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, 1997
                       Commission file number 333-05112-C

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


         Delaware                                          93-0898539
    (State or jurisdiction of                          (I.R.S. Employer
    incorporation 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, underlying Redeemable Common Stock Purchase
Warrants.
(3) Underwriter's Warrant to purchase shares of Common Stock, $.025 par value.
(4) Common Stock, $.025 par value, issuable upon exercise of the Underwriter's
Warrant.

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 $914,035.

As of March 27, 1998, the Issuer had 2,235,188 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 27,
1998, (based on the average closing bid and asked prices as of March 27, 1998 as
reported by the Nasdaq SmallCap Market), was approximately $5,029,173.

DOCUMENTS INCORPORATED BY REFERENCE:  None

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

<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 geometric computing which
encompasses as much of the entire body of geometry as the Company believes to be
possible into a computer system. SHAPES(R), currently the principal product
offering of the Company, adds physical characterization to visual data, allowing
computer models to be "felt" in addition to being seen. This ability to "feel"
the item modeled also differentiates the Company's product from Computer Aided
Design ("CAD") solid modelers, as does the capability to include bodies of
different dimensions in a single complex model of intersecting surfaces and
solids, such as three dimensional ("3D") earth models or models of the human
body. The completeness of the Company's product allows it to model or simulate
real world geometry problems where much more information is needed when compared
to graphics or visualization needs, or where the models are much more complex
than can be simulated with solid modeling geometry alone.

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

     On September 11, 1996, the Company completed its initial public offering of
its Units, each Unit consisting of one share of Common Stock and one Redeemable
Common Stock Purchase Warrant. The offering, including a partial exercise of the
underwriter's over-allotment option, resulted in the sale of 870,000 Units and
provided the Company with net proceeds of approximately $4,997,000. These net
proceeds have, to date, provided the Company with financial resources to pay
down some debt and to continue to pursue its business strategy.

(b) BUSINESS OF THE COMPANY

PRODUCTS

     The Company's principal product, the SHAPES(R) Geometric Computing System
("SHAPES"), is sold and licensed to software developers in the Geosciences
industry to be embedded in their application software. The Company's primary
near term business strategy is to generate royalty revenues from these
application software developers. The Company hopes, additional near term
revenues will be developed from a CAD cleanup technology ("GDX").

     SHAPES not only adds speed and clarity of "feel" to any visual model, but
also handles much more complex modeling requirements when compared to the solid
modeling geometry that exists in CAD systems. These solid modelers are prevalent
in the products marketed by the large CAD vendors, including Autodesk,

<PAGE>


Inc., Parametric Technologies, Inc., SDRC, EDS Unigraphics, Matra Datavision,
and others as well as the ACIS product marketed as an independent geometry
product by Spatial Technologies. These modelers were developed in the 1970's and
1980's using a subset of geometry (called B-splines or NURBs) specifically for
the purpose of designing manufactured solid objects, like automobile parts,
airplane parts, etc. 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, like the porosity and density of the parts
of the human body for medical applications, or the retention of similar
measurements for the elements of an earth model, such as distinguishing oil,
water, gas, shale and rock.

(2) Precise and robust intersections, the functions directly covered by the
Company's patents. SHAPES has excelled in modeling complex intersections like
those that occur with earth layers intersecting faults and salt domes.

(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 oil rig. 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 accurate and robust models, allowing users to look at and feel areas of
interest in great detail, and to simulate the impact of change.

     The advantages of SHAPES over solid modelers are now leading the Company to
seek partners to jointly develop its first end-user products (as compared to the
set of software libraries which the Company historically has sold to its
application software customers) targeted for the Geoscience and CAE. The Company
expects to begin to contractualize these partnerships in 1998 with initial
revenues from products jointly developed through these partnerships anticipated
in late 1998.

CUSTOMERS

     SHAPES has been licensed as an enabling component technology to over 20
software developers. Over 20,000 copies of SHAPES have been integrated into OEM
applications.

     For the fiscal year ended December 31, 1997, revenues from Schlumberger
Corporation ("Schlumberger") and Shell International Exploration & Production
B.V ("Shell Oil") were approximately $430,000, which represents approximately
47% of 1997 revenues. The Company currently anticipates that the same companies
could account for a significant portion of its annual revenue in 1998.

MARKETS AND APPLICATIONS

     Initially, the Company focused its marketing efforts principally on
software developers in the CAD market, achieving modest acceptance. In the last
three years, the Company has begun to explore market areas other than CAD,
including Geophysical software, Geographical Information Systems ("GIS"),
Medical Imaging, Scientific Visualization and Analysis software, Computer Aided
Manufacturing ("CAM"), and CAE. Because the full breadth of the Company's
product is well suited for 3D Earth Modeling and because this industry is
actively pursuing new technology, the Geosciences industry currently represents
what the Company believes is its strongest niche market.

<PAGE>


    GEOSCIENCES

     The Geosciences industry represents the largest number of active developers
of SHAPES-based products, including Shell Oil and Schlumberger. 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 Company has been working closely with Schlumberger, one of the world's
largest oil services companies, to refine and adapt SHAPES as a geometric
modeler for use in the geophysical industry.

     The precision of SHAPES geometry in creating 3D earth models is designed to
enable users to build more accurate models than was previously possible. Oil
companies have substantial interest in models which accurately direct their
exploration and production activities. The Company is extending SHAPES
capabilities in this industry to allow simulation of more complex earth models.

     ADVANCED COMPUTER AIDED DESIGN AND ANALYSIS

     The Company was formed in 1985 to develop 3D geometric modeling software
for use in conjunction with CAD applications. CAD had emerged in the late
1970's, with a principal focus on simulating and studying model surface areas,
such as testing potential wind resistance over the surface of an airplane wing
or automobile. Generally, software developed for CAD applications uses a limited
portion of Euclidian geometry (the geometry of B-splines) to simulate surface
areas through a process commonly referred to as solid modeling. Some inherent
limitations to solid modeling technology are its inability to accurately depict
areas of intersection or to identify characteristics beneath the surface of a
model. In contrast, the concept of SHAPES was to incorporate the full body of
Euclidian geometry into a geometric computing software system. This enables
SHAPES-based products to generate more sophisticated models of complex surfaces,
models of internal structures (such as faults, salt domes and layers of
different materials in Geoscience applications), and models that incorporate
non-geometric information such as properties of materials.

      Although CAD systems have done well with less sophisticated geometry
systems, some advanced usages are emerging which exceed the capabilities of
standard CAD systems. After CAD designs are created, they are used for various
purposes, including computer-based analysis of how a designed product might
perform under various stresses, pressures and heat treatment. An industry called
Finite Element Analysis ("FEA") exists to test such designs. A leader in the FEA
industry, ANSYS, Inc. (the parent of SAS IP, Inc.) ("ANSYS"), was one of the
earliest adopters of SHAPES technology. ANSYS has been shipping SHAPES-embedded
products since 1992. In working with ANSYS, the Company has confirmed that the
designs produced by CAD systems are often inadequate for these "advanced" needs
because the geometry is not complete; the designs do not intersect and have
"tears" and "holes," along with other inadequacies. The Company's GDX technology
offering targets this need and offers a possible solution to the problem.


     MEDICAL IMAGING AND ANALYSIS

     Similar to the Geosciences industry, the Medical Imaging and Analysis
market involves the modeling of complex surfaces and differing material
properties. The Company believes its technology could have broad application
within this market, including the use of information from 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 modeled, not just visualized, 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.

<PAGE>


     OTHER POTENTIAL MARKETS

     There are many other industries where the Company believes its technology
has future potential. These include: (i) molecular modeling; (ii) architectural
modeling; and (iii) other earth sciences (including oceanography, ground water
pollution and air pollution modeling). 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's primary product strategy is to position itself as the
provider of next generation geometric modeling component software. The Company
anticipates that it will gain the majority of its near-term (through 1998)
revenues from software developers who embed SHAPES as a software component into
their products. In addition, the Company has recently placed increase emphasis
on developing partnerships and strategic alliances that will use SHAPES to
jointly develop end-user products. By expanding its business strategy to include
development of end-user products, the Company expects to become less dependent
on longer-term Original Equipment Manufacturers ("OEM") sales for its total
revenues.

MARKETING AND SALES

     The Company markets its products in North America, Europe and Asia through
direct sales and distributors, both strongly supported by a technical sales
support staff. In 1997, the Company also marketed its products pursuant to an
agreement with IIS Infotech, Ltd. ("IIS"), its partner in the Indian joint
venture organization described below. As described below, the Company is not
satisfied with the results of the joint venture and is developing an alternative
to the joint venture.

     Currently the Company's sales and marketing activities are conducted using
a team effort approach led by its Chief Technical Officer and supported by
staff. 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.

LICENSE AND DISTRIBUTOR AGREEMENTS

     The Company enters into license agreements with its customers. However,
other than its agreements with Schlumberger Corporation and Shell Oil Company,
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 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

<PAGE>


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 exist in
geophysical modeling.


     The ACIS Geometric Modeler, a solid modeling product developed by Spatial
Technology Inc. ("Spatial"), is the primary competitive product in the CAD and
CAM marketplace. In the CAD/CAM market, Spatial has attempted to position ACIS
as a geometry standard. Spatial has had some success in the scientific
visualization and CAM markets but has not yet achieved success in penetrating
the geophysical niche. The Company also faces known competition from a variety
of other competitors in the CAD/CAM market including ParaSolids, developed by
EDS Unigraphics and CAS.Cade, developed by Matra Datavision.

     As with all rapidly evolving technological environments, the Company will
likely face competition from other competitors which are not currently known. In
addition, internal development is a strong alternative in the market segments
pursued by the Company. For many CAD software developers, geometry is considered
to be integral to their development process and architecture. Also, the payment
of royalties may be considered to be high in comparison to the cost of
maintaining an internal geometry staff.

     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,
CAD/CAM/CAE, 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) its GDX
technology for a product, which is intended to provide for the input of CAD data
in various formats (IGES, VDA, STEP, SAT), filling of inadequacies contained in
such data and exclusion of extraneous data used in advanced CAD and analysis
applications.

     The Company's research and development expenses increased 48% over 1996 to
$1,346,675 representing 39% of operating expenses in 1997 as compared to 40% of
operating expenses in 1996. This increase in research and development expenses
was primarily the result of the growth in Company employment levels and activity
levels with the Indian joint venture described below.

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.

<PAGE>


     In December 1996, the Company made an equity investment of $41,020 in
IIS-XOX and became a 47.5% shareholder of IIS-XOX. The Company's 47.5% share of
its equity and earnings of the joint venture is reflected in its statements of
operations as part of the equity method of accounting. However, the salary of
the managing director of IIS-XOX is paid entirely by the Company; therefore, any
net income from IIS-XOX is entirely offset by this expenditure. At present the
Company is negotiating an exit from the joint venture with its joint veture
partner IIS Infotech Ltd.

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.

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 13 people
(excluding personnel available through the joint venture described above), and
all but one are full time employees. 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. Given the recent workforce reduction
discussed elsewhere herein, the Company believes it maintains good relations
with its employees.



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.

<PAGE>


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.

<PAGE>


                                     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. The
following table sets forth, for the fiscal year 1996 calendar quarters
indicated, the high and low bid prices for the Company's Units as reported by
Nasdaq, and for the fiscal year 1997 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. On or about
March 11, 1997, the Common Stock and Redeemable Warrants detached and became
separately tradeable. The Company's Common Stock and Redeemable Warrants have
been approved for listing on the Nasdaq SmallCap Market under the symbols XOXC
and XOXCW, respectively. Pending satisfaction of certain listing conditions of
Nasdaq Listing Qualifications Panel, effective Feburary 12,1998, the Company's
securities were identified with a fifth character "C" ("conditional") appended
to its symbol. In the event the Company is unable to satisfy the conditions for
continued listing on the Nasdaq SmallCap Market imposed by the Nasdaq Listing
Qualifications Panel, the Company's securities may be delisted from trading on
the Nasdaq SmallCap Market and will trade on the OTC Bulletin Board, as
described elsewhere herein.

     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 Liefshcultz 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.

                                                HIGH                LOW

1996
Third Quarter (from September 11, 1996)       $  7.750            $  6.620
Fourth Quarter                                $  7.500            $  5.000

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 (through March 20, 1998)        $  2.438            $  1.250



     As of March 20, 1998, there were (a) 3,051,931 shares of common stock
outstanding, held of record by approximately 219 registered shareholders, (b)
outstanding options to purchase an aggregate of 1,106,573 shares of Common
Stock, and (c) outstanding warrants to purchase an aggregate of 1,456,214 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.


B.   USE OF PROCEEDS FROM REGISTERED SECURITIES


<PAGE>


1.   The effective date of the registration statement for which this information
     is reported was September 11, 1996.

2.   The following is a reasonable estimate of, the amount of net offering
     proceeds to the issuer used for each of the purposes listed below. An "x"
     has been placed to the left of any amount that is an estimate.

                  DIRECT OR INDIRECT PAYMENTS TO
                  DIRECTORS, OFFICERS, GENERAL PARTNERS OF
                  THE ISSUER OR THEIR ASSOCIATES; TO
                  PERSONS OWNING TEN PERCENT OR MORE OF
                  ANY CLASS OF EQUITY SECURITIES OF THE
                  ISSUER; AND TO AFFILIATES OF THE            DIRECT OR INDIRECT
                  ISSUER                                      PAYMENTS TO OTHERS
                                         (A)                          (B)
--------------------------------------------------------------------------------
(01) Construction of plant, building
     and facilities
--------------------------------------------------------------------------------
(02) Purchase and installation of
     Machinery and equipment                                       $115,139
--------------------------------------------------------------------------------
(03) Purchase of real estate
--------------------------------------------------------------------------------
(04) Acquisition of other business(s)
--------------------------------------------------------------------------------
(05) Repayment of indebtedness          $597,572                   $258,446
--------------------------------------------------------------------------------
(06) Working capital             x                                 $757,912
--------------------------------------------------------------------------------

Temporary investment (specify)

(07)     Money Market            x                                 $687,039
         ------------------------------------------------------------------
(08)
         ------------------------------------------------------------------
(09)
         ------------------------------------------------------------------
(10)
         ------------------------------------------------------------------

Other purposes (specify)

(11)     Purchase of software                                       $85,000
         ------------------------------------------------------------------
(12)     Sales and marketing                                       $788,912
         ------------------------------------------------------------------
(13)     Research and development                                $1,546,285
         ------------------------------------------------------------------
(14)     IMETRIX Loan                                              $161,000
         ------------------------------------------------------------------
(15)
         ------------------------------------------------------------------
(16)
         ------------------------------------------------------------------

<PAGE>


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

RESULTS OF OPERATIONS

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996


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

RESULTS OF OPERATIONS

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     Net revenues for fiscal year 1997 were $914,035, an increase of
approximately 13% from the net revenues of $806,505 realized in fiscal year
1996. The increase in revenue in 1997 is attributable to an increase in license
sales, as well as contracts with Shell Oil. Two customers, Shell Oil and
Schlumberger, represented approximately 47% of the revenue sources for XOX in
1997. The Company anticipates that geosciences will continue in fiscal year 1998
to represent the strongest niche market for providing revenues to XOX.

     The Company's 1997 revenues of $914,035 did not meet prior expectations of
the Company's Board of Directors and its management. This revenue disappointment
resulted, in part, from a failure in the generation of revenues from the
Company's royalty business model. To increase revenues in 1998 the current Board
and management intend to broaden the scope of business opportunities, including
without limitation, the sale of nonexclusive licenses which may include the
ownership of source code, partnerships and strategic alliances for the purpose
of joint development and marketing of end user products, and continued sale of
OEM licenses at increased prices, which price may include negotiated royalties
and development support. While the Company is in the process of developing
long-term strategic opportunities to supplement or replace the Company's royalty
business model, there can be no assurance that any of the foregoing business
opportunities will help the Company achieve profitability during or after 1998.

     Although revenues received in 1997 increased 13% over those of 1996, 1997
operating expenses increased 49% over 1996 to $3,458,063. Research and
development expenses increased approximately 45% over 1996 to $1,346,675
representing approximately 39% of operating expenses as compared to 40% of
operating expense in 1996. Nearly 60% of the 1997 research and development
expenses occurred in the first half of 1997. The increase is attributable to
increased staffing, increased involvement in the joint venture IIS-XOX, and
working capital provided to IMMETRIX Ltd., as discussed below.

     Selling, general and administrative expenses increased approximately 51%
over 1996 to $2,111,388 and represented approximately 61% of 1997 operating
expenses. The increase in sales, general administrative expenses over the same
period in 1996 is due, in part, to increased employment levels and spending on
other administrative expenses relating to operating as a public company during
1997, efforts to remain listed on the Nasdaq SmallCap Market, and severance
compensation paid to terminated employees as required under their employment
contracts with the Company.

<PAGE>


     These factors, combined with the failure in the generation of revenues from
the Company's royalty business model resulted in a net loss of $2,470,841 for
1997. The net loss per share for 1997 was $.83 compared to the net loss per
share for 1996 of $.88.

     In an attempt to achieve profitability in 1998 by improving the ratio of
operating expenses to sales, the Company's current Board of Directors and its
management budgeted reduced expenses and monthly cash expenditures. These
reductions were effective on January 1, 1998. In December 1997 the Company moved
its offices to a more accessible, cost-efficient location. The results of these
efforts, as well as others, will be reflected in the Company's quarterly results
beginning in the first quarter of 1998.

     Interest income in 1997 of approximately $79,146 resulted from the
investment of the surplus cash realized from the Company's initial public
offering in September 1996 in money market accounts and short-term commercial
paper.

     For the year 1998, 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 and its licensees' products.

LIQUIDITY AND CAPITAL RESOURCES

     The completion of the Company's initial public offering of its Units 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 $687,039 at December 31, 1997, compared to
$2,720,551 at December 31, 1996. The Company's working capital was $687,199 at
December 31, 1997 compared to a working capital of $2,718,734 at December 31,
1996.

     With operating expenses far exceeding revenues during 1997, the Company
used $1,914,358 of cash for its operating activities. The comparable amount of
cash used in operating activities for 1996 was $1,729,685. To help remedy this
situation, the Company reduced its work force throughout 1997 as well as its
facility leasing costs. These expense reductions and associated reductions in
monthly cash expenditures are expected to be reflected in the Company's
operating results beginning in the first quarter of 1998.

     Investing activities during 1997 used $219,333 of cash of which, $70,333
was used for the purchase of equipment (principally computers) and furniture and
work cubicles and $114,000 was used for working capital advances to IMMETRIX
Ltd.

     In 1996, XOX entered into a joint development and marketing agreement with
an Israeli company (IMETRIX Ltd.), which owns data capture technology for aerial
and satellite data capture. In 1996, the Board of Directors of the Company
authorized working capital advances to be made to IMETRIX in the form of a term
loan of up to $200,000. The Company, thereafter, entered into a term loan
agreement with IMETRIX on September 15, 1997. The agreement provides XOX
conversion (and registration) rights related to the loan, warrant coverage, and
some security interest in the technology of IMETRIX. The term loan agreement
between IMETRIX Limited and the Company dated September 15,1997 was filed as
part of the Company's Form 10-QSB for the quarter ended September 30, 1997. As
part of that term financing, the Company made working capital advances to
IMETRIX of $12,000 in October 1996, $114,000 in the quarter ended March 31,
1997, and $35,000 in the third quarter of 1997 for a total of $149,000 in 1997.
As of December 31, 1997, working capital advances to IMETRIX totaled $161,000.

     The total working capital advances to IMETRIX were carried on the Company's
balance sheet as a note receivable of $161,000 for the quarter ended September
30,1997. However, while the advances are not scheduled

<PAGE>


to be repaid until the middle of 1999, the Company has chosen to reserve a loss
for this debt, due to the fact that IMETRIX is an early stage development
company, has not had revenues to date, and there can be no assurance that
IMETRIX will achieve its projected results or be profitable in the future in a
manner sufficient to repay the Company. Therefore the Company expensed $161,000
to research and development as a year end adjustment.

     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 the year ended
December 31, 1997 amounted to $39,512, resulting in an investment in the balance
sheet of $80,532 at December 31, 1997 in accordance with the equity method of
accounting. The majority of the salary of the managing director of IIS-XOX is
paid entirely by the Company; therefore, any earnings from IIS-XOX is entirely
offset by this expenditure. At present the Company is negotiating to exit from
the joint venture.

     Sales of equity securities by the Company offset by certain note payments,
financing, and repayments provided a net amount of cash of $100,179 in 1997. A
private placement of up to 100,000 shares of the Company's common stock to
members of the Company's Board of Directors at a price of $1.50/share was the
principal financing transaction for the Company in 1997. The Company took this
action in an explicit attempt to maintain its listing on the NASDAQ SmallCap
market as explained in the Company's Form 8-K filed November 26, 1997.

     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 chose 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 1997. The 1998 installment is expected to be completed during the first
quarter of 1998.

     The Company estimates that it will make capital expenditures in 1998 of
approximately $20,000 for computer equipment.

     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 at least the second quarter of 1998. 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 1998.

     In November of 1997 the Company received correspondence from the NASDAQ
Stock Market, Inc. which described the Company's failure to be in compliance
with continued listing requirements based on financial information contained in
the Company's Form 10-QSB for the quarter ending September 30, 1997. Following
XOX's filing of a Form 8-K on November 26, 1997, evidencing compliance with
applicable Nasdaq continued total asset and capital surplus listing criteria,
Nasdaq scheduled a hearing on January 23, 1998 relating to the decision of the
Nasdaq Stock Market Inc. to delist the quotation of the Company's securities
from the Nasdaq Small Cap Market. Following this review by the Nasdaq Listing
Qualifications Panel, Nasdaq determined that the XOX's securities would continue
to be "conditionally" listed on the Nasdaq SmallCap Market subject to the
following. On March 2, 1998, XOX was required to provided Nasdaq certain
supplemental information regarding business developments and, on or before March
31,1998, it must make a public filing with the Securities and Exchange
Commission evidencing a minimum of $3 million in net tangible assets. If the
Company's securities should cease to be listed on the Nasdaq SmallCap Market
they may continue to be listed on the OTC-Bulletin Board.

<PAGE>


     On March 31, 1998 the Board of Directors of XOX Corporation informed the
NASDAQ SmallCap Market, Inc. that it would not be making a public filing with
the Securities and Exchange Commission evidencing a minimum of $3 million in net
tangible assets as of March 31,1998. The Company believes that in order to make
a filing evidencing $3 million of net tangible assets the Company would be
required to raise an amount of capital that would unnecessarily dilute the
equity of existing shareholders given pending business developments. However,
there can be no assurances that the Company will be able to achieve such pending
business developments, nor can there be any assurances that the Company will not
need to raise additional equity capital causing dilution to existing
shareholders in the future. Therefore, the Company anticipates that its units,
shares, and warrants will be delisted from trading on the NASDAQ Small Cap
Market and will trade on the OTC-Bulletin Board. Such action may limit share-
holder liquidity and subject the trading of the Company's stock to the more
stringent "penny stock" rules, as discussed in the Company's Registration
Statement on Form SB-2 (File No. 333-05112-C).

     The year 2000 effect is not expected to have a material impact on the
Company. Future developments may have a material adverse effect on the Company.

     Concurrent with Mr. McGraw's departure as CEO and from the Board of
Directors, Steve Mercil and Dirk McDermott were added as members of the Board.
In September 1997, Dirk McDermott tendered his resignation from the Board. In
October 1997, Robert Mars, Jr. resigned from the Board. Thereafter, Steven B.
Liefschultz, Bernard J. Reeck and Richard L. Fast, and John Sherbin II joined
the Company's Board of Directors. Steven B. Liefschultz was appointed Chairman
of the Board of Directors, replacing Mercil as Chairman, and Steven Mercil was
appointed Interim Chief Executive Officer, President, and Chief Financial
Officer. In addition to normal duties as Chairman of the Board, at the request
of the Board, Mr. Liefschultz has agreed to provide additional services to the
Company.


ITEM 7. FINANCIAL STATEMENTS

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

                                                                          Page

Independent Auditors' Report   ............................................ F-1


Balance Sheets as of December 31, 1997 and 1996 ........................... F-2

Statements of Operations for the years ended December 31, 1997 and 1996 ... F-4

Statement of Stockholders' Equity for the years ended
  December 31, 1997 and 1996   ............................................ F-5

Statements of Cash Flows for the years ended December 31, 1997 and 1996 ... F-6

Notes to Financial Statements   ........................................... F-7


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

     None


<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

<TABLE>
<CAPTION>

    Name                       Age      Position                                       Director
    ----                       ---      --------                                        Since
                                                                                       --------
<S>                             <C>                                                      <C>
    Steven Mercil               46      Interim Chief Executive Officer and              1997
                                        President, Interim Chief Financial Officer
                                        and Director(2)(3)

    Dr. Pradeep Sinha           39      Vice President of Research, Chief                1987
                                        Technical Officer and Director(2)(3)

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

    Steven B Liefschultz        55      Chairman of the Board and Director               1997
                                        (1)(2)(3)

    John M. Sherbin II                  Director(1)                                      1997

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

    Richard L. Fast                     Director(1)                                      1997

    Dr. Indranil Chakravarty    44      Vice President High Performance Computing         --
</TABLE>

<PAGE>


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

STEVEN MERCIL is the Interim Chief Executive Officer, Chief Financial Officer
and President of the Company, as well as a member of the Board of Directors. Mr.
Mercil 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 after previously serving from 1993 to 1995.

DR. PRADEEP SINHA is a co-founder of the Company, a director and the Vice
President of Research and Chief Technical Officer. Dr. Sinha's research provided
the basis upon which the Company's software products were developed. Dr. Sinha
received his Doctorate from Cornell University in Mechanical Engineering.

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. Mr. Lucas
holds a J.D. degree from William Mitchell College of Law in St. Paul, Minnesota
and an B.A. from the University of Notre Dame.

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.

JOHN M. SHERBIN II is a director of the Company. Mr. Sherbin II is the Chief
Financial Officer, Vice President, Finance and Administration, and Secretary of
ANSYS, Incorporated (ANSYS). He is also a Director, President and Secretary of
SAS IP, Inc. Prior to joining ANSYS, Sherbin II was Chief Financial Officer and
Treasurer of II-VI, Incorporated, an infrared materials and electro-components
manufacturer, from February 1986 to May 1994. Sherbin II also serves on the
board of Applied Electro-Optics, Incorporated, a laser scanner and systems
company.

RICHARD L. FAST is a director of the Company. Mr. Fast is currently employed by
Minnesota Technology, Inc. as a Business/Investment Services Specialist.
Minnesota Technology, Inc. is a shareholder of the Company. From 1985 to 1989,
Mr. Fast served as the President and CEO of Derata Company, a $3.0 million
medical-device manufacturer. From 1965 to 1985, Mr. Fast was employed by
Medtronic, Inc., an international medical technology company. During his tenure
with Medtronic, Inc., Mr. Fast served in a variety of capacities, including
Corporate Vice President, U.S. Business Groups, Vice President, U.S.
Manufacturing, Director, International Manufacturing, Assistant General Manager
and Manufacturing and Product Design Engineer. Mr. Fast received a Bachelor of
Science-Electrical Engineering degree from the University of Minnesota.

<PAGE>


DR. INDRANIL CHAKRAVARTY is Vice President of High Performance Computing of the
Company. Dr. Chakravarty is also the Managing Director of IIS-XOX Asia Pacific
Pvt., Ltd., a joint venture of the Company and IIS Infotech, Ltd. From June 1993
to June 1995, Dr. Chakravarty was Program Manager at Siemens Corporate Research,
Inc. From April 1981 to May 1993, Dr. Chakravarty was Program Manager at
Schlumberger, Ltd. Dr. Chakravarty holds a Bachelor's degree in Electrical
Engineering from New York University and received his Masters and Doctorate
degrees from Rensselaer Polytechnic Institute in Computer and Systems
Engineering.

COMMITTEES OF THE BOARD OF DIRECTORS

     The Board currently has four Committees - an Executive Committee, an Audit
Committee, a Nominating 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
Company. The Executive Committee is composed of Messrs. Lucas, Mercil, Reeck,
Liefschultz and Sinha. 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, Fast, Liefschultz and Sherbin II. The Nominating Committee
proposes a nominee for each elective Board position then vacant or to be vacant.
Currently the entire Board of Directors serves as the Nominating Committee. 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.

(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.

Pradeep Sinha, Vice President of Research, Chief Technical Officer and a
Director of the Company, filed a Form 4 in February, 1998 to report a
transaction occurring in October, 1997. Mr. Sinha also filed a Form 5 in March,
1998 to report a transaction occurring in March, 1997 and a transaction
occurring in October 1997. Steven Mercil, Interim Chief Executive Officer and
Chief Financial Officer and a Director of the Company filed a Form 3 in
November, 1997 to report a transaction occurring in October, 1997.

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, 1997, 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.

<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     The following table provides certain summary information for the past three
years ended December 31, 1997 concerning executive compensation paid or accrued
by the Company to the Company's Chief Executive Officer whose salary and bonus
compensation for 1997 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>
Lawrence W. McGraw (1)             1997     $125,000     $50,000             86,000
(Chief Executive Officer)          1996      172,500      21,000             50,000
                                   1995      171,255      30,000               None

Steven B. Mercil (2)               1997      100,000       None              60,000
(Interim Chief Executive Officer
and Chief Financial Officer)

Pradeep Sinha (3)                  1997      96,000        None              35,000

</TABLE>

(1)  Mr. McGraw served as the Company's Chief Executive Officer until August 6,
     1997, at which time he resigned from the Company.

(2)  Mr. Mercil became Chief Executive Officer effective October 1997. He is to
     serve for 6 months, on an interim basis, and will be compensated on a pro
     rata basis.

(3)  Mr. Sinha served as interim Chief Executive Officer from August 1997 to
     October 1997.


STOCK OPTION GRANTS DURING FISCAL YEAR 1997

     The following table provides information regarding stock options granted
during fiscal year 1997 to the named executive officer in the Summary
Compensation Table.


                              % OF TOTAL OPTIONS
                    OPTIONS    VESTED IN FISCAL   EXERCISE PRICE
            NAME    GRANTED         YEAR          PER SHARE      EXPIRATION DATE

Lawrence W. McGraw  10,000.00        100%            $4.75         June 30, 1998
                    (1)
                    76,000.00        100%             2.50         June 30, 1998
                    (1)

Steven B. Mercil    50,000.00         33%             2.23       October 1, 2007
                    (2)
                    10,000.00                         2.23       October 1, 2007
                    (3)

Pradeep Sinha       25,000.00         20%             2.50        August 6, 2004
                    (4)
                    10,000.00                         2.23       October 1, 2007
                    (5)

<PAGE>


(1)  As stated above, Mr. McGraw resigned from the Company in August 1997. Upon
     his resignation, Mr. McGraw was required to surrender to the Company all
     incentive stock options granted to Mr. McGraw. The Company then granted Mr.
     McGraw nonqualified stock options to purchase 86,000 shares of the
     Company's common stock at exercise prices equivalent to the surrendered
     options.

(2)  Mr. Mercil may exercise the subject nonqualified stock option for up to
     1/16 of the option stock commencing December 11, 1997 with additional
     installments of 1/6 of the option stock becoming exercisable each month
     thereafter.

(3)  Mr. Mercil may exercise the subject non-qualified option for up to 100% of
     the option stock on October 1, 1998.

(4)  Mr. Sinha may exercise the subject non-qualified stock option for up to 20%
     of the option stock commencing August 6, 1997 with additional installments
     of 20% of the option stock becoming exercisable each year thereafter.

(5)  Mr. Sinha may exercise the subject non-qualified stock option for up to
     100% of the option stock on October 1, 1998.



OPTION EXERCISES DURING FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>

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

                     Number of                 Number of Unexercised         Value (1) of Unexercised
                     Shares                    Options at December 31, 1997  Options at December 31, 1997
                     Acquired      Value (1)   ----------------------------  ----------------------------
           Name      on Exercise   Realized    Exercisable   Unexercisable   Exercisable   Unexercisable
           ----      -----------   --------    -----------   -------------   -----------   -------------
<S>                       <C>          <C>         <C>               <C>       <C>               <C>
Lawrence W. McGraw        0            0           86,000            0.00      No value          No value
Steven B. Mercil          0            0            8,333          41,667      No value          No value
Pradeep Sinha             0            0            5,000          30,000      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, 1997 of $1.563.


EMPLOYMENT AGREEMENT

     The Company had an employment agreement with Lawrence W. McGraw in effect
until December 31, 1997 or until such agreement was terminated by Mr. McGraw
upon 30 days' written notice, subject to the Company's right to terminate the
agreement immediately for cause or upon Mr. McGraw's continuing disability. The
agreement also provided that the Company could terminate Mr. McGraw at any time
for any other reason, subject to the obligation of the Company to pay Mr. McGraw
an amount equal to Mr. McGraw's base salary for a period of six months. Mr.
McGraw's employment under this agreement ended on August 6, 1997. Mr. McGraw is
prohibited from indirectly or directly competing with the Company for a period
of 12 months after his resignation, whether for his own account or the account
of a third party.

     The Company has an oral agreement with Steven B. Mercil regarding his
employment as Interim Chief Executive Officer, President, and Chief Financial
Officer. Pursuant to such, Mr. Mercil's employment agreement remains in effect
for a term of six (6) months, commencing October 1, 1997. The Agreement can only
be terminated for cause and is not subject to renewal but may be extended by
mutual agreement.

<PAGE>


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 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. Members of the Board have historically received stock options pursuant to
the Company's 1996 Omnibus Stock Plan (the "Plan"). Under the recently amended
version of the Plan, such stock options, including those granted to members
serving on the Board of Directors, are determined by the Committee administering
such Plan. The prior version of the Plan contained a provision for certain
"formula" grants to directors. Pursuant to such formula provisions, directors
servicing as of the date of the Company Annual Shareholder Meeting, received a
non-statutory stock option to purchase 5,000 shares of common stock at 100% of
the Fair Market Value of each share on the date of grant. However, the Board of
Directors, subject to shareholder approval at the Company's next Annual
Shareholder Meeting, amended the Plan and eliminated the formula provision. In
addition, during fiscal year 1997, 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. Other than the formula stock option grants given to
Directors prior to the amendment of the Plan, the stock options given to
Directors appointed after the plan was ammended, and the stock options given to
the Executive Committee members, the only person to receive additional Director
compensation during fiscal year 1997 was Steven Liefschultz. Mr. Liefschultz was
granted an option to purchase 100,000 shares of Common Stock at a price 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, and, while options
previously granted thereunder remain excersisable, no new options will be
granted under either of the superseded plans. 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. As stated
above, on November 11, 1997 the Board of Directors amended the Plan to eliminate
the formula provisons of the Plan and to reserve additional shares of common
stock available for issuance under the Plan. Subject to such shareholder
approval at the Company's next Annual Shareholder Meeting, an additional 500,000
shares of the Company's common stock will 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 749,873
Shares of Common Stock are available for issuance under the Plan.

<PAGE>


     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.

1987 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANS

     The 1987 Incentive and Non-Qualified Stock Option Plans (the "1987 Plans")
reserved for issuance 600,000 and 200,000 shares of Common Stock, respectively.
The Plans were administered by the Board which had responsibility to interpret
the Plans. Employees of the Company were eligible to receive incentive stock
options under the 1987 Incentive Stock Option Plan and nonemployees and
employees could receive nonqualified options under the 1987 Non-Qualified Stock
Option Plan. The 1987 Plans provide that the option price of stock options
granted thereunder must be at least 100% of fair market value of the Company's
Common Stock as of the date of the option grant and that the term of any
incentive stock option may not exceed ten years. All options quoted under the
1987 Plans are nontransferable and are subject to various other conditions and
restrictions.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of the date of this Form 10-KSB, 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.

<PAGE>


                                 Number of Shares of Common    Percentage of
Name                             Stock Beneficially Owned(1)  Outstanding Shares
----                             --------------------------   ------------------

SAS IP, Inc.                                382,749(3)                11.55%
123 East 17th Street
Cheyenne, Wyoming 15342

Minnesota Technology, Inc.                   190,194(4)                6.16%
111 Third Avenue South
Suite 400
Minneapolis, Minnesota 55401

Dr. Pradeep Sinha(2)                         171,456(5)                5.43%

Steven B. Liefschultz                        334,200(6)                10.49%
7630 West 78th Street Bloomington,
Minnesota 55401

Thomas J. Lucas                              126,310(7)                4.10%
6725 Colby Lane
Bloomfield Hills, Michigan 48239

Steven Mercil(2)                             50,000(8)                 1.61%

Richard L.Fast                             None Owned(9)                 *
400 Hill Place
111 Third Avenue South
Minneapolis, Minnesota 55401

John Sherbin II                            None Owned(10)                *
ANSYS, Inc.
275 Technology Drive
Canonsburg, PA 15317

Indranill Chakravarty (2)                   32,400 (11)                  *

Bernard J. Reeck                            183,128(12)                 5.99%
1232 Duluth Court
St. Paul, MN 55109

Total Executive Officers and Directors        816,743                  26.76%
   as a group (eight persons)


------------------------
*       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

<PAGE>


     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)  The address of Mr. Mercil, Mr. Chakravarty, and Dr. Sinha is 7640 West 78th
     Street Bloomington, Minnesota 55439.

(3)  Includes 95,230 shares subject to currently exercisable options and 166,487
     shares issuable upon exercise of warrants.

(4)  Includes 5,000 shares subject to currently exercisable options and 30,401
     shares issuable upon exercise of warrants.

(5)  Includes 20,651 shares issuable upon exercise of warrants and conversion
     privileges and 82,531shares subject to currently exercisable options.

(6)  Includes 29,600 shares issuable upon exercise of warrants and 105,000
     shares subject to currently exercisable options.

(7)  Includes 6,344 shares subject to currently exercisable options and 25,050
     shares issuable upon exercise of warrants.

(8)  Includes 50,000 shares subject to options currently exercisable.

(9)  Excludes the securities held by Minnesota Technology, Inc. of which Mr.
     Fast is the Business/Investment Service Specialist.

(10) Excludes the securities held by SAS IP, Inc. and ANSYS, Inc. Mr. Sherbin II
     is an officer of both companies.

(11) Includes 32,400 shares subject to options currently exercisable.

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


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;
Convertible VRDs in the aggregate principal amount of $69,848; 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, 9,031
are held by officers and major stockholders 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 warrants to purchase 26,000 shares of Common Stock at $15.00 per
share. Certain officers and directors of the Company hold an aggregate of
$23,773 of the Collateralized VRDs and have warrants to purchase 1,500 shares of
Common Stock.

<PAGE>


     The Convertible VRDs originated out of a loan transaction in 1991. The
holders of the Convertible VRDs have the right to convert the Convertible VRDs
into Common Stock at a conversion rate of either $5.00 per share, or in the
event that the Company completes an equity offering greater than $500,000, the
conversion rate is 1/2 of the offering price. On June 18, 1996, the Company
received waivers of conversion rights from the holders of the Convertible VRDs
and, in exchange, $46,914 of the Convertible VRDs held by Dr. John A. Swanson, a
director of the Company, was repaid from proceeds of the initial public offering
in September 1996. An aggregate of $22,933 of Convertible VRDs and accrued
interest of $3,625 were converted into 8,169 shares of Common Stock in June
1996.

     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 hold $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 repayment schedule for the
next three years on the Employee Interest-Bearing Notes. Over a three years
beginning in 1997, up to one-third of an employees' interest-bearing debt will
be repaid annually, if the employee agreed to convert 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 officers holding $83,918 of
employee interest-bearing debt elected this repayment and conversion option. The
1998 repayment installment is expected to be completed by March 31, 1998.

     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. 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 has (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. Both of the foregoing
expire two years after the final repayment of the SAS IP VRD. In September 1996
the SAS IP VRD was repaid out of proceeds from the Company's initial public
offering. SAS IP is a major stockholder of the Company.

     In February 1993, the Company issued a license to ANSYS, Inc. that is now
held by SAS IP. This license does not require the payment of future royalties.
The Company issued a significant number of prepaid sub-licenses to Concentra,
Inc. ("Concentra") (formerly Wisdom Systems, Inc./ICAD), such that it is
unlikely that Concentra will pay royalties to the Company in the foreseeable
future. In addition, the SAS IP VRD granted SAS IP certain rights with regard to
the Company's software should the Company default on any of its obligations
thereunder. In particular, SAS IP could have received a nonexclusive,
royalty-free license to use a majority of the Company's intellectual property,
including using such intellectual property to compete with the Company, in the
event of a default.

     Beginning in January 1994, the Company obtained bridge loans (the "1994
Bridge Loans") to finance the Company prior to the completion of a private
offering of shares of Common Stock. The 1994 Bridge Loans were evidenced by
demand promissory notes, the outstanding principal and accrued interest of which
became due and payable upon the demand of the holder thereof. The 1994 Bridge
Loans bore interest at the rate of ten percent (10%) per year, compounded
annually. The $56,000 of the aggregate principal amount of the 1994 Bridge Loans
that was still outstanding at the time of the Company's initial public offering,
was repaid in September 1996, shortly after receipt of the proceeds of the
offering.

     From June through November 1994, the Company offered and sold 114,707
shares of Common Stock at a price per share of $3.00 ("PPM 6"). From November
through December 1995, the Company offered and sold 96,805 shares of Common
Stock at a price per share of $4.50 ("PPM 7").

<PAGE>


     Beginning in December 1994, the Company offered a series of 10% convertible
debentures (the "Debentures"). On May 31, 1996, all of the Debentures converted
into 564,086 shares of Common Stock at a price per share of $3.00.

     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.

     On August 29, 1996 an officer of the Company made a bridge loan of $25,000.
This loan was evidenced by a promissory note and bore interest at the rate of
10.75%, compounded annually. There were no warrants to purchase Common Stock
issued in this bridge loan transaction. The loan and accrued interest was repaid
on September 17, 1996 out of proceeds from 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 1997
and participated in the foregoing transactions as follows:

<TABLE>
<CAPTION>

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

                                                          Employee
                                               Employee     Non-                                Debentures
                       Collater-   Convert-   Interest-   Interest                               (Before
                        alized       ible      Bearing     Bearing     SAS IP       1994          Conver-         1996
                         VRDs        VRDs       Notes       Notes        VRD       Bridge          sion)         Bridge
<S>                     <C>         <C>        <C>         <C>         <C>         <C>            <C>            <C>
Thomas J. Lucas           --          --          --          --          --          --          238,000(2)      25,000
Turhan F. Rahman         3,088        --        34,816      34,150        --          --             --             --
Robert S. Mars, Jr      12,192       4,395        --          --          --        61,000(1)        --           25,000
Minnesota
  Technology, Inc         --          --          --          --          --       150,000         54,000           --
SAS IP, Inc               --          --          --          --       279,657        --             --             --
Pradeep Sinha            3,088        --        49,102      48,163        --          --             --             --
TK Srinkanth             5,404        --        39,458      38,704        --          --             --             --
John A. Swanson           --        46,914        --          --          --        56,000           --           25,000
William J
  Birmingham              --          --          --          --          --          --             --           25,000

Totals                  23,773      51,310     123,377     121,016     279,657     267,000        292,000        100,000
</TABLE>

                                        Equity (Shares of Common Stock)
                       ---------------------------------------------------------


                                                                 Debentures
                                                                  (After
                            PPM 6                PPM 7           Conversion)
Robert S. Mars, Jr          17,789(1)(3)         2,250(1)          --
John A. Swanson             16,667                --               --
Thomas J. Lucas               --                 5,555(4)        89,371(2)
Minnesota Technology        34,293                --             20,500

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

(1) Of this amount, Mr. Mars converted $51,000 (plus accrued interest) into
17,789 shares of Common Stock in PPM 6 and the other $10,000 (plus accrued
interest) converted into 2,250 shares of Common Stock in PPM 7.

(2) In addition, Roger C. Lucas, the brother of Thomas J. Lucas, purchased
$25,000 of Debentures which converted into 9,118 shares of Common Stock.

<PAGE>


(3) Between December 1995 to February 1996, Mr. Mars gifted the 17,789 shares of
Common Stock to his seven children and their spouses.

(4) In addition, Cornelius Lucas, the father of Thomas J. Lucas, purchased
10,000 shares of Common Stock.


     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.

     Dr. Indranil Chakravarty owns five percent (5%) of IIS-XIX Asia Pacific
Pvt. Ltd. pursuant to the joint venture agreement between the Company, IIS
Infotech Ltd. and Dr. Chakravarty.

     In August, 1997, Dr. Pradeep Sinha was granted an option to purchase
25,000 shares of the Company's Common Stock as part of his compensation for
serving as Chief Executive Officer.

     In October, 1997, Mr. Steven Mercil was granted an option to purchase
50,000 shares of the Company's Common Stock as part of his compensation for
serving as Chief Executive Officer.

     In November 1997, the Company granted a stock option to Mr. Steven
Liefschultz, the Chairman of the Board and a director of the Company, to
purchase 100,000 shares of common stock at a price 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 contemplated work to be performed by Mr. Liefschultz. 25% of the shares
subject to Mr. Liefschultz's option vested immediately upon grant. 50% of the
shares subject to Mr. Liefschultz's option vest in equal installments on
November 30, 1997, December 31, 1997 and January 31, 1998. The remaining 25% of
the shares subject to Mr. Liefschultz's 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 financing or transactions.

     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.

     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.

     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. The Company filed a Form 8-K on November 26, 1997
relating to the following.

     The Company had received correspondence dated November 14, 1997 from the
NASDAQ Stock Market, Inc. which described the Company's failure to be in
compliance with the continuing listing requirements of the NASDAQ SmallCap
Market. The correspondence indicated that, absent demonstrated compliance with
such listing requirements, the Company's shares of common stock were subject to
delisting, effective with the close of business on November 28, 1997. In an
effort to maintain listing on the SmallCap Market the Company took the following
action:

     On November 25, 1997, the Company's Board of Directors approved the private
placement of up to 100,000 shares of the Company's common stock, $0.025 par
value, to members of the Company's Board of Directors at a price of $1.50 per
share (the "Private Placement"). The 1.50 per share purchase price is not
believed to be less than the current fair market value of such shares on
November 25,1997. Each of the members of the Board of Directors was offered to
purchase his proportional share of the Private Placement and, as of the date of
the Form-8K, Messrs. Steven Liefschultz and Bernard Reeck had agreed to
participate in the Private Placement in the amount of 50,000 shares ($75,000)
each.

<PAGE>


                              FINANCIAL STATEMENTS

                                 XOX CORPORATION

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<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, 1997 and 1996, 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,
1997 and 1996, and the results of its operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, certain conditions raise
substantial doubt concerning the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.



Minneapolis, Minnesota
February 27, 1998

<PAGE>


                                 XOX Corporation

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                                1997         1996
                                                             ----------   ----------
<S>                                                          <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents                                 $  687,039   $2,720,551
   Accounts receivable                                          279,888      193,976
   Prepaid expenses                                              22,719       90,957
                                                             ----------   ----------
Total current assets                                            989,646    3,005,484

Property and equipment:
   Furniture and fixtures                                        81,691       51,235
   Computer equipment                                           393,002      358,825
   Leasehold improvements                                          --         68,766
                                                             ----------   ----------
                                                                474,693      478,826
   Less accumulated depreciation                                363,889      345,190
                                                             ----------   ----------
                                                                110,804      133,636

License agreements, net of amortization of $62,292 in 1997
   and $4,792 in 1996                                            52,708      110,208

Investment in joint venture                                      80,532       41,020

Note receivable                                                    --         12,000
                                                             ----------   ----------
Total assets                                                 $1,233,690   $3,302,348
                                                             ==========   ==========
</TABLE>

<PAGE>


<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                           1997            1996
                                                       ------------    ------------
<S>                                                    <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                    $    184,005    $    209,395
   Accrued expenses                                         118,442          77,355
                                                       ------------    ------------
Total current liabilities                                   302,447         286,750

Deferred revenues                                           118,465          65,667

Long-term liabilities:
   Long-term debt--related parties                          632,005         734,451
   Accrued payroll taxes                                     25,783          34,163
   Other accrued liabilities                                 78,771          78,624

Stockholders' equity:
   Undesignated shares - 10,000,000
   Common Stock, $.025 par value:
     Authorized shares - 10,000,000--1997 and
       5,000,000--1996
     Issued and outstanding shares - 3,051,931--1997
       and 2,930,401--1996
                                                             76,298          73,260
   Additional paid-in capital                            12,677,471      12,236,142
   Accumulated deficit                                  (12,677,550)    (10,206,709)
                                                       ------------    ------------
Total stockholders' equity                                   76,219       2,102,693
                                                       ------------    ------------
Total liabilities and stockholders' equity             $  1,233,690    $  3,302,348
                                                       ============    ============
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>


                                 XOX Corporation

                            Statements of Operations


                                                 YEAR ENDED DECEMBER 31
                                                  1997           1996
                                              -----------    -----------
Net revenues:
   Customer support and consulting            $   543,683    $   367,567
   Product sales                                  360,791        289,247
   Royalties                                        9,561        149,691
                                              -----------    -----------
                                                  914,035        806,505
Operating expenses:
   Research and development                     1,346,675        926,115
   Selling, general and administrative          2,111,388      1,399,567
                                              -----------    -----------
                                                3,458,063      2,325,682
                                              -----------    -----------
Net loss from operations                       (2,544,028)    (1,519,177)

Equity in earnings of joint venture                39,512           --
Interest income                                    79,146         47,838
Interest expense                                  (45,471)      (196,061)
                                              -----------    -----------
Net loss                                      $(2,470,841)   $(1,667,400)
                                              ===========    ===========

Basic and diluted net loss per common share   $      (.83)   $      (.88)

Weighted average shares outstanding             2,960,053      1,900,316


SEE ACCOMPANYING NOTES.

<PAGE>


                                 XOX Corporation

                        Statement of Stockholders' Equity

<TABLE>
<CAPTION>
                                                            PREFERRED STOCK               COMMON STOCK
                                                          SHARES       AMOUNT         SHARES       AMOUNT
                                                          -------    ----------     ---------    ----------
<S>                                                       <C>        <C>            <C>          <C>
Balance December 31, 1995                                 160,000      $  4,000     1,243,884     $  31,097
   Conversion of convertible debentures and accrued
     interest into Common Stock                              --            --         564,086        14,102
   Fair value of warrant issued in connection with
     bridge loans                                            --            --            --            --
   Initial public offering of Common Stock, net of
     expenses                                                --            --         870,000        21,750
   Conversion of Preferred Stock into Common Stock       (160,000)       (4,000)      160,000         4,000
   Exercise of stock options                                 --            --          85,225         2,131
   Shares surrendered for exercise of stock options          --            --         (16,523)         (413)
   Sale of Common Stock                                      --            --          15,000           375
   Conversion of long-term debt and accrued interest
     into Common Stock                                       --            --           8,729           218
   Net loss                                                  --            --            --            --
                                                          -------    ----------     ---------    ----------
Balance at December 31, 1996                                 --            --       2,930,401        73,260
   Conversion of long-term debt and accrued interest
     into Common Stock                                       --            --          20,330           508
   Exercise of stock warrants                                --            --           1,200            30
   Fair value of stock options granted for services          --            --            --            --
   Sale of Common Stock                                      --            --         100,000         2,500
   Net loss                                                  --            --            --            --
                                                          -------    ----------     ---------    ----------
Balance at December 31, 1997                                 --      $     --       3,051,931    $   76,298
                                                          =======    ==========     =========    ==========
</TABLE>

[WIDE TABLE CONTINUED]

<TABLE>
<CAPTION>
                                                         ADDITIONAL                        TOTAL
                                                          PAID-IN       ACCUMULATED    STOCKHOLDERS'
                                                          CAPITAL         DEFICIT         EQUITY
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
Balance December 31, 1995                               $ 5,439,528    $ (8,539,309)   $ (3,064,684)
   Conversion of convertible debentures and accrued
     interest into Common Stock                           1,678,156            --         1,692,258
   Fair value of warrant issued in connection with
     bridge loans                                             5,000            --             5,000
   Initial public offering of Common Stock, net of
     expenses                                             4,975,555            --         4,997,305
   Conversion of Preferred Stock into Common Stock             --              --              --
   Exercise of stock options                                150,024            --           152,155
   Shares surrendered for exercise of stock options        (106,987)           --          (107,400)
   Sale of Common Stock                                      67,125            --            67,500
   Conversion of long-term debt and accrued interest
     into Common Stock                                       27,741            --            27,959
   Net loss                                                    --        (1,667,400)     (1,667,400)
                                                       ------------    ------------    ------------
Balance at December 31, 1996                             12,236,142     (10,206,709)      2,102,693
   Conversion of long-term debt and accrued interest
     into Common Stock                                       50,317            --            50,825
   Exercise of stock warrants                                 1,770            --             1,800
   Fair value of stock options granted for services         241,742            --           241,742
   Sale of Common Stock                                     147,500            --           150,000
   Net loss                                                    --        (2,470,841)     (2,470,841)
                                                       ------------    ------------    ------------
Balance at December 31, 1997                           $ 12,677,471    $(12,677,550)   $     76,219
                                                       ============    ============    ============
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>


                                 XOX Corporation

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                          1997          1996
                                                                      -----------    -----------
<S>                                                                   <C>            <C>
OPERATING ACTIVITIES
Net loss                                                              $(2,470,841)   $(1,667,400)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Depreciation                                                          18,699         32,934
     Amortization                                                          57,500          4,792
     Loss on disposal of property and equipment                            74,466           --
     Equity earnings of joint venture                                     (39,512)          --
     Fair value of options granted for service                            241,742           --
     Write-off of note receivable due to impairment                       161,000           --
     Noncash interest expense related to warrants                            --           30,120
     Changes in other operating assets and liabilities:
       Accounts receivable                                                (85,912)      (155,868)
       Prepaid expenses                                                    68,238        (89,552)
       Accounts payable                                                   (25,390)       127,681
       Accrued interest                                                      --          (70,599)
       Accrued liabilities                                                 32,854         82,541
       Deferred revenue                                                    52,798        (24,334)
                                                                      -----------    -----------
Net cash used in operating activities                                  (1,914,358)    (1,729,685)

INVESTING ACTIVITIES
Purchase of property and equipment                                        (70,333)       (77,134)
Purchase of license agreements                                               --         (115,000)
Investment in joint venture                                                  --          (41,020)
Advances under note receivable                                           (149,000)       (12,000)
                                                                      -----------    -----------
Net cash used in investing activities                                    (219,333)      (245,154)

FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock                                151,800      5,109,560
Proceeds from bridge loans                                                   --          375,000
Payments on bridge loans                                                     --         (431,000)
Payments on notes payable                                                 (51,621)      (388,088)
                                                                      -----------    -----------
Net cash provided by financing activities                                 100,179      4,665,472
                                                                      -----------    -----------

Net (decrease) increase in cash and cash equivalents                   (2,033,512)     2,690,633
Cash and cash equivalents at beginning of year                          2,720,551         29,918
                                                                      -----------    -----------
Cash and cash equivalents at end of year                              $   687,039    $ 2,720,551
                                                                      ===========    ===========

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Conversion of accrued interest and convertible debentures into
 Common Stock                                                         $      --      $ 1,692,258
Conversion of accrued interest and long-term debt into Common Stock   $    50,825    $    27,959
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>


                                 XOX Corporation

                          Notes to Financial Statements

                                December 31, 1997


1. BUSINESS ACTIVITY

XOX Corporation ("the Company") develops and sells computer software products
used for geometric processing. The Company was incorporated in September 1985.

Net losses since the Company's inception have resulted in an accumulated deficit
balance of approximately $12.7 million. The Company's ability to continue as a
going concern and the realization of its assets and orderly satisfaction of its
liabilities are dependent on future events, including obtaining additional funds
from outside sources and generating sufficient working capital from profitable
operations. The Company's actions, in order to continue as a going concern,
include funding efforts and increasing sales through marketing efforts.

The Company is in negotiations with third parties regarding sales of license
rights which management believes will provide sufficient cashflow to continue
operations. The financial statements have been prepared on a going-concern basis
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The financial statements, therefore, do not
include any adjustments relating to the recoverability and classification of
recorded assets amounts or the amounts of liabilities that might be necessary
should the Company be unable to continue as a going concern.

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.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenues from software sales are recognized upon delivery of the software.
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.

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. The Company is a 47.5% shareholder in the joint venture and accounts for
its investment under the equity method of accounting.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. Diluted earnings per share is not presented as the effect of
outstanding options and warrants is antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." This
statement establishes revenue recognition requirements for companies that sell
software for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of SOP 97-2 and has not determined the result,
if any, on the Company's financial position, results of operations or cash
flows.

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 1997
presentation.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


3. LONG-TERM DEBT

Maturities of the long-term debt to related parties totaling $632,005 and
$734,451 at December 31, 1997 and 1996, 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, 1997 and 1996, promissory notes issued to various
      directors, officers, stockholders and employees of the Company had
      outstanding principal balances of $150,351. The promissory notes bear
      interest at the prime rate plus 2% (10.50% at December 31, 1997 and 10.25%
      at December 31, 1996). 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 26,000 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.

   *  Prior to 1996, the Company had issued promissory notes to a group of
      stockholders, officers and directors which had an outstanding principal
      balance totaling $69,848. In 1996, the Company repaid $46,915 of these
      notes and the remaining $22,933 plus $3,625 of accrual interest, was
      converted to 8,164 shares of Common Stock.

   *  As of December 31, 1997 and 1996, promissory notes issued to certain
      directors of the Company had outstanding principal balances totaling
      $27,767. The promissory notes bear interest at the prime rate plus 2%
      (10.50% at December 31, 1997 and 10.25% at December 31, 1996). 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.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


3. LONG-TERM DEBT (CONTINUED)

   *  As of December 31, 1997 and 1996, promissory notes issued to the Company's
      employees for accrued wage concessions plus accrued interest, had
      outstanding principal balances totaling $453,887 and $556,333,
      respectively. Certain of these notes, totaling $229,245 and $280,866 at
      December 31, 1997 and 1996, respectively, bear interest at the prime rate
      plus 2% (10.50% at December 31, 1997 and 10.25% at December 31, 1996).
      Interest is payable quarterly. The remaining employee promissory notes,
      totaling $224,642 and $275,467 at December 31, 1997 and 1996,
      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 1997, for certain noteholders specifically electing a Company
      offered option, the Company converted one-third of their 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
      for these same individuals. The Company intends to convert and repay the
      remaining balances of the notes by one-half over the next two years for
      the individuals that elected this option.

   *  In 1996, the Company repaid a $279,657 promissory note from a related
      party. The promissory note accrued interest at the prime rate plus 2% and
      was secured by certain licensing and marketing rights in the Company's
      technology. The related party has an option to purchase 90,230 shares of
      Common Stock at an exercise price of $294,578 and a warrant to purchase
      161,204 shares of Common Stock at an exercise price of $5.68 per share as
      additional consideration for the loan. The option may only be exercised in
      full. The option and warrant both expire two years after the repayment of
      the promissory note.

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.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


4. CONVERTIBLE DEBENTURES

In 1995, the Company issued a total of $1,508,000 of convertible debentures.
Interest accrued at the rate of 10% per year from the date of issue. The holders
of the convertible debentures received warrants to purchase 150,800 shares of
Common Stock. The warrants are exercisable at $6.00 per share and remain
outstanding until May 31, 1998. In connection with the issuance of the
convertible debentures, the Company granted warrants to the selling agent to
purchase 44,800 shares Common Stock at $3.00 per share. The warrants are
exercisable over five years and were deemed to have a value of $74,300 which was
recorded as interest expense over the life of the debenture. In May 1996, the
convertible debentures and accrued interest of $184,258 were converted into
564,086 shares of Common Stock.

5. BRIDGE FINANCING

In 1994, the Company obtained $567,500 of bridge financing. At December 31,
1995, $56,000 remained outstanding. This amount was repaid in full during 1996.
The participants in the bridge financing received warrants to purchase 94,586
shares of Common Stock at a purchase price of $1.50 per share. The warrants are
exercisable for five years from the date of grant.

In March 1996, the Company issued a $100,000 note payable bearing interest at 8%
per year. In connection with the issuance of the note, the Company granted
warrants to purchase 2,222 shares of Common Stock at $4.50 per share exercisable
over five years. The note was repaid in December 1996.

In May 1996 and August 1996, the Company borrowed a total of $275,000 through a
bridge financing agreement. The notes incurred interest at 10% per year. In
connection with the notes, the Company issued warrants for the purchase of
12,500 shares of Common Stock. The warrants are exercisable at $6.00 and remain
outstanding for five years from the date of issuance. The bridge financing was
repaid in September 1996.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


6. STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

In September 1996, the Company sold 870,000 units in an initial public offering
from which the Company received $5,481,000 before deducting expenses. Each unit
sold in the initial public offering consisted of one share of Common Stock and
one Redeemable Warrant. Each Redeemable Warrant entitles the holder to purchase
one share of Common Stock at a price of $8.00. In March 1997, the Redeemable
Warrant could have been redeemed by the Company at a redemption price of $.01
per Redeemable Warrant if the closing bid price had equaled or exceeded (i)
$10.50 per unit or (ii) $9.50 per share of Common Stock for twenty consecutive
trading days. In connection with the initial public offering, the Company issued
a warrant to the underwriter for the purchase of 70,544 shares of Common Stock
at $9.10 per share. The warrants expire in 2000.

PREFERRED STOCK

Upon the conclusion of the Company's initial public offering, all 160,000
outstanding shares of Series A Convertible Preferred Stock were converted on a
one-for-one basis to Common Stock. The Company has authorized 5,000,000 shares
of preferred stock.

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, 1997:

                                                           NUMBER OF  CONVERSION
DESCRIPTIONS                                                  SHARES       PRICE
----------------------------------------------------------   -------------------

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   $1.56 (1)
                                                             -------
                                                             112,789
                                                             =======

(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 $1.56 was used which was
     the closing price of the Company's stock on December 31, 1997. All parties
     have the right to convert any unpaid principal or accrued interest at any
     time prior to payment.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


7. 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
                                                  RESERVED       OPTIONS    EXERCISE PRICE
                                                 FOR GRANT     OUTSTANDING    PER SHARE
                                                 -----------------------------------------
<S>                                                 <C>            <C>         <C>
Balance at December 31, 1995                        285,167        515,831     $3.91
  Granted                                          (223,200)       223,200      4.67
  Shares no longer reserved under the 1987 Plan     (61,967)             -        -
  Shares reserved under the 1996 Omnibus Plan       500,000              -        -
  Omnibus Plan options granted                      (37,000)        37,000      6.50
  Options exercised                                       -        (85,225)     1.79
  Options canceled                                        -           (730)     4.64
                                                 -----------  -------------
Balance at December 31, 1996                        463,000        690,076      4.57
  Shares reserved under the 1996 Omnibus Plan       500,000              -        -
  Options granted                                  (506,000)       506,000      3.20
  Options canceled                                  292,873       (292,873)     3.31
                                                 -----------  -------------
Balance at December 31, 1997                        749,873        903,203     $3.92
                                                 ===========  =============
</TABLE>

Outside the Plans, the Company has 203,370 options outstanding to purchase
shares of Common Stock with a weighted average exercise price of $3.31 per
share. At December 31, 1997 and December 31, 1996, respectively, 148,370 and
108,370 options outside the Plan were exercisable at weighted average exercise
prices of $3.87 and $4.87 per share, respectively.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


7. STOCK-BASED COMPENSATION (CONTINUED)

The following table summarizes information about Plan options outstanding at
December 31, 1997:

<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             1997           LIFE       EXERCISE PRICE         1997       EXERCISE PRICE
-------------------------- ------------------------------------------------ ---------------------------------
<S>                              <C>           <C>            <C>                 <C>           <C>
     $1.50 to $2.50              410,200       9 years        $  2.22             217,300       $  2.20
     $3.00 to $4.50              235,079       7 years           3.33              48,566          3.45
     $4.75 to $6.50              181,400       8 years           4.83              21,000          5.08
     $15.00                       76,524       3 years          15.00              76,524         15.00
                           -----------------                                -----------------
                                 903,203                         3.92             363,390       $  5.23
                           =================                                =================
</TABLE>

The number of options exercisable as of December 31, 1997, 1996 and 1995 were
363,390, 327,846 and 216,578, respectively at weighted average exercise prices
of $5.23, $4.50 and $4.18 per share, respectively.

The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $3.19 and $4.58 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 rate of 6.31%; no dividend yield; volatility
factor of the expected market price of the Company's common stock of 1.28; and a
weighted-average expected life of the option of 7 years.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


7. 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:

                                                          1997         1996
                                                      --------------------------

Pro forma net loss                                    $(3,004,311)  $(1,933,126)
Pro forma basic and diluted net loss per common share    $(1.01)      $(1.02)

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, 1995          508,006    $ 1.50 - $15.00  1997 - 2000
     Warrants granted                    980,742      4.50 -   9.10  1997 - 2001
                                      ----------
   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  1997 - 2001
                                      ==========

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


8. SALES CONTRACTS

The Company has entered into sales contracts with various customers. Each
agreement generally has a license fee and royalty or usage fees. Some of the
contracts are structured to include prepayment of license or royalty fees or
payments of minimum guarantees. Prepayments have been recorded as deferred
revenue in the financial statements.

9. INCOME TAXES

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $10,629,000 plus research and development tax credit carryforwards
of approximately $157,000. 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.

Components of deferred tax assets are as follows:

                                                        DECEMBER 31
                                                   1997              1996
                                             ----------------- -----------------
   Deferred tax assets:
     Net operating loss carryforwards            $4,252,000        $3,416,000
     Research and development credits               157,000           150,000
     Other accruals                                 102,000            25,000
                                             ----------------- -----------------
                                                  4,511,000         3,591,000
   Less valuation allowance                      (4,511,000)       (3,591,000)
                                             ----------------- -----------------
   Net deferred tax assets                       $        -        $        -
                                             ================= =================

10. 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 also leases other equipment
through operating leases which expire in future years.

<PAGE>


                                 XOX Corporation

                    Notes to Financial Statements (continued)


10. LEASES (CONTINUED)

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:
     1998                                               $45,548
     1999                                                36,879
     2000                                                35,464
                                                 -------------------
     Total                                             $117,891
                                                 ===================

Rent expense on operating leases for the years ended December 31, 1997 and 1996
was $67,135 and $71,980, respectively

11. 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 expire at various times through December 31, 1998. 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.

12. SIGNIFICANT CUSTOMERS AND FOREIGN SALES

The Company has a domestic customer that represents 19% and 22% of net revenues
for the years ended December 31, 1997 and 1996, respectively. In addition the
Company has foreign sales to one customer which represents 28% and 22% of net
revenues for the years ended December 31, 1997 and 1996, respectively. The
Company made additional foreign sales to other companies which represents
approximately 8% of 1997 net revenues.


<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 26, 1998                       XOX Corporation

                                          By /s/ Steven B. Mercil
                                             President, Chief Executive Officer,
                                             and 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 26, 1998.

                                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, President, Chief Executive Officer,
                                  and Chief Financial Officer

/s/  Steven B. Liefschultz
Steve Liefschultz.                Chairman of the Board

/s/  Dr. Pradeep Sinha
Dr. Pradeep Sinha                 Vice President of Research, Chief Technical
                                  Officer and Director

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

/s/  John M. Sherbin II
John Sherbin II                   Director

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

/s/  Richard L. Fast
Richard Fast                      Director

<PAGE>


                                 XOX CORPORATION
                                EXHIBIT INDEX TO
                FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
<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...........................  *

<PAGE>


Item No.             Title of Document                                  Method of Filing
--------             -----------------                                  ----------------


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
       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-Prakla
       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 12/19/98 ..........  Filed herewith electronically

24.1   Power of Attorney..............................................  Included in signature page of
                                                                        this Form 10-KSB
27.1   Financial Data Schedule for Year Ended December 31, 1997.......  Filed herewith electronically.
27.2   Financial Data Schedule for Fiscal Year Ended December 31, 1996
       and Quarters Ending March 31, 1996, June 30, 1996, and
       September 30, 1996.............................................  Filed herewith electronically.
27.3   Financial Data Schedule for Quarters Ended March 31, 1997, June
       30, 1997, and September 30, 1997...............................  Filed herewith electronically.
</TABLE>

<PAGE>

*  SEC File No. 333-05112-C, previously filed and incorporated by reference.

# 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.