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, 1998
                                         or
      [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

             For the transition period from ____________ to ____________

                         Commission File Number 0-25036

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

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

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

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

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

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

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

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

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

       At March 1, 1999,  the  aggregate  market  value of Common  Stock held by
non-affiliates of the Registrant was approximately $3,133,971

       As of March 1, 1999,  there  were  5,858,149  shares of the  Registrant's
Common Stock outstanding.

                         DOCUMENTS INCORPORATED BY REFERENCE
       Materials from the Registrant's  definitive  Proxy Statement  relating to
its 1999 Annual Meeting of  Shareholders  to be held on or about August 19, 1999
(the "Proxy  Statement")  have been  incorporated by reference into Part III, of
this Report.

<PAGE>

                                 VIDEONICS, INC.

                                TABLE OF CONTENTS

PART I

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

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

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

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

PART II

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

     ITEM 6.   SELECTED FINANCIAL DATA........................................19

     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS............................20

     ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.....30

     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................30

     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE............................51

PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................51

     ITEM 11.  EXECUTIVE COMPENSATION.........................................51

     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT.....................................................51

     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................51

PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
               FORM 8-K.......................................................52

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                                     PART 1

       This Annual  Report on Form 10-K contains  forwarding-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,
particularly  statements  regarding market  opportunities,  market share growth,
competitive  growth,  new  product   introductions,   success  of  research  and
development,  research and  development  expenses,  customer  acceptance  of new
products,  gross margin and selling,  general and administrative expenses. These
forward-looking  statements involve risks and uncertainties,  and the cautionary
statements  set forth below identify  important  factors that could cause actual
results to differ  materially  from those  predicted in any such forward looking
statements.  Such factors  include,  but are not limited to, adverse  changes in
general economic  conditions,  including adverse changes in the specific markets
for the Company's products,  adverse business  conditions,  decreased or lack of
growth in the market for video  post-production  equipment,  adverse  changes in
customer  order  patterns,  increased  competition,  lack of  acceptance  of new
products, pricing pressures, lack of success in technological advancement, risks
associated with foreign operations,  risks associated with the Company's efforts
to comply with Year 2000 requirements, and other factors, including those listed
below.



ITEM 1.   BUSINESS

       Videonics,   Inc.,  a  California  corporation  organized  in  1986  (the
"Company" or "Videonics"), is a leader in the design, development,  manufacture,
and sale of affordable,  high quality,  real time, digital video post-production
equipment.  The Company's  products process,  edit, and mix raw video footage as
well as enhance such footage with audio, special effects, and titles,  resulting
in professional quality video production. Videonics equipment is used throughout
the world in the  post-production  of videos. As of December 31, 1998, more than
530,000 units of Videonics equipment have been sold worldwide.

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

The Video Production Process

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

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

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

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

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

The Markets For Video Post-Production Equipment

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

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

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

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

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

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

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

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The Videonics Solution

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

Strategy

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

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

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

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

       Leverage Manufacturing and Distribution. The Company's strategy is to use
its resources in a cost-effective manner.  Wherever practical,  the Company uses
third party services for activities such as manufacturing  and accessing certain
sales channels. For instance, except for start-up production and the specialized
signal  processing  products  from its  recently  sold Nova  Division in Canton,
Connecticut,  the Company  contracts with third party  manufacturers  located in
Mexico for most product manufacturing.

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Technology

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

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

              PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS

                               Approximate       Approximate Lines       Year
      Product                ASIC Gate Count     of Software Code       Shipped
      -------                ---------------     ----------------       -------
Sound Effects Mixer                   0               1,000              1991
Thumbs Up Video Editor            4,000               6,000              1992
Video TitleMaker 2000            20,000              25,000              1994
Digital Video Mixer              62,000              15,000              1994
Edit Suite                        8,000              28,000              1995
PowerScript                     142,000             100,000              1996
Effetto Pronto (1)              250,000             600,000              1997
MXPro                           118,000             107,000              1998

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


Selected Products

       The Company offers a broad range of digital video products, each designed
to meet specific video post-production needs. The products work with most of the
commonly used broadcast  standards,  videotape formats, and with most brands and
models of video equipment. The Company's products range in price from under $179
for  certain  software  products  to more than  $34,700  for  certain  broadcast
products.

Videographer

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

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four sources without the need for additional  monitors.  The Digital Video Mixer
offers a "picture-in-picture"  which allows two moving video images to be placed
on the screen at once. A unique  "compose"  function allows the user to create a
complex  image made up of any number of still  images  and  colored  rectangles,
along with a moving  video or solid color  background.  The "chroma key" feature
enables the user to shoot a subject against a solid color background and replace
that color with a separate  video  source.  This is the same  technique  used to
place a  weather  forecaster  in front of a weather  map.  The  product  accepts
S-video as well as  composite  video  signals.  The Digital  Video Mixer has won
numerous awards,  including the Outstanding New Editing Equipment Award for 1994
by Video Magazine,  the European Video Editing Product of The Year for 1994-1995
by the European  Video Awards Panel,  the Video  Post-Production  Product of The
Year  1994-1995  by  Video  Camera  Magazine  U.K,  and  the  1997  Audio  Video
International  Product  of The Year Award for  Special  Effects  Generator.  The
Digital Video Mixer has a U.S. suggested retail price of $1,199.

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

       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
colors;  fades,  rolls  and  crawls;  bold,  shadow,  and  outline;  ability  to
superimpose over video or colored or patterned backgrounds; full set of accented
and international characters; and storage as projects. The Video TitleMaker 3000
received the 1997 Consumer  Electronics Show Innovations Award.  TitleMaker 3000
carries a U.S. suggested retail price of $799 and is available in other language
versions.

       Personal  TitleMaker.  First  shipped  in  November  1997,  the  Personal
TitleMaker is a character generator primarily aimed at the camcorder enthusiasts
looking for an entry-level  titler. The Personal  TitleMaker offers its users: a
choice  of seven  high-resolution  fonts;  over  1,000,000  colors  for  titles,
backgrounds and borders;  fades,  rolls and crawls;  ability to superimpose over
video  or  colored  or   patterned   backgrounds;   full  set  of  accented  and
international  characters and a GPI (General  Purpose  Interface)  trigger input
allows remote 

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triggering of titles from  external  controllers,  such as Videonics'  Thumbs Up
editor and Edit Suite. Personal TitleMaker carries a U.S. suggested retail price
of $399. In 1998,  Personal  TitleMaker won the Best Production  Accessory Award
from Camcorder User Magazine.

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

       Python.  First  shipped in  November  1997,  Python  captures,  digitally
compresses,  and plays back  full-motion  video from any video source  including
camcorders,  VCRs, and cameras.  Python is an external MPEG video capture device
which allows PC and laptop users to send video e-mails,  add streaming  video to
Web pages, and add full-motion video to multimedia presentations. Python creates
highly compressed video files in real time, using the  industry-standard  MPEG-1
format. Python also captures  high-resolution JPEG still pictures.  Software for
viewing  MPEG video and JPEG still  pictures  is widely  available  on most PCs.
Python has a U.S. suggested retail price of $349.

Broadcast

       Effetto  Pronto.  The first Effetto  Pronto beta units shipped in limited
quantities in the fourth  quarter of 1997  followed by  production  shipments in
June of 1998.  Effetto Pronto consists of Effetto, a QuickTime based compositing
software component and Pronto, a dedicated  resolution  independent PCI hardware
accelerator card. The Pronto PCI accelerator card can process almost one million
pixels of film, video,  graphics and character  generator elements in real-time.
Effetto  Pronto  enables  significant  increases in  productivity  and frees the
creative process by allowing multiple  iterations,  rapid re-edits and rendering
speeds up to ten times faster than other  compositing  products.  Effetto Pronto
offers  virtually  unlimited  creative  control,   with  effects  and  functions
previously unavailable in an integrated  compositing package.  Features include:
chrominance  and  luminance  keying;  a full  complement of special  effects;  a
professional  character  generator  with complete  animation  control over every
letter of text,  the ability to design in true  three-dimensional  workspace and
instant feedback on a video monitor. Effetto software version 1.1 began shipping
in November of 1998 and  included  support for certain  third-party  Adobe After
Effects  plug-ins.  Effetto  Pronto won several awards in 1998  including:  1998
Video Systems Vanguard Award,  Digital  Producer  Magazine Best product of 1998,
1998 A/V Video Magazine  Platinum  Award in the  Compositing/DVE  category,  Top
Tools of 1998 from  Interactivity  Magazine  and the Editors  Choice  Award from
Videography Magazine for NAB'97. The Videonics' Effetto Pronto system has a U.S.
suggested retail price of $4,995.

       PowerScript. First shipped in September 1996, PowerScript is a standalone
character generator that generates images,  characters, and graphics internally,
without the aid of an external computer. Rotation, sizing, stretching, outlines,
color,  transparency,  and other  advanced  functions are imaged by its internal
PostScript  engine.  PowerScript  is designed for broadcast,  video  production,
multimedia,  industrial, and videography applications.  It displays high quality
(10-bit digital video)  anti-aliased  titles and offers the character,  graphics
display, 

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and formatting  features  supported by the PostScript  display  technology.  Two
high-end  versions of  PowerScript  were added in 1997;  PowerScript  Studio has
composite and Y/C video inputs and outputs while  PowerScript  Studio  Component
offers analog  component  inputs and outputs,  in addition to composite and Y/C.
Both models are  available in PAL (Phase  Alternating  Line) and NTSC  (National
Television  Standards  Committee)  versions.  In 1998, two models of PowerScript
Studio 4000 were  introduced  and  shipped.  These models are a step-up from the
PowerScript  Studio and include  enhanced  version 4.0 software and come bundled
with  PowerScript  Communicator,  a Windows based software product that includes
control and  scheduling of up to 10  PowerScript  from remote  locations.  While
PowerScript  is a standalone  product,  it also  includes  extensive  networking
capabilities  that 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,
user-definable styles, roll and crawl, transition effects,  clock/calendar,  GPI
trigger, and video test patterns.  The Videonics  PowerScript product line has a
U.S. suggested retail price range of $3,000 to $6,000.

       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. In January 1999, the Company  completed the sale of certain of its
assets and the  assumption  of certain  of its  liabilities  related to its Nova
Systems  Division  to a private  company  in  Massachusetts.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

       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  applications
where the highest 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 is
available, including: Serial Digital Converters, Noise Reducers,  Synchronizers,
Time-Base-Correctors,  Distribution Amplifiers,  and Format Converters. The Nova
StudioFrame  Series  range in price  from  $1,345 to  $34,700  depending  on the
configuration.

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 11
different U.S. trade shows during 1998, including the 

                                       10

<PAGE>

International Broadcasters Convention, the National Association of Broadcasters,
and INFOCOMM.

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

Sales

       Domestic Sales. The Company  wholesales its products in the United States
through a direct  sales  organization,  supported by  independent  manufacturers
representative  organizations.  In 1998, 1997, and 1996, respectively,  sales in
the United States accounted for approximately 64%, 67%, and 58% of the Company's
total  revenues.  The Company sells to a variety of sales channels which in turn
sell to end-users.  The Company's  sales channels  include Value Added Resellers
(VARs) who  specialize  in selling to the  Broadcast  Market,  direct mail order
businesses,  audio/visual  specialty stores, camera and video shops,  industrial
dealers  which  service  business  and  industry,  catalogs,  and  certain  mass
merchants.   The  majority  of  the  Company's  sales  channels   specialize  in
audio-visual or video products and have product knowledgeable sales personnel.

       International  Sales. The Company has addressed the international  market
opportunity  by selling its  products  through  wholesale  distributors  and its
German subsidiary, which service 78 different countries, and by selling selected
products to  international  private label  customers.  In 1998,  1997, and 1996,
respectively,  sales outside the United States accounted for approximately  36%,
33%, and 42% of the  Company's  total  revenues.  As of December  31, 1998,  the
Company had eight  employees who service and support its  international  private
label customers and country specific distributors.  The Company's  international
distributors also sell the Company's products under the Videonics 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.

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

       Sales made by the Company  outside  the United  States are priced in U.S.
dollars and are, therefore,  not subject to currency exchange fluctuations.  The
Company's primary exposure to changes in exchange rates is related to its German
subsidiary  and  changes  in the German 

                                       11

<PAGE>

mark.  In 1998,  1997  and 1996  foreign  currency  fluctuations  did not have a
material affect on the Company's operating results.

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

       Videographer  products  may be  defined  as free  standing,  easy to use,
inexpensive  products  that address a particular  need,  such as video mixing or
titling.   These  products  are  sold  through  direct  mail  order  businesses,
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 as stand alone units. These units must
comply with industry technical  specifications for video quality.  An example of
this type of product is the PowerScript Character Generator.  Broadcast products
are sold  principally  through VARs and system houses that service the broadcast
industry.

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

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

       Private  label   relationships.   The  Company  believes  that  strategic
alliances  are  essential  to  compete  successfully  in certain  large  foreign
markets,  particularly  Japan. The Company therefore seeks to distribute through
select private label  relationships  with well-known  electronics  manufacturers
having  highly  developed  distribution  channels  and  substantial  brand  name
recognition in the country of distribution. This strategy enables the Company to
concentrate  its  efforts on  technology  and product  development,  rather than
making the heavy  financial and time commitment  required to build  distribution
channels in these difficult-to-access markets. The Company's first private label
relationship  in Japan  was with  Matsushita  Electrical  Industrial  Co.,  Ltd.
("Matsushita.") Matsushita purchased a custom version of the Company's EditMaker
product  that was  manufactured  by the Company and is sold under the  Panasonic
brand name. While the Company has discontinued  this product,  it has an ongoing
support  obligation to Matsushita.  The Company currently  manufactures the Sony
Titler, a Japanese language  character  generator for sale in Japan known as the
Sony  XV-J1000.  Designed  to  Sony  specifications  by  the  Company's  product
development team in Campbell, 

                                       12

<PAGE>

California,  the Sony Titler is  manufactured by the Company and shipped to Sony
from the United States.  The Sony Titler includes a front-end  processor,  which
translates from a standard  keyboard into 6,930 unique Kanji and Kana (Japanese)
characters  for  subsequent  video  display (up to 110,880  different  font/size
character  variations).   This  software-intensive   product  provides  all  the
functionality  of  its  English  language  counterpart,   plus  some  additional
functions required by the Japanese  language.  Such features include the ability
to present  text  (titles)  in either a  horizontal  or a vertical  format.  The
Company's private label sales decreased  significantly between 1996 and 1997 and
remained flat between 1997 and 1998.

        For 1998, 1997, and 1996, no one customer accounted for more than 10% of
revenues. Any termination by a significant customer of its relationship with the
Company or material  reduction  in the amount of business  such a customer  does
with the Company  could  materially  adversely  effect the  Company's  business,
financial  condition  or  operating  results.  Also,  see  Note 10 of  Notes  to
Consolidated  Financial  Statements for information  concerning sales to foreign
customers and industry segments.

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


Manufacturing and Suppliers

       Typically, the Company initiates small production runs of new products at
the  Company's   headquarters  in  Campbell,   California  before   transferring
manufacturing  to third party contract  manufacturers  located in Mexico.  Final
configuration and testing  ordinarily take place at the Company's  headquarters.
Generally, when received in Campbell, each of the products undergoes testing and
inspection  before final  shipment to customers.  The Company uses an integrated
materials management system for purchasing,  inventory control, cost accounting,
and invoicing. All products in the Nova product line are assembled,  tested, and
distributed from the Company's facility in Canton,  Connecticut.  As of December
31,  1998,  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 one
person  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 

                                       13

<PAGE>

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 1998, 1997,
and 1996,  the Company  invested $4.8 million,  $7.0 million,  and $5.0 million,
respectively,  constituting  24%,  35%,  and 17% of its  total net  revenues  in
research and development,  respectively.  Because digitized video consumes large
amounts of data and requires  substantial  computer  power to process such data,
the  Company's  engineers  constantly  seek new methods to improve its products'
capacity  and  manipulation  of  video.   Maximizing  the  processing  of  video
information  contained  in video  random  access  memory  ("VRAM"),  through the
development of ASICs, is a focus of the Company's  development staff, as are the
compression and storage issues  necessitated  when  integrating and manipulating
large  amounts of video data.  As part of this ongoing  effort,  the Company has
made  significant  investments  in  advanced  computer  programming  tools.  The
Company's engineers work extensively with VHDL design methodology.  Any new ASIC
designs are maintained in VHDL libraries,  which product  designers may then use
to prototype subsequent new products.

       As of December  31, 1998,  the Company  employed 32 hardware and software
engineers with technical  skills in design and development of ASICs,  digital or
analog video signal generation-processing, or embedded software.

       In 1998,  the  Company  continued  to  experience  substantial  delays in
completing the successful  development  of products.  The Company  completed and
began   shipping  MXPro  and  Effetto  Pronto  in  April  1998  and  June  1998,
respectively.  MXPro,  the  Company's  advanced  Digital  Mixer  was  originally
scheduled to begin shipments in the fourth quarter of 1997.  Effetto Pronto, the
Company's digital video effects and compositing system, was originally scheduled
to begin production  shipments in 1997. Delays in shipments of MXPro and Effetto
Pronto  contributed to the revenue shortfall for 1998. In addition,  the Company
had expected to introduce a digital video product for its  Videographer  market,
late in 1998 with first  shipments to occur in early 1999. As of March 23, 1999,
this product has not yet been  introduced to market.  The Company  completed and
began shipping Python,  Personal TitleMaker and a beta version of Effetto Pronto
in the fourth quarter of 1997. Shipments of Python and beta shipments of Effetto
Pronto  occurred  later than  originally  planned,  resulting  in a  significant
revenue shortfall for 1997, which, in turn, significantly affected profitability
as the Company suffered substantial  operating losses. The PowerScript Character
Generator  in the NTSC video  format,  introduced  in 1995,  was  completed  for
shipment in September of 1996.  After  extensive  field use, major  revisions of
PowerScript's  software were made in 1997,  with additional  improvements  being
made in the  first  quarter  of  1998.  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  product
development delays that would have an adverse effect on the profitability of its
operations. There can be no assurance 

                                       14

<PAGE>

that the Company will be successful in the timely development of new products to
replace or supplement  existing  products or that the Company will be successful
in integrating  acquired  products or  technologies  with its current  business.
Delays in new product  development  have had an adverse  material  impact on the
Company's  growth  in 1998,  1997  and  1996.  Similar  adverse  effects  on the
Company's  results  of  operations  can  be  expected  until  new  products  are
successfully introduced and accepted by end users. See "Management's  Discussion
and Analysis of Financial Condition and Results of Operations."

       The Company's success depends,  in part, on its ability to anticipate new
technological  developments,  to develop expertise in such technologies,  and to
develop and introduce in a timely and cost-effective  manner additional features
and new products that satisfy  customer needs and desires.  As noted above,  the
Company has been unable to ship new products in a timely  fashion in 1998,  1997
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,   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 the majority of these desktop computer and
workstation-based  vendors sell more  sophisticated  products  primarily for the
broadcast  professional  and business and  industrial  markets at  significantly
higher  price  points  than  the  Company's  products,  these  vendors  are  now
introducing  products  which  target many of the same  markets as the  Company's
products and at similar price points.

       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, manufacturing and marketing resources than the Company.

       The desktop  compositing  and effects  market is highly  competitive  and
requires  the Company to partner  with other  companies  offering  complementary
products in order to provide  complete  solutions to customers.  These companies
include  Media  100,  Artel,  Puffin  

                                       15

<PAGE>

Designs  and ICE.  All of these and other  companies  continue  to work with the
Company to  demonstrate  the  compatibility  of their  respective  offerings  at
various  trade  shows  and  seminars.  Maintaining  this  compatibility,   while
enhancing  its  own  products,  continues  to  put a  tremendous  burden  on the
Company's  engineering  resources.  The  Company is  currently  aware of several
competitors in this market,  including Adobe and Discreet  Logic.  Many of these
companies have  significantly  greater financial,  technical,  manufacturing and
marketing  resources  than the Company.  There can be no assurance  that Company
will  be  able to keep up with  the  rapid  technological  change  and  evolving
industry standards.

       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 its products will remain highly
competitive. The Company believes that its ability to compete depends on factors
both  within and outside its  control,  including  the success and timing of new
product  developments  introduced  by the Company and its  competitors,  product
performance  and price,  market presence and customer  support.  There can be no
assurance that the Company will be able to compete  successfully with respect to
these  factors.  Maintaining  any  advantage  that the Company may have over its
competitors will require  continuing  investments by the Company in research and
development,  sales and marketing and customer service and support. In addition,
as the Company enters new markets, whether through acquisitions,  alliances with
other companies or on its own, the Company may encounter  distribution channels,
technical  requirements  and  competitive  factors that differ from those in the
markets in which it currently  operates.  There can be no assurance  the Company
will be able  to  compete  successfully  in  these  new  markets.  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.  The Company has registered the Videonics brand name
and certain product  trademarks in the United States,  as well as in some of its
international  markets. There can be no assurance however, that the Company will
have access to the  Videonics  brand name and  trademark in all  countries.  The
inability  to use the  Videonics  brand name and  trademark  in a country  could
materially  and  adversely  affect the Company's  business in that country.  The
Company  routinely  enters into  confidentiality  and  assignment  of  invention
agreements with each of its employees and nondisclosure  agreements with its key
customers and vendors.

       While the Company  relies on these  measures  to protect its  proprietary
rights,  there can be no assurance  that the Company's  technology is adequately
protected by such measures or that the technology will not be reverse-engineered
by third parties without  violation of the Company's  proprietary  rights.  Such
protection may not preclude  competitors from developing  products with features
and prices  similar to or even  better  than those of the  Company.  The Company
believes that its products and other proprietary rights do not infringe upon the

                                       16

<PAGE>

proprietary rights or products of third parties. In 1997, the Company reached an
agreement  with a third party patent  holder in which  royalties  are payable on
certain of the Company's  products.  Payment of these royalties will not have an
adverse  material  effect on the  Company's  financial  condition  or results of
operations.  There can be no assurance,  however,  that other third parties will
not assert  infringement  claims  against the Company in the future or that such
claims  will not result in costly  litigation  or require the Company to license
intellectual property rights from third parties.  There can be no assurance that
any such licenses would be available on terms  acceptable to the Company,  if at
all.

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


Employees

       As of March 1, 1999, the Company had 88 full-time employees, including 25
in research and development,  28 in sales and marketing, 26 in operations, and 9
in finance and administration. None of the Company's employees is represented by
a labor union or is covered by  collective  bargaining  agreements.  The Company
believes that its employee relations are good. The Company has never experienced
a work stoppage.

                                       17

<PAGE>


ITEM 2.   PROPERTIES.

       The Company's principal administrative, sales and marketing, research and
development,  and operating  facilities are located in Campbell,  California and
consist of approximately  29,900 square feet under a lease which expires on July
31, 1999. The Company is currently  renegotiating this lease and expects to sign
a new lease at current  market  rates.  As a new lease has not yet been  signed,
there can be no assurance that this will occur.  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,  1999.  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
and under a lease,  which expires on October 31, 1999 unless terminated  earlier
by the Company by providing a 60-day  advance  notice.  On January 29, 1999, the
Company  submitted  its  60-day  notice  of  termination.  The  Company  had  an
administrative,  sales and  marketing and research and  development  facility in
Belmont,  California,  totaling 6,050 square feet under a sublease.  In December
1998,  in  accordance  with  the  lease   expiration,   the  Company  moved  its
administrative,  sales and marketing and research and  development  personnel to
the Company's Campbell, California location.


ITEM 3.   LEGAL PROCEEDINGS.

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


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

       No matter was  submitted to a vote of the Company's  shareholders  during
the fourth quarter of the fiscal year ended December 31, 1998.

                                       18

<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  that 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 years ended December 31, 1998 and 1997.

                             Q1              Q2             Q3               Q4 
                             --              --             --               --
FY98     High              $4.50           $4.63           $2.13           $1.50
         Low               $1.50           $1.38           $0.75           $0.47

FY97     High              $9.50           $7.63           $7.63           $7.25
         Low               $3.75           $3.50           $4.38           $3.50


       As of March 1,  1999,  there  were  approximately  2,000  holders  of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 1, 1999 was $1.13 per share.

       On October 6, 1998,  the  Company  received a notice from Nasdaq that the
Company's  Common Stock would be subject to delisting  from the Nasdaq  National
Market System  ("Nasdaq/NMS")  because the Company no longer met the  $5,000,000
market value of public float (MVPF)  requirement  pursuant to  Marketplace  Rule
4450(a)(2)  under  maintenance  standard  1. On March 11, 1999 the Company had a
hearing  with Nasdaq with  respect to delisting  of the  Company's  shares.  The
Company has not yet received  notice of Nasdaq's  decision  resulting  from such
hearing.

       If Nasdaq delists the Company's Common Stock from Nasdaq/NMS, the Company
believes that it will meet the  requirements for listing on the Nasdaq Small Cap
Market and that its Common Stock would, therefore,  continue to be traded on the
Nasdaq  market.  However,  there can be no assurance  that the Company's  Common
Stock will be listed on the Nasdaq  Small Cap Market if such shares are delisted
from Nasdaq/NMS.  Any delisting would likely affect  shareholder  liquidity with
respect to their common stock.

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

                                       19

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

       The selected financial data set forth below with respect to the Company's
statements  of  operations  for each of the years in the five year period  ended
December 31, 1998,  and with respect to the balance sheets at December 31, 1998,
1997,  1996, 1995 and 1994 are derived from financial  statements that have been
audited by  PricewaterhouseCoopers  LLP, independent accountants.  The financial
data should be read in conjunction with the Company's  Financial  Statements and
related  Notes and with  "Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations"  included  elsewhere in this Report.  The
balance sheets as of December 31, 1998 and 1997, and the statement of operations
for each of the  three  years in the  period  ended  December  31,  1998 and the
independent auditors' report thereon, are included in Item 8 of this Report.

                                       20

<PAGE>

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

                                                               Year Ended December,
                                     1998              1997            1996          1995           1994 
                                     ----              ----            ----          ----           ---- 
<S>                                <C>               <C>              <C>           <C>           <C>    
Net revenues                       $19,672           $19,955          $29,195       $33,561       $31,498
Operating income (loss)             (6,722)(4)       (12,984)(3)          401         4,811(2)      5,627
Net income (loss)                   (6,713)(4)       (13,441)(3)          744         3,746(2)      5,993(1)
Net income (loss) per
share - basic                        (1.15)(4)         (2.34)(3)         0.13          0.69(2)       1.57(1)
Shares used in per share
calculation - basic                  5,833             5,744            5,616         5,413         3,817
Net income (loss) per
share - diluted                      (1.15)(4)         (2.34)(3)         0.13          0.65(2)       1.39(1)
Shares used in per share
calculation - diluted                5,833             5,744            5,933         5,791         4,324

Balance Sheet Data:
Working capital                    $ 4,404           $ 9,902          $21,412       $20,127       $18,394
Total assets                         9,164            15,694           27,958        27,350        22,279
Shareholders' equity                 5,927            12,606           25,731        24,149        19,403
Dividends declared per
share (5)                              -                 -                -             -            0.71
<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.

(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.

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

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

(5)  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>


                                       21

<PAGE>


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

         This Annual  Report on Form 10-K,  including  the  following  sections,
contains forward-looking statements within the meaning of the Private Securities
Litigation  Reform  Act  of  1995,   particularly  statements  regarding  market
opportunities,   market   share   growth,   competitive   growth,   new  product
introductions, success of research and development expenses, customer acceptance
of new products,  gross margin and selling, general and administrative expenses.
These  forward-looking  statements  involve  risks  and  uncertainties,  and the
cautionary statements set forth below,  specifically those contained in "Factors
That May Affect Future Results of Operations,"  identify  important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking  statements.  Such  factors  include,  but are not  limited  to,
adverse changes in general economic conditions, including adverse changes in the
specific  markets  for the  Company's  products,  adverse  business  conditions,
decreased or lack of growth in the market for video  post-production  equipment,
adverse  changes in customer  order  patterns,  increased  competition,  lack of
acceptance of new products,  pricing pressures, lack of success in technological
advancements,  risks associated with foreign  operations,  risks associated with
the Company's efforts to comply with Year 2000 requirements,  and other factors,
including those listed below.

Overview

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

       In 1996,  the Company  continued  to  diversify  into the  broadcast  and
desktop  markets with the  acquisition of the assets of KUB Systems  ("KUB") for
$350,000  in cash.  KUB is 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.  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.

       In 1997,  the  Company  continued  to improve the  PowerScript  Character
Generator.  New  versions  of the  operating  software  that  enhanced  the user
interface  and  operating  speed of the product  were  released in 1997.  Signal
timing  issues were  addressed  with the  introduction  of two new higher priced
versions of PowerScript  (PowerScript  Studio and PowerScript  Studio Component)
targeted at higher end customers.  In 1997, the Company announced four major new
products that were expected to ship in 1997: Effetto Pronto,  MXPro,  Python and
Personal TitleMaker. As of December 31, 1997, the Company had brought Python and
Personal  TitleMaker  to market  in  commercial  quantities.  Since  Python  and
Personal  TitleMaker were 

                                       22

<PAGE>

shipped in the fourth  quarter of 1997, the first three quarters of 1997 did not
contain  revenues  from  any of  the  aforementioned  new  products.  To  reduce
expenses,  the Company  reduced its  personnel by twelve  percent on January 15,
1998.

       In the second quarter of 1998, the Company began production  shipments of
MXPro and Effetto Pronto.  Sales of MXPro tracked closely to the Company's plan,
while sales of Effetto Pronto were significantly  below plan. Effetto Pronto did
not generate  meaningful revenues during 1998, as customer acceptance was slower
than expected.  Effetto Pronto's lower than anticipated revenues,  combined with
continued  significant research and development and sales and marketing expenses
associated  with the product,  resulted in a significant  operating loss for the
Company.  The Company expects that with improved strategic marketing efforts and
the release of a significant software upgrade, the product will better reach its
intended customer base. The next major software upgrade will contain significant
feature enhancements and is scheduled for release in the second quarter of 1999.
In addition, sales of the Company's open system products decreased significantly
from their 1997 run rate,  due primarily to increased  competition.  As such, in
the fourth  quarter of 1998, the Company  reduced its open systems  inventory to
its net realizable  value.  These factors,  combined with declining sales of the
Company's  older  Videographer  products and delays in shipment of the Company's
new Videographer products, resulted in operating losses in each quarter of 1998.
The Company  expects  losses during its first quarter of 1999,  with results for
the remainder of the year dependent on planned shipment and customer  acceptance
of new products.  Although the Company  reduced its 1998  operating  expenses by
nearly $4.0 million compared to 1997, the Company further reduced  personnel and
initiated  other  expense  reductions  in January  1999,  to lower the Company's
breakeven point.

       On January 29,  1999,  the Company  completed  the sale of certain of the
assets and the  assumption  of certain  of the  liabilities  related to its Nova
Systems Division  ("Nova") to a private company in  Massachusetts.  For the year
ended December 31, 1998, Nova recorded  revenues of $1.9 million and a loss from
operations  of $248,000.  For the year ended  December 31, 1997,  Nova  recorded
revenues  of $2.8  million and a loss from  operations  of $1.4  million,  which
included a write-off of $700,000 of non-performing assets. Additionally, in 1997
Videonics wrote off $1.9 million of intangible  assets related to Nova. The sale
of Nova is expected to provide  Videonics  with net revenues  from  royalties in
1999.  These  royalties are predicated upon future sales of Nova products by the
acquiring company. The sale of Nova will not result in a capital gain or loss to
Videonics.

                                       23

<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,
                                         1998           1997          1996
                                         ----           ----          ----

Net revenues                            100.0%         100.0%         100.0%
Cost of revenues                         69.1           69.7           52.3
  Gross profit                           30.9           30.3           47.7
Operating expenses
  Research & development                 24.4           34.8           17.2
  Selling & marketing                    33.5           40.3           23.1
  General & administrative                7.2            8.9            4.7
  Amortization of intangible assets         -            2.0            1.3
  Write-off of intangible assets            -            9.4             -
                                        -----          -----          -----
  Total operating expenses               65.1           95.4           46.3
                                        -----          -----          -----
     Operating income (loss)            (34.2)         (65.1)           1.4
Other income, net                           -            1.3            1.2
                                        -----          -----          -----
  Income (loss) before income taxes     (34.2)         (63.8)           2.6
Provision for income taxes                  -            3.6            0.1
                                        -----          -----          -----
     Net income (loss)                  (34.2)%        (67.4)%          2.5%
                                        ======         ======         =====


Comparison of Years Ended December 31, 1998 and 1997

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

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

       Research and Development. Research and development expenses decreased 31%
to $4.8 million during 1998 compared to $7.0 million in 1997, and decreased as a
percentage  of net  revenues  to 24% in 1998  from  35% in 1997.  The  decreased
expenses were primarily due to the  reductions in personnel and decreased  usage
of  consultants as  significant  work on PowerScript  and MXPro was completed in
1998. The Company further  anticipates  that research and  development  expenses
will decrease in 1999 due to reductions in personnel.

       Selling and Marketing.  Selling and marketing  expenses  decreased 18% to
$6.6 million in 1998  compared to $8.0 million in 1997,  and decreased to 34% in
1998 compared to 40% in 

                                       24

<PAGE>

1997, as a percentage  of net  revenues.  This decrease in selling and marketing
expenses  was  primarily  a result  of  decreased  advertising  and  promotional
expenses as the Company brought  advertising  expenditures  in-line with current
revenue levels.

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

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

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

       Provision for Income Taxes.  At December 31, 1998 the Company  recorded a
tax  benefit of $30,000  on a pretax  loss of $6.7  million.  This  benefit  was
primarily the result of a state tax refund. In addition, the Company recorded an
income tax benefit of $3.7  million on its pretax loss  offset  completely  by a
$3.7 million increase in the valuation  allowance against the Company's deferred
tax assets. The Company continued to maintain a 100% valuation allowance against
its deferred tax assets due to the  uncertainty  surrounding  the realization of
such  assets.  If it is  determined  that it is more  likely  than  not that the
deferred tax assets are realizable,  the valuation allowance will be reduced. At
December 31, 1997 the Company incurred a tax charge of $718,000 on a pretax loss
of $12.7  million.  This  charge was the result of the  establishment  of a $5.9
million  valuation  allowance  against the Company's  deferred tax assets offset
partially by an income tax benefit of $4.6  million the Company  recorded on its
pretax loss.

Factors That May Affect Future Results of Operations

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

       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

                                       25

<PAGE>

of the Company's  Common Stock.  Finally,  the Company  participates in a highly
dynamic industry, which often results in significant volatility of the Company's
Common Stock price. See "Business - Research and Development".

Year 2000 Update

        Many currently  installed computer systems,  software products and other
equipment  utilizing  microprocessors are coded to accept only two digit entries
in the date code  field.  These date code  fields will need to accept four digit
entries to distinguish  twenty-first century dates from twentieth century dates.
This is commonly referred to as the "Year 2000 issue."

         The Company is aware of the Year 2000 issue and has commenced a program
to identify,  remediate,  test and develop plans to address the Year 2000 issue.
Its  corporate  networks and  computing  hardware  operate on Unix and Microsoft
Windows  NT  Operating  Systems.  The  Company  relies on its  fully  integrated
Computer   Associates   MANMAN  system  ("MIS   system")  for  all   accounting,
manufacturing, and procurement functions. The Company makes use of EDI and other
forms of  electronic  data  exchange with two of its customers and one financial
institution.  The Company has no automated  manufacturing,  or automated testing
systems which could be materially adversely affected by Year 2000 problems.

       As of  February  1999,  the  Company  had  completed  several  Year  2000
projects,  including upgrades of its Windows NT Operating System and tape backup
software,  upgrade of its UNIX  workstations,  evaluation  of the  Company's MIS
system,  evaluation  of the Company's  email and servers,  evaluation of network
routing, interconnect, and firewall hardware and software compliance, evaluation
of the Company's telephone,  security, and voicemail equipment and evaluation of
the Company's products. The Company's review of the Year 2000 issue with respect
to its internal systems preliminarily indicates no material problems.

       As of February  1999,  the  following  Year 2000 projects are in process:
completion  of the new email  system  and the  conversion  of email from the old
system,  upgrade of the UNIX  Operating  System for the  HP3000  hardware  which
supports the Company's MIS system (expected  completion is April 1999).  Upgrade
of the MIS system software (expected completion is April 1999), development of a
list of critical  vendors and  identification  of any material  vendor  problems
(expected completion is April 1999) and evaluation of the Company's EDI partners
(expected completion is May 1999).  Although testing is not complete, it appears
that the Company's  products are "Year 2000  compliant,"  although some products
may require the user to perform a simple  reset of the product  (ongoing  during
1999).  As of February 1999,  the Company's  aggregate  expenditures  (excluding
employee  costs) in  connection  with Year  2000  compliance  has been less than
$10,000 and the Company  estimates the total cost of its Year 2000 projects will
be approximately $50,000.

       The  Company  currently  does not  anticipate  that the cost of Year 2000
compliance will be material to its financial condition or results of operations.
However,  satisfactorily  addressing  the Year 2000 issue is  dependent  on many
factors, some of which are not completely within the Company's control. Further,
the  Company  does not  currently  have any  contingency  plans if its  planning
activities fail.  Should the Company's  internal systems or the internal systems
of one or more significant  vendors,  manufacturers or suppliers fail to achieve
Year 2000 compliance, the Company's business and its results of operations could
be adversely affected. The failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business  activities
or operations. Due to the 

                                       26

<PAGE>

general  uncertainty  inherent in the Year 2000 problem,  resulting in part from
the  uncertainty  of the  Year  2000  readiness  of  third-party  suppliers  and
customers,  the  Company  is  unable  to  determine  at this  time  whether  the
consequences  of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Company's Year 2000
compliance  project is expected to  significantly  reduce the Company's level of
uncertainty  about the Year 2000 issue and, in  particular,  about the Year 2000
compliance  and readiness of third parties it deals with.  The Company  believes
that,  with the  implementation  of new business  systems and  completion of the
project as scheduled,  the  possibility of significant  interruptions  of normal
operations should be reduced.

       The  foregoing  statements  are forward  looking.  The  Company's  actual
results could differ because of several  factors,  including  those set forth in
the subsection entitled "Factors That May Affect Future Results of Operations".


Comparison of Years Ended December 31, 1997 and 1996

       Net Revenues.  Net revenues  decreased 32% to $20.0 million in 1997, from
$29.2 million in 1996. This decrease is primarily  attributable to reduced sales
of older  Videographer  products,  and the  absence of major new  product  sales
during the first three  quarters of the year.  International  revenues  for 1997
were $6.6 million or 33% of net revenues compared to $12.3 million or 42% of net
revenues in 1996. The percentage  decrease in  international  revenue in 1997 is
due primarily to decreased  sales of older  Videographer  products and delays in
the introduction of Python and other new products in the international market.

       Gross  Profit.  Gross profit  decreased  57% to $6.1 million in 1997 from
$13.9 million in 1996. Gross profit, as a percentage of net revenues,  decreased
to 30% in 1997 from 48% in 1996.  The  percentage  decrease  in gross  profit is
principally  attributable to charges for the following:  a $1.6 million increase
in inventory  reserves for components  rendered obsolete by product revisions of
which  approximately  $608,000  related to PowerScript,  $265,000 related to KUB
Systems  and  $700,000  related  to  excess  and  obsolete  assets at Nova and a
$124,000  increase  in  warranty  reserves  was taken for  PowerScript  hardware
updates.  Additionally,  fixed  manufacturing  overhead,  such as  salaries  and
facilities costs, have been spread over lower revenues.

       Research and Development. Research and development expenses increased 38%
to $7.0 million during 1997 compared to $5.0 million in 1996, and increased as a
percentage  of net  revenues  to 35% in 1997  from  17% in 1996.  The  increased
expenses were primarily due to the Company's  hiring of additional  hardware and
software  engineers  who were working on the  development  of the  Company's new
products,  combined with  increased  salary  levels.  In addition,  research and
development expenses include the personnel of KUB Systems for the full 1997-year
compared to only seven months in 1996.

       Selling and Marketing.  Selling and marketing  expenses  increased 19% to
$8.0 million in 1997  compared to $6.7 million in 1996,  and increased to 40% in
1997 compared to 23% in 1996, 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.  Additionally,  expenses for the Company's German
sales office were  included  for the full year  compared to only three 

                                       27

<PAGE>

months of expenses in 1996 as the Company established its German sales office in
October of 1996.

       General and Administrative. General and administrative expenses increased
30% to $1.8 million in 1997  compared to $1.4 million in 1996,  and increased to
9% in 1997 compared to 5% in 1996 as a percentage of net revenues. This increase
was  primarily  due to a charge of $375,000 to bad debt  reserves  for  specific
accounts,  the inclusion of KUB Systems expenses for the full 1997-year compared
to only seven months in 1996, and increased salary levels.  The Company acquired
the assets of KUB Systems in May of 1996.

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

       Interest Income,  net.  Interest income decreased 28% to $261,000 in 1997
compared to $361,000 in 1996,  primarily  as a result of a  significantly  lower
average cash balance.

       Provision for Income Taxes.  At December 31, 1997 the Company  incurred a
tax charge of $718,000 on a pretax  loss of $12.7  million.  This charge was the
result of the  establishment of a $5.9 million  valuation  allowance against the
Company's  deferred tax assets offset partially by an income tax benefit of $4.6
million the Company  recorded on its pretax loss. The Company has  established a
valuation  allowance  against  its  deferred  tax assets due to the  uncertainty
surrounding the realization of such assets.  If it is determined that it is more
likely  than not that the  deferred  tax assets are  realizable,  the  valuation
allowance  will be reduced.  In 1996, the 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 its 32% rate for 1995. The rate of 2%
for 1996 was  primarily  the result of higher  than  expected  federal and state
research  tax  credits  on  significantly  increased  research  and  development
spending, and lower than expected taxable income.

                                       28

<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>

                                                   1998                                1997                
                                     ----------------------------------   ---------------------------------
(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                          $4,719    $5,907    $5,025  $4,021    $4,501   $5,467   $5,360  $4,627 
Gross profit (loss)                    1,742     2,437     2,066    (161)      959    2,290    2,444     362 
Operating loss                        (1,705)     (883)   (1,128) (3,006)   (3,508)  (1,747)  (1,707) (6,022)
Net loss                              (1,706)     (841)   (1,137) (3,029)   (2,412)  (1,221)  (1,168) (8,640)
Net loss per share - basic and
  diluted                              (0.29)    (0.14)    (0.19)  (0.52)    (0.42)   (0.21)   (0.20)  (1.50)
Shares used in computing per
  share amounts - basic and diluted    5,790     5,831     5,854   5,857     5,730    5,736    5,741   5,772 
</TABLE>
----------

       The  Company  has  experienced   significant  quarterly  fluctuations  in
operating  results and anticipates that these  fluctuations will continue in the
future.  The  fluctuation  in  revenues  in  the  periods  reflected  above  are
attributable   to  various   factors,   including  the  timing  of  new  product
introductions  and shipments,  variations in product mix sold, and private label
sales.  In 1998  and  1997,  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 to the Company 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, 1998, the
Company's  principal  source of  liquidity  is cash of  approximately  $837,000.
Throughout  most  of  1998,  the  Company  maintained  borrowings  from a  major
shareholder ranging from $600,000 to $1.0 million at interest rates between 8.0%
- 8.5%,  terms that the Company  considered  more  favorable than those it could
obtain from other  commercial  sources.  At December 31,  1998,  the Company had
borrowings  from this  shareholder  totaling $1.0 million at an interest rate of
8.0% per year, due October 16, 1999.

                                       29

<PAGE>

       Operating Activities.  In 1998, net cash used in operating activities was
$811,000,  resulting  primarily  from an operating  loss of $3.7  million  after
adjusting  for non-cash  items,  offset by a decrease in accounts  receivable of
$414,000 and a decrease in  inventories  of $2.4  million.  Accounts  receivable
decreased  because of lower sales during the fourth  quarter of 1998 compared to
1997 and  improved  collections.  Inventories  decreased  as the Company  better
aligned its inventory with its current revenue levels. In 1997, net cash used in
operating  activities  was $5.6 million,  resulting  primarily from an operating
loss of $6.6  million  after  adjusting  for  non-cash  items,  an  increase  in
inventories of $2.3 million, offset by a decrease in accounts receivable of $1.7
million.   Inventories  increased  primarily  in  anticipation  of  new  product
shipments and lower than expected shipments of new products in 1997. Receivables
decreased  primarily  because  of  decreased  sales.  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
$203,000,  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 new product  shipments  and lower than
expected shipments of new products in 1996.

       Investing  Activities.  Capital equipment  expenditures in 1998, 1997 and
1996 were, $378,000, $1.6 million, and $1.3 million respectively,  primarily for
computers,  software and engineering  equipment used in research and development
and other  activities.  The Company  currently  anticipates  that  additions  to
property and equipment will require capital expenditures of $440,000 through the
end of 1999. In 1997, the Company had  redemptions of $1.5 million of marketable
securities.  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.

       Financing  Activities.  In 1998,  the Company  received  $34,000 from the
exercise of stock options under the Company's  stock option plans.  In 1997, the
Company received $154,000 from the exercise of stock options under the Company's
stock option plans. In 1996, the Company received  $100,000 from the exercise of
stock options under the Company's stock option plans.  Additionally in 1996, the
Company paid the $1.0 million promissory note issued in connection with the Nova
acquisition.

       The Company has incurred  losses and negative cash flows from  operations
for each of the two years in the period ended December 31, 1998 and is dependent
upon support  from a  substantial  shareholder  and upon  generating  sufficient
revenues  from  existing  and  soon to be  released  products  in  order to fund
operations.  The  substantial  shareholder  has agreed  that,  at the  Company's
option, the loan may be extended until January 2000. In addition, Management has
taken steps to reduce costs,  and after year-end  announced the sale of its Nova
Systems  division,  which  had  incurred  losses in each of the two years in the
period ended  December 31, 1998.  The Company is assessing  its product lines to
identify how to enhance  existing or create new  distribution  channels.  During
1999,  the Company is  developing  and expects,  to release two next  generation
products for its core Video  Production  segment.  The Company believes that its
current cash,  borrowings  from a shareholder,  together with its operating cash
flows,  will be  sufficient  to meet  the  Company's  requirements  for  working
capital,  and capital expenditures through the end of 1999. The Company does not
currently  have  a  commitment  from a  commercial  source  or  its  substantial
shareholder to provide additional funding as of the date of this report.

                                       30

<PAGE>

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
          MARKET RISK

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

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       Balance  sheets  of the  Company  as of  December  31,  1998 and 1997 and
statements of income,  shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998, together with the related notes and
the report of PricewaterhouseCoopers LLP, independent accountants, are set forth
on pages 32 to 50. Other required financial  information is set forth herein, on
page 59.

                                       31

<PAGE>


Videonics, Inc.
Consolidated Financial Statements
as of December 31, 1998 and 1997


                                       32

<PAGE>

                        Report of Independent Accountants


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


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of shareholder's equity and of cash flows
present fairly, in all material  respects,  the financial position of Videonics,
Inc.  and its  subsidiaries  at December  31, 1998 and 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.






San Jose, California
March 26, 1999


                                       33


<PAGE>

Videonics, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
--------------------------------------------------------------------------------

                                                             1998        1997
Assets
Current assets:
   Cash and cash equivalents                               $    837    $    992
   Accounts receivable, net                                     852       1,291
   Inventories                                                5,830       9,938
   Prepaid income taxes                                        --           550
   Prepaids and other current assets                            122         219
                                                           --------    --------
       Total current assets                                   7,641      12,990

Property and equipment, net                                   1,507       2,438
Other assets                                                     16         266
                                                           --------    --------

       Total assets                                        $  9,164    $ 15,694
                                                           ========    ========

Liabilities and Shareholders' Equity
Current liabilities:
   Loan payable to shareholder                             $  1,000    $   --
   Accounts payable                                             947       1,442
   Accrued expenses                                           1,290       1,646
                                                           --------    --------
       Total current liabilities                              3,237       3,088
                                                           --------    --------

Commitments and contingencies (Note 6)

Shareholders' equity:
   Preferred stock, no par value:
     Authorized:  10,000 shares in 1998 and 1997;
     Issued and outstanding:  None                             --          --
   Common stock, no par value:
     Authorized:  30,000 shares in 1998 and 1997;
     Issued and outstanding: 5,858 shares in 1998 and
     5,785 shares in 1997                                    20,647      20,613
   Accumulated deficit                                      (14,720)     (8,007)
                                                           --------    --------
       Total shareholders' equity                             5,927      12,606
                                                           --------    --------

       Total liabilities and shareholders' equity          $  9,164    $ 15,694
                                                           ========    ========


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


                                       34

<PAGE>

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

                                                     Year Ended December 31,
                                                    1998        1997        1996

Net revenues                                    $ 19,672    $ 19,955    $ 29,195
Cost of revenues                                  13,588      13,900      15,266
                                                --------    --------    --------
     Gross profit                                  6,084       6,055      13,929
                                                --------    --------    --------

Operating expenses:
   Research and development                        4,798       6,951       5,027
   Selling and marketing                           6,593       8,041       6,741
   General and administrative                      1,415       1,779       1,367
   Amortization of intangible assets                --           393         393
   Write-off of intangible assets                   --         1,875        --
                                                --------    --------    --------
                                                  12,806      19,039      13,528
                                                --------    --------    --------

Operating income (loss):                          (6,722)    (12,984)        401

Interest, net                                        (21)        261         361
                                                --------    --------    --------

Income (loss) before income taxes                 (6,743)    (12,723)        762

Provision for (benefit from) income taxes            (30)        718          18
                                                --------    --------    --------

Net income (loss)                               $ (6,713)   $(13,441)   $    744
                                                ========    ========    ========

Net income (loss) per share - basic             $  (1.15)   $  (2.34)   $   0.13
                                                ========    ========    ========

Shares used in per share calculation - basic       5,833       5,744       5,616
                                                ========    ========    ========

Net income (loss) per share - diluted           $  (1.15)   $  (2.34)   $   0.13
                                                ========    ========    ========

Shares used in per share calculation - diluted     5,833       5,744       5,933
                                                ========    ========    ========


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


                                       35

<PAGE>

<TABLE>
<CAPTION>
Videonics, Inc.
Consolidated  Statements  of  Shareholders'  Equity
For each of the three  years in the period ended December 31, 1998 
(in thousands, except per share data)
------------------------------------------------------------------------------------------------

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

<S>                    <C>                    <C>        <C>           <C>           <C>     
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 options                --             690          --             690
   Net income                                  --            --             744           744
                                           --------      --------      --------      --------
                                                                                    
Balances, December 31, 1996                   5,705        20,297         5,434        25,731
                                                                                    
   Issuance of common stock from                                                    
     exercise of options                         80           154          --             154
   Amortization of deferred compensation       --              36          --              36
   Tax benefit from exercise of                                                     
     nonqualified stock options                --             126          --             126
   Net loss                                    --            --         (13,441)      (13,441)
                                           --------      --------      --------      --------
                                                                                    
Balances, December 31, 1997                   5,785        20,613        (8,007)       12,606
                                                                                    
   Issuance of common stock from                                                    
     exercise of options                         73            34          --              34
   Net loss                                    --            --          (6,713)       (6,713)
                                           --------      --------      --------      --------
                                                                                    
Balances, December 31, 1998                   5,858      $ 20,647      $(14,720)     $  5,927
                                           ========      ========      ========      ========

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


                                              36

<PAGE>

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

                                                                                        Year Ended December 31,
                                                                                      1998       1997         1996
<S>                                                                                <C>         <C>         <C>
Cash flows from operating activities:
   Net income (loss)                                                               $ (6,713)   $(13,441)   $    744
   Adjustments to reconcile net income (loss)
     to net cash used in operating activities:
       Loss on disposal of property and equipment                                         5          76        --
       Depreciation and amortization                                                  1,304       1,563       1,190
       Provision for doubtful accounts                                                   25         375         (10)
       Provision for excess and obsolete inventories                                  1,661       1,641        (240)
       Deferred income taxes                                                           --         1,299         111
       Write-off of intangible assets                                                  --         1,875        --
       Change in assets and liabilities:
        Accounts receivable                                                             414       1,740         428
        Inventories                                                                   2,447      (2,270)     (3,232)
        Prepaid income taxes                                                            550         670        (150)
        Prepaid and other current assets                                                 97         274        (203)
        Other                                                                           250        (252)         (3)
        Accounts payable                                                               (495)        352        (136)
        Accrued expenses                                                               (356)        509          97
                                                                                   --------    --------    --------
            Net cash used in operating activities                                      (811)     (5,589)     (1,404)
                                                                                   --------    --------    --------

Cash flows from investing activities:
   Purchases of property and equipment                                                 (378)     (1,611)     (1,303)
   Net cash paid in acquisition                                                        --          --          (350)
   Purchases of marketable securities                                                  --          --        (1,500)
   Proceeds from marketable securities                                                 --         1,500       4,708
                                                                                   --------    --------    --------
            Net cash provided by (used in) investing activities                        (378)       (111)      1,555
                                                                                   --------    --------    --------

Cash flows from financing activities:
   Proceeds from issuance of loans payable to shareholder                             1,000        --          --
   Repayment of notes payable                                                          --          --        (1,000)
   Proceeds from issuance of common stock                                                34         154         100
                                                                                   --------    --------    --------
            Net cash provided by (used in) financing activities                       1,034         154        (900)
                                                                                   --------    --------    --------

Decrease in cash and cash equivalents                                                  (155)     (5,546)       (749)
Cash and cash equivalents at beginning of year                                          992       6,538       7,287
                                                                                   --------    --------    --------

Cash and cash equivalents at end of year                                           $    837    $    992    $  6,538
                                                                                   ========    ========    ========

Supplemental  disclosure of cash flow  information:  Cash paid during the period
   for:
     Interest                                                                      $     43    $   --      $     31
     Income taxes                                                                  $      2    $      5    $     44
Supplement schedule of non-cash financing activities:
   Tax benefit from exercise of nonqualified
     stock options                                                                 $   --      $    126    $    690


<FN>
              The accompanying notes are an integral part of these
                       consolidated financial statements.
</FN>
</TABLE>
                                                         37

<PAGE>

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

1.     Business

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


2.     Summary of Significant Accounting Policies

       Basis of preparation
       
       The Company has incurred  losses and negative cash flows from  operations
       for each of the two years in the period  ended  December  31, 1998 and is
       dependent upon support from a substantial shareholder and upon generating
       sufficient  revenues  from  existing and soon to be released  products in
       order to fund operations. The substantial shareholder has agreed that, at
       the  Company's  option,  the loan may be extended  until January 2000. In
       addition,  Management has taken steps to reduce costs, and after year-end
       announced the sale of its Nova Systems division which had incurred losses
       for each of the two years in the period  ended  December  31,  1998.  The
       Company  is  assessing  its  product  lines to  identify  how to  enhance
       existing or create new distribution channels. During 1999, the Company is
       developing and expects,  to release two next generation  products for its
       core  Video  Production   segment.   Management  expects  that  the  cost
       reductions  together with revenue  generated  from these products will be
       sufficient to meet all the Company's obligations as they become due.

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

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

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


                                       38

<PAGE>

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

       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.
       Advertising  expense for the period ended  December 31, 1998,  1997,  and
       1996 was $721,000, $1,412,000, and $947,000, respectively.

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

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

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

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

       Comprehensive income
       There are no differences  between net income (loss) for each of the three
       years ended in the period to December  31,  1998,  and the  comprehensive
       income (loss) for those periods.

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

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

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


                                       39

<PAGE>

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

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

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

       Recent accounting pronouncements
       In June 1998,  the FASB issued SFAS No. 133  "Accounting  for  Derivative
       Instruments  and Hedging  Activities"  which  establishes  accounting and
       reporting standards for derivative instruments and hedging activities. It
       requires  that an entity  recognize all  derivatives  as either assets or
       liabilities  on the balance sheet and measure those  instruments  at fair
       value. Management has not yet evaluated the effect of these change on its
       operations.  SFAS 133 will be  effective  for the  Company's  fiscal year
       2000.


3.     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


                                       40

<PAGE>


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


       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
                                                                        =======
4.     Balance Sheet Detail

       Accounts receivable comprise (in thousands):

                                                                 December 31,
                                                                1998       1997

Trade accounts receivable                                    $   998    $ 1,546
Less allowance for doubtful accounts                            (146)      (255)
                                                             -------    -------

                                                             $   852    $ 1,291
                                                             =======    =======


       Inventories comprise (in thousands):

                                                                 December 31,
                                                                1998       1997

Raw materials                                                $ 4,381    $ 7,649
Work in process                                                  375        437
Finished goods                                                 1,074      1,852
                                                             -------    -------

                                                             $ 5,830    $ 9,938
                                                             =======    =======


       Property and equipment comprise (in thousands):

                                                                 December 31,
                                                                1998       1997

Machinery and equipment                                      $ 3,248    $ 3,933
Furniture and fixtures                                            86         86
Leasehold improvements                                           179        179
Tooling                                                        1,015      1,747
                                                             -------    -------
                                                               4,528      5,945
Less accumulated depreciation and amortization                (3,021)    (3,507)
                                                             -------    -------

                                                             $ 1,507    $ 2,438
                                                             =======    =======


                                       41

<PAGE>

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


       Intangible assets comprise (in thousands):

                                                                    December 31,
                                                                        1997

Purchased technology                                                   $ 2,443
Goodwill                                                                   316
                                                                       -------
                                                                         2,759
Less accumulated amortization                                             (884)
Write-off of intangible assets                                          (1,875)
                                                                       -------

                                                                       $     -
                                                                       =======


       In 1997,  the Company  wrote-off the remaining  unamortized  value of the
       purchased  technology  and goodwill  established  in connection  with the
       acquisition  of Nova Systems.  The write-off  totaled  $1,875,000 and was
       primarily due to continued losses and lack of commercially successful new
       product introductions.

       Accrued expenses comprise (in thousands):

                                                                December 31,
                                                              1998       1997

Accrued advertising                                         $   163    $   221
Accrued vacation                                                180        258
Salaries payable                                                228        239
Accrued acquisition reserve                                     239        250
Warranty reserve                                                 77        198
Other accrued expenses                                          403        480
                                                            -------    -------

                                                            $ 1,290    $ 1,646
                                                            =======    =======


5.     Loans Payable to Shareholder

       At  December  31,  1998,  the  Company  has  an  unsecured  loan  from  a
       shareholder of the Company. This loan, in the amount of $1,000,000, bears
       interest at 8% per year, and is due on October 16, 1999. Accrued interest
       is payable on a quarterly basis.


6.     Commitments and Contingencies

       The  Company  leases  a  building  for its  principal  facility  under an
       operating lease which expires in July 1999. Under the terms of the lease,
       the  Company  is  responsible   for  utilities,   taxes,   insurance  and
       maintenance.  At December 31, 1998,  future  minimum lease payments under
       all non-cancelable operating leases were $192,000 and terminate in 1999.

       Rent  expense for the years  ended  December  31,  1998,  1997,  and 1996
       amounted to $448,000, $423,000 and $396,000, respectively.

                                       42


<PAGE>


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

       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 or operations.


7.     Income Taxes

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

                                                   1998        1997        1996

Current:
   Federal                                      $  --       $  (380)    $  (110)
   State                                          (30)           --          17

Deferred:
   Federal                                         --           995         239
   State                                           --           103        (128)
                                                -------     -------     -------

                                                $ (30)      $   718     $    18
                                                =======     =======     =======


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


                                                   1998        1997        1996

Federal statutory income tax rate                 (34.0)%     (34.0)%      34.0%
State income tax rate, net of federal benefit      (7.3)       (2.9)        5.7
Tax exempt interest                                  --          --       (13.4)
Foreign net operating loss                         (5.4)        1.3         5.7
Research tax credits                               (4.8)       (6.4)      (32.8)
Other                                              (3.8)        1.6         3.2
Increase in valuation allowance                    54.9        46.0          --
                                                 -------     -------    -------

                                                   (0.4)%       5.6 %       2.4%
                                                 =======     =======    =======


                                       43

<PAGE>

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

       The tax effects of temporary  differences  that give rise to  significant
       portions of the deferred tax assets are presented below (in thousands):
           
                                                            1998           1997

       Intangible assets                                 $ 1,464        $ 1,366
       Inventory reserves                                  1,322            891
       Depreciation                                           47             45
       Net operating loss carryforward                     4,487          2,198
       Tax credit carryforward                             1,386            815
       Deferred California research                          442           --
       Other accrued liabilities and reserves                405            537
                                                         -------        -------
       Subtotal                                            9,553          5,852
       Less valuation allowance                           (9,553)        (5,852)
                                                         -------        -------
                                                     
       Net deferred tax asset                            $  --          $  --
                                                         =======        =======


       At December  31,  1998,  the Company has federal and state net  operating
       losses of $11,500,000 and $2,750,000,  respectively, which expire in 2018
       and 2003, respectively. The Company also has federal and state tax credit
       carryforwards  of $850,000 and  $550,000,  respectively,  which expire in
       2018.

       In accordance with generally accepted accounting principles,  a valuation
       allowance must be  established  for a deferred tax asset if its uncertain
       that a tax  benefit may be  realized  from the asset in the  future.  The
       Company  has  established  a  valuation  allowance  to the  extent of its
       deferred  tax  assets  since  it is not  certain  that a  benefit  can be
       realized  in the  future  due  to the  Company's  operating  losses.  The
       Company's valuation  allowance  increased from $5,852,000 at December 31,
       1997 to $9,553,000 at December 31, 1998.


                                       44

<PAGE>

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


8.     Net Income (Loss) Per Share

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

                                                   1998        1997       1996

Numerator - basic and diluted
       Net income (loss)                        $ (6,713)   $(13,441)   $    744
                                                --------    --------    --------

   Net income (loss) available to
     common stockholders                        $ (6,713)   $(13,441)   $    744
                                                ========    ========    ========

Denominator - basic
   Weighted average common shares outstanding      5,833       5,744       5,616
                                                --------    --------    --------

       Basic net income (loss) per share        $  (1.15)   $  (2.34)   $   0.13
                                                ========    ========    ========

Denominator - diluted
   Denominator - basic                             5,833       5,744       5,616
   Effect of dilutive securities:
     Common stock options                           --          --           317
                                                --------    --------    --------

Diluted weighted average common shares             5,833       5,744       5,933
                                                --------    --------    --------

       Diluted net income (loss) per share      $  (1.15)   $  (2.34)   $   0.13
                                                ========    ========    ========


9.     Shareholders' Equity

       At December 31, 1998, the Company has reserved 1,000,000 shares of common
       stock for issuance under its 1996 Amended Stock Option Plan. In addition,
       the Company has  reserved  900,000  shares of common  stock for  issuance
       under its 1987 Stock  Option Plan ("1987  Plan").  The 1987 Plan had been
       set to  terminate,  in  accordance  with its  terms,  on January 1, 1997.
       Effective  May 1997,  the  Company's  Board of Directors  authorized  the
       amendment  of the 1987 Plan to permit  the grant of  non-statutory  stock
       options  previously  granted  under the 1987 Plan  that have  expired  or
       terminated. The Plans provide for the granting of incentive stock options
       to officers  and  employees  of the Company and  non-qualified  incentive
       stock  options to  employees,  officers  and  directors of the Company at
       prices  not less  than the fair  market  value of the  Company's'  common
       stock.  Options  generally vest over a three-to-four  year period and are
       canceled 90 days after termination of employment.


                                       45

<PAGE>

<TABLE>
<CAPTION>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------------------------------------------

       A summary of stock option activity follows:

                                                         Outstanding Options
                                -----------------------------------------------------------------------
                                    1987 and 1996 Plan         Other
                                --------------------------  ------------                                    Weighted
                                    Shares                                                                   Average
                                   Available    Number of     Number         Exercise                       Exercise
                                   for Grant     Shares      of Shares        Price           Total           Price
<S>               <C>             <C>            <C>                        <C>            <C>             <C>     
Balances, January 1, 1996           136,510        590,927           --     $0.33-$14.75   $  1,881,434    $   3.18

   Additional shares reserved     1,000,000           --             --                             --
   Options granted                 (859,128)       859,128           --      7.50-9.00        6,752,363        7.86
   Options canceled                 147,958       (147,958)          --      0.47-14.75      (1,413,857)       9.56
   Options exercised                   --         (186,918)          --      0.33-7.50         (100,468)       0.54
                                -----------   ------------   -----------                     ----------

Balances, December 31, 1996         425,340      1,115,179           --      0.33-14.75       7,119,472        6.38

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

Balances, December 31, 1997         377,168      1,083,202           --      0.33-7.50        4,514,181        4.17

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

Balances, December 31, 1998         431,471        955,649        320,000   $0.47-$5.00    $  2,015,729    $   1.58
                                ===========   ============   ===========                     ==========
</TABLE>


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

       In March 1998,  the Company  granted a  nonqualified  stock  option to an
       officer of the  Company to  purchase a total of 320,000  shares of common
       stock.  The option was granted  outside the Company's stock option plans,
       at an exercise  price of $2.13 per share,  the fair  market  value of the
       Company's  Common  Stock on the  relevant  date.  On June 24,  1998,  the
       Company offered  employees the right to cancel certain  outstanding stock
       options at original  exercise  prices and receive new options  with a new
       exercise price.  In accordance  with this offer,  the option was canceled
       and  reissued  at an exercise  price of $1.50 per share,  the fair market
       value of the  stock on June 24,  1998.  Vesting  of the new  option  will
       follow the original  option vest  schedule  except the option will remain
       unvested  until June 24,  1999 at which time  vesting of new option  will
       vest according to the original vest schedule.  This option is exercisable
       for a term of ten years,  vests over a four-year  period and is cancelled
       90 days after  termination  of  employment.  As of December 31, 1998,  no
       portion of the option was exercisable.

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


                                       46

<PAGE>

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

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

       Had  compensation  cost for the years ended  December 31, 1998,  1997 and
       1996  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  (loss) and net income
       (loss) per share for the years ended  December  31,  1998,  1997 and 1996
       would have been reduced to the pro forma amounts indicated below:

                                                  1998          1997        1996

Net income (loss) - pro forma                $  (7,802)   $  (15,557)   $    126
                                             =========    ==========    ========
Net income (loss) per share - basic          $   (1.34)   $    (2.71)   $   0.02
                                             =========    ==========    ========
Net income (loss) per share - diluted        $   (1.34)   $    (2.71)   $   0.02
                                             =========    ==========    ========

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

       The weighted average fair value of options granted in 1998, 1997 and 1996
       was $1.40, $2.22 and $4.10,  respectively.  The fair value of each option
       grant is  estimated  on the date of the  grant  using  the  Black-Scholes
       method with the following weighted average assumptions by subgroup:

                                                1998          1997        1996

Risk-free interest rate                    4.45%-5.61%    5.71-6.09%  5.36-6.36%
Expected life                                       5             5           3
Expected dividends                                 --            --          --
Volatility                                       1.19          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.


                                       47

<PAGE>

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

       The options  outstanding  and currently  exercisable by exercise price at
       December 31, 1998 are as follows:
<CAPTION>
                                                                                  Options Currently
                                    Options Outstanding                              Exercisable
                    ----------------------------------------------------  ----------------------------------
                                         Weighted
                        Number           Average           Weighted           Number           Weighted
                     Outstanding        Remaining           Average         Exerciable          Average
    Exercise          December 31,     Contractual         Exercise         December 31,       Exercise
     Price               1998              Life              Price             1998              Price

<S>     <C>            <C>                <C>              <C>                <C>              <C>     
$0.47 - $0.75            190,547          6.17             $   0.59           110,561          $   0.48
$1.13 - $1.50            975,318          9.48                 1.50                 -                 -
$2.00 - $3.81             73,781          8.73                 2.76            22,502              2.90
$5.00 - $8.88             36,003          8.52                 5.48            25,507              5.45
                    -------------                                      --------------

                       1,275,649          8.92             $   1.58           158,570          $   1.97
                    =============                                      ==============
</TABLE>


10.    Segment Information

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

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

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

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

                                          1998           1997             1996

Video Production
    Sales                              $ 17,750        $ 17,149        $ 24,794
    Operating loss                       (6,474)         (9,339)            (43)

Signal Processing
    Sales                                 1,922           2,806           4,401
    Operating loss                         (248)         (1,389)            825

Reconciling items                          --            (2,256)           (381)


                                       48

<PAGE>

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

       For the year ended  December 31, 1997,  reconciling  items of  $2,256,000
       relate to the  amortization and write-off of intangible  assets.  For the
       year  ended  December  31,  1996,  the  reconciling  item  relates to the
       amortization of intangible assets.

       The Company markets and services it 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,  loss
       and assets employed by the Company's foreign subsidiary were not material
       to the consolidated financial statements.

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

                                                            December 31,
                                                     1998       1997       1996

Revenues from unaffiliated customers:
   United States                                   $12,665    $13,317    $16,852
   Europe                                            2,662      2,007      4,774
   Asia                                              2,772      2,637      3,925
   Americas (excluding the United States)            1,573      1,994      3,644
                                                   -------    -------    -------

                                                   $19,672    $19,955    $29,195
                                                   =======    =======    =======

       For the years ended  December  31, 1998,  1997 and 1996,  no one customer
       accounted  for more than 10% of the  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 $200 of the
       employee's  contribution per quarter.  The employee's  entitlement to the
       Company   matching   contributions   is  fully  vested  on  the  date  of
       contribution.  The Company,  at its sole discretion and with the Board of
       Directors' approval, can make an additional incremental contribution.  To
       date, the Company has not made discretionary contributions. The Company's
       matching  contributions  charged  against  income  totaled  approximately
       $39,000,  $51,000 and $52,000 for the years ended December 31, 1998, 1997
       and 1996, respectively.


                                       49

<PAGE>

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


12.    Subsequent Events

       On January 29,  1999,  the Company  completed  the sale of certain of the
       assets and the  assumption of certain of the  liabilities  related to its
       Nova Systems Division to a private company in Massachusetts. For the year
       ended  December 31, 1998,  Nova  recorded  revenues of $1.9 million and a
       loss from  operations of $248,000.  For the year ended December 31, 1997,
       Nova recorded revenues of $2.8 million and a loss from operations of $1.4
       million, which included a write-off of $700,000 of non-performing assets.
       Additionally  in 1997,  Videonics  wrote off $1.9 million of  intangibles
       related to Nova.  The sale of Nova is expected to provide  Videonics with
       net revenues from royalties in 1999.  These royalties are predicated upon
       future sales of Nova products by the acquiring company.  The sale of Nova
       will not result in a capital gain or loss to Videonics.


                                       50

<PAGE>

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

       Not applicable.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Information  concerning  the  directors  and  executive  officers  of the
Company is incorporated herein by reference from the information contained under
the caption  "Election of  Directors"  with  respect to directors  and under the
caption  "Management"  with  respect to  executive  officers,  contained  in the
Company's  Proxy Statement (the "Proxy  Statement")  relating to its 1999 Annual
Meeting of  Shareholders  to be held on or about  August 19,  1999.  Information
regarding compliance with the reporting  requirements under Section 16(a) of the
Securities  and  Exchange  Act of 1934,  as  amended is  incorporated  herein by
reference  from  the  information  under  the  caption  "Executive  Compensation
Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in the
Proxy  Statement.  The Proxy  Statement  will be filed with the  Securities  and
Exchange  Commission in  accordance  with Rule  14a-6(B)  promulgated  under the
Securities Exchange Act of 1934. With the exception of the foregoing information
and other information  specifically  incorporated by reference into this Report,
the Proxy Statement is not being filed as a part hereof.

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                       51

<PAGE>


                                     PART IV

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

         (a)      1.       Financial Statements

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

                  -        Report of Independent Accountants

                  -        Balance Sheets at December 31, 1998 and 1997

                  -        Statements of Income for the Years Ended
                           December 31, 1998, 1997, and 1996

                  -        Statement of Shareholders' Equity for the
                           Years Ended December 31, 1998, 1997, and
                           1996

                  -        Statements of Cash Flows for the Years
                           Ended December 31, 1998, 1997, and 1996

                  -        Notes to Financial Statements

                  2.       Financial Statement Schedules

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

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


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

                  3.       Exhibits

         Exhibit No.
         -----------
              3.01         Amended and Restated Articles of
                           Incorporation of Videonics, Inc., dated
                           December 19, 1994. (3)

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

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

                                       52

<PAGE>

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

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

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

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

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

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

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

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

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

             21.1          Subsidiaries

             23.1          Consent of PricewaterhouseCoopers LLP,
                           Independent Accountants.

             27.1          Financial Data Schedule


                                       53
<PAGE>

(b)      Reports on Form 8-K

       The Company filed no reports on Form 8-K with the  Commission  during the
fiscal quarter ended December 31, 1998.
----------

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

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

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

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

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

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

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

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


                                       54
<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 28th day of
March, 1999.

                                      VIDEONICS, INC.


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

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

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

<S>                                            <C>                                  <C>
/s/ Michael L. D'Addio                         Chairman of the Board                March 28, 1999
-----------------------------                  and Chief Executive Officer   
Michael L. D'Addio                             (Principal Executive Officer) 


/s/ B. Yeshwant Kamath                         President and Director               March 28, 1999
-----------------------------
B. Yeshwant Kamath


/s/ Gary L. Williams                           Vice President of Finance,           March 28, 1999
-----------------------------                  and Chief Financial Officer  
Gary L. Williams                               (Principal Financial Officer 
                                               and Principal Accounting     
                                               Officer)                     


/s/ Mark C. Hahn                               Vice President and Chief             March 28, 1999
-----------------------------                  Technical Officer and  
Mark C. Hahn                                   Director               


/s/ Carl E. Berg                               Director                             March 28, 1999
-----------------------------
Carl E. Berg


/s/ N. William Jasper, Jr.                     Director                             March 28, 1999
-----------------------------
N. William Jasper, Jr.
</TABLE>


                                       55
<PAGE>

                                 VIDEONICS, INC.

              INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

                                                                        Page in
                                                                       Form 10-K

Financial statements:

    Report of Independent Accountants.........................................33

    Balance Sheets............................................................34

    Statements of Income......................................................35

    Statements of Shareholders' Equity........................................36

    Consolidated Statements of Cash Flows.....................................37

    Notes to Financial Statements.............................................38

Schedules:
             Report of Independent Accountants................................58

    II       Valuation and Qualifying Accounts................................59

             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:


    21.1     Subsidiaries.....................................................__

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

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


                                       56
<PAGE>

                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1998

                                   ITEM 14(d)

                          FINANCIAL STATEMENT SCHEDULE



                                       57
<PAGE>



                   INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE



Our report on the financial  statements of Videonics,  Inc. and  subsidiaries is
included  on page 33 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 56 of this Form 10-K.

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


                                                      PricewaterhouseCoopers LLP







San Jose, California
March 26, 1999



                                       58
<PAGE>

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

                        Valuation and Qualifying Accounts

                                 (in thousands)

                                    Balance at  Charged to               Balance
                                     Beginning   Costs and             at End of
Description                          of Period   Expenses  Deductions    Period
-----------                          ---------   --------  ----------    ------

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

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

Year ended December 31, 1996
   Allowance for doubtful accounts:    $173        $(10)        $(40)     $ 123




                                    Balance at  Charged to               Balance
                                     Beginning   Costs and             at End of
Description                          of Period   Expenses  Deductions    Period
-----------                          ---------   --------  ----------    ------
Year ended December 31, 1998
   Allowance for excess and
   obsolete inventories:             $1,753      $1,661        $(585)   $ 2,829

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

Year ended December 31, 1996
   Allowance for excess and
   obsolete inventories:               $826       $(240)       $(209)     $ 377



                                       59
<PAGE>

                                 VIDEONICS, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1998

                                   ITEM 14(c)

                                    EXHIBITS