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, 1996
                                       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 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:

      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 3, 1997,  the  aggregate  market  value of Common  Stock held by
non-affiliates of the Registrant was approximately $15,344,780.

       As of March 3, 1997,  there  were  5,735,045  shares of the  Registrant's
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
       Materials from the Registrant's  definitive  Proxy Statement  relating to
its 1997  Annual  Meeting of  Shareholders  to be held May 22,  1997 (the "Proxy
Statement") have been incorporated by reference into Part III, of this Report.

<PAGE>

<TABLE>

                                                VIDEONICS, INC.
<CAPTION>

                                               TABLE OF CONTENTS

<S>      <C>         <C>                                                                                   <C> 
PART I

         ITEM 1.     BUSINESS.............................................................................. 3

         ITEM 2.     PROPERTIES............................................................................16

         ITEM 3.     LEGAL PROCEEDINGS.....................................................................16

         ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................................16

PART II

         ITEM 5.     MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED SHAREHOLDERS MATTERS....17

         ITEM 6.     SELECTED FINANCIAL DATA...............................................................18

         ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                     OPERATIONS............................................................................19

         ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................25

         ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..47

PART III

         ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.......................................47

         ITEM 11.    EXECUTIVE COMPENSATION................................................................47

         ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................47

         ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................47

PART IV

         ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................48

</TABLE>

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<PAGE>

                                     PART 1

       The following  discussion  in this section  "Business"  contains  forward
looking  statements  within the meaning of Section 27A of the  Securities Act of
1933,  as amended,  and Section 21E of the  Securities  Exchange Act of 1934, as
amended.  Actual  results could differ  materially  from those  projected in the
forward  looking  statements  as a result of the  factors  set  forth  below and
elsewhere in this Form 10-K.


ITEM 1.       BUSINESS

       Videonics,   Inc.,  a  California  corporation  organized  in  1986  (the
"Company"),  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  post-production  of videos. In June of 1996, the Company hired
all the  personnel  and  acquired  substantially  all  the  assets  and  certain
liabilities  of KUB  Systems  ("KUB").  KUB  develops  and  sells  products  for
compositing and adding special effects to videos for broadcast. KUB products are
desktop video products that  incorporate the use of a personal  computer for the
control and user interface of the post production functions.  As of December 31,
1996, more than 450,000 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 in a timely manner. 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,  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.

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<PAGE>

       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 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

                                       4
<PAGE>

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.

The Videonics Solution

       The  Company's  solution is to design,  develop,  manufacture  and market
products that incorporate  advanced  proprietary  digital video  technologies to
reduce significantly 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 digital video post-production  products.  As a consequence,  the Company
has been  able to offer  its  products  at  attractive  prices  to users in this
market.  Moreover,  the Company's  products contain features that have minimized
the need for most video makers to purchase  more  expensive  systems in order to
create high quality video.

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 timely 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.


                                       5
<PAGE>


       Broaden  Product Line. The Company  intends to expand its product line in
order to broaden its potential market and to reduce its reliance on any specific
market  segment.  Videonics  has been an  innovator  in  developing  affordable,
full-featured  editing  products  primarily for the  videographer,  business and
industry,  and videophile  market  segments.  The Company seeks to leverage this
expertise by developing new products with enhanced  functionality that establish
price/performance  leadership in other market segments,  including broadcast and
desktop  video.  The  acquisitions  of Nova,  Abbate,  and KUB,  along  with the
development  of the  PowerScript  Character  Generator,  are all tactics used to
accomplish this objective.

       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 the
emerging markets of Asia, South America, Central Europe, and Africa. The Company
believes that  distributing  products through domestic dealers and international
wholesalers is a cost-effective  method of reaching  potential product users. In
addition,  the Company allies itself with third parties to sell certain products
in specific countries. These selective selling arrangements allow the Company to
have  improved  distribution  in certain  markets or  geographic  areas over its
conventional  sales  channels.  An example of such an arrangement  includes that
which the Company has with Sony.

       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. For instance, except for start-up production and the specialized
signal  processing  products from Nova,  the Company  contracts with third party
manufacturers located in Mexico for most product manufacturing.

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  resident  team of  designers.  The software is all
proprietary and has been developed by the Company's software engineers.

       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.

                                       6

<PAGE>

           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


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 $100
for  certain  software  products  to more than  $20,000  for  certain  broadcast
products.

       PowerScript.  First shipped in September 1996, PowerScript is an advanced
PostScript video character  generator designed for broadcast,  video production,
multimedia,  industrial, and videography applications.  It displays high quality
(17.5 ns resolution,  10-bit 4:2:2 digital video) anti-aliased titles and offers
the  character,  graphics  display,  and  formatting  features  supported by the
PostScript display technology.

       PowerScript is a standalone  character  generator,  meaning that it makes
images,  characters,  and  graphics  internally,  without the aid of an external
computer.  Rotation, sizing, stretch,  outlines, color, transparency,  and other
advanced functions are imaged by its internal PostScript engine.

       While PowerScript is standalone,  it also includes  extensive  networking
capabilities  that allow 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 allow 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
(time  base  corrector),  user-definable  styles,  roll  and  crawl,  transition
effects,  clock/calendar,  GPI trigger, video test patterns, and optional analog
component output.

       In March of 1997,  Videonics  shipped  version  1.1,  an  upgrade  to the
original  PowerScript  product,  that offers  greater  speed,  an enhanced  user
interface,  improved  documentation,  and other  performance  improvements.  The
upgrade  is  being  made  available  to all  existing  customers  at no  charge.
PowerScript has a U.S. suggested retail price of $3000.

       Edit Suite.  The Edit Suite,  first  shipped in 1995, is an A/B-roll edit
controller which automates multiple source editing.  It memorizes the in and out
points for each scene from up to four independent videotape sources, controlling
the players and recorder to automatically complete the production. It works with
a wide range of camcorders, VCRs, and VTRs (Video Tape Recorders),  ranging from
simple  consumer  units  with  Control-L  or  Panasonic  5-pin  edit  control to
professional RS-232 and  RS-422-controlled  decks. It also supports consumer and
professional  time code  standards,  including RC, SMPTE VITC (Society of Motion
Picture  and  Television  Engineers,  Vertical  Interval  Time  Code),  and  LTC
(Longitudinal Time Code), for

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<PAGE>


accurate    productions.    The   unit   works   with   GPI   (General   Purpose
Interface)-controllable  mixers and titlers,  including  the  Videonics  Digital
Video Mixer and Video TitleMakers,  to automatically trigger effects and titles.
Edit Suite won the 1995 Video Magazine VIVA!  Gold award and the EIA (Electronic
Industries  Association)  Consumer Electronics Show's 1995 Innovations Award for
design and engineering innovation. It has a U.S. suggested retail price of $699.

       Digital Video Mixer.  The Digital Video Mixer,  first shipped in February
1994, effectively 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 TBC feature that allows it to
produce  video  mixing.  A  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  allows 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 has S-video as well as composite connectors.
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,  and the
Video  Post-Production  Product of The Year  1994-1995 by Video Camera  Magazine
U.K. The Digital Video Mixer has a U.S. suggested retail price of $1,199.

       Video  TitleMaker 2000. The Video TitleMaker 2000, first shipped in March
1994, replaced the Company's original Video TitleMaker character generator.  The
Video  TitleMaker  2000 has a broader range of features  including  better video
quality and improved signal-to-noise ratio. The product delivers high resolution
(720 by 480  pixels)  titles for  smooth,  clean  letters  and has 92  font/size
combinations,  each of which  can be  rendered  in over a million  colors.  Many
styling features can be added,  including outline,  shadow, colored backgrounds,
colored patterns (such as rainbow), and borders. The product contains a full set
of accented and international  characters including boxes,  hearts,  arrows, and
similar  pictorial  characters,  as  well  as the  accents  needed  for  foreign
languages. Titles can be superimposed over solid color backgrounds, patterns, or
moving video with special effects adding motion between pages of titles. Complex
scrolling effects are also possible.  For instance,  a page of titles can scroll
from one  direction,  stay on the screen for a user-defined  interval,  and then
scroll out another  direction.  In addition,  effects such as fades,  wipes, and
scrolls can be mixed. The unit holds approximately  8,000 characters,  which can
be grouped into pages and projects.  A lithium battery backup preserves  titles,
even when power is lost.  The  product  has  S-video as well as  composite-video
connectors and advanced features such as "Preview Out." A built-in demonstration
presents  an  unattended  demonstration  of the  product's  features.  The Video
TitleMaker  2000 has a U.S.  suggested  retail  price of $599. A version of this
product is sold exclusively in Japan by Sony.

       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,  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

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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. TitleMaker 3000 carries a
U.S.  suggested  retail  price of $799  and is  available  in  language-specific
versions.

       Video ToolKit. The Video ToolKit is a software product for both Macintosh
(first  shipped in 1995) and Windows based PCs (scheduled for shipment in March,
1997). It catalogs video scenes and performs assembly editing,  controlling VCRs
and  camcorders  to record the good  footage on a new tape.  It  supports a wide
range of VCR and camcorder control  protocols,  including  Control-L,  Panasonic
5-pin,  RS-232/422,  and Sony ViSCA. It also supports  consumer and professional
time  codes,  including  RC and SMPTE  VITC.  The Video  ToolKit  also  supports
QuickTime  non-linear  (disk-based)  digital  video,  as  well  as  tape-to-tape
editing.  Users can include QuickTime clips in a taped production and can record
productions on tape or as QuickTime.  It also permits users to output their edit
lists in HTML form to make it easy to publish video clips on the World Wide Web.
The Video ToolKit carries a U.S. suggested retail price of $279.

       MediaMotion.  MediaMotion is a  machine-control  plug-in software product
for Adobe Premiere, a popular non-linear  (disk-based) video editing application
marketed by Adobe Systems,  Inc., for use with personal  computers  using either
Intel  microprocessors  or those  which are used by  Apple's  Macintosh  line of
personal computers.  MediaMotion adds the ability to control VCRs and camcorders
from inside Adobe  Premiere.  It also works with Data  Translation's  Media 100.
With  MediaMotion,  a user can  batch-digitize  select portions of source tapes,
allowing  unattended  recording  to  disk.  This  saves  time  and  disk  space.
MediaMotion is available for both the Windows and Macintosh operating systems at
a U.S. suggested retail price of $99.

       The  Company's  Nova product line includes  time base  correctors,  frame
synchronizers,  transcoders,  video converters and signal distribution products.
Nova's end users are in  broadcasting,  cable  television  ("CATV"),  multimedia
studios,  corporate A/V, video  conferencing  and  presentation,  and industrial
market areas. Nova brought several new products to market in 1996.

       NovaAVD  Audio/Video  Delay  System.  NovaAVD  Audio/Video  Delay  system
utilizes the latest digital video processing technology,  the device provides up
to 10 seconds of real time uncompressed  audio and video programming  delay. The
NovaAVD  is ideal for live  program  profanity  monitoring,  momentary  delay of
network feeds, lip-sync correction, amphitheater video/audio matching and system
synchronization.

       NovaMNR.  The  NovaMNR  standalone  Median  Noise  Reducer is designed to
eliminate  a wide  variety of impulse  and  transmission  noise from  satellite,
microwave, and fiber optic feeds. The NovaMNR can also be utilized in non-linear
video  editing  applications  to  minimize  input noise and  increase  operating
efficiencies.

       StudioFrame  Series.  First  shipped  in the  summer  of  1996,  the Nova
StudioFrame  Series is a modular,  flexible,  digital/analog  signal  processing
system.  StudioFrame  is designed to  accommodate  the evolving  video and audio
interfacing   requirements   of  both  today  and  tomorrow.   Targeting   those
applications  where the  utmost  video  quality is  demanded,  the system can be
easily  configured  to  accomplish  a wide variety of  ultra-transparent  signal
conversion/processing  functions.  A  comprehensive  range of both  digital  and
analog function  modules are available,  including:  Serial Digital  Converters,
Noise Reducers,  Synchronizers,  Time-Base-Correctors,  Distribution Amplifiers,
and Format Converters.

                                       9

<PAGE>

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 the market. Videonics has received editorial mention
in  many of  these  publications.  The  Company  exhibited  its  products  at 20
different U.S. trade shows during 1996, including the Consumer Electronics Show,
the  National  Association  of  Broadcasters,  and  COMDEX.  In 1996 the Company
presented  movie  making  seminars  in  cities  throughout  the U.S.  as well as
England, Canada, Australia, and New Zealand.

       All Company products carry a standard two-year warranty on both parts and
labor. 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 1996, 1995, and 1994, respectively,  sales in
the United States accounted for approximately 58%, 51%, and 60% 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 servicing 78
different  countries and by selling selected  products to several  international
private label customers.  The Company currently has twelve employees who service
and support its  international  private  label  customers  and country  specific
distributors.  The  Company's  international  distributors  sell  the  Company's
products under the Videonics and Nova brand names,  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.

       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 which address a particular  need,  such as video mixing or
titling.   These  products  are  sold  through  direct  mail  order  businesses,
audio/visual specialty stores, camera and video shops.

       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

                                       10
<PAGE>

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 which service the broadcast industry.

       Desktop video  products use a general  purpose  computer as their control
element.  These  products  are sold  through  VARs and  retailers  who 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 Video  TitleMaker  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.  The  product  architecture  accommodates  this  further by  supporting
non-English  character sets including  those that read and produce from right to
left, such as Hebrew.

       Private  label   relationships.   The  Company  believes  that  strategic
alliances  are  essential  to  compete  successfully  in certain  large  foreign
markets,  particularly Japan. The Company therefore distributes in Japan through
select  private label  relationships.  These  relationships  are 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
Electrical  Industrial Co., Ltd.  ("Matsushita.")  Matsushita purchased a custom
version of the Company's EditMaker product which was manufactured by the Company
and is sold under the Panasonic brand name.  While the Company has  discontinued
its  domestic  version  of this  product,  it has an ongoing  sales and  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.

        For 1996, 1995, and 1994, no one customer accounted for more than 10% of
revenues.

       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 an almost immediate  adverse impact on the Company's  operating results and
on the Company's ability to maintain profitability.

                                       11

<PAGE>

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. All products in the Nova product line are assembled,  tested, and
distributed from the Company's facility in Canton,  Connecticut.  As of December
31,  1996,  the  Company  employed  32 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. Nova employed five
people  in  its  separate   manufacturing   and  operations   group  in  Canton,
Connecticut.

       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. 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 1996, 1995,
and 1994,  the Company  invested $5.0 million,  $3.1 million,  and $1.6 million,
respectively, constituting 17%, 9%, and 5% 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 use to prototype  subsequent  new
products.

       As of December  31, 1996,  the Company  employed 41 hardware and software
engineers with technical  skills in design and development of ASICs,  digital or
analog video signal generation-processing, or embedded software.

       During 1996, the Company  continued to experience  substantial  delays in
completing the successful  development of products.  The  PowerScript  Character
Generator  in the NTSC video  format,  introduced  in 1995,  was  completed  for
shipment in September of 1996. After extensive field use, a major revision (1.1)
of  PowerScript's  software  was  completed  for  shipment  in  March  of  1997.
PowerScript is the first major product  offering that the Company has brought to

                                       12
<PAGE>

market in nearly two  years.  Although  the  Company's  other  1996 new  product
releases such as;  TitleMaker 3000, the Nova Median Noise Reducer,  and the Nova
StudioFrame Signal Processing System,  demanded significant  technical expertise
and design,  they did not require the same level of technical  sophistication as
PowerScript. The ASIC and software technology of PowerScript will be utilized in
other products that the Company currently has in development.  As the complexity
of the Company's  product  designs and feature sets  continues to increase,  the
Company may continue to experience  similar delays in the future,  especially if
the  Company  expands  through  acquisition  of other  companies'  products  and
technology which it seeks to integrate with its own product line and 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.  In 1995,  the Company  announced four new products.
Since this announcement,  only two products have shipped.  One began shipping in
June of 1995.  PowerScript  began shipping in September  1996, and the other two
products had still not been introduced  successfully on a commercial basis as of
March 1997. This has had an adverse  material impact on the Company's  growth in
1995 and 1996 and, until these products are successfully introduced and accepted
by end users,  can be expected to have a similar adverse effect in the future on
the Company's results of operations.  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 1995 and
1996,  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  or  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

       In  the  videographer   and  desktop  video  markets,   the  Company  has
encountered competition from smaller and comparably-sized  companies which offer
functionally similar products,  as well as from larger companies,  such as Sony,
Matsushita,  and JVC, which market both traditional  analog equipment as well as
new digital video  post-production  devices.  A number of competitors  exist who
have substantially greater resources than the Company and who make digital video
editing  products and other  post-production  devices for  operation on personal
computers   and    workstations.    Although   these   desktop    computer   and
workstation-based  vendors sell more  sophisticated  products  primarily for the
broadcast  professional and business and industrial markets and at significantly
higher  price  points than the  Company's  products,  it is  possible  that such
vendors may at some future time introduce products which target the same markets
as the Company's products.

       The character  generation and graphics  imaging  systems market is highly
competitive  and is  characterized  by rapid  technological  change and evolving
industry standards. Rapid obsolescence of products,  frequent development of new
products and significant price erosion are all features of the industry in which
the Company operates.  The Company anticipates  increased  competition from both
existing  companies and new market  entrants.  The Company is currently aware of
several major and a number of smaller  competitors.  In the standalone character
generator area, the Company believes its primary competitors are Chyron,  For-A,
Knox, and AVS. Many of these  companies have  significantly  greater  financial,
technical,

                                       13
<PAGE>

manufacturing  and marketing  resources than the Company.  In addition,  certain
product categories and market segments,  on a  region-by-region  basis, in which
the Company does or may compete,  are dominated by certain vendors. As a result,
the Company's ability to compete in these areas may be limited.

       The Company  believes  that the markets for the  Company's  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.  In addition,  increased  competition  in any of the Company's  current
markets  could  result in price  reductions,  reduced  margins or 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
or future competitors.


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.  In addition,  the Company has several patents.  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.  The
Company  routinely  enters into  confidentiality  and  assignment  of inventions
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.  However,  the  Company has
received communications from a third party patent holder asserting patent rights
claims embracing  certain of the Company's  products.  The Company believes that
the ultimate resolution of these claims 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 patent,  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 

                                       14
<PAGE>

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 3, 1997, the Company had 141 full-time  employees,  including
47 in research and development, 41 in sales and marketing, 39 in operations, and
14 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.


                                       15
<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  29,900 square feet under a lease which expires on July
31, 1999.  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  31,  1998.  The Company has an  administrative,  sales and  marketing,
research and development,  and operating  facility in Canton,  Connecticut.  The
building is approximately  5,000 square feet under a lease which expires on July
31, 1997. The Company has an administrative,  sales and marketing,  research and
development,  and  operating  facility  in Belmont,  California  which has 6,050
square feet under a sublease which expires on December 31, 1998.


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.

       At a Special  Meeting of  Shareholders on December 12, 1996, an amendment
to the  Company's  1996  Stock  Option  Plan  was  approved,  pursuant  to which
1,000,000 shares of common stock were reserved for issuance.

                                                                Votes        
                                       Affirmative      ----------------------
                                          Votes         Against      Abstained
                                          -----         -------      ---------
Approval of the Company's
Amended 1996 Stock
Option Plan                            3,406,106       790,831         19,745



                                       16
<PAGE>

                                     PART II


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

       The Company's  Common Stock has been listed on the Nasdaq National Market
System  under the symbol  "VDNX"  since its initial  public  offering  which was
declared  effective  on  December  15,  1994.  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 year ended December 31, 1996.

                            Q1            Q2             Q3            Q4
                           ----          ----           ----          ----
FY96         High         $13.00        $12.25         $10.88        $10.00
             Low          $ 7.00        $ 7.50         $ 7.75        $ 7.25
FY95         High         $20.25        $17.50         $24.00        $21.25
             Low          $11.25        $13.25         $15.50        $10.75
         
      
       As of March 3,  1997,  there  were  approximately  2,100  holders  of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 3, 1997 was $4.875 per share.

     Prior to the Company's  initial  public  offering on December 15, 1994, the
Company  had been  treated for  federal  and state  income tax  purposes as an S
corporation under the Internal Revenue Code of 1986, as amended (the "Code"). As
a result,  the  Company's S  corporation  shareholders  had been required to pay
taxes based on the Company's earnings through the date immediately preceding the
date of  termination  of the Company's S corporation  tax status,  regardless of
whether such amounts had been  distributed  to the  shareholders.  Following the
Company's  initial  public  offering,  the  Company was no longer  eligible  for
Subchapter S treatment and is taxed as a C corporation under applicable Internal
Revenue Service regulations and rules.

       In 1994, the Company made distributions to its S corporation shareholders
for certain income tax  liabilities  associated with the Company's 1994 earnings
through December 14, 1994, of $2.7 million.

       Other than the distributions to S corporation  shareholders  described in
the preceding  paragraphs,  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.


                                       17
<PAGE>

ITEM 6.         SELECTED FINANCIAL DATA
<TABLE>

       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, 1996,  and with respect to the balance sheets at December 31, 1996,
1995,  1994, 1993 and 1992 are derived from financial  statements that have been
audited by Coopers & Lybrand L.L.P., 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, 1996 and 1995, and the statement of operations
for each of the  three  years in the  period  ended  December  31,  1996 and the
independent auditors' report thereon, are included in Item 8 of this Report.
<CAPTION>

                                                                   Year Ended December,
                                                    1996        1995       1994            1993       1992
                                                    ----        ----       ----            ----       ----
                                                               (in thousands, except per share data)
<S>                                                <C>        <C>         <C>            <C>         <C>    
Statement of Operations Data:
Net revenues                                       $29,195    $33,561     $31,498        $13,885     $11,564
Operating income                                       401      4,811       5,627            809         734
Net income                                             744      3,746       5,993(1)         605         518
Net income per share                                  0.13       0.65        1.39(1)        0.16         -
Net income per share, excluding charge for
  purchased research and development (2)              0.13       0.88        1.39(1)        0.16         -
Shares used in computing per share
  amounts                                            5,933      5,791       4,324          3,842         -


                                                     1996       1995         1994           1993        1992
                                                     ----       ----         ----           ----        ----
Balance Sheet Data:
Working capital (deficiency)                       $21,412    $20,127     $18,394          ($493)      ($801)
Total assets                                        27,958     27,350      22,279          5,524       3,549
Shareholders' equity (deficit)                      25,731     24,149      19,403            214        (417)
Dividends declared per share (3)                       -         -           0.71           0.01         -
<FN>

----------
(1)  In connection  with its December 15, 1994,  initial  public  offering,  the
     Company  terminated  its S  corporation  status and recorded a one time tax
     benefit of $650,000, which is reflected in the Company's 1994 results. On a
     pro  forma  basis,  utilizing  a 38  percent  tax  rate and  excluding  net
     operating  losses,  pro forma net income and pro forma net income per share
     for the period  ending  December  31, 1994 would have been  $3,424,000  and
     $0.79,  respectively.  See  Provision  for Income  Taxes  under the caption
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations of this Report" for further discussion.

(2)  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.  See  Note 3 of  Notes  to the  Financial
     Statements.

(3)  See Part II, Item 5 of this Report regarding the distributions of dividends
     to the  Company's  S  corporation  shareholders  to cover  certain of their
     income tax liabilities resulting from the Company's earnings.
</FN>
</TABLE>

                                       18
<PAGE>

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

       The following  discussion in this section  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations"  contains  trend
analysis and other forward looking  statements within the meaning of Section 27A
of the  Securities  Act of 1933, as amended,  and Section 21E of the  Securities
Exchange Act of 1934, as amended.  Actual results could differ  materially  from
those projected in the forward looking statements as a result of the factors set
forth below and elsewhere in this Form 10-K.

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 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,  frame synchronizers,  time base correctors,  video format
converters,   transcoders,   distribution  amplifiers,   routing  switchers  and
audio/visual delay systems.

       In February  1994,  the  Company  first  shipped its Digital  Video Mixer
product,  which  significantly  added to the  capabilities  and  features of the
Company's line of video  post-production  equipment and sold for more than twice
the price of any of the Company's  other then current  products.  In 1994,  this
product represented  approximately 64% of revenues,  and together with the Video
TitleMaker  2000,  also  introduced in 1994,  represented  approximately  85% of
revenues.

       In 1995,  the Company  continued to improve gross profit  through  volume
related purchasing,  improved manufacturing,  and a lower proportional amount of
OEM revenues. The Company began shipping its Edit Suite product in June 1995. In
September 1995, the Company hired all the personnel,  acquired substantially all
the assets and certain  liabilities  of Nova,  a  manufacturer  of video  signal
processing  equipment in the broadcast market, and incurred a one time charge of
$2.0 million, for purchased in-process research and development. In addition, in
September of 1995,  the Company hired the  personnel and acquired  substantially
all the assets of Abbate, a developer of desktop video products.

       In 1996,  the Company  continued  to  diversify  into the  broadcast  and
desktop markets with the  acquisition of the assets of KUB Systems,  a developer
of desktop  digital video  production  equipment for the  broadcast  market.  In
addition,  the Company made significant changes in the structure of its Research
and Development  department  which included the addition of a new Vice President
of R&D.  The  TitleMaker  3000  and the  PowerScript  Character  Generator  were
introduced  at the end of the  third  quarter  of 1996  resulting  in the  first
quarterly  increase  in  revenues  in five  quarters.  However,  after  shipping
PowerScript to a wide base of customers,  deficiencies in the user interface and
certain signal timing issues in specific  applications were discovered that made
the product  difficult  to sell.  A new version of the  operating  software  was
released in March of 1997, which improved the user interface and operating speed
of the product. The signal timing issues will be addressed with the introduction
of two additional  higher priced versions of PowerScript  targeted at higher end
customers  and  expected  to  be  introduced  at  the  National  Association  of
Broadcasters Show in April of 1997. Additional costs in Research and Development
and  Sales and  Marketing  related  to the  Company's  diversification  into the
broadcast and desktop markets,  combined with lower sales of the Company's older
Videographer products, are expected to result in a loss for the first quarter of
1997,  with results for the remainder of the year dependent on planned  shipment
and customer acceptance of new products.

                                       19
<PAGE>


Results of Operations

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

                                                  YEAR ENDED DECEMBER 31,
                                            1996            1995          1994
                                            ----            ----          ----

Net revenues                               100.0%          100.0%        100.0%
Cost of revenues                            52.3            51.1          60.3
  Gross profit                              47.7            48.9          39.7
Operating expenses
  Research & development                    17.2             9.4           5.1
  Selling & marketing                       23.1            15.4          14.0
  General & administrative                   4.7             3.6           2.7
  Amortization of intangible assets          1.3             0.3            -
  Charge for purchased R&D                    -              5.8            -
                                            ----            ----          ----
  Total operating expenses                  46.3            34.5          21.8
                                            ----            ----          ----
     Operating income                        1.4            14.4          17.9
Other income (expense), net                  1.2             2.1          (0.4)
                                            ----            ----          ----
  Income before income taxes                 2.6            16.5          17.5
Provision for (benefit from)
  income taxes                               0.1             5.3          (1.5)
                                            ----            ----          ----
     Net income                              2.5            11.2          19.0
                                            ====            ====          ====


Comparison of Years Ended December 31, 1996 and 1995

       Net Revenues.  Net revenues  decreased 13% to $29.2 million in 1996, from
$33.6  million in 1995.  This  decrease is primarily  attributable  to decreased
sales of older Videographer  products and the absence of new products during the
first three quarters of the year, partially offset by the additional revenues of
Nova Systems.  International  revenues for 1996 were $12.3 million or 42% of net
revenues  compared  to  $16.4  million  or 49%  of net  revenues  in  1995.  The
percentage decrease in international  revenue in 1996 is due primarily to delays
in the  introduction of PowerScript and other new products in the  international
market.

       Gross  Profit.  Gross profit  decreased 15% to $13.9 million in 1996 from
$16.4 million in 1995. Gross profit, as a percentage of net revenues,  decreased
to 48% in 1996 from 49% in 1995.  The  percentage  decrease  in gross  profit is
principally  attributable to spreading  fixed  manufacturing  overhead,  such as
salaries and facilities costs, over lower revenues.

       Research and Development: Research and development expenses increased 60%
to $5.0 million during 1996 compared to $3.1 million in 1995, and increased as a
percentage  of net  revenues  to 17% in 1996  from  9% in  1995.  The  increased
expenses were primarily due to the Company's hiring of consultants and engineers
in 1996, who are working on the  development  of the Company's new products.  In
addition,  research and development  expenses  include the personnel of Nova and
Abbate for the full 1996 year and the  personnel of KUB Systems since June 1996.
The Company anticipates that research and development  expenses will continue to
increase in absolute terms due to ongoing and future product development.

       Selling and Marketing.  Selling and marketing  expenses  increased 30% to
$6.7 million in 1996  compared to $5.2 million in 1995,  and increased to 23% in
1996 compared to 15% in 1995, as a percentage of net revenues.  This increase in
selling and marketing  expenses was  primarily a result of increased  personnel,
advertising  and  promotional  expenses  as the  Company  diversifies  into  the
broadcast and desktop markets.

                                       20
<PAGE>



       General and Administrative. General and administrative expenses increased
13% to $1.4 million in 1996  compared to $1.2 million in 1995,  and increased to
5% in 1996 compared to 4% in 1995 as a percentage of net revenues. This increase
was primarily due to the addition of personnel.

       Interest Income,  net.  Interest income decreased 51% to $361,000 in 1996
compared to $732,000 in 1995,  primarily as a result of the Company's investment
in tax exempt  securities  for the full year 1996 combined with a  significantly
lower average cash balance.

       Provision for Income Taxes.  The  Company's  December 31, 1996  effective
rate of 2% was below the 36% rate which the Company had utilized in  calculating
its tax  provision  for the first  three  quarters of 1996 and less than the 32%
rate for 1995.  The rate of 2% was  primarily the result of higher than expected
federal and state  research  credits on  significantly  increased  research  and
development spending, and lower than expected 1996 taxable income.

       Factors  That May  Affect  Future  Results  of  Operations:  The  Company
believes  that in the future its  results of  operations  could be  impacted  by
factors such as delays in development and shipment of the Company's new products
and major 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.

       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".

Comparison of Years Ended December 31, 1995 and 1994

       Net  Revenues.  Net revenues  increased 7% from $31.5  million in 1994 to
$33.6 million in 1995.  This increase is primarily  attributable to sales of the
Edit  Suite  product  beginning  in June  1995  and the  acquisition  of Nova in
September  1995.  The  increase was offset by the  discontinuation  of the Video
Equalizer in January,  decreased sales in certain older products,  and lower OEM
sales to Sony.  International revenues for 1995 were $16.4 million or 49% of net
revenues  compared to $12.7 million or 40% of net revenues in 1994. The increase
in  international  revenue in 1995 is due  primarily to  increased  European and
Asian sales.  The Company expects that  international  revenues will continue to
represent a significant portion of its net revenues.

       Gross  Profit.  Gross profit  increased 31% to $16.4 million in 1995 from
$12.5 million in 1994. Gross profit, as a percentage of net revenues,  increased
to 49% in  1995  from  40% in  1994.  The  percentage  increase  is  principally
attributable to purchasing and manufacturing  efficiencies in 1995 over 1994 and
the  greater  proportion  of  Videonics  brand  name  products  sold,  which are
typically at higher margins, when compared to OEM products.

                                       21

<PAGE>

       Research and Development. Research and development expenses increased 93%
to $3.1 million during 1995 compared to $1.6 million in 1994, and increased as a
percentage of net revenues to 9% in 1995 from 5% in 1994. The increased expenses
were  primarily  due to the  Company's  hiring  of  consultants  and  additional
hardware and software  engineers in 1995, who are working on the  development of
the Company's new products.  In addition,  since  September  1995,  research and
development  expenses  include  the  personnel  of  Nova  and  Abbate  who  were
principally  in  engineering.   The  Company   anticipates   that  research  and
development  expenses will continue to increase in absolute terms due to ongoing
and future product development.

       Selling and Marketing.  Selling and marketing  expenses  increased 18% to
$5.2 million in 1995  compared to $4.4 million in 1994,  and increased to 15% in
1995 compared to 14% in 1994 as a percentage  of net revenues.  This increase in
selling and  marketing  expenses as a percentage of net revenues was primarily a
result of increased advertising and promotional expenses.

       General and Administrative. General and administrative expenses increased
39% to $1.2 million in 1995  compared to $866,000 in 1994,  and  increased 4% in
1995 compared to 3% in 1994 as a percentage  of net revenues.  This increase was
substantially  due to the  additional  reporting  requirements  and  shareholder
communications  of a public  company for all of 1995 and the  addition of Nova's
administrative expenses.

       Provision for Income Taxes.  The  Company's  December 31, 1995  effective
rate of 32% was below the 38% rate which the Company had utilized in calculating
its tax  provision  for the  first  and  second  quarters  of 1995  and  used to
calculate its 1994 pro forma taxes and pro forma net income. The rate of 32% was
a result of lower than  expected 1995  revenue,  a higher  percentage of foreign
sales and an increased  research and  development  credit due to the significant
increase in research and  development  spending.  See  Comparison of Years Ended
December 31, 1994 and 1993, "Provision for Income Taxes," for further discussion
of 1994's  recorded tax benefit.  In 1994, if the Company had been taxed for the
full year as a C corporation  utilizing an effective tax rate of 38%,  exclusive
of all available Net Operating Loss  carryforwards  ("NOLs"),  the Company's pro
forma net income and pro forma net income per share would have been $3.4 million
or $0.79 per share respectively.

       Interest Income.  As a result of the equity raised in connection with its
initial  public  stock  offering in late 1994,  the Company  earned net interest
income in 1995 of $732,000 compared to net interest expense of $106,000 in 1994.

                                       22
<PAGE>

Quarterly Results of Operations
<TABLE>

       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>
                                                   1996                                1995
                                     ----------------------------------   ------------------------------------
(in thousands, except                   Q1       Q2       Q3      Q4        Q1       Q2       Q3       Q4
  per share data)                       --       --       --      --        --       --       --       --

<S>                                   <C>      <C>      <C>      <C>        <C>     <C>      <C>      <C>   
Net revenues                          $7,059   $7,055   $6,770   $8,311     $8,253  $8,505   $8,691   $8,112
Gross profit                           3,501    3,422    3,219   3,786       3,886   4,070    4,580    3,865
Operating income  (loss)                 604      236      (41)   (399)      1,665   1,955      284      907
Net income                               449      212       31      52       1,189   1,361      332      864
Net income per share                    0.08     0.04     0.01    0.01        0.21    0.24     0.06     0.15
Net income per share excluding
  charge for purchased R&D (1)          0.08     0.04     0.01    0.01        0.21    0.24     0.27     0.15
Shares used in computing per
  share amounts                        5,900    5,946    5,942   5,946       5,764   5,763    5,813    5,824
<FN>

----------
(1)  Results  for the  third  quarter  of 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, net income for the third
     quarter of 1995 would have been  $1,550,000 or $0.27 per share.  See Note 3
     of Notes to the Financial Statements.
</FN>
</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.  Particularly  in 1996 and  1995,  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.

Liquidity and Capital Resources

       From the  Company's  inception  until  its  initial  public  offering  in
December  1994,  which  resulted in net proceeds of $15.8  million,  the Company
financed its operations through private sales of equity, shareholder loans, cash
flow from operations,  and bank borrowings.  At December 31, 1996, the Company's
principal source of liquidity is cash and marketable  securities of $8.0 million
dollars.

       Operating Activities.  In 1996, net cash used in operating activities was
$1.4  million,  resulting  primarily  from an  increase in  inventories  of $3.2
million, an increase in prepaid and other current assets of $204,000, a decrease
in the  provision  for excess and  obsolete  inventory  of $240,000  offset by a
profit  of  $744,000,  depreciation  and  amortization  of $1.2  million,  and a
decrease in accounts receivable of $428,000.  Inventories increased primarily in
anticipation of
                                       23
<PAGE>

new product shipments and lower than expected shipments of new products in 1996.
In 1995, net cash provided by operating activities was $339,000,  resulting from
a profit of $3.8 million,  which included a non-cash  charge of $2.0 million for
purchased  in-process  research and development related to the Nova acquisition.
In 1995, operating profit excluding the non-cash charge, was partially offset by
an  increase  in  accounts  receivable  of  $1.7  million  and  an  increase  in
inventories  of $3.3  million.  Receivables  increased  due to third and  fourth
quarter 1995 sales  promotions with extended terms and inventories  increased in
anticipation  of new product  shipments.  In 1994,  cash  provided by  operating
activities  was  $6.3  million,   resulting  from  a  profit  of  $6.0  million,
depreciation of $587,000,  and deferred taxes of $650,000  partially offset by a
decrease in accounts payable amounting to $278,000.

       Investing  Activities.  Capital equipment  expenditures in 1996, 1995 and
1994 were $1.3  million,  $958,000,  and $686,000  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 $1.5 million through
the end of 1997.  In 1996,  the Company had net  redemptions  of $3.2 million of
marketable  securities.  In May 1996, the Company acquired substantially all the
assets and assumed  certain  liabilities of KUB Systems for $350,000 in cash. In
1995,  the Company  purchased  $4.7 million of marketable  securities and had no
redemptions. In September 1995 the Company acquired substantially all the assets
and certain  liabilities of Nova for $5.0 million in cash, $4.0 million of which
was paid at closing and $1.0 million  through a  promissory  note payable in two
installments  of $500,000  each in March 1996 and September  1996,  with accrued
interest.  There were no purchases or  redemptions  of marketable  securities in
1994.

       Financing  Activities.  In 1996, the Company  received  $100,000 from the
exercise of stock options under the Company's  stock option plan.  Additionally,
the Company paid the $1.0 million  promissory note issued in connection with the
Nova acquisition.  In 1995 the only cash generated from financing activities was
$135,000 from the exercise of stock  options  under the  Company's  stock option
plan. In March 1994,  the Company  borrowed $2.8 million under an unsecured bank
note  bearing  interest  at the  prime  rate.  The  note was  guaranteed  by two
shareholders.  Proceeds from the note were used to retire all shareholder  loans
plus accrued  interest.  In September  1994, the Company  replaced the bank note
with a $2.4 million  bank line of credit  secured by all the  Company's  assets,
with $400,000  restricted to standby letters of credit. In the fourth quarter of
1994, the Company repaid the balance plus accrued interest outstanding under the
line of credit agreement.  The Company made distributions of $2.7 million to its
S  corporation  shareholders  in  1994  to  cover  certain  of  the  income  tax
liabilities incurred by such shareholders with respect to the Company's earnings
in 1994.

       The Company  believes  that its current cash and  marketable  securities,
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
1997.


                                       24
<PAGE>


ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       Balance  sheets  of the  Company  as of  December  31,  1996 and 1995 and
statements of income,  shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996, together with the related notes and
the report of Coopers & Lybrand L.L.P.,  independent accountants,  are set forth
on the  following  pages.  Other  required  financial  information  is set forth
herein, as more fully described in Item 14 hereof.


                                       25

<PAGE>
                                VIDEONICS, INC.

                                     -----



                              FINANCIAL STATEMENTS

                  for the three years ended December 31, 1996


                                       26

<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors
Videonics, Inc.
Campbell, California

We have audited the accompanying  consolidated balance sheets of Videonics, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related statements of
income,  shareholders'  equity and cash flows for each of the three years in the
period  ended   December  31,  1996.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining,  on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial   position  of  Videonics,   Inc.  and
subsidiaries as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended  December 31,
1996, in conformity with generally accepted accounting principles.




                                             /s/ COOPERS & LYBRAND L.L.P.


San Jose, California
January 31, 1997



                                       27


<PAGE>
<TABLE>
                                 VIDEONICS, INC.
             CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995
                                 (in thousands)
<CAPTION>
                             ASSETS
                                                                                         1996              1995
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>       
Current assets:
   Cash and cash equivalents                                                          $    6,538        $    7,287
   Marketable securities                                                                   1,500             4,708
   Accounts receivable, net                                                                3,406             3,824
   Inventories                                                                             9,309             5,561
   Deferred income taxes                                                                   1,299             1,410
   Prepaid income taxes                                                                    1,094               254
   Prepaids and other current assets                                                         493               284
                                                                                      -----------       -----------
           Total current assets                                                           23,639            23,328

Property and equipment, net                                                                2,037             1,350
Other assets                                                                                  14                11
Intangible assets, net                                                                     2,268             2,661
                                                                                      -----------       -----------
              Total assets                                                            $   27,958        $   27,350
                                                                                      ===========       ===========
                          LIABILITIES

Current liabilities:
   Notes payable                                                                      $        -        $    1,000
   Accounts payable                                                                        1,090             1,226
   Accrued expenses                                                                        1,137               975
                                                                                      -----------       -----------
           Total current liabilities                                                       2,227             3,201
                                                                                      -----------       -----------
Commitments and contingencies (Note 7).

                      SHAREHOLDERS' EQUITY

Preferred stock, no par value:
   Authorized:  10,000 shares in 1996 and 1995;
   Issued and outstanding:  None

Common stock, no par value:
   Authorized:  30,000 shares in 1996 and 1995
   Issued and outstanding:  5,705 shares in 1996 and 5,518
       shares in 1995
                                                                                           20,297            19,459
Retained earnings                                                                           5,434             4,690
                                                                                      -----------       -----------
           Total shareholders' equity                                                      25,731            24,149
                                                                                      -----------       -----------
              Total liabilities and shareholders' equity                               $   27,958        $   27,350
                                                                                      ===========       ===========
<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                       28
<PAGE>
<TABLE>
                                 VIDEONICS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands, except per share data)
<CAPTION>
                                                                                     Year Ended December 31,
                                                                            ---------------------------------------
                                                                                1996          1995          1994
                                                                            -----------   -----------   -----------
<S>                                                                         <C>           <C>           <C>       
Net revenues                                                                $   29,195    $   33,561    $   31,498

Cost of revenues                                                                15,266        17,160        18,986
                                                                            -----------   -----------   -----------
        Gross profit                                                            13,929        16,401        12,512
                                                                            -----------   -----------   -----------
Operating expenses:
   Research and development                                                      5,027         3,138         1,624
   Selling and marketing                                                         6,741         5,181         4,395
   General and administrative                                                    1,367         1,208           866
   Amortization of intangible assets                                               393            98             -
   Charge for purchased in-process research and development                          -         1,965             -
                                                                            -----------   -----------   -----------
                                                                                13,528        11,590         6,885
                                                                            -----------   -----------   -----------
           Operating income                                                        401         4,811         5,627

Other income (expense):
   Interest, net                                                                   361           732          (106)
   Other                                                                             -             -             2
                                                                            -----------   -----------   -----------
           Income before income taxes                                              762         5,543         5,523

Provision for (benefit from) income taxes                                           18         1,797          (470)
                                                                            -----------   -----------   -----------

              Net income                                                    $      744    $    3,746    $    5,993
                                                                            ===========   ===========   ===========

Net income per share                                                        $     0.13    $     0.65    $     1.39
                                                                            ===========   ===========   ===========

Shares used in per share calculation                                             5,933    $    5,791         4,324
                                                                            ===========   ===========   ===========

Unaudited pro forma information (Note 2):
   Pro forma income before income taxes                                                                 $    5,523
   Pro forma provision for income taxes                                                                      1,218
                                                                                                        -----------
           Pro forma net income                                                                         $    4,305
                                                                                                        ===========

Pro forma net income per share                                                                          $     1.00
                                                                                                        ===========

Pro forma shares used in per share calculation                                                               4,324
                                                                                                        ===========
<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                       29
<PAGE>
<TABLE>
                                 VIDEONICS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
            for the three years in the period ended December 31, 1996
                      (in thousands, except per share data)
<CAPTION>
                                                                                        
                                                                                        
                                                                                        

                                                                    Common Stock        Retained                        
                                                               ----------------------   Earnings     Shareholders'       
                                                                 Shares     Amount      (Deficit)       Equity
                                                               --------   -----------   ----------    -----------
<S>                                                             <C>       <C>            <C>          <C>       
Balances, December 31, 1993                                      3,748    $    2,599     $ (2,385)    $      214
   Payment of cash dividends to shareholders ($.711
       per share)                                                                          (2,664)        (2,664)  
   Issuance of common stock from exercise of options                 3             2                           2
   Public offering of common stock, net of issuance
       costs                                                     1,600        15,848                      15,848
   Amortization of deferred compensation                                          10                          10
   Net income                                                                               5,993          5,993
                                                               --------   -----------   ----------    -----------
Balances, December 31, 1994                                      5,351        18,459          944         19,403
   Issuance of common stock from exercise of options               167           135                         135
   Amortization of deferred compensation                                          48                          48
   Tax benefit from exercise of nonqualified stock
       options                                                                   817                         817
   Net income                                                                               3,746          3,746
                                                               --------   -----------   ----------    -----------
Balances, December 31, 1995                                      5,518        19,459        4,690         24,149
   Issuance of common stock from exercise of options               187           100                         100
   Amortization of deferred compensation                                          48                          48
   Tax benefit from exercise of nonqualified stock                               690                         690
       options                                                                                744            744
                                                               --------   -----------   ----------    -----------

Balances, December 31, 1996                                      5,705    $   20,297    $   5,434     $   25,731
                                                               ========   ===========   ==========    ===========

<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                       30

<PAGE>
<TABLE>

                                 VIDEONICS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<CAPTION>
                                                                                      Year Ended December 31,
                                                                           --------------------------------------------
                                                                             1996              1995              1994
                                                                           --------          --------          --------
<S>                                                                        <C>               <C>               <C>
Cash flows from operating activities:
   Net income                                                              $    744          $  3,746          $  5,993
   Adjustments to reconcile net income to net cash provided by
       (used in) operating activities:
      Loss on disposal of property and equipment                                                                    102
      Depreciation and amortization                                           1,190               788               587
      Provision for doubtful accounts                                           (10)               28               155
      Provision for excess and obsolete inventories                            (240)              336               469
      Charge for purchased in-process research and development                                  1,965
      Deferred income taxes                                                     111              (760)             (650)
      Changes in assets and liabilities:
        Accounts receivable                                                     428            (1,713)              (96)
        Inventories                                                          (3,232)           (3,305)              (65)
        Prepaid income taxes                                                   (150)              563
        Prepaids and other current assets                                      (203)              (37)               24
        Other                                                                    (3)               12                 5
        Accounts payable                                                       (136)             (690)             (278)
        Accrued expenses                                                         97              (594)               94
                                                                           --------          --------          --------
           Net cash provided by (used in) operating activities               (1,404)              339             6,340
                                                                           --------          --------          --------

Cash flows from investing activities:
   Purchases of property and equipment                                       (1,303)             (958)             (986)
   Net cash paid in acquisition                                                (350)           (3,920)
   Purchases of marketable securities                                        (1,500)           (4,708)
   Proceeds from  marketable securities                                       4,708
   Acquisition of intangible assets                                                               (94)
                                                                           --------          --------          --------
           Net cash provided by (used in) investing activities                1,555            (9,680)             (986)
                                                                           --------          --------          --------

Cash flows from financing activities:
   Proceeds from issuance of loans payable to bank                                                                2,840
   Proceeds from issuance of common stock                                       100               135            15,850
   Repayments on note payable to bank                                                                            (2,840)
   Repayment on notes payable                                                (1,000)
   Repayments on notes payable to shareholders                                                                   (2,250)
   Dividend paid to shareholders                                                                                 (2,664)
                                                                           --------          --------          --------
           Net cash provided by (used in) financing activities                 (900)              135            10,936
                                                                           --------          --------          --------

Increase (decrease) in cash and cash equivalents                               (749)           (9,206)           16,290
Cash and cash equivalents at beginning of year                                7,287            16,493               203
                                                                           --------          --------          --------
Cash and cash equivalents at end of year                                   $  6,538          $  7,287          $ 16,493
                                                                           ========          ========          ========

Supplemental  disclosure of cash flow  information:
  Cash paid during the period for:
      Interest                                                             $     31          $     16          $    719
      Income taxes                                                         $     44          $  1,924
Supplemental schedule of non-cash financing activities:
   Tax benefit from exercise of nonqualified stock options                 $    690          $    817

<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                       31
<PAGE>

                                 VIDEONICS, INC.
                          NOTES TO 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 standalone 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:

         Principles of Consolidation:

         The  consolidated   financial   statements   include  the  accounts  of
         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 recognizes  revenues from gross sales, less a provision for
         estimated  future  customer  returns and  exchanges,  upon  shipment of
         product.

         Research and Development Expenditures:

         Research and  development  expenditures  are charged to  operations  as
         incurred.

         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.

                                   Continued
                                       32
<PAGE>


                                 VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 2.   Summary of Significant Accounting Policies, continued:

         Advertising, continued:

         Advertising  expense for the period ended  December 31, 1996,  1995 and
         1994 was $947,000, $502,000 and $447,000, respectively.

         Income Taxes:

         Prior to an initial  public  offering on December 15, 1994, the Company
         elected  to be  taxed  under  the  provisions  of  Subchapter  S of the
         Internal  Revenue  Code.  Under those  provisions,  the Company was not
         subject to corporate federal taxation.  The Company was subject only to
         a 1.5% state  surcharge  tax.  Accordingly,  no provision  for taxes on
         income earned through  December 15, 1994 had been made,  except for the
         state surcharge,  because the remaining taxes are the obligation of the
         shareholders.

         Upon  conversion to a C corporation  on December 15, 1994,  the Company
         received a one-time tax benefit of $650,000  (see Note 8). In addition,
         for the period  December 16 through  December 31, 1994, the Company was
         taxed  as a C  corporation,  and  a  current  tax  provision  utilizing
         statutory rates is accordingly  reflected for this period.  The Company
         uses the liability  method in accounting  for income taxes.  Under this
         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.

         Cash and Equivalents:

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

         Marketable Securities:

         Marketable   securities  are  classified  as   available-for-sale   and
         therefore  are  carried at fair  value.  Unrealized  holding  gains and
         losses  on such  securities  are  reported  net of  related  taxes as a
         separate component of shareholders'  equity.  Realized gains and losses
         on sales of all such  securities  are reported in earnings and computed
         using the specific identification cost method.

         Inventories:

         Inventories   are  stated  at  the  lower  of   standard   cost  (which
         approximates actual cost on a first-in, first-out basis) or market.
         
                                    Continued
                                       33
<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 2.   Summary of Significant Accounting Policies, continued:

         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.

         Goodwill and Intangible Assets:

         Capitalized   purchased   technology   and  goodwill   relating  to  an
         acquisition (see Note 3) are amortized over a seven year life.

         Product Warranty:

         Since 1994, the Company  warrants all parts and labor on domestic sales
         for two years. The Company provides for the estimated cost to repair or
         replace these products at the time of sale.

         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.

                                    Continued
                                       34

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 2.   Summary of Significant Accounting Policies, continued:

         Distributions to Shareholders:

         The  Company  made   dividend   distributions   to  its  S  corporation
         shareholders  in 1994 to cover  certain of the  income tax  liabilities
         incurred by such shareholders  with respect to the Company's  earnings.
         Since  the  above   mentioned   distribution   to  its  S   corporation
         shareholders,  the Company has not  declared or paid  dividends  on its
         common stock.

         Computation of Earnings Per Share:

         Net income per share is calculated using the weighted average number of
         common and dilutive common  equivalent  shares  outstanding  during the
         period.  Dilutive  common  equivalent shares consist  of common  shares
         issuable upon exercise stock options (using the treasury stock method).

         Pursuant  to  Securities  and  Exchange   Commission  Staff  Accounting
         Bulletin No. 83, options to purchase common stock granted with exercise
         prices below the assumed initial public offering price per share during
         the  twelve  months  preceding  the date of the  initial  filing of the
         Registration  Statement  are  included  in the  calculation  of  common
         equivalent  shares,  using the treasury  stock method,  as if they were
         outstanding for all periods presented.

         Pro Forma Net Income Per Share:

         For 1994,  pro forma net income and pro forma net income per share have
         been determined  assuming the Company had been taxed as a C corporation
         for federal  income tax purposes for all periods  presented.  Pro forma
         net  income  per share has been  computed  using the  weighted  average
         number of common and dilutive common equivalent shares  outstanding for
         the period. If Net Operating Loss  carryforwards were not available for
         the year ending  December 31, 1994,  pro forma net income and pro forma
         net  income  per  share   would   have  been   $3,424,000   and  $0.79,
         respectively.

                                    Continued
                                       35

<PAGE>


                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 2.   Summary of Significant Accounting Policies, continued:

         Fair Value of Financial Instruments:

         Carrying  amounts  of certain of the  Company's  financial  instruments
         including  cash and cash  equivalents,  accounts  receivable,  accounts
         payable and other  accrued  liabilities  approximate  fair value due to
         their short maturities. Based on borrowing rates currently available to
         the Company for loans with similar  terms,  the carrying value of notes
         payable  approximates fair value.  Estimated fair values for marketable
         securities,  which  are  separately  disclosed  elsewhere  are based on
         quoted market prices for the same or similar instruments.

         Recent Accounting Pronouncement:

         During February 1997, the Financial  Accounting  Standards Board issued
         Statement No. 128, "Earning per Share",  (SFAS 128) which specifies the
         computation,  presentation and disclosure requirements for Earnings Per
         Share.  SFAS 128 will become  effective for the  Company's  1997 fiscal
         year.  The  impact  of  adopting  SFAS 128 on the  Company's  financial
         statements has not yet been determined.


 3.   Acquisition of Nova Systems:

      Effective  September 7, 1995, the Company acquired  substantially  all the
      assets and certain liabilities of Nova Systems (Nova). Nova is a developer
      and  manufacturer  of  video  frame   synchronizers,   digital  time  base
      correctors and video signal processing  equipment used for video and audio
      post production in the broadcast,  cable,  video  presentation,  and video
      conferencing  markets.  Under the terms of the  acquisition,  the  Company
      agreed to pay Nova $4,000,000 in cash and $1,000,000 in a note payable due
      in two  installments  of $500,000 on March 7, 1996 and  September 6, 1996,
      with accrued  interest at a rate of 6% per annum.  In accordance  with the
      acquisition   agreement,   the  purchase   price  is  subject  to  certain
      adjustments.  Adjustments  have been established at $200,000 and are shown
      as a receivable  from the seller and serve to reduce the  purchase  price.
      The acquisition  has been accounted for as a purchase  transaction and the
      results of operations of Nova have been included with those of the Company
      since September 7, 1995.

                                    Continued
                                       36
<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 3.   Acquisition of Nova Systems, continued:

      The purchase price consisted of (in thousands):

              Cash paid                             $    4,000
              Notes payable to seller                    1,000
              Receivable from seller                      (200)
                                                    -----------
                                                    $    4,800
                                                    -----------

      The purchase price was allocated to assets and liabilities  acquired based
      on the  underlying  fair value of assets and  liabilities  as follows  (in
      thousands):

              Cash                                  $       80
              Accounts receivable                          134
              Inventory                                    517
              Other assets                                  13
              Property and equipment                        35
              Intangible assets                          2,665
              Purchased research and development         1,965
              Accounts payable                            (247)
              Accrued expenses                            (362)
                                                    -----------
                                                    $    4,800
                                                    -----------

      Intangibles consist of purchased technology and goodwill of $2,443,000 and
      $222,000,  respectively,  which are being amortized over a period of seven
      years.

      The amount  allocated to  purchased  in-process  research and  development
      totaling $1,965,000 was expensed on the acquisition date as the technology
      had not reached  technological  feasibility and had no alternative  future
      use. Net of income taxes, this charge was equal to $0.23 per share.


                                   Continued
                                       37

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued

4.    Acquisition of KUB Systems:

      Effective  May 24, 1996,  the Company hired all the personnel and acquired
      certain  assets and certain  liabilities  of KUB Systems  (KUB).  KUB is a
      developer and manufacturer of advanced digital video production  equipment
      for the  broadcast,  post-production,  and  institution  video  production
      markets. Under the terms of acquisition,  the Company paid KUB $350,000 in
      cash. The acquisition has been accounted for as a purchase transaction and
      the  results of  operations  of KUB have been  included  with those of the
      Company since May 24, 1996, the date the purchase was consummated.

      The purchase price consisted of (in thousands):

               Cash  paid                           $    350 


      The purchase  price was  allocated to assets and  liabilities  acquired as
      follows (in thousands):

               Inventory                            $    276
               Other current assets                        6
               Property                                  133
               Accrued expenses                          (65)
                                                   ---------
                                                    $    350
                                                   ---------

 5.   Marketable Securities:

      At December  31, 1996 and 1995  marketable  securities  are stated at cost
      which approximate fair value.  Marketable  securities consist of municipal
      securities,  which  were  held by one  investment  bank  in  1996  and two
      investment  banks in 1995.  Interest  rates in 1996 and 1995 were 4.0% per
      annum and 4.0% to 4.4% per annum,  respectively.  Balances at December 31,
      1996 mature in February 1997. At December 31, 1996 and 1995, there were no
      realized gains or losses on disposals of marketable securities.

                                   Continued
                                       38

<PAGE>

                                 VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 6.   Balance Sheet Detail:

      Accounts receivable comprise (in thousands):

                                                       December 31,
                                              ------------------------------
                                                  1996              1995
                                              ------------      ------------

     Trade accounts receivable                $     3,529       $     3,997
     Less allowance for doubtful accounts            (123)             (173)
                                              ------------      ------------
                                              $     3,406       $     3,824
                                              ============      ============

      Inventories comprise (in thousands):

                                                       December 31,
                                              ------------------------------
                                                  1996              1995
                                              ------------      ------------
      Raw materials                           $     6,210       $     3,659
      Work in process                               1,437             1,095
      Finished goods                                1,662               807
                                              ------------      ------------
                                              $     9,309       $     5,561
                                              ============      ============

      Property and equipment comprise (in thousands):

                                                       December 31,
                                              ------------------------------
                                                  1996              1995
                                              ------------      ------------
     Machinery and equipment                  $     3,013       $     2,068
     Furniture and fixtures                           126                58
     Leasehold improvements                           103                58
     Tooling                                        1,270             1,008
                                              ------------      ------------
                                                    4,512             3,192
     Less accumulated depreciation
       and amortization                            (2,475)           (1,842)
                                              ------------      ------------
                                              $     2,037       $     1,350
                                              ============      ============


                                   Continued
                                       39

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued



 6.   Balance Sheet Detail, continued:

      Intangible assets comprise (in thousands):

                                                         December 31,
                                                -----------------------------
                                                    1996              1995
                                                -----------       -----------

     Purchased technology                       $    2,443        $    2,443
     Goodwill                                          316               316
                                                -----------       -----------

                                                     2,759             2,759
     Less accumulated amortization                    (491)              (98)
                                                -----------       -----------
                                                $    2,268        $    2,661
                                                ===========       ===========

      Accrued expenses comprise (in thousands):

                                                         December 31,
                                                -----------------------------
                                                    1996              1995
                                                -----------       -----------

     Accrued advertising                        $      137        $    107
     Accrued vacation                                  154             184
     Salaries payable                                  201             111
     Accrued acquisition reserve                       250             250
     Other accrued expenses                            395             323
                                                -----------       ----------
                                                $    1,137        $    975
                                                ===========       ==========
 7.   Commitments and Contingencies:

      The  Company  leases  a  building  for its  principal  facility  under  an
      operating  lease which  expires in July 1999.  The Company may cancel this
      lease as of April  1997.  Under the terms of the  lease,  the  Company  is
      responsible for utilities,  taxes, insurance and maintenance.  At December
      31, 1996, future minimum lease payments under all noncancelable  operating
      leases were as follows (in thousands):

                1997                             $     380
                1998                                   345
                1999                                   153
                                                 ----------
                                                 $     878
                                                 ==========


                                   Continued
                                       40

<PAGE>



                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


7.    Commitments and Contingencies, continued:

      Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted
      to $396,000, $239,000 and $183,000, respectively.

      The Company has received  communications  from a third party patent holder
      asserting  patent  rights  embracing  certain of the  Company's  products.
      Management believes that the ultimate resolution of these matters will not
      have a material  adverse  effect on the Company's  financial  condition or
      results of operations.


 8.   Income Taxes:

      As stated in Note 2, the  Company  was taxed as an S  corporation  through
      December 15, 1994,  after which the Company  converted to a C  corporation
      and received a one-time tax benefit.  The  components of the provision for
      (benefit from) income taxes are as follows (in thousands):

                                       1996          1995            1994
                                    ---------      ----------      --------
        Current:
           Federal                  $   (110)      $   2,117       $   110
           State                          17             440            70
        Deferred:
           Federal                       239            (640)         (650)
           State                        (128)           (120)
                                    ---------      ----------      --------
                                    $     18       $   1,797       $  (470)
                                    =========      ==========      ========

                                   Continued
                                       41

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued



 8.   Income Taxes, continued:
<TABLE>

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

<CAPTION>
                                                             1996          1995           1994
                                                           --------      ---------      ------------
<S>                                                           <C>            <C>            <C>  
Federal statutory income tax rate                             34.0%          34.0%          34.0%
State income tax rate, net of federal benefit                  5.7            5.3            1.0
Tax exempt interest                                          (13.4)          (1.6)
Foreign net operating loss                                     5.7
Federal and state tax credits                                (32.8)          (1.9)
Benefit of S corporation status through December
    15, 1994
                                                                                           (32.0)
Other                                                          3.2           (3.4)         (11.5)
                                                           --------      ---------      ---------
                                                               2.4%          32.4%         (8.5)%
                                                           ========      =========      =========
</TABLE>

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


                                                      1996          1995
                                                    ---------     ---------

     Intangible assets                              $    848      $    728
     Inventory reserves                                  149           307
     Sales return reserves                                46            48
     Accounts receivable reserves                         49            65
     Depreciation                                         99            75
     Other accrued liabilities and reserves              108           187
                                                    ---------     ---------

                                                    $  1,299      $  1,410
                                                    =========     =========

                                   Continued
                                       42

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 9.   Shareholders' Equity:

      At December 31, 1996, 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 which terminates, in accordance with its terms,
      on January 1, 1997. The Plans provide for the granting of incentive  stock
      options  to  officers  and  employees  of  the  Company  and  nonqualified
      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 three-year  period and are
      canceled 90 days after termination of employment.

<TABLE>

      A summary of stock option activity follows:
<CAPTION>

                                                                    Outstanding Options
                                           Shares       ---------------------------------------------
                                         Available        Number       Exercise                        
                                         for Grant      of Shares       Price              Total
                                      -------------  -------------   -------------   ---------------- 


<S>                                   <C>               <C>           <C>             <C>           
Balances, December 31, 1993                317,235        580,764     $.33-$1.67      $      266,351
   Options granted                        (112,200)       112,200     $2.00-$9.35            573,594
   Options canceled                         22,125        (22,125)    $.47-$4.33             (38,538)
   Options exercised                                       (3,249)       $.47                 (1,516)
                                      -------------  -------------                    ---------------
Balances, December 31, 1994                227,160        667,590     $.33-$9.35             799,891
   Options granted                         (92,450)        92,450    $11.75-$14.75         1,227,575
   Options canceled                          1,800         (1,800)   $1.67-$14.75            (10,788)
   Options exercised                                     (167,313)    $.33-$11.75           (135,244)
                                      -------------  -------------                    ---------------
Balances, December 31, 1995                136,510        590,927     $.33-$14.75          1,881,434
   Additional shares reserved            1,000,000
   Options granted                        (859,128)       859,128     $7.50-$9.00          6,752,363
   Options canceled                        147,958       (147,958)    $.47-$14.75         (1,413,857)
   Options exercised                                     (186,918)    $.33-$7.50            (100,468)
                                      -------------  -------------                    ---------------
Balances, December 31, 1996                425,340      1,115,179     $.33-$14.75          7,119,472
                                      =============  =============                    ===============
</TABLE>

      At December 31, 1996, options to purchase 446,932 shares were exercisable.

      Compensation  of  approximately  $114,000  has  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  is being
      recognized  as a charge  to  income  over the  three-year  vesting  period
      commencing in October 1994.


                                   Continued
                                       43

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 9.   Shareholders' Equity, continued:

      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 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." Had compensation cost for the years ended December 31, 1996
      and  1995  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 income and net income per share
      for the years ended  December 31, 1996 and 1995 would have been reduced to
      the pro forma amounts indicated below:


                                                       1996            1995
                                                   ----------      ------------
        
      Net income - as reported                     $     744       $     3,746
                                                   ==========      ============
      Net income - pro forma                       $     126       $     3,625
                                                   ==========      ============
      Net income per share - as reported           $    0.13       $      0.65
                                                   ==========      ============
      Net income per share -  pro forma            $    0.02       $      0.63
                                                   ==========      ============

      The fair  value of each  option  grant is  estimated  on the date of grant
      using  the  Black-Scholes  method  with  the  following  weighted  average
      assumptions by subgroup:

                                              1996                     1995
                                         --------------          ---------------

      Risk-free interest rate              5.36%-6.36%              5.58%-7.25%
      Expected life                             3                        3
      Expected dividends                        -                        -
      Volatility                               0.75                    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.

                                   Continued
                                       44

<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 9.   Shareholders' Equity, continued:
<TABLE>

      The options  outstanding  and currently  exercisable  by exercise price at
December 31, 1996 are as follows:

<CAPTION>
                                                                         Options Currently
                            Options Outstanding                             Exercisable
  --------------------------------------------------------------       ----------------------
                                        Weighted                  
                                         Average        Weighted                     Weighted    
                                        Remaining       Average                       Average     
         Exercise         Number       Contractual      Exercise         Number      Exercise    
          Price         Outstanding       Life            Price        Exercisable    Price      
      ------------      -----------    -----------      --------       -----------   --------
     
      <S>                  <C>            <C>            <C>             <C>           <C>  
      $0.33-$0.47           231,283       4.82           $0.46           231,283       $0.46
      $2.00-$4.50            47,600       7.41           $3.86            35,251       $3.83
      $7.50-$7.50           511,962       9.18           $7.50           115,725       $7.50
      $7.87-$9.00           263,334       9.30           $8.61            29,672       $8.80
      $9.35-$14.75           61,000       8.07           $11.36           35,001       $11.15

</TABLE>


10.   Segment Information:

      The  Company is  engaged in a single  industry  segment  encompassing  the
      development  and marketing of computer based video  products.  The Company
      markets and services its products in North America  through its own direct
      sales organization and through sales representatives.  The Company markets
      its  products  in  foreign   countries   outside  North  America   through
      distributors and its wholly owned subsidiary in Germany.

      The Company's German office is primarily a sales office.  Revenue,  income
      and assets employed by the Company's foreign  subsidiary were not material
      to the consolidated financial statements.

                                   Continued
                                       45


<PAGE>

                                VIDEONICS, INC.
                    NOTES TO FINANCIAL STATEMENTS, Continued


10.   Segment Information, continued:

<TABLE>
      Geographic net export sales information is shown below (in thousands):
<CAPTION>
                                                                            December 31,
                                                               -------------------------------------------
                                                                    1996           1995           1994
                                                               -------------  -------------  -------------
       <S>                                                     <C>            <C>            <C>         
       Revenues from unaffiliated customers:
         United States                                         $     16,852   $     17,210   $     18,772
         Europe                                                       4,774          6,823          5,466
         Asia                                                         3,925          6,865          4,530
         Americas (excluding the United States)                       3,644          2,663          2,730
                                                               -------------  -------------  -------------
                                                               $     29,195   $     33,561   $     31,498
                                                               =============  =============  =============
</TABLE>

      For the years ended  December  31,  1996,  1995 and 1994,  no one customer
      accounted  for more than 10% of revenues  during the periods.  The Company
      has no significant assets in foreign countries.


11.   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 $800 contributed by
      the  employee.   The  employee's   entitlement  to  the  Company  matching
      contributions is fully vested on the date of contribution.  The Company at
      its  sole  discretion  with  the  Board of  Directors'  approval  can make
      incremental contributions. To date, the Company has not made discretionary
      contributions. The Company's matching contributions charged against income
      totaled  approximately  $52,000,  $38,000  and $23,000 for the years ended
      December 31, 1996, 1995 and 1994, respectively.


                                       46

<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 set forth 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  1997  Annual  Meeting  of  Shareholders  to be held on May 22,  1997 and is
incorporated  by reference into this Report.  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 to the
information under the caption  "Executive  Compensation"  contained in the Proxy
Statement.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       Information  concerning  the  Common  Stock  beneficially  owned  by each
director and executive officer of the Company,  by all officers and directors of
the Company as a group, and by each  shareholder  known by the Company to be the
beneficial owner of 5% of the outstanding  Common Stock, is incorporated  herein
by reference to 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

       Information  responsive to this item is incorporated  herein by reference
to the information  under the caption  "Certain  Transactions"  contained in the
Proxy Statement.


                                       47
<PAGE>

                                     PART IV

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

         (a)      1.       Financial Statements

         The following financial statements are included in Item 8:

                  -        Report of Independent Accountants

                  -        Balance Sheets at December 31, 1996 and 1995

                  -        Statements of Income for the Years Ended December 31,
                           1996, 1995, and 1994

                  -        Statement of Shareholders' Equity for the Years Ended
                           December 31, 1996, 1995, and 1994

                  -        Statements of Cash Flows for the Years Ended December
                           31, 1996, 1995, and 1994

                  -        Notes to Financial Statements

                  2.       Financial Statement Schedules

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


                  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.

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

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

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

                                       48
<PAGE>

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

            *10.04         Stock Option Plan, and related agreements.

           **10.05         S  corporation  Termination,   Tax  Allocation,   and
                           Indemnification  Agreement,  dated November 28, 1994,
                           among Videonics, Inc. and certain shareholders.

           **10.06         Loan  Agreement,  dated  September 30, 1994,  between
                           Videonics, Inc. and Cupertino National Bank.

           **10.07         Commercial  Security  Agreement,  dated September 30,
                           1994, between Videonics,  Inc. and Cupertino National
                           Bank.

          ***10.08         Asset Purchase  Agreement relating to the acquisition
                           of Nova  Systems,  Inc., by  Videonics,  Inc.,  dated
                           September 7, 1995.

         ****10.09         Asset Purchase  Agreement relating to the acquisition
                           of KUB Systems,  Inc., by Videonics,  Inc., dated May
                           24, 1996.

             10.10         Letter of Employment Agreement with Steve L. Peters.

             10.11         Promissory  Note  issued in  connection  with loan by
                           Videonics, Inc. to Steve L. Peters.

             11.           Statement   Regarding   Computation   of  Per   Share
                           Earnings.

             23.1          Consent  of  Coopers  & Lybrand  L.L.P.,  Independent
                           Accountants.

         (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, 1996.

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

**   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.

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

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

                                       49

<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 18th day of
March, 1997.

                                 VIDEONICS, INC.


By: /s/ Michael L. D'Addio                       By: /s/ James A. McNeill
   -----------------------                          ----------------------------
   Michael L. D'Addio                               James A. McNeill
   President and Chief                              Vice President of Finance,
   Executive Officer                                Chief Financial Officer and
                                                    Assistant Secretary


       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 date indicated.



Name and Signature                   Title                        Date
------------------------------       -----                        ----

s/ Michael L. D'Addio                Chairman of the Board,       March 18, 1997
---------------------                President and CEO
Michael L. D'Addio                   


/s/ Mark C. Hahn                     Vice President and Chief     March 18, 1997
------------------------------       Technical Officer
Mark C. Hahn                         


/s/ Carl E. Berg                     Director                     March 18, 1997
------------------------------
Carl E. Berg


/s/ N. William Jasper, Jr.           Director                     March 18, 1997
------------------------------
N. William Jasper, Jr.



                                       50
<PAGE>

<TABLE>

                                                VIDEONICS, INC.

                             INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<CAPTION>

                                                                                                      Page in
                                                                                                     Form 10-K

<S>      <C>                                                                                            <C>
Financial statements:

         Report of Independent Accountants.............................................................. 27

         Balance Sheets ................................................................................ 28

         Statements of Income .......................................................................... 29

         Statements of Shareholders' Equity............................................................. 30

         Consolidated Statements of Cash Flows.......................................................... 31

         Notes to Financial Statements.................................................................. 32

Schedules:
                     Report of Independent Accountants.................................................. 53

         II          Valuation and Qualifying Accounts.................................................. 54

                     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:

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

         10.03       Sublease, dated July 11, 1996 between Diba, Inc. and Videonics, Inc.
                     at 270 Harbor Boulevard, Belmont, California....................................... __
 
         10.10       Letter of Employment Agreement with Steve L. Peters................................ __

         10.11       Promissory Note issued in connection with loan by Videonics, Inc. to
                     Steve L. Peters.................................................................... __

         11.         Statement Regarding Computation of Earnings Per Share.............................. __

         23.1        Consent of Coopers & Lybrand L.L.P., Independent Accountants....................... __

</TABLE>

                                       51
<PAGE>



                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1996

                                   ITEM 14(d)

                          FINANCIAL STATEMENT SCHEDULE




                                       52


<PAGE>



                   INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE


Our report on the financial  statements of Videonics,  Inc. and  subsidiaries is
included  on page 27 of this Form 10-K.  In  connection  with our audits of such
financial  statements,  we have also  audited  the related  financial  statement
schedule listed in the index on page 51 of this Form 10-K.

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


                                             /s/ COOPERS & LYBRAND L.L.P.
                                             -----------------------------------
                                                 COOPERS & LYBRAND L.L.P.


                                       53



San Jose, California
January 31, 1997


<PAGE>

<TABLE>


                                                VIDEONICS, INC.
                               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                                       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, 1996
   Allowance for doubtful accounts:                 $173            $(10)             $ 40           $ 123

Year ended December 31, 1995
   Allowance for doubtful accounts:                 $150            $ 28              $ (5)          $ 173

Year ended December 31, 1994
   Allowance for doubtful accounts:                 $ 50            $155              $(55)          $ 150


</TABLE>




                                       54
<PAGE>

<TABLE>


       Directors and Officers
<CAPTION>


       Board of Directors                           Officers

         <S>                                        <C>  
         Michael L. D'Addio                         Jack M. Aiello
         President, Chief Executive Officer         Vice President of Customer Relations
         and Chairman of the Board
                                                    Jeffrey A. Burt
         Carl E. Berg                               Vice President of Operations
         Private investor, member of the
         board of directors of Integrated           Michael L. D'Addio
         Device Technology, Valence                 President, Chief Executive Officer
         Technology, and Systems Integrated         and Chairman of the Board
         Research
                                                    James Francis
         Mark C. Hahn                               Executive Vice President of Sales and
         Vice President, Chief Technical            Marketing
         Officer and Secretary
                                                    Mark C. Hahn
         N. William Jasper, Jr.                     Vice President, Chief Technical
         President and Chief Operating              Officer and Secretary
         Officer of Dolby Laboratories, Inc.
                                                    Tom Herrmann
         Committees of the Board                    Vice President of International Sales

         AUDIT & COMPENSATION                       Wojciech Majewski
                                                    Vice President of Business Development
         Carl E. Berg
         N. William Jasper, Jr.                     James A. McNeill
                                                    Vice President of Finance, Chief
                                                    Financial Officer and Assistant
                                                    Secretary

                                                    David O'Kelly
                                                    Vice President of Domestic Sales

                                                    Steve Peters
                                                    Vice President of Research
                                                    and Development
</TABLE>

                                       55
<PAGE>

Shareholder Information


Annual Meeting
The Videonics, Inc. annual shareholders' meeting will be held on May 22, 1997.

Shareholder Information
Videonics'  Common Stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market System under the symbol "VDNX." Copies of Videonics' Report on Form
10-K for the fiscal year ended December 31, 1996  (incorporated  in full in this
Annual  Report)  and  additional  copies of this  Annual  Report may be obtained
without charge upon written request from:

              Videonics, Inc.
              Investor Relations
              1370 Dell Ave
              Campbell, California 95008
              Tel: 408-866-8300
              Fax: 408-866-4859

Transfer Agent and Registrar
              Boston EquiServe
              150 Royall Street
              Canton, MA 02021

Independent Accountants
              Coopers & Lybrand L.L.P., San Jose, California

Independent Counsel
              Wise & Shepard L.L.P., Palo Alto, California

Corporate Headquarters
              Videonics, Inc.
              1370 Dell Ave
              Campbell, California 95008
              Tel: 408-866-8300


                                       56

<PAGE>


                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1996

                                   ITEM 14(c)

                                    EXHIBITS



                                       57