U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10QSB

(Mark One)

             [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998.

             [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         EXCHANGE ACT

             For the transition period from __________ to __________

                         Commission file number 0-23858

                                 VIDEOLABS, INC.

        (Exact name of small business issuer as specified in its charter)

Delaware                                                     47-1726281
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                               Identification No.)

                             5960 Golden Hills Drive
                             Golden Valley, MN 55416
                    (Address of principal executive offices)

                                 (612) 542-0061
                           (Issuer's telephone number)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ___

                      APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of August 3, 1998: 4,246,233


Transitional Small Business Disclosure Format (check one): Yes___  No _X_


<PAGE>


                         PART 1 -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 VIDEOLABS, INC.

                         INTERIM CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                          JUNE 30,            DECEMBER 31,
                                                                                            1998                 1997
                                                                                          UNAUDITED             AUDITED
                                                                                         ----------           ----------
<S>                                                                                      <C>                  <C>       
                                     ASSETS
Current assets
   Cash and cash equivalents..........................................................   $1,937,555           $1,746,928
   Certificate of deposit-restricted (Note 4).........................................      198,833              275,833
   Interest Receivable................................................................        2,448                9,228
   Accounts Receivable, less allowance for doubtful accounts of $33,416 on June 30,
     1998 and $35,000 on December 31, 1997............................................      761,116              626,320
   Inventories........................................................................    1,180,279            1,153,665
   Deferred income taxes..............................................................      125,000              100,000
   Prepaid expenses...................................................................       38,039               47,209
                                                                                         ----------           ----------
     Total Current assets.............................................................    4,243,270            3,959,183

Property and Equipment
   Office and computer equipment......................................................      430,154              367,874
   Machinery and equipment............................................................       97,340               97,340
   Tooling............................................................................      323,021              278,733
   Leasehold improvements.............................................................       45,016               45,016
                                                                                         ----------           ----------
   Total equipment....................................................................      895,531              788,963
       Less accumulated depreciation..................................................      547,643              468,556
                                                                                         ----------           ----------
       Net  property and equipment....................................................      347,888              320,407

Intangible Assets
   Patents............................................................................      200,000                    0
       Less accumulated amortization..................................................        6,374                    0
                                                                                         ----------           ----------
       Net patents....................................................................      193,626                    0

       Total assets...................................................................   $4,784,784           $4,279,590
                                                                                         ==========           ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable...................................................................     $387,806             $278,204
   Current maturities of long-term debt...............................................       12,484               22,605
   Note payable other.................................................................       10,000                    0
   Customer deposits and other liabilities............................................        6,269                9,080
   Accrued compensation...............................................................       38,781              264,221
   Purchase commitments, reserves and other...........................................      304,526              366,017
                                                                                         ----------           ----------
     Total current liabilities........................................................      759,866              940,127

Long-Term Debt, net of current maturities.............................................       36,134               36,134

Stock holders' Equity
   Common stock, $.01 par value; Authorized 20,000,000 shares issued and outstanding,
    3,920,221 shares at June 30, 1998 and  3,215,283 shares at December 31, 1997 .....       39,202               32,152
   Additional paid in capital.........................................................    6,114,172            5,553,553
   Accumulated deficit................................................................   (2,164,590)          (2,282,376)
                                                                                         ----------           ----------
     Total stockholders' equity.......................................................    3,988,784            3,303,329
                                                                                         ----------           ----------
       Total liabilities and stockholders' equity.....................................   $4,784,784           $4,279,590
                                                                                         ==========           ==========
</TABLE>


<PAGE>


                    INTERIM CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                           Three Months Ended                     Six  Months Ended
                                                     ------------------------------         ------------------------------
                                                                 June 30                               June 30
                                                     ------------------------------         ------------------------------
                                                        1998               1997                1998               1997
                                                     -----------        -----------         -----------        -----------
<S>                                                  <C>                <C>                 <C>                <C>        
Sales..............................................  $ 1,906,266        $ 2,038,222         $ 3,115,109        $ 3,637,709
Cost of goods sold ................................    1,155,354          1,155,564           1,822,156          2,101,390
                                                     -----------        -----------         -----------        -----------
Gross profit ......................................      750,912            882,658           1,292,953          1,536,319
Selling, general and administrative expenses ......      728,753            675,167           1,241,321          1,282,324
                                                     -----------        -----------         -----------        -----------
Operating Income ..................................       22,159            207,491              51,632            253,995
Other income  (expense)
Interest, net .....................................       20,227             14,433              41,154             25,326
Loss on sale of assets ............................            0             (6,016)                  0            (17,366)
                                                     -----------        -----------         -----------        -----------
Total other income (expense) ......................       20,227              8,417              41,154              7,960
Income Tax Benefit ................................       25,000             25,000              25,000             25,000
                                                     -----------        -----------         -----------        -----------
Net Income.........................................  $    67,386        $   240,908         $   117,786        $   286,955
                                                     ===========        ===========         ===========        ===========

Basic earnings per common share ...................  $      0.02        $      0.08         $      0.03        $      0.09

Weighted average shares outstanding (Note 3) ......    3,920,221          3,135,192           3,920,221          3,135,192

Diluted earnings per common share .................  $      0.01        $      0.06         $      0.03        $      0.07

Diluted shares outstanding (Note 3) ...............    4,627,189          3,755,534           4,627,189          4,048,084

</TABLE>


                   INTERIM CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                        -----------------------------
                                                                   JUNE 30
                                                        -----------------------------
                                                            1998              1997
                                                        -----------       -----------
<S>                                                     <C>               <C>        
Cash Flows From Operations:
      Net cash provided by (used for) operations        $  (157,929)      $   659,228

Cash Flows From Investing:
     Capital expenditures                                  (296,114)                0
     Proceeds from sale of assets                                 0           156,722
     Purchase/Sale of certificates of deposit, net           77,000           208,788
                                                        -----------       -----------
     Net cash from (used for)  investing                   (219,114)          365,510

Cash Flows From Financing:
     Net proceeds from sale of common stock                 567,670                 0
                                                        -----------       -----------

Net increase in cash and cash equivalents                   190,627         1,024,738

Cash and cash equivalents at beginning of period          1,746,928           434,048
                                                        -----------       -----------

Cash and cash equivalents at end of period              $ 1,937,555       $ 1,458,786
                                                        ===========       ===========
</TABLE>


<PAGE>


FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1.  BASIS OF PRESENTATION

         The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments (consisting only of normally recurring adjustments) necessary to
make the results of operations for the interim periods a fair statement of such
operations.

NOTE 2.  INITIAL PUBLIC OFFERING

         On May 17, 1994, the Company closed the public offering and sale of
1,500,000 shares of the Company's common stock at a public offering price of
$3.50 per share. After deducting an underwriting discount of $0.35 per share,
this public offering resulted in net proceeds to the Company of $4,275,000.
Bridge notes totaling $750,000, plus accrued interest, were paid at the time of
closing along with a three percent (3%) non-accountable expense allowance of
$157,500 (less $15,000 that was prepaid to the underwriter).

NOTE 3.  INCOME (LOSS) PER COMMON SHARE

         During the quarter ended March 30, 1998 the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
established a new method for calculating earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share is similar to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options using the
treasury stock method. All amounts presented have been restated to conform to
the new presentation. The components of the earnings per share are as follows:

                                                            JUNE 30, 
                                                      1998            1997
                                                    ---------      ---------
Weighted average common shares outstanding for
      Basic earnings per share                      3,920,221      3,135,192

Effect of dilutive securities:
      Stock Options and Warrants                      706,968        912,892
                                                    ---------      ---------

Shares used in diluted earnings per share           4,627,189      4,048,084
                                                    =========      =========

NOTE 4.  BANK LINE OF CREDIT

         As of April 10, 1998 the Company's line with its bank matured and has
not been renewed. At June 30, 1998, restricted certificates of deposit serve as
collateral for two irrevocable letters of credit.

NOTE 5.  INCOME TAXES

         During 1997 and the second quarter of 1998, the Company recorded a net
deferred tax asset of $125,000, reflecting the benefit of approximately
$1,189,000 of net operating loss carryforward, reduced by a deferred tax
allowance valuation.


<PAGE>


NOTE 6.  NEWLY ISSUED ACCOUNTING STANDARDS

         In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" and No. 129 "Disclosure of Information about Capital
Structure" was approved for issuance. In June, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" was approved for issuance
and will be adopted in fiscal 1998. In July of 1997, Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and
Related Information" was approved for issuance. The Company will adopt these
statements for the year ended December 31, 1997. The effect of these Statements
has not been determined. However, the impact on the Company's financial position
and results of operations is not expected to be material.

ITEM 2:  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         As provided under the Private Securities Reform Act of 1995, the
Company wishes to caution investors of the following factors which could affect
the Company's results of operations and cause such results to differ materially
from those anticipated in forward-looking statements made in this document or
elsewhere by or on behalf of the Company: sales projections, technology changes,
new competitors, reduced current cost for items in inventory, changes in
currency valuations, government regulations and ongoing litigation.

         The Company recognizes revenue when it is both realized and earned
typically at the time of shipment. Net revenues for the quarter ended June 30,
1998 were $1,906,266 compared to $2,038,222 for the second quarter of 1997, a
decrease of 6 percent. Net revenues for the 6 months ending June 30, 1998 were
$3,115,109 compared to $3,637,709 for the same period of 1997, a decrease of 14
percent. This decrease is attributed to the decrease of sales into the computer
markets and a decline in sales to foreign markets.

         The Company is focused on professional markets including education,
audio-visual, security and medical markets, while de-emphasizing sales to highly
competitive retail markets where the Company had experienced declines and low
margins. The Company's core business is operating in a profitable mode as new
products have allowed the Company to maintain market share in the presentation
market. The Company has decided to return to the computer market with a new
digital product in the fourth quarter of 1998. The Company is cautiously
entering the computer market on a limited basis due to a new low cost design
necessary to be competitive in the digital computer market.

         During the second quarter ending June 30, 1998, sales in North and
South America, Europe and Asia/Pacific were respectively 80%, 19% and 1%
compared to respectively 63%, 27% and 10% for the same quarter ending June 30,
1997. During the first 6 months of 1998 sales in North and South America, Europe
and Asia/Pacific were respectively 74%, 24% and 2% compared to respectively 62%,
30% and 8% for the same period ending June 30, 1997. The decrease in European
sales is attributable to the increase in competition in the European market. The
decrease in the Asia/Pacific market are attributable to the depressed Asian
economy and the Company's decision to pull sales and marketing efforts out of
the Asia/Pacific market until the economy was more stable.

         The Company is actively working on acquisitions and new products that
could return the Company to its former growth profile. On April 6, 1998 the
Company closed on an acquisition of assets and certain intellectual property
rights of Video Dynamics, Inc, a Florida Corporation. Video Dynamics is located
in Sunrise, Florida and will be operating as a division of the Company called
VideoLabs' Healthcare Products Division. The founders of Video Dynamics are now
both employees of the Company and have been leading designers of video capture
solutions for medical professionals, healthcare institutions and other
manufacturers for a combined total of over 50 years. The Company originally
anticipated that the total revenues of this division would be approximately 20
percent of the total combined revenues of the companies in 1998. Subsequently,
the Company 


<PAGE>


estimates that the total revenues for the Healthcare Products Division will be
less than 20 percent. Total revenues for the Healthcare Products Division for
the quarter ending June 30, 1998 were $160,653 or 8 percent of total sales for
the Company.

         Gross profits of the Company are determined by deducting from net
revenues all materials, labor, packaging, manuals and related overhead costs
which are directly attributable to the cost of manufacture and shipment of the
Company's products. Royalty costs and commission costs related to the sales of
products are not included in cost of goods, but are included in selling
expenses. The Company's gross profit on sales during the second quarter of 1998
was $750,912 or 39 percent as compared to $882,658 or 43 percent for the second
quarter of 1997. This decrease in gross margin as a percentage of revenues is
mainly attributable to the product mix that the Company sold. The Company's
gross profit on sales during the 6 month period ending June 30, 1998 were
$1,292,953 or 42 percent as compared to $1,536,319 or 42 percent for the same
period in 1997. The Company has a goal to maintain gross margins in the 40
percent range, but there is no assurance that it will be able to do so.

         Selling, general and administrative expenses include all costs of the
Company except those related directly to the manufacture of products described
above and other income and expense items below. These expenses increased from
$675,167 in the second quarter of 1997 to $728,753 in the second quarter of
1998. This increase is attributable to the increase in selling, general and
administrative expenses from the Healthcare Products Division purchased on April
6, 1998. For the first 6 months of 1998 the Company's selling, general and
administrative expenses were $1,241,321 compared to $1,282,324 for the same
period for 1997. The Company continues to make progress towards its efforts in
cost control. However, the Company is actively developing new products that will
result in an increase in research and development expenses and sales and
marketing expenses to initiate new product launches.

         Operating income for the second quarter of 1998 was $22,159 compared to
an operating income of $207,491 for the same period in 1997. The operating
income for the first 6 months of 1998 was $51,632 compared to operating income
of $253,995 for the same period for 1997. The decrease in operating income is
relative to the decrease in sales for the first 6 months of 1998 and the
decrease in gross margins for the second quarter of 1998 and increase expenses
related to promotions, acquisitions and new product development.

         The other income and expenses consist of interest income on the
investment of cash and interest expense.

         As of June 30, 1998, the Company had a deferred tax asset of $125,000,
reflecting the benefit of approximately $1,189,000 of net operating loss
carryforward, reduced by a deferred tax allowance valuation. If the Company
continues to be profitable, additional tax benefit will be recorded.

         Net income for the second quarter of 1998 was $67,386 compared to a net
income of $240,908 for the second quarter of 1997. Management attributes this
decrease in earnings to the Company's decrease in total revenues for the second
quarter of 1998, the decrease in gross profit and the marketing investments as
discussed above. Net income for the first 6 months of 1998 was $117,786 compared
to $286,955 for the same period for 1997.

         Basic and fully diluted earnings per share for the quarter ended June
30, 1998 were computed based on the weighted average number of shares
outstanding, plus the shares that would be outstanding assuming exercise of
options and warrants which are considered to be common stock equivalents, less
the shares assumed to be acquired by the Company using the proceeds from the
assumed exercise of options and warrants based on market prices. Basic and fully
diluted shares considered outstanding were 3,920,221 and 4,627,189, respectively
for the quarter ended June 30, 1998. Basic and fully diluted shares considered
outstanding were 3,135,192 and 3,755,534, respectively for the quarter ended
June 30, 1997. Basic and fully diluted shares considered outstanding were
3,920,221 and 4,627,189, respectively for the six month period ended June 30,
1998. Basic and 


<PAGE>


fully diluted shares considered outstanding were 3,135,192 and 4,048,084,
respectively for the six month period ended June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used for operating activities totaled $157,929 for the 6
months ended June 30, 1998 compared to net cash provided by operating activities
totaling $659,228 for the 6 months ended June 30, 1997. The decrease is due
primarily to cash provided by decreases in inventories and accounts receivable
in the first 6 months of 1997.

         Net cash used for investing activities totaled $219,114 for the 6 month
period ending June 30, 1998 compared to cash provided from investing activities
of $365,510 for the 6 month period ending June 30, 1997. The cash used in 1998
was for capital equipment purchases and the cash provided in 1997 was from the
sale of computer equipment.

         Net cash provided from financing activities for the 6 month period
ending June 30, 1998 was $567,670 from the exercising of outstanding warrants.

         Prior to the Company's Initial Public Offering, the Company sold units
in private placement transactions consisting of one share of common stock and
one warrant to purchase one share of common stock. The warrants that were
purchased had expiration dates ranging from July 27, 1997 to January 15, 1999.
In the 6 month period ending June 30, 1998 and as a subsequent event to the 6
month period certain warrantholders have exercised a total of 955,703 warrants
at an exercise price of $0.6875. The Company has received a total of $657,046 in
proceeds from the exercise of these warrants into the Company's common stock.
Currently the Company has approximately 650,000 warrants remaining that have
expiration dates extending over the period of August 23, 1998 to January 15,
1999 with potential proceeds of approximately $450,000 (assuming the exercising
of all outstanding warrants).

         The board of directors of the Company approved in March of 1997 a stock
buy back of 100,000 shares and in May of 1998 a stock buy back of another
100,000 shares. In March and April of 1998 the Company redeemed a total of
91,231 shares of the Company's common stock in private transactions and retired
all 91,231 shares. In July of 1998 the Company redeemed a total of 35,000 shares
of the Company's common stock in a private transaction and retired all 35,000
shares.

         Working capital, which consists principally of cash, receivables and
inventories, was $3,483,404 at June 30, 1998 and $3,019,056 at December 31,
1997. The ratio of current assets to current liabilities was 6:1 at June 30,
1998 and 4:1 at December 31, 1997. Inventories at June 30, 1998 were $1,180,279.
The Company continues to monitor and control inventory levels. However, with the
development and introduction of new products in the 4th quarter of 1998, the
Company's inventory level is anticipated to increase. The Company believes its
liquidity to be adequate for the next 12 months and intends to use the proceeds
from the exercise of warrants as working capital.


                           PART II--OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

ITEM 2.  CHANGES IN SECURITIES

None.


<PAGE>


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits required by Item 601.

None

(b)  Reports on Form 8-K

None

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

                                    VIDEOLABS, INC.


Date:   August 10, 1998             By:  /s/  James Hansen
                                         James W. Hansen
                                         President, CEO, Treasurer and Chairman