<PAGE>   1
Proteon, Inc.                                                    EXHIBIT 13

----------------------------------------
  SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     Years ended December 31,
(in thousands, except per share data)              1997           1996           1995          1994           1993
-------------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>             <C>           <C>           <C>
Net sales                                        $26,944       $ 45,296        $75,323       $93,912       $103,405
Cost of sales                                     15,340         25,670         36,664        48,148         61,723
-------------------------------------------------------------------------------------------------------------------
Gross profit                                      11,604         19,626         38,659        45,764         41,682
Operating expenses:
  Research and development                         5,987          9,353          8,802        11,162         15,481
  Selling and marketing                           10,703         15,486         17,903        23,955         31,778
  General and administrative                       3,870          4,590          4,683         7,065         10,222
  Restructure costs                                 (241)         3,312              -         6,330          7,711
-------------------------------------------------------------------------------------------------------------------
       Total operating expenses                   20,319         32,741         31,388        48,512         65,192
-------------------------------------------------------------------------------------------------------------------
(Loss) income from operations                     (8,715)       (13,115)         7,271        (2,748)       (23,510)
Interest income (expense), net                     1,052          1,261          1,437           455            330
Other income                                           -              -              -         1,205              -
-------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes                 (7,663)       (11,854)         8,708        (1,088)       (23,180)
Provision (benefit) for income taxes                 184            160            488           251         (3,385)
-------------------------------------------------------------------------------------------------------------------
(Loss) income before cumulative effect of
  accounting change                               (7,847)       (12,014)         8,220        (1,339)       (19,795)
Cumulative effect of accounting change for
  income taxes                                         -              -              -             -            452
-------------------------------------------------------------------------------------------------------------------
Net (loss) income                                $(7,847)      $(12,014)       $ 8,220       $(1,339)      $(19,343)
-------------------------------------------------------------------------------------------------------------------

Basic (loss) income per share:
(Loss) income per share before
  cumulative effect of accounting change         $ (0.51)      $  (0.77)       $  0.53       $( 0.09)      $  (1.36)
Cumulative effect of accounting change for
  income taxes                                         -              -              -             -           0.03
-------------------------------------------------------------------------------------------------------------------
Basic (loss) income per common and
  common equivalent share                        $ (0.51)      $  (0.77)       $  0.53       $ (0.09)      $  (1.33)
-------------------------------------------------------------------------------------------------------------------

Diluted (loss) income per share:
(Loss) income per share before
  cumulative effect of accounting change         $ (0.51)      $  (0.77)       $  0.52       $( 0.09)      $  (1.36)
Cumulative effect of accounting change for
  income taxes                                         -              -              -             -           0.03
-------------------------------------------------------------------------------------------------------------------
Diluted (loss) income per common and
  common equivalent share                        $ (0.51)      $  (0.77)       $  0.52       $ (0.09)      $  (1.33)
-------------------------------------------------------------------------------------------------------------------
Weighted average number of common
  shares outstanding                              15.301         15,630         15,416        14,808         14,527
Weighted average number of common and
  common equivalent shares outstanding            15,301         15,630         15,692        14,808         14,527
-------------------------------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET DATA:

Working capital                                  $23,620       $ 30,597        $39,006       $27,550       $ 20,698
Total assets                                      33,403         45,571         59,029        56,911         56,767
Stockholders' equity                              26,892         35,191         47,323        37,679         36,739
</TABLE>

<PAGE>   2


-------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
-------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto.

Results of Operations

During 1997 the Company continued to make progress in its transition from the
LAN business environment to the Internet Access marketplace. Although overall
product revenue decreased by 30.9% in 1997, the Company's GlobeTrotter Internet
Access product revenue increased by 76.5% on a unit sales increase of 92.7%.
Sales of GlobeTrotter products increased to 26.4% of total product revenue from
10.3% in 1996. The Company continued to experience losses in 1997 as the growth
of the GlobeTrotter product line was not sufficient to offset the 44.1% decline
in product revenue from LAN products and the winding up of the IBM and Digital
Equipment software licensing agreements. The 1997 operating loss reflects
approximately $880,000 or $0.06 per share of certain adjustments and accruals
relating to business operations in the ASIA-Pacific region as well as certain
employee incentive programs, both of which transpired in the fourth quarter of
1997.

Net Sales
Product sales decreased by 30.9% to $22,248,000 in 1997 from $32,175,000 in
1996. This anticipated decline reflects Proteon's continuing product transition
from LAN products to Internet Access products. Although overall product revenue
declined in 1997, GlobeTrotter product revenue increased 76.5% from 1996 as a
result of increased unit sales. Corporate Enterprise and LAN product revenue
declined in 1997 by 43.3% from 1996 levels. Software licensing revenue in 1997
decreased by 88.1% to $895,000 from $7,530,000 in 1996 reflecting the declining
revenue produced from the IBM and Digital Equipment software licensing
agreements. The Company expects that it will continue to have software licensing
revenue in the future, however at varying and uncertain levels since software
licensing revenue is an ancillary component of the Company's core revenue stream
but strategic in its promotion of OpenROUTE routing technology in the
marketplace. Service and other sales in 1997 decreased by 32.0% to $3,801,000
from $5,591,000 in 1996. This decrease was primarily due to the reduction in
service contracts and upgrade revenue worldwide resulting from the Company's
transition to Internet Access products which require less support services.

Product sales decreased by 37.9% to $32,175,000 in 1996 from $51,810,000 in
1995. This decline was due to the Company's redirection of its business and
products. The Company experienced declining revenues in both its LAN products
and Corporate Enterprise product categories. The decrease in LAN products net
sales in 1996 was due primarily to lower average selling prices and declining
unit volumes of Adapter Cards, Switches and Hubs. The Corporate Enterprise
reduction was due to a planned reduction in CNX backbone router as the Company
shifted to Internet Access routers. Although in 1996 total units in the Internet
Access category increased 63.3% from 1995 due primarily to GlobeTrotter sales
which are typically lower average per unit sales prices, this increase was not
enough to offset the decline in product revenues in the LAN and Corporate
Enterprise categories. Software licensing sales in 1996 decreased by 47.3% to
$7,530,000 from $14,284,000 in 1995. This anticipated reduction in software
licensing revenue was a result of the continued decline in remaining revenue
from the near completion of two major multi-year agreements with IBM and Digital
Equipment Corporation. The Company expected software licensing revenue from
these agreements to decrease quarterly as the contracts neared completion.
Service and other sales in 1996 decreased by 39.4% to $5,591,000 from $9,229,000
in 1995. This decrease was primarily due to the reduction in service spares and
upgrades revenue worldwide as corporate enterprise sales decreased.
International sales accounted for approximately 35.4%, 38.3%, and 35.7% of net
sales in 1997, 1996, and 1995, respectively.

GROSS PROFIT
Total gross profit margin decreased slightly in 1997 to 43.1% from 43.3% in
1996. Gross margin on product revenue improved significantly to 42.8% in 1997
from 35.3% in 1996 principally due to the expansion of the GlobeTrotter product
line into a number of higher margin models as well as to reductions in
manufacturing overhead expenses. Gross margin on service and other revenues also
increased to 31.1% in 1997 from 23.0% in 1996 primarily due to improved
efficiencies in the customer service area. However, these improvements were not
sufficient to offset the substantial decline in software licensing revenue which
is highly profitable. Total gross profit margin decreased in 1996 to 43.3% from
51.3% in 1995. Gross profit margin from the

<PAGE>   3

Company's software licensing and service and other sales increased in 1996 to
63.1% from 60.5% in 1995 due primarily to the decreased engineering efforts
related to existing agreements. Gross profit margin on product sales decreased
in 1996 to 35.3% from 47.2% in 1995 due mainly to both declining margins and
volume decreases in token ring adapter card segment of the LAN product category.
During the fourth quarter of 1996, the Company recorded an additional inventory
provision of $2,400,000 to reflect further inventory exposures as the Company
transitioned from LAN to Internet Access products.

RESEARCH AND DEVELOPMENT

The Company considers product development expenditures to be critical to future
revenues. These activities are closely related to product enhancement and new
product development. The Company's strategy also includes joint development
partnerships to bring new technologies and products to market. All of the
Company's research and development costs to date have been expensed as incurred.

     Research and development expenses were $5,987,000 or 22.2%, $9,353,000 or
20.6%, and $8,802,000 or 11.7% of net sales in 1997, 1996 and 1995,
respectively. The decrease in expenses of $3,366,000 in 1997 from 1996 was
primarily due to lower personnel and personnel-related costs as well as a more
defined focus on the Internet Access products only. When comparing 1996 to 1995,
the increase of $551,000 in research and development expenses was due to the
reallocation of engineering efforts from software licensing contracts to
internally funded development.

     Major efforts in 1997 included the continuing development of the
GlobeTrotter series of products with the introduction of several new models
during the year.

     During 1996, the Company initiated the GlobeTrotter series, as well as the
continued development of the RBX router, the CSX 900ER routing and switching
product, the CSX 900E Ethernet switch/repeater and the CSX 901T Token Ring
Switch.

SELLING AND MARKETING

Selling and marketing expenses were $10,703,000 or 39.7%, $15,486,000 or 34.2%,
and $17,903,000 or 23.8% of net sales in 1997, 1996 and 1995, respectively. The
decrease in expenses in 1997 from 1996 of $4,783,000 was primarily the result of
lower personnel and personnel-related costs including sales commissions due to
the decline in revenues in 1997 from 1996. However, 1997 selling and marketing
expenses as a percentage of net sales increased when compared to 1996 in part
due to the effort to promote the new Internet Access products. In 1996 sales and
marketing expenses decreased by $2,417,000 when compared to 1995. This decrease
was due mainly to lower personnel and personnel-related costs as well as a
reduction in advertising expenses for 1996.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $3,870,000, $4,590,000, and $4,683,000
in 1997, 1996 and 1995, respectively. When comparing 1997 to 1996, the decrease
in expenses of $720,000 was largely due to lower personnel and personnel-related
costs. During 1996, general and administrative expenses decreased by $93,000
when compared to 1995. This slight decrease was also due to a lower level of
personnel and personnel-related costs for 1996.

RESTRUCTURING OF OPERATIONS

The Company's management continually reviews methods to reduce its expense base
in response to decreased revenue streams. As a result, the Company has
implemented a series of restructurings, the most recent of which transpired in
1996. This restructuring of operations was necessary to reestablish the
strategic direction of the Company and better align its operating expenses with
anticipated revenues.

     In the fourth quarter of 1996, the Company recorded a $3,312,000
restructuring charge in connection with its strategic redirection of the
Company's business to the Internet Access marketplace. This charge included
approximately $410,000 of severance costs, approximately $785,000 to reduce the
Company's occupancy requirements, approximately $1,922,000 associated with the
disposal of fixed assets, and $195,000 of other costs. During 1996 the cash
impact for restructuring was insignificant and as of December 31, 1996 there was
an accrual of $1,661,000 relating to future spending.

     During 1997, the Company incurred cash expenditures in connection with the
1996 restructuring of approximately $495,000 for severance and payroll related
costs, approximately $672,000 as a result of reducing its occupancy costs and
$253,000 in other restructuring related costs. Management has determined that
all of the Company's obligations from

<PAGE>   4

the 1996 and prior restructurings have been settled. Accordingly, the Company
reversed its remaining restructuring provision of $241,000 in the third quarter
of 1997.

PROVISION FOR INCOME TAXES

In 1997, the Company recorded an income tax provision of $184,000 primarily
due to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1997 is mainly
due to net operating loss carryforwards whose future realization is uncertain.

    In 1996, the Company recorded an income tax provision of $160,000, primarily
due to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1996 is also due
primarily to net operating loss carryforwards whose future realization is
uncertain.


    In 1995, the Company recorded an income tax provision $488,000 principally
associated with alternative minimum tax, and state and foreign taxes. The
difference between the effective tax rate and the statutory tax rate in 1995 is
due primarily to the utilization of net operating loss carryforwards in 1995.

YEAR 2000

The Company is reviewing all systems and equipment which may be affected by the
Year 2000 issue. Management is also in the process of developing an action plan
that provides for the repair or replacement of all systems with exposure to Year
2000 problems by the end of 1998, the cost of which is not expected to have a
material financial impact on the Company. The plan calls for a combination of
internal and external resources. The commitment of internal resources is not
expected to have a significant impact on the Company's future sales and
operating results.

NEWLY ISSUED ACCOUNTING STANDARDS

The FASB recently issued Statement No. 130 ("SFAS 130") "Reporting Comprehensive
Income." This Statement requires changes in comprehensive income to be shown in
a financial statement that is displayed with the same prominence as other
financial statements. While not mandating a specific financial statement format,
the Statement requires that an amount representing total comprehensive income be
reported. The Statement will become effective for periods beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
is required for comparative purposes. The Company does not believe that the
adoption of SFAS 130 will have a material impact on its result of operations.

The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This Statement, which supersedes
Statement No. 14 "Financial Reporting for Segments of a Business Enterprise,"
changes the way public companies report information about segments. The
Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this Statement and its
effect on financial statement disclosures.

LIQUIDITY AND CAPITAL RESOURCES

During 1997, the Company's working capital decreased to $23,620,000 from
$30,597,000 in 1996. Cash, cash equivalents and marketable securities
constituted $17,760,000 of the $23,620,000 in working capital at December 31,
1997.
<PAGE>   5

     Cash consumed by operating activities decreased by $2,789,000 in 1997 from
1996. This change was due mainly to a smaller net operating loss in 1997 of
$8,715,000 when compared to the 1996 net operating loss of $13,115,000,
reducing cash consumption by $4,400,000. Also contributing to the change was a
reduction in inventory levels at year end 1997 of $3,027,000 when compared to
year end 1996 inventory levels. However, these two significant reductions were
partially offset by a reduction in accounts payable and accrued expenses of
$3,869,000.

     Cash consumed by investing activities increased by $4,533,000 in 1997 from
1996. This cash use was due primarily to marketable securities purchases
exceeding sales by $5,525,000 in 1997.

     The Company's management believes that its cash, cash equivalents and
marketable securities will satisfy its expected working capital and capital
expenditure requirements through the next twelve months.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

The 1997 Annual Report, including the President's Letter and the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on management's current expectations and
involve a number of risks and uncertainties. The Company's future results remain
difficult to predict and may be affected by a number of factors including:
business conditions within the networking industry; timing of orders from, and
shipments to major customers; timing of new products introductions; acceptance
of products in the marketplace; increased competition; changes in manufacturing
costs; changes in the mix of product sales; and changes in world economic
conditions. Other risk factors are listed from time to time in the required
documents including the Company's annual report on Form 10-K, filed with the
SEC.

<PAGE>   6

PROTEON, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                                         As of December 31,
------------------------------------------------------------------------------------------------------------
(in thousands, except share data)                                                         1997          1996
------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                                   <C>           <C>
Current assets:
     Cash and cash equivalents                                                        $  5,317        16,612
     Marketable securities                                                              12,443         6,918
     Accounts receivable less reserve for doubtful accounts of $927 and
        $672 at December 31, 1997 and 1996, respectively                                 6,224         7,625
     Inventories                                                                         5,710         8,737
     Deposits and other assets                                                             437         1,085
------------------------------------------------------------------------------------------------------------
        Total current assets                                                            30,131        40,977
     Property and equipment, net                                                         3,272         4,594
------------------------------------------------------------------------------------------------------------
        Total assets                                                                  $ 33,403      $ 45,571
------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                 $  2,292      $  3,010
     Accrued compensation                                                                  765         1,075
     Accrued expenses                                                                    2,779         3,560
     Accrued restructuring costs                                                             -         1,661
     Accrued warranty                                                                      675         1,074
------------------------------------------------------------------------------------------------------------
        Total current liabilities                                                        6,511        10,380

Commitments and Contingencies (Note F)                                                                         -             -

Stockholders' equity:

     Preferred stock, par value $.01, authorized 7,500,000 shares                            -             -
     Common stock, par value $.01 per share, authorized 30,000,000 shares, issued
     15,669,524 and 15,637,670 shares at December 31, 1997 and 1996, respectively          157           156
     Capital in excess of par value                                                     49,347        49,292
     Accumulated deficit                                                               (21,666)      (13,819)
     Cumulative translation adjustments                                                    110           177
     Less treasury stock, at cost, 397,435 shares and 210,685 shares                    (1,056)         (615)
        at December 31, 1997 and 1996, respectively
------------------------------------------------------------------------------------------------------------
        Total stockholders' equity                                                      26,892        35,191
------------------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity                                    $ 33,403      $ 45,571
------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>   7

PROTEON, INC.
Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                           For the years ended December 31,
----------------------------------------------------------------------------
(in thousands, except per share data)      1997          1996          1995
----------------------------------------------------------------------------
Sales:
<S>                                      <C>          <C>            <C>
     Product                             $22,248      $ 32,175       $51,810
     Software licensing                      895         7,530        14,284
     Service and other                     3,801         5,591         9,229
----------------------------------------------------------------------------
        Net sales                         26,944        45,296        75,323

Cost of sales:
     Product                              12,722        20,825        27,373
     Software licensing                        -           538         2,656
     Service and other                     2,618         4,307         6,635
----------------------------------------------------------------------------
        Cost of sales                     15,340        25,670        36,664
----------------------------------------------------------------------------

     Gross profit                         11,604        19,626        38,659

Operating expenses:
     Research and development              5,987         9,353         8,802
     Selling and marketing                10,703        15,486        17,903
     General and administrative            3,870         4,590         4,683
     Restructure costs                      (241)        3,312             -
----------------------------------------------------------------------------
        Total operating expenses          20,319        32,741        31,388
----------------------------------------------------------------------------

(Loss)/income from operations             (8,715)      (13,115)        7,271
Interest income                            1,052         1,271         1,490
Interest expense                               -           (10)          (53)
----------------------------------------------------------------------------
(Loss)/income before income taxes         (7,663)      (11,854)        8,708
Provision for income taxes                   184           160           488
----------------------------------------------------------------------------
Net (loss)/income                        ($7,847)     ($12,014)       $8,220
----------------------------------------------------------------------------
(Loss)/earnings per share -- Basic        ($0.51)       ($0.77)        $0.53
                                         -----------------------------------
  Weighted average number of
  common shares outstanding -- Basic      15,301        15,630        15,416
----------------------------------------------------------------------------
(Loss)/earnings per share -- Diluted      ($0.51)       ($0.77)        $0.52
                                         -----------------------------------
   Weighted average number of common and
    common equivalent shares outstanding
    -- Diluted                            15,301        15,630        15,692
----------------------------------------------------------------------------
</TABLE>



The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>   8

PROTEON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                         Common stock
                               -----------------------------------
                                                        Capital in                 Cumulative     Treasury stock       Total
                                                        excess of    Accumulated   translation   -----------------  stockholders'
(in thousands)                 Shares       Amount      par value      deficit     adjustment     Shares    Amount     equity
--------------------------------------------------------------------------------------------------------------------------------

<S>                             <C>       <C>            <C>          <C>              <C>         <C>    <C>          <C>
BALANCE, DECEMBER 31, 1994      15,315        $153       $47,884      ($10,025)        ($46)        81      ($287)     $37,679

Issuance of common stock           274           3         1,257                                                         1,260
Currency translation                                                                    164                                164
Net income                                                               8,220                                           8,220

---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995      15,589         156        49,141        (1,805)         118         81       (287)      47,323

Issuance of common stock            48                       151                                                           151
Repurchase of stock as
  treasury stock                                                                                   130       (328)        (328)
Currency translation                                                                     59                                 59
Net loss                                                               (12,014)                                        (12,014)

--------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996      15,637         156        49,292       (13,819)         177        211       (615)      35,191

Issuance of common stock            33           1            55                                                            56
Repurchase of stock as
  treasury stock                                                                                   186       (441)        (441)
Currency translation                                                                    (67)                               (67)
Net loss                                                                (7,847)                                         (7,847)

---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997      15,670        $157       $49,347      ($21,666)        $110        397    ($1,056)     $26,892
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>   9

PROTEON, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                               For the years ended December 31,
-----------------------------------------------------------------------------------------------
(in thousands)                                                 1997          1996          1995
-----------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>           <C>
Cash flows provided by operating activities:
Net income (loss)                                          $ (7,847)     $(12,014)     $  8,220
  Adjustments to reconcile net income (loss) to cash
  flows (consumed) provided by operating activities:
     Bad debt provision                                         439             -             -
     Inventory provision                                          -         2,374             -
     Depreciation and amortization                            1,550         3,401         4,185
     Restructuring cost                                           -         1,922             -
     Loss (gain) on disposition of fixed assets                 198          (117)          (44)
  Changes in assets and liabilities:
     Decrease (increase) in accounts receivable                 962         4,513          (152)
     Decrease (increase) in inventories                       3,027        (6,686)          598
     Decrease in deposits and other assets                      768           372         1,260
     Decrease in accounts payable and accrued expenses       (3,869)       (1,326)       (7,526)
                                                           ------------------------------------
Net cash (consumed) provided by operating activities         (4,772)       (7,561)        6,541
                                                           ------------------------------------

Cash flows consumed by investing activities:
     Proceeds from the sale of fixed assets                     182           117            82
     Capital expenditures                                      (728)       (1,600)       (2,411)
     Marketable securities sales and maturities              19,428        15,456         7,120
     Marketable securities purchases                        (24,953)      (15,511)      (11,883)
                                                           ------------------------------------
Net cash consumed by investing activities                    (6,071)       (1,538)       (7,092)
                                                           ------------------------------------

Cash flows (consumed) provided by financing activities
     Proceeds from the issuance of common stock                  56           151         1,260
     Purchase of treasury stock                                (441)         (328)            -
                                                           ------------------------------------
Net cash (consumed) provided by financing activities           (385)         (177)        1,260
Effect of exchange rate changes on cash                         (67)           59           164
                                                           ------------------------------------
Net (decrease) increase in cash and cash equivalents        (11,295)       (9,217)          873
Cash and cash equivalents at beginning of year               16,612        25,829        24,956
                                                           ------------------------------------
Cash and cash equivalents at end of year                   $  5,317      $ 16,612      $ 25,829
                                                           ------------------------------------

Supplemental disclosure of cash flow information:
Non cash investing in finance activities:
     Note receivable on sale of fixed assets               $    120             -             -
     Interest paid during the year                                -      $     10      $     53
                                                           ------------------------------------
     Income taxes paid during the year                     $    230      $    321      $    344
                                                           ------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>   10


-------------------------------------------------------------------------------
                   Notes To Consolidated Financial Statements
-------------------------------------------------------------------------------

A. NATURE OF OPERATIONS

Proteon, Inc. and its subsidiaries including its wholly owned subsidiary
OpenROUTE Networks, Inc., develops, markets and supports a wide range of
networking products that encompass the Internet Access, Local Area Networking
and Remote Access components of the networking industry. The Company's
principal markets include North America, Europe and the Far East.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates
To prepare the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In particular, the Company records reserves for estimated
product returns, as well as the estimated collectibility of accounts receivable,
estimated inventory obsolesence and estimated warranty obligations. All
estimates are based upon experience and actual results could differ from the
estimates and assumptions used by management.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries including its wholly owned subsidiary OpenROUTE Networks, Inc.
All intercompany transactions have been eliminated in consolidation.

Revenue Recognition
The Company recognizes revenue from product sales upon shipment of the product.
Revenue from service agreements is recognized ratably over the term of the
agreement. Revenue from software licensing is recognized upon performance of
milestones when collectibility is reasonably assured. Revenue from development
contracts is recognized under the percentage-of-completion method of accounting
as costs are incurred. Provisions for estimated losses on contracts are recorded
in the period when such losses are determined.

Significant Customers and Export Sales
In 1997, 1996 and 1995, net sales to one customer accounted for approximately
11%, 14% and 12%, respectively. A second customer accounted for approximately
8%, 14% and 10% of net sales in 1997, 1996, and 1995, respectively. The Company
had international sales of approximately $9,541,000, $17,355,000 and $26,884,000
in 1997, 1996, and 1995, respectively. Export sales consisted of approximately
$7,043,000, $11,698,000 and $18,548,000 for those same periods. Of these export
sales, sales into Europe were approximately $5,337,000, $8,185,000, and
$13,089,000 in 1997, 1996 and 1995, respectively. Export sales do not include
direct sales from the Company's foreign subsidiaries.

Translation of Foreign Currencies
The Company has designated the local currency as the functional currency for all
foreign locations. Accordingly, assets and liabilities of all foreign
subsidiaries are translated at year-end rates of exchange, and income statement
accounts are translated at average rates of exchange. The resulting translation
adjustments are excluded from net earnings, and accumulated as a separate
component of stockholder's equity.
     Foreign currency transaction gains and losses are included in results of
operations in the periods in which they occur, and are immaterial for all
periods presented.

Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Marketable securities consist of
highly liquid investments with maturities of more than three months when
purchased. Investments are stated at cost, plus accrued interest, which
approximates fair market value. In addition, the Company classified all
investments as available-for-sale securities. Realized gains and losses are
determined on the specific identification method and are included in interest
income or expense. The portfolio at December 31, 1997 matures at various dates
through December 31, 1998.

<PAGE>   11

Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.

Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed principally using the straight-line method
over the estimated useful lives of the assets as follows:

                  Machinery and equipment            1-5 years
                  Furniture and fixtures             7 years
                  Leasehold improvements             shorter of lease term
                                                     or estimated useful life.

     Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost of the disposed assets and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income.

Income Taxes
Deferred tax assets and liabilities reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance is provided for the net deferred tax assets if, based on the weighted
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.

Accrued Warranty
The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs which approximates
expected future warranty costs.

Research and Development
Cost incurred in the research and development of software products are expensed
as incurred until the technological feasibility of the product has been
established. After technological feasibility is established, any additional
costs would be capitalized. As the Company believes the current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no costs have been capitalized to date.

Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, are principally cash and cash equivalents, marketable securities,
and accounts receivable. The Company places its investments in highly rated
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution.
     Concentration of credit risk with respect to accounts receivable is limited
to certain customers with whom the Company makes substantial sales. Two
customers accounted for approximately 28% and 30% of the Company's outstanding
accounts receivable at December 31, 1997 and 1996, respectively. To reduce
credit risk, the Company performs ongoing credit evaluation, account monitoring
procedures and maintains reserves for potential losses. These losses have been
within management's expectations.

Net Income (Loss) Per Common Share and Common Equivalent Share
The Company adopted the requirements of SFAS No. 128 "Earnings per Share" in
the fourth quarter, 1997. This statement replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share
(EPS). Basic EPS excludes the effect of any dilutive options, warrants or
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed by dividing income
available to common stockholders by the sum of the weighted average number of
common shares and common share equivalents computed using the average market
price for the period under the treasury stock method. All earnings per share
amounts have been restated to conform with the SFAS 128 requirements.

The following table reconciles the numerator and the denominators of the basic
and diluted EPS computations shown on the Consolidated Statements of Operations:

<TABLE>
<CAPTION>
                                               For the years ended December 31,
--------------------------------------------------------------------------------
(in thousands, except per share data)            1997         1996        1995
--------------------------------------------------------------------------------
<S>                                            <C>          <C>          <C>
Basic EPS computation:
Numerator:
  Net (loss) income                            ($7,847)     ($12,014)    $ 8,220
Denominator:
  Weighted average common shares outstanding    15,301        15,630      15,416
Basic EPS                                       ($0.51)       ($0.77)      $0.53

Diluted EPS computation:
Numerator:
  Net (loss) income                            ($7,847)     ($12,014)    $ 8,220
Denominator:
  Weighted average common shares outstanding    15,301        15,630      15,416
  Stock options                                      -             -         276
                                               ---------------------------------
  Total shares                                  15,301        15,630      15,692
Diluted EPS                                     ($0.51)       ($0.77)      $0.52
</TABLE>

Outstanding options of 1,758,605 and 1,272,009 as of December 31, 1997 and 1996,
respectively, were not included in the  diluted EPS computation because their
effect would be antidilutive. Options to purchase shares of the Company's common
stock of 69,837 for the year ended December 31,1995 were outstanding during the
period but were not included in the computation of diluted EPS because the price
of the options, which range from $7.73 to $14.00 for 1995, was greater than the
average market price of the common stock for the reported period. The
outstanding options not included in the calculation for 1995 will expire between
September 25, 2001 and October 25, 2005.



<PAGE>   12

Newly Issued Accounting Standards

The FASB has issued Statement No. 130 ("SFAS 130") "Reporting Comprehensive
Income." This Statement requires changes in comprehensive income to be shown in
a financial statement that is displayed with the same prominence as other
financial statements. While not mandating a specific financial statement format,
the Statement requires that an amount representing total comprehensive income be
reported. The Statement will become effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
is required for comparative purposes. The Company does not believe that the
adoption of SFAS 130 will have a material impact on result of operations.

The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This Statement, which supersedes
Statement No. 14 "Financial Reporting for Segments of a Business Enterprise,"
changes the way public companies report information about segments. The
Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this Statement and its
effect on financial statement disclosures.

Change In Presentation of Consolidated Statements of Cash Flows
During 1997 the Company changed from the direct to the indirect method of
presenting its consolidated statements of cash flows. Prior year amounts have
been reclassified to conform to the current year presentation.

C INVESTMENTS
Investment classified as current assets were as follows:
<TABLE>
<CAPTION>
                                 1997        1996
--------------------------------------------------
(in thousands)
--------------------------------------------------
<S>                            <C>         <C>
Cash equivalents:
Repurchase agreements          $ 1,260     $ 1,950
Mutual funds                     1,674       6,750
Commercial paper                   808       2,448
--------------------------------------------------
Total cash equivalents         $ 3,742     $11,148
--------------------------------------------------

Marketable securities:
Fixed income securities        $ 7,074     $     -
Repurchase agreements              263           -
Certificates of deposit          1,291           -
Commercial paper                 2,557       2,918
U.S. Government securities       1,258       4,000
--------------------------------------------------
Total marketable securities    $12,443     $ 6,918
--------------------------------------------------
</TABLE>


<PAGE>   13


D. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
                                 December 31,
------------------------------------------------
(in thousands)               1997           1996
------------------------------------------------
<S>                        <C>            <C>
Raw materials              $1,043         $1,373
Work in process               373            718
Finished goods              4,294          6,646
------------------------------------------------
Total inventories          $5,710         $8,737
------------------------------------------------
</TABLE>

During 1996, the Company recorded an additional inventory provision of
$2,400,000 to reflect inventory exposures as the Company transitioned from LAN
to remote access products.

E. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
                                                       December 31,
----------------------------------------------------------------------
(in thousands)                                       1997         1996
----------------------------------------------------------------------
<S>                                                <C>         <C>
Machinery and equipment                            $11,492     $12,083
Furniture and fixtures                                 554         572
Leasehold improvements                               1,188         970
----------------------------------------------------------------------
                                                    13,234      13,625
Less accumulated depreciation and amortization       9,962       9,031
----------------------------------------------------------------------
Property and equipment, net                        $ 3,272     $ 4,594
----------------------------------------------------------------------
</TABLE>

F. COMMITMENTS AND CONTINGENCIES
Letter of Credit
The Company has an outstanding letter of credit of approximately $288,000 at
December 31, 1997 and 1996. This letter of credit which matures on April 30,
2002, automatically renews annually on December 31. This letter of credit
collateralized the Company's obligation to a third party for a certain lease
transaction. The fair value of this letter of credit is estimated to be the same
as the contract amount.

Operating Leases
The Company leases its office and manufacturing facilities under operating
leases expiring at various dates through 2002. Under certain leases the Company
is obligated to pay taxes, repairs, and other operating costs. The Company has
the option to extend the term of the lease of its primary office and
manufacturing facility for two five-year periods commencing on May 1, 2002 and
May 1, 2007. Rental expense amounted to approximately $1,128,000, $1,556,000 and
$1,666,000 in 1997, 1996 and 1995, respectively. At December 31, 1997 future
rental commitments are as follows:
<TABLE>
<CAPTION>
---------------------------
(in thousands)
---------------------------
<C>                  <C>
1998                 $  653
1999                    543
2000                    496
2001                    476
2002                    162
Thereafter                -
---------------------------
Total                $2,330
</TABLE>


<PAGE>   14



G. CAPITAL STOCK
Common Stock
The Company has an Employee Stock Purchase Plan ("Purchase Plan") available to
most full time employees. Under this plan, 300,000 shares of common stock were
reserved for issuance. Eligible employees may designate not more than 5% of
their cash compensation to be deducted each pay period for the purchase of
common stock under the Purchase Plan. The purchase price of the shares under the
plan is equal to the lower of 85% of the fair market value per share of the
stock on the grant date (first day of the exercise period) or 85% of the fair
market value on the exercise date (the last day of the exercise period, the fair
market value as of a given date is determined by averaging the last sales price
of the stock for the ten trading days immediately proceeding the given date. The
Company sold 32,677 shares and 41,628 shares to employees in 1997 and 1996,
respectively, under the Purchase Plan. At December 31, 1997, 257,097 shares
remained unissued under the Purchase Plan. The weighted average fair value of
the purchase right to a share of Company stock under the Purchase Plan was
estimated to be $1.33 and $1.65 for 1997 and 1996, respectively. No compensation
cost has been recognized for shares purchased.

Preferred Stock
In 1991, the Shareholders approved the authorization of 7,500,000 shares of
preferred stock. The Board of Directors is authorized, subject to any
limitations prescribed by law, to issue from time to time such shares of
preferred stock in one or more series. Each such series of preferred stock will
have such number of shares, designations, preferences, voting power,
qualifications, and special or private rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend
rights, voting rights, preemptive and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights. No such shares have been
issued to date.

Stock Options
The Company's stock option plans generally provide for the granting to employees
of incentive stock options to purchase shares of common stock at the fair market
value as defined by the plan on the date of grant and of non-qualified stock
options at no less than 50% of the fair market value as defined by the plan on
the date of the grant. To date the Company has never issued non-qualified stock
options at an exercise price less than the fair market value on the date of the
grant. Generally, options become exercisable at the rate of 25% at the end of
each of the first four anniversaries of the grant. Options generally expire ten
years from the date of grant, or ninety days from the date of termination of
employment. As of December 31, 1997, 4,384,000 shares of common stock were
reserved under the plans and 349,400 shares were available for grant.

     In September 1996, the Compensation Committee of the Board of Directors,
pursuant to the authority granted under the Company's 1991 Restated Stock
Option Plan, voted to allow employees of the Company holding options with
exercise prices greater than $3.625 per share to exchange those options for
substitute options having an option exercise price of $3.625 per share.  In
October 1996, 707,154 options were surrendered by employees and exchanged for
new options at the new option exercise price and vesting schedule.

     A summary of the status of the Company's stock plans as of December 31,
1997, 1996 and 1995, and changes during the years ended on those dates is
presented below:


<PAGE>   15


<TABLE>
<CAPTION>

                                     1997                    1996                     1995
                            ----------------------  -----------------------  ----------------------
                                          Weighted                 Weighted                Weighted
                                           Average                  Average                 Average
                              Number of   Exercise   Number of     Exercise   Number of    Exercise
                               Options       Price    Options         Price    Options        Price
                            ----------------------  -----------------------  ----------------------
<S>                           <C>            <C>       <C>            <C>      <C>            <C>
Outstanding at the
beginning of the year         1,272,009      $3.34     1,237,649      $5.52    1,446,597      $5.37
Granted                       1,007,805      $2.02     1,245,726      $4.11      404,700      $6.76
Exercised                             -          -        (6,712)     $4.01     (218,875)     $4.72
Canceled                       (521,209)     $3.18    (1,204,654)     $6.23     (394,773)     $6.67
                            ------------            -------------            ------------
Outstanding                   1,758,605      $2.70     1,272,009      $3.34    1,237,649      $5.52
                            ----------------------  -----------------------  ----------------------

Options exercisable
at year end                     685,270      $3.41       522,604      $3.41      440,778      $5.44
Weighted average fair
value of options granted
during the year                              $1.34                    $2.78                   $4.70
</TABLE>

The following table summarizes information concerning outstanding options at
December 31, 1997:
<TABLE>
<CAPTION>
                                       Weighted Average          Weighted
    Range of           Number of          Remaining               Average
  Exercise Prices     Outstanding      Contractual Life        Exercise Price
  ---------------     ----------      -----------------        --------------
   <S>                 <C>                  <C>                      <C>
   $0.73 - $1.10          12,300            9.58                     $0.95
   $1.45 - $1.56         248,100            9.95                     $1.45
   $1.70 - $2.10         346,905            9.62                     $1.85
   $2.53 - $3.63       1,130,350            8.14                     $3.18
   $6.00 - $7.50          20,950            3.36                     $7.43
                      --------------------------------------------------------
                       1,758,605            8.64                     $2.71
                      =========================================================
</TABLE>

Pro Forma Impact of SFAS 123
SFAS 123 "Accounting for Stock-Based Compensation" requires that companies
either recognize compensation expense for grants of stock, stock options, and
other equity instruments based on fair value, or provide pro forma disclosure of
net income and earnings per share in the notes to the financial statements. The
Company adopted the disclosure provisions of SFAS 123 in 1996 and has applied
APB Opinion 25 and related interpretations in accounting for its plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on fair value at grant dates as calculated in accordance with
SFAS 123, the Company's net (loss) income and (loss) income per share for the
years ended December 31, 1997, 1996 and 1995 would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>

                          1997                         1996                             1995
                -------------------------    -------------------------    ------------------------------------------------
                            Basic/Diluted               Basic/Diluted                       Basic             Diluted
                Net loss   loss per share    Net loss   loss per share    Net Income   Income per share   Income per share
                -------------------------    -------------------------    -------------------------------------------------
<S>              <C>            <C>           <C>             <C>            <C>             <C>              <C>
As reported      ($7,847)       ($0.51)       ($12,014)       ($0.77)         $8,220         $0.53            $0.52

Pro forma        ($8,140)       ($0.53)       ($12,627)       ($0.81)         $8,011         $0.51            $0.51
</TABLE>

The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of six years, expected volatility of 75% in 1997,
and 65% in 1996 and 1995, and no dividends assumed. The weighted average
assumptions for the risk-free interest rates for 1997, 1996 and 1995 were 6.11%,
6.32% and 6.58%, respectively.

     The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts since SFAS 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.


<PAGE>   16



H. RESTRUCTURING OF OPERATIONS
During the fourth quarter of 1996, the Company's management announced a
restructuring plan for the strategic redirection of the Company. The
restructuring principally addressed the move toward the continued development of
the OpenROUTE Networks subsidiary. The strategies for this subsidiary are
designed to allow the Company to aggressively focus its efforts on the rapidly
growing Internet/Intranet connectivity marketplace. The Company is attempting to
leverage its strengths in the OpenROUTE internetworking software and its
successful line of GlobeTrotter Remote Access routers. The Company is
concentrating its efforts on gaining more market share and increasing revenue.
     As a result, the Company recorded a $3,312,000 charge for restructuring of
operations in the fourth quarter of 1996. This included a reduction in the
Company's work force of forty-two employees, or approximately 22%, accounting
for approximately $410,000 of severance costs. The Company incurred a charge of
approximately $785,000 in connection with the substantial reduction in its
occupancy requirements. In addition, the charge included approximately
$1,922,000 for disposal of fixed assets and approximately $195,000 of other
costs.
     During 1997, the Company incurred cash expenditures relating to the 1996
restructuring of approximately $495,000 for severance and payroll related costs,
approximately $672,000 as a result of reducing its occupancy costs and $253,000
in other restructuring related costs. Management has determined that all of the
Company's obligations from the 1996 and prior restructurings have been settled.
Accordingly, the Company reversed its remaining restructuring provision of
$241,000 against operating expenses in the third quarter of 1997.

<TABLE>
<CAPTION>
I. INCOME TAXES
The provision for income taxes consists of the following:
                                                              December 31,
-------------------------------------------------------------------------------
(in thousands)                                           1997     1996     1995
-------------------------------------------------------------------------------
<S>                                                      <C>      <C>      <C>
Federal - current                                        $  -     ($65)    $319
State - current                                            28       10       57
Foreign - current                                         156      215      112
-------------------------------------------------------------------------------
Total                                                    $184     $160     $488
-------------------------------------------------------------------------------
</TABLE>

Reconciliation between the Company's effective tax rate and the U.S. statutory
is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
December 31,                               1997        1996      1995
----------------------------------------------------------------------
<S>                                        <C>        <C>        <C>
U.S. statutory rate                        (34.0%)    (34.0%)    34.0%
Foreign tax rate differential                2.4        0.1      (2.8)
Change in federal valuation allowance       34.0       35.2     (26.1)
State income taxes, net of U.S.
 Federal income tax effect                     -          -       0.5
----------------------------------------------------------------------
Effective tax rate                           2.4%       1.3%      5.6%
----------------------------------------------------------------------
</TABLE>

A valuation allowance of  $13,210,000 and $9,982,000 for 1997 and 1996
respectively has been recorded to offset the related net deferred tax assets due
to the uncertainty of realizing the benefit of these assets. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996:

<TABLE>
<CAPTION>

---------------------------------------------------------
(in thousands)                              1997     1996
---------------------------------------------------------
<S>                                     <C>        <C>
Deferred tax assets:
 Bad debt reserve                          $360     $   -
 Restructuring charge                         -       644
 Inventory reserves                         533       884
 Product warranty                           262       417
 Federal tax benefit of
  net operating loss carryforwards        7,889     3,878
 State tax benefit of
  net operating loss carryforwards        1,827     1,286
 Tax credit carryforwards                   912       912
 Alternative minimum tax credit             699       542
 Depreciation                               144         -
 Other items                                584       919
---------------------------------------------------------
Total deferred tax assets                13,210     9,482
Valuation allowance for
 deferred tax assets                    (13,210)   (9,112)
---------------------------------------------------------
Net deferred assets                           -       370
Deferred tax liability:
 Depreciation                                         370
---------------------------------------------------------
Net deferred tax asset                       $0        $0
---------------------------------------------------------
</TABLE>

As of December 31, 1997 the Company had net operating loss forwards of
approximately $23,000,000 and $38,000,000 for federal and state income tax
purposes, respectively.  The federal net operating losses begin to expire in
2010 and state net operating losses begin to expire in 1998. Similarly,
research and development credit carryforwards of approximately $912,000
were available on December 31, 1997, expiring at various dates through 2005.
<PAGE>   17

J.  RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan for its employees, which has been
qualified under Section 401(k) of the Code. Eligible employees are permitted to
contribute to the 401 (k) Plan through payroll deductions within statutory
limitations and subject to any limitations included in the 401 (k) Plan. The
Plan provides for the matching contribution by the Company in an annual amount
approximating 2% of a participant's compensation. The Company contributed
approximately $128,000, $185,000, and $165,000 to the plan in 1997, 1996, and
1995, respectively.

K. QUARTERLY FINANCIAL DATA

                                                                    (unaudited)

Selected quarterly financial data for the years ended December 31, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
                                                                               Basic/diluted
                                                                                  Net income
                                                  Net        Gross   Net income       (loss)
(in thousands, except per share amounts)        sales       profit       (loss)    per share
--------------------------------------------------------------------------------------------
1997
<S>                                           <C>          <C>        <C>            <C>
First Quarter                                  $9,125       $4,256       ($313)      ($0.02)
Second Quarter                                  7,748        3,748      (1,133)       (0.07)
Third Quarter                                   5,006        1,754      (2,894)       (0.19)
Fourth Quarter                                  5,065        1,846      (3,507)       (0.23)
--------------------------------------------------------------------------------------------
Total                                         $26,944      $11,604     ($7,847)      ($0.51)
============================================================================================

1996
First Quarter                                 $14,018       $7,231        $141        $0.01
Second Quarter                                 10,646        4,932      (2,345)       (0.15)
Third Quarter                                  10,589        5,119      (1,763)       (0.11)
Fourth Quarter                                 10,043        2,344      (8,047)       (0.52)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Total                                         $45,296      $19,626    ($12,014)      ($0.77)
--------------------------------------------------------------------------------------------
</TABLE>

The 1997 fourth quarter operating loss reflects approximately $880,000 or $0.06
per share of certain adjustments and accruals relating to business operations
in the Asia-Pacific region, as well as certain employee incentive programs.
<PAGE>   18

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Proteon, Inc.:

We have audited the accompanying consolidated balance sheets of Proteon, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997.  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 Proteon, Inc.
as of December 31, 1997 and 1996 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.


                                             /s/ COOPERS & LYBRAND L.L.P.
                                             ----------------------------
Coopers & Lybrand, L.L.P.
Boston, Massachusetts
February 11, 1998

<PAGE>   19


-------------------------
  STOCK PRICE HISTORY
-------------------------


The following table sets forth the high and low sales prices of the Company's
Common Stock as reported on the NASDAQ Stock Market from January 1, 1996 to
December 31, 1997. As of December 31, 1997, the Company had approximately 507
stockholders of record. The Company has paid no dividends on its Common Stock
and anticipates it will reinvest any earnings to finance future growth.
<TABLE>
<CAPTION>

For year ended December 31, 1997                High               Low
-----------------------------------------------------------------------
<S>                                            <C>              <C>
First Quarter                                  3 11/16           1 5/16
Second Quarter                                 2 15/16           1 7/16
Third Quarter                                   2 1/2            1 9/16
Fourth Quarter                                  3 1/2            1 1/32


For year ended December 31, 1996                High               Low
-----------------------------------------------------------------------
First Quarter                                   7 1/2             4 3/4
Second Quarter                                  6 1/2             3 5/8
Third Quarter                                   4 1/4             2 3/8
Fourth Quarter                                  4 1/4            2 1/16
</TABLE>