)
Plan, and income earned on such contributions, are not taxable to employees
until withdrawn from the 401(k) Plan. The trustee under the 401(k) Plan, at
the direction of each participant, invests the assets of the 401(k) Plan in
any of a number of investment options.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

The Company currently has employment agreements in effect with Kenneth B.
Hamlet, the Company's Chairman of the Board, President and Chief Executive
Officer, Robert R. Creager, the Company's Executive Vice President, Corporate
Development, and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice
President and Chief Operating Officer.

On September 22, 1995, the Company entered into an at-will employment
agreement with Mr. Creager pursuant to which the Company retained his services
as the Company's President and Chief Executive Officer until the appointment
of Mr. Hamlet to such posts and retained Mr. Creager's services as Chairman of
the Company's Board of Directors thereafter. The term of the agreement is
until September 22, 1996 and can be voluntarily continued by the Company.
Under the agreement, Mr. Creager's salary is set at $175,000 per year. In
addition to his salary, Mr. Creager is entitled to participate in the
Company's executive bonus program and employee benefit plans. In the event of
a change of control transaction, Mr. Creager, whether or not employed by the
Company and unless terminated by the Company for cause, shall be entitled to
participate in any Company arrangement designed to compensate or incentivize
executives in connection with a change of control transaction.

On November 28, 1995, the Company entered into an at-will employment
agreement with Mr. Hamlet pursuant to which the Company retained his services
as President and Chief Executive Officer beginning January 15, 1996. The
agreement provides for an annual base salary of $250,000, subject to annual
review concerning increases. In addition, Mr. Hamlet is eligible to receive an
annual bonus based upon certain financial criteria to be agreed upon by
Mr. Hamlet and the Board of Directors, including revenue and profitability
targets and other organizational milestones. Such bonus shall be payable in
part in cash and in part in Common Stock of the Company. The number of shares
of Common Stock issuable in connection with Mr. Hamlet's bonus shall, upon the
closing of the Offerings, be determined by dividing the cash portion of the
bonus by a price per share to be determined by negotiation between the Company
and Mr. Hamlet. Such shares shall be fully vested at the time of issuance.

On June 20, 1996, the Company entered into an at-will employment letter
agreement with Mr. Druehl which provides for an annual base salary of $155,000
and an annual cash bonus based on the achievement of individual and Company
performance objectives.

Under the 1992 Plan, in the event of a merger or change-of-control of the
Company, the successor corporation may assume outstanding options or
substitute equivalent options. If such successor corporation does not assume
such options or substitute equivalent options, vesting of outstanding options
under the 1992 Plan will automatically accelerate. In addition, currently
outstanding options under the 1992 Plan for the Named Executive Officers
provide that if such option is assumed or an equivalent option is substituted,
vesting of such option will automatically accelerate if such officer's
employment with the successor corporation is terminated within twelve months
of the merger or change-of-control transaction.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Certificate of Incorporation that
eliminate to the fullest extent permissible under Delaware law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
Delaware law, including in circumstances in which indemnification is otherwise
discretionary under Delaware law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.

CERTAIN TRANSACTIONS

Between October 1992 and May 1996, the Company sold and issued 10,908,878
shares of its Preferred Stock for an aggregate consideration of $56,402,000.
The Company sold the Preferred Stock in series as follows: (i) 150,000 shares
of Series A Preferred Stock in October 1992 at a price of $2.00 per share;
(ii) 440,068 shares of Series B Preferred Stock in October 1992 at a price of
$4.00 per share; (iii) 888,859 shares of Series B Preferred Stock in March
1993 at a price of $4.50 per share and warrants to acquire 174,993 shares of
Common Stock at an exercise price of $4.50 per share; (iv) 6,287,093 shares of
Series C Preferred Stock in September 1994 at a price of $4.50 per share and
warrants to acquire 1,111,111 shares of Series C Preferred Stock at an
exercise price of $4.50 per share; (v) an aggregate of 3,142,858 shares of
Series D Preferred Stock in December 1995 and May 1996 at a price of $7.00 per
share and warrants to acquire up to an aggregate 200,000 shares of Common
Stock (subject to adjustment) at an exercise price of $7.00 per share.

The following table summarizes purchases, valued in excess of $60,000, of
shares of Preferred Stock and Common Stock by directors, executive officers,
and 5% stockholders of the Company:

SHARES
-----------------------------------------------------------------
COMMON SERIES C SERIES D
COMMON SERIES C WARRANTS(1) WARRANTS(2) SERIES D WARRANTS(3)
------ --------- ----------- ----------- --------- -----------

RRE Investors,
L.L.C.(4).............. -- 4,000,000 -- 1,111,111 -- --
Equity-Linked Investors
II..................... -- -- -- -- 1,500,000 95,455
Festival Company, Inc... -- -- -- -- 1,000,001 63,636
Pomona Capital,
L.P.(5)................ -- 669,150 66,667 -- -- --
Kenneth B. Hamlet(6).... 28,000(8) -- -- -- 28,000 1,782
James A. Barth(7)....... 12,000(8) -- -- -- 12,000 764

- --------
(1) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Common Stock at an exercise price of $0.50 per share issued in
connection with a bridge note financing in September 1994.
(2) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Series C Preferred Stock (and, upon the effectiveness of the
registration statement covering the Offerings, to acquire Common Stock)
issued in connection with the Company's Series C Preferred Stock
Financing. If not exercised in connection with the Offerings, such
warrants will terminate.
(3) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Common Stock issued in connection with the Company's Series D
Preferred Stock Financing. If not exercised in connection with the
Offerings, such warrants will terminate.
(4) Includes shares purchased by Sunset Partners, L.P., Sunset Partners II,
L.P., and Sunset Partners III, L.P. (collectively, the "Sunset
Partnerships"). RRE Investors, L.L.C. is the general partner of each of
the Sunset Partnerships.
(5) Includes shares purchased by Pomona Capital, L.P., SOF Venture Capital,
L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P.
Michael D. Granoff, a member of the Company's Board of Directors, is the
sole shareholder of Pomona Partners, Inc., the general partner of SOF
Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture
Capital, L.P. and the general partner of Pomona Associates, L.P. which
serves as the general partner of Pomona Capital, L.P.
(6) Mr. Hamlet is Chairman of the Board, President and Chief Executive Officer
of the Company.
(7) Mr. Barth is Executive Vice President and Chief Financial Officer of the
Company.
(8) Mr. Hamlet and Mr. Barth purchased the number of shares of Common Stock
indicated on May 30, 1996 at a purchase price per share of $2.00.

On September 29, 1994, the Company entered into a consulting agreement with
RRE Investors, L.L.C. ("RRE"), which terminates on September 28, 1997. RRE is
the general partner of each of Sunset Partners, L.P., Sunset Partners, L.P.
and Sunset Partners III, L.P., which collectively hold greater than 5% of the
outstanding Common Stock of the Company. The agreement provides that RRE will
provide consulting and advisory services to the Company regarding strategic
planning and business and financial matters for a fee of $150,000 for the
first year of the agreement and $200,000 for each of the following two years.
The agreement also provides that the Company will reimburse RRE for reasonable
business expenses incurred by RRE, its employees and its agents in providing
such services.

The Company has entered into employment agreements with certain officers of
the Company. See "--Employment Agreements and Change in Control Arrangements."

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 31, 1996 and as adjusted
to reflect the sale of the 5,000,000 shares of Common Stock offered hereby by
(i) each person or entity who is known by the Company to own beneficially 5%
or more of the Company's outstanding Common Stock; (ii) each director of the
Company; (iii) each of the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group.

NUMBER OF PERCENTAGE OF TOTAL SHARES(2)
SHARES BENEFICIALLY ------------------------------
NAME AND ADDRESS(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
------------------- ------------------- --------------- --------------

RRE Investors, L.L.C.(3).... 4,726,495 35.1% 25.6%
122 East 56th Street, 22nd
Floor
New York, NY 10022
Equity-Linked Investors II.. 1,522,028 11.3% 8.2%
c/o Desai Capital
Management, Inc.
540 Madison Avenue, 36th
Floor
New York, NY 10022
Festival Company, Inc. ..... 1,014,685 7.5% 5.5%
Wisma Barito Pacific, Tower
B
Lt. 11, J1 S. Paman Kav.
62-63 Jakarta 11410
Indonesia
Pomona Capital, L.P.(4)..... 733,251 5.4% 4.0%
780 Third Avenue
New York, NY 10017-7076
Kenneth B. Hamlet(5)........ 219,992 1.6% 1.2%
Robert R. Creager(6)........ 423,000 3.1% 2.3%
James A. Barth(7)........... 85,718 * *
Gordon E. (Ned) Druehl, Jr.
............................ -- -- --
Pang T. Ho, Ph.D.(8) ....... 51,459 * *
Stuart J. Ellman(9)......... 4,726,495 35.1% 25.6%
Michael D. Granoff(10)...... 733,251 5.4% 4.0%
Michael Ramsay(11).......... 7,292 * *
James D. Robinson IV(12).... 4,726,495 35.1% 25.6%
Jeffrey A. Bixler(13)....... -- -- --
Eric S. Hass(14)............ 132,826 1.0% *
All current executive
officers and directors as a
group
(9 persons)(15)............. 6,247,207 44.8% 33.0%

- --------
*Less than 1%.
(1) Unless otherwise indicated, the address for each listed stockholder is
c/o MagiNet Corporation, 405 Tasman Drive, Sunnyvale, California 94089.
Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock held by them.
(2) Applicable percentage ownership is based on 13,459,439 shares of Common
Stock outstanding as of August 31, 1996 and 18,459,439 shares immediately
following the completion of the Offerings (assuming no exercise of the
Underwriters' over-allotment option), together with applicable options
for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities, subject
to community property laws, where applicable. Shares of Common Stock
subject to options that are presently exercisable or exercisable within
60 days of August 31, 1996 are deemed to be beneficially owned by the
person holding such options for the purpose of computing the percentage
of ownership of

such person but are not treated as outstanding for the purpose of computing
the percentage of any other person. To the extent that any shares are
issued upon exercise of options or other rights to acquire the Company's
capital stock that are presently outstanding or granted in the future or
reserved for future issuance under the Company's stock plans, there will be
further dilution to new public investors.
(3) Includes 1,808,907 shares held by Sunset Partners, L.P. ("Sunset"),
1,591,412 shares held by Sunset Partners II, L.P. ("Sunset II") and
1,326,176 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE
Investors, L.L.C. is the general partner of each of Sunset Partners,
L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P.
(collectively, the "Sunset Partnerships").
(4) Includes 244,417 shares held by Pomona Capital, L.P. ("Pomona"), 195,534
shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,980 shares
held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,320
shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D.
Granoff, a director of the Company, is the sole shareholder of Pomona
Partners, Inc., which serves as the general partner of SOF Venture, SP
Offshore and SP Venture, and which also serves as the general partner of
Pomona Associates, L.P., the general partner of Pomona.
(5) Includes 163,581 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Hamlet is the Company's President and
Chief Executive Officer and Chairman of its Board of Directors.
(6) Includes 233,000 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Creager is the Company's founder and
Executive Vice President of Corporate Development.
(7) Includes (i) 63,542 shares of Common Stock issuable upon exercise of
stock options which are presently exercisable or will become exercisable
within 60 days of August 31, 1996, (ii) 5,000 shares of Common Stock held
by Mr. Barth's wife and (iii) 1,000 shares held by Mr. Barth's son. Mr.
Barth is the Company's Executive Vice President and Chief Financial
Officer.
(8) Includes 27,459 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996 and 4,000 shares held byDr. Ho's children. Dr.
Ho is the Company's Vice President of Engineering.
(9) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Ellman is a member of the
Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(10) Includes 244,417 shares held by Pomona, 195,534 shares held by SOF
Venture, 175,980 shares held by SP Offshore and 117,320 shares held by SP
Venture. Mr. Granoff, a member of the Company's Board of Directors, is
the sole shareholder of Pomona Partners, Inc., the general partner of SOF
Venture, SP Offshore and SP Venture and the general partner of Pomona
Associates, L.P., which serves as the general partner of Pomona. Mr.
Granoff disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(11) Includes 7,292 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Ramsay is a member of the Company's Board
of Directors.
(12) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Robinson is a member of
the Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(13) Mr. Bixler resigned from the Company effective in December 1995.
(14) Includes 46,140 shares held by Mr. Hass individually and 86,686 shares
held by Mr. Hass and his wife, as trustees of the Hass Community Property
Trust. Mr. Hass resigned from the Company effective in March 1996.
(15) Includes 494,874 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of August 31, 1996. Excludes 132,826 shares
beneficially held by Eric S. Hass, who resigned as an officer of the
Company effective in March 1996.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of the Offerings, the Company will be authorized to
issue 45,000,000 shares of Common Stock, $0.001 par value, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value. The following
description of the Company's capital stock does not purport to be complete and
is subject to and qualified in its entirety by the Company's Restated
Certificate of Incorporation and Bylaws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable Delaware law.

COMMON STOCK

Upon conversion of the Preferred Stock, there will be 13,459,439 shares of
Common Stock outstanding held of record by approximately 90 holders. Holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders. Holders of Common Stock do not have cumulative
voting rights, and, therefore, holders of a majority of the shares voting for
the election of directors can elect all of the directors. In such event, the
holders of the remaining shares will not be able to elect any directors.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or
paid cash dividends on its capital stock, expects to retain future earnings,
if any, for use in the operation and expansion of its business, and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding.

PREFERRED STOCK

Effective upon the closing of the Offerings, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of, and the voting and other rights of, the holders of Common Stock. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no current plans to issue any shares
of Preferred Stock.

ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called annual or special meeting and may
not be effected by written consent. The Company's Bylaws provide that, except
as otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of
Directors, by the chief executive officer of the Company, or by stockholders
holding shares in the aggregate entitled to cast not less than 10% of the
votes at such meeting. In addition, the Company's Bylaws establish an advance
notice procedure for stockholder proposals to be brought before an annual
meeting of stockholders, including proposed nominations of persons for
election to the Board. Stockholders at an annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the Board of Directors or by a
stockholder who was a

stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has delivered timely written notice in proper form
to the Company's Secretary of the stockholder's intention to bring such
business before the meeting.

The foregoing provisions of the Company's Certificate of Incorporation and
Bylaws are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by
the Board of Directors and to discourage certain types of transactions which
may involve an actual or threatened change of control of the Company. Such
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
These provisions may also have the effect of preventing changes in the
management of the Company. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."

EFFECT OF DELAWARE ANTITAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from
engaging, under certain circumstances in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of the Antitakeover
Law, a "business combination" includes, among other things, a merger or
consolidation involving the Company and the interested shareholder and the
sale of more than ten percent (10%) of the Company's assets. In general, the
Antitakeover Law defines an "interested stockholder" as any entity or person
beneficially owning 15% or more the outstanding voting stock of the Company
and any entity or person affiliated with or controlling or controlled by such
entity or person. A Delaware corporation may "opt out" of the Antitakeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the Company's
outstanding voting shares. The Company has not "opted out" of the provisions
of the Antitakeover Law. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."

REGISTRATION RIGHTS

After the Offerings, the holders of approximately 3,977,000 shares of Common
Stock will be entitled upon expiration of lock-up agreements with the
Underwriters to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the agreement between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other securities holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. Holders of
registration rights may also require the Company to file a registration
statement under the Securities Act at the Company's expense with respect to
their shares of Common Stock, and the Company is required to use its best
efforts to effect such registration. Further, holders may require the Company
to file registration statements on Form S-3 at the Company's expense when such
form becomes available for use to the Company. All such registration rights
are subject to certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares to be included in
such registration.

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offerings, there has been no market for the Common Stock and
there is no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offerings. Sales of substantial amounts
of Common Stock in the public market could adversely affect the market price
of the Common Stock and could impair the Company's future ability to raise
capital through the sale of its equity securities.

Upon completion of the Offerings, the Company will have outstanding
18,459,439 shares of Common Stock based upon shares outstanding as of August
31, 1996. In addition to the 5,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
effective date of the Registration Statement (the "Effective Date"), there
will be 13,459,439 shares of Common Stock outstanding, all of which are
"restricted" shares (the "Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). Approximately 5,000 Restricted Shares
will be eligible for sale immediately following the Effective Date in reliance
on Rule 144(k) of the Securities Act. Beginning 90 days after the Effective
Date approximately 31,000 Restricted Shares of Common Stock will become
eligible for sale in the public market pursuant to Rule 144 and Rule 701 of
the Securities Act. Beginning 180 days after the Effective Date, approximately
9,448,000 additional Restricted Shares of Common Stock subject to lock-up
agreements will become eligible for sale in the public market. Of the
approximately 9,448,000 Restricted Shares that will become available for sale
in the public market beginning 180 days after the Effective Date,
approximately 7,411,000 shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144.

On August 31, 1996, options to purchase 1,655,484 shares were outstanding,
of which options to purchase approximately 489,483 shares were then
exercisable. See "Management--1992 Key Personnel Stock Option Plan." The
Company intends to file, a Form S-8 registration statement under the
Securities Act to register shares reserved for issuance under this stock
option plan and upon exercise of outstanding options. Shares of Common Stock
issued upon exercise of options after the effective date of the Form S-8 will
be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and lock-up agreements. Beginning 180
days after the Effective Date, 798,679 shares issuable upon the exercise of
vested options will be eligible for sale.

In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years but less than
three years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Common Stock (approximately 185,000 shares immediately after the
Offerings) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least three years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above. Under Rule 701, shares
issued under certain compensatory stock-based plans, such as the Company's
option plan, may be resold under Rule 144 by non-affiliates subject only to
the manner of sale requirements, and by affiliates without regard to the two-
year holding period requirements, commencing 90 days after the date of the
Offerings.

CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a person that, for United States federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or
an estate or trust, in each case not subject to U.S. federal income tax on a
net income tax basis in respect of income or gain from Common Stock (a "non-
U.S. holder"). This discussion is based on the Internal Revenue Code of 1986,
as amended, Treasury regulations thereunder, and administrative and judicial
interpretations as of the date hereof, all of which may be changed. This
discussion does not address all the aspects of U.S. federal income and estate
taxation that may be relevant to non-U.S. holders in light of their particular
circumstances, or to certain types of holders subject to special treatment
under United States federal income tax laws (such as life insurance companies
and dealers in securities). Nor does it address tax consequences under the
laws of any state, municipality or other taxing jurisdiction or under the laws
of any country other than the United States.

Prospective holders should consult their own tax advisors about the
particular tax consequences to them of holding and disposing of Common Stock.

DIVIDENDS

Generally, dividends paid to a non-U.S. holder of Common Stock will be
subject to United States federal withholding tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty, unless the
dividends are effectively connected with the conduct of a trade or business
within the United States (or alternatively are attributable to a United States
permanent establishment of such holder, if an applicable income tax treaty so
requires as a condition for the non-U.S. holder to be subject to United States
income tax on a net income basis in respect of such dividends). Such
"effectively connected" dividends, or dividends attributable to a permanent
establishment, are subject to tax at rates applicable to United States
citizens, resident aliens and domestic United States corporations, and are not
generally subject to withholding. Effectively connected dividends received by
a non-U.S. corporation may be subject to an additional "branch profits tax" at
a 30% rate (or a lower rate under an applicable income tax treaty) when such
dividends are deemed repatriated from the United States.

Under current U.S. Treasury regulations, dividends paid to an address
outside the United States in a foreign country are presumed to be paid to a
resident of such country for purposes of the withholding tax. Under current
interpretation of U.S. Treasury regulations, the same presumption applies to
determine the applicability of a reduced rate of withholding under a tax
treaty. Thus, non-U.S. holders receiving dividends at addresses outside the
United States are not currently required to file tax forms to obtain the
benefit of an applicable treaty rate. Under U.S. Treasury regulations that are
proposed to be effective for distributions after 1997 (the "Proposed
Regulations"), to claim the benefits of a tax treaty a non-U.S. holder of
Common Stock would be required to satisfy applicable certification
requirements. In addition, under the Proposed Regulations, in the case of
Common Stock held by a foreign partnership, (x) the certification requirement
would generally be applied to the partners of the partnership and (y) the
partnership would be required to provide certain information. The Proposed
Regulations also provide look-through rules for tiered partnerships. It is not
certain whether, or in what form, the Proposed Regulations will be adopted as
final regulations.

If there is excess withholding on a person eligible for a treaty benefit,
the person can file for a refund with the United States Internal Revenue
Service.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of Common Stock
unless (i) the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, (ii) in the case of a non-U.S. holder
who is an individual and holds

the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the disposition and certain
other conditions are met, (iii) the non-U.S. holder is subject to tax pursuant
to the provisions of United States tax law applicable to certain United States
expatriates, or (iv) the Company is or has been a "U.S. real property holding
corporation" for federal income tax purposes and, if the Common Stock is
regularly traded on an established securities market, the non-U.S. holder
held, directly or indirectly, at any time during the 5-year period ending on
the date of disposition (or such shorter period that such shares were held)
more than 5% of the Common Stock. The Company has not been and does not
anticipate becoming a "U.S. real property holding corporation" for United
States federal income tax purposes.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence. Dividends not subject to withholding tax may be subject
to backup withholding if the non-U.S. holder is not an "exempt recipient" and
fails to provide a tax identification number and other information to the
Company. Under the Proposed Regulations, dividend payments generally will be
subject to information reporting and backup withholding unless applicable
certification requirements are satisfied.

If the proceeds of a disposition of Common Stock are paid over by or through
a United States office of a broker, the payment is subject to information
reporting and possible backup withholding at a 31% rate unless the disposing
holder certifies under penalties of perjury as to his name, address, and non-
U.S. holder status or otherwise establishes an exemption. Generally, United
States information reporting and backup withholding requirement will not apply
to a payment of disposition proceeds if the payment is made outside the United
States through a non-United States office of a broker. However, United States
information reporting requirements (but not backup withholding) will apply to
a payment of disposition proceeds outside the United States if (A) the payment
is made through an office outside the United States of a broker that either
(i) is a U.S. person, (ii) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (iii)
is a "controlled foreign corporation" for United States federal income tax
purposes and (B) the broker fails to maintain documentary evidence that the
holder is a non-U.S. holder or that the holder otherwise is entitled to an
exemption.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.

FEDERAL ESTATE TAXES

Common Stock held by a non-U.S. holder at the time of death will be included
in such holder's gross estate for United States federal estate tax purposes
unless an applicable estate tax treaty provides otherwise.

UNDERWRITING

Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, each of the Underwriters named below (the "U.S. Underwriters"),
for whom Lehman Brothers Inc. and Hambrecht & Quist LLC are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company, and the Company has agreed to sell to each U.S. Underwriter, the
number of shares of Common Stock set forth opposite the name of such U.S.
Underwriter below:

NUMBER OF
U. S. UNDERWRITERS SHARES
------------------ ---------

Lehman Brothers Inc. .............................................
Hambrecht & Quist LLC.............................................
---------
Total........................................................... 4,000,000
=========

Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part, each of
the managers named below (the "International Managers"), for whom Lehman
Brothers International (Europe) and Hambrecht & Quist LLC are acting as lead
managers (the "Lead Managers"), has severally agreed to purchase from the
Company, and the Company has agreed to sell to each International Manager, the
number of shares of Common Stock set forth opposite the name of such
International Manager below:

NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------

Lehman Brothers International (Europe)............................
Hambrecht & Quist LLC.............................................

---------
Total........................................................... 1,000,000
=========

The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers to purchase shares of
Common Stock are subject to certain conditions, and that, if any of the
foregoing shares of Common Stock are purchased by the U.S. Underwriters
pursuant to the U.S. Underwriting Agreement or by the International Managers
pursuant to the International Underwriting Agreement, all the shares of Common
Stock agreed to be purchased by either the U.S. Underwriters or the
International Managers, as the case may be, pursuant to their respective
Underwriting Agreement must be so purchased. The offering price and
underwriting discounts and commissions for the U.S. Offering and the
International Offering are identical. The closing of the U.S. Offering is a
condition to the closing of the International Offering, and the closing of the
International Offering is a condition to the closing of the U.S. Offering.

The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page
of this Prospectus, and to certain selected dealers (who may include the U.S.
Underwriters and the International Managers) at such public offering price
less a selling concession not in excess of $ per share. The selected
dealers may reallows a concession not in excess of $ per share to certain
brokers and dealers. After the initial public offering, the public offering
price, the concession to selected dealers and reallowance may be changed by
the Representative and the Lead Managers.

Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
for shares of the Common Stock or as to the price at which shares of the
Common Stock may trade in the public market from time to time subsequent to
the Offerings. The initial public offering price for the Common Stock will be
determined by negotiations among the Company, the Representatives and the Lead
Managers. Among the factors to be considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market
conditions, will be the financial and operating history and condition of the
Company, the Company's business and financial prospects, the prospects for the
industry in which the Company operates, the recent market prices of securities
of companies in businesses similar to that of the Company and other relevant
factors.

The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an aggregate of 600,000 and 150,000
additional shares of Common Stock, respectively, exercisable solely to cover
over-allotments, at the initial price to the public less the aggregate
underwriting discounts, shown on the cover page of this Prospectus. Either or
both options may be exercised at any time up to 30 days after the date of this
Prospectus. To the extent that the U.S. Underwriters or International Managers
exercise such options, each of the U.S. Underwriters or International
Managers, as the case may be, will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such U.S. Underwriter's or International Manager's initial
commitment.

The U.S. Underwriters and the International Managers have entered into an
Agreement between U.S. Underwriters and International Managers pursuant to
which such U.S. Underwriter has agreed that as part of the distribution of the
shares (plus any of the shares to cover over-allotments) of Common Stock
offered in the U.S. Offering, (i) it is not purchasing any of such shares for
the account of anyone other than a U.S. Person (as defined below) and (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any of such shares of distribute any Prospectus relating to the
U.S. Offering to anyone other than a U.S. Person. In addition, pursuant to the
same Agreement, each International Manager has agreed that, as part of the
distribution of the shares (plus any of the shares to cover over-allotments)
of Common Stock offered in the International Offering, (i) it is not
purchasing any of such shares for the account of a U.S. Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any Prospectus relating to the
International Offering to any U.S. Person. Each International Manager has also
agreed that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers, including (i)
certain purchases and sales between the U.S. Underwriters and International
Managers, (ii) certain offers, sales, resales, deliveries or distributions to
or through investment advisors or other persons exercising investing
discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also
acting as an International Manager or by an International Manager who is also
acting as a U.S. Underwriter and (iv) other transactions specifically approved
by the Representatives and the Lead Managers. As used herein, "U.S. Person"
means any resident or citizen of the United States or Canada and its
provinces, any corporation or other entity created or organized in or under
the laws of the United States or Canada and its provinces or any estate or
trust the income of which is subject to United States or Canadian federal
income taxation regardless of the source of its income. The term "United
States" means the United States of America (including the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares of Common Stock as may be
mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for Common Stock being sold by the U.S.
Underwriters and the International Managers, less an amount not greater than
the selling concession allocable to such Common Stock. To the extent there are
sales between the U.S. Underwriters and the International Managers pursuant to
the Agreement Between U.S. Underwriters and International Managers, the number
of shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus.

Each International Manager has represented and agreed that (i) it has not
offered or sold, and will not offer or sell, in the United Kingdom, by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an
offer to the public within the meaning of the Companies Act 1985); (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on, and will only issue and pass on to any person in
the United Kingdom, any document received by it in connection with the issue
of the Common Stock if that person is of a kind described in Article 9(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1988 or is a person to whom the document may otherwise be lawfully issued or
passed on.

Purchasers of the shares offered pursuant to the Offerings may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country to purchase in addition to the initial public offering price
set forth on the cover page hereof.

The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act or to contribute to payments that U.S. Underwriters
and the International Managers may be required to make in respect thereof.

In connection with the Offerings, the officers and directors of the Company,
certain other securityholders and the Company have agreed, with certain
exceptions, not to sell or otherwise dispose of any shares of Common Stock for
a period of 180 days from the date of this Prospectus, in each case, without
first obtaining the written consent of Lehman Brothers.

The Representatives have informed the Company that the U.S. Underwriters do
not intend to confirm sales of Common Stock to any accounts over which they
exercise discretionary authority.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, and for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. As of the date of this Prospectus, a member of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, and investment
partnerships of which members of such firm are partners beneficially own
17,457 shares of the Company's Common Stock.

EXPERTS

The consolidated financial statements of MagiNet Corporation at December 31,
1994 and 1995 and June 30, 1996, and for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete.
In each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in all respects by such reference. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited summary financial information for each
of the first three quarters of each fiscal year.

MAGINET CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
MagiNet Corporation

We have audited the accompanying consolidated balance sheets of MagiNet
Corporation as of December 31, 1994 and 1995 and June 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 and
for the six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MagiNet
Corporation at December 31, 1994 and 1995 and June 30, 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 and for the six months ended
June 30, 1996 in conformity with generally accepted accounting principles.

Ernst & Young LLP

Palo Alto, California
August 21, 1996

F-2

MAGINET CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31,
------------------
UNAUDITED PRO
FORMA
STOCKHOLDERS'
EQUITY
JUNE 30, JUNE 30,
1994 1995 1996 1996
-------- -------- -------- -------------

ASSETS
Current assets:
Cash and cash equivalents..... $ 10,532 $ 18,672 $ 14,772
Short-term investments........ 429 151 --
Accounts receivable........... 347 1,191 2,152
Other current assets.......... 351 624 1,930
-------- -------- --------
Total current assets........... 11,659 20,638 18,854
Video systems, net............. 10,704 20,961 27,854
Property and equipment, net.... 638 1,376 1,659
Prepaid royalties.............. 876 1,095 1,466
Other assets................... 122 2,470 2,352
-------- -------- --------
Total assets................... $ 23,999 $ 46,540 $ 52,185
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short-term debt............... $ 374 $ 97 $ 180
Accounts payable.............. 2,327 1,738 1,544
Accrued compensation.......... 54 340 510
Accrued interest.............. 16 1,016 1,070
Other accrued liabilities..... 1,137 2,905 1,979
-------- -------- --------
Total current liabilities...... 3,908 6,096 5,283
Deferred tax liability......... -- 544 915
Long-term debt................. -- 24,900 25,403
Minority interests in
consolidated subsidiaries..... 167 389 421
Commitments....................
Stockholders' equity:
Preferred stock, no par value;
12,122 shares authorized,
issuable in series: 7,766
shares 9,005 shares and
10,909 shares issued and
outstanding at December 31,
1994 and 1995, and June 30,
1996, respectively, all of
which are convertible;
aggregate liquidation
preference of $56,572 at June
30, 1996 (pro forma; $.001
par value, 5,000 shares
authorized, none
outstanding)................. 32,593 40,231 53,241 $ --
Common stock, no par value;
20,000 shares authorized; 276
shares, 307 shares and 481
shares issued and outstanding
at December 31, 1994 and
1995, and June 30, 1996,
respectively (pro forma;
$.001 par value, 45,000
shares authorized, 11,390
shares issued and outstanding
at June 30, 1996)............ 9 23 255 11
Additional paid-in capital.... -- -- -- 53,485
Warrants to purchase common
stock........................ -- 101 101 101
Accumulated deficit........... (12,678) (25,474) (32,800) (32,800)
Cumulative translation
adjustment................... -- (270) (634) (634)
-------- -------- -------- --------
Total stockholders' equity.... 19,924 14,611 20,163 $ 20,163
-------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 23,999 $ 46,540 $ 52,185
======== ======== ========

See accompanying notes.

F-3

MAGINET CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- ----------- -------
(UNAUDITED)

Revenue....................... $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923
Costs and expenses:
Direct costs................ 294 1,156 3,731 1,687 3,854
Depreciation and
amortization............... 171 957 3,682 1,510 3,149
Operations expenses......... 464 2,876 3,108 1,213 1,016
Selling, general and
administrative............. 1,497 4,294 8,420 3,563 4,652
Research and development.... 1,320 856 1,247 571 937
------- ------- -------- ------- -------
Total costs and expenses...... 3,746 10,139 20,188 8,544 13,608
------- ------- -------- ------- -------
Operating loss................ (3,351) (7,797) (11,499) (5,242) (5,685)
Interest expense.............. (49) (319) (1,297) (42) (1,855)
Interest income and other,
net.......................... 21 66 306 46 473
------- ------- -------- ------- -------
Loss before income taxes and
minority interest in net
losses of consolidated
subsidiaries................. (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income taxes.... -- -- (554) (300) (383)
Minority interest in net
losses of consolidated
subsidiaries................. -- 124 248 153 124
------- ------- -------- ------- -------
Net loss...................... $(3,379) $(7,926) $(12,796) $(5,385) $(7,326)
======= ======= ======== ======= =======
Pro forma net loss per share.. $ (1.03) $ (0.59)
Shares used in computation of
pro forma
net loss per share........... 12,392 12,407

See accompanying notes.

F-4

MAGINET CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

PREFERRED STOCK COMMON STOCK CUMULATIVE TOTAL
---------------- ------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT ADJUSTMENT EQUITY
------- -------- ------ ------ -------- ----------- ----------- -------------

BALANCES AT DECEMBER 31,
1992................... 590 $ 2,018 285 $ 3 $ -- $ (1,373) $ -- $ 648
Issuance of Series B
Convertible Preferred
Stock (net of issuance
costs of $61)......... 889 3,939 -- -- -- -- -- 3,939
Repurchase of Common
Stock................. -- -- (21) -- -- -- -- --
Net loss............... -- -- -- -- -- (3,379) -- (3,379)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1993................... 1,479 5,957 264 3 -- (4,752) -- 1,208
Exercise of stock
options............... -- -- 12 6 -- -- -- 6
Issuance of Series C
Convertible Preferred
Stock (net of issuance
costs of $1,656)...... 6,287 26,636 -- -- -- -- -- 26,636
Net loss............... -- -- -- -- -- (7,926) -- (7,926)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1994................... 7,766 32,593 276 9 -- (12,678) -- 19,924
Exercise of stock
options............... -- -- 31 14 -- -- -- 14
Warrants to purchase
Common Stock issued in
conjunction with
senior debt
financing............. -- -- -- -- 101 -- -- 101
Issuance of Series D
Convertible Preferred
Stock (net of issuance
costs of $1,038)...... 1,239 7,638 -- -- -- -- -- 7,638
Translation
adjustment............ -- -- -- -- -- -- (270) (270)
Net loss............... -- -- -- -- -- (12,796) -- (12,796)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1995................... 9,005 40,231 307 23 101 (25,474) (270) 14,611
Exercise of stock
options............... -- -- 109 102 -- -- -- 102
Issuance of Common
Stock................. -- -- 65 130 -- -- -- 130
Issuance of Series D
Convertible Preferred
Stock (net of issuance
costs of $314)........ 1,904 13,010 -- -- -- -- -- 13,010
Translation
adjustment............ -- -- -- -- -- -- (364) (364)
Net loss............... -- -- -- -- -- (7,326) -- (7,326)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT JUNE 30,
1996................... 10,909 $ 53,241 481 $255 $ 101 $(32,800) $(634) $20,163
======= ======== === ==== ===== ======== ===== =======

See accompanying notes.

F-5

MAGINET CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- --------- ----------- -------
(UNAUDITED)

OPERATING ACTIVITIES
Net loss..................... $(3,379) $(7,926) $ (12,796) $(5,385) $(7,326)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation................ 153 851 3,212 1,282 2,605
Amortization of prepaid
royalties.................. 18 106 479 228 544
Amortization of Senior
Secured Note financing
costs...................... -- -- 145 -- 238
Interest on convertible
subordinated debt.......... -- 192 -- -- --
Minority interests.......... -- (124) (248) (153) (124)
Changes in operating assets
and liabilities:
Accounts receivable......... (46) (301) (844) (507) (961)
Other current assets........ (90) (261) (273) (735) (1,306)
Other assets................ 43 (105) (303) (270) (120)
Accounts payable and other
accrued liabilities........ 1,548 1,431 3,009 1,136 (525)
------- ------- --------- ------- -------
Total adjustments........... 1,626 1,789 5,177 981 351
------- ------- --------- ------- -------
Net cash used in operating
activities................. (1,753) (6,137) (7,619) (4,404) (6,975)
------- ------- --------- ------- -------
INVESTING ACTIVITIES
Redemption (purchase) of
available-for-sale
securities.................. -- (429) 278 429 151
Investment in video systems.. (2,590) (8,670) (13,262) (8,353) (9,590)
Investment in property and
equipment................... (501) (262) (1,215) (246) (555)
Nonrefundable prepaid
royalty..................... -- -- (698) -- (915)
------- ------- --------- ------- -------
Net cash used in investing
activities.................. (3,091) (9,361) (14,897) (8,170) (10,909)
------- ------- --------- ------- -------
FINANCING ACTIVITIES
Proceeds from debt........... -- 374 6,000 5,000 586
Payment on debt.............. (257) -- (6,277) (256) --
Proceeds (payment) of note
payable to stockholders..... 1,400 (1,400) -- -- --
Proceeds from Senior Secured
Notes, net of issuance
costs....................... -- -- 22,811 -- --
Proceeds from Convertible
Subordinated Debt........... -- 9,000 -- -- --
Issuance of Preferred Stock,
net of issuance costs....... 3,939 17,444 7,638 -- 13,010
Issuance of Common Stock..... -- 6 14 7 232
Proceeds from minority
investors................... -- 291 470 470 156
------- ------- --------- ------- -------
Net cash provided by
financing activities........ 5,082 25,715 30,656 5,221 13,984
------- ------- --------- ------- -------
Net increase (decrease) in
cash and cash equivalents... 238 10,217 8,140 (7,353) (3,900)
Cash and cash equivalents at
beginning of period......... 77 315 10,532 10,532 18,672
------- ------- --------- ------- -------
Cash and cash equivalents at
end of period............... $ 315 $10,532 $ 18,672 $ 3,179 $14,772
======= ======= ========= ======= =======
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of Series C
Preferred Stock for
cancellation of convertible
subordinated debt plus
accrued interest............ $ -- $ 9,192 $ -- $ -- $ --
======= ======= ========= ======= =======
Warrants issued in connection
with Senior Secured Notes... $ -- $ -- $ 101 $ -- $ --
======= ======= ========= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid................ $ 18 $ 319 $ 187 $ 45 $ 1,592
======= ======= ========= ======= =======

See accompanying notes.

F-6

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

In August 1995, MagiNet Corporation (the Company) was created as a holding
company for all of its operating subsidiaries. The Company provides advanced
in-room interactive video entertainment and information systems to hotels in
the Pacific Rim, Middle East, Europe, and Africa.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of MagiNet
Corporation and its subsidiaries primarily located in the Pacific Rim. All
significant intercompany balances and transactions have been eliminated.

The accompanying financial statements have been prepared assuming that the
Company will remain in compliance with its senior note covenants by achieving
its operating plan for the remainder of 1996 and 1997. If the Company were not
able to achieve its operating plan, the Company may need to either raise
additional equity capital, reduce expenses or both in order to remain in
compliance with the senior note covenants. Management believes the Company
will be able to remain in compliance with the senior note covenants, obtain
waivers thereof or establish alternative debt financing through 1997.

INTERIM FINANCIAL DATA

The interim financial data for the six months ended June 30, 1995 is
unaudited; however, in the opinion of management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results for the interim period ended June 30,
1995. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996.

NET LOSS PER SHARE

Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, convertible Preferred Stock and warrants are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common share equivalent shares issued during the period beginning 12 months
prior to the proposed initial filing of the Company's Registration Statement
at prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the assumed public offering price for stock options
and warrants and the if-converted method for convertible Preferred Stock).

F-7

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

Historical net loss per share information is as follows:

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------

Net loss per share.......... $(0.73) $(1.72) $(2.77) $(1.17) $(1.58)
Shares used in computing
historical net loss per
share (in thousands)....... 4,598 4,606 4,626 4,617 4,641

Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the if-converted method). Such shares are included from
the original date of issuance.

REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK

The Company installs and operates its video systems at no cost to the
hotels, and issues invoices to the hotels and recognizes revenue, less an
allowance for denials, each month based on reported viewings of hotel guests.
The Company also sells its video systems to hotels in markets where it does
not expect to maintain operations. The Company performs ongoing credit
evaluations of its installed hotels and does not generally require collateral.
Reserves are maintained for potential credit losses and such losses have been
within management's expectations.

FOREIGN CURRENCY TRANSLATION

The Company's foreign subsidiaries use as their functional currency the
local currencies of the countries in which they operate. Their assets and
liabilities are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. Revenues and expenses are translated at average
rates of exchange prevailing during the period. The resulting cumulative
translation adjustments are disclosed as a separate component of stockholders'
equity. Foreign currency transaction gains and losses were not material in any
of the comparison periods.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The Company adopted in 1996, FASB Statement No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(FAS 121), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. FAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The adoption of FAS 121
did not have a material impact on the Company.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

F-8

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company invests its surplus cash principally in money market funds and
certificates of deposit. Those investments maturing within 90 days after
purchase are classified as cash equivalents. Those maturing after 90 days are
classified as short-term investments. Short-term investments are stated at
cost which approximates market. All marketable securities held by the Company
are classified as available-for-sale. The Company has not realized any
material gains or losses on such investments during the six months ended June
30, 1995 and 1996, and during the years ended December 31, 1993, 1994 and
1995.

The Company's marketable investments consist of the following:

DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)

Cash................................................ $ 908 $ 2,623 $ 2,299
Money market........................................ 3,496 12,768 9,778
Certificates of deposit............................. 599 3,432 2,695
U.S. treasury obligation............................ 3,000 -- --
U.S. commercial paper............................... 2,958 -- --
------- ------- -------
Total............................................... $10,961 $18,823 $14,772
======= ======= =======
Disclosed as:
Cash and cash equivalents......................... $10,532 $18,672 $14,772
Short-term investments............................ 429 151 --
------- ------- -------
Total............................................. $10,961 $18,823 $14,772
======= ======= =======

During the six months ended June 30, 1995 and 1996, there were no gross cash
flows from the purchases of available-for-sale securities. During the six
months ended June 30, 1995 and 1996 gross cash flows from the maturities of
available-for-sale securities were $429,000 and $151,000, respectively.

Gross cash flows from the purchases of available-for-sale securities were
none, $429,000 and $151,000 for the years ended December 31, 1993, 1994 and
1995. Gross cash flows from the maturities of available-for-sale securities
were none for the years ended December 31, 1993 and 1994, and $429,000 for the
year ended December 31, 1995.

At June 30, 1996, the Company held approximately $312,000 of restricted cash
as collateral against an equipment lease line of credit and $500,000 of
certificates of deposit restricted as collateral for letters of credit which
expire on August 31, 1996.

DEFERRED DEBT FINANCING COSTS

Debt financing costs are deferred and amortized over the term of the related
debt. The Company's deferred financing costs are included within other assets
and consist of the following:

DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(IN THOUSANDS)

Deferred financing costs incurred in connection with
the August 1995 issuance of Senior Secured Notes, net
of amortization of $145 at December 31, 1995 and $383
at June 30, 1996..................................... $2,045 $1,807
====== ======

F-9

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

VIDEO SYSTEMS

Video systems are stated at cost, net of accumulated depreciation, and
consist of the following:

DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)

Installed video systems......................... $ 7,592 $20,845 $25,932
Uninstalled video systems and installations-in-
progress....................................... 3,935 3,674 7,812
------- ------- -------
11,527 24,519 33,744
Less accumulated depreciation................... (823) (3,558) (5,890)
------- ------- -------
$10,704 $20,961 $27,854
======= ======= =======

Installed video systems consist of equipment and installation costs at hotel
locations and are depreciated using the straight-line method over the lesser
of the life of the contract or five years. Uninstalled video systems and
installations-in-progress consist primarily of purchased components.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, less accumulated depreciation and
consist of the following:

DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------- --------
(IN THOUSANDS)

Computer and video testing equipment................ $ 703 $ 1,758 $2,347
Furniture and fixtures.............................. 117 277 310
----- ------- ------
820 2,035 2,657
Less accumulated depreciation....................... (182) (659) (998)
----- ------- ------
$ 638 $ 1,376 $1,659
===== ======= ======

Property and equipment is depreciated using the straight-line method over an
estimated useful life of between two and seven years.

2. TECHNOLOGY AGREEMENTS

Pursuant to an agreement in 1992, the Company has the exclusive right to use
certain technology in the design and manufacture of its product, as defined in
the agreement, for use in specific countries principally in the Pacific Rim,
Middle East and Africa. The owner of the technology became a related party
pursuant to the purchase of Preferred Stock in 1993. Such owner held a seat on
the Company's Board of Directors until December 1995. As of June 30, 1996,
such owner's share of total outstanding voting securities had declined to 3%.
In addition, pursuant to a technology license agreement entered into in
December 1995, the Company acquired the exclusive right to use another
technology in the design and manufacture of its product for use outside of
North America.

The Company has paid cumulative nonrefundable royalties of $2,000,000 as of
June 30, 1996 in prepayments against future royalty obligations. Future
royalty obligation terms range from a certain percentage of net revenues less
hotel commissions (subject to reduction upon certain conditions) generated
from use of the

F-10

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

technology to a flat fee per room per month where the technology is utilized.
Additional nonrefundable royalty prepayments in the amount of $3,000,000 will
be due in the second half of 1996, $1,000,000 in 1997 and $1,500,000 in 1998,
based on performance of the vendor in providing additional enhancements to the
technology.

3. DEBT

Short-term debt represents notes payable on borrowings by the Company's
majority-owned joint venture in Japan from the joint venture's minority
partner, and the current portion of liabilities for an equipment lease line of
credit in Korea. Interest on the Japanese note accrues at 9.5%. Both interest
and principal on the Japanese note are payable after the joint venture is
profitable for at least one quarter.

Long-term debt consists of Senior Secured Notes issued by the Company on
August 15, 1995, and an amount borrowed pursuant to a $2.8 million equipment
lease line of credit in South Korea which was established in May, 1996. The
equipment lease line of credit is partially denominated in Korean won and
partially in U.S. dollars. The balance due on the equipment lease line was
$592,000 at June 30, 1996 and is to be repaid over 5 years at LIBOR plus 1.42%
on the U.S. portion and at South Korean Basic Lending Rate on the South Korean
portion. The interest rate at June 30, 1996 was approximately 7% per annum.
The amount of restricted cash collateralized against the South Korean
equipment lease line was $312,000 at June 30, 1996.

The $24,900,000 Senior Secured Notes are payable in full on August 15, 2000
and bear interest at 11.5% per annum. Interest is payable semiannually on
February 15 and August 15. The Company has pledged, as collateral to the
holders of Senior Secured Notes, between 66% and 100% of its shares in each of
its wholly owned subsidiaries and majority-owned joint ventures. The Senior
Secured Notes covenants restrict payment of dividends.

The carrying value of the Senior Secured Notes approximates fair value at
June 30, 1996. The fair value of the Company's Senior Secured Notes was
estimated using discounted cash flow analysis, based on the incremental
borrowing rates currently available to the Company for borrowings with similar
terms and maturity.

4. COMMITMENTS

The Company leases its headquarters and foreign sales and support facilities
and certain equipment under noncancelable operating leases. At June 30, 1996,
minimum lease commitments are as follows:

OPERATING
LEASES
--------------
(IN THOUSANDS)

Six months ending December 31, 1996........................ $295
Years ending December 31, 1997............................. 318
1998..................................................... 153
1999..................................................... 23
2000..................................................... 8
----
Total minimum payments required............................ $797
====

Rent expense was approximately $143,000 and $291,000 for the six months
ended June 30, 1995 and 1996 and $59,000, $222,000 and $320,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.

F-11

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Preferred Stock authorized and outstanding at June 30, 1996 is as follows:

NUMBER OF SHARES
---------------------- AGGREGATE
ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING AMOUNT PREFERENCE
---------- ----------- ------- -----------
(IN THOUSANDS, EXCEPT SHARES)

Designated series (all convert-
ible):
A........................... 150,000 150,000 $ 277 $ 300
B........................... 1,328,930 1,328,927 5,680 5,980
C........................... 7,500,000 6,287,093 26,636 28,292
D........................... 3,142,858 3,142,858 20,648 22,000
---------- ---------- ------- -------
12,121,788 10,908,878 $53,241 $56,572
========== ========== ======= =======

All series of Preferred Stock are convertible at the stockholder's option at
any time into Common Stock on a one-for-one basis (subject to adjustment for
certain dilutive events). All series have voting rights equal to the voting
rights of the Common shares they would have upon conversion. Conversion is
automatic upon the closing of an underwritten public offering with aggregate
offering proceeds exceeding $25,000,000. At June 30, 1996, the Company had
reserved 10,908,878 shares of Common Stock to be issued to stockholders upon
conversion of the outstanding Preferred Stock.

Holders of Preferred Stock are entitled to noncumulative dividends (per
share) as follows:

Series A............................................................ $0.16
Series B............................................................ $0.36
Series C............................................................ $0.36
Series D............................................................ $0.56

Dividends, if declared, shall be set apart for payment and paid first to
holders of Series D Preferred Stock, second to holders of Series C Preferred
Stock, and third ratably to the holders of Series A and B Preferred Stock. No
dividends shall be declared on Common Stock until all holders of Preferred
Stock have been paid in full. As of June 30, 1996 no dividends have been
declared.

In the event of a liquidation or winding up of the Company, holders of
Preferred Stock are entitled to the following liquidation preferences (per
share):

Series A............................................................ $2.00
Series B............................................................ $4.50
Series C............................................................ $4.50
Series D............................................................ $7.00

The liquidation preferences are to be paid in full, so long as proceeds are
available, first to the holders of Series D Preferred Stock, second to the
holders of Series C Preferred Stock, third to the holders of Series B
Preferred Stock, and fourth to the holders of Series A Preferred Stock. If any
assets of the Company remain after payment of the full liquidation preferences
of the holders of Preferred Stock, they will be distributed among the holders
of Series B, Series C, and Series D Preferred Stock and Common Stock in
proportion to the shares of

F-12

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

Common Stock then held by them and the shares of Common Stock which they then
have the right to acquire upon the conversion of their Preferred Stock.

STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

During 1992, the Company adopted two stock option plans, the Key Personnel
Stock Option Plan and the 1992 Stock Option Plan (together, the Plans). The
Plans provide that options for 2,000,000 shares of Common Stock may be granted
to employees, officers, directors, consultants and promotional representatives
of the Company. The Plans allow for both incentive and nonqualified stock
options to be granted to employees.

The Plans provide that the exercise price for incentive stock options will
be no less than the fair market value of the Company's Common Stock (no less
than 85% of fair market value for nonqualified stock options), as determined
by the board of directors at the date of grant. These options have five year
terms and become exercisable ratably over three to four years.

The effect of applying the FASB statement's minimum value method to the
Company's stock option awards did not result in pro forma net loss and loss
per share that are materially different from historical amounts reported.
Therefore, such pro forma information is not separately presented herein.
Future pro forma net income and earnings per share results may be materially
different from actual amounts reported.

F-13

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

Aggregate option activity is as follows:

OUTSTANDING STOCK OPTIONS
----------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
-------------- ------------

Balance at December 31, 1992................... 49,000 $ 0.45
Granted...................................... 58,300 $ 0.46
--------------
Balance at December 31, 1993................... 107,300 $ 0.46
Granted...................................... 149,750 $ 0.83
Exercised.................................... (12,469) $ 0.45
Canceled..................................... (34,331) $ 0.46
--------------
Balance at December 31, 1994................... 210,250 $ 0.72
Granted...................................... 951,450 $ 1.12
Exercised.................................... (30,913) $ 0.47
Canceled..................................... (118,337) $ 0.89
--------------
Balance at December 31, 1995................... 1,012,450 $ 1.09
Granted...................................... 718,524 $ 2.00
Exercised.................................... (108,696) $ 0.95
Canceled..................................... (134,884) $ 0.99
--------------
Balance at June 30, 1996....................... 1,487,394 $ 1.55
==============

As of June 30, 1996, 360,528 shares of Common Stock reserved under the Plans
were available for granting of additional options. The price range at June 30,
1996 of options outstanding under the Plans is $0.45 to $2.00. The weighted
average contractual life of the outstanding options at June 30, 1996 is 47
months. At June 30, 1996, the Company has reserved 1,847,922 shares of
authorized Common Stock for issuance under the Plans.

The following table summarizes the number and weighted average price per
share of exercisable stock options under the Plans.

EXERCISABLE STOCK OPTIONS
---------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
------------- ------------

December 31, 1993............................... 23,748 $ 0.47
December 31, 1994............................... 44,432 $ 0.50
December 31, 1995............................... 314,187 $ 0.96
June 30, 1996................................... 430,236 $ 1.21

WARRANTS

As of June 30, 1996 warrants to purchase 2,520,396 shares of Common Stock
were outstanding at exercise prices of $0.50 to $7.00 per share. As of June
30, 1996, warrants to purchase 1,184,444 shares of Series C Preferred Stock
were outstanding at an exercise price of $4.50 per share. At June 30, 1996,
the Company has reserved 3,704,840 shares of authorized Common Stock pursuant
to these warrants. All warrants are exercisable at the option of the holders
on or before dates ranging from March 1, 1998 through September 29, 1999, or
earlier upon effectiveness of an initial public offering.

F-14

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

6. INCOME TAXES

The provision for income taxes is comprised of the following:

YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
-------- -------- ------- --------------
(IN THOUSANDS)

State
Current........................... $ -- $ -- $ 2 $ 2
Foreign
Current........................... -- -- 8 10
Deferred.......................... -- -- 544 371
-------- -------- ------- ----
$ -- $ -- $ 554 $383
======== ======== ======= ====

The Company's effective provision for income taxes from continuing
operations differs from the amount computed by applying the federal statutory
rate of 34% due to the following:

YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
------- ------- ------- -------------
(IN THOUSANDS)

Expected tax (benefit) at federal
statutory rate.................. $(1,149) $(2,695) $(4,315) $(2,445)
Net operating losses not benefit-
ted............................. 1,149 2,695 4,315 2,445
State taxes...................... -- -- 2 2
Foreign withholding taxes........ -- -- 544 371
Other, net....................... -- -- 8 10
------- ------- ------- -------
Provision for income taxes....... $ -- $ -- $ 554 $ 383
======= ======= ======= =======

For the years ended December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1996 the Company had pre-tax losses from foreign operations of
$408,000, $1,239,000, $3,990,000 and $2,430,000, respectively.

As of December 31, 1995, the Company had federal net operating loss
carryforwards and research and development tax credits of approximately
$16,200,000 and $130,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 2007 through 2011. The
Company had state net operating loss carryforwards of approximately $9,500,000
as of December 31, 1995, which will expire at various dates beginning in 1997
through 2002. The Company also had foreign net operating loss carryforwards
from various taxing authorities of approximately $5,800,000 at December 31,
1995. The principal portion of the foreign net operating loss carryforwards
will expire at various dates beginning in 1999 through 2000.

Utilization of the federal and state net operating losses and credits may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.

F-15

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

Significant components of the Company's deferred tax assets for federal,
state and foreign income taxes are as follows:

YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED
1994 1995 JUNE 30, 1996
----------- ----------- -------------
(IN THOUSANDS)

Deferred tax assets:
Federal and state net operating
losses.......................... $ 3,450 $ 6,090 $ 7,620
Foreign net operating losses..... 540 1,890 2,670
Research credit carryforwards.... 150 200 210
Capitalized research & develop-
ment............................ 90 130 160
Video systems reserves........... 520 600 590
Other............................ 50 90 85
----------- ----------- --------
Total deferred tax assets........ 4,800 9,000 11,335
Valuation allowance for deferred
tax assets...................... (4,800) (9,000) (11,335)
----------- ----------- --------
Net deferred tax assets.......... -- -- --
----------- ----------- --------
Deferred tax liabilities:
Foreign withholding taxes........ -- (544) (915)
----------- ----------- --------
Net deferred tax liability....... $ -- $ (544) $ (915)
=========== =========== ========

Due to the Company's lack of earnings history, the net deferred tax asset has
been fully offset by a valuation allowance. The valuation allowance increased
by $1,300,000 and $3,000,000 in 1993 and 1994, respectively.

F-16

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

7. GEOGRAPHIC DATA

Geographic information for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1996 is presented in the following table.
Identifiable assets are those that can be directly associated with a
particular geographic area.

YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
------- ------- -------- -------------
(IN THOUSANDS)

Net revenue
United States.................... $ -- $ -- $ -- $ 146
Pacific Rim...................... 395 2,342 8,520 7,287
Other............................ -- -- 169 490
------- ------- -------- --------
$ 395 $ 2,342 $ 8,689 $ 7,923
======= ======= ======== ========
Operating loss
United States.................... $(3,111) $(6,763) $ (5,637) $ (2,056)
Pacific Rim...................... (240) (941) (3,763) (1,872)
Other............................ -- (10) (508) (581)
Intercompany elimination......... -- (83) (1,591) (1,176)
------- ------- -------- --------
$(3,351) $(7,797) $(11,499) $ (5,685)
======= ======= ======== ========
Identifiable assets
United States.................... $ 4,752 $23,925 $ 49,266 $ 56,543
Pacific Rim...................... 1,050 6,308 22,689 30,374
Other............................ -- 15 1,701 4,296
Intercompany elimination......... (1,091) (6,249) (27,116) (39,028)
------- ------- -------- --------
$ 4,711 $23,999 $ 46,540 $ 52,185
======= ======= ======== ========

8. SUBSEQUENT EVENTS

On August 8, 1996, the Board of Directors authorized the Company to proceed
with an Initial Public Offering (IPO) of Common Stock and increased the
authorized number of shares of Common Stock to 45,000,000. Upon completion of
the IPO, all of the Company's 10,908,878 shares of convertible preferred stock
outstanding as of June 30, 1996 will be converted into 10,908,878 shares of
Common Stock. The pro forma effect of these conversions has been reflected on
the accompanying unaudited pro forma balance sheet assuming they had occurred
at June 30, 1996.

On August 8, 1996, the Board of Directors approved the reincorporation of
the Company in the State of Delaware, which is expected to be effective in
October 1996.

On August 8, 1996, the Board of Directors granted options under the 1992
Stock Option Plan and the Key Personnel Stock Option Plan to purchase 193,500
shares of common stock at an exercise price of $5.25 per share. These options
were granted to provide additional incentives to retain management, key
employees and consultants. The deemed fair value of common stock at this date
was $5.25 per share.

On August 8, 1996, the Board of Directors also approved, subject to
stockholder approval which is expected to be obtained in September 1996, an
amendment to the 1992 Stock Option Plan increasing the number of shares of
Common Stock reserved for issuance thereunder by 1,800,000 shares to 3,647,922
shares.

F-17

MAGINET CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

On August 8, 1996, the Board of Directors approved the 1996 Director's Stock
Option Plan and reserved a total of 200,000 shares of the Company's authorized
but unissued Common Stock for issuance to non-employee directors upon the
exercise of options granted. Options must be granted with exercise prices at
least equal to the fair market value of the Common Stock on the date of grant
as determined by the Company's Board of Directors.

On August 8, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan and reserved a total of 200,000 shares of the Company's
authorized but unissued Common Stock for issuance thereunder.

F-18

[GRAPHIC DEPICTING MAGINET LOGO WITH FILM REEL]

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

NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE U.S.
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLIC-
ITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS

PAGE
----

Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial and Other Data........................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 60
Index to Consolidated Financial Statements............................... F-1

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE-
LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.

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

5,000,000 SHARES

(LOGO)

COMMON STOCK

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

PROSPECTUS
, 1996

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

LEHMAN BROTHERS

HAMBRECHT & QUIST

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

PROSPECTUS

5,000,000 SHARES
(PASTE-UP LOGO OF MAGINET)
COMMON STOCK

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

Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
1,000,000 shares are being offered initially outside the United States and
Canada by the International Managers (the "International Offering") and
4,000,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering"). Such offerings are referred to
collectively as the "Offerings."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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

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

Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------

Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offerings estimated at
$1,050,000 payable by the Company.
(3) The Company has granted to the International Managers a 30-day option to
purchase up to 150,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
The U.S. Underwriters have been granted a similar option to purchase up to
600,000 additional shares solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

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

The shares of Common Stock offered by this Prospectus are offered by the
International Managers, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain other conditions. It is expected that
delivery of such shares will be made at the offices of Lehman Brothers Inc.,
New York, New York, on or about , 1996.

-------------
________________________________________________
LEHMAN BROTHERS HAMBRECHT & QUIST

, 1996

[BACK COVER; INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INTERNA-
TIONAL MANAGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURI-
TIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS

PAGE
----

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

5,000,000 SHARES

(LOGO)

COMMON STOCK

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

PROSPECTUS
, 1996

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

LEHMAN BROTHERS

HAMBRECHT & QUIST

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable
by the Company in connection with the sale of Common Stock being registered.
All amounts are estimates except the SEC registration fee and the NASD filing
fee.

SEC Registration Fee........................................... $ 27,759
NASD Filing Fee................................................ 8,050
Nasdaq National Market Listing Fee............................. 50,000
Printing Fees and Expenses..................................... 150,000
Legal Fees and Expenses........................................ 500,000
Accounting Fees and Expenses................................... 250,000
Blue Sky Fees and Expenses..................................... 10,000
Transfer Agent and Registrar Fees.............................. 15,000
Miscellaneous.................................................. 39,191
----------
Total........................................................ $1,050,000
==========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

Article VIII of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.

Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the corporation, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his conduct was unlawful.

The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since inception the Registrant has issued and sold the following
unregistered securities:

1. From March 31, 1994 to July 31, 1996, the Registrant issued and sold
201,192 shares of Common Stock to employees and consultants at prices
ranging from $.45 to $2.00 upon exercise of stock options pursuant to the
Registrant's 1992 Key Personnel Stock Option Plan and its 1992 Stock Option
Plan.

2. On July 23, 1992, the Registrant issued and sold 150,000 shares of
Series A Preferred Stock to two investors at a sale price of $2.00 per
share.

3. On August 31, 1992, the Registrant issued and sold 440,068 shares of
Series B Preferred Stock to 11 investors at a sale price of $4.50 per
share.

4. On March 15, 1993, the Registrant issued and sold 888,859 shares of
Series B Preferred Stock to 19 investors at a sale price of $4.50 per
share. In connection with the issuance of such shares of Series B Preferred
Stock, the Company also issued the investors warrants to acquire up to an
aggregate of 182,993 shares of Common Stock.

II-1

5. On September 23, 1993, the Registrant issued a Secured Promissory Note
in the principal amount of $4,500,000 due on June 30, 1995 to Comsat Video
Enterprises, Inc. ("Comsat"). In connection with such note, the Company
also issued to Comsat a warrant to acquire up to an aggregate of 157,500
shares of Common Stock at an exercise price per share of $5.00.

6. On March 11, 1994, the Registrant issued its Convertible Secured
Promissory Notes in the aggregate principal amount of $3,710,015 to 24
investors. Such notes were convertible into the series of Preferred Stock
issued in connection with the Registrant's next round of equity financing
and subsequently converted into Series C Preferred Stock on September 29,
1994. The Registrant also issued warrants to such investors to acquire up
to an aggregate of 152,381 shares of Common Stock at an exercise price of
$0.50 per share.

7. In connection with a debt financing transaction, on June 24, 1994, the
Registrant issued to Silicon Valley Bank and Hambrecht & Quist Guaranty
Finance warrants to acquire up to an aggregate of 18,553 shares of Common
Stock at an exercise price of $0.50 per share.

8. On September 12, 1994, the Registrant issued its Convertible Secured
Promissory Notes in the aggregate principal amount of $5,000,000 to 8
investors. Such notes were convertible into the series of Preferred Stock
issued in connection with the Registrant's next round of equity financing
and subsequently converted into Series C Preferred Stock on September
29,1994. The Registrant also issued warrants to such investors to acquire
up to an aggregate of 111,112 shares of Common Stock at an exercise price
of $0.50 per share.

9. On September 29, 1994, the Registrant issued and sold 6,264,871 shares
of Series C Preferred Stock to 37 investors at a sale price of $4.50 per
share. In addition, the Registrant also issued to certain purchasers of the
Series C Preferred Stock warrants to acquire up to an aggregate of
1,111,111 shares of Series C Preferred Stock at an exercise price of $4.50
per share. In connection with the issuance of Series C Preferred Stock, on
October 26, 1994, the Registrant also issued to 3 investors warrants to
acquire up to an aggregate of 73,333 shares of Series C Preferred Stock at
an exercise price of $4.50 per share.

10. On December 1, 1994, the Registrant issued and sold 22,222 shares of
Series C Preferred Stock at a sale price of $4.50 per share.

11. In connection with a debt financing transaction, on May 16, 1995, the
Registrant issued to Silicon Valley Bank a warrant acquire up to an
aggregate of 75,000 shares of Common Stock at an exercise price of $7.00
per share.

12. On August 15, 1995, the Registrant issued its Seniors Secured Notes
due 2000 in the aggregate principal amount of $24,900,000 to New York Life
Insurance Company, The Mutual Life Insurance Company of New York, Waslic
Company II and Namtor BVC LP (collectively, the "Senior Noteholders"). In
connection with such financing, the Registrant issued warrants to such
investors to purchase up to an aggregate of 1,422,857 shares of Common
Stock at an exercise price of $7.00 per share.

13. On December 29, 1995, the Registrant issued and sold 1,239,397 shares
of Series D Preferred Stock to 5 investors at a price of $7.00 per share.
On May 15, 1996, the Registrant issued and sold 1,562,202 shares of Series
D Preferred Stock to 4 investors at a purchase price of $7.00 per share. On
May 15, 1996, the Registrant also issued to the purchasers and prior
purchasers of its Series D Preferred Stock warrants to purchase up to an
aggregate of 178,284 shares of Common Stock at an exercise price of $7.00
per share, subject to adjustment of the number of shares and exercise
price. In addition, in connection with effecting certain amendments to the
Note Agreement dated August 15, 1996 among the Company and the Senior
Noteholders relating to the issuance of Series D Preferred Stock, the
Registrant amended the warrants issued August 15, 1996 to provide for the
issuance of up to an additional 200,000 shares of Common Stock at a sale
price of $7.00, subject to adjustment of the number of shares and exercise
price.

14. On May 30, 1996, the Registrant issued an aggregate of 341,259 shares
of Series D Preferred Stock to 7 investors, including the Company's
President and Chief Executive Officer and Chief Financial Officer, at a
sale price of $7.00 per share. In addition, the Registrant issued to such
purchasers warrants to acquire up to an aggregate of 21,716 shares of
Common Stock at an exercise price of $7.00 per share, subject to adjustment
of the exercise price and number of shares.

II-2

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Registrant.

EXHIBIT INDEX

1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1 Form of Certificate of Incorporation to be filed prior to the
effective date of the Registration Statement under which the
Offerings are made.
3.2 Form of Restated Certificate of Incorporation to be filed after the
closing of the Offerings made under this Registration Statement.
3.3 Bylaws, as amended.
4.1* Specimen Common Stock Certificate.
4.2 Form of Lock-Up Agreement.
4.3 Amended and Restated Shareholders' Agreement, as amended, dated
December 29, 1995.
4.4 First Amendment of Amended and Restated Shareholders' Agreement,
dated May 15, 1996.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2 1992 Key Personnel Stock Option Plan, as amended, and form of
agreement thereunder.
10.3 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereto.
10.4 1996 Director Stock Option Plan, as amended, and form of agreement
thereto.
10.5** Technology License Agreement between Registrant and On Common Video
Corporation
10.6** Technology License Agreement between Registrant and Guestserve
Development Group
10.7 Exclusive License Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.8 Exclusive Sublicense Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.9** Agreement between Registrant and InterGame, Ltd., dated July 8,
1996.
10.10** Note Agreement among Registrant, New York Life Insurance Company,
The Mutual Life Insurance Company of New York, Waslic Company II
and Namtor BVC LP, dated August 15, 1995.
10.11 First Amendment Agreement to Note Agreement among Registrant and
New York Life Insurance Company, The Mutual Life Insurance Company
of New York, Waslic Company II and Namtor BVC LP, dated May 7,
1996.
10.12** Installation Agreement between Registrant and Shangri-la Hotel &
Resorts (undated).
10.13** Revised Installation Agreement between Registrant and Shangri-La
Hotel & Resorts, dated September 7, 1994.
10.14** Guest Video Services Agreement between Registrant and Southern
Pacific Hotel Corporation Limited, dated September 6, 1995.
10.15** Guest Video Services Agreement by and among Registrant and Hyatt
International-Asia Pacific Limited, Hyatt Chain Services Limited
and Guestserve Development Group, dated August 11, 1995.
10.16** Memorandum of Agreement between Registrant and Trinity Group, dated
May 22, 1996.
10.17** Agreement between Registrant and United International Pictures,
dated June 28, 1996.
10.18 Employment Agreement between Registrant and Kenneth B. Hamlet,
dated November 28, 1995.
10.19 Employment Agreement between Registrant and Robert R. Creager,
dated September 22, 1995.

II-3

10.20 Offer of Employment Letter from Registrant to Gordon E. (Ned)
Druehl, Jr., dated June 18, 1996.
10.21 Lease for the Registrant's headquarters in Sunnyale, CA, dated
February 16, 1994.
10.22 Pledge of Shares Agreement among Registrant, New York Life
Insurance Company, The Mutual Life Insurance Company of New York,
Waslic Company II, Namtor BVC LP and The Chase Manhattan Bank,
N.A., dated December 29, 1995.
10.23 Pledge Agreement between Registrant and The Chase Manhattan Bank
N.A., dated December 28, 1995.
10.24 Shareholders Agreement between Registrant, Mr. Arun Churdboonchart
and AC Telecom Limited, dated June 6, 1995.
10.25** Letter of Intent between Registrant and Bloomberg, L.P., dated
September 6, 1996.
10.26 Shareholder Agreement between Registrant and Spectrum, Inc., dated
August 1, 1994.
11.1 Calculation of earnings per share.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditor.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.

- --------
* To be filed by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1996.
Omitted portions have been filed separately with the Commission.

(b) Financial Statement Schedules

None.

Schedules not listed above have been omitted because the information
required to be set forth therein is not, applicable or is shown in the
financial statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 17TH DAY OF SEPTEMBER, 1996.

MAGINET CORPORATION

/s/ Kenneth B. Hamlet
By __________________________________
KENNETH B. HAMLET
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Kenneth B. Hamlet and James A. Barth and
each one of them, acting individually and without the other, as his or her
attorney-in-fact, each with full power of substitution, for him and her in any
and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or substitutes may
do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED

SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kenneth B. Hamlet Chairman of the September 17,
- ------------------------------------- Board, President 1996
(KENNETH B. HAMLET) and Chief Executive
Officer (Principal
Executive Officer)

/s/ James A. Barth Executive Vice September 17,
- ------------------------------------- President, Chief 1996
(JAMES A. BARTH) Financial Officer
and Secretary
(Principal
Financial and
Accounting Officer)

/s/ Robert R. Creager Director September 17,
- ------------------------------------- 1996
(ROBERT R. CREAGER)

/s/ Stuart J. Ellman Director September 17,
- ------------------------------------- 1996
(STUART J. ELLMAN)

/s/ Michael D. Granoff Director September 17,
- ------------------------------------- 1996
(MICHAEL D. GRANOFF)

/s/ Michael Ramsay Director September 17,
- ------------------------------------- 1996
(MICHAEL RAMSAY)

/s/ James D. Robinson IV Director September 17,
- ------------------------------------- 1996
(JAMES D. ROBINSON IV)

II-5

EXHIBIT INDEX

10.17** Agreement between Registrant and United International Pictures,
dated June 28, 1996.

10.18 Employment Agreement between Registrant and Kenneth B. Hamlet,
dated November 28, 1995.

10.19 Employment Agreement between Registrant and Robert R. Creager,
dated September 22, 1995.

10.20 Offer of Employment Letter from Registrant to Gordon E. (Ned)
Druehl, Jr., dated June 18, 1996.

10.21 Lease for the Registrant's headquarters in Sunnyale, CA, dated
February 16, 1994.

10.22 Pledge of Shares Agreement among Registrant, New York Life
Insurance Company, The Mutual Life Insurance Company of New York,
Waslic Company II, Namtor BVC LP and The Chase Manhattan Bank,
N.A., dated December 29, 1995.

10.23 Pledge Agreement between Registrant and The Chase Manhattan Bank
N.A., dated December 28, 1995.

10.24 Shareholders Agreement between Registrant, Mr. Arun Churdboonchart
and AC Telecom Limited, dated June 6, 1995.

10.25** Letter of Intent between Registrant and Bloomberg, L.P., dated
September 6, 1996.

10.26 Shareholder Agreement between Registrant and Spectrum, Inc., dated
August 1, 1994.

11.1 Calculation of earnings per share.

21.1 List of Subsidiaries of the Registrant.

23.1 Consent of Ernst & Young LLP, Independent Auditor.

23.2* Consent of Counsel (included in Exhibit 5.1).

24.1 Power of Attorney (see page II-5).

27.1 Financial Data Schedule.

- --------
* To be filed by amendment.

** Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1995. Omitted
portions have been filed separately with the Commission.