U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

_X_      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

___      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                       COMMISSION FILE NUMBER: 34-0-23-858
                                 VIDEOLABS, INC.
                 (Name of Small Business Issuer in its charter)

            DELAWARE                                    41-1726281
 (State or other jurisdiction of                      (IRS Employer
  incorporation or organization)                    Identification No.)

               5960 GOLDEN HILLS DRIVE, MINNEAPOLIS, MN 55416-1040
               (Address of principal executive offices) (Zip code)

        Registrants telephone number, including area code: (612) 542-0061

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

                                                  Name of each exchange
       Title of each class                         on which registered
       -------------------                         -------------------
             None                                         None

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

                          COMMON STOCK, $.01 PAR VALUE
                                (title of class)

         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 ___

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive Proxy or
Information Statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this form 10-KSB. [X]

         State Issuer's revenues for most recent Fiscal Year. $6,949,652

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Issuer, based upon the closing bid price of the
Common Stock on January 30, 1998 as reported on the NASDAQ Small Cap Market, was
approximately $2,771,475. Shares of the voting and non-voting common equity held
by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of February 28, 1998, Registrant had outstanding 3,215,283 shares of Common
Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE
                PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS

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                                     PART I
               CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
                THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO
            DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS

            In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management of Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.

            This document and any documents incorporated by reference herein
also identify important factors which could cause actual results to differ
materially from those indicated by forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.

            The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

            VideoLabs, Inc. (the "Company") is a Delaware corporation which was
incorporated in 1992. The Company designs and manufactures image capture,
transmission and manipulation devices for use as components of systems for
identification, medical, desktop computer video applications,
video-teleconferencing and computer-based and non-computer based solutions.

            The Company believes that there are opportunities for growth in the
application of the core technologies of the Company in several market segments.
The potential for increases in use of image capture devices in audio visual,
education and computer markets is increasing as computer processing power, speed
and cost factors have all improved as has higher capacity transmission
utilities. The Company has also observed emerging applications in the use of
video image capture solutions in identification, medical and other market
segments that are primarily due to new, flexible, lower cost digital
applications that allow for unique solutions targeted at potential niche
markets.

            The Company's short term strategy is to develop or acquire image
capture solutions for specific niche markets in education, audio visual,
identification and medical applications where it already has distribution
resources and can provide value-added solutions.

            The Company reported in March 1998 that it has reached an agreement
in principal to acquire the assets and certain intellectual property rights of
Video Dynamics, Inc (VDI). The founders of VDI have over 50 years combined
experience in designing video image capture solutions for medical professionals,
healthcare institutions and other manufacturers. The founders will be employees
of the Company. The closing is anticipated within the next 30 days.

<PAGE>


THE COMPANY STRATEGY

            The Company's business strategy is to utilize its core competencies
in analog and digital image capture development and distribution to provide
solutions for individual and organizational customers and to earn an acceptable
return on equity for the Company's shareholders.

FOCUS ON PROFITABLE GROWTH

            The Company is focused on internal growth in profitable niches in
professional image capture solutions for audio visual, education, identification
and medical markets where it currently has distribution system capabilities. The
Company intends to become a multiple product supplier in these markets through
internal product development and through product acquisitions. The Company is
positioned to respond to growth opportunities in the desktop video and computer
videoconferencing markets as profitable niches and internal resources become
available.

            The company has instituted an ISO 9001 quality program and is
working with its suppliers to reduce cost of goods sold and inventory levels
while improving quality and customer response times. During 1996 the Company
reduced its staffing levels and 1997 budgets to reduce overhead costs.

            Furthermore the Company is working on partnerships with its
suppliers and distributors to reduce cost of goods sold and selling expenses
while shortening cycle times and putting the Company closer to our customers in
the selling channel.

PRINCIPAL PRODUCTS, SERVICES AND THEIR MARKETS

THE COMPANY'S CURRENT PRODUCTS

            The Company offers a unique line of video products ranging from
image capture devices, image transmission and image manipulation. The Company's
product offering enables our customers to sell stand alone products or as an
integral part of a solution.

            The Company has three primary markets of focus for 1998:
Videomicroscopy for education and industrial inspection market, photo
identification and security for corporate, education and memberships markets and
audio visual for the educational and professional presentation markets. As new
markets emerge for the FlexCam family of products we will be evaluating and
determining our focus for the next year. Our business partners also use our
image capture devices in medical, identification and industrial applications.

EDUCATION/VIDEOMICROSCOPY PRODUCT LINE CALLED THE "DIDACTA SERIES"

          *  SCHOLASTICCAM
          *  STUDENTCAM
          *  TEACHCAM W/ ILLUMABASE
          *  MICROSCOPECAM
          *  DOCCAM
          *  MEDCAM
          *  IDCAM

            VideoLabs released a new product family to our
Educational/Videomicroscopy channel in late 1997. The "Didacta Series", which is
Greek for education, consists of new and existing image capture devices:
ScholasticCam, StudentCam, TeachCam w/ IllumaBase, MicroscopeCam, DocCam, MedCam
and IDCam.

            The company's first product was the ScholasticCam (formerly known as
FlexCam) camera. The ScholasticCam consists of an integrated desktop 1/4"
high-resolution color CCD video camera and microphone mounted on flexible
18-inch gooseneck which allows precise, unobtrusive positioning of the camera
for hands-free operation. The ScholasticCam provides high-quality, S-video
output, industry-standard NTSC or PAL video and line-level audio primarily for
the classroom videoconferencing, video journals and image capture applications.

<PAGE>


            The StudentCam is an affordable presentation option for educational
applications. It comes with three microscope adapters and integrated microphone.
It was designed to encourage classroom participation between teacher and student
when used with or without a microscope.

            The TeachCam w/ IllumaBase is a new offering within the Didacta
series. The camera base has been transformed into the IllumaBase, a built-in
light source that allows users to present micro images without the use of a
microscope. This new feature also allows for 35mm slide presentations without
the use of a projector. In addition, the gooseneck has been lengthened to 27"
for use with taller microscopes. The camera and accessories ship complete in a
new wooden storage box for ease of storage and mobility. The TeachCam w/
IllumaBase started first shipments to customers in November 1997.

            The MicroscopeCam is the ideal tool for medical, scientific,
teaching and other applications using a fluorescent microscope; its design is
perfect for the study of any branch of science. Using its microscope adapters,
the customer can connect MicroscopeCam to virtually any microscope to display
slides and scientific objects or to view X-rays from fluorescent light panels on
a monitor.

            The MedCam features an 8' cable neck versus the signature gooseneck
for those applications that require more mobility. Its high-resolution C-Mount
lens and audio capability makes it the perfect choice for attachment to
telescopes and specialized equipment in a variety of medical applications.

            The DocCam is VideoLabs high-quality presentation camera. Designed
to compete with the overhead "document cameras" of Elmo, Canon, Panasonic and
other manufacturers, the DocCam offers similar capability at less cost. The
DocCam's sharp 6mm lens projects 8 x 12 and A4 documents placed so that the
audience and the presenter may read without turning upside-down. The lens may
also be focused down to within four inches, which effectively produces
"microscopic" magnification of 50:1. VideoLabs DocCam features S-Video and an
automatic iris, resulting in superior color quality and includes stereo
microphones.

            The IDCam is designed for the photo identification application. The
camera's 16mm C-mount (interchangeable) lens can be used for photo ID,
fingerprint or signature capture. The IDCam includes a 2-button image brightness
adjustment for virtually any lighting condition. It is compatible with all Photo
ID capture boards and software.

MULTIMEDIA PRODUCT LINE

          *  PLANETVIEW
          *  STINGERPRO CAPTURE CARD FOR WINDOWS 3.1/95/NT

            Our videoconferencing solution, PLANETVIEW, includes the
ScholasticCam, Enhanced CU-SeeMe videoconferencing software from White Pine and
the StingerPro Video Overlay and Capture Card for the PCI bus. It offers an
affordable package for corporate and educational networks or home use.
PLANETVIEW is compatible with either Macintosh or Windows.

            The StingerPro Video Overlay and Capture Card was specifically
designed by the Company to be a full-featured, low-cost, high-speed multimedia
card for the Windows 3.x/95/NT user. The PCI bus card acts as a single frame
grabber, full-motion video capture and an excellent videoconferencing tool. The
Stinger Pro also has TWAIN drivers which make it the optimal choice for
integration with photo ID solutions.


THE COMPANY'S PROPOSED PRODUCTS

            The Company's engineering team is committed to the development of a
minimum of three products for 1998. This commitment is part of engineering's
eighteen month plan which in turn is part of the Company's 1998 business plan.

<PAGE>


PROFCAM

            The ProfCam is a product that the Company is committed to developing
for release in the second quarter of 1998. This is a feature rich, high
resolution (approximately 500 tv lines) camera which will provide the customer
with full functionality by automatic, remote control and manual camera settings.
The ProfCam will enable the Company's product offerings to be introduced to the
higher education and corporate audio-visual markets.

FLEXCAM DIGITAL

            The second product to be developed by the Company's engineering team
is a motion digital video camera to be released in the second quarter of 1998 as
part of a videoconferencing package for schools and the corporate market to
provide point to point or group videoconferencing over the internet or
intranets. The digital video camera is compatible with all Windows based
computers and eliminates the video capture card needed with analog cameras. The
company will offer a variety of videoconferencing software packages to be
bundled with the digital video camera.

IMAGINIZER

            The third product the Company's engineering team is committed to
develop is a product that will plug directly into both the analog monitors and
computers in schools. This product is scheduled for release in the third quarter
of 1998. Currently computers require a video capture card, such as the Company's
Stinger Pro. This product will eliminate the need for any video capture card,
thus providing a plug and play camera for both analog devices such as monitors,
projectors, VCR's and digital devices such as computers.

            The Company also intends to market cameras designed specifically for
industrial arts and health educators in 1998.

MARKETING AND DISTRIBUTION

            The Company currently sells through Business Partners, Resellers and
the Internet. All of these distribution levels are maintained and sold with
factory direct sales and marketing employees from the Company.

            The Company's Business Partners are Dealers and Distributors which
have worked with the Company to give an annual commitment in sales. This was a
new initiative in 1997 for the Company. The Company supports this channel
through training, product demonstrations and joint marketing efforts. All of the
Company's Business Partners are required to sign annual contracts and are
considered partners versus traditional distributors, due to the change from
transactional relationships to a long term commitment.

            The Company's Resellers consist of Value Added Resellers, Mail Order
Suppliers, System Integrators and Resellers of products. Our current Reseller
base is over 800 customers, which buy and resell our family of products direct
to the consumer. This channel is supported through training, product
demonstrations and vertical advertising.

            In the international markets the Company sells its products through
the same Business Partner model as above. As of December 31, 1997, the Company's
products were being offered for sale by distributors in over fifty (50)
countries, including the United Kingdom, Germany, France, Italy, The
Netherlands, Switzerland, Scandinavia, Singapore, Korea, Hong Kong and
Australia. Arrangements with these distributors provide for significant
incentives for them to purchase the Company's products in large volumes. Through
exposure of the products at international trade shows, additional international
distributors are being actively solicited. In 1997, approximately thirty seven
percent (37%) of the Company's gross revenue was from international markets
primarily in Europe.

            All of the Company's international sales are invoiced in United
States dollars. International sales are made on the basis of cash in advance by
wire transfer, credit card, or irrevocable letters of credit. Credit limits have
been established for several of the international distributors. The Company's
international sales are subject to certain risks common to many export
activities, such as government regulations, export license requirements and the
risk of imposition of tariffs and other trade barriers.

<PAGE>


MAJOR CUSTOMERS

            During 1997 the Company did not have any one customer with sales
over 10%. The Company reported a significant sale of product to the Immigration
and Naturalization Service (INS) in August 1997. The first phase of the project
has been completed along border crossing points on the Southwest border. The
next phase will cover the Northwest, then the Northeast and finally in the
Midwest. Although significant to the Company, total sales from this customer is
likely not to exceed 10% of total sales.

BACKLOG

            The Company typically ships product within one to two weeks after
receipt of an order, which is common in this industry. Accordingly, backlog as
of any particular date is not representative of actual sales for any succeeding
period. However, due to the Company's business partner program, sales
commitments for future sales do exist.

CUSTOMER SERVICE

            The Company believes that customer service is a critical element in
maintaining strong customer relationships. Customer service includes
installation support, product training, technical support, applications support,
timely maintenance and effective operations manuals. Repair of the Company's
products is performed at the Company's manufacturing facility by trained
technicians.

            The Company warrants its products for a period of five (5) years
(limited) from the date of receipt by the end user. This covers all defects and
faulty workmanship in the camera for one (1) year and a five (5) year limited
warranty on the gooseneck. The product registration card must be returned with a
dated copy of the invoice in order to validate the warranty. For OEM customers
product line warranty is generally negotiated with each customer.

RESEARCH AND DEVELOPMENT

            In 1997, the Company's expenses relating to research and development
were $325,881. During 1996, the Company's expenses relating to research and
development were $384,804. The Company expenses the related costs to research
and development as they are occurred. The Company's current engineering staff
consists four (4) full-time equivalent employees. The Company also contracts
services for mechanical, electrical and software engineers as required.

MANUFACTURING AND SUPPLIES

            The Company assembles its products at its facility in Golden Valley,
Minnesota. The Company's manufacturing operation consists of procurement and
inspection of components and sub-assemblies, final assembly and testing of
finished products. After components have been procured, they are sent in kits to
sub-assembler companies, mostly located near the Company's facilities, which
then build the sub-assemblies. The sub-assemblies are then returned to the
Company's Golden Valley facility for final assembly. All finished products are
subjected to a minimum twelve hour burn-in and reliability test before they are
packaged and shipped to customers.

            Components and sub-assemblies are inspected for mechanical and
electrical compliance with the Company's specifications. All finished products
are tested against Company and customer specifications. The Company's products
are shipped in protective packaging to minimize potential damage during
shipment.

            Certain components continue to be available only from a single
source, or a limited number of sources. The Company has several principal
suppliers. The Company attempts to keep an adequate supply of critical
components in its inventory to minimize the impact caused by the loss of a
significant supplier. There can be no assurance, however, that loss of a
supplier would not result in a material adverse effect on the ability of the
Company to meet its product shipment requirements.

COMPETITION

            The electronic camera market is highly competitive. The Company
competes with a number of companies ranging from very small businesses to large
companies, some of which have substantially greater financial,

<PAGE>


manufacturing, marketing and product development resources than the Company.
Some of these other companies manufacture and sell electronic cameras as well as
video-capture equipment, and some are distributors for these products. The
Company believes that it competes most directly with Sony, Toshiba, Panasonic,
Ken A Vision, Sharp Electronics and Elmo.

            Because the Company manufactures its product lines through the
assembly of component parts which are readily available in the world
marketplace, there are few barriers which would prevent others from designing
and assembling products similar to those sold by the Company.

            The Company competes for electronic camera sales primarily on the
basis of image quality, design, focus, costs, flexibility, delivery time,
reputation, reliability, the effectiveness of its sales and distribution
channels and its customer service. The Company believes that its products
compete favorably on these factors, although there can be no assurance that this
will continue to be true in the future.

INTELLECTUAL PROPERTY RIGHTS

            The Company attempts to protect the proprietary rights to its
products by use of patents, copyrights, trade secret law and internal
non-disclosure safeguards. The source code for the software contained in the
Company's products is considered proprietary and is not furnished to customers.
The Company has also entered into confidentiality and non-compete agreements
with certain key employees as well as outside consultants. See "Management."
Despite these restrictions, it may be possible for competitors or users to copy
aspects of the Company's products or to obtain information that the Company
regards as proprietary.

            The Company has received a patent for the FlexCam and intends to
vigorously defend that patent in the marketplace.

            FlexCam was engineered by Suick Bay Technologies of Maple Grove,
Minnesota and Worrell Design of Minneapolis at the direction of the Company. The
Company has a royalty agreement with Worrell Design and pays two percent (2%) of
revenues resulting from the first 36,000 electronic camera sales and one percent
(1%) of the revenues from the subsequent 20,000 unit sales and one-half percent
(0.5%) of the next 20,000 unit sales. The Company has currently shipped
approximately 67,000 units under this agreement. The royalty agreement with
David Krekelberg of Suick Bay Technologies has been terminated.

            The Company uses the name "FlexCam" under an indefinite license from
Video Dynamics, Inc. for a yearly payment of $5,000.

            Because of the rapid pace of technological changes in the computer
industry, the Company believes that patent, trade secret and copyright
protection are less significant to its competitive position than are factors
such as the knowledge, ability and experience of the Company's personnel, the
Company's success at new product development and frequent product enhancements,
and the Company's name recognition and ongoing reliable product maintenance and
support.

EMPLOYEES

            As of December 31, 1997, the Company had twenty-one (21) full-time
employees, including six (6) in manufacturing, four (4) in engineering, product
development and warranty repair, six (6) in sales and marketing, and five (5) in
general administration, finance and customer service. None of the Company's
employees are represented by a labor union or are subject to any collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its employee relations are satisfactory. The Company does intend
to add employees in the engineering and sales departments.

ENVIRONMENTAL COMPLIANCE

            Compliance with federal, state and local laws regarding the
discharge of materials into the environment has no material effect upon capital
expenditures, earnings, competitive position or finances of the Company.


<PAGE>


GOVERNMENT REGULATION

            Products sold by the Company are subject to regulations of the U.S.
Government Federal Communication Commission and European product compliance
requirements. All products sold by the Company have met mandatory requirements
of both the FCC and CE regulations. The Company does not know of any pending
regulations which would affect its operations or products.

ITEM 2.  DESCRIPTION OF PROPERTY

            The Company's operations are located in Golden Valley, Minnesota,
where the Company has leased approximately 5,806 square feet of office and
research and development lab space and 2,633 square feet of manufacturing space
since October 1, 1997 under a lease that expires in September 30, 2002. The
Company believes the facility is in excellent condition. The annual rent plus
estimated tax costs and estimated monthly operating costs are approximately
$85,000. This is an increase over the last lease agreement, however to renew at
the old location, the costs would have been equivalent to the new location. The
Company was able to design the new facility gaining efficiencies in the office,
development and manufacturing departments.

            In 1994 the Company purchased a condominium in Rotterdam, The
Netherlands for $137,579, for use by Company sales representatives. From
September 1994 through November 15, 1996 this condominium was occupied by Greg
Craven, a sales representative of the Company who is also the adult son of
Richard F. Craven, a Director of the Company. Greg Craven is no longer employed
by the Company and the apartment was sold by the Company in April 1997 for a
small gain.

ITEM 3.  LEGAL PROCEEDINGS

            There are no pending material legal proceedings against the Company
or its property.

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

            No matters were submitted to vote of the security holders during the
quarter ended December 31, 1997.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY
         AND RELATED STOCKHOLDER MATTERS

a)  Market Information.

            The Company's Common Stock is traded on the NASDAQ Small Cap market
under the symbol VLAB. The following table sets forth, for the periods
indicated, the high and low bid prices per share for the Company's Common Stock
as reported to the Company by NASDAQ. The Company's Common Stock began trading
on May 10, 1994.

FISCAL YEAR ENDED DECEMBER 31, 1996       Low Bid           High Bid
-----------------------------------       -------           --------
Quarter ended March 31, 1996               $2.5             $2.75
Quarter ended June 30, 1996                $3.375           $3.75
Quarter ended September 30, 1996           $1.875           $2
Quarter ended December 31, 1996            $.5625           $.75
FISCAL YEAR ENDED DECEMBER 31, 1997
-----------------------------------
Quarter ended March 31, 1997               $.6875           $.8125
Quarter ended June 30, 1997                $1.25            $1.5625
Quarter ended September 30, 1997           $2.0625          $2.3125
Quarter ended December 31, 1997            $1.9375          $1.96875

b)  Holders.

As of March 31, 1998 there were approximately 157 record holders of the
Company's Common Stock and approximately 1,800 beneficial shareholders.

<PAGE>


c)  Dividends.

The Company has not declared any cash dividends on any class of common equity
for the last four fiscal years. The Company currently intends to retain earnings
for its use in operations and does not anticipate paying cash dividends in the
foreseeable future.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

GENERAL

            The Company was incorporated in July of 1992 to design and develop a
hardware and software videoconferencing system. Shortly after formation, the
Company sold its software development project due to capital constraints and
concentrated on the design, manufacture and sales of desktop cameras for the
integration into systems for computer video applications, video teleconferencing
and computer based audio-visual presentations.

            The Company's first product was the FlexCam, a small color video
camera with a microphone attached to an 18-inch flexible shaft which transmits
live video images of persons, objects or documents through a video capture board
to the monitor of a computer. Subsequent products have been specifically
designed for specific market niches that have a need for high quality, flexible
image capture.

            The Company completed several rounds of private financing during
1992 and 1993 and completed its IPO on May 10, 1994 at a price of $3.50 per
share, raising approximately $5 million in an underwriting transaction through
R.J. Steichen and Company.

            The Company experienced steady growth through 1995 and reached
profitability due to the sale of the remaining investment in the original
software project the Company had spun out earlier. In 1994, the Company began
the development of the Universal Digital Camera Module (UDCM) and ordered
inventory to support sales expectations. The product was not subsequently
completed and a reserve for inventory value adjustments were taken at year end
1996. At the same time, the Company's founder and President retired and a
reserve was created for severance costs resulting from a layoff of 20% of the
then current staff, along with a reserve for the settlement of a lawsuit
relating to the discontinued product development of the UDCM with a former
officer and director of the Company.

             1997 was a transition year for the Company. The Company recorded
its first four profitable quarters of operations, restored its reputation for
quality products and introduced the TeachCam with IllumaBase, a unique camera
for science teaching applications. The Company is committed to fulfilling the
vision of its founders as it transitions to a revised purpose statement with
renewed focus on providing customer solutions involving our core competency,
image capture, achieving continued profitability on an annualized basis and
challenging all associates to meet plan and grow professionally.

RESULTS OF OPERATIONS

            Net Sales for the year ending December 31, 1997 decreased six (6%)
from the prior year end from $7,405,548 in 1996 to $6,949,652 in 1997. This
sales decrease was primarily due to the restructuring early in the year. The
Company significantly restructured its customer base, replacing approximately
60% of the abandoned highly competitive, low margin computer market with
increased penetration in the education market. The strategy is to develop or
acquire image capture solutions for specific niche markets in education, audio
visual, identification and medical applications where it already has
distribution resources and can provide value-added solutions.

            During 1997, sales in the U.S., Europe and Asia/Pacific were
respectively 63%, 31% and 6% of total sales. During 1996, sales in the U.S.,
Europe and Asia/Pacific were respectively 60%, 32% and 8% of total sales. The
decrease in sales volume in the Asia Pacific Region is primarily due to the lack
of sales due to the depressed Asian economy. The Company's sales representative
for the Asia/Pacific market resigned in July 1997 and was not replaced. The
Company's largest distributor purchased 8.4% of the total sales volume in 1997
and 8.5% in 1996 and is

<PAGE>


anticipated to keep the same volumes for 1998, however, the loss of any
significant order could adversely affect the Company.

            Gross profits for the period ending December 31, 1997 were
$2,924,811 which was 42% of total sales compared to $1,077,677 which was 15% of
total sales for year ending December 31, 1996. This increase in gross profit for
1997 is primarily due to the 1996 year end write down of $1,575,000 to reflect
the valuation of inventory which became technologically obsolete in 1996
including a reserve for purchase commitments for addition obsolete inventory.
This inventory valuation write down was 21% of 1996 total sales. The Company
started purchasing inventory in late 1994 for the Universal Digital Camera
Module (UDCM) product. The product was never completed and the technology became
obsolete. The Company aggressively pursued different sources to either sell the
components at a discount or engineer the components into future products without
success. The Company also attributes approximate 6% of this increase in gross
profit to achieving the goals set for 1997 of reducing cost of materials and
costs associated to manufacturing overhead. The Company has set similar goals
for 1998 in reducing cost of materials used in manufacture and costs associated
to manufacturing overhead.

            Cost of sales includes 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. Cost of sales does not
include royalty costs or commission costs related to the sales of products.

            In 1996 the Company changed to an off shore supplier to reduce costs
and realized quality problems. This resulted in higher manufacturing overhead
cost for quality repair and warranty repair work. The Company phased out the off
shore components in the first quarter of 1997 with a higher quality solution.
The Company is committed to restoring the quality of its products in 1998 and
continues to develop an ISO 9001 quality program.

            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 discussed below. Selling,
general and administrative expenses decreased 37% from $3,675,060 in 1996 to
$2,322,598 in 1997. Selling expenses decreased from $1,677,189 in 1996 to
$765,737 in 1997. Research and development expenses decreased from $384,804 in
1996 to $325,881 in 1997. General and administrative expenses decreased from
$1,613,067 in 1996 to $1,230,980 in 1997. This decrease in selling, general and
administrative expenses is attributed to the reorganization of the Company in
late 1996. The Company established at 1996 year end reserves for retirement and
severance charges, for a charge to cover future warranty costs, and a charge to
litigation reserves for settlement costs associated with the lawsuit with a
former officer and director of the Company. The litigation was settled within
the reserve in February 1997. In addition to the reduction of the selling,
general and administrative expenses because of the reserves set up in 1996, the
Company aggressively reduced SG&A expenses by over $900,000. This reduction
resulted from the Company reducing its employment base by 20%, closing the
European sales office and implementing a conservative operating budget for 1997.

            The Company's operating income for the year ending December 31 ,
1997 was $602,213 compared to an operating loss of $2,597,383 for the year
ending December 31, 1996. The Company attributes the increase in operating
income to the cost control efforts discussed above and the increase in gross
margin. The Company anticipates that operating margins in 1998 will improve with
the objectives the Company has set for 1998 including raw material cost
reductions, manufacturing overhead cost reductions and SG&A cost reductions.
However, even if these efficiencies are achieved, if the sales volumes do not
meet projections, overall income from operations will be adversely affected.

            Other income for 1997 consisted of interest income of $75,089
compared to interest income for 1996 of $54,007 and interest expense for 1997 of
$3,965 compared to interest expense of $2,117 for 1996. In 1995 the Company
converted its $100,000 note receivable from RSI, Inc. into 88,888 shares of RSI,
Inc. common stock. The Company sold 25,000 shares of RSI, Inc. common stock at
the time of RSI, Inc.'s initial public offering which resulted in a
non-operating gain on sale of assets of $198,606 for 1995. The Company sold the
remaining 63,888 shares at a discount in May 1996 after receiving consent from
the underwriter for a profit of $230,354. The Company recorded a loss on the
sale of assets for 1997 of $19,913 consisting of the sale of computer equipment.

            At December 31, 1997 the Company had a net operating loss carry
forward of approximately $1,189,000 and a general business credit carry forward
of $78,000 available to be carried to future periods. The loss carry forward and
general business credit carryforwards expire in 2008 through 2012 if not used.
In 1997, the Company recorded a deferred tax asset of $100,000 reflecting the
partial benefit of $1,189,000 in net operating loss carryforwards.

<PAGE>


Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that at least $100,000 of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could change in the near term if estimates of
future taxable income during the carryforward period change.

            The net income for the year ending December 31, 1997 was $753,424
compared to a net loss for the year ending December 31, 1996 of $2,362,115. The
basic earnings per common share for 1997 was $0.24 per share compared to a basic
loss per common share for 1996 of $0.75 per share. Basic earning per common
share were based on the weighted average number of shares outstanding for 1997
and 1996 respectively of 3,168,480 and 3,134,498. Earnings per common share
assuming dilution for 1997 was $0.18 per share compared to a loss per common
share for 1996 of $0.75. During 1996, stock options and warrants for the
purchase of common stock were anti-dilutive and have not been included in the
1996 computation. The fully diluted weighted average number of shares
outstanding for 1997 was 4,086,558.

LIQUIDITY AND CAPITAL RESOURCES

            Working Capital, consisting principally of cash, certificates of
deposit, receivables and inventories, was $3,019,056 at December 31, 1997 and
$2,124,418 at December 31, 1996. The ratio of current assets to current
liabilities was 4:1 at December 31, 1997 and 2:1 at December 31, 1996. Working
Capital ratios have continued to improve due to the Company's positive cash flow
mainly due to the net income.

            Inventories at December 31, 1997 were $1,153,665 compared to
$1,830,300 for 1996. Throughout 1997 the Company aggressively worked off excess
inventory levels and is committed to maintaining adequate levels for 1998. The
Company has to purchase components four months in advance, so if the Company's
projections are not accurate, inventories are higher than required. In the event
that such inventory becomes obsolete, the Company's cash would be substantially
diminished and the Company could be put into a position of needing funds.

            Currently the Company has a discretionary working capital line of
credit with its bank of the lesser of $500,000 or 75% of eligible accounts
receivable (as defined), with outstanding borrowings due April 10, 1998. The
available line of credit is reduced by outstanding irrevocable letters of credit
which totaled $200,000 at December 31, 1997. The letter of credit may be drawn
upon by a major supplier of the Company. The letter of credit expires on April
10, 1998. There are no borrowings outstanding under this line of credit at
December 31, 1997. Advances under the note are secured by substantially all
corporate assets. Interest is charged at 1.5% over the bank's "index rate". The
interest rate at December 31, 1997 was 10% The terms of the note agreement with
the bank require the Company to maintain certain financial ratios that the
Company has not attained.

            The Company believes that it has sufficient liquidity to support its
anticipated growth during the next twelve months. However, this belief is
predicated upon meeting the anticipated sales forecast. If the projections are
not met, the inventory reductions anticipated by the Company will not occur.
This would materially adversely affect the Company's cash position.

YEAR 2000 ISSUES

            Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.

            Management is currently evaluating its reliance on both internal and
external systems with respect to year 2000 issues. At this time, year 2000
issues are not expected to materially affect the Company's financial condition,
results of operations or liquidity.

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS





                         REPORT OF INDEPENDENT AUDITORS


The Stockholders
    and Board of Directors
VideoLabs, Inc.
Golden Valley, Minnesota

We have audited the accompanying balance sheet of VideoLabs, Inc. as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VideoLabs, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.


                                        Boulay, Heutmaker, Zibell & Co. P.L.L.P.
                                        Certified Public Accountants

Minneapolis, Minnesota
February 13, 1998

<PAGE>


                                 VIDEOLABS, INC.

                                  Balance Sheet

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------
                                                                     December 31
          ASSETS                                                   1997         1996
---------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
CURRENT ASSETS
    Cash and cash equivalents                                   $1,746,928   $  631,456
    Certificates of deposit- restricted                            275,833      513,788
    Accounts receivable
        Trade accounts, less allowance for  doubtful accounts
            of $35,000 in 1997 and $25,400 in 1996                 626,320      799,799
        Other receivables                                            9,228        6,157
    Inventories                                                  1,153,665    1,830,300
    Deferred income taxes                                          100,000
    Prepaid expenses                                                47,209      154,749
                                                                ----------   ----------
            Total current assets                                 3,959,183    3,936,249


PROPERTY HELD FOR SALE, net of $37,805 accumulated
    depreciation                                                                 99,774


PROPERTY AND EQUIPMENT
    Office and computer equipment                                  367,874      356,126
    Machinery and equipment                                         97,340       90,951
    Tooling                                                        278,733      189,311
    Leasehold improvements                                          45,016       21,249
                                                                ----------   ----------
                                                                   788,963      657,637
    Less accumulated depreciation                                  468,556      355,877
                                                                ----------   ----------
            Net property and equipment                             320,407      301,760
                                                                ----------   ----------

            TOTAL ASSETS                                        $4,279,590   $4,337,783
                                                                ==========   ==========
</TABLE>

Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                                  Balance Sheet

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
                                                                       December 31
     LIABILITIES AND STOCKHOLDERS' EQUITY                          1997           1996
-----------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
CURRENT LIABILITIES
    Trade accounts payable                                     $   278,204    $ 1,057,869
    Current maturities of long-term debt                            22,605         10,285
    Customer deposits                                                9,080         15,070
    Accrued compensation                                           264,221        153,607
    Purchase commitments, reserves and other                       366,017        575,000
                                                               -----------    -----------
            Total current liabilities                              940,127      1,811,831

LONG-TERM DEBT, net of current maturities                           36,134         16,110

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock, $.01 par value;
        Authorized, 20,000,000 shares
        Issued and outstanding, 3,215,283 shares in 1997 and
            3,134,948 in 1996                                       32,152         31,349
     Preferred stock, $.01 par value;
        Authorized, 5,000,000 shares
        No shares issued and outstanding
    Additional paid-in capital                                   5,553,553      5,514,293
    Accumulated deficit                                         (2,282,376)    (3,035,800)
                                                               -----------    -----------
            Total stockholders' equity                           3,303,329      2,509,842
                                                               -----------    -----------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $ 4,279,590    $ 4,337,783
                                                               ===========    ===========
</TABLE>

Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                             Statement of Operations

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------
                                                            Years Ended December 31
                                                              1997           1996
------------------------------------------------------------------------------------
<S>                                                       <C>            <C>
SALES                                                     $ 6,949,652    $ 7,405,548

COST OF SALES
    Cost of goods sold                                      4,024,841      4,752,871
    Adjustment for write down of inventories, including
        purchase commitments                                               1,575,000
                                                          -----------    -----------
            Total cost of sales                             4,024,841      6,327,871
                                                          -----------    -----------

GROSS PROFIT                                                2,924,811      1,077,677

OPERATING EXPENSES
    Selling expenses                                          765,737      1,677,189
    General and administrative expenses                     1,230,980      1,613,067
    Research and development                                  325,881        384,804
                                                          -----------    -----------
            Total operating expenses                        2,322,598      3,675,060
                                                          -----------    -----------

OPERATING INCOME (LOSS)                                       602,213     (2,597,383)

OTHER INCOME (EXPENSE)
    Interest income                                            75,089         54,007
    Interest expense                                           (3,965)        (2,117)
    Gain (loss) on sale of assets                             (19,913)       213,378
                                                          -----------    -----------
            Total other income, net                            51,211        265,268
                                                          -----------    -----------

INCOME (LOSS) BEFORE PROVISION FOR (RECOVERY OF)
    INCOME TAXES                                              653,424     (2,332,115)

PROVISION FOR (RECOVERY OF) INCOME TAXES                     (100,000)        30,000
                                                          -----------    -----------

NET INCOME (LOSS)                                         $   753,424    ($2,362,115)
                                                          ===========    ===========

EARNINGS (LOSS) PER COMMON SHARE                          $      0.24    ($     0.75)
                                                          ===========    ===========

EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION        $      0.18    ($     0.75)
                                                          ===========    ===========
</TABLE>

Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                        Statement of Stockholders' Equity

                     Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                              Net
                                                                           Unrealized
                                                            Additional      Gain On
                                   Common Stock              Paid-In       Marketable   Accumulated
                                Shares        Amount         Capital       Securities     Deficit
---------------------------------------------------------------------------------------------------
<S>                            <C>          <C>            <C>            <C>           <C>
BALANCES -
     DECEMBER 31, 1995         3,133,948    $    31,339    $ 5,511,653    $   219,215   ($  673,685)
                             -----------    -----------    -----------    -----------   -----------

    Net loss                                                                             (2,362,115)

    Exercise of warrants           1,000             10          2,640

    Change in unrealized
        gain on marketable
        securities                                                           (219,215)
                             -----------    -----------    -----------    -----------   -----------
BALANCES -
    DECEMBER 31, 1996          3,134,948         31,349      5,514,293           --      (3,035,800)

    Net income                                                                              753,424

    Issuance of shares               244              2             (2)

    Exercise of warrants         110,091          1,101         74,587

    Purchase of stock            (30,000)          (300)       (35,325)
                             -----------    -----------    -----------    -----------   -----------


BALANCES -
    DECEMBER 31, 1997          3,215,283    $    32,152    $ 5,553,553    $      --     ($2,282,376)
                             ===========    ===========    ===========    ===========   ===========
</TABLE>

Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                             Statement of Cash Flows

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
                                                                     Years Ended December 31
                                                                      1997          1996
--------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss)                                             $   753,424    ($2,362,115)
    Adjustments to reconcile net income (loss) to net cash
    from (used for) operations:
        Depreciation and amortization                                 140,905        221,867
        Provision for losses on accounts receivable                     9,640
        Amortized premium on investments                                                 861
        (Gain) loss on sale of assets                                  19,913       (213,378)
        Deferred income taxes                                        (100,000)        30,000
        Change in assets and liabilities
            Accounts receivable                                       160,768        469,404
            Inventories                                               676,635        569,647
            Prepaid expenses                                          107,540        (47,947)
            Trade accounts payable                                   (779,665)       287,513
            Customer deposits                                          (5,990)        (6,055)
            Accrued compensation                                      110,614         88,995
            Purchase commitments, reserves and other                 (208,983)       527,000
                                                                  -----------    -----------
            Net cash from (used for) operating activities             884,801       (434,208)

CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                                             (179,491)       (70,177)
    Proceeds from sale of assets                                      106,225         25,144
    Purchase of certificates of deposit                              (474,167)    (1,034,960)
    Proceeds from maturities of certificates of deposit               712,122      1,098,072
    Proceeds from sales and maturities of marketable securities                      365,468
                                                                  -----------    -----------
            Net cash from investing activities                        164,689        383,547
</TABLE>

                                  - Continued -

Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                       Statement of Cash Flows - Continued

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------
                                                                        Years Ended December 31
                                                                          1997           1996
------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
    Issuance of common stock and warrants                             $    75,688    $     2,650
    Payments of long-term debt                                            (14,081)        (8,041)
    Proceeds of long-term debt                                             40,000
    Repurchase of common stock                                            (35,625)
                                                                      -----------
           Net cash from (used for) financing activities                   65,982         (5,391)
                                                                      -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    1,115,472        (56,052)

CASH AND CASH EQUIVALENTS - Beginning of Year                             631,456        687,508
                                                                      -----------    -----------

CASH AND CASH EQUIVALENTS - End of Year                               $ 1,746,928    $   631,456
                                                                      ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION
    Cash paid during the year for interest                            $     3,965    $     2,117
                                                                      ===========    ===========
        Cash paid during the year for taxes                           $      --      $      --
                                                                      ===========    ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
    Unrealized gain on marketable securities classified as
        available-for-sale, net of tax effect                         $      --      ($  219,215)
                                                                      ===========    ===========

    Capital lease obligations incurred                                $     6,426    $    34,436
                                                                      ===========    ===========
</TABLE>

    During 1997, the Company issued 244 shares of stock in a noncash transaction
    During 1996, the Company retired $64,552 of fully depreciated fixed assets.


Notes to Financial Statements are an integral part of this Statement.

<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

            VideoLabs, Inc. designs, manufactures and markets image capture
solutions. The Products are sold throughout the world.

ACCOUNTING ESTIMATES

            Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could differ from those
estimates.

            At December 31, 1997 and 1996, the Company has recorded a reserve
for future inventory obsolescence of $60,000 due to the risk of technological
changes in the industry. During 1996, the Company recognized a write down of
inventories including future purchase commitments for a product that was not
marketable. While it is possible that the estimate will change materially in the
near term, no estimate can be made of the range of additional loss, or recovery,
if any.

            The Company has recorded a reserve for product warranties in the
amount of $20,000 in 1997 and $35,000 in 1996. This warranty accrual pertains
primarily to one product. It is not possible to estimate additional product
warranty costs, if any, at this time. Actual warranty costs could differ from
amounts estimated.

            In 1997, the Company recorded a deferred tax asset of $100,000
reflecting the partial benefit of $1,189,000 in net operating loss
carryforwards, which expire in varying amounts between 2008 and 2012.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that at least $100,000 of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could change in the near term if estimates of
future taxable income during the carryforward period change.

            Fourth quarter adjustments in 1996, which decreased income by
approximately $1,975,000, were made to reflect changes in the valuation of
inventory, retirement and severance charges, and for costs associated with
litigation involving the Company.


CASH AND CASH EQUIVALENTS

            For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. At times throughout the year, the
Company's cash deposited in financial institutions may exceed FDIC insurance
limits.

<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

MARKETABLE SECURITIES

            The Company classifies its marketable debt securities as
"held-to-maturity" if it has the intent and ability to hold the securities to
maturity. All other marketable securities are classified as
"available-for-sale". Securities classified as held-to-maturity are carried at
amortized cost. Securities classified as available-for-sale are carried at their
estimated fair value. Realized gains and losses, determined using the average
cost method, are included in earnings; unrealized holding gains and losses on
available-for-sale securities are reported as a separate component of
stockholders' equity, net of any tax effect.

PROPERTY AND EQUIPMENT

            Property and equipment is recorded at the lower of cost or estimated
fair value. Depreciation is provided over estimated useful lives by the use of
straight-line and accelerated methods. The present values of capital lease
obligations are classified as long-term debt and the related assets are included
in machinery and equipment. Amortization of machinery and equipment under
capital leases is included in depreciation expense.

RESEARCH AND DEVELOPMENT COSTS

            Research and development costs are charged to operations when
incurred.

INCOME TAXES

            Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the bases of accounts
receivable, inventory, property and equipment, and certain accrued liabilities
for financial and income tax reporting. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes payable. Deferred tax
assets are subject to a valuation allowance based on the estimated realization
of those assets.

INVENTORIES

         Materials and work-in-process are stated at the lower of average cost
or market. Finished goods are stated at the lower of moving average cost or
market.

ADVERTISING

         The Company expenses the costs of advertising as incurred. Advertising
expense was $238,500 and $351,000 in 1997 and 1996, respectively.

RECLASSIFICATIONS

            The presentation of certain items in the financial statements for
1996 have been changed to conform to the classifications used in 1997. These
reclassifications had no effect on stockholders' equity or net loss as
previously reported.


<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

EARNINGS (LOSS) PER COMMON SHARE

         The following data show the amounts used in computing the weighted
average number of shares of dilutive potential common stock at December 31:

                                                       1997            1996
                                                       ----            ----

         Weighted average number of shares used
             in basic earnings per share            3,168,480        3,134,498
         Effect of dilutive securities:
             Stock options                              9,328
             Stock warrants                           908,750
                                                    ---------        ---------

                     Totals                         4,086,558        3,134,498
                                                    =========        =========

            No adjustments were made to income (loss) in either year for the
purpose of calculating earnings per share. Stock options and warrants were not
included in computing earnings per share in 1996 because their effects were
antidilutive.

            The adoption of Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", had no effect on the previously reported 1996 earnings per
share.

NEWLY ISSUED ACCOUNTING STANDARDS

            In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" was approved for issuance. The Company will
adopt this Statement in fiscal 1998. The effect of this Statement has not been
determined, however, the impact on the Company's financial position and results
of operations is not expected to be material.

2. MAJOR CUSTOMERS AND SUPPLIERS

            The Company extends credit in the normal course of business to its
customers who are generally companies in the computer industry. The Company
performs credit evaluations of its customers' financial condition and generally
requires no collateral.

            At December 31, 1997 and 1996, the Company has two customers who
accounted for approximately $117,000 and $144,000, respectively, of the
outstanding trade accounts receivable balance.

            During 1997 and 1996, the Company had total sales outside the United
States of approximately $2,559,000 and $2,907,000, respectively. Of these
amounts approximately $1,927,000 and $2,244,000, respectively, were sales to
customers in Europe, and $223,000 and $539,000, respectively, were sales to
customers in the Asia/Pacific region.

            In 1997 and 1996, the Company had a supplier from which it made
purchases of approximately $1,500,000 and $1,600,000, respectively. Although no
long-term supply contract exists, the Company believes there are alternative
suppliers of this raw material.

            At December 31, 1997 and 1996 the Company had purchase commitments
with four suppliers in the amount of $818,000 and $1,626,000, respectively (See
Note 13).


<PAGE>



                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


3. MARKETABLE SECURITIES

            The Company did not hold any marketable securities at December 31,
1997 and 1996.

            The Company had U.S. Treasury Securities that matured in 1996. The
amortized cost basis was $62,000 and there was no realized gain or loss.
Proceeds from sales of securities held as available-for-sale were $303,468 in
1996. During 1996 the Company realized gains of $231,582 from sales of
available-for-sale marketable securities.

4. INVENTORIES

            Inventories consisted of the following at December 31:

                                                      1997          1996
                                                      ----          ----

         Materials                                  $1,227,508    $2,137,687
         Work-in-process                               171,921       335,486
         Finished goods                                446,499       747,127
                                                    ----------    ----------
                                                     1,845,928     3,220,300
         Reserves for inventory write down and
             obsolescence                             (692,263)   (1,390,000)
                                                    ----------     ---------

                                                    $1,153,665    $1,830,300
                                                     =========     =========

5. EUROPEAN REAL ESTATE

            During fiscal 1994, the Company purchased real estate in the
Netherlands for use as an office and residence by its European salesperson who
is a related party. The residence was provided to the salesperson as part of his
compensation. The Company no longer employs a salesperson in Europe and the
property was sold in April 1997.

6. LINE OF CREDIT

            The Company has a discretionary line of credit with its bank of the
lesser of $500,000 or 75% of eligible accounts receivable (as defined), with
outstanding borrowings due April 10, 1998. The available line of credit is
reduced by an outstanding irrevocable letter of credit which totaled $200,000 at
December 31, 1997. The letter of credit may be drawn upon by a major supplier of
the Company. The letter of credit also expires April 10, 1998. At December 31,
1997, restricted cash serves as collateral for two irrevocable letters of
credit. There were no borrowings outstanding under this line of credit at
December 31, 1997. Advances under the note are secured by substantially all
corporate assets. Interest is charged at 1.5% over the bank's "index rate". The
interest rate at December 31, 1997 was 10.00%. The terms of the note agreement
with the bank require the Company to maintain certain financial ratios with
which the Company was in compliance with December 31, 1997.

            During 1996, the Company had a discretionary working capital line of
credit with its bank of the lesser of $1,500,000 or 80% of eligible accounts
receivable (as defined) plus $500,000 in cash collateral (restricted cash), with
outstanding borrowings due April 10, 1997. The available line of credit is
reduced by outstanding irrevocable letters of credit which totaled $1,201,909 at
December 31, 1996. There were no borrowings outstanding under this line of
credit at December 31, 1996. Interest was charged at 1% over the bank's "index
rate". The interest rate at December 31, 1996 was 9.25%. The terms of the note
agreement with the bank required the Company to maintain certain financial
ratios with which the Company was not in compliance with at December 31, 1996.


<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


F7.  LONG-TERM DEBT

            Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                              1997       1996
                                                                              ----       ----
<S>                                                                          <C>       <C>
Capital lease obligations, at implicit rates from 12% to 14%, payable in
installments to 1999                                                         $20,319   $26,395

Note payable to bank, interest at the bank's "index rate" plus 1% (9.5% at
December 31, 1997), secured by substantially all corporate assets, payable
in installments to 2002                                                       38,420
                                                                             -------   -------
          Totals                                                              58,739    26,395
          Less amounts due within one year                                    22,605    10,285
                                                                             -------   -------

          Net long-term debt                                                 $36,134   $16,110
                                                                             =======   =======
</TABLE>

            Scheduled maturities of long-term debt are as follows at December
31, 1997:

             1998                                          $22,605
             1999                                           11,795
             2000                                            8,114
             2001                                            8,937
             2002                                            7,288
                                                           -------

                       Total long-term debt                $58,739
                                                           =======


8. LEASE OBLIGATIONS

            The Company leases various items of equipment over terms of 3 to 5
years. The Company also leases office and warehouse space. Equipment leases
expire at varying dates over the next three years. The office and warehouse
lease expires in September 2002. The Company is obligated to pay costs of
property taxes and operating costs under the terms of the office and warehouse
lease.

            Property and equipment includes the following amounts for capital
leases at December 31:

                                                             1997       1996
                                                             ----       ----

            Machinery and equipment                        $40,826     $34,436
            Accumulated amortization                        17,672       4,384
                                                            ------     -------

                      Net equipment under capital leases   $23,154     $30,052
                                                            ======      ======

            At December 31, 1997, the Company had the following minimum
commitments for payments of rentals under leases which at inception had a
noncancellable term of more than one year:


<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


8. LEASE OBLIGATIONS - Continued

                                                       Operating       Capital
                                                        Leases          Leases
                                                        ------          ------

     1998                                              $ 76,402         $17,033
     1999                                                76,402           4,568
     2000                                                76,402
     2001                                                73,258
     2002                                                51,291
                                                        -------          ------

          Total lease commitments                      $353,755          21,601
                                                        =======

          Less amount representing interest                               1,282
                                                                          -----

          Present value of minimum lease payments
             (included in long-term debt)                               $20,319
                                                                        =======

            Rental expense for operating leases totaled $69,734 and $67,755 in
1997 and 1996, respectively.

9. STOCKHOLDERS' EQUITY

         During 1997, the Board of Directors authorized the redemption of up to
100,000 shares of the Company's common stock. During 1997, 30,000 shares with a
cost of $35,625 were redeemed.

         The Company has outstanding warrants to purchase common stock at prices
ranging form $0.69 to $4.20 per share. The warrants expire at various dates
through November 2000. Following is a summary of transactions:

                                                  Shares Under Warrants
                                                     1997         1996
                                                     ----         ----

            Outstanding, beginning of year          819,264      820,264
                Exercised during the year          (110,091)      (1,000)
                Granted during the year           1,361,130
                                                  ---------      -------

            Outstanding, end of year              2,070,303      819,264
                                                  =========      =======

            The Company has reserved 2,070,303 authorized shares for issuance as
warrants are exercised.

            The Board of Directors has not yet established rights and
preferences for the Company's preferred stock.


<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996

10. STOCK BASED COMPENSATION

            The Company has a qualified incentive stock option plan, whereby
options to purchase shares of the Company's common stock are granted at a price
not less than the fair market value of the stock at the date of grant. Each
option expires no later than ten years from the date of grant. If options are
granted to persons owning more than ten percent of the voting stock of the
Company, the Plan provides that the exercise price shall not be less than 110%
of the fair market value per share at the date of grant, and will expire no
later than five years from the date of grant. The Plan has authorized 300,000
options for the purchase of Company stock.

            The Company has another non-qualified incentive stock option plan
for outside directors and non-employees, with 500,000 authorized options to
purchase the Company's stock. The plan is substantially the same as the plan
discussed above. However, the exercise price may be lower than, greater than, or
equal to the stock price at the date of issuance.

            The fair value of each option grant is estimated on the date of
grant using the Black-Sholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively;
dividend yield of 0% for all years; expected volatility of 88% and 71%;
risk-free interest rates of 6.5 and 5.8 percent; and expected lives of four
years.

            A summary of the Company's stock option plans as of December 31,
1997 and 1996 and changes during the years ending on those dates is listed
below:

<TABLE>
<CAPTION>

                                                  1997                      1996
                                        -----------------------    ------------------------
                                                   Weighted-                   Weighted-
                                                    Average                     Average
                                        Shares   Exercise Price    Shares    Exercise Price
                                        ------   --------------    ------    --------------
<S>                                     <C>          <C>           <C>           <C>
Outstanding at beginning of year        405,000      $1.82         200,000       $2.51
Granted                                 200,000       1.00         255,000         .81
Expired                                       -                          -
Forfeited                               (94,000)      2.22         (50,000)       2.79
                                        -------                    -------
Outstanding at end of year              511,000                    405,000        1.82
                                        =======                    =======

Options exercisable at year end         422,250                    226,750
                                        =======                    =======
Weighted-average fair value of
    options granted during the year     $   .67                    $   .47
</TABLE>

<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


10. STOCK BASED COMPENSATION - Continued

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

<TABLE>
<CAPTION>

                             Weighted-Average
                 Number         Remaining        Options
   Price      Outstanding    Contractual Life    Exercisable                Vesting
   -----      -----------    ----------------    -----------                -------
<S>               <C>            <C>                 <C>         <C>
   $3.13          22,000         0.8 years           16,500      25% each year for four years.
    2.13          39,000         1.8 years           19,500      25% each year for four years.
     .81          85,000         3.0 years           21,250      25% each year for four years.
     .81         165,000         9.0 years          165,000      In whole or in part over ten years.
    1.00         100,000         3.4 years          100,000      In whole or in part over ten years
    1.00          40,000         9.4 years           40,000      In whole or in part over ten years.
    2.13          20,000         2.2 years           20,000      In whole or in part over three years.
    2.65          20,000         2.2 years           20,000      In whole or in part over three years.
     .69          20,000         2.2 years           20,000      In whole or in part over three years.
                --------                           --------
                 511,000                            422,250
                 =======                            =======
</TABLE>

            The Company has chosen to account for stock based compensation in
accordance with APB Opinion 25. If compensation cost would have been recognized
in accordance with Statement of Financial Accounting Standards No. 123,
compensation cost would have been $38,869 and $3,776 for the years ended
December 31, 1997 and 1996, respectively. The compensation cost would have
reduced net income in 1997 and increased net loss in 1996 by the same amounts.
Basic earnings per share would have decreased by $0.01 in 1997. There would be
no effect in fiscal 1996.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

            Estimated fair values of the Company's financial instruments are as
follows at December 31:

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

                               Carrying      Fair        Carrying       Fair
                                Amount       Value        Amount       Value
                                ------       -----        ------       -----

Cash and equivalents          $1,746,928  $1,746,928     $ 631,456   $ 631,456
Certificates of deposit          275,833     275,833       513,788     513,788
Long-term debt, exclusive
    of capital leases             38,420      38,420

            The carrying values of cash and equivalents and certificates of
deposit approximate fair values. The fair value of long-term debt is based on
estimates of current rates at which the Company could borrow funds with similar
remaining maturities.


<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


12. INCOME TAXES

            The income tax provision consists of the following components:

                                                           1997          1996
                                                           ----          ----

        Current                                          $      -       $     -
        Deferred                                         (100,000)       30,000
                                                          -------        ------

        Net provision for (recovery of) income taxes    ($100,000)      $30,000
                                                          =======        ======

            The provision for (recovery of) income taxes differs from that which
would result from applying Federal statutory rates to the earnings (loss) before
income taxes because a valuation allowance has been provided to reduce the
deferred tax asset to the amount that is estimated to be more likely than not
realized. This difference is reconciled as follows:

                                                      1997           1996
                                                      ----           ----

        Federal statutory income benefit rate        (34.0%)         (34.0%)
        State tax (benefit) rate, net                 (2.0)           (2.0)
        Permanent differences                          5.8
        Valuation allowance                           14.9            37.3
                                                      ----            ----

        Effective tax benefit rate                   (15.3%)           1.3%
                                                      ====           =====

            The total deferred tax assets and liabilities included in the net
deferred tax asset are as follows:

                                                           1997         1996
                                                           ----         ----
  Deferred tax assets (primarily inventory and,
      litigation reserves, net operating loss and tax
      credit carryforwards)                              $946,000   $1,061,000
  Deferred tax liabilities (property and equipment)        (4,000)     (11,000)
  Deferred tax asset valuation allowance                 (842,000)  (1,050,000)
                                                          -------    ---------

  Net deferred tax asset                                 $100,000   $       -
                                                          =======    =========


            The net decrease in valuation allowance was $208,000 in 1997. The
net increase in the valuation allowance was $816,000 in 1996.

            For income tax purposes, the Company had a federal net operating
loss carryforward at December 31, 1997 and 1996 of approximately $1,189,000 and
$819,000, respectively. At December 31, 1997 and 1996 the Company also had a
general business credit carryforward of approximately $78,000, available to be
carried to future periods. The net operating loss carryforward and general
business credit carryforward expire in 2008 through 2012 if not used.

<PAGE>


                                 VIDEOLABS, INC.

                          Notes to Financial Statements

                           December 31, 1997 and 1996


13. COMMITMENTS AND CONTINGENCIES

            At December 31, 1996 the Company accrued a loss on purchase
commitments and established a reserve for pending litigation. The Company has
purchase commitments related to raw materials for a product the Company will not
be able to bring to market. The Company was a defendant in a lawsuit by a former
consultant claiming damages for payment of royalties on products developed by
the claimant. A settlement in this lawsuit was reached in 1997, and the
settlement amount is within the amount accrued at December 31, 1996.

14. EMPLOYEE BENEFIT PLAN

            The Company sponsors a discretionary 401(k) profit sharing plan and
trust covering employees who are over 18 years of age and have completed 90 days
of service. The Company made no contributions to the Plan in 1997 and 1996.

<PAGE>


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

            The Company has not changed public accountants and has not had any
disagreements with such accountants on accounting and disclosure matters.

                                    PART III

            Certain information required by Part III is omitted from this report
in that the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

            The information required by this Item is incorporated by reference
to the Company's Proxy Statement.

ITEM 10.  EXECUTIVE COMPENSATION

            The information required by this item is incorporated by reference
to the Company's Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

            The information required by this item is incorporated by reference
to the Company's Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The information required by this item is incorporated by reference
to the Company's Proxy Statement.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report.

            1. Financial Statements: The following Financial Statements of the
Company and Report of Independent Auditors are incorporated as Item 7 of this
report.

     Balance Sheet - December 31, 1997 and 1996.

     Statement of Operations - Years Ended December 31, 1997 and 1996.

     Statement of Stockholders' Equity - Years Ended December 31, 1997 and 1996.

     Statement of Cash Flows - Years ended December 31, 1997 and 1996.

     Notes to Financial Statements.

     Report of Independent Auditors.

     Financial Data Schedule.

            2.    Financial Statement Schedules: The following financial
                  statement schedules of the Company for the fiscal year ended
                  December 31, 1997 are filed as part of this Report and should
                  be read in conjunction with the Financial Statements of the
                  Company.

                        None

<PAGE>


            3. Exhibits: The exhibits listed in the following Index to Exhibits
are filed as a part of, or incorporated by reference into this Report.

Exhibit         Form SB-2*
  No.           Exhibit No.          Description
  ---           -----------          -----------
(3) (i)              3.1      Certificate of Incorporation
(3) (ii)             3.2      By-laws
(4)                  Pg. 29   Instruments defining the rights of security
                               holders, including indentures.
(10)                          Material contracts.
(10) (i)             1.1      Underwriting Agreement
(10) (ii)            1.2      Selected Dealer Agreement
(10) (iii)           4.2      Warrant to Purchase Shares of Common Stock
(10) (iv)            4.3      Bridge Note
(10) (v)             4.4      Bridge Warrant
(10) (vi)            10.3     Settlement and License Agreement
(10) (vii)           10.4     Design Royalty Agreement
(10) (viii)          10.5     Waiver of Contract Rights by Messrs. Johnson,
                               Craven, Clapp and Collins
(10) (ix)            10.6     Johnson Employment Agreement
(10) (x)             10.8     Asset Sale Agreement with RSI (formerly Rocket
                               Science, Inc.)
(10) (xi)            10.14    Krekelberg Employment Agreement
(10) (xii)           10.13    Suick Bay Technologies Royalty Agreement
(10) (xiii)          1.1      Underwriting Agreement
(10) (xiv)           10.10    CLI Purchase Order
(10) (xv)            10.15    Underwriter lockup Agreements
(10) (xvi)           10.1     Office Warehouse Lease
(10) (xvii)          10.7     Letter of Credit Americana Bank
(10) (xviii)                  Johnson  Retirement Agreement - Filed with
                                                                 1996 10KSB
(10) (xix)                    Hansen Consulting Agreement - Filed with
                                                                 1996 10KSB
(10)   (xx)                   Broghammer  Consulting Agreement - Filed with
                                                                    1996 10KSB
(10) (xxi)                    Hansen Employment Agreement - filed herewith
(10) (xxii)                   Office Warehouse Lease - filed herewith



      Footnote No.
      ------------
 (11)        1.    Statement regarding computation of per share earnings
 (13)        2.    Annual report to security holders, Form 10-Q or quarterly
                     report to security holders
 (24)        3.    Contained in the Report of Independent Auditors
 (25)        3.    Power of Attorney - filed herewith

*  Incorporated by reference to the exhibit filed with the Registrants
   Registration Statement on Form SB-2 filed March 26, 1994, and amended on
   April 27, 1994, which became effective on May 10, 1994.

1.     Incorporated by reference to Company's Annual Report to Shareholders.
2.     Incorporated by reference to Company's Annual Report to Shareholders.
3.     Filed herewith, see following page

            Financial Data Schedules Per FAS No. 128 Regarding Earnings Per
Share Calculation

<TABLE>
<CAPTION>

  Exhibit No.  # of Columns in FDS      Periods Covered                     [Restated] Tag Used
  -----------   -----------------       ---------------                     -------------------
<S>                   <C>             <C>                                          <C>
  27.1                1               Fiscal year end 1997                           No

  27.2                2               Quarters 1 and 2 for 1996                      Yes

  27.3                1               Quarter 3 for 1996                             Yes

  27.4                1               Fiscal year end for 1996                       Yes

  27.5                3               Quarters 1, 2, and 3 for 1997                  Yes
</TABLE>


<PAGE>



(b) Reports on Form 8-K

            On June 12, 1997, the following information was reported on form
8-K:

            The Company had outstanding warrants to purchase an aggregate of
481,764 shares of Company common stock that were originally issued at exercise
prices of $1.50, $2.50, $2.65 and $2.80 per share. Such warrants contained
provisions for the adjustment of the purchase price and the number of shares
purchasable under the warrant in the event the Company subsequently issued
certain securities. As part of a settlement with a former employee, the Company
issued options to purchase common stock at an exercise price of $.6875 per
share. On April 28, 1997, the Company notified the holders of the adjustable
warrants that as a result of the issuance of the options, the purchase price for
shares of Company common stock under their warrants had adjusted down to $.6875
per share, and the number of shares of Company common stock purchasable under
their warrants proportionately increased, pursuant to the terms of their
respective warrants. Other outstanding warrants, issued at exercise prices of
$3.50 and $4.20 per share did not have the provision for adjustment. As a result
of the adjustments, as of April 28, 1997 the aggregate number of shares of
Company common stock purchasable under the adjusted warrants increased from
481,764 to 1,842,894, and the aggregate number of shares of Company common stock
purchasable under all warrants outstanding increased from 819,264 to 2,180,394.

            The Company's interim, President and CEO, James W. Hansen, has
agreed to accept on a permanent basis the positions of President, CEO, Chairman
and Treasurer as of June 1, 1997.



SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                                VIDEOLABS, INC.




                                                By:  /s/  James W. Hansen
                                                     James w. Hansen
                                                     Chairman and CEO
Dated: March 31, 1998

<PAGE>


POWER OF ATTORNEY

            KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. Hansen and Jill R. Larson,
jointly and severally, attorneys-in-fact, each with the power of substitution,
for any and all capacities, to sign any amendments to this Report on Form
10-KSB, and to file the same, with exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.

            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
Registrant and in the capacities and on the dates indicated.

  Signature                          Title                         Date
  ---------                          -----                         ----

/s/James W. Hansen
James W. Hansen         President, Treasurer                      March 31, 1998
                        Chief Executive Officer, Director
                        and Chairman of the Board of Directors

/s/ Ward C. Johnson
Ward C. Johnson         Director                                  March 31, 1998


/s/ Richard F. Craven
Richard F. Craven       Director                                  March 31, 1998


/s/ John A. Collins
John A. Collins         Director                                  March 31, 1998