SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 1999
                                       or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

    For the transition period from ____________ to ____________

                         Commission File Number 0-25036

                                 VIDEONICS, INC.
             (Exact name of Registrant as specified in its charter)

                California                                     77-0118151
         (State or other jurisdiction of                    (I.R.S. Employer
         incorporation or organization)                     Identification No.)

1370 Dell Ave., Campbell, California                              95008
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code:          (408) 866-8300

Securities registered pursuant to Section 12(b) of the Act:       None

Securities registered pursuant to Section 12(g) of the Act:

       Title of each class             Name of each exchange on which registered
       -------------------             -----------------------------------------
Common Stock, without par value               Nasdaq National Market System

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

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

       At March 1, 2000,  the  aggregate  market  value of Common  Stock held by
non-affiliates of the Registrant was approximately $6,002,364

       As of March 1, 2000,  there  were  5,881,847  shares of the  Registrant's
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

       Materials from the Registrant's  definitive  Proxy Statement  relating to
its 2000 Annual Meeting of  Shareholders  to be held on or about August 17, 2000
(the "Proxy  Statement")  have been  incorporated by reference into Part III, of
this Report.

<PAGE>

<TABLE>
                                 VIDEONICS, INC.

                                TABLE OF CONTENTS

<CAPTION>
PART I

<S>           <C>                                                                                          <C>
         ITEM 1.    BUSINESS.............................................................................. 3

         ITEM 2.    PROPERTIES............................................................................18

         ITEM 3.    LEGAL PROCEEDINGS.....................................................................18

         ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................................18

PART II

         ITEM 5.    MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................19

         ITEM 6.    SELECTED FINANCIAL DATA...............................................................20

         ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.22

         ITEM 7A.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK............................31

         ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................31

         ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..49

PART III

         ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.......................................49

         ITEM 11.   EXECUTIVE COMPENSATION................................................................49

         ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................49

         ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................49

PART IV

         ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................50
</TABLE>

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                                     PART I

       This Annual  Report on Form 10-K contains  forwarding-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,
particularly  statements  regarding market  opportunities,  market share growth,
competitive  growth,  new  product   introductions,   success  of  research  and
development,  research and  development  expenses,  customer  acceptance  of new
products,  gross margin and selling,  general and administrative expenses. These
forward-looking  statements involve risks and uncertainties,  and the cautionary
statements  set forth below identify  important  factors that could cause actual
results to differ  materially  form those  predicted in any such forward looking
statements.  Such factors  include,  but are not limited to, adverse  changes in
general economic  conditions,  including adverse changes in the specific markets
for the Company's products,  adverse business  conditions,  decreased or lack of
growth in the market for video  post-production  equipment,  adverse  changes in
customer  order  patterns,  increased  competition,  lack of  acceptance  of new
products, pricing pressures, lack of success in technological advancement, risks
associated with foreign  operations,  and other factors,  including those listed
below.

ITEM 1. BUSINESS

       Videonics,   Inc.,  a  California  corporation  organized  in  1986  (the
"Company" or "Videonics"), is a leader in the design, development,  manufacture,
and sale of affordable,  high quality,  real time, digital video post-production
equipment.  The Company's  products process,  edit, and mix raw video footage as
well as enhance such footage with audio, special effects, and titles,  resulting
in professional quality video production. Videonics equipment is used throughout
the world in the  production  of videos.  As of  December  31,  1999,  more than
550,000 units of Videonics equipment have been sold worldwide.

       Videonics'    products     incorporate     general-purpose     computers,
special-purpose   microprocessor-based   systems,   and   internally   developed
application   specific   integrated   circuits  ("ASICs")  with  digital  signal
processing ("DSP") and other  capabilities.  The Company also implements much of
its  products'   functionality  in  software.  The  Company  believes  that  its
proprietary  technologies provide the infrastructure to develop a broad array of
video  post-production  solutions.  By  reducing  the  cost of high  performance
post-production  equipment,  Videonics  is making  post-production  capabilities
available to an expanding market of potential users.

The Video Production Process

       The video  production  process  consists of three steps:  pre-production,
production, and post-production.

       Pre-production  is the  planning of a video:  writing a script,  creating
storyboards   (sketches  which  show  how  a  scene  will  look  and  describing
transitions),  planning shots,  budgeting,  obtaining  props and locations,  and
scheduling.  Production  is the  shooting of the video  scenes,

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with or without sound.  Post-production  involves assembling and combining video
footage with titles,  effects,  and audio elements to create a master tape ready
for distribution.

       The need for video  post-production  processing arises from the fact that
it is very  difficult  to make  an  original  recording  serve  as the  finished
production.  Doing so would  require  that scenes be shot in the final order and
that no errors occur during the original recording session.  Each time a mistake
is made,  the user would have to position  the tape  precisely at the end of the
previous scene and reshoot the desired scene perfectly.  Titles and effects must
be  planned  ahead of time and  inserted  exactly  at the  appropriate  moments,
working from a complete,  thorough script. Since this scenario is impractical in
most  situations,  the user instead  shoots raw footage and  assembles the final
video  production  by using  post-production  equipment  to arrange  the desired
scenes and add effects,  titles,  and other  improvements.  For video makers who
desire a polished product, the post-production process is essential.

       Generally, post-production includes five major elements. Video editing is
the process of removing,  rearranging,  and recording  video footage from one or
more video sources onto a single video output medium  (e.g.,  videotape).  Video
mixing allows video from  multiple  sources to be combined in many ways beyond a
simple cut or fade.  Transition  effects,  such as dissolves or fades (one video
scene fades away as another appears), wipes and slides (a moving boundary sweeps
in new video as the old video is pushed away),  and compression  effects (videos
shrink  away or expand to fill the  screen)  are all used as  "fillers"  between
scenes.  Video special effects manipulate video images to add dramatic elements.
Special  effects can be used to modify the video  material,  changing its color,
flipping the image,  and adding picture  warping  effects to achieve a different
mood or appearance such as those created by a picture within a picture. A chroma
key helps to  superimpose  one image over another  (e.g.,  enabling a TV weather
forecaster to stand in front of an animated  weather map).  Video titling is the
process of adding text,  special  characters,  and basic graphic elements to the
video. Titles can be superimposed on the video or on colored backgrounds. Titles
help tell the story, identify people,  places, and objects, add credits, and the
like. A variety of colors,  patterns,  fonts, sizes, and effects (e.g.,  scrolls
and crawls) can be used. Audio mixing is the process of combining  various sound
elements  such as native sound (the  original  sound  recorded  with the video),
narration,  music, and sound effects (e.g., a crashing window, a lion's roar, or
an explosion).

The Markets For Video Post-Production Equipment

       The Company believes that the market for video post-production  equipment
generally  can be  separated  into  five  segments,  categorized  by the  users'
requirements  and  individual  expertise:  videographer;  business and industry;
videophile;  education;  and  broadcast  professional.  These  markets for video
post-production  equipment  cover a wide  range  of  users,  price  sensitivity,
expertise levels, applications, demographics, and objectives.

       Videographer.   Videographers   are  typically   full-time  or  part-time
entrepreneurs  producing  videotapes  on a  commercial  basis.  They may  record
special events such as weddings,  birthdays,  sporting  competitions,  religious
ceremonies, and other celebrations.  Videographers also perform substantial work
on a commercial  basis for business and industry.  For instance,  a videographer
may produce videos for customer  instruction  in the use of a product,  create a
"home" or "commercial  property" tour video for small residential and commercial
real estate  brokerage  concerns,  or make videos of vacation  destinations  for
travel

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agents.  Videographers  want their videos to have the same  appearance  as those
produced by broadcast professionals.

       Business and Industry.  The business and industry  category includes both
internal and external  production  facilities  producing  video for  government,
corporate,  institutional, and other large organizations. An internal user could
include  the  in-house  production  department  of  a  large  corporation  or  a
charitable  organization.  The  external  user  could  be an  independent  video
production  facility marketing its expertise to large institutions which lack an
in-house video production  department.  A typical  corporate user in this market
might produce videos for  instruction in the use of the  corporation's  products
(e.g., how to install and use a cellular telephone or a new computer),  employee
training  manuals,  sales or promotional  aids for product  presentation,  video
informational brochures, or video newsletters from management to shareholders or
employees.

       Videophile.  The  videophile  is a video  enthusiast  or  hobbyist  whose
interest has led to the adoption of new video  technology  for personal use. The
videophile  generally shoots a video for personal  non-commercial  purposes with
the intention of editing raw video footage into a finished video production. The
videophile's  camcorders,  VCRs,  and editing  equipment are affordable and high
quality.  Occasionally,  videophiles  capitalize on their  growing  expertise by
becoming videographers.  A typical videophile may belong to a "video club" along
with other  video  making  enthusiasts  or merely  want to record  entertainment
events and historical milestones for family and friends.  Videophiles may create
a tape library in several different video formats and may want an easy method to
consolidate and edit tapes into a single,  standard format.  Videophiles require
affordable  post-production equipment that works with different tape formats and
is easy to use.

       Education.  The education market consists of the audio-visual departments
of educational  institutions,  which use video  internally to serve the needs of
the  institution  as well as teach students the art of video  production.  While
some uses in an  educational  setting may be no different than those of business
and industry, other uses include recording sporting events to improve a player's
performance,  recording a debate or dramatic  performance  to teach  speaking or
other acting skills,  and replacing,  as in the case of a video yearbook,  still
photography with video.

       Broadcast Professional.  The broadcast professional is the most demanding
video  post-production  equipment user,  requiring equipment to meet the highest
quality  broadcast  standards  in  order to  create  finished  commercial  video
productions.  Industry  analysts have  estimated that there are more than 16,000
worldwide sites for equipment in this user category,  including  studio,  cable,
network,  and television  broadcasters  as well as  independent  post-production
facilities.  Users in this market are generally less  price-sensitive than those
in other  categories,  frequently  paying  from  $100,000  to  $2,000,000  for a
complete suite of video  post-production  equipment.  This specialized equipment
also requires a large investment in user training and studio facilities.

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The Videonics Solution

       The  Company's  solution is to design,  develop,  manufacture  and market
products that incorporate  advanced  proprietary  digital video  technologies to
significantly reduce the cost and difficulty of creating high quality video. The
Company's  current  product  line  provides  solutions  for  each  stage  of the
post-production   process.   The   majority  of  the   Company's   products  are
single-purpose microprocessor-based systems that utilize DSP algorithms in ASICs
and  proprietary  software,  all  developed  by the  Company.  The Company  also
provides  post-production  solutions which operate on general-purpose  computers
and local area networks.  These  solutions are generally  categorized as desktop
video.  Company-developed  software,  incorporated  in each  Videonics  product,
provides  easy-to-use  implementations  of sophisticated  video  post-production
processes.  By using proprietary ASICs and software to replace more costly video
post-production equipment, the Company has been able to significantly reduce the
cost of its digital video post-production products.

Strategy

       Videonics'  objective is to maintain and expand its position in the video
post-production  market.  The Company has implemented  this strategy by means of
its acquisitions,  as well as internally developed  technologies,  products, and
marketing  programs.  By reducing the cost of high  performance  post-production
equipment,  the  Company  makes  post-production  capabilities  available  to an
expanding   market  of  potential  users.   The  Company's   business   strategy
incorporates the following elements:

       Expand  Proprietary  Technology  Base.  The  Company  believes  that  its
proprietary   digital  video  hardware  and  software   technology   provides  a
competitive  advantage in achieving  the  development  of a broad array of video
post-production solutions. The Company intends to continue to devote significant
resources to expanding its library of circuits, proprietary ASICs and associated
software to develop  products that  incorporate  higher  levels of  performance,
functionality, and integration.

       Expand Worldwide Distribution. The Company intends to further develop its
United States market by targeting  specific  vertical  distribution  channels to
reach  the   broadcast   professional   and  business   and  industry   markets.
Internationally,  the Company is expanding its distribution channels in emerging
markets.  The Company  believes  that  distributing  products  through  domestic
dealers and  international  wholesalers is a  cost-effective  method of reaching
potential product users.

       Heighten Brand Name Awareness.  The Company  believes that its brand name
awareness will remain an important factor in the distribution channels where its
products are sold,  and it takes steps to heighten such  recognition by selected
advertising,  attendance  at industry  trade shows,  and  maintaining  a focused
public relations campaign.

       Leverage Manufacturing and Distribution. The Company's strategy is to use
its resources in a cost-effective manner.  Wherever practical,  the Company uses
third party services for activities such as manufacturing  and accessing certain
sales channels.  The Company contracts with third party manufacturers located in
Mexico for most product manufacturing.

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Technology

       Digital technology has been incorporated in all of the Company's products
developed in the 1990s.  This technology is principally  implemented by means of
Company-developed  DSP ASICs and software.  All of the Company's ASICs have been
developed  by the  Company's  engineers or contract  employees.  The software is
proprietary  and has been  developed  by the  Company's  software  engineers  or
contract employees.

       The  Company's   engineers  employ  proprietary   hardware  and  software
libraries in conjunction  with other  advances in technology,  such as fast turn
gate  arrays and VHDL  design  methodology,  to  prototype  new  products  in an
efficient manner.  One measure of the growth in the technical  sophistication of
the Company's  products is illustrated below in terms of the increasing  numbers
of  complex  gate  arrays in its  proprietary  ASICs and of lines of code in its
proprietary software algorithms in select products.

           PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS

                            Approximate           Approximate Lines      Year
      Product             ASIC Gate Count         of Software Code      Shipped
      -------             ---------------         ----------------      -------

Sound Effects Mixer                0                   1,000             1991
Thumbs Up Video Editor         4,000                   6,000             1992
Video TitleMaker 2000         20,000                  25,000             1994
Digital Video Mixer           62,000                  15,000             1994
Edit Suite                     8,000                  28,000             1995
PowerScript                  142,000                 100,000             1996
Effetto Pronto (1)           250,000                 600,000             1997
MXPro                        118,000                 107,000             1998
MXProDV                      150,000                 137,000             1999

(1) Beta version shipped in 1997 with production version shipped in 1998.

Selected Products

       The Company offers a broad range of digital video products, each designed
to meet specific video post-production needs. The products work with most of the
commonly used broadcast  standards,  videotape formats, and with most brands and
models of video equipment. The Company's products range in price from under $179
for certain software products to more than $6,000 for certain hardware products.

Videographer

       Digital Video Mixer.  The Digital Video Mixer,  first shipped in February
1994,  provides a user with a portable video  production  facility.  The Digital
Video  Mixer has four video  inputs and  offers  over 200  effects at any of ten
speeds.    These   effects   include   fades,    wipes,    slides,    dissolves,
picture-in-picture,  flips,  luminance  key,  color  generation,  zooms,  freeze
frames,  color and negative  reversals,  rolls,  the ability to superimpose  one
video  image  over  another,  and  a  split  screen.  The  Digital  Video  Mixer
incorporates  four ASICs,  including an ASIC with a time base corrector  ("TBC")
feature that allows it to execute video mixing. A

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reduced view of all four video inputs on a single  "preview"  monitor  shows the
action of all four sources without the need for additional monitors. The Digital
Video Mixer offers a  "picture-in-picture"  which allows two moving video images
to be placed on the screen at once. A unique "compose"  function allows the user
to create a complex  image  made up of any number of still  images  and  colored
rectangles,  along with a moving  video or solid color  background.  The "chroma
key"  feature  enables  the  user  to  shoot a  subject  against  a solid  color
background and replace that color with a separate video source. This is the same
technique  used to place a weather  forecaster  in front of a weather  map.  The
product accepts  S-video as well as composite  video signals.  The Digital Video
Mixer has won numerous awards,  including the Outstanding New Editing  Equipment
Award for 1994 by Video Magazine, the European Video Editing Product of The Year
for  1994-1995 by the European  Video Awards  Panel,  the Video  Post-Production
Product of The Year  1994-1995 by Video Camera  Magazine U.K, and the 1997 Audio
Video International Product of The Year Award for Special Effects Generator. The
Digital Video Mixer has a U.S. suggested retail price of $999.

       MXPro.  The MXPro  Digital  Video Mixer  first  shipped in April of 1998.
Designed from the ground up, the MXPro is the only  4-input,  10-bit video mixer
in its price category.  Over 500 different effects,  including stars, hearts and
diamonds,  hard  edges,  soft  edges,  colored  borders  and  shadows  provide a
multitude of options for the creative video professional. Thirty transitions can
be placed in a  user-definable  menu for easy access.  Basic,  trailing  effects
shapes,  edges and the  user-definable  effects are  organized  into  transition
"banks" and can be easily  accessed with the press of one button.  MXPro's built
in color  correction  capability  and TBC  eliminate  the  need  for  dedicated,
specialized equipment providing a similar function.  Color correction parameters
can  be  selected   separately  for  each  channel  of  video.  MXPro  boasts  a
signal-to-noise  ratio of  greater  than 60db and  bandwidth  of  5.5mhz.  MXPro
incorporates  upgradeable  architecture  to support  the future  addition  of DV
(Digital Video) inputs and outputs. MXPro has won several awards including: Best
"Stand Alone Special  Effects  Generator" from VideoMaker and the 1998 A/V Video
Magazine Platinum Award. The MXPro has a U.S. suggested retail price of $1,799.

       MXProDV.  The MXProDV  Digital  Video Mixer is a real-time DV  production
tool that preserves the DV signal from start to finish.  The MXProDV  combines a
switcher, mixer, frame synchronizer,  TBC (Time Base Corrector), special effects
generator,  10-bit A to D converter and Firewire/iLink technology all in one. It
offers over 500 real-time transitions and effects to mix from both DV and analog
sources.  The  flexibility of MXProDV's  feature set makes it the ideal solution
for live  studio  productions  and  presentations,  broadcast  streaming  on the
Internet,  and the perfect  companion for a non-linear  editing system.  MXProDV
supports and mixes both DV (via IEEE  1394/FireWire/i.LINK) and analog video and
audio.  The 500 digital  effects  include  dissolves,  transitions,  shape wipes
(circles,  hearts, etc.) with soft edges, colored borders, drop shadows,  chroma
key, picture-in-picture,  negative, flip, mosaic, and many other effects. Mixing
can be done between four sources at a time from a  combination  of ten different
video inputs  including 2 DV, 4 S-video,  and 4 composite.  MXProDV supports the
enhanced audio mixing  capability of the DV format including 32kHz 4 channel and
48kHz 2 channel digital audio sampling with a multitude of mixing  options.  The
MXProDV was awarded  the 1999 Best  Stand-Alone  Special  Effects  Generator  by
VideoMaker Magazine. MXProDV has a U.S. suggested retail price of $2,495.

       Video  TitleMaker  3000.  First  shipped  in  September  1996,  the Video
TitleMaker  3000 is a step up from the TitleMaker  2000.  Its two-piece  design,
with a  separate  PC-style  keyboard,

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makes it easier to type in text.  User  productivity  is also  improved with the
superior  keyboard  and  more  than  three  times  the  processing  speed of the
TitleMaker  2000.  The  product  offers  more  than 200  font-size  combinations
(compared  to 92 in  TitleMaker  2000) and  doubles the amount of user memory to
store over  16,000  characters.  A  clock/calendar  function  allows the user to
display the time and date and permits the user to  automatically  trigger a page
of titles at a specified time and date, and to repeat that action  periodically.
The product  features the same video quality and  resolution  as the  TitleMaker
2000 and includes its other features: 1,000,000 colors; fades, rolls and crawls;
bold,  shadow,  and  outline;  ability to  superimpose  over video or colored or
patterned backgrounds;  full set of accented and international  characters;  and
storage as  projects.  The Video  TitleMaker  3000  received  the 1997  Consumer
Electronics Show Innovations Award.  TitleMaker 3000 has a U.S. suggested retail
price of $799 and is available in other language versions.

       Personal  TitleMaker.  First  shipped  in  November  1997,  the  Personal
TitleMaker is a character generator primarily aimed at the camcorder enthusiasts
looking for an entry-level  titler. The Personal  TitleMaker offers its users: a
choice  of seven  high-resolution  fonts;  over  1,000,000  colors  for  titles,
backgrounds and borders;  fades,  rolls and crawls;  ability to superimpose over
video  or  colored  or   patterned   backgrounds;   full  set  of  accented  and
international  characters and a GPI (General  Purpose  Interface)  trigger input
allows remote triggering of titles from external controllers, such as Videonics'
Thumbs Up editor and Edit Suite. Personal TitleMaker has a U.S. suggested retail
price of $399. In 1998,  Personal  TitleMaker won the Best Production  Accessory
Award from Camcorder User Magazine.

       MediaMotion.  MediaMotion is a  machine-control  plug-in software product
for non-linear  (disk-based) video editing applications including Adobe Premiere
 .  MediaMotion  adds the  ability  to  control  VCRs,  camcorders  and other GPI
triggerable devices from inside Adobe Premiere and Ulead's MediaStudio Pro. With
MediaMotion, a user can batch-digitize select portions of source tapes, allowing
unattended  recording to disk.  This saves time and disk space.  MediaMotion 3.0
won the  VideoMaker  1998  Accessory  Product of the Year award.  MediaMotion is
available for Windows operating systems and has a U.S. suggested retail price of
$179.

       Python.  First  shipped in  November  1997,  Python  captures,  digitally
compresses,  and plays back  full-motion  video from any video source  including
camcorders,  VCRs, and cameras.  Python is an external MPEG video capture device
which allows PC and laptop users to send video e-mails,  add streaming  video to
Web pages, and add full-motion video to multimedia presentations. Python creates
highly compressed video files in real time, using the  industry-standard  MPEG-1
format. Python also captures  high-resolution JPEG still pictures.  Software for
viewing  MPEG video and JPEG still  pictures  is widely  available  on most PCs.
Python has a U.S. suggested retail price of $199.

Broadcast

Effetto Pronto.  Effetto Pronto,  first shipped in 1997,  consists of Effetto, a
QuickTime  based  compositing   software   component  and  Pronto,  a  dedicated
resolution independent PCI hardware accelerator card. The Pronto PCI accelerator
card can  process  almost  one  million  pixels  of film,  video,  graphics  and
character  generator elements in real-time.  Effetto Pronto enables  significant
increases in productivity  and frees the creative  process by allowing  multiple
iterations, rapid re-edits and increased rendering speeds. Effetto Pronto offers

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virtually  unlimited  creative  control,  with effects and functions  previously
unavailable in an integrated compositing package. Features include:  chrominance
and luminance  keying;  a full  complement of special  effects;  a  professional
character  generator with complete  animation control over every letter of text,
the ability to design in true three-dimensional workspace, instant feedback on a
video monitor and support for certain  third-party Adobe After Effects plug-ins.
In July of 1999,  software version 2.0 was released adding an Animatable  Camera
function, Dynamic Effects Caching and a real-time chroma-keyer with edge control
and spill  supression.  Effetto  Pronto has won several awards  including:  1998
Video Systems Vanguard Award,  Digital  Producer  Magazine Best product of 1998,
1998 A/V Video Magazine  Platinum  Award in the  Compositing/DVE  category,  Top
Tools of 1998 from  Interactivity  Magazine  and the Editors  Choice  Award from
Videography Magazine for NAB'97. The Videonics' Effetto Pronto system has a U.S.
suggested retail price of $1,999.

       PowerScript. First shipped in September 1996, PowerScript is a standalone
character generator that generates images,  characters, and graphics internally,
without the aid of an external computer. Rotation, sizing, stretching, outlines,
color,  transparency,  and other  advanced  functions are imaged by its internal
PostScript engine. It displays high quality (10-bit digital video)  anti-aliased
titles and offers the  character,  graphics  display,  and  formatting  features
supported  by the  PostScript  display  technology.  Two  high-end  versions  of
PowerScript were added in 1997;  PowerScript  Studio has composite and Y/C video
inputs and outputs while  PowerScript  Studio  Component offers analog component
inputs and outputs,  in addition to composite and Y/C. Both models are available
in  PAL  (Phase  Alternating  Line)  and  NTSC  (National  Television  Standards
Committee)  versions.  In 1998,  two  models  of  PowerScript  Studio  4000 were
introduced and shipped.  These models include  enhanced version 4.0 software and
come bundled with  PowerScript  Communicator,  a Windows based software  product
that  includes  control  and  scheduling  of up to 10  PowerScript  from  remote
locations. While PowerScript is a standalone product, it also includes extensive
networking  capabilities that enables users to connect the product to a separate
computer or computer network. It supports  industry-standard  Internet protocols
(TCP/IP,  FTP,  PPP) and accepts  serial or Ethernet  connections.  These enable
desktop computers,  using standard software and hardware,  to transfer projects,
fonts, graphics,  and other files.  PowerScript images EPS-format graphic files,
created using standard graphic  applications like Adobe Illustrator,  CorelDraw,
and Adobe Photoshop, on standard platforms,  including Macintosh,  Windows, DOS,
UNIX, and Amiga. A wide range of additional  features include expandable PC Card
(PCMCIA)  storage,  TBC,  user-definable  styles,  roll  and  crawl,  transition
effects,  clock/calendar,  GPI  trigger,  and  video  test  patterns.  In  1999,
PowerScript  4000 Pro was added to the  PowerScript  product line. The Videonics
PowerScript  product line has a U.S.  suggested  retail price range of $3,000 to
$6,000.

Marketing

       The  primary  goal of the  Company's  marketing  efforts  is to  increase
awareness of the Company's  products and technology and of their advantages over
competing  products or technologies.  These objectives are accomplished  through
advertising programs directed at users of post-production  equipment, a targeted
public relations program,  trade show exhibitions,  and educational  programs in
video making.

       The Company  advertises  principally  in magazines  directed at broadcast
professionals,  videographers,  and video producers in the business, industrial,
and educational segments of

                                       10

<PAGE>

the  market.   Videonics  has  received  editorial  mention  in  many  of  these
publications.  The Company  exhibited  its products at 11 different  U.S.  trade
shows during 1999,  including the  International  Broadcasters  Convention,  the
National Association of Broadcasters, and INFOCOMM.

       The Company's  standalone  products carry a standard two-year warranty on
both parts and labor. Each of the Company's computer based products carry either
a two-year  warranty on hardware and a 90 day warranty on software or a one-year
warranty on both hardware and software.  In 1995, the Company added a ProService
feature that  enabled  customers to receive  their  repaired  units within 48-72
hours in exchange for payment of rush  charges.  The Company's  HelpLine  allows
customers  to talk  directly  with  support  personnel  equipped  to answer user
questions.  This support is free to the Company's  customers except for the cost
of the phone call. The Company believes that it obtains  valuable  feedback from
offering this service, which it then uses in developing new products.

Sales

       Domestic Sales. The Company  wholesales its products in the United States
through a direct  sales  organization,  supported by  independent  manufacturers
representative  organizations.  In 1999, 1998, and 1997, respectively,  sales in
the United States accounted for approximately 71%, 64%, and 67% of the Company's
total  revenues.  The Company sells to a variety of sales channels which in turn
sell to end-users.  The Company's  sales channels  include Value Added Resellers
(VARs) who  specialize  in selling to the  broadcast  market,  direct mail order
businesses,  audio/visual  specialty stores, camera and video shops,  industrial
dealers  which  service  business  and  industry,  catalogs,  and  certain  mass
merchants.   The  majority  of  the  Company's  sales  channels   specialize  in
audio-visual or video products and have product knowledgeable sales personnel.

       International  Sales. The Company has addressed the international  market
opportunity  by selling its  products  through  wholesale  distributors  and its
German subsidiary, which service 78 different countries, and by selling selected
products to  international  private label  customers.  In 1999,  1998, and 1997,
respectively,  sales outside the United States accounted for approximately  29%,
36%,  and 33% of the  Company's  total  revenues As of December  31,  1999,  the
Company had three  employees who service and support its  international  private
label customers and country specific distributors.  The Company's  international
distributors  also sell the Company's  products under the Videonics  brand name,
through  channels  similar  to those used by the  Company in the United  States.
These  distributors  also  provide  dealers  with  marketing  programs,  such as
advertising  and public  relations,  as well as customer  service and  technical
support.

       Protectionist  trade  legislation  in either the  United  States or other
countries, such as a change in the current tariff structures,  export compliance
laws or other trade policies,  could adversely  affect the Company's  ability to
sell in  international  markets.  Furthermore,  revenues from outside the United
States are subject to inherent  risks  related  thereto,  including  the general
economic and political  conditions  in each  country.  There can be no assurance
that the economic  crisis and currency  issues  currently  being  experienced in
certain parts of Asia and South America will not have a material  adverse effect
on the Company's revenue or operating results in the future.

                                       11

<PAGE>

Sales made by the Company  outside the United States are priced in U.S.  dollars
and are, therefore, not subject to currency exchange fluctuations. The Company's
primary  exposure  to  changes  in  exchange  rates  is  related  to its  German
subsidiary  and  changes  in the German  mark.  In 1999,  1998 and 1997  foreign
currency  fluctuations did not have a material affect on the Company's operating
results. In September of 1999, the Company sold its German subsidiary, Videonics
Vertrieb Deutschland GmbH.

       Distribution  channels.  The Company sells to three categories of buyers,
both  internationally  and domestically:  videographer,  broadcast,  and desktop
video.

       Videographer  products  may be  defined  as free  standing,  easy to use,
inexpensive  products  that address a particular  need,  such as video mixing or
titling.   These  products  are  sold  through  direct  mail  order  businesses,
e-commerce sites, audio/visual retailers, and industrial dealers.

       Broadcast   products  may  be  defined  as  those  which   operate  in  a
professional  edit studio and may be used in  conjunction  with a master control
panel or a switcher,  or may also operate as stand alone units. These units must
comply with industry technical  specifications for video quality.  An example of
this type of product is the PowerScript Character Generator.  Broadcast products
are sold  principally  through VARs and system houses that service the broadcast
industry.

       Desktop video  products,  such as Effetto Pronto,  use a  general-purpose
computer as their  control  element.  These  products  are sold through VARs and
retailers  who  may  also  sell   general-purpose   computers,   software,   and
peripherals.

       Localized  marketing.  The Company works with its private label customers
and international distributors to provide extensive support by adapting both its
products and  accompanying  publications  for the local country of distribution.
Promotional  materials,  such as brochures,  are produced in the local language.
Universal  symbols,  rather than language  specific text, are used for many user
interface elements such as on-screen displays. All products are designed to meet
most  local  regulatory  standards.   In  Europe,  for  example,   products  are
manufactured for the PAL television standard. The Company's products are further
designed to support local languages.  The Company's character generator products
include  special  characters  and accents to support  French,  German,  Italian,
Spanish, Dutch, Russian,  Hungarian,  Polish, Greek, Romanian,  Turkish, and the
Scandinavian   languages.   The  Company's  product   architecture   facilitates
additional  localization by substituting one read only memory ("ROM")  component
for another  (e.g.,  a  Czech/Slovak  ROM for an English  ROM) to become a local
product.

       Private  label   relationships.   The  Company  believes  that  strategic
alliances  are  essential  to  compete  successfully  in certain  large  foreign
markets,  particularly  Japan. The Company therefore seeks to distribute through
select private label  relationships  with well-known  electronics  manufacturers
having  highly  developed  distribution  channels  and  substantial  brand  name
recognition in the country of distribution. This strategy enables the Company to
concentrate  its  efforts on  technology  and product  development,  rather than
making the heavy  financial and time commitment  required to build  distribution
channels in these difficult-to-access markets. The Company's first private label
relationship  in Japan  was with  Matsushita

                                       12

<PAGE>

Electrical  Industrial Co., Ltd.  ("Matsushita.")  Matsushita purchased a custom
version of the Company's  EditMaker product that was manufactured by the Company
and is sold under the Panasonic brand name.  While the Company has  discontinued
this product,  it has an ongoing support  obligation to Matsushita.  The Company
currently  manufactures the Sony Titler, a Japanese language character generator
for sale in Japan known as the Sony XV-J1000. Designed to Sony specifications by
the Company's product development team in Campbell,  California, the Sony Titler
is manufactured  by the Company and shipped to Sony from the United States.  The
Sony Titler  includes a front-end  processor,  which  translates from a standard
keyboard into 6,930 unique Kanji and Kana  (Japanese)  characters for subsequent
video display (up to 110,880 different  font/size  character  variations).  This
software-intensive  product  provides  all  the  functionality  of  its  English
language  counterpart,  plus some additional  functions required by the Japanese
language. Such features include the ability to present text (titles) in either a
horizontal  or a  vertical  format.  The  Company's  private  label  sales  have
decreased  significantly over the past 3 years and represent less than 1 percent
of revenues for 1999.

       For  1998 and  1997,  no one  customer  accounted  for  more  than 10% of
revenues.  During 1999 sales to B&H Photo  accounted for 13% of total  revenues.
Any termination by a significant  customer of its relationship  with the Company
or material  reduction in the amount of business  such a customer  does with the
Company could  materially  adversely  effect the Company's  business,  financial
condition  or  operating  results.  Also,  see Note 11 of Notes to  Consolidated
Financial  Statements for information  concerning sales to foreign customers and
industry segments.

       Backlog.  The Company typically  operates with a small amount of backlog.
Accordingly,  the Company generally does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter.  Any  significant  weakening in customer demand would therefore
have and has had in the past an almost immediate adverse impact on the Company's
operating results and on the Company's ability to maintain profitability.

Manufacturing and Suppliers

       Typically, the Company initiates small production runs of new products at
the  Company's   headquarters  in  Campbell,   California  before   transferring
manufacturing  to third party contract  manufacturers  located in Mexico.  Final
configuration and testing  ordinarily take place at the Company's  headquarters.
Generally, when received in Campbell, each of the products undergoes testing and
inspection  before final  shipment to customers.  The Company uses an integrated
materials management system for purchasing,  inventory control, cost accounting,
and invoicing. As of December 31, 1999, the Company employed 21 persons directly
in  manufacturing  and  operations  management  in Campbell  and has a permanent
quality and test assurance program at its contract  manufacturers'  locations in
Mexico.

       The Company is dependent on sole source suppliers for certain  components
used in its products.  These components include certain key integrated circuits,
which  are  utilized  in  the   Company's   products,   ASICs  or  gate  arrays,
microprocessors,  filters, converters, and other parts. Although the Company has
generally  been  able to  procure  components  on a timely  basis,  an  extended
interruption  in the supply of any of the components  currently  obtained from a
single source could have a material  adverse  effect on the Company's  operating
results.

                                       13

<PAGE>

While  the  Company  believes  alternative  sourcing  of  these  items  could be
developed,  this might result in additional  cost in materials and overhead.  In
addition,  the Company buys most of its components from third party vendors on a
purchase order basis without any advance  contractual  commitments  and does not
carry significant inventories of these items. A shortage of any one part such as
ROM  semiconductor  devices,  or an  increase  in the  price  of a  part,  could
adversely affect  production of the Company's  products or reduce gross margins.
There can be no assurance that component  supplies will be adequate at all times
to ensure  that  customer  product  orders will be  manufactured  or filled in a
timely manner.

Research and Development

       The  Company  places  a  high  priority  on  research  and   development.
Development  efforts focus on video  quality,  system  performance,  feature set
expansion, user productivity,  improved processing,  and storage. In 1999, 1998,
and 1997,  the Company  invested $2.9 million,  $4.8 million,  and $7.0 million,
respectively,  constituting  20%,  24%,  and 35% of its  total net  revenues  in
research and development,  respectively.  Because digitized video consumes large
amounts of data and requires  substantial  computer  power to process such data,
the  Company's  engineers  constantly  seek new methods to improve its products'
capacity  and  manipulation  of  video.   Maximizing  the  processing  of  video
information  contained  in video  random  access  memory  ("VRAM"),  through the
development of ASICs, is a focus of the Company's  development staff, as are the
compression and storage issues  necessitated  when  integrating and manipulating
large  amounts of video data.  As part of this ongoing  effort,  the Company has
made  significant  investments  in  advanced  computer  programming  tools.  The
Company's engineers work extensively with VHDL design methodology.  Any new ASIC
designs are maintained in VHDL libraries,  which product  designers may then use
to prototype subsequent new products.

       As of December  31, 1999,  the Company  employed 13 hardware and software
engineers with technical  skills in design and development of ASICs,  digital or
analog video signal generation-processing, or embedded software.

       In 1999,  the  Company  continued  to  experience  substantial  delays in
completing the successful  development  of products.  The Company  completed and
began shipping  Effetto Pronto software  version 2.0 in July 1999 and MXProDV in
August 1999. Effetto Pronto version 2.0, the Company's digital video effects and
compositing  system, was originally  scheduled to begin production  shipments in
April 1999.  MXProDV,  the Company's  advanced DV Digital Mixer,  was originally
scheduled  to be  introduced  in late in 1998,  but due to delays  was  actually
introduced  in April 1999 with  production  shipments  beginning in August 1999.
Delays in shipments of Effetto Pronto version 2.0 and MXProDV contributed to the
revenue shortfall for 1999.

       In 1998, 1997 and 1996, the Company also experienced  substantial  delays
in completing the successful  development  of products,  which  contributed to a
shortfall  in revenues and  significantly  affected  profitability  during those
periods.  The Company  completed and began  shipping MXPro and Effetto Pronto in
April 1998 and June 1998,  respectively.  MXPro, the Company's  advanced Digital
Mixer,  introduced  in  September  of 1997  was  originally  scheduled  to begin
shipments in the fourth quarter of 1997.  Effetto Pronto,  the Company's digital
video  effects  and  compositing  system,  was  originally  scheduled  to  begin
production  shipments in 1997. The Company  completed and began shipping Python,
Personal  TitleMaker

                                       14

<PAGE>

and a beta version of Effetto Pronto in the fourth quarter of 1997. Shipments of
Python and beta  shipments  of Effetto  Pronto  occurred  later than  originally
planned.  The  PowerScript   Character  Generator  in  the  NTSC  video  format,
introduced  in 1995,  was  completed  for shipment in  September of 1996.  After
extensive  field use,  major  revisions of  PowerScript's  software were made in
1997, with additional improvements being made in the first quarter of 1998.

       As the  complexity  of the  Company's  product  designs and feature  sets
continues to increase,  the Company may continue to experience  similar  product
development delays that would have an adverse effect on the profitability of its
operations. There can be no assurance that the Company will be successful in the
timely development of new products to replace or supplement existing products or
that  the  Company  will be  successful  in  integrating  acquired  products  or
technologies with its current business.  Delays in new product  development have
had an adverse  material impact on the Company's  growth in 1999, 1998 and 1997.
Similar adverse  effects on the Company's  results of operations can be expected
until new products are  successfully  introduced and accepted by end users.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

       The Company's success depends,  in part, on its ability to anticipate new
technological  developments,  to develop expertise in such technologies,  and to
develop and introduce in a timely and cost-effective  manner additional features
and new products that satisfy  customer needs and desires.  As noted above,  the
Company  has been  unable to ship new  products  in a timely  fashion  in recent
years,  which has had a substantial  adverse impact on the Company's  results of
operations.  Such results have, in any event,  fluctuated  widely on a quarterly
basis.  There  can be no  assurance  that  any new  products  will be  developed
successfully, that the Company will be able to introduce additional new products
which  will  gain  acceptance  in  the   marketplace,   that  the  Company  will
successfully  assess new  technological  developments  and incorporate them into
future  or  current  products,  or that the  Company  will be able to do so in a
timely  fashion.  Any future  failure to develop or introduce  new products in a
timely  manner,  or  customer  rejection  of new  products,  may have a material
adverse effect on the Company's future results of operations.

Competition

       The  video  production  equipment  market is  highly  competitive  and is
characterized  by  rapid  technological  change,  new  product  development  and
obsolescence, evolving industry standards and significant price erosion over the
life of a product.  Competition is fragmented with several hundred manufacturers
supplying  a  variety  of  products  to this  market.  The  Company  anticipates
increased  competition in the video  post-production  equipment market from both
existing  manufacturers  and new market entrants.  Increased  competition  could
result in price  reductions,  reduced  margins and loss of market share,  any of
which could  materially and adversely affect the Company's  business,  financial
condition and results of operations.  There can be no assurance that the Company
will be able to compete successfully against current and future competitors.

       Competition  for  the  Company's   broadcast  products  (i.e.   character
generation and desktop  compositing) is generally based on product  performance,
breadth of product line,  service and support,  market  presence and price.  The
Company's principal competitors in the character generation and graphics imaging
systems market include Chyron,  For-A, Knox, and AVS.

                                       15

<PAGE>

Competitors  in the desktop  compositing  and effects  market  include Adobe and
Discreet  Logic.  Although viewed as competition in some of the markets in which
the Company  competes,  the Company's  desktop  compositing  and effects product
requires  the Company to partner  with other  companies  offering  complementary
products in order to provide  complete  solutions to customers.  These companies
include  Media  100,   Artel,   Puffin   Designs  and  ICE.   Maintaining   this
compatibility,  while enhancing its own products,  continues to put a tremendous
burden on the Company's engineering resources.

       The Company's  competition in the videographer market comes from a number
of groups of video companies,  such as suppliers of traditional  video equipment
including JVC,  Matsushita  and Sony,  providers of desktop  editing  solutions,
video  software  application  companies  and others.  Suppliers of desktop video
editing systems or components such as Avid, Pinnacle Systems, Matrox Electronics
Systems,  Ltd.,  Media100,  Inc., have  established  desktop video  distribution
channels,  experience  in marketing  video  products and  significant  financial
resources.

       Many of the  Company's  competitors  have greater  financial,  technical,
marketing,  sales and customer support  resources,  greater name recognition and
larger  installed  customer  bases than the Company.  In  addition,  some of the
Company's  competitors also offer a wide variety of video  equipment,  including
professional video tape recorders, video cameras and other related equipment. In
some cases, these competitors may have a competitive  advantage based upon their
ability to bundle their equipment in certain large system sales.

       The Company believes that the markets for its products will remain highly
competitive. The Company believes that its ability to compete depends on factors
both  within and outside its  control,  including  the success and timing of new
product  developments  introduced  by the Company and its  competitors,  product
performance  and price,  market presence and customer  support.  There can be no
assurance that the Company will be able to compete  successfully with respect to
these  factors.  Maintaining  any  advantage  that the Company may have over its
competitors will require  continuing  investments by the Company in research and
development,  sales and marketing and customer service and support. In addition,
as the Company enters new markets, whether through acquisitions,  alliances with
other companies or on its own, the Company may encounter  distribution channels,
technical  requirements  and  competitive  factors that differ from those in the
markets in which it currently  operates.  There can be no assurance  the Company
will be able to compete successfully in these new markets

                                       16

<PAGE>

Proprietary Rights

       The  Company  relies on a  combination  of trade  secret,  copyright  and
trademark laws, and contractual  agreements to safeguard its proprietary  rights
in technology and products.  The Company has registered the Videonics brand name
and certain product  trademarks in the United States,  as well as in some of its
international  markets. There can be no assurance however, that the Company will
have access to the  Videonics  brand name and  trademark in all  countries.  The
inability to use the  Videonics  brand name and  trademark  in a country,  could
materially  and  adversely  affect the Company's  business in that country.  The
Company  routinely  enters into  confidentiality  and  assignment  of  invention
agreements with each of its employees and nondisclosure  agreements with its key
customers and vendors.

       While the Company  relies on these  measures  to protect its  proprietary
rights,  there can be no assurance  that the Company's  technology is adequately
protected by such measures or that the technology will not be reverse-engineered
by third parties without  violation of the Company's  proprietary  rights.  Such
protection may not preclude  competitors from developing  products with features
and prices  similar to or even  better  than those of the  Company.  The Company
believes that its products and other proprietary rights do not infringe upon the
proprietary rights or products of third parties. In 1997, the Company reached an
agreement  with a third party patent  holder in which  royalties  are payable on
certain of the Company's  products.  Payment of these royalties will not have an
adverse  material  effect on the  Company's  financial  condition  or results of
operations.  There can be no assurance,  however,  that other third parties will
not assert  infringement  claims  against the Company in the future or that such
claims  will not result in costly  litigation  or require the Company to license
intellectual property rights from third parties.  There can be no assurance that
any such licenses would be available on terms  acceptable to the Company,  if at
all.

       The Company believes that, because the pace of technological change is so
rapid in the digital video  electronics  industry,  the best  protection for its
proprietary  rights is its  continued  substantial  investment  in research  and
development to apply the latest advances in data storage and data compression to
the integration of video  post-production  functions.  The Company believes that
any legal protection  afforded by copyright,  and trade secret laws will be less
of a factor on the Company's  ability to compete than the ability and creativity
of its research and development staff to develop products which satisfy customer
needs.  Moreover,  the Company believes that market positioning and rapid market
entry are equally important to the success of its products.

Employees

       As of March 1, 2000, the Company had 62 full-time employees, including 16
in research and development,  20 in sales and marketing, 21 in operations, and 5
in finance and administration. None of the Company's employees is represented by
a labor union or is covered by  collective  bargaining  agreements.  The Company
believes that its employee relations are good. The Company has never experienced
a work stoppage.

                                       17

<PAGE>

ITEM 2. PROPERTIES.

       The Company's principal administrative, sales and marketing, research and
development,  and operating  facilities are located in Campbell,  California and
consist of approximately  27,500 square feet under a lease which expires on July
31, 2002.  The Company also has a research and  development  facility in Millis,
Massachusetts,  which has 2,500  square  feet  under a lease  which  expires  on
December 1, 2000.


ITEM 3. LEGAL PROCEEDINGS.

       The Company is not currently involved in any material legal proceedings.


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

       No matter was  submitted to a vote of the Company's  shareholders  during
the fourth quarter of the fiscal year ended December 31, 1999.

                                       18

<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

       Effective May 20, 1999,  the  Company's  Common Stock moved to the Nasdaq
SmallCap Market from the Nasdaq National Market System, where it had been listed
since its initial public  offering was declared  effective on December 15, 1994.
The Company's  trading symbol on the Nasdaq SmallCap Market is "VDNX".  Prior to
that date,  there was no  established  public  trading  market for the Company's
Common Stock.  The following  table sets forth the quarterly  high and low sales
price information of the Common Stock during the fiscal years ended December 31,
1999 and 1998.

                       Q1                Q2                Q3               Q4
                      ----              ----              ----             ----
FY99    High         $3.25             $2.06             $1.50            $1.31
        Low          $0.38             $0.50             $0.25            $0.50
FY98    High         $4.50             $4.63             $2.13            $1.50
        Low          $1.50             $1.38             $0.75            $0.47

       As of March 1,  2000,  there  were  approximately  1,150  holders  of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 1, 2000 was $2.06 per share.

       Other than the  distributions  to S corporation  shareholders for certain
income tax  liabilities  associated  with the Company's  1994  earnings  through
December  14,  1994,  the Company has never  declared or paid  dividends  on its
Common Stock and does not  anticipate  paying any  dividends in the  foreseeable
future.  The Company currently  intends to retain its earnings,  if any, for the
operation and development of its business.

                                       19

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

       The selected financial data set forth below with respect to the Company's
statements  of  operations  for each of the years in the five year period  ended
December 31, 1999,  and with respect to the balance sheets at December 31, 1999,
1998,  1997, 1996 and 1995 are derived from financial  statements that have been
audited by  PricewaterhouseCoopers  LLP, independent accountants.  The financial
data should be read in conjunction with the Company's  Financial  Statements and
related  Notes and with  "Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations"  included  elsewhere in this Report.  The
balance sheets as of December 31, 1999 and 1998, and the statement of operations
for each of the  three  years in the  period  ended  December  31,  1999 and the
independent auditors' report thereon, are included in Item 8 of this Report.

                                       20

<PAGE>

<TABLE>
Statement of Operations Data:
(in thousands, except per share data)

                                                   Year Ended December,

<CAPTION>
                              1999            1998          1997           1996       1995
                              ----            ----          ----           ----       ----
<S>                        <C>            <C>            <C>            <C>        <C>
Net revenues               $ 14,226       $ 19,672       $ 19,955       $ 29,195   $ 33,561
Operating income (loss)      (2,562)(1)     (6,722)(2)    (12,984)(3)        401      4,811(4)
Net income (loss)            (2,634)(1)     (6,713)(2)    (13,441)(3)        744      3,746(4)
Net income (loss) per
share - basic                 (0.45)(1)      (1.15)(2)      (2.34)(3)       0.13       0.69(4)
Shares used in per share
calculation - basic           5,866          5,833          5,744          5,616      5,413
Net income (loss) per
share - diluted               (0.45)(1)      (1.15)(2)      (2.34)(3)       0.13       0.65
Shares used in per share
calculation - diluted         5,866          5,833          5,744          5,933      5,791

Balance Sheet Data:
Working capital            $  3,823       $  4,404       $  9,902       $ 21,412   $ 20,127
Total assets
                              6,089          9,164         15,694         27,958     27,350
Shareholders' equity          3,346          5,927         12,606         25,731     24,149
Dividends declared per
 share                         --             --             --             --         --

<FN>
----------------------------

(1)   Results for 1999 include a $655,000  charge in the fourth  quarter for the
      write-down of the Company's inventory to its net realizable value

(2)   Results for 1998 include a $1.3 million  charge in the fourth  quarter for
      the  write-down  of the  Company's  open  systems  inventory  to  its  net
      realizable value.

(3)   Results for 1997 include:  a $1.9 million  write-off of intangible  assets
      related to Nova Systems; a $1.6 million increase in inventory reserves for
      components  rendered obsolete by product revisions of which  approximately
      $608,000  related to PowerScript  and $265,000  related to KUB Systems and
      $700,000 related to excess and obsolete assets at Nova Systems; a $124,000
      increase in warranty  reserves for  PowerScript  hardware  updates;  a tax
      charge of $5.9 million due to the  establishment of a valuation  allowance
      against the Company's  deferred tax assets;  and a $100,000 charge for the
      reduction of  approximately  12 percent of the Company's  work force.  The
      total of these charges equaled $9.6 million.

(4)   Results for 1995 include a one-time  charge of  $1,965,000  for  purchased
      in-process  research and  development  related to the acquisition of Nova.
      Without this one-time charge, the net income of $3,746,000 would have been
      $5,075,000 or $0.88 per share.
</FN>
</TABLE>

                                       21

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

         This Annual  Report on Form 10-K,  including  the  following  sections,
contains forward-looking statements within the meaning of the Private Securities
Litigation  Reform  Act  of  1995,   particularly  statements  regarding  market
opportunities,   market   share   growth,   competitive   growth,   new  product
introductions, success of research and development expenses, customer acceptance
of new products,  gross margin and selling, general and administrative expenses.
These  forward-looking  statements  involve  risks  and  uncertainties,  and the
cautionary statements set forth below,  specifically those contained in "Factors
That May Affect Future Results of Operations,"  identify  important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking  statements.  Such  factors  include,  but are not  limited  to,
adverse changes in general economic conditions, including adverse changes in the
specific  markets  for the  Company's  products,  adverse  business  conditions,
decreased or lack of growth in the market for video  post-production  equipment,
adverse  changes in customer  order  patterns,  increased  competition,  lack of
acceptance of new products,  pricing pressures, lack of success in technological
advancements,  risks  associated  with foreign  operations,  and other  factors,
including those listed below.

Overview

       Videonics  is a  designer  of  affordable,  high-quality,  digital  video
post-production  equipment.   Videonics  products  are  used  by  videographers,
business,  industry,  education  and  videophiles;  they  are  also  used in the
broadcast, cable, video presentation and video conferencing markets. The Company
manufactures  standalone  and  personal-computer-based   hardware  and  software
products  that capture,  edit and mix raw video footage and add special  effects
and titles.  Products include edit  controllers,  video and audio mixers,  video
processors, character generators,  multimedia software, computer-based animation
and video compositing systems.

1997
       After  shipping  PowerScript  to  a  wide  base  of  customers  in  1996,
deficiencies  in the user interface and certain signal timing issues in specific
applications were discovered that made the product difficult to sell. Therefore,
in 1997,  the Company  released  new  versions of the  operating  software  that
enhanced the user  interface  and operating  speed of the Power Script  Product.
Signal  timing issues were  addressed  with the  introduction  of two new higher
priced  versions  of  PowerScript  (PowerScript  Studio and  PowerScript  Studio
Component) targeted at higher end customers. In 1997, the Company announced four
major new products that were expected to ship in 1997:  Effetto  Pronto,  MXPro,
Python and Personal TitleMaker. As of December 31, 1997, the Company had brought
Python and Personal TitleMaker to market in commercial quantities.  Since Python
and Personal  TitleMaker  were shipped in the fourth  quarter of 1997, the first
three quarters of 1997 did not contain  revenues from any of the  aforementioned
new products.  To reduce  expenses,  the Company reduced its personnel by twelve
percent on January 15, 1998.

1998
       In the second quarter of 1998, the Company began production  shipments of
MXPro and Effetto Pronto.  Sales of MXPro tracked closely to the Company's plan,
while sales of Effetto Pronto were significantly  below plan. Effetto Pronto did
not generate  meaningful revenues

                                       22

<PAGE>

during 1998, as customer  acceptance was slower than expected.  Effetto Pronto's
lower than anticipated  revenues,  combined with continued  significant research
and  development and sales and marketing  expenses  associated with the product,
resulted in a significant operating loss for the Company. In addition,  sales of
the Company's open system products  decreased  significantly from their 1997 run
rate, due primarily to increased competition.  As such, in the fourth quarter of
1998,  the Company  reduced its open  systems  inventory  to its net  realizable
value.

1999
       To reduce the  Company's  expenses and focus its  resources,  the Company
sold its Nova Systems Division ("Nova") to a private company in Massachusetts on
January 29, 1999 (see the Notes to the  Consolidated  Financial  Statements  for
further  details).  In July 1999, the Company began  shipments of Effetto 2.0, a
significant  software  upgrade to Effetto  Pronto.  Although  Effetto Pronto 2.0
included numerous feature enhancements,  sales of the product were significantly
below plan and failed to generate  meaningful  revenues in 1999. In August 1999,
the  Company  began  shipments  of  its  MXProDV  product,   which  provided  an
incremental  increase to revenues.  In the fourth  quarter of 1999,  the Company
reduced  the  carrying  value of certain  slow  moving  products  and soon to be
discontinued products to their net realizable value. These factors combined with
declining  sales of the  Company's  older  Videographer  products  and delays in
shipment of the  Company's  new  Videographer  products,  resulted in  operating
losses in each quarter of 1999. Results for 2000 are highly dependent on planned
shipment and customer acceptance of new products.

                                       23

<PAGE>


Results of Operations

       The  following   table  sets  forth  certain  items  from  the  Company's
consolidated  statements  of  operations as a percentage of net revenues for the
periods indicated:

                                                    Year Ended December 31,
                                                 1999        1998        1997
                                                -----       -----       -----

Net revenues                                    100.0%      100.0%      100.0%
Cost of revenues                                 62.0        69.1        69.7
  Gross profit                                   38.0        30.9        30.3
Operating expenses
  Research & development                         20.2        24.4        34.8
  Selling & marketing                            27.2        33.5        40.3
  General & administrative                        8.6         7.2         8.9
  Amortization of intangible assets               --          --          2.0
  Write-off of intangible assets                  --          --          9.4
                                                -----       -----       -----
  Total operating expenses                       56.0        65.1        95.4
                                                -----       -----       -----
     Operating loss                             (18.0)      (34.2)      (65.1)
Interest income (expense), net                   (0.5)        --          1.3
                                                -----       -----       -----
  Loss before income taxes                      (18.5)      (34.2)      (63.8)
Provision for income taxes                        --          --          3.6
                                                -----       -----       -----
     Net loss                                   (18.5)%     (34.2)%     (67.4)%
                                                =====       =====       =====

Comparison of Years Ended December 31, 1999 and 1998

       Net Revenues.  Net revenues  decreased 28% to $14.2 million in 1999, from
$19.7  million in 1998.  The  decrease in revenue was due in part to the sale of
the Company's Nova Division, decreased sales of the Company's older videographer
products and decreased  sales of the Company's  Effetto Pronto  product,  offset
partially by sales of the MXProDV  product which was  introduced in late August,
1999.  International  revenues for 1999 were $4.1 million or 29% of net revenues
compared to $7.0 million or 36% of net revenues in 1998.

       Gross Profit.  Gross profit  decreased to $5.4 million in 1999, from $6.1
million in 1998. Gross profit, as a percentage of net revenues, increased to 38%
in 1999 from 31% in 1998. In 1999, the Company  recorded a $733,000  increase in
inventory  reserves  to  reduce  the  carrying  value  of its  slow  moving  and
discontinued  products  to their net  realizable  value.  In 1998,  the  Company
recorded a $1.7 million increase in inventory  reserves  primarily to reduce the
carrying value of its open systems inventory.  Charges to inventory reserves, as
a percentage of net revenues were 5% and 8% for 1999 and 1998, respectively.

       Research and Development. Research and development expenses decreased 40%
to $2.9 million during 1999 compared to $4.8 million in 1998, and decreased as a
percentage of net revenues to 20% in 1999 from 24% in 1998. The decrease was due
to the Company's  sale of Nova, a decrease in personnel and reduction in the use
of consultants.  The Company anticipates that research and development  expenses
will decrease slightly in 2000 when compared to 1999.

       Selling and Marketing.  Selling and marketing  expenses  decreased 41% to
$3.9 million in 1999  compared to $6.6 million in 1998,  and decreased to 27% in
1999 compared to 34% in

                                       24

<PAGE>

1998,  as a percentage  of net  revenues.  The decrease was primarily due to the
Company's  sale of Nova, a decrease in  personnel  and reduced  advertising  and
promotional  expenses as the Company brought  advertising  expenditures  in-line
with current  revenue  levels.  Included in expenses for 1999 was  approximately
$52,000  of  closing  costs  associated  with the sale of the  Company's  German
subsidiary. Revenue and assets employed by the Company's German office, were not
material to the consolidated financial statements.  Since the sale of its German
subsidiary,  the Company has utilized local  distribution to market and sell its
products as it does throughout the rest of Europe.

       General and Administrative. General and administrative expenses decreased
14% to $1.2  million  in 1999  compared  to $1.4  million in 1998.  General  and
administrative  expenses increased as a percentage of net revenues to 9% in 1999
compared to 7% in 1998. The decrease in actual expenses between 1999 and 1998 is
primarily due to a decrease in personnel.

       Interest  Expense,  net. The Company  recorded  net  interest  expense of
$72,000 in 1999  compared  to net  interest  expense  of  $21,000  in 1998.  The
increase is  primarily  due to interest  expense  incurred on higher  borrowings
between years and  amortization of warrants issued in August 1999, in connection
with the Company's line of credit.

       Provision  for Income  Taxes.  In 1999,  Company  recorded  an income tax
benefit of $847,000 on its pretax loss, offset completely by a $847,000 increase
in the valuation  allowance against the Company's  deferred tax assets. As such,
no tax  benefit was  recognized  during  1999.  The  Company  maintained  a 100%
valuation  allowance  against  its  deferred  tax assets due to the  uncertainty
surrounding the realization of such assets.  If it is determined that it is more
likely  than not that the  deferred  tax assets are  realizable,  the  valuation
allowance will be reduced.  During 1998,  the Company  recorded a tax benefit of
$30,000 on a pretax loss of $6.7 million.  This benefit was primarily the result
of a state tax refund.  In addition,  the Company recorded in 1998 an income tax
benefit of $3.7 million on its pretax loss,  offset completely by a $3.7 million
increase in the valuation allowance against the Company's deferred tax assets.

Comparison of Years Ended December 31, 1998 and 1997

       Net Revenues.  Net revenues  decreased 1% to $19.7 million in 1998,  from
$20.0 million in 1997. This decrease is primarily  attributable to reduced sales
of  open  systems  products  and  older  Videographer  products  offset  by  the
introduction of MXPro and Effetto Pronto.  International  revenues for 1998 were
$7.0  million  or 36% of net  revenues  compared  to $6.6  million or 33% of net
revenues in 1997.

       Gross  Profit.  Gross  profit  remained at $6.1 million for both 1998 and
1997.  Gross profit,  as a percentage of net revenues,  increased to 31% in 1998
from 30% in 1997.  In 1998,  the  Company  recorded a $1.3  million  increase in
inventory  reserves to reduce the carrying value of its open systems  inventory.
In 1997, the Company recorded a $1.6 million increase in inventory  reserves for
components  rendered  obsolete  by  product  revisions  of  which  approximately
$608,000 related to PowerScript, $265,000 related to KUB and $700,000 related to
excess and obsolete assets at Nova; and a $124,000 increase in warranty reserves
for PowerScript hardware updates.

                                       25

<PAGE>

       Research and Development. Research and development expenses decreased 31%
to $4.8 million during 1998 compared to $7.0 million in 1997, and decreased as a
percentage  of net  revenues  to 24% in 1998  from  35% in 1997.  The  decreased
expenses were primarily due to the  reductions in personnel and decreased  usage
of  consultants as  significant  work on PowerScript  and MXPro was completed in
1998.

       Selling and Marketing.  Selling and marketing  expenses  decreased 18% to
$6.6 million in 1998  compared to $8.0 million in 1997,  and decreased to 34% in
1998 compared to 40% in 1997, as a percentage of net revenues.  This decrease in
selling and marketing  expenses was primarily a result of decreased  advertising
and promotional expenses as the Company brought advertising expenditures in-line
with current revenue levels.

       General and Administrative. General and administrative expenses decreased
20% to $1.4 million in 1998  compared to $1.8 million in 1997,  and decreased to
7% in 1998 compared to 9% in 1997 as a percentage of net revenues. This decrease
was  primarily  due to a charge of  $375,000  in 1997 to bad debt  reserves  for
specific accounts.

       Write-off of  Intangibles.  In 1997, the Company  wrote-off the remaining
unamortized  value of the  purchased  technology  and  goodwill  established  in
connection with the acquisition of Nova. The write-off  totaled $1.9 million and
was primarily due to continued  losses and lack of  commercially  successful new
product introductions.

       Interest Expense,  net. In 1998 the Company recorded net interest expense
of $21,000  compared to net interest  income of $261,000 in 1997. The shift from
interest  income to  interest  expense  is  primarily  due to  interest  expense
calculated  on  shareholder  loans offset only  partially by interest  income on
lower cash balances available for investment.

       Provision for Income Taxes.  At December 31, 1998 the Company  recorded a
tax  benefit of $30,000  on a pretax  loss of $6.7  million.  This  benefit  was
primarily the result of a state tax refund. In addition, the Company recorded an
income tax benefit of $3.7  million on its pretax loss  offset  completely  by a
$3.7 million increase in the valuation  allowance against the Company's deferred
tax assets. The Company continued to maintain a 100% valuation allowance against
its deferred tax assets due to the  uncertainty  surrounding  the realization of
such assets.  At December 31, 1997 the Company incurred a tax charge of $718,000
on a  pretax  loss  of  $12.7  million.  This  charge  was  the  result  of  the
establishment  of a $5.9  million  valuation  allowance  against  the  Company's
deferred  tax assets  offset  partially by an income tax benefit of $4.6 million
the Company recorded on its pretax loss.

                                       26

<PAGE>

<TABLE>
Quarterly Results of Operations

       The following table sets forth certain  quarterly  financial  information
for the periods  indicated.  This  information  has been derived from  unaudited
financial  statements that, in the opinion of management,  have been prepared on
the same basis as the audited  information,  and includes  all normal  recurring
adjustments  necessary for a fair presentation of such information.  The results
of operations for any quarter are not  necessarily  indicative of the results to
be expected for any future period.

<CAPTION>
                                                       1999                                         1998
                                      --------------------------------------      --------------------------------------
(in thousands, except per share data)    Q1         Q2         Q3         Q4         Q1         Q2         Q3         Q4
                                         --         --         --         --         --         --         --         --

<S>                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net revenues and other income         $ 3,665    $ 3,394    $ 3,842    $ 3,326    $ 4,719    $ 5,907    $ 5,025    $ 4,021
Gross profit (loss)                     1,458      1,464      1,646        843      1,742      2,437      2,066       (161)
Operating loss                           (810)      (806)      (245)      (701)    (1,705)      (883)    (1,128)    (3,006)
Net loss                                 (823)      (821)      (261)      (729)    (1,706)      (841)    (1,137)    (3,029)
Net loss per share - basic and
  diluted                               (0.14)     (0.14)     (0.04)     (0.12)     (0.29)     (0.14)     (0.19)     (0.52)
Shares used in computing per
  share amounts - basic and diluted     5,858      5,867      5,869      5,872      5,790      5,831      5,854      5,857
</TABLE>

----------

       The  Company  has  experienced   significant  quarterly  fluctuations  in
operating  results and anticipates that these  fluctuations will continue in the
future.  The  fluctuation  in  revenues  in  the  periods  reflected  above  are
attributable   to  various   factors,   including  the  timing  of  new  product
introductions  and shipments,  variations in product mix sold, and private label
sales.  In 1999  and  1998,  the  Company's  delay in the  sales  of  previously
announced  new products had a  significant  effect on the  Company's  results of
operations,  and  there can be no  assurance  that the  Company  will be able to
introduce  and timely sell new  products  on a basis which will avoid  quarterly
fluctuations in the future, or even that such new products will be successful in
the marketplace.

       The Company typically operates with a small backlog. Therefore, quarterly
revenues and operating results have generally  depended on the volume and timing
of orders received during the quarter.  Backlog is not an accurate  predictor of
what the  Company's  revenues  will be in  future  periods,  and there can be no
assurance that the Company will be profitable in any particular quarter.

Factors That May Affect Future Results of Operations

        The Company  believes its future  results of  operations  will likely be
impacted by factors such as delays in development  and shipment of the Company's
new products and new versions of existing  products,  market  acceptance  of new
products  and  upgrades,  growth  in  the  marketplace  in  which  it  operates,
competitive   product  offerings,   and  adverse  changes  in  general  economic
conditions  in any of the  countries  in which the Company  does  business.  The
Company's   results  in  prior  years  have  been  affected  by  these  factors,
particularly  with respect to developing  and  introducing  new products such as
PowerScript, Effetto Pronto, MXPro and Python.

                                       27

<PAGE>

       Due to the factors noted above,  the Company's  future earnings and stock
price may be subject to  significant  volatility,  particularly  on a  quarterly
basis.  Any shortfall in revenue or earnings from levels  expected by securities
analysts  or  anticipated  by the Company  based upon  product  development  and
introduction schedules could have an immediate and significant adverse effect on
the  trading  price  of  the  Company's   Common  Stock  in  any  given  period.
Additionally,  the  Company may not learn of such  shortfalls  until late in the
fiscal quarter,  which could result in an even more immediate and adverse effect
on the  trading  price of the  Company's  Common  Stock.  Finally,  the  Company
participates  in a highly dynamic  industry,  which often results in significant
volatility  of the  Company's  Common Stock price.  See "Business - Research and
Development".

Year 2000 Update

       We believe  that we have  successfully  rendered  our  product,  internal
management and other  administrative  systems and external  information  systems
year 2000 compliant.  Since January 1, 2000, we have  experienced no disruptions
in our  business  operations  as a result of year 2000  compliance  problems  or
otherwise,  and have  received no reports of any year 2000  compliance  problems
with our products.  To date,  the total cost of our efforts to address year 2000
compliance has not been material.

       Nonetheless,  some problems related to the year 2000 risks may not appear
until  several  months after  January 1, 2000.  Year 2000 issues  could  include
problems with our own products or with  third-party  products or technology that
we use. Any problems  that are not  identified  and corrected  successfully  and
completely could adversely affect our business.

Liquidity and Capital Resources

       From the  Company's  inception  until  its  initial  public  offering  in
December  1994,  which resulted in net proceeds to the Company of $15.8 million,
the Company financed its operations through private sales of equity, shareholder
loans, and bank borrowings. At December 31, 1999, the Company's principal source
of  liquidity  is cash of  approximately  $715,000  and access to a $1.0 million
revolving,  asset based line of credit.  Throughout 1999, the Company maintained
borrowings from a major shareholder of $1.0 million at an interest rate of 8.0%,
terms that the Company considered more favorable than those it could obtain from
other commercial  sources. At December 31, 1999, the Company had borrowings from
this shareholder totaling $1.0 million at an interest rate of 8.0% per year, due
January 16, 2001. On March 22, 2000,  the maturity date of the $1.0 million loan
was extended from January 16, 2001 to January 16, 2002.

       Operating Activities.  In 1999, net cash used in operating activities was
$96,000  resulting  primarily from an operating loss of $756,000 after adjusting
for  non-cash  items and a $524,000  decrease in accrued  expenses,  offset by a
decrease in  inventories of $1.2 million.  Inventories  decreased as the Company
continued to better align its  inventory  with its current  revenue  levels.  In
1998, net cash used in operating  activities was $811,000,  resulting  primarily
from an  operating  loss of $3.7 million  after  adjusting  for non-cash  items,
offset by a decrease  in  accounts  receivable  of  $414,000  and a decrease  in
inventories  of $2.4 million.  Accounts  receivable  decreased  because of lower
sales  during  the  fourth  quarter  of  1998  compared  to  1997  and  improved
collections.  Inventories  decreased as the Company better aligned its

                                       28

<PAGE>

inventory with its current revenue  levels.  In 1997, net cash used in operating
activities was $5.6 million,  resulting primarily from an operating loss of $6.6
million after  adjusting for non-cash  items, an increase in inventories of $2.3
million,   offset  by  a  decrease  in  accounts  receivable  of  $1.7  million.
Inventories  increased  primarily in anticipation  of new product  shipments and
lower than  expected  shipments of new products in 1997.  Receivables  decreased
primarily because of decreased sales

       Investing  Activities.  Capital equipment  expenditures in 1999, 1998 and
1997 were  $120,000,  $378,000,  and $1.6 million  respectively,  primarily  for
computers,  software and engineering  equipment used in research and development
and other  activities.  The Company  currently  anticipates  that  additions  to
property and equipment will require capital expenditures of $320,000 through the
end of 2000.  In 1999,  the Company  received  proceeds of $52,000 in connection
with the sale of its Nova Systems division. In 1997, the Company had redemptions
of $1.5 million of marketable securities.

       Financing  Activities.  In 1999,  the  Company  received  $7,000 from the
exercise of stock options under the Company's  stock option plan and proceeds of
$35,000  from the  issuance  of notes  payable to a  shareholder.  In 1998,  the
Company  received $34,000 from the exercise of stock options under the Company's
stock  option  plan and  proceeds  of $1.0  million  from the  issuance of notes
payable to a  shareholder.  Additionally  in 1998, the Company repaid $19,000 of
the notes payable to a shareholder.  In 1997, the Company received $154,000 from
the exercise of stock options under the Company's stock option plan

       The Company has incurred  losses and negative cash flows from  operations
for each of the  three  years  in the  period  ended  December  31,  1999 and is
dependent  upon  support  from a  substantial  shareholder  and upon  generating
sufficient  revenues from existing and soon to be released  products in order to
fund  operations.  During  1999,  Management  continued to take steps to further
reduce costs,  including the sale of its Nova Systems  division,  and its German
subsidiary,  both of which had  incurred  losses  in the two  years  immediately
preceding their sale. The Company is assessing its product lines to identify how
to enhance  existing  or create new  distribution  channels.  During  2000,  the
Company is  developing  and expects to release  more than two new products.

       As described in the notes to the consolidated  financial statements,  the
Company has  obtained a $1.0  million  asset  based line of credit from  Venture
Banking Group, a division of Cupertino  National Bank,  secured by the Company's
assets.  Interest on any  advances  will be  calculated  at a rate of 1.5% above
prime.  Under the terms of the  agreement,  the  Company is required to maintain
certain  financial ratios and meet other  covenants,  including those related to
net worth,  profitability and indebtedness.  The revolving maturity date of this
facility is August 25, 2001. As of the date of this filing,  the Company had not
borrowed from this facility.

       The  Company   believes  that  its  current  cash,   borrowings   from  a
shareholder,  together with its operating cash flows, will be sufficient to meet
the Company's requirements for working capital, and capital expenditures through
the end of 2000.

                                       29

<PAGE>

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
         MARKET RISK

       The  Company's  market  risk  disclosures  pursuant  to  item  7A are not
material and are therefore not required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       Balance  sheets  of the  Company  as of  December  31,  1999 and 1998 and
statements of income,  shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999, together with the related notes and
the report of PricewaterhouseCoopers LLP, independent accountants, are set forth
on pages 31 to 48. Other required financial  information is set forth herein, on
page 58.

                                       30

<PAGE>


Videonics, Inc.
Consolidated Financial Statements
as of December 31, 1999 and 1998

                                       31

<PAGE>

                        Report of Independent Accountants

To the Board of Directors and Shareholders of
Videonics, Inc.:

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of shareholder's equity and of cash flows
present fairly, in all material  respects,  the financial position of Videonics,
Inc.  and its  subsidiaries  at December  31, 1999 and 1998,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1999, in conformity  with  accounting  principles  generally
accepted in the United States. 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 of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States,  which  require  that we plan and  perform  the  audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

San Jose, California
January 28, 2000

                                       32

<PAGE>


Videonics, Inc.
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands)
--------------------------------------------------------------------------------


                                                             1999         1998
Assets
Current assets:
    Cash and cash equivalents                              $    715    $    837
    Accounts receivable, net                                    886         852
    Inventories                                               3,785       5,830
    Prepaids and other current assets                           145         122
                                                           --------    --------
        Total current assets                                  5,531       7,641

Property and equipment, net                                     513       1,507
Other assets                                                     45          16
                                                           --------    --------

        Total assets                                       $  6,089    $  9,164
                                                           --------    --------

Liabilities and Shareholders' Equity
Current liabilities:
    Loan payable to shareholder                            $   --      $  1,000
    Accounts payable                                            974         947
    Accrued expenses                                            734       1,290
                                                           --------    --------
        Total current liabilities                             1,708       3,237
                                                           --------    --------

Long term liabilities
    Loan payable to shareholder                               1,035        --
                                                           --------    --------
        Total liabilities                                     2,743       3,237
                                                           --------    --------

Commitments and contingencies (Note 6)

Shareholders' equity:
    Preferred stock, no par value:
      Authorized:  10,000 shares in 1999 and 1998;
      Issued and outstanding:  None                            --          --
    Common stock, no par value:
      Authorized:  30,000 shares in 1999 and 1998;
      Issued and outstanding: 5,874 shares in 1999 and
      5,858 shares in 1998                                   20,700      20,647
    Accumulated deficit                                     (17,354)    (14,720)
                                                           --------    --------
        Total shareholders' equity                            3,346       5,927
                                                           --------    --------

           Total liabilities and shareholders' equity      $  6,089    $  9,164
                                                           --------    --------

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       33

<PAGE>

Videonics, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
--------------------------------------------------------------------------------

                                                    Year Ended December 31,
                                                  1999        1998       1997

Net revenues and other income                  $ 14,226    $ 19,672    $ 19,955
Cost of revenues                                  8,815      13,588      13,900
                                               --------    --------    --------
      Gross profit                                5,411       6,084       6,055
                                               --------    --------    --------

Operating expenses:
    Research and development                      2,879       4,798       6,951
    Selling and marketing                         3,875       6,593       8,041
    General and administrative                    1,219       1,415       1,779
    Amortization of intangible assets              --          --           393
    Write-off of intangible assets                 --          --         1,875
                                               --------    --------    --------
                                                  7,973      12,806      19,039
                                               --------    --------    --------

Operating loss:                                  (2,562)     (6,722)    (12,984)

Interest (expense) income, net                      (72)        (21)        261
                                               --------    --------    --------

Loss before income taxes                         (2,634)     (6,743)    (12,723)

Provision for (benefit from) income taxes          --           (30)        718
                                               --------    --------    --------

Net loss                                       $ (2,634)   $ (6,713)   $(13,441)
                                               --------    --------    --------

Net loss per share - basic and diluted         $   (.45)   $  (1.15)   $  (2.34)
                                               --------    --------    --------

Shares used in per share calculation - basic      5,866       5,833       5,744
                                               --------    --------    --------

Shares used in per share calculation - diluted    5,866       5,833       5,744
                                               --------    --------    --------

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       34

<PAGE>


<TABLE>
Videonics, Inc.
Consolidated Statements of Shareholders' Equity
For Each of the Three Years in the Period Ended December 31, 1999
(in thousands, except per share data)
---------------------------------------------------------------------------------------------

<CAPTION>
                                                                     Retained
                                                                     Earnings
                                                   Common Stock    (Accumulated Shareholders'
                                                 Shares    Amount    Deficit)     Equity

<S>                                               <C>     <C>        <C>         <C>
Balances, December 31, 1996                       5,705   $ 20,297   $  5,434    $ 25,731

Issuance of common stock from
    exercise of options                              80        154       --           154
Amortization of deferred compensation              --           36       --            36
Tax benefit from exercise of
    nonqualified stock options                     --          126       --           126
Net loss                                           --         --      (13,441)    (13,441)
                                               --------   --------   --------    --------

Balances, December 31, 1997                       5,785     20,613     (8,007)     12,606

Issuance of common stock from
    exercise of options                              73         34       --            34
Net loss                                           --         --       (6,713)     (6,713)
                                               --------   --------   --------    --------

Balances, December 31, 1998                       5,858     20,647    (14,720)      5,927

Issuance of common stock from
    exercise of options                              16          8       --             8
Issuance of warrants in payment of loan fees       --           45       --            45
Net loss                                           --         --       (2,634)     (2,634)
                                               --------   --------   --------    --------

Balances, December 31, 1999                       5,874   $ 20,700   $(17,354)   $  3,346
                                               --------   --------   --------    --------

<FN>
        The accompanying notes are an integral part of these consolidated
                             financial statements.
</FN>
</TABLE>

                                       35

<PAGE>

<TABLE>
Videonics, Inc.
Consolidated Statements of Cash Flows
(in thousands)
----------------------------------------------------------------------------------------------


<CAPTION>
                                                                    Year Ended December 31,
                                                                 1999       1998        1997

<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
    Net loss                                                 $ (2,634)   $ (6,713)   $(13,441)
    Adjustments to reconcile net loss
      to net cash used in operating activities:
        Loss on disposal of property and equipment                  7           5          76
        Loss on sale of Nova Systems                               48        --          --
        Loss on sale of German Subsidiary                          65        --          --
        Depreciation and amortization                           1,025       1,304       1,563
        Provision for doubtful accounts                          --            25         375
        Provision for excess and obsolete inventories             733       1,661       1,641
        Deferred income taxes                                    --          --         1,299
        Write-off of intangible assets                           --          --         1,875
        Change in assets and liabilities:
           Accounts receivable                                    (71)        414       1,740
           Inventories                                          1,203       2,447      (2,270)
           Prepaid income taxes                                  --           550         670
           Prepaid and other current assets                        46          97         274
           Other                                                  (29)        250        (252)
           Accounts payable                                        35        (495)        352
           Accrued expenses                                      (507)       (356)        509
                                                             --------    --------    --------
               Net cash used in operating activities              (79)       (811)     (5,589)
                                                             --------    --------    --------

Cash flows from investing activities:
    Purchases of property and equipment                          (120)       (378)     (1,611)
    Proceeds from disposition of Nova Systems                      52        --          --
    Proceeds from sale of marketable securities                  --          --         1,500
                                                             --------    --------    --------
               Net cash used in investing activities              (68)       (378)       (111)
                                                             --------    --------    --------

Cash flows from financing activities:
    Proceeds from issuance of loans payable to shareholder         18       1,019        --
    Repayment of notes payable                                   --           (19)       --
    Proceeds from issuance of common stock                          7          34         154
                                                             --------    --------    --------
               Net cash provided by financing activities           25       1,034         154
                                                             --------    --------    --------

Decrease in cash and cash equivalents                            (122)       (155)     (5,546)
Cash and cash equivalents at beginning of year                    837         992       6,538
                                                             --------    --------    --------

Cash and cash equivalents at end of year                     $    715    $    837    $    992
                                                             --------    --------    --------

Supplemental  disclosure of cash flow  information:
    Cash paid during the period for:
      Interest                                               $      3    $     43    $   --
      Income taxes                                           $   --      $      2    $      5
Supplement schedule of non-cash financing activities:
    Tax benefit from exercise of nonqualified
      stock options                                          $   --      $   --      $    126

<FN>
        The accompanying notes are an integral part of these consolidated
                             financial statements.
</FN>
</TABLE>

                                       36

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.     Business

       Videonics,  Inc. (the  "Company") was  incorporated  on July 3, 1986. The
       Company is a designer of digital  video  post-production  equipment.  The
       Company's  products  are  used  by  videographers,   business,  industry,
       education and  videophiles;  they are also used in the broadcast,  cable,
       video   presentation  and  video   conferencing   markets.   The  Company
       manufactures   stand-alone  and  personal-computer   based  hardware  and
       software  products  that  edit and mix raw  video  footage,  add  special
       effects and titles, and process audio and video signals.


2.     Summary of Significant Accounting Policies

       Basis of preparation

       The Company has incurred  losses and negative cash flows from  operations
       in each of the three years in the period  ended  December 31, 1999 and is
       dependent upon support from a substantial shareholder and upon generating
       sufficient  revenues  from  existing and soon to be released  products in
       order to fund operations. Management has taken steps to reduce costs, and
       in that regard sold its Nova Systems division on January 29, 1999 and its
       German  subsidiary  on September  29, 1999 which had incurred  losses for
       each of the two years in the period ended  December 31, 1998. The Company
       is assessing  its product  lines to identify  how to enhance  existing or
       create new distribution channels.  During 2000, the Company is developing
       and expects to release  more than two new  products.  Management  expects
       that the cost  reductions  together  with  revenue  generated  from these
       products will be sufficient  to meet the  Company's  obligations  as they
       become due. In the event that such cost  reduction  and revenue  from new
       products  are not  sufficient  to meet  the  Company's  obligations,  the
       Company may need to seek additional financing.  There can be no assurance
       that such additional  financing will be available or will be available on
       terms  acceptable to the Company which, as a result,  may have an adverse
       effect on the Company.

       Principles of consolidation

       The consolidated financial statements include the accounts for Videonics,
       Inc.  and its wholly owned  subsidiaries.  All  significant  intercompany
       accounts and transactions have been eliminated.

       Use of estimates

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

       Revenue recognition

       The  Company  recognized  revenues  from gross  sales,  upon  shipment of
       product,  provided all significant obligations have been met. A provision
       is  made  to   estimate   customer   returns   and   estimated   warranty
       repair/replacement costs at the time a sale is recorded.

       Research and development expenditures

       Research  and  development  expenditures  are  charged to  operations  as
       incurred.

                                       37

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       Advertising

       The Company  expenses the production costs of advertising as the expenses
       are incurred.  The production costs of advertising  consist  primarily of
       magazine  advertisements,  agency fees and other direct production costs.
       Advertising  expense for the period ended  December 31, 1999,  1998,  and
       1997 was $232,000, $721,000, and $1,412,000, respectively.

       Income taxes

       The Company accounts for income taxes under the liability  method.  Under
       the liability method,  deferred tax assets and liabilities are determined
       based on differences  between financial reporting and tax bases of assets
       and  liabilities  and are  measured  using the enacted tax rates and laws
       that will be in effect when the differences are expected to reverse.  The
       Company is required to adjust its deferred tax  liabilities in the period
       when  tax  rates  or  the  provisions  of the  income  tax  laws  change.
       Valuations  allowances are established  when necessary to reduce deferred
       tax assets to the amounts expected to be realized.

       Cash and equivalents

       Cash  equivalents  consist of highly  liquid  investments  with  original
       maturities at time of purchase of three months or less.

       Inventories

       Inventories are stated at the lower of standard cost (which  approximates
       actual cost on a first-in, first-out basis) or net realizable value.

       Property and equipment

       Property  and  equipment  are  stated  at  cost  and   depreciated  on  a
       straight-line basis over the estimated useful lives of the assets ranging
       from  two to  five  years.  Leasehold  improvements  are  amortized  on a
       straight-line  basis  over the  lesser  of the  term of the  lease or the
       estimated useful life of the asset.

       Comprehensive income

       There were no differences between net income (loss) for each of the three
       years ended in the period to December  31,  1999,  and the  comprehensive
       income (loss) for those periods.

       Concentrations of credit risk

       Financial instruments that potentially subject the Company to significant
       concentrations  of  credit  risk  consist  principally  of cash  and cash
       equivalents and trade accounts receivable.

       The  Company  maintains  its  cash and cash  equivalents  with  financial
       institutions  located in California  and in high grade  commercial  paper
       with original  maturities of less than three months.  As part of its cash
       management  process,  the Company  performs  periodic  evaluations of the
       relative credit standing of these financial institutions.

       The Company's customer base is dispersed across many different geographic
       areas  throughout the world and consists  principally of distributors and
       dealers in the electronics industry.  The Company performs ongoing credit
       evaluations  of its  customers  and  maintains an allowance for potential
       credit losses. The Company generally receives confirmed letters of credit
       or cash in advance of  shipping to  distributors  located  outside  North
       America.

                                       38

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       Stock based compensation

       The Company  accounts for stock based  compensation  using the  intrinsic
       value  method  prescribed  by APB Opinion No. 25,  "Accounting  for Stock
       Issued to Employees." Accordingly, compensation cost for stock options is
       measured  as the  excess,  if any,  of the  quoted  market  price  of the
       Company's stock at the date of the grant over the amount an employee must
       pay to acquire the stock.  The  Company  has adopted the  disclosure-only
       provisions  of  Statement  of  Financial  Accounting  Standards  No. 123,
       "Accounting for Stock-Based Compensation."

       Net income (loss) per share

       The Company  calculates  earnings per share in accordance  with Financial
       Accounting  Standards No. 128 ("SFAS 128"),  "Earnings Per Share".  Basic
       net income  (loss) per share is  calculated  by  dividing  income  (loss)
       available to common shareholders by the weighted average number of common
       shares outstanding for the period. Diluted net income (loss) per share is
       calculated by dividing net income (loss) available to common shareholders
       by the weighted  average number of common and dilutive common  equivalent
       shares outstanding  during the period.  Dilutive common equivalent shares
       consist of common stock issuable upon the exercise of stock options.

       Fair value of financial instruments

       Carrying  amounts  of  certain  of the  Company's  financial  instruments
       including cash and cash  equivalents,  accounts  receivable,  payable and
       other  accrued  liabilities  approximate  fair  value due to their  short
       maturities.  Estimated fair values for marketable  securities,  which are
       separately  disclosed  elsewhere  are  based on quoted  market  prices of
       similar instruments.

       Recent accounting pronouncements

       In June 1998,  the FASB issued SFAS No. 133  "Accounting  for  Derivative
       Instruments  and Hedging  Activities"  which  establishes  accounting and
       reporting standards for derivative instruments and hedging activities. It
       requires  that an entity  recognize all  derivatives  as either assets or
       liabilities  on the balance sheet and measure those  instruments  at fair
       value. Management has evaluated the effects of this standard and believes
       there will be no material impact on the Company's  financial  position or
       results of  operations.  The Company  will adopt SFAS 133 as required for
       its first quarterly filing of the year 2000.

3.     Disposal of subsidiary and business

       Sale of Nova Systems

       On January 29, 1999, the Company completed the sale of certain assets and
       the assumption of certain liabilities related to its sale of Nova Systems
       Division ("Nova") to a privately held company in  Massachusetts.  For the
       year ended December 31, 1998, Nova recorded  revenues of $1.9 million and
       a loss from operations of $248,000. For the year ended December 31, 1997,
       Nova recorded revenues of $2.8 million and a loss from operations of $1.4
       million, which included a write-off of $700,000 of non-performing assets.
       Additionally  in 1997,  the Company wrote off $1.9 million of intangibles
       related  to Nova.  The  sale of Nova may  provide  the  Company  with net
       revenues  from  royalties of up to a maximum of  approximately  $450,000,
       contingent  upon future sales of Nova products by the acquiring  company.
       Royalties will be paid, to the extent due, by the acquiring  company on a
       monthly  basis from March 1999 until receipt of  approximately  $450,000.
       The sale of Nova resulted in a $48,000 loss to Videonics.  As of December
       31, 1999, royalties of $207,000 have been received.

                                       39

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       Sale of the German subsidiary

       On September  29, 1999,  the Company sold its wholly owned  subsidiary in
       Germany.  The  Company's  German  office was  primarily  a sales  office.
       Revenue, net loss and assets employed by the Company's foreign subsidiary
       were not material to the consolidated  financial statements.  The Company
       recorded a loss of $65,000 in connection with the sale.

4.     Balance Sheet Detail

       Accounts receivable comprise (in thousands):

                                                                 December 31,
                                                              1999        1998

       Trade accounts receivable                            $ 1,016     $   998
       Less allowance for doubtful accounts                    (130)       (146)
                                                            -------     -------

                                                            $   886     $   852
                                                            -------     -------

       Inventories comprise (in thousands):

                                                                 December 31,
                                                              1999         1998

       Raw materials                                         $3,179       $4,381
       Work in process                                          302          375
       Finished goods                                           304        1,074
                                                             ------       ------

                                                             $3,785       $5,830
                                                             ------       ------

       Property and equipment comprise (in thousands):

                                                                 December 31,
                                                               1999       1998

       Machinery and equipment                               $ 2,909    $ 3,248
       Furniture and fixtures                                     74         86
       Leasehold improvements                                    175        179
       Tooling                                                 1,071      1,015
                                                             -------    -------
                                                               4,229      4,528
       Less accumulated depreciation and amortization         (3,716)    (3,021)
                                                             -------    -------

                                                             $   513    $ 1,507
                                                             -------    -------

                                       40

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       Accrued expenses comprise (in thousands):

                                                                  December 31,
                                                                1999       1998

       Accrued advertising                                     $   66     $  163
       Accrued vacation                                           116        180
       Salaries payable                                           166        228
       Accrued acquisition reserve                                 29        239
       Warranty reserve                                            52         77
       Interest payable                                            79         17
       Other accrued expenses                                     226        386
                                                               ------     ------

                                                               $  734     $1,290
                                                               ------     ------

5.     Note Payable to Shareholder

       On April 16,  1999,  the Company  replaced a  $1,000,000  unsecured  loan
       bearing  interest at 8% per year and due on October 16, 1999,  with a new
       loan in the amount of  $1,035,000  bearing  interest  at a rate of 8% per
       year and due on January 16, 2001.  The new loan is unsecured and from the
       same director and significant  shareholder of the Company as the previous
       loan.  Accrued  interest  under the new loan is payable at  maturity.  On
       March 22, 2000,  the April 16, 1999 loan in the amount of $1,035,000  was
       amended to adjust the maturity  date from January 16, 2001 to January 16,
       2002.


6.     Commitments and Contingencies

       The  Company  leases  a  building  for its  principal  facility  under an
       operating  lease which  expires on July 31, 2002.  Under the terms of the
       lease,  the Company is responsible  for utilities,  taxes,  insurance and
       maintenance.  At December 31, 1999,  future  minimum lease payments under
       all non-cancelable operating leases were as follows (in thousands):

               2000                                   $ 458,099
               2001                                   $ 435,875
               2002                                   $ 259,875


       Rent  expense for the years  ended  December  31,  1999,  1998,  and 1997
       amounted to $370,000, $448,000 and $423,000, respectively.

                                       41

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

7.     Line of Credit

       In August 1999,  the Company  obtained a $1.0 million asset based line of
       credit from Venture Banking Group, a division of Cupertino National Bank,
       secured  by the  Company's  assets.  Interest  on any  advances  will  be
       calculated  at a rate  of  1.5%  above  prime.  Under  the  terms  of the
       agreement,  the Company is required to maintain certain  financial ratios
       and  meet  other  covenants,   including  those  related  to  net  worth,
       profitability  and  indebtedness.  The  maturity  date of this  revolving
       facility  is August 25,  2001.  In  connection  with this  agreement  the
       Company  issued  95,000 fully vested  warrants to purchase the  Company's
       common stock to the bank, at an exercise  price of $0.65.  These warrants
       expire on September 15, 2002.  The Company  recognized  $45,000 (the fair
       value of the warrants  issued using the  Black-Scholes  model) as prepaid
       financing  costs during the quarter ended  September 1999. This amount is
       being  amortized  to interest  expense  over the term of the loan.  As of
       December 31, 1999, the Company had not borrowed from this facility.

8.     Income Taxes

       The  components  of the  provision  for income  taxes are as follows  (in
       thousands):

                                                  1999         1998       1997

       Current:
           Federal                                $--         $--         $(380)
           State                                   --           (30)       --

       Deferred:
           Federal                                 --          --           995
           State                                   --          --           103
                                                  -----       -----       -----

                                                  $--         $ (30)      $ 718
                                                  -----       -----       -----

       The  Company's  effective tax rate on loss before income tax differs from
       the U.S. federal statutory regular tax rate as follows:

                                                      1999     1998     1997

       Federal statutory income tax rate             (34.0)%  (34.0)%  (34.0)%
       State income tax rate, net of federal benefit   0.6     (7.3)    (2.9)
       Tax exempt interest                              --       --       --
       Foreign net operating loss                      4.1     (5.4)     1.3
       Research tax credits                           (4.9)    (4.8)    (6.4)
       Other                                           2.2     (3.8)     1.6
       Increase in valuation allowance                32.0     54.9     46.0
                                                      ----     ----     ----

                                                       -- %    (0.4)%    5.6%
                                                      ----     ----     ----

                                       42

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       The tax effects of temporary  differences  that give rise to  significant
       portions of the deferred tax assets are presented below (in thousands):

                                                             1999         1998

       Intangible assets                                  $  1,469     $  1,464
       Inventory reserves                                      408        1,322
       Depreciation                                             45           47
       Net operating loss carryforward                       6,230        4,487
       Tax credit carryforward                               1,636        1,386
       Deferred California research                            386          442
       Other accrued liabilities and reserves                  226          405
                                                          --------     --------
       Subtotal                                             10,400        9,553
       Less valuation allowance                            (10,400)      (9,553)
                                                          --------     --------

       Net deferred tax asset                             $   --       $   --
                                                          --------     --------


       At December  31,  1999,  the Company has federal and state net  operating
       losses of $17,200,000 and $4,500,000,  respectively, which expire in 2019
       and 2014, respectively. The Company also has federal and state tax credit
       carryforwards of $1,100,000 and $690,000,  respectively,  which expire in
       2019.

       In accordance with generally accepted accounting principles,  a valuation
       allowance must be  established  for a deferred tax asset if its uncertain
       that a tax  benefit may be  realized  from the asset in the  future.  The
       Company  has  established  a  valuation  allowance  to the  extent of its
       deferred  tax  assets  since  it is not  certain  that a  benefit  can be
       realized  in the  future  due  to the  Company's  operating  losses.  The
       Company's  valuation  allowance increased from $9,553,000 at December 31,
       1998 to $10,400,000 at December 31, 1999.

                                       43

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

9.     Net Loss Per Share

       In  accordance   with  the  disclosure   requirements   of  SFAS  128,  a
       reconciliation  of the numerator and denominator of basic and diluted net
       income (loss) per share is provided as follows (in thousands,  except per
       share amounts):

                                                  1999        1998       1997

       Numerator - basic and diluted
               Net loss                        $ (2,634)   $ (6,713)   $(13,441)
                                               --------    --------    --------

           Net loss available to
             common stockholders               $ (2,634)   $ (6,713)   $(13,441)
                                               --------    --------    --------

       Denominator - basic
           Weighted average common shares         5,866       5,833       5,744
                                               --------    --------    --------

               Basic net loss per share
                  outstanding                  $   (.45)   $  (1.15)   $  (2.34)
                                               --------    --------    --------

       Denominator - diluted
           Denominator - basic                    5,866       5,833       5,744
           Effect of dilutive securities:
             Common stock options                  --          --          --
                                               --------    --------    --------

       Diluted weighted average common shares     5,866       5,833       5,744
                                               --------    --------    --------

               Diluted net loss per share      $   (.45)   $  (1.15)   $  (2.34)
                                               --------    --------    --------

10.    Shareholders' Equity

       At December 31, 1999, the Company has reserved 1,000,000 shares of common
       stock for issuance under its 1996 Amended Stock Option Plan. In addition,
       the Company has  reserved  900,000  shares of common  stock for  issuance
       under its 1987 Stock  Option Plan ("1987  Plan").  The 1987 Plan had been
       set to  terminate,  in  accordance  with its  terms,  on January 1, 1997.
       Effective  May 1997,  the  Company's  Board of Directors  authorized  the
       amendment  of the 1987 Plan to permit  the grant of  non-statutory  stock
       options  previously  granted  under the 1987 Plan  that have  expired  or
       terminated. The Plans provide for the granting of incentive stock options
       to officers  and  employees  of the Company and  non-qualified  incentive
       stock  options to  employees,  officers  and  directors of the Company at
       prices  not less  than the fair  market  value of the  Company's'  common
       stock. Options generally vest over a four year period and are canceled 90
       days after termination of employment.

                                       44

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

<TABLE>
       A summary of stock option activity follows:

<CAPTION>
                                                                                                                   Weighted
                                                Shares                                                             Average
                                              Available   Number of      Number     Exercise                       Exercise
                                              for Grant     Shares     of Shares      Price          Total          Price

<S>                                           <C>         <C>          <C>         <C>             <C>            <C>
       Balances, December 31, 1996             425,340    1,115,179           -     0.33-14.75     $7,079,602     $   6.38

           Options granted                    (929,534)     929,534           -      3.81-5.00      4,536,769         4.88
           Options canceled                    881,362     (881,362)          -      3.81-9.00     (6,987,932)        7.93
           Options exercised                         -      (80,149)          -      0.33-7.50       (154,128)        1.92
                                              ---------   ----------   ---------                   -----------

       Balances, December 31, 1997             377,168    1,083,202           -      0.33-8.88      4,474,311         4.17

           Options granted                    (871,354)     871,354     640,000      0.75-2.50      2,514,626         1.66
           Options canceled                    925,657     (925,657)   (320,000)     0.47-7.50     (4,978,895)        4.00
           Options exercised                         -      (73,250)                   0.47           (34,183)        0.47
                                              ---------   ----------   ---------                   -----------

       Balances, December 31, 1998             431,471      955,649     320,000      0.47-8.88      1,975,859         1.58

           Options granted                    (348,124)     348,124           -     0.38 - 0.88       213,567         0.61
           Options canceled                    422,609     (422,609)   (200,000)    0.38 - 5.00      (985,131)        1.58
           Options exercised                         -      (15,950)          -     0.47 - 0.75        (7,656)        0.48
                                              ---------   ----------   ---------                   -----------

       Balances, December 31, 1999             505,956      865,214     120,000    $0.38 - $8.88   $1,196,639     $   1.21
                                              ---------   ----------   ---------                   -----------
</TABLE>

       Compensation  of  approximately  $114,000  had been  attributed  to stock
       options  granted  after March 1994 and prior to the sale of the Company's
       common  stock  in  an  initial  public  offering.  The  compensation  was
       recognized  as a charge  to income  over the  three-year  vesting  period
       commencing in October 1994 and terminating in September 1997.

       In March 1998,  the Company  granted a  nonqualified  stock  option to an
       officer of the  Company to  purchase a total of 320,000  shares of common
       stock.  The option was granted  outside the Company's stock option plans,
       at an exercise  price of $2.13 per share,  the fair  market  value of the
       Company's  Common  Stock on the  relevant  date.  On June 24,  1998,  the
       Company offered  employees the right to cancel certain  outstanding stock
       options at original  exercise  prices and receive new options  with a new
       exercise price.  In accordance  with this offer,  the option was canceled
       and  reissued  at an exercise  price of $1.50 per share,  the fair market
       value of the  stock on June 24,  1998.  Vesting  of the new  option  will
       follow the original  option vest  schedule  except the option will remain
       unvested  until June 24,  1999 at which time  vesting of new option  will
       vest according to the original vest schedule.  This option is exercisable
       for a term of ten years,  vests over a four-year  period and is cancelled
       90 days after termination of employment. As of December 31, 1999, options
       to purchase 120,000 shares were exercisable.

       On August 19, 1997,  the Company  offered  employees  the right to cancel
       certain outstanding stock options at original exercise prices and receive
       new options  with a new  exercise  price.  Options to purchase a total of
       733,072 shares at original  exercise  prices ranging from $7.50 to $14.75
       per share were canceled and new options were issued at an exercise  price
       of $5.00 per  share,  the fair  market  value of the stock on August  19,
       1997. Vesting under the new options commenced on the date of the original
       options first vest date with an additional  year added to the new options
       vesting period, increasing their original vesting period from three years
       to four years.

                                       45

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       On June 24,  1998,  the  Company  offered  employees  the right to cancel
       certain outstanding stock options at original exercise prices and receive
       new options  with a new  exercise  price.  Options to purchase a total of
       669,222  shares at original  exercise  prices ranging from $2.50 to $5.00
       per share were canceled and new options were issued at an exercise  price
       of $1.50 per share,  the fair market value of the stock on June 24, 1998.
       Vesting of the new options will follow the original options vest schedule
       except  options  will remain  unvested  until June 24, 1999 at which time
       vesting of new options will vest  according to the original  options vest
       schedule.

       Had  compensation  cost for the years ended  December 31, 1999,  1998 and
       1997  been  determined  based  on  the  fair  value  at the  grant  date,
       consistent  with the  provisions of SFAS No. 123 and been included in the
       Company's  operations,  the Company's net loss and net loss per share for
       the years ended December 31, 1999,  1998 and 1997 would have been reduced
       to the pro forma amounts indicated below:

                                              1999         1998          1997

       Net loss - pro forma                $  (3,154)   $  (7,802)   $  (15,557)
                                           ---------    ---------    ----------
       Net loss per share - basic          $    (.54)   $   (1.34)   $    (2.71)
                                           ---------    ---------    ----------
       Net loss per share - diluted        $    (.54)   $   (1.34)   $    (2.71)
                                           ---------    ---------    ----------

       The  impact  on pro  forma  loss and pro  forma net loss per share in the
       table above may not be  indicative  of the effect in the future  years as
       options vest over several years and the Company  continues to grant stock
       options to employees. This policy may or may not continue.

       The weighted average fair value of options granted in 1999, 1998 and 1997
       was $0.58, $1.40 and $2.22,  respectively.  The fair value of each option
       grant is  estimated  on the date of the  grant  using  the  Black-Scholes
       option pricing model with the following  weighted average  assumptions by
       subgroup:

                                           1999            1998          1997

       Risk-free interest rate        5.36%-6.38%     4.45%-5.61%     5.71-6.09%
       Expected life                           7               5              5
       Expected dividends                    --              --             --
       Volatility                           1.41            1.19           0.75

       The weighted  average  expected life was calculated  based on the vesting
       period  and  the  exercise  behavior  of  the  Company's  employees.  The
       risk-free  interest rate was calculated in accordance with the grant date
       and estimated expected life.

                                       46

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

<TABLE>
       The options  outstanding  and currently  exercisable by exercise price at
       December 31, 1999 are as follows:

<CAPTION>
                                                                                         Options Currently
                                           Options Outstanding                              Exercisable
                           ----------------------------------------------------  -----------------------------
                                                Weighted
                               Number           Average         Weighted           Number           Weighted
                            Outstanding        Remaining         Average         Exercisable         Average
           Exercise          December 31,     Contractual       Exercise         December 31,       Exercise
            Price               1999              Life            Price             1999              Price

<S>    <C>   <C>              <C>                <C>              <C>              <C>                <C>
       $0.38-$0.47            216,968            6.91             $ 0.41            81,648            $ 0.47
       $0.50-$1.13            193,170            9.09             $ 0.78            36,368            $ 0.78
       $1.50-$1.50            536,018            8.48             $ 1.50           476,256            $ 1.50
       $2.50-$8.88             39,058            7.70             $ 3.92            24,868            $ 4.58
                              -------                                              -------

                              985,214            8.22             $ 1.21           619,140            $ 1.45
                              -------                                              -------
</TABLE>

11.    Segment Information

       In 1998,  Videonics adopted SFAS 131. Prior years segment information has
       been restated to present  Videonics' two reportable  segments - (1) Video
       Production and (2) Signal Processing.

       The accounting  policies of the segments are the same as those  described
       in the "Summary of Significant  Accounting Policies." Videonics evaluates
       the performance of its segments based on revenue and operating income.

       Videonics is organized  primarily on the basis of three separate  product
       lines.  Two of its  product  lines have been  aggregated  into the "Video
       Production"   segment.   This  segment   manufactures   and  sells  video
       post-production  equipment  into  broadcast,  cable,  industry  and  home
       producer  markets.  "Signal  Processing"  represented  the Company's Nova
       Division that  manufactured  and sold signal  conversion  and  processing
       equipment  primarily into television and cable studios.  The Company sold
       its Nova Division on January 29, 1999.

       The table below  presents  information  about  reported  segments for the
       years ending December 31, (in thousands):

                                             1999           1998          1997

       Video Production
             Sales                        $ 14,135       $ 17,750      $ 17,149
             Operating loss                 (2,527)        (6,474)       (9,339)

       Signal Processing
             Sales                              91*         1,922         2,806
             Operating loss                    (36)*         (248)       (1,389)

       Reconciling items                      --             --          (2,256)

                                       47

<PAGE>

Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       *Results  presented  are through  January 29, 1999,  the date the Company
       completed its sale of Nova.

       For the year ended  December 31, 1997,  reconciling  items of  $2,256,000
       relate to the amortization and write-off of intangible assets.

       The Company markets and services it products in North America through its
       own direct  sales  organization.  The  Company  markets  its  products in
       foreign countries outside North America through distributors.

       Geographic net export sales information is shown below (in thousands):

                                                             December 31,
                                                       1999     1998       1997

       Revenues from unaffiliated customers:
          United States                              $10,149   $12,665   $13,317
          Europe                                       1,325     2,662     2,007
          Asia                                         2,034     2,772     2,637
          Americas (excluding the United States)         718     1,573     1,994
                                                     -------   -------   -------

                                                     $14,226   $19,672   $19,955
                                                     -------   -------   -------

       For the years ended December 31, 1998 and 1997, no one customer accounted
       for more that 10% of  revenues  during  the  periods.  For the year ended
       December 31, 1999, one customer accounted for 13% of annual revenue.  The
       Company has no significant assets in foreign countries.

12.    401(k) Plan

       In August  1994,  the  Company  adopted a 401(k)  employee  savings  plan
       wherein the employee can contribute up to specified Internal Revenue Code
       limits and the Company  matches,  at a rate of 50%, the first $200 of the
       employee's  contribution per quarter.  The employee's  entitlement to the
       Company   matching   contributions   is  fully  vested  on  the  date  of
       contribution.  The Company,  at its sole discretion and with the Board of
       Directors' approval, can make an additional  discretionary  contribution.
       To date,  the  Company  has not  made  discretionary  contributions.  The
       Company's   matching   contributions   charged   against  income  totaled
       approximately  $26,000,  $39,000 and $51,000 for the years ended December
       31, 1999, 1998 and 1997, respectively.

                                       48

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Information  concerning  the  directors  and  executive  officers  of the
Company is incorporated herein by reference from the information contained under
the caption  "Election of  Directors"  with  respect to directors  and under the
caption  "Management"  with  respect to  executive  officers,  contained  in the
Company's  Proxy Statement (the "Proxy  Statement")  relating to its 2000 Annual
Meeting of  Shareholders  to be held on or about  August 17,  2000.  Information
regarding compliance with the reporting  requirements under Section 16(a) of the
Securities  and  Exchange  Act of 1934,  as  amended is  incorporated  herein by
reference  from the  information  under the caption  "Executive  Compensation  -
Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in the
Proxy  Statement.  The Proxy  Statement  will be filed with the  Securities  and
Exchange  Commission in  accordance  with Rule  14a-6(b)  promulgated  under the
Securities Exchange Act of 1934. With the exception of the foregoing information
and other information  specifically  incorporated by reference into this Report,
the Proxy Statement is not being filed as a part hereof.

ITEM 11. EXECUTIVE COMPENSATION

       The  information  required by this item is incorporated by reference from
the  information  under the caption  "Executive  Compensation"  contained in the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by this item is incorporated herein by reference
from the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The information required by this item is incorporated herein by reference
from the information under the caption "Certain  Transactions"  contained in the
Proxy Statement.

                                       49

<PAGE>

                                     PART IV

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

         (a)      1.       Financial Statements

         The following financial statements are filed as part of this report:

                  -        Report of Independent Accountants

                  -        Balance Sheets at December 31, 1999 and 1998

                  -        Statements of Operations for the Years Ended December
                           31, 1999, 1998, and 1997

                  -        Statement of Shareholders' Equity for the Years Ended
                           December 31, 1999, 1998, and 1997

                  -        Statements of Cash Flows for the Years Ended December
                           31, 1999, 1998, and 1997

                  -        Notes to Financial Statements

                  2.       Financial Statement Schedules

         The following financial statement schedule is included in Item 14(d):

                   Schedule                                Title
                   --------                                -----
                  Schedule II                  Valuation and Qualifying Accounts


         Schedules  other than the one listed above have been omitted  since the
         required  information  is not present in amounts  sufficient to require
         submission  of the  schedule,  or because the  information  required is
         included in the financial statements or notes thereto.

                  3.       Exhibits

         Exhibit No.
         -----------

              3.01         Amended and  Restated  Articles of  Incorporation  of
                           Videonics, Inc., dated December 19, 1994. (3)

              3.02         Amended and  Restated  Bylaws of  Videonics,  Inc. as
                           Adopted  by the Board of  Directors  on  October  27,
                           1994. (3)

              4.01         Warrant to Purchase  Stock  between  Venture Bank and
                           Videonics Inc., dated September 15, 1999. (11)

                                       50

<PAGE>

              4.02         Holder  Rights  Agreement  between  Venture  Bank and
                           Videonics Inc., dated September 15, 1999. (11)

             10.01         Lease,  dated July 6, 1994 between H-K Associates and
                           Videonics,   Inc.  at  1370  Dell  Avenue,  Campbell,
                           California. (1)

             10.02         Lease,   dated  September  27,  1995  between  Canton
                           Gateway Office Park and Videonics,  Inc. at 50 Albany
                           Turnpike, Canton, Connecticut. (4)

             10.03         Sublease,  dated July 11, 1996 between Diba, Inc. and
                           Videonics,  Inc.  at 270 Harbor  Boulevard,  Belmont,
                           California. (4)

             10.04         Stock Option Plan, and related agreements. (2)

             10.05         Asset Purchase  Agreement relating to the acquisition
                           of Nova  Systems,  Inc., by  Videonics,  Inc.,  dated
                           September 7, 1995. (5)

             10.06         Asset Purchase  Agreement relating to the acquisition
                           of KUB Systems,  Inc., by Videonics,  Inc., dated May
                           24, 1996. (6)

             10.07         Letter of Employment  Agreement with Steve L. Peters.
                           (4)

             10.08         Promissory  Note  issued in  connection  with loan by
                           Videonics, Inc. to Steve L. Peters. (4)

            +10.09         Letter of Employment  Agreement with Yeshwant  Kamath
                           dated November 17, 1997. (7)

             10.10         Loan  agreement  issued in connection  with a loan by
                           Carl Berg to Videonics,  Inc. dated October 16, 1998.
                           (8)

             10.11         Key  Employee  Agreement  between  Jeffrey  Burt  and
                           Videonics dated February 25, 1999. (9)

             10.12         Key  Employee  Agreement  between  James  McNeill and
                           Videonics dated February 25, 1999. (9)

             10.13         Key  Employee  Agreement  between  Gary  Williams and
                           Videonics dated February 25, 1999. (9)

             10.14         Promissory  Note between Carl Berg and Videonics Inc.
                           dated April 16, 1999. (10)

                                       51

<PAGE>

             10.15         Loan and Security  Agreement between Venture Bank and
                           Videonics dated August 25, 1999. (11)

             10.16         Intellectual   Property  Security  Agreement  between
                           Venture  Bank and  Videonics  dated  August 25, 1999.
                           (11)

             10.17         Subordination  Agreement  between  Venture  Bank  and
                           Videonics dated August 25, 1999. (11)

             10.18         Second Addendum to lease,  dated July 6, 1994 between
                           H-K  Associates  and  Videonics,  Inc.  at 1370  Dell
                           Avenue, Campbell, California dated April 27, 1999.

             23.1          Consent of  PricewaterhouseCoopers  LLP,  Independent
                           Accountants.

             27.1          Financial Data Schedule

                                       52

<PAGE>


(b)      Reports on Form 8-K

       The Company filed no reports on Form 8-K with the  Commission  during the
fiscal quarter ended December 31, 1999.

----------

(1)     Filed as an Exhibit to the Company's  Registration Statement on Form S-1
        (No.  33-85734) as declared  effective by the Commission on December 15,
        1994, and incorporated herein by reference.

(2)     Incorporated by reference to Registration  Statement (No.  333-21003) on
        Form S-8.

(3)     Filed as an exhibit to the Company's  Annual Report on Form 10-K for the
        year ended December 31, 1994, and incorporated herein by reference.

(4)     Filed as an exhibit to the Company's  Annual Report on Form 10-K for the
        year ended December 31, 1996, and incorporated herein by reference.

(5)     Filed as an Exhibit to the  Company's  Current  Report on Form 8-K dated
        September 7, 1995, and incorporated herein by reference.

(6)     Filed as an Exhibit to the  Company's  Current  Report on Form 8-K dated
        June 6, 1996, and incorporated herein by reference.

(7)     Filed as an exhibit to the Company's  Annual Report on Form 10-K for the
        year ended December 31, 1997, and incorporated herein by reference.

(8)     Filed as an exhibit to the Company's  Annual Report on Form 10-K for the
        year ended December 31, 1998, and incorporated herein by reference.

(9)     Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q for
        the period ended March 31, 1999, and incorporated herein by reference.

(10)    Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q for
        the period ended June 30, 1999, and incorporated herein by reference.

(11)    Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q for
        the  period  ended  September  30,  1999,  and  incorporated  herein  by
        reference.

+       Confidential  treatment  has been  requested  with  respect  to  certain
        portions of this Exhibit.  Such portions have been omitted and have been
        filed separately with the Securities and Exchange Commission.

                                       53

<PAGE>


                                   SIGNATURES


       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this Report to be signed on
its behalf by the undersigned,  thereunto duly  authorized,  on this 27th day of
March, 2000.

                               VIDEONICS, INC.

                           By: /s/ Michael L. D'Addio
                               ----------------------
                               Michael L. D'Addio
                               Chief Executive Officer


<TABLE>
       Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the  following  persons on behalf of the Company
and in the capacities and on the dates indicated.


<CAPTION>
Name and Signature                             Title                                    Date
------------------                             -----                                    ----

<S>                                            <C>                                      <C>
/s/ Michael L. D'Addio                         Chairman of the Board                    March 27, 2000
------------------------------                 and Chief Executive Officer
Michael L. D'Addio                             (Principal Executive Officer)


/s/ Gary L. Williams                           Vice President of Finance,               March 27, 2000
------------------------------                 and Chief Financial Officer
Gary L. Williams                               (Principal Financial Officer
                                               and Principal Accounting
                                               Officer)


/s/ Mark C. Hahn                               Director                                 March 28, 2000
------------------------------
Mark C. Hahn


/s/ Carl E. Berg                               Director                                 March 27, 2000
------------------------------
Carl E. Berg


/s/ N. William Jasper, Jr.                     Director                                 March 27, 2000
------------------------------
N. William Jasper, Jr.
</TABLE>

                                       54

<PAGE>


                                 VIDEONICS, INC.

              INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

                                                                      Page in
                                                                     Form 10-K

Financial statements:

         Report of Independent Accountants.................................32

         Consolidated Balance Sheets.......................................33

         Consolidated Statements of Operations.............................34

         Consolidated Statements of Shareholders' Equity...................35

         Consolidated Statements of Cash Flows.............................36

         Notes to Consolidated Financial Statements........................37

Schedules:
                     Report of Independent Accountants.....................57

         II          Valuation and Qualifying Accounts.....................58

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

Exhibits:

       10.18         Second Addendum to lease, dated July 6, 1994 between H-K
                     Associates and Videonics, Inc. at 1370 Dell Avenue,
                     Campbell, California dated April 27, 1999................__

       23.1          Consent of PricewaterhouseCoopers LLP, Independent
                     Accountants..............................................__

       27.1          Financial Data Schedule..................................__

                                       55

<PAGE>


                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1999

                                   ITEM 14(d)

                          FINANCIAL STATEMENT SCHEDULE

                                       56

<PAGE>


                   INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE

Our report on the financial  statements of Videonics,  Inc. and  subsidiaries is
included  on page 32 of this Form 10-K.  In  connection  with our audits of such
consolidated  financial  statements,  we have also audited the related financial
statement schedule listed in the index on page 55 of this Form 10-K.

In our  opinion,  the  financial  statement  schedule  referred  to above,  when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects,  the information required to be
included therein.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000

                                       57

<PAGE>


<TABLE>
                                 VIDEONICS, INC.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                 Consolidated Valuation and Qualifying Accounts

                                 (in thousands)

<CAPTION>
                                                Balance at        Charged to                          Balance
                                                 Beginning         Costs and                         at End of
Description                                      of Period         Expenses        Deductions         Period

<S>                                                <C>               <C>              <C>              <C>
Year ended December 31, 1999
   Allowance for doubtful accounts:                $146              $ --             $  (16)          $ 130

Year ended December 31, 1998
   Allowance for doubtful accounts:                $255              $ 25             $ (134)          $ 146

Year ended December 31, 1997
   Allowance for doubtful accounts:                $123              $375             $ (243)          $ 255
</TABLE>

<TABLE>
<CAPTION>
                                                Balance at        Charged to                         Balance
                                                 Beginning         Costs and                        at End of
Description                                      of Period         Expenses        Deductions         Period

<S>                                              <C>               <C>              <C>             <C>
Year ended December 31, 1999
   Allowance for excess and
   obsolete inventories:                         $2,829            $  733           $(2,538)        $ 1,024

Year ended December 31, 1998
   Allowance for excess and
   obsolete inventories:                         $1,753            $1,661           $  (585)        $ 2,829

Year ended December 31, 1997
   Allowance for excess and
   obsolete inventories:                         $  377            $1,641           $  (265)        $ 1,753
</TABLE>

                                       58

<PAGE>


                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1999

                                   ITEM 14(c)

                                    EXHIBITS