SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year ended December 31, 1998
                       Commission file number 0-28610

                                 XOX CORPORATION
           (Name of small business issuer as specified in its charter)


                Delaware                                 93-0898539
(State or jurisdiction of incorporation              (I.R.S. Employer
           or organization)                          Identification No.)

               7640 West 78th Street, Bloomington, Minnesota 55439
                                 (612) 946-1191
   (Address and telephone number of principal executive offices and principal
                               place of business)

Securities registered pursuant to Section 12(g) of the Act:
(1) Units, each unit consisting of one share of Common Stock, $.025 par value,
and one Redeemable Common Stock Purchase Warrant.
(2) Common Stock, $.025 par value.
(3) Redeemable Common Stock Purchase Warrants.

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___

Check if disclosure of delinquent filers in response to item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____

The Issuer's revenues for its most recent fiscal year were $2,241,389.

As of March 19, 1999, the Issuer had 1,732,881 shares of common stock, $.025 par
value, outstanding, excluding outstanding shares beneficially owned by
affiliates. The aggregate market value of such common stock as of March 19,
1999, (based on the average closing bid and asked prices as of March 19, 1999 as
reported by the OTC Bulletin Board), was approximately $1,813,460.

DOCUMENTS INCORPORATED BY REFERENCE:  None

Transitional Small Business Disclosure Format (check one): Yes ___; No _X_


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<PAGE>


                                     PART I

     This Form 10-KSB contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
or "continue" or the negative or other variation thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors, not
limited to, but including the risk factors set forth in the "Risk Factors"
section of the Company's Registration Statement on Form SB-2 (File No.
333-05112-C).

ITEM 1. DESCRIPTION OF BUSINESS

(a) BUSINESS DEVELOPMENT

     XOX Corporation (the "Company" or "XOX" [pronounced zocks]) designs,
develops and markets proprietary software for creating virtual mock-ups or
models within the computer that capture the complete geometry of objects or
spatial areas of interest. This model can then be used for visual analysis or to
simulate physical phenomena in a diverse set of disciplines ranging from
geosciences to medical applications.

     Uses of geometric computing software include, but are not limited to,
Geophysical software (such as oil-field modeling), Computer Aided Design
("CAD"), Computer Aided Engineering ("CAE"), Geographical Information Systems
("GIS"), Medical Image Processing, Industrial and Graphics Arts Design,
Animation as well as Scientific Visualization and Analysis.

     The Company was incorporated under the laws of the state of Delaware on
September 16, 1985.

     For the past several years, the Company has focused a significant portion
of its development and marketing resources in the area of Geosciences. The
Company believes that this market offers good opportunities for customer
revenues in the next two years and beyond.



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<PAGE>


Over the last year, the company has concluded several licensing and partnering
arrangements that further solidify its position as a geometry technology
provider for these markets. In particular, the company has signed a multi-year
contract with Schlumberger GeoQuest for support and contract services, and
partnering arrangements with Seismic Micro Technologies and Interpretive
Imaging, LLC.

(b) BUSINESS OF THE COMPANY

PRODUCTS

     The Company receives its revenues from marketing of three products: (1) its
core geometric modeling technology SHAPES which is applicable to diverse
industries, (2) GeoScience specific modules that provide earth modeling
functions targeted at the oil and gas exploration industry, and (3) consulting
and support services targeted at current and potential users of SHAPES
functionality. These three products are briefly described below:

SHAPES

     The Company's principal product, the SHAPES(R) Geometric Computing System
("SHAPES"), is licensed to software applications developers in the Geosciences,
medical, and other industries. Such licensees imbed SHAPES within their
application software as a sub-module that handles geometric modeling needs
required by the application.

     SHAPES and associated modules perform most of the work related to modeling
and analyzing the geometry of areas or objects of interest in the computer.
Since its inception, SHAPES has been distinguished from other competing
technologies in that it is able to handle much more complex modeling
requirements when compared to the surface- or solids-modeling systems that exist
in the CAD and other industries. In the CAD industry, for example, vendors have
used technologies developed in the late 1970's and early 1980's and a subset of
geometric shapes (called B-splines or NURBs) for the purpose of designing
manufactured solid objects, like automobile parts, airplane parts, etc. These
technologies are not useful for modeling objects in the geosciences or medical
domains. Similarly, technologies in medical or geosciences domains have used
ad-hoc techniques for creating and working with geometry that do not allow
sophisticated analysis of the relations between the geometric objects
(topology). SHAPES, on the other hand, has since its inception been based on a
more general model for geometry and topology that allows it to function
efficiently as enabling technology for a variety of areas ranging from CAD/CAM
and geosciences to medical modeling.

     Based on feedback received from its customers, the Company maintains that
these modelers are limited in four important areas where the Company's product
excels in contrast to competing products:

(1) Retention of material properties: SHAPES models can retain properties like
the porosity and density of the parts of the human body for medical
applications, or similar measurements for the elements of an earth model, such
as distinguishing oil, water, gas, shale and rock.

(2) Precise and robust intersections. SHAPES has excelled in modeling complex
intersections like those that occur with earth layers intersecting faults and
salt domes.


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<PAGE>


(3) N-dimensional and mixed-dimensional modeling. This is a unique capability of
SHAPES, used for example to intersect one-dimensional struts to a
three-dimensional platform for the CAD-like design of an offshore oilrig. This
capability is extended to the modeling of boreholes inserted into a 3D-earth
model or a surgical instrument intrusion into the 3D model of the human body.

(4) The ability to model ill-formed data. CT scans in the Medical field and
Seismic data in Geosciences create fuzzy data. Using industry supplied methods
for identifying points of interest, the Company's product converts this data
into robust and complete models, that allows the users to look at and feel areas
of interest in great detail, and to simulate the impact of change.

The company realizes revenues from licensing of the SHAPES Development system to
the licensees as well as royalties when SHAPES based applications are shipped to
end-users by licensed application developers.

GEOSCIENCE MODULES

Over the past year, the company has started to move beyond its "core-technology"
focus and started to develop modules that more directly address some of the
modeling needs of end-users in the GeoScience industry. These modules leverage
the company's SHAPES core-technology and pre-package much of the functionality
that GeoScience applications developers would need to develop themselves using
SHAPES. Such functionality includes built in notion of faults, horizons, and
unconformities, and standard ways of constructing these within the workflow most
often used by geologists and geophysicists.

The company expects to realize revenues from such modules in two ways: (1)
licensing fees and/or ongoing royalties for resold imbedded copies, and (2)
direct sales to end-users through its own sales force.

SUPPORT AND CONSULTING SERVICES

XOX provides geometry consulting and custom development services to clients in
various industry segments. Such services are towards incorporating relevant
parts of the company's SHAPES product or its geoscience specific modules into
its client's products. These services can range in scope from telephone hot-line
support to custom development of a complete application on contract from the
client. Such services have the added benefit of expediting the deployment of
SHAPES based applications through partners, and the flow of royalty revenues to
XOX.

Support and consulting services from the company are available not only to
customers in the geosciences, but other industries such as medical and
GIS/remote-sensing as well.

MARKETS AND APPLICATIONS

Until the early 90's, the company focused its marketing efforts principally on
software developers in the CAD market, achieving modest acceptance. In the
recent years, the Company has explored market areas other than CAD, including
Oil and Gas Exploration and Production (E&P), Geographical Information Systems 
and Remote sensing, Medical Imaging, Scientific Visualization and Analysis
software.

Of the above areas, the Company believes its strongest market is currently
represented by the Oil and Gas E&P. This is because the scope of the Company's
offerings in this area have matured over the recent years to cover a vast
majority of earth modeling requirements. In addition, this industry is currently
actively pursuing a move to 3D modeling of the type provided by the Company's
products. For these reasons, the company is currently pursuing technology
licensing as well as direct end-user product marketing opportunities in the oil
and gas E&P industry.

The Company's other marketing efforts are geared currently towards the medical
and GIS/Remote-sensing markets. In both of these areas, the company is exploring
opportunities where it can leverage its proprietary modeling technology to
deliver end-user products in partnership with companies that have identified
strong product opportunities in their respective domains.


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<PAGE>


GEOSCIENCES - OIL AND GAS E&P

     The Geosciences industry represents the largest number of active developers
of SHAPES-based products, including Shell Oil, Schlumberger GeoQuest, Seismic
Micro Technologies, and Interpretive Imaging, LLC. In addition, the company is
also creating an end-user products for geologists that will be directly marketed
to users within oil-companies.

The end-users of these products, principally oil exploration and oil producing
companies, invest heavily in computer technology for its aid in locating new oil
fields and in enhancing the production and extraction of petroleum from existing
oil fields. The recent years have seen a shift in this industry towards greater
acceptance and accelerated incorporation of 3D technology into production use.
Key standards committees and consortiums such as POSC and OpenSpirit have
initiated efforts towards definition and propagation of interoperability
specifications that include 3D geometry.

     The company sees a need for its robust earth modeling technology and
expertise not only with larger software vendors such as Schlumberger but also
some of the smaller applications vendors who need to upgrade their offerings to
include 3D facilities. Smaller vendors are also more likely to use XOX
consulting to aid in the development of their SHAPES based product.

     The flexibility of the SHAPES system in creating 3D earth models allows its
users to build models easily from a variety of data-sources and through a
variety of different tools and procedures. The resulting 3D model provides
unprecedented completeness of information and thus constitutes a very key piece
of the core information needed to drive all phases of work in the oil and gas
industry starting from exploration to planning and recovery.

One of XOX's key customers, Schlumberger, is using SHAPES to create 3D earth
models starting from processed seismic data, and then creating a complete earth
model including property descriptions at each point in the model. The resulting
model is expected to be used to drive procedures for locating reservoirs and
simulating oil flow during production. This product called Property 3D was
released in early March 1999 by Schlumberger

MEDICAL IMAGING AND ANALYSIS

     Similar to the Geosciences industry, the Medical Imaging and Analysis
industry is moving towards computer visualization and simulation to aid all
stages of the process starting from diagnosis through to surgical or other
clinical treatments. Many of the data-gathering techniques are similar in nature
to those in the geosciences. For example, CAT scans or MRI images essentially
use similar underlying technologies and produce similar results as seismic data
gathering techniques in geosciences. Further, a variety of factors are moving
the industry to find minimally invasive techniques for diagnosis and treatment.
This requires as complete information as possible of the 3D description of
specific patient anatomies, sometimes with clearly segmented information for the
individual parts under study of treatment.

     The Company its technology could have broad application within this market,
including the use of CT (Computed Tomography) and MRI (Magnetic Resonance
Imaging) scans to develop sophisticated models of portions of the human body for
radiation therapy planning, orthopedic fittings, development of surgical
strategies, and assistance in robotic surgery. The ability to look at parts of
the human body under different stress conditions has significance in the medical
industry. As an example, using SHAPES-based products from two of the Company's
customers, researchers at Stanford University created computer models of a
series of real blood vessels and arteries. They then simulated the effect of
moderate exercise on a clinically observed plaque deposit within an artery. They
were able to conclude that the flow through the artery was clearly less impeded
with the accelerated flow resulting from moderate exercise. Although the
Company's efforts in this industry are currently only exploratory in nature, the
Company hopes to be able to market its enabling technology to medical
application developers because of the unique capabilities of SHAPES.


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<PAGE>


ADVANCED COMPUTER AIDED DESIGN AND ANALYSIS

         The Company is currently spending limited resources in the CAD market
to continue to service customers and to explore potential opportunities where
its proprietary technology can be leveraged. The CAD market is, however, crowded
with a multitude of end-user and core-technology offerings that perform
geometric modeling operations. Distinctive features of the Company's technology
have provided key benefits in limited but important areas.

One of these areas is Finite Element Analysis. The Company's customers in this
areas are using SHAPES to model the parts on which simulation software is then
run in order to predict stress or thermal conditions under operating conditions.
One such customer is ANSYS, Inc. (the parent of SAS IP, Inc.) ("ANSYS"), has
employed SHAPES in such modeling of geometry. ANSYS has been one of the earliest
adopters of SHAPES technology and has been shipping SHAPES-embedded products
since 1992.

The Company expects to continue to maintain its presence in the CAD market as a
niche player and address opportunities as and when they appear and can be
leveraged by its proprietary technology.

OTHER POTENTIAL MARKETS

     There are several other industries where the Company believes its
technology has future potential - for example, remote sensing for GIS. The
Company intends to target those industries where the need is the most immediate,
the returns are likely to be the greatest, and where it will have the
opportunity to deliver potentially dominant technology.

STRATEGY

     The company is focussing on the two pronged strategy of (1) joint venturing
with partners in delivering state-of-the-art products based on its advanced
SHAPES technology for a variety of areas, and (2) exploiting niche opportunities
to provide products directly to end-users through direct sales.

     The joint-venturing or partnering approach differs from its original OEM
approach in that as a partner in a joint venture, the company partakes more
heavily in defining, scheduling and developing the SHAPES based end product.
This expedites deployment of SHAPES based products and provides XOX with higher
revenues on a more predictable schedule.

In addition, the Company is providing products directly to the end-user markets
where it finds the opportunities. This has the benefit of creating name
recognition, creating a market-pull for partnerships and partnered products, and
helping the Company better guide its technology through direct interaction with
end-users.

CUSTOMERS

Over 20 software development entities have licensed the SHAPES core technology
for incorporation into larger software applications. These include OEMs such as
Schlumberger Geoquest, partners such as Interpretive Imaging, LLC, and
universities such as Stanford and RPI.

     For the fiscal year ended December 31, 1998, revenues from Schlumberger
Corporation ("Schlumberger") and Shell International Exploration & Production
B.V ("Shell Oil") were approximately $1,905,000, which represents approximately
85% of 1998 revenues. The Company currently anticipates that the same companies
could account for a significant portion of its annual revenue in 1999.


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<PAGE>


MARKETING AND SALES

     The Company has been marketing its products in North America, Europe and 
Asia mainly through sales effort from its corporate offices. The Company 
announced on March 5, 1999 it is in the process of opening a business and sales 
office in Houston, Texas. Further, the Company hired Mr. Tim Ryan as Vice 
President of Sales. Mr. Ryan has over fifteen years of experience in geology and
software sales and recently worked for Paradigm Geophysical. Currently the sales
effort is being led by the Company's Vice President of Sales with assistance and
support by the Executive Vice President and COO working in conjunction with a
team of sales account representatives. The sales support staff is responsible
for aiding potential customers in technical evaluation of SHAPES as a possible
core technology for the customer's software. The Company's sales support staff
will often build an initial prototype of a potential application during this
phase.

     As the company moves from selling to technical leaders within OEM/partner
organizations to selling directly to end-users, it is now augmenting its sales
strategy. The Company is in the process of opening an office in Houston, which
will be staffed by a sales executive and one or more support staff. It will be 
the responsibility of this group to execute sales demos to user groups at client
sites and to provide post-sales support - at the customer site if necessary.

LICENSE AND DISTRIBUTOR AGREEMENTS

     The Company enters into license agreements with its customers. However,
other than its agreements with Schlumberger Corporation, no other license
agreements are anticipated to account for more than 10% of the Company's future
revenue. As further partnerships and strategic alliances are formed at this
point to jointly develop end-user products, the Company believes a growing share
of its overall revenue will be contributed from such sources. License agreements
provide that each customer is entitled to utilize the Company's proprietary
technology in the development of the customer's product. With the exception of
the agreement with Unitechnic SA, which provides exclusivity in France, the
license agreements are non-exclusive and provide that each licensee is required
to make royalty payments to the Company based on the number of customer products
sold. Each of the license agreements provide that the licensee may cancel the
agreement at any time upon written notice and further provide the licensee with
the right to use source code in certain prescribed events. In such event,
however, the licensee must continue to pay royalties as provided for in the
agreement. Although the existence of this term may diminish the value of the
Company's assets, the Company believes that the licensee's obligation to
continue to make royalty payments would minimize the impact.

     The Company's distribution agreements with TechSoft GmbH and Unitechnic SA
grant those entities the right to distribute the Company's products. These
agreements provide that any license generated as a result of a distributor's
efforts will be directly between the Company and the licensee. The agreements
provide that the distributor will invoice the licensee and pay a portion of any
fees and royalties to the Company. The distribution agreement with TechSoft
originally provided that it had exclusive distribution rights to the Company's
SHAPES product in Europe, the independent republics formerly part of the Soviet
Union, and Israel. However, this agreement has been modified as a result of
TechSoft's failure to meet the performance measures mandated in the agreement.
This failure is perceived by the Company to be attributable to TechSoft's
limited sales and support capabilities outside of Germany. As a result, the
agreement with TechSoft is now a non-exclusive distribution right. The Company's
agreement with Unitechnic grants it the sole distribution right in France for
the Company's SHAPES products.

COMPETITION

     In the geophysical market, The GoCad Research Program is the Company's
primary competitor. GoCad is a consortium based at the University of Nancy in
France, which includes several large petroleum companies and a large French
geophysical software company. The consortium's GoCad software product is
designed specifically for geophysical modeling and has significant technical
strengths in the area of surface or boundary representations, which are required
in geophysical modeling. In addition, internal development is a strong
alternative for application vendors who the Company is trying to convert into
partners.

     Additionally, as the company moves towards providing end-user products, it
will face competition from several existing and emerging products. Some of these
products are expected to address the same market that the Company's product is
designed to address while the others may provide significant overlap within the
target domain.


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<PAGE>


     While many of the Company's competitors have more experience, greater
specialization and greater financial and other resources than the Company, the
Company believes that technical abilities, functionality and design make its
product superior to those of its competitors.

RESEARCH AND DEVELOPMENT

     The Company plans to focus on research and development of products which
will allow it to more fully exploit its technology in the Geophysical software,
Remote Sensing, and Medical Imaging markets. Currently the Company is working on
development of: (i) a geological modeling product for the PC environment; (ii)
speed and performance improvements for handling large models; and (iii) several
partnered products that are a result of its consulting and partnering
relationships.

JOINT VENTURE EFFORT

     In December 1995, the Company entered into a joint venture agreement with
IIS Infotech Ltd. ("IIS"), a major software services company located in New
Delhi, India thereby creating the organization of IIS-XOX Asia Pacific Pvt. Ltd.
("IIS-XOX"). Through this effort the Company intended to accomplish an
accelerated integration of SHAPES into its customers' end-user products. The
Company expected that IIS-XOX would be able to service the application
development needs of the customers of the Company for much less than it would
cost the Company to provide equivalent services. In December 1996, the Company
made an equity investment of $41,020 in IIS-XOX and became a 47.5% shareholder
of IIS-XOX. In 1998, the Company made a decision that it would be best to close
down the joint venture and opted to pursue more direct control through a wholly
owned subsidiary.

     The reduction of $80,532 of assets in investment in the joint venture from
1997 reflects the dissolution of the joint venture, which was finalized during
the fourth quarter of 1998. The Company feels there is an advantage in
maintaining, with greater controls, a subsidiary in India to provide an added
labor resource as well as provide greater daily support services to its
customers. The Company is in the process of establishing a wholly owned
subsidiary in India. The Company anticipates completing this process in the
second quarter of 1999.

PATENTS AND PROPRIETARY TECHNOLOGY

     The Company relies on patents, patent applications, trademark, copyright
and trade secret laws, employee and third party non-disclosure agreements and
other methods to protect its proprietary rights. The Company currently holds two
patents relating to intersection algorithms and one patent approved for issuance
relating to the microtopology module in the United States. There can be no
assurance any future patent applications will be granted or that any current or
future patent, regardless of whether the Company is an owner or a licensee of
such patent, will not be challenged, invalidated or circumvented or that the
rights granted thereunder or under licensing agreements will provide competitive
advantages to the Company. Management of the Company believes that the Company's
technology is further protected by the knowledge, experience, and creativity of
the Company's research and development staff, which will enable the Company to
develop new technologies in an industry characterized by rapid technological
change. However, there can be no assurance that competitors may not successfully
duplicate the Company's proprietary software by their own research efforts or
that the Company will be able to retain (or replace) personnel important to its
research and development efforts.

     The Company's success is dependent on protecting its proprietary software
and intellectual property rights, especially the computer algorithms that allow
the Company's products to process geometric data with the generality, speed,
reliability, and efficiency required in the computer marketplace, and believes
such rights are of critical importance to the Company. Thus, it is the Company's
policy, whenever possible, to file for patents, copyrights, and trademarks and
to aggressively pursue perceived infringements of its technology.


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<PAGE>


OTHER

     The Company is not a manufacturer, and as such, there are no raw materials
or principal suppliers to be concerned with. The use of magnetic media, tapes,
diskettes, "chips" or transmitting the software via telecommunications is common
with all software companies. There are currently no domestic government
approvals or regulations, which affect the marketing of the company's existing
or future software products. However, in the event of any international sale of
its products, the Company would likely be subject to various domestic and
foreign laws aimed at regulating such export and export-related activities.
There are no current environmental laws germane to the Company's business.

EMPLOYEES

     As of the date of this Form 10-KSB, the company employs 14 full time
people. No employee of the Company is represented by a labor union and the
Company is not subject to a collective bargaining agreement. All key employees
of the Company are covered by agreements containing confidentiality and
non-compete provisions.


ITEM 2. DESCRIPTION OF PROPERTY

     The Company currently leases approximately 4,332 square feet of commercial
office space at 7640 West 78th Street, Bloomington, Minnesota 55439. The lease
has a term through the year 2000. The annual rental payment on these premises is
approximately $29,680 plus a sharing of expenses for the term of the lease. The
Company currently does not maintain any investment in real estates or related
industries.


ITEM 3. LEGAL PROCEEDINGS

     To the best of its knowledge, the Company is not involved in any pending or
threatened litigation.


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

     None.


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                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

A. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since September 11, 1996 (the date of the Company's initial public offering of
its Units, each Unit consisting of one share of Common Stock, $.025 par value,
and one Redeemable Common Stock Purchase Warrant) and for the period which
followed, the Company's Units have traded in the over-the-counter market and
have been quoted on the Nasdaq SmallCap Market under the symbol XOXCU. On or
about March 11, 1997, the Common Stock and Redeemable Warrants became separately
tradable and were approved for listing on the Nasdaq SmallCap Market under the
symbols XOXC and XOXCW, respectively. The following table sets forth, for the
fiscal year 1997 and 1998 calendar quarters indicated, the high and low bid
prices for the Company's Common Stock as reported by Nasdaq. Such quotations
represent interdealer prices, without retail markup, markdown or commission, and
do not necessarily represent actual transactions.


                                        HIGH            LOW

1997
First Quarter                          $3.500          $3.000
Second Quarter                         $3.500          $1.750
Third Quarter                          $3.000          $1.750
Fourth Quarter                         $2.750          $1.000

1998
First Quarter                          $2.187          $1.250

Pending satisfaction of certain listing conditions of Nasdaq Listing
Qualifications Panel, effective February 12,1998, the Company's securities were
identified with a fifth character "C" ("conditional") appended to its symbol. On
March 31,1998, the Company informed the NASDAQ SmallCap Market Inc. that it
would be unable to satisfy the conditions for continued listing on the Nasdaq
SmallCap Market imposed by the Nasdaq Listing Qualifications Panel. As a
result, the Company's securities was delisted from trading on the Nasdaq
SmallCap Market and are now quoted on the OTC Bulletin Board. The following
table sets forth for the high and low bid prices for the Company's Common Stock
as reported by OTC Bulletin Board. Such quotations represent interdealer prices,
without retail markup, markdown or commission, and do not necessarily represent
actual transactions.


                                        HIGH             LOW

1998
Second Quarter                         $1.750          $1.187
Third Quarter                          $3.500          $1.500
Fourth Quarter                         $1.875          $1.000


1999

First Quarter as of March 19, 1999     $1.218          $0.875



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     On November 25, 1997, the Company's Board of Directors approved the private
placement of up to 100,000 shares of the Company's unregistered common stock to
members of the Company's Board of Directors at a price of $1.50 per share (the
"Private Placement"). Each member of the Board of Directors was offered the
ability to purchase his proportional share of the Private Placement. Messrs.
Steven Liefschultz and Bernard Reeck each agreed to participate in the Private
Placement, with each purchasing 50,000 shares of such common stock. The total
offering price for the Private Placement was $150,000, and the securities were
sold pursuant to exemptions under Sections 4(2) and 4(6) of the Securities Act
of 1933, as amended, as well as pursuant to Rules 504 and 506 of Regulation D.

     As of March 19, 1999, there were (a) 3,072,901 shares of common stock
outstanding, held of record by approximately 207 registered shareholders, (b)
outstanding options to purchase an aggregate of 887,977 shares of Common Stock,
and (c) outstanding warrants to purchase an aggregate of 1,139,710 shares of
Common Stock. The Company has not declared or paid any cash dividends on its
Common Stock since its inception and does not intend to pay any dividends for
the foreseeable future.

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<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

RESULTS OF OPERATIONS

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

     Net revenues for fiscal year 1998 increased approximately 145% to 
$2,242,389 from net revenues of $914,035 realized in fiscal year 1997. The
increase in the Company's revenues in 1998 relates to continuing efforts to 
broaden the scope of business opportunities available to the Company. The 
primary reason for the increase in net revenues is attributable to revenues
earned from certain agreements the Company entered into with Geoquest, a
division of Schlumberger Technology Corporation (The "Schlumberger Agreements").
The Schlumberger Agreements were the subject of a press release dated July 23, 
1998. The Schlumberger Agreements provide for payments of approximately $5.75 
million to XOX Corporation over three years, with additional sums possible based
upon potential software dispositions. There is no restriction on the number of 
years in which XOX will receive royalties based on the number of such software
dispositions made by Schlumberger. The Company anticipates that geosciences will
continue in fiscal year 1999 to represent the strongest niche market for
providing revenues to XOX.

         To achieve profitability in 1998, the Company's Board of Directors and
its management budgeted for reduced expenses and monthly cash expenditures for
1998. As a result, 1998 operating expenses were reduced by $1,683,210 from 1997
to $ 1,774,853 for 1998 representing a 49% decrease from 1997. Thus operating
expenses averaged about $140,000 per month less than the Company's operating
expenses for 1997.

         Research and development expenses decreased approximately 39% from 1997
to $823,473 representing approximately 46% of operating expenses as compared to
39% of operating expenses in 1997. Reduction in research and development
expenses was achieved without decreases in key research and development 
personnel.

         Selling, general and administrative expenses decreased approximately
55% from 1997 to $951,380 representing approximately 54% of operating expenses
as compared to 61% of operating expense in 1997. The decrease in sales, general
and administrative expenses over the same period in 1997 is due, in part, to
decreased employment levels and spending on other administrative expenses
relating to operating as a public company during 1998.

         Improved revenues combined with reductions in operating expenses
resulted in net income of $377,520 for 1998 compared to a net loss of $2,470,841
reported for 1997. The net income per share for 1998 was $.12 compared to the
net loss per share for 1997 of $.83.

         In December 1996, the Company made an equity investment of $41,020 in
IIS-XOX, in exchange for a 47.5% interest in the joint venture. The Company's
47.5% share of equity in earnings of the joint venture for 1998 is reported as a
loss of $80,532 as compared to $39,512 in 1997 to reflect the dissolution of the
joint venture which was finalized during the fourth quarter of 1998.The Company
feels there is an advantage in maintaining, with greater controls, a subsidiary
in India to provide an added labor resource as well as provide greater daily
support services to its customers. The Company is in the process of establishing
a wholly owned subsidiary in India. The Company anticipates completing this
process in the second quarter of 1999.

         Other income in 1998 of $36,950 consists primarily of the investment
of the surplus cash realized from the Company's 1998 earnings in money market
accounts and short-term commercial paper.

         Interest expense of $35,434 in 1998 is approximately $10,000 less than
1997 due to reduction of long-term debt from 1997.


                                                                              12
<PAGE>


         For the year 1999, the Company believes that operating results could
vary substantially from quarter to quarter. At its current stage of operations,
the Company's quarterly revenues and results of operations may be materially
affected by the timing of the development, introduction and market acceptance of
the Company's products and its licensees' products.

LIQUIDITY AND CAPITAL RESOURCES

         The completion of the Company's initial public offering in
September 1996, and a partial exercise of the underwriter's over-allotment
option in November 1996, provided the Company with net proceeds of approximately
$4,997,000. This financing transaction gave the Company the necessary cash
infusion to pay down some debt and to continue to pursue its business strategy.

         Cash and cash equivalents were $1,194,397 at December 31, 1998 compared
to $687,039 at December 31, 1997. The Company's working capital was $1,184,898
at December 31, 1998 compared to a working capital of $687,199 at December 31,
1997.

         The Company estimates that it will make capital expenditures in 1999 of
approximately $75,000 for computer equipment, office furniture and leasehold 
improvements related its operations in India, operations to be established in
Houston, Texas as well as operation at its headquarters in Bloomington, 
Minnesota.

         At a regularly scheduled meeting of the Company's Board of Directors on
November 15, 1996, by a unanimous vote, the Board authorized a repayment
schedule for the next three years on the interest bearing employee debt. Over
three years beginning in 1997, up to one-third of an employee's interest-bearing
debt is expected to be repaid annually, if the employee agreed to convert an
equal or greater amount of non-interest bearing debt into Common Stock at the
conversion rate of $2.50 per share. Eleven individuals have chosen to accept the
Board's proposal. The Company repaid approximately $51,621 of interest-bearing
notes and converted $50,825 amount of non-interest bearing notes into Common
Stock in 1998. The 1999 installment is expected to be completed during the first
quarter of 1999.

         The Company estimates that its current cash balance and the cash to be
generated from customer revenues will be sufficient to fund its operations and
capital needs through second quarter of 2001. At its current stage of business
development, the Company's quarterly revenues and results of operations may be
materially affected by, among other factors, development and introduction of
products, time to market, market acceptance, demand for the Company's products,
reviews in the press concerning the products of the Company or its competitors
and general economic conditions. Many of these factors are not within the
control of the Company. As a result, there can be no assurance that the Company
will be sufficiently funded through the second quarter of 2001.

Year 2000
         The Company is aware of the Year 2000 issue. During the past several
months, the Company performed an internal analysis of its primary software
product (SHAPES) and has begun to assess the readiness of the Company's other
products, its internal computer systems and third party equipment and software
for handling such Year 2000 issues. The Company believes that the SHAPES product
is currently Year 2000 compliant. During the next several months, the Company,
its software engineers and its technical support staff continue to perform an
extended analysis on vendor supplied modules. While the Company cannot give any
assurances that these vendor modules will be Year 2000 compliant, the Company
expects to be able to successfully address and implement any necessary changes
to ensure Year 2000 compliance.

         The Company is also in the process of addressing its administrative
dependence on software packages. Management has sent correspondence to its
outside vendors and third party suppliers to inquire about the Year 2000
readiness of their respective products or services. To the extent that such
vendors and suppliers can ensure Year 2000 compliance, the Company anticipates
the continued use and dependence on such third parties. However, there can be no
assurance that these outside vendors and third party suppliers will be able to
become Year 2000 compliant, which could have an adverse effect on the Company.

         XOX is committed to being Year 2000 compliant and realizes the impact
to our customers if the


                                                                              13
<PAGE>


Company is unable to continue developing, maintaining and supplying SHAPES
software. The Company continues to develop contingency plans in areas that may
be impacted by Year 2000 related computer failure and expects to have these
plans in place by the year end 1999.

         To date, the Company has not incurred any significant expenditures 
associated with becoming Year 2000 compliant. The Company anticipates it may 
incur up to $20,000 of expenditures in association with becoming Year 2000
compliant. However, as management continues the assessment, the Company may find
it necessary to incur additional costs to become Year 2000 compliant. The
Company cannot give any assurance that it will in fact be able to be Year 2000
compliant, or that other problems or costs associated with the Year 2000 issue
will not arise.

         

ITEM 7. FINANCIAL STATEMENTS

      The following Financial Statements and Report of Independent Auditors
thereon are included herein (page numbers refer to pages in this Report on Form
10-KSB):

                                                                            Page

Independent Auditors' Report................................................ 24


Balance Sheets as of December 31, 1998 and 1997............................. 25

Statements of Operations for the years ended December 31, 1998 and 1997 .... 27

Statement of Stockholders' Equity for the years ended
  December 31, 1998 and 1997................................................ 28

Statements of Cash Flows for the years ended December 31, 1998 and 1997 .... 29

Notes to Financial Statements............................................... 30


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None


                                                                              14

<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) DIRECTORS, EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES

 Name                  Age     Position                                 Director
 ----                  ---     --------                                   Since
                                                                          -----

Steven Mercil           46    Interim Chief Financial Officer             1997
                              and Director (1)(2)(3)(4)
                              
Mark O. Senn            50    Executive Vice President and
                              Chief Operating Officer

Thomas J. Lucas         46    Director(1)(2)(3)(4)                        1995

Steven B. Liefschultz   55    Chairman of the Board and Director          1997
                                (2)(3)

Bernard J. Reeck        71    Director(2)(3)                              1997

Paul Johnson            48    Director                                    1998

Peter Dahl              32    Director(1)                                 1998

Craig Gagnon            59    Director(1)(3)(4)                           1998

(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Executive Committee
(4) Compliance Committee

STEVEN MERCIL was Interim Chief Executive Officer from October 1997 to June 4,
1998 and serves as Interim Chief Financial Officer of the Company. Mr Mercil is
a member of the Board of Directors. Mr. Mercil is CEO of MIN-Corp. a venture
fund that focuses on investments in Minnesota. He was previously the equity fund
manager of Minnesota Technology, Inc. (MTI), an equity investment fund
specializing in Minnesota technology companies. MTI granted Mr. Mercil a leave
of absence to be employed at the Company on an interim basis. Mr. Mercil has
more than 13 years of experience assisting in the strategic development and
growth of public and private companies. He rejoined the Company's Board last
August of 1997 after previously serving from 1993 to 1995.

MARK O. SENN was promoted from Vice President of Operations to Executive Vice
President and Chief Operating Officer on March 5, 1999. Mr. Senn has 20 years of
operations and management experience in both the private and public sector. His
experience includes VP and General Manager of Oxford Properties, Inc. and
President of Marcus Corporation.

THOMAS J. LUCAS is a director of the Company. Mr. Lucas was Group Vice President
for Flint Ink Company, located in Detroit, Michigan for seven years. Currently,
Mr. Lucas is Chief Executive Officer for Made in the Shades Optical Inc. Mr.
Lucas holds a J.D. degree from William Mitchell College of Law in St. Paul,
Minnesota and a B.A. from the University of Notre Dame.


                                                                              15
<PAGE>


BERNARD J. REECK is a director of the Company. Mr. Reeck is the president of
Group Services Company, which has interests, among others, in the oil and gas
industry, and of the Cellars Wines & Spirits Inc., a chain of retail liquor
stores in Minnesota. He has also been involved in numerous real estate
transactions since 1975. Mr. Reeck has a law degree from the University of North
Dakota and is retired managing editor of West Publishing Company.

STEVEN B. LIEFSCHULTZ is the Chairman of the Board and Director of the Company.
Mr. Liefschultz is Chairman of the Remada Company, a real estate development and
management company in Minnesota. Prior to this, Liefschultz practiced law for 12
years, specializing in commercial litigation, contract negotiation and
commercial real estate. He has extensive experience in the development,
ownership, financing and management of income real estate and other areas of
investment.

PAUL A. JOHNSON is a director of the Company. Mr. Johnson has been employed by
ANSYS, Inc. as Senior Vice President of Product Development since February 1998
and was the Vice President of Product Development from October 1996 to January
1998. Prior to joining ANSYS, Inc., Mr. Johnson was Vice President of
Development for S&R Systems, a software company, from April 1996 to September
1996. From November 1979 to August 1995, he was Vice President of Development
for Legent Corporation, a software company.

PETER DAHL is a director of the Company. Mr. Dahl currently is the Executive
Vice President and Chief Operating Officer for BankWindsor. He oversees the
commercial and private lending functions of the bank as well as the overall
asset growth and performance of the loan portfolio. His areas of expertise
involve small business, mezzanine, and real estate finance, which enhance his
ability to cultivate relationships with entrepreneurs and their businesses. Mr.
Dahl works closely with younger companies to establish the credit facilities
they need to help them grow.

CRAIG GAGNON is a director of the Company. Mr. Gagnon is a partner with
Oppenheimer Wolff & Donnelly in Minneapolis, Minnesota. Mr. Gagnon's practice is
concentrated in litigation in the areas of securities fraud, accounting
malpractice and legal malpractice defense work. Mr. Gagnon chairs the Board of
Trustees for William Mitchell College of Law; is a Fellow in the American
College of Trial Lawyers; and is a past president of the Metropolitan Breakfast
Club. Mr. Gagnon also acts as a general partner in several commercial real
estate partnerships located in Minnesota. Mr. Gagnon received his Bachelor of
Arts degree from the University of Minnesota (1964) and his Juris Doctor degree
from William Mitchell College of Law (1968 - magna cum laude).

     Richard L. Fast was director of the Company from November 11, 1997 until 
his resignation announced August 20, 1998. Concurrently with Mr. Fast's 
resignation, Mr. Larry Shearon, VP of Corporate Technology for Medtronics, Inc. 
was appointed to the Company's Board of Directors. On March 11, 1999, Mr. 
Shearon resigned from the Corporation's Board of Directors. On November 4, 
1998, the Company announced the resignation of Mr. John M. Sherbin II as a 
member of the Board of Directors. Mr. Sherbin had been a member of the Board of 
Directors since November 1997 and had resigned his position as Chief Financial 
Officer of ANSYS, Inc. Concurrent with his resignation, the Company appointed 
Paul Johnson to the Board of Directors. On March 5, 1999, the Company announced
the resignation of Dr. Pradeep Sinha as CEO, CTO and member of the Board to 
pursue private consulting interests. Dr. Sinha's resignation as a Board member
and Executive Committee member was effective February 26, 1999. Dr. Sinha 
continued his employment duties until March 26, 1999. It is possible that Dr. 
Sinha may have an ongoing role with the Company as a consultant.

     The Board currently has four Committees - an Executive Committee, an Audit
Committee, a Compliance Committee and a Compensation Committee. The recently
created Executive Committee takes an active role in the operation and strategic
direction of the Company. It is authorized and directed to take any and all
necessary and appropriate action of the Company including, but not limited to,
forming and appointing members to an advisory committee, determining the
compensation of any such advisory committee, conducting executive searches,
filling employment positions with the Company, hiring organizational
consultants, conducting directorial searches and recommending candidates to the
Board, and negotiating contracts with existing and potential customers of the


                                                                              16
<PAGE>


Company. The Executive Committee is composed of Messrs. Lucas, Mercil, Reeck,
Liefschultz, Sinha and Gagnon. The Audit Committee reviews the results and scope
of the audit and other services provided by the Company's independent auditors,
as well as the Company's accounting principles and its system of internal
controls, and reports the results of its review to the Board. The Audit
Committee is composed of Messrs. Lucas, Dahl, Mercil and Gagnon. The Compliance
Committee is composed of Messrs. Lucas, Mercil, Gagnon and from the Company's
Legal Counsel, Les Korsh. The Compensation Committee makes recommendations
concerning executive compensation and incentive compensation for employees of
the Company, subject to ratification by the Board. Currently the Executive
Committee members serve as the Compensation Committee. Currently, the entire
Board of Directors proposes a nominee for each elective Board position then
vacant or to become vacant.

(b) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and all persons who beneficially
own more than 10% of the outstanding shares of the Company's Common Stock to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of the Company's Common Stock. Directors,
executive officers and greater than 10% beneficial owners are also required to
furnish the Company with copies of all Section 16(a) forms that they file.

 Dr. Pradeep Sinha, Chief Executive Officer, Chief Technical Officer and a
Director of the Company, filed a Form 4 in July, 1998 to report a transaction
occurring in March, 1998 and June, 1998.

On July 28, 1998, Mr. Mercil and Mr. Lucas were granted options to correct
errors related to prior service on the Board of the Company. As of this date,
neither individual has filed the initial reports related to the granting of
these options. However, as of the date of this filing, the individuals have
undertaken to file the required reports.

To the Company's knowledge, based upon a review of the copies of such reports
furnished to the Company no other reports were required, during the year ended
December 31, 1998, none of the other Company's directors, executive officers or
beneficial owners of greater than 10% of the Company's Common Stock failed to
file on a timely basis the forms required by Section 16(a) of the Securities
Exchange Act of 1934.


ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

         The following table provides certain summary information for the years
indicated concerning executive compensation paid or accrued by the Company to
the Company's Chief Executive Officer whose salary and bonus compensation for
1998 exceeded $100,000 (the "Named Executive Officer").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                    LONG TERM
                                        ANNUAL COMPENSATION    COMPENSATION AWARDS
                                        -------------------    -------------------
                                         FISCAL                                 SECURITIES
NAME AND PRINCIPAL POSITION               YEAR     SALARY       BONUS       UNDERLYING OPTIONS
---------------------------              ------    ------       -----       ------------------
<S>                                      <C>       <C>          <C>                <C>
Steven B. Mercil (1)                      1998      50,000      None               22,250
(Interim Chief Executive Officer          1997      20,835      None               60,000
and Interim Chief Financial Officer)

Pradeep Sinha (2)                         1998     112,000      None               60,000
(Chief Executive Officer &                1997      96,000      None               35,000
Chief Technical Officer)
</TABLE>

(1)      Mr. Mercil became Chief Executive Officer effective October 1997
         through June 4, 1998 and was compensated based on an annualized salary
         of $100,000 on a pro rata basis. Mr. Mercil continues to serve as
         Interim Chief Financial Officer to which he receives no compensation.
         However MIN-Corp. an affiliate of Mr. Mercil received an option for
         16,000 shares of common stock to compensate for Mr. Mercils' assistance
         to the Company.

(2)      Mr. Sinha served as Interim Chief Executive Officer from August 1997 to
         October 1997 and then became Chief Executive Officer on June 4, 1998.
         Effective March 26, 1999 Dr. Sinha resigned.


                                                                              17
<PAGE>


STOCK OPTION GRANTS DURING FISCAL YEAR 1998

     The following table provides information regarding stock options granted
during fiscal year 1998 to the named executive officer in the Summary
Compensation Table.

<TABLE>
<CAPTION>
                                       % OF TOTAL OPTIONS
                            OPTIONS    GRANTED TO EMPLOYEES        EXERCISE PRICE
NAME                        GRANTED       IN FISCAL YEAR    PER SHARE     EXPIRATION DATE
----                        -------            ----         ---------     ---------------
<S>                        <C>                  <C>            <C>         <C>
Pradeep Sinha              60,000.00            37%            1.38        June  4, 2008
                             (1)

Steven B. Mercil           16,000               10%            1.38        June  4, 2008
                            6,250                4%            3.50        July 28, 2008
                             (2)
</TABLE>


(1) Mr. Sinha may exercise the subject non-qualified stock option for up to 33%
of the stock option upon signing of employment agreement, 33% six month after
signing new employment agreement and 33% 12 months after signing new employment.
No new employment agreement was signed.

(2) MIN-Corp. received options for 16,000 shares of common stock to compensate
for Mr. Mercils' assistance to the Company. MIN-Corp. may exercise the subject
non-qualified option for up to 100% of the option stock after March 31, 1999.
Mr. Mercil was granted options for 6,250 shares currently exercisable to correct
errors related to prior service on the board of the Company.


OPTION EXERCISES DURING FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                     Number of                 Number of Unexercised           Value (1) of Unexercised
                     Shares                    Options at December 31, 1998    Options at December 31, 1998
                     Acquired      Value (1)   ----------------------------    ----------------------------
           Name      on Exercise   Realized    Exercisable   Unexercisable     Exercisable   Unexercisable
           ----      -----------   --------    -----------   -------------     -----------   -------------
<S>                     <C>          <C>         <C>            <C>              <C>            <C>
Steven B. Mercil        0            0           66,250              0           No value       No value
Pradeep Sinha           0            0                0         60,000           No value       No value
</TABLE>

(1) Value is the difference between the exercise price of the option and the
closing price of the common stock on December 31, 1998 of $1.000.


EMPLOYMENT AGREEMENT

         The Company had an oral agreement with Steven B. Mercil regarding his
employment as Interim Chief Executive Officer and Chief Financial Officer. As
part of the agreement, Mr. Mercil agreed to serve as Interim Chief Executive
Officer until June 4, 1998. Mr. Mercil agreed to serve as Interim Chief
Financial Officer with no cash compensation until his resignation effective
March 31, 1999. Dr. Pradeep Sinha, Chief Executive Officer and Chief Technical
Officer and Board Member, has been working under an employment agreement dating
back to December 20, 1994. Dr. Sinha has resigned effective March 26, 1999 to
pursue private consulting.


DIRECTOR COMPENSATION

     The Company has a standard arrangement outlining the compensation to be
given to its Board of Directors. Members of the Board (or the entities with
which such directors are affiliated) do not receive any cash compensation


                                                                              18
<PAGE>


for serving on the Board, except for reimbursement for expenses incurred in
attending meetings and instead receive a non-qualified stock option to purchase
5,000 shares of the Company's common stock for each year of service on the
Board. In addition, during fiscal year 1998, members of the Company's Executive
Committee received stock options to purchase 10,000 shares of Common Stock at
100% of the Fair Market Value of each share at the date of grant. Each option
granted to Directors on the Executive Committee vests one year from the date of
grant, provided that on such anniversary date the Optionee has served on such
Executive Committee for one year. In addition, in fiscal year 1997, Steven B.
Liefschultz was granted an option to purchase 100,000 shares of Common Stock at
an exercise price of $1.70 per share which was not less than 85% of the Fair
Market Value of the Common Stock on the date of grant. This grant was not made
pursuant to the Company's 1996 Omnibus Stock Plan, and was made in consideration
of the additional contemplated work to be performed by Mr. Liefschultz. 25% of
the shares subject to the Liefschultz option vested immediately upon grant. 50%
of the shares subject to the Liefschultz option vested in equal installments on
November 30, 1997, December 31, 1997 and January 31, 1998. The remaining 25% of
the shares subject to the Liefschultz option vest upon the occurrence of certain
contingencies related to either the amount of time Mr. Liefschultz works for the
Company or the occurrence of various business and financial transactions.

1996 OMNIBUS STOCK PLAN

      The Board of Directors of the Company adopted and the Company's
stockholders approved the Company's 1996 Omnibus Stock Plan effective June 14,
1996 (the "Plan"). The Plan supersedes both the 1987 Incentive Stock Option Plan
and the 1987 Non-Qualified Stock Option Plan of the Company. The purpose of the
Plan is to promote the interests of the Company and its stockholders by
providing personnel of the Company with an opportunity to acquire a proprietary
interest in the Company and thereby develop a stronger incentive to put forth
maximum effort for the continued success and growth of the Company and to aid
the Company in attracting and retaining personnel of outstanding ability. The
Company reserved a total of 500,000 shares of Common Stock for issuance under
the Plan. At the Annual Shareholder Meeting held on June 4, 1998, stockholders
approved an amendment to the Plan to add 500,000 shares of the Company's common
stock to be reserved for issuance under the Plan (so that a total of 1,000,000
shares of common stock will have been reserved for issuance under the Plan). The
Company has the balance of 872,739 Shares of Common Stock are available for
issuance under the Plan.

     The Plan is administered by a committee of three or more non-employee
directors of the Company (the "Committee") appointed by the Board. The Committee
has the responsibility to interpret the Plan and all determinations made by it
are final and conclusive, subject in all cases to the provisions of the Plan and
the applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). The Committee has complete discretion to select the participants and to
establish the terms and conditions of each award. Outside Directors are eligible
to receive only nonstatutory stock options under the Plan.

     Employees of the Company are eligible to receive incentive stock options
(as that term is defined in Section 422 of the Code), nonqualified stock
options, reload options, stock appreciation rights and restricted stock under
the Plan. Other key individuals, who are not employees, may also be granted
nonqualified options under the Plan. Common Stock of the Company granted to
recipients may be unrestricted or may contain such restrictions, including
provisions requiring forfeiture and imposing restrictions upon stock transfer.
Unless forfeited, the recipient of restricted Common Stock will have all other
rights of a stockholder, including without limitation, voting and dividend
rights. The value of a stock appreciation right granted to a recipient is
determined by the appreciation in Common Stock of the Company, subject to any
limitations upon the amount or percentage of total appreciation that the
Committee may determine at the time the right is granted. Concurrent with the
award of any options, the Committee also may authorize reload options to
purchase for cash or shares a number of shares of Common Stock.

     The Plan requires that the option price of incentive stock options granted
under the Plan shall be not less than 100% of the fair market value of the
Company's Common Stock as of the date the option is granted and that the term of
an incentive stock option may not exceed ten years. The Plan provides that
nonqualified stock options shall have an option price not less than 85% of the
fair market value of the Company's Common Stock on the date of grant. The
exercise price of any incentive stock option granted to an employee who owns
capital stock representing more than 10% of the voting rights of the Company's
outstanding capital stock on the date of grant must be equal to at least 110% of
the fair market value on the date of grant and shall expire five years from the
date of grant. The Committee sets the term during which any nonqualified options
may be exercised and determines whether such options are exercisable
immediately, in stages, or otherwise. All options granted under the Plan are
nontransferable and are subject to various other conditions and restrictions.
Shares of Common Stock subject to canceled options are available for
subsequently granted options under the Plan.


                                                                              19
<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth as of March 19, 1999, the number of
shares of the Company's Common Stock beneficially owned by (i) each director of
the Company; (ii) each of the Named Executive Officers; (iii) each person known
by the Company to beneficially own more than 5% of the outstanding shares of
Common Stock; and (iv) all executive officers and directors as a group.


<TABLE>
<CAPTION>
                                                  Number of Shares of Common       Percentage of
Name                                             Stock Beneficially Owned (1)   Outstanding Shares
----                                             ----------------------------   ------------------
<S>                                                       <C>                           <C>
SAS IP, Inc.                                              126,315(2)                    4%
123 East 17th Street                             
Cheyenne, Wyoming 15342                          
                                                 
Minnesota Investment Network Corporation                  168,128(3)                    5%
111 Third Avenue South                           
Suite 420                                        
Minneapolis, Minnesota 55401                     
                                                 
Dr. Pradeep Sinha                                         258,022(4)                    8%
7640 West 78th Street                            
Bloomington, Minnesota 55439                     
                                                 
Steven B. Liefschultz                                     353,000(5)                   11%
7630 West 78th Street                            
Bloomington, Minnesota 55401                     
                                                 
Thomas J. Lucas                                           119,177(6)                    4%
6725 Colby Lane                                  
Bloomfield Hills, Michigan 48239                 
                                                 
Steven Mercil                                              82,250(7)                    3%
111 3rd Ave S Suite 420                          
Minneapolis, Minnesota 55401                     
                                                 
Bernard J. Reeck                                          221,128(8)                    7%
1232 Duluth Court                                
St. Paul, Minnesota 55109                        
                                                 
Peter Dahl                                                  5,000(9)                    *
BankWindsor                                      
740 Marquette Ave                                
IDS Center                                       
Minneapolis, Minnesota 55402                     
                                                 
Craig Gagnon                                                5,000(10)                   *
Oppenheimer Wolff & Donnelly                 
45 South 7th Street
Suite 3400
Minneapolis, Minnesota 55402
</TABLE>


                                                                              20
<PAGE>


Paul Johnson                                    None Owned(11)       *
ANSYS, Inc.
275 Technology Drive
Canonsburg, Pennsylvania 15317

Total Executive Officers and Directors           1,340,020(12)      44%
   as a group (eight persons and affiliates)

*       Less than 1%.

(1)  Shares of Common Stock subject to options, warrants, or convertible debt
     securities currently exercisable or Exercisable within 60 days after the
     date of this Form 10-KSB are deemed to be outstanding for purposes of
     computing the percentage of shares beneficially owned by the person holding
     such options, warrants, or convertible debt securities but are not deemed
     to be outstanding for purposes of computing such percentage for any other
     person. Except as indicated by footnote, each person or group identified
     has sole voting and investment powers with respect to all shares of Common
     Stock shown as beneficially owned by them.

(2)  Includes 5,283 shares issuable upon exercise of warrants.

(3)  Includes 8,335 shares issuable upon exercise of warrants and 5,000 options
     currently exercisable.

(4)  Includes 1,386 shares issuable upon exercise of warrants and 160,888
     options currently exercisable.

(5)  Includes 30,600 shares issuable upon exercise of warrants and 115,00
     options currently exercisable.

(6)  Includes 1,250 shares issuable upon exercise of warrants and 23,001 options
     currently exercisable.

(7)  Includes 82,250 options currently exercisable. Excludes securities held by
     Minnesota Investment Network Corporation of which Mr. Mercil is CEO.

(8)  Includes 28,000 shares issuable upon exercise of warrants and 15,000
     options currently exercisable.

(9)  Includes 5,000 shares subject to options currently exercisable.

(10) Includes 5,000 shares subject to options currently exercisable.

(11) Excludes the securities held by SAS IP, Inc. and ANSYS, Inc., of which Mr. 
     Johnson serves as Senior Vice President of Product Development of ANSYS, 
     Inc.

(12) Includes securities held by SAS IP, Inc. and ANSYS, Inc. and Minnesota 
     Investment Network Corporation of which Mr. Johnson and Mr. Mercil are 
     affiliated.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     As noted in the chart following the descriptions below, each of the
following transactions involved parties related to the Company.

     In February 1993, the Company issued a series of variable repayment
debentures (the"VRDs") as part of an exchange of its then current debt. These
VRDs include: Collateralized VRDs in the aggregate principal amount of $150,352;
Directors VRDs in the aggregate principal amount of $27,766; Employee
Interest-Bearing Notes in the aggregate principal amount of $282,266; Employee
Non-Interest Bearing Notes in the aggregate principal amount of $276,866; and
the SAS IP VRD in the principal amount of $279,657. In connection with a
Subordination and Deferral Agreement, the holders of the VRDs hold warrants to
purchase 15,302 shares of Common Stock at a purchase price of $1.50 per share.
Of these warrants, 603 are held by current and former officers and directors of
the Company.

     With the exception of the Employee Non-Interest Bearing Notes, which bear
no interest, the VRDs bear interest at a rate equal to the prime rate plus two
percent (2%). Interest is payable on a quarterly basis, and principal is payable
out of "adjusted after tax profits" as defined in the instruments evidencing the
debt. The Employee Non-Interest Bearing Notes are convertible into Common Stock
at a conversion rate of $2.50 per share at the option of the note holder and are
payable in eight (8) quarterly installments beginning 90 days after all of the
VRDs have been repaid.

      The collateralized VRDs originated out of two loan transactions in 1989.
The holders of the Collateralized VRDs have the right to convert unpaid interest
into Common Stock at the rate of $15.00 per share. Holders of the Collateralized
VRDs have received warrants to purchase 26,000 shares of Common Stock at $15.00
per share. 4,500 of


                                                                              21
<PAGE>


these warrants expired in 1998. In addition, the Company paid off $22,344 of
these loans in 1998 in connection with a waiver of certain rights contained in
the VRD's. Certain current and former officers and directors of the Company hold
an aggregate of $77,081 of the Collateralized VRDs and have warrants to purchase
11,000 shares of Common Stock.

      The Employee Interest-Bearing Notes and Employee Non-Interest Bearing
Notes originated from wage deferrals by the Company's employees from 1988
through 1991. Current and former officers of the Company held $123,377 and
$121,016 of the Employee Interest-Bearing Notes and Employee Non-Interest
Bearing Notes, respectively. In November 1996, at a regularly scheduled meeting
of the Company's Board of Directors, the Board authorized a three-year repayment
schedule on the Employee Interest-Bearing Notes. Over a three year period
beginning in 1997, up to one-third of an employees' interest-bearing debt is
repaid annually, if the employee converts an equal or greater amount of his/her
non-interest bearing debt into Common Stock at the conversion rate of $2.50 per
share. In 1996 two of the Company's then current officers holding $83,918 of
employee interest-bearing debt elected this repayment and conversion option. The
third and final repayment installment is expected to be completed on or about
March 31, 1999.

     The Directors VRDs originated out of a loan transaction in 1988 with the
Company's then current directors. The holders of the Directors VRDs have the
right to convert the principal and unpaid interest accrued thereon into Common
Stock at the then current market price or the price paid by any third party. In
1998, the Company paid off $7,767 of these loans in connection with a waiver of
certain rights contained in the VRDs. No current officers, directors or major
stockholders of the Company hold any Directors VRDs.

     The SAS IP VRD originated out of a loan transaction in 1991. In connection
with the original loan, and after the effect of certain anti-dilution
provisions, the holder of the SAS IP VRD held (i) an option to purchase 90,230
shares of Common Stock for $294,578, and (ii) warrants to purchase 161,204
shares of Common Stock at the rate of $5.68 per share. In September 1996 the SAS
IP VRD was repaid out of proceeds from the Company's initial public offering.
Both the above option and warrants expired in September of 1998.

     From April through May 1996, the Company obtained bridge loans (the "1996
Bridge Loans") to finance the Company prior to completion of its initial public
offering. The 1996 Bridge Loans were evidenced by promissory notes, on which the
principal balance became due and payable on November 15, 1996 or out of proceeds
of the initial public offering, whichever occurred first. The 1996 Bridge Loans
bore interest at the rate of ten percent (10%) per year, compounded annually. In
connection with these loans, the Company issued warrants to purchase 12,500
shares of Common Stock to the holders of the Bridge Loans. The 1996 Bridge Loans
were repaid in September 1996, shortly after receipt of proceeds of the initial
public offering.


The following table includes major stockholders, current and former directors
and officers of the Company who served in these capacities during 1998 and
participated in the foregoing transactions as follows:


                                    Debt ($)
                                    --------

                                                           Employee
                                                Employee     Non-
                    Collateralized              Interest    Interest
                        VRD's                   Bearing     Bearing       1996
                                                 Notes       Notes        Bridge

Thomas J. Lucas         --              --        --          --         25,000

Turhan F. Rahman        --                      11,605        11,383       --

Pradeep Sinha          2,001            --      16,367        16,054       --

Totals                 2,001                    27,972        27,437     25,000



                         Equity (Shares of Common Stock)


Steven B. Liefschultz      50,000   PPM November 11, 1997
Bernard J. Reeck           50,000   PPM November 11, 1997


     Minnesota Technology, Inc. ("MTI"), had the right under an agreement with
the Company to purchase its pro-rata share of certain types of securities issued
by the Company, including Shares, at the same price and on the same terms as
others participating in the offering. The Company notified MTI of the initial
public offering and MTI waived those rights.


                                                                              22
<PAGE>


     On December 2, 1997 the Company entered into a lease agreement (the
"Lease") with the Braemar Business Center, LLC regarding the leasing of the
Company's office space. Prior to December 31, 1997 Mr. Steven Liefschultz,
Chairman of the Company's Board of Directors, had a significant ownership
interest in Braemar Center, LLC. Currently, Mr. Liefschultz has no financial
interest or ownership in the Braemer Center.

     The Company intends that all ongoing and future transactions between the
Company and its directors, officers, principal stockholders and affiliates of
any such persons will be on terms no less favorable to the Company than those
that are generally available from unaffiliated third parties, and will be
ratified by a majority of the independent outside members of the Company's Board
of Directors who do not have an interest in the transaction.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS. See Exhibit index.

(b) REPORTS ON FORM 8-K.

    NONE.


                                                                              23
<PAGE>



                         Report of Independent Auditors


The Board of Directors
XOX Corporation

We have audited the accompanying balance sheets of XOX Corporation as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. 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 our audit to obtain
reasonable assurance about whether these 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 financial position of XOX Corporation at December 31,
1998 and 1997, and the results of its operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.


                                            /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 26, 1999


                                                                              24
<PAGE>


                                 XOX CORPORATION

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                        1998            1997
                                                                   --------------------------
<S>                                                                 <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                        $1,194,397     $  687,039
   Accounts receivable                                                 172,312        279,888
   Prepaid expenses                                                         --         22,719
                                                                   --------------------------
Total current assets                                                 1,366,709        989,646

Property and equipment:
   Furniture and fixtures                                               58,519         81,691
   Computer equipment                                                   95,348        393,002
                                                                   --------------------------
                                                                       153,867        474,693
   Less accumulated depreciation                                        90,736        363,889
                                                                   --------------------------
                                                                        63,131        110,804

License agreements, net of amortization of $115,000 in 1998 and
   $62,292 in 1997                                                          --         52,708

Investment in joint venture                                                 --         80,532






                                                                   --------------------------
Total assets                                                        $1,429,840     $1,233,690
                                                                   ==========================
</TABLE>


                                                                              25
<PAGE>


<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                                                  1998              1997
                                                             -------------------------------
<S>                                                           <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                           $     64,212      $    184,005
   Accrued payroll expenses                                         35,456           105,580
   Other accrued expenses                                           82,143            12,862
                                                             -------------------------------
Total current liabilities                                          181,811           302,447
Deferred revenues                                                  221,818           118,465

Long-term liabilities:
   Long-term debt--related parties                                 496,249           632,005
   Accrued payroll taxes                                            17,701            25,783
   Other accrued liabilities                                            --            78,771

Stockholders' equity:
   Undesignated shares - 10,000,000 -
   Common Stock, $.025 par value:
     Authorized shares - 20,000,000--1998 and
       10,000,000--1997
     Issued and outstanding shares - 3,072,901--1998
       and 3,051,931--1997                                          76,821            76,298
   Additional paid-in capital                                   12,735,470        12,677,471
   Accumulated deficit                                         (12,300,030)      (12,677,550)
                                                             -------------------------------
Total stockholders' equity                                         512,261            76,219
                                                             -------------------------------
Total liabilities and stockholders' equity                    $  1,429,840      $  1,233,690
                                                             ===============================
</TABLE>

SEE ACCOMPANYING NOTES.


                                                                              26
<PAGE>


                                 XOX CORPORATION

                            Statements of Operations

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                            1998              1997
                                                        -----------------------------
<S>                                                       <C>               <C>
Net revenues:
   Customer support and consulting                       $ 1,129,153      $   543,683
   License and product sales                               1,014,400          360,791
   Royalties                                                  97,836            9,561
                                                        -----------------------------
                                                           2,241,389          914,035
Operating expenses:
   Research and development                                  823,473        1,346,675
   Selling, general and administrative                       951,380        2,111,388
                                                        -----------------------------
                                                           1,774,853        3,458,063
                                                        -----------------------------
Net income (loss) from operations                            466,536       (2,544,028)

Equity in earnings (loss) of joint venture                   (80,532)          39,512
Other income                                                  36,950           79,146
Interest expense                                             (35,434)         (45,471)
                                                        -----------------------------
Income (loss) before income taxes                            387,520       (2,470,841)
Income tax expense                                            10,000               --
                                                        -----------------------------
Net income (loss)                                        $   377,520      $(2,470,841)
                                                        =============================

Basic and diluted net income (loss) per common share     $       .12      $      (.83)

Weighted average shares outstanding                        3,067,661        2,960,053
</TABLE>

SEE ACCOMPANYING NOTES.


                                                                              27

<PAGE>


                                 XOX CORPORATION
                        Statement of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                PREFERRED STOCK               COMMON STOCK              ADDITIONAL
                                                         ------------------------------------------------------           PAID-IN
                                                             SHARES        AMOUNT          SHARES         AMOUNT          CAPITAL
                                                         --------------------------------------------------------------------------

<S>                                                         <C>        <C>                <C>          <C>             <C>
Balance December 31, 1995                                   160,000    $      4,000       1,243,884    $     31,097    $  5,439,528
   Conversion of convertible debentures and accrued
     interest into Common Stock                                  --              --         564,086          14,102       1,678,156
   Fair value of warrant issued in connection with
     bridge loans                                                --              --              --              --           5,000
   Initial public offering of Common Stock, net of
     expenses                                                    --              --         870,000          21,750       4,975,555
   Conversion of Preferred Stock into Common Stock         (160,000)         (4,000)        160,000           4,000              --
   Exercise of stock options                                     --              --          85,225           2,131         150,024
   Shares surrendered for exercise of stock options              --              --         (16,523)           (413)       (106,987)
   Sale of Common Stock                                          --              --          15,000             375          67,125
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --              --           8,729             218          27,741
   Net loss                                                      --              --              --              --              --
                                                         --------------------------------------------------------------------------
Balance at December 31, 1996                                     --              --       2,930,401          73,260      12,236,142
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --              --          20,330             508          50,317
   Exercise of stock warrants                                    --              --           1,200              30           1,770
   Fair value of stock options granted for services              --              --              --              --         241,742
   Sale of Common Stock                                          --              --         100,000           2,500         147,500
   Net loss                                                      --              --              --              --              --
                                                         --------------------------------------------------------------------------
Balance at December 31, 1997                                     --              --       3,051,931          76,298      12,677,471
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --              --          20,970             523          51,901
   Fair value of stock options granted for services              --              --              --              --           6,098
   Net income                                                    --              --              --              --              --
                                                         --------------------------------------------------------------------------
Balance at December 31, 1998                                     --    $         --       3,072,901    $     76,821    $ 12,735,470
                                                         ==========================================================================
</TABLE>

SEE ACCOMPANYING NOTES.

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                                                            TOTAL
                                                        ACCUMULATED     STOCKHOLDERS'
                                                          DEFICIT          EQUITY
                                                     ------------------------------
<S>                                                    <C>             <C>
Balance December 31, 1995                              $ (8,539,309)   $ (3,064,684)
   Conversion of convertible debentures and accrued
     interest into Common Stock                                  --       1,692,258
   Fair value of warrant issued in connection with
     bridge loans                                                --           5,000
   Initial public offering of Common Stock, net of
     expenses                                                    --       4,997,305
   Conversion of Preferred Stock into Common Stock               --              --
   Exercise of stock options                                     --         152,155
   Shares surrendered for exercise of stock options              --        (107,400)
   Sale of Common Stock                                          --          67,500
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --          27,959
   Net loss                                              (1,667,400)     (1,667,400)
                                                     ------------------------------
Balance at December 31, 1996                            (10,206,709)      2,102,693
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --          50,825
   Exercise of stock warrants                                    --           1,800
   Fair value of stock options granted for services              --         241,742
   Sale of Common Stock                                          --         150,000
   Net loss                                              (2,470,841)     (2,470,841)
                                                     ------------------------------
Balance at December 31, 1997                            (12,677,550)         76,219
   Conversion of long-term debt and accrued interest
     into Common Stock                                           --          52,424
   Fair value of stock options granted for services              --           6,098
   Net income                                               377,520         377,520
                                                     ------------------------------
Balance at December 31, 1998                           $(12,300,030)   $    512,261
                                                     ==============================
</TABLE>


                                                                              28
<PAGE>


                                 XOX CORPORATION

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                               1998              1997
                                                           -----------------------------
<S>                                                         <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                           $   377,520      $(2,470,841)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
     Depreciation                                                45,348           18,699
     Amortization                                                52,708           57,500
     Loss on disposal of property and equipment                   2,325           74,466
     Write-off (equity earnings) of joint venture                80,532          (39,512)
     Fair value of options granted for service                    6,098          241,742
     Write-off of note receivable due to impairment                  --          161,000
     Changes in other operating assets and liabilities:
       Accounts receivable                                      107,576          (85,912)
       Prepaid expenses                                          22,719           68,238
       Accounts payable                                        (119,793)         (25,390)
       Accrued liabilities                                      (87,696)          32,854
       Deferred revenue                                         103,353           52,798
                                                           -----------------------------
Net cash provided by (used in) operating activities             590,690       (1,914,358)

INVESTING ACTIVITIES
Purchase of property and equipment                                   --          (70,333)
Advances under note receivable                                       --         (149,000)
                                                           -----------------------------
Net cash used in investing activities                                --         (219,333)

FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock                           --          151,800
Payments on notes payable                                       (83,332)         (51,621)
                                                           -----------------------------
Net cash (used in) provided by financing activities             (83,332)         100,179
                                                           -----------------------------

Net increase (decrease) in cash and cash equivalents            507,358       (2,033,512)
Cash and cash equivalents at beginning of year                  687,039        2,720,551
                                                           -----------------------------
Cash and cash equivalents at end of year                    $ 1,194,397      $   687,039
                                                           =============================

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Conversion of accrued interest and long-term debt into
  Common Stock                                              $    52,424      $    50,825
</TABLE>

SEE ACCOMPANYING NOTES.


                                                                              29

<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


1. BUSINESS ACTIVITY

XOX Corporation ("the Company") designs, develops and markets proprietary
software for creating virtual mock-ups or models within the computer that
captures the complete geometry of objects or spatial areas of interest. The
Company was incorporated in 1985.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided on a
straight-line method over five years, the estimated useful life of the assets.
Leasehold improvements are amortized using the straight-line method over three
to five years, representing the shorter of their estimated useful lives or the
underlying lease term.

RESEARCH AND DEVELOPMENT

Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. All research and development costs have been expensed as
incurred.

REVENUE RECOGNITION

Revenues from software sales are recognized upon delivery of the software in
instances where the Company has evidence of a contract, the fee is fixed and
determinable and collection is probable. Revenues earned from customer support
(i.e., long-term maintenance contracts) are recognized over the life of the
contract on a straight-line method. Consulting revenues are recognized as worked
is performed.

The Company also earns royalty fees from the incorporation of its products into
other vendors' software. Such revenue is recognized upon delivery of the end
product.


                                                                              30

<PAGE>

                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

INCOME TAXES

Income taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and income tax bases of assets and liabilities under the
liability method.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses 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.

INVESTMENT IN JOINT VENTURE

In December 1996, the Company formed a joint venture with another entity from
India, which was subsequently dissolved in 1998. The Company was a 47.5%
shareholder in the joint venture and accounted for its investment under the
equity method of accounting.

EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of common
shares outstanding. Diluted earnings per share is computed using the combination
of dilutive common share equivalents and the weighted average number of common
shares outstanding. Diluted earnings per share is not presented as the effect of
outstanding options and warrants is antidilutive.


                                                                              31

<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

The Company follows the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and
applies Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for its plans. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation is recognized.

RECLASSIFICATION

Certain prior year items have been reclassified to conform with the 1998
presentation.

3. LONG-TERM DEBT

Maturities of the long-term debt to related parties totaling $496,249 and
$632,005 at December 31, 1998 and 1997, respectively, are dependent upon the
profitability of the Company in the future. Due to the uncertainty surrounding
the maturities of the long-term debt, it is not possible to determine its fair
market value. The various components of the debt are as follows:

   *  As of December 31, 1998 and 1997, promissory notes issued to various
      directors, officers, stockholders and employees of the Company had
      outstanding principal balances of $128,007 and $150,351, respectively. The
      promissory notes bear interest at the prime rate plus 2% (9.75% at
      December 31, 1998 and 10.50% at December 31, 1997). Interest is payable on
      a quarterly basis. The notes have a variable repayment plan which is
      dependent upon the Company attaining after-tax profits.

      Also, certain of the noteholders are able to convert the unpaid principal
      balance into Common Stock at a conversion rate of $15.00. In addition, the
      noteholders have warrants to purchase a total of 21,500 shares of Common
      Stock at $15.00 per share. The notes issued to certain of the noteholders
      are secured by an interest in the Company's technology.


                                                                              32
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


3. LONG-TERM DEBT (CONTINUED)

   *  As of December 31, 1998 and 1997, promissory notes issued to certain
      directors of the Company had outstanding principal balances of $20,000 and
      $27,767, respectively. The promissory notes bear interest at the prime
      rate plus 2% (9.75% at December 31, 1998 and 10.50% at December 31, 1997).
      Interest is payable on a quarterly basis. The notes have a variable
      repayment plan, which is dependent upon the Company attaining after-tax
      profits.

      The holders of these notes can convert either principal or interest to
      Common Stock at any time. The conversion price shall be the lower of (a)
      the lowest prevailing market price, or (b) the price per share paid by any
      third party (other than on the exercise of stock options). These notes are
      secured by an interest in the Company's technology.

   *  As of December 31, 1998 and 1997, promissory notes issued to the Company's
      employees for accrued wage concessions plus accrued interest, had
      outstanding principal balances totaling $348,242 and $453,887,
      respectively. Certain of these notes, totaling $176,024 and $229,245 at
      December 31, 1998 and 1997, respectively, bear interest at the prime rate
      plus 2% (9.75% at December 31, 1998 and 10.50% at December 31, 1997).
      Interest is payable quarterly. The remaining employee promissory notes,
      totaling $172,218 and $224,642 at December 31, 1998 and 1997,
      respectively, bear no interest. These notes have a conversion feature
      allowing the holder to convert the unpaid principal balance into Common
      Stock at a conversion rate of $2.50 per share. The interest bearing notes
      have a variable repayment plan, which is dependent upon the Company
      attaining after-tax profits. The noninterest bearing notes shall be paid
      in eight equal quarterly installments beginning ninety days after the
      variable repayment debt has been repaid.

      In January 1998 and 1997 the Company converted one-third of its interest
      bearing promissory notes into Common Stock at a rate of $2.50 per share.
      The Company also repaid one-third of its non-interest bearing promissory
      notes. The Company intends to convert and repay the remaining balances of
      the notes in 1999. Interest paid in 1998 and 1997 on these notes was
      $26,062 and $45,471, respectively.


                                                                              33
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998

3. LONG-TERM DEBT (CONTINUED)

In connection with a debt restructuring that occurred in February 1993, the
Company granted a related party a perpetual, royalty free license and
maintenance agreement and a separate related party a specific number of fully
paid licenses. Due to the lack of a definitive time frame over which the related
parties will be entitled to have the Company perform maintenance services,
limited to $50,000 per year, to customers of the related parties, and the
inability of the Company to estimate the cost of these maintenance services, no
liability has been recorded.

4. STOCKHOLDERS' EQUITY

COMMON STOCK

The following table summarizes the number of shares of Common Stock to be issued
upon conversion of convertible debt outstanding as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                NUMBER OF       CONVERSION
DESCRIPTIONS                                                     SHARES            PRICE
------------------------------------------------------------   ---------------------------
<S>                                                               <C>             <C>
Common Stock issuable upon conversion of promissory
  notes to various directors, officers, shareholders and
  employees                                                        5,133          $15.00

Common Stock issuable upon conversion of promissory
  notes to employees                                              89,857            2.50

Common Stock issuable upon conversion of promissory
  notes to directors                                              17,799            1.00(1)
                                                                 -------
                                                                 112,789
                                                                 =======
</TABLE>

(1)--The conversion price is to be the lower of (a) the lowest prevailing market
     price or (b) the price per share paid by any third party (other than on the
     exercise of stock options). A conversion price of $1.00 was used which was
     the closing price of the Company's stock on December 31, 1998. All parties
     have the right to convert any unpaid principal or accrued interest at any
     time prior to payment.


                                                                              34
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


5. STOCK-BASED COMPENSATION

STOCK OPTIONS

In 1996, the Company adopted the 1996 Omnibus Stock Plan (the "Plan"). The Plan
supersedes both the 1987 Incentive Stock Options Plan and the 1987 Non-Qualified
Stock Option Plan. Under the Plan, 1,000,000 shares are reserved for future
issuance. Options granted under the Plan may be either incentive options or
nonqualified options. The Plan requires that the option price of incentive stock
options be not less than 100% of the fair market value of the Company's Common
Stock on the date of grant and may remain outstanding up to ten years from the
date of grant. Nonqualified options must be priced not less than 85% of the fair
market value of the Company's Common Stock on the date of grant.

Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                     SHARES                       AVERAGE
                                                   AVAILABLE       OPTIONS     EXERCISE PRICE
                                                   FOR GRANT     OUTSTANDING     PER SHARE
                                                   ------------------------------------------
<S>                                                <C>            <C>              <C>
Balance at December 31, 1996                        463,000        690,076         $ 4.57
  Shares reserved under the 1996 Omnibus Plan       500,000             --             --
  Options granted                                  (506,500)       506,500           3.20
  Options canceled                                  292,871       (292,871)          3.31
                                                   --------------------------
Balance at December 31, 1997                        749,371        903,705           3.92
  Options granted                                  (193,917)       193,917           1.60
  Options canceled                                  317,285       (317,285)          3.36
                                                   --------------------------
Balance at December 31, 1998                        872,739        780,337         $ 3.23
                                                   ==========================
</TABLE>

Outside the Plans, the Company has 107,640 options outstanding to purchase
shares of Common Stock with a weighted average exercise price of $2.64 per
share.


                                                                              35
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


5. STOCK-BASED COMPENSATION (CONTINUED)

The following table summarizes information about Plan options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                        ------------------------------------------------ -------------------------------
                                           WEIGHTED
                             NUMBER         AVERAGE                           NUMBER
                         OUTSTANDING AT    REMAINING       WEIGHTED       EXERCISABLE AT     WEIGHTED
     RANGE OF             DECEMBER 31,    CONTRACTUAL      AVERAGE         DECEMBER 31,      AVERAGE
  EXERCISE PRICES             1998           LIFE       EXERCISE PRICE         1998       EXERCISE PRICE
----------------------- ------------------------------------------------ -------------------------------
<S>                           <C>           <C>            <C>                 <C>           <C>
  $ 1.50 to $2.50             436,000       8 years        $  1.89             285,634       $  1.91
     3.00 to 4.50             220,492       6 years           3.25             202,692          3.16
     4.75 to 6.50              85,800       7 years           4.75              56,600          4.75
       15.00                   38,045       3 years          15.00              38,045         15.00
                        -----------------                                -----------------
                              780,337                                          582,971
                        =================                                =================
</TABLE>

The number of options exercisable as of December 31, 1998, 1997 and 1996 were
582,971, 363,390 and 327,846, respectively at weighted average exercise prices
of $3.23, $5.23 and $4.50 per share, respectively.

The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 was $1.62 and $3.19 per share, respectively.

PRO FORMA DISCLOSURES

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions all years
presented: risk-free interest rates in 1998 and 1997 of 5.50% and 6.31%,
respectively; no dividend yield; volatility factor of the expected market price
of the Company's common stock in 1998 and 1997 of 1.01 and 1.28, respectively;
and a weighted-average expected life of the option of 8.5 years.


                                                                              36
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


5. STOCK-BASED COMPENSATION (CONTINUED)

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 of 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.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

                                                          1998          1997
                                                       -------------------------

   Pro forma net loss                                  $(270,352)   $(3,004,311)
   Pro forma basic and diluted net loss per common
    share                                                  $(.09)        $(1.01)

WARRANTS

The Company has also issued warrants in connection with debt and equity
offerings to purchase shares of Common Stock which are currently exercisable.
Warrant activity is summarized as follows:

                                   WARRANTS
                                 OUTSTANDING
                                      AND               PRICE         EXPIRATION
                                  EXERCISABLE         PER SHARE          DATE
                                 -----------------------------------------------

Balance at December 31, 1996       1,488,748      $1.50 - $15.00     1997 - 2000
  Warrants exercised                  (1,200)          1.50               -
  Warrants canceled                  (31,334)         15.00               -
                                 -------------
Balance at December 31, 1997       1,456,214       3.00 - 15.00      1998 - 2001
  Warrants canceled                 (316,504)      5.68 - 15.00           -
                                 -------------
Balance at December 31, 1998       1,139,710      $1.50 - $15.00     1999 - 2001
                                 ============


                                                                              37
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


6. INCOME TAXES

At December 31, 1998, the Company had net operating loss carryforwards of
approximately $9,825,000 plus research and development tax credit carryforwards
of approximately $219,000. The net operating loss carryforwards are available to
offset future taxable income through 2012 and are subject to the limitations
under Section 382 of the Internal Revenue Code due to changes in the equity
ownership of the Company. All tax expense in 1998 consists of federal and state
alternative minimum tax.

Components of deferred tax assets are as follows:

                                                   1998              1997
                                               -----------------------------
Deferred tax assets:
  Net operating loss carryforwards             $ 3,930,000       $ 4,252,000
  Research and development credits                 219,000           157,000
  Other accruals                                   110,000           102,000
                                               -----------------------------
                                                 4,259,000         4,511,000
Less valuation allowance                        (4,259,000)       (4,511,000)
                                               -----------------------------
Net deferred tax assets                        $        --       $        --
                                               =============================

Reconciliation of the statutory federal income tax to the Company's tax
attributable to continuing operations is as follows:

                                                  1998              1997
                                               -----------------------------

Tax at statutory rate                          $  131,778        $        --
State income taxes                                 23,255                 --
Alternative minimum tax                            10,000                 --
Impact of net operating loss carryforward        (155,033)                --
                                               -----------------------------
Income tax expense                             $   10,000        $        --
                                               =============================


                                                                              38
<PAGE>


                                 XOX CORPORATION

                          Notes to Financial Statements

                                December 31, 1998


7. LEASES

The Company had an operating lease agreement for certain premises within a
building that was canceled in October 1997. The Company moved to a new location
during November 1997 and entered into a new building lease agreement that has a
term extending through December 2000. The lease requires annual base rent of
approximately $29,680 plus a sharing of expenses. Management fees that are paid
to the business center owners will be reimbursed by a pro-rata amount for one
board member who is also an owner. The Company has also leases other equipment
operating leases which expire in future years.

Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:

   Year ending December 31:
     1999                                                       $40,104
     2000                                                        35,965
     2001                                                           220
                                                                -------
   Total                                                        $76,289
                                                                =======

Rent expense on operating leases for the years ended December 31, 1998 and 1997
was $43,740 and $67,135, respectively.

8. EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with members of its senior
management. The agreements include provisions for compensation and benefits. The
agreements continue through 1999. The employment agreements also contain
non-compete clauses that prohibit the employee from being employed by a
competitor of the Company. The non-compete clause is in effect for the longer of
three years from the signing of the employment agreement or one-year after
termination.

9. SIGNIFICANT CUSTOMERS

The Company has a domestic customer that represents 63% and 19% of net revenues
for the years ended December 31, 1998 and 1997, respectively. In addition, the
Company has foreign sales to one customer which represents 21% and 28% of net
revenues for the years ended December 31, 1998 and 1997, respectively.


                                                                              39
<PAGE>


                                   SIGNATURES

     In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated:  March 31, 1999                      XOX Corporation

                                         By /s/ Steven B. Mercil
                                            Interim Chief Financial Officer



     In accordance with the requirements of the Exchange Act, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities indicated on March 31, 1999.

                                POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints Steven
B. Mercil as their true and lawful attorney-in-fact and agent, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorney-in-fact and agent, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.


SIGNATURE                         POSITION
---------                         --------

/s/  Steven B. Mercil             
Steven B. Mercil                  Director, Interim Chief Financial Officer
                                  (Principal Executive Officer)            
                                  
/s/  Steven B. Liefschultz
Steve Liefschultz.                Chairman of the Board

/s/ Thomas J. Lucas
Thomas J. Lucas                   Director

/s/  Bernard J. Reeck
Bernard J. Reeck                  Director

/s/ Paul Johnson
Paul Johnson                      Director

/s/ Peter Dahl
Peter Dahl                        Director

/s/ Craig Gagnon
Craig Gagnon                      Director


                                                                              40
<PAGE>


XOX CORPORATION

                                EXHIBIT INDEX TO
                FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
Item No.             Title of Document                                                         Method of Filing
--------             -----------------                                                         ----------------
<S>    <C>                                                                                            <C>
 3.1   Amended and Restated Certificate of Incorporation of small business issuer .............        *

 3.2   Amended and Restated Bylaws of small business issuer....................................        *

 4.1   Specimen of Unit Certificate............................................................        *

 4.2   Form of Warrant Agreement...............................................................        *

 4.3   Form of 1996 Promissory Note and Common Stock Purchase Warrant..........................        *

 4.4   Security Agreement, $100,000 Promissory Note and Common Stock Purchase
       Warrant between Unitechnic and the Company dated March 8, 1996 .........................        *

 4.5   Form of 1994 Bridge Loan Promissory Note and Security Agreement.........................        *

 4.6   Form of 1993 Convertible Variable Repayment Debenture...................................        *

 4.7   Form of Director's Variable Repayment Debenture.........................................        *

 4.8   Form of 1993 Employee Debt-Related Promissory Note......................................        *

 4.9   Form of 1993 Secured Collateralized Variable Repayment Debenture .......................        *

 4.10  Form of 1993 Unsecured Collateralized Variable Repayment Debenture .....................        *

 4.11  Form of 1993 Employee Debt-Related Variable Repayment Debenture.........................        *

 4.12  $297,656.30 Variable Repayment Debenture dated February 1993,
       between Swanson Analysis Systems, Inc., as Payee, and the Company, as Payor ............        *

 4.13  Form of 1993 Debt Exchange Subscription Agreement and Letter of Investment Intent ......        *

 5.1   Opinion of Doherty, Rumble & Butler Professional Association ...........................        *

10.1#  License Agreement between ANSYS, Inc. (formerly Swanson
       Analysis Systems, Inc.) and the Company dated February 9, 1993 .........................        *

10.2   Joint Venture Agreement between IIS Infotech Ltd., the Company
       and Dr. Indranil Chakravarty dated December 20, 1995 ...................................        *

10.3#  Software License Agreement between Landmark Graphics, Inc. and
       the Company dated January 1, 1995 ......................................................        *

10.4#  Software License Agreement between Schlumberger Corporation and the Company dated
       October 14, 1994 .......................................................................        *

10.5#  Software License Agreement between CogniSeis Development, Inc. and the Company dated
       July 10, 1995 ..........................................................................        *

10.6   Sublease Agreement between the Company and St. Paul Software,
       Inc. dated July 25, 1995................................................................        *

10.7   Employment Agreement between the Company and Lawrence W.
       McGraw dated December 20, 1994 .........................................................        *

10.8   Employment Agreement between the Company and Dr. Pradeep
       Sinha dated December 20, 1994 ..........................................................        *

10.9   Employment Agreement between the Company and Dr. T.K.
       Srikanth dated December 20, 1994 .......................................................        *

10.10  Employment Agreement between the Company and Dr. Indranil
       Chakravarty dated September 15, 1995....................................................        *

10.11  Employment Agreement between the Company and Turhan Rahman dated December 20, 1994 .....        *

10.12  XOX Corporation 1996 Omnibus Stock Plan.................................................        *

10.13  XOX Corporation 1987 Incentive Stock Option Plan and
</TABLE>


                                                                              41
<PAGE>

<TABLE>
<S>    <C>                                                                                          <C>
       Agreement...............................................................................        *

10.14  XOX Corporation 1987 Non-Qualified Stock Option Plan and Agreement .....................        *

10.15# Software License Agreement between CADKEY, Inc. and the Company dated
       September 27, 1990 .....................................................................        *

10.16# Software License Agreement between Schlumberger/Geco-Prakl
       and the Company dated November 30, 1993 ................................................        *

10.17# Software License Agreement between Shell Oil and the Company
       dated October 7, 1994 ..................................................................        *

10.18# Confidential Disclosure Agreement between Fairfield Imaging-
       VoluMetrix and the Company dated October 17, 1995 ......................................        *

10.19# Distribution License Agreement among the Company, TechSoft
       GmbH and SAPEX dated April 18, 1995 ....................................................        *

10.20# Marketing and Support Agreement between TechSoft GmbH and
       the Company dated October 1, 1994 ......................................................        *

10.21# Development and License Agreement between Visual Software,
       Inc. and the Company dated November 28, 1995 ...........................................        *

10.22# International Distribution Agreement between Unitechnic SA and
       the Company dated June 1, 1996 .........................................................        *

10.23  $100,000 Secured Promissory Note, Guaranty and Security
       Agreement among Robert S. Mars, Jr., as Guarantor, and First
       Bank National Association, as Bank, and the Company, as
       Borrower, dated July 10, 1996 ..........................................................        *

10.24# Software License Agreement between Evans and Sutherland
       Corporation and the Company dated January 9, 1996 ......................................        *

10.25  Source Code Licensing Agreement between VoluMetrix and the
       Company dated October 31, 1996..........................................................        *

10.26  Software, known as "MACADAMIA", purchase agreement between
       Jacques E. Gavois and the Company dated December 1, 1996................................        *

10.27  Employment Agreement between Jacques E. Gavois and the
       Company dated December 1, 1996 .........................................................        *

10.28# Reciprocal Joint Development and Marketing Agreement between
       IMETRIX Ltd. and the Company dated October 31, 1996 ....................................        *

10.29# Letter of understanding regarding a Convertible Bridge Loan
       Agreement between the Company and IMETRIX Ltd. dated
       February 26, 1997 ......................................................................        *

10.30# SURFER Software License Agreement between Shell Oil
       Company and the Company dated October 3, 1996...........................................        *

10.31# XOX Corporation and Shell International Exploration and
       Production B.V. Consultancy Agreement dated 12/19/97.....................................       **
                                                                                                       

10.32# XOX Corporation and Geoquest agreements dated 7/24/98 ...................................       ***

23.1   Consent of Ernst & Young LLP.............................................................       Filed herewith
                                                                                                       electronically

24.1  Power of Attorney........................................................................        Included in signature 
                                                                                                       page of this Form 10-KSB

27.7  Financial Data Schedule for Year Ended December 31, 1998.................................        Filed herewith
                                                                                                       electronically.

</TABLE>


*  Incorporated by reference to the companies registration statement on form 
SB2, SEC file number 333-05112-C.

** Incorporated herein by reference to the companies filing of form 10K for year
ended December 31, 1997.

*** Incorporated herein by reference to the companies filing of form 10Q for
quarter ending June 30, 1998 as exhibits 10.31#.

# Confidential Treatment Requested pursuant to the Securities Exchange Act of
1934, as amended, Rule 24b-2; confidential portions of the exhibits have been
deleted and filed separately with the Securities and Exchange Commission.


                                                                              42