1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO 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

FOR THE TRANSITION PERIOD FROM _________ TO _________

-----------

COMMISSION FILE NUMBER: 0-23342

ELTRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

CALIFORNIA 95-4302537
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

41 MORELAND ROAD, SIMI VALLEY, CA 93065-1692
(Address of principal executive office) (Zip Code)

(805) 579-1800
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE

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

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

The aggregate market value of the common stock held by non-affiliates of the
Registrant as of March 18, 1998 was $159,939,000.

The number of shares outstanding of the Registrant's common stock as of
March 18, 1998 was 7,468,670.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be filed no later
than 120 days after December 31, 1997 are incorporated by reference into Part
III.

================================================================================

ELTRON INTERNATIONAL, INC.

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997

INDEX

Page
----

PART I
Item 1. Business ........................................................... 3
Item 2. Properties ......................................................... 11
Item 3. Legal Proceedings .................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ................ 12

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 12
Item 6. Selected Consolidated Financial Data ............................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 14
Item 8. Financial Statements and Supplemental Data.......................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures .............................................. 21

PART III

Item 10. Directors and Executive Officers of the Registrant ................. 21
Item 11. Executive Compensation ............................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 21
Item 13. Certain Relationships and Related Transactions ..................... 21

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 21

SIGNATURES

Signatures .................................................................. 22

CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements .................................. 23

EXHIBITS

Index to Exhibits ........................................................... 45

PART I

Except as otherwise noted, all share and per share data in this Form 10-K
have been adjusted to reflect a 2-for-1 forward stock split effected on May 1,
1995. Unless the context otherwise requires, the term "Company" or "Eltron"
refers to Eltron International, Inc. and its subsidiaries. Unless the context
otherwise requires, the terms "Russet," "Donner," "Privilege" and "RJS" refer to
the Company's subsidiaries Russet Limited, Donner Media, Inc., Privilege, S.A.
and RJS, Inc., respectively.

This report may contain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Factors associated with the forward looking statements
which could cause actual results to differ materially from those stated include,
among others, dependence on a significant customer, ability to sustain growth
rate, management of rapidly changing business and acquisitions, management of
inventory, competition, risks associated with international operations,
development of markets and acceptance of products, growth in automatic
identification data collection markets, and reliance on certain suppliers. For a
fuller discussion of these risk factors, see pages 18 to 21.

ITEM 1. BUSINESS

COMPANY OVERVIEW

Eltron International, Inc. designs, manufactures and distributes a full
range of direct thermal and thermal transfer bar code label printers, integrated
verified printing systems, receipt printers, plastic card printers, secure
identification printing systems, related accessories, and support software.
Eltron also manufactures and distributes a full range of pressure sensitive
labels, tags, plastic cards, and printer ribbons for use with Eltron and other
printers. The Company believes that its success to date has resulted from
Eltron's ability to offer high quality printers and related products with
features comparable to or exceeding those of available competing products at a
lower cost and, additionally, because the Company offers the broadest range of
thermal label and plastic card printers currently on the market.

Eltron has developed an expertise in the design and manufacture of low cost
thermal printers. The Company believes that the design simplicity, reliability,
low cost and low maintenance requirements of thermal print technology make it
particularly well suited for applications which require the on-demand printing
of labels, tags, tickets, receipts, variable length forms and plastic cards, as
well as for distributed printing applications where one high volume centralized
printer is replaced with multiple lower volume printers placed where the labels,
receipts or cards are requested.

From its inception in 1991, Eltron has focused on bringing to market
printers that satisfy unique customer demand which is not well served by
cut-sheet laser printers or other mass market printer products. The Company
initially focused its efforts on developing high quality, low cost desktop bar
code label and tag printers and has since expanded its range of products to
include high speed industrial bar code printers; integrated verified printing
systems; portable label, tag and receipt printers; airline boarding pass
printers; plastic card printers; secure identification printing systems; related
accessories; pressure sensitive labels; tags; thermal printer ribbons; and
plastic cards. Eltron is currently working to further expand its broad line of
quality printers and accessories to meet the needs of additional markets, and to
maintain and enhance its position as a price and quality leader.

Eltron printers can be used for a wide variety of applications including
identification and tracking of products, cartons, packages, baggage, medical
specimens, patients, serial numbers and assets; warehouse management and
logistics; airline ticketing; point of sale receipt printing; clothing tags;
financial transaction receipt printing; national and regional ID cards; driver's
licenses; insurance ID cards; medical records; employee ID cards and badges;
time and attendance; school ID; security access control; corrections; recreation
passes; and loyalty cards.

The Company's products are sold through multiple distribution channels that
include value added resellers, systems integrators, original equipment
manufacturers, and national and regional distributors located in more than 80
countries. Industries for which the Company believes its printers are
particularly well-suited include shipping and package delivery, retail
distribution and point of sale, healthcare, manufacturing, financial services,
security and governmental identification. The Company currently focuses its
sales efforts in these markets, although it continues to explore the potential
for new markets in which it can apply its expertise in the design and
manufacture of thermal printers.

3
4

INDUSTRY OVERVIEW

Eltron's products are designed to meet a wide range of customer needs, with
the majority of its printers and related products sold into the bar code label
printer and custom plastic card segments of the automatic identification data
collection industry.

Automatic identification data collection ("AIDC") refers to the automatic
recognition and processing of data without the need for manual input. Currently,
AIDC is accomplished through the computerized reading and writing of information
encrypted in bar codes, magnetic stripes, biometrics and smart chips, with bar
coding the predominant technology. A bar code consists of a series of bars and
spaces of specified widths, the grouping of which represents specific numeric or
alphanumeric characters. A unique bar code can be affixed to permit rapid and
accurate identification of any number of variables relating to any item to be
tracked or managed. Using AIDC systems, workers are able, with limited training,
to collect data by scanning bar codes, magnetic stripes, or smart chips and
transfer this information into computer databases in real time. AIDC is highly
reliable compared to conventional manual methods and eliminates human error that
occurs during manual input of information and results in lower labor and process
costs.

Bar code label printers use a number of printing technologies commonly used
in the conventional computer printer industry. These technologies are direct
thermal, thermal transfer, inkjet, impact and laser. Thermal transfer and
thermal dye sublimation technologies are used for plastic card printers.
Initially, AIDC technology used bar code labels to track or identify objects.
Now, AIDC technology is increasingly being used to track or identify people
using personalized plastic cards.

Early stage AIDC technology was adopted by the transportation and retail
industries, and it is now regularly used in industries ranging from
manufacturing to medical research. As the cost of AIDC technology has decreased
and customer acceptance increased, applications have diversified and created a
number of new markets. Moreover, as information technology has increasingly come
into use, retailers, manufacturers, and distributors in a large number of
industries have issued compliance standards requiring that suppliers provide bar
coded information on their products.

While a number of AIDC applications allow for preprinted bar coded
information to be included in package design, a significant number of
applications require the on-demand encoding of variable data in unique bar code
labels, thus making preprinted bar codes impractical. Generally, bar coded
labels or tickets may be either preprinted off-site by a third party or on-site
by the user where the bar code label will be used. On-demand printing is
required when variable data that is not known until shortly before a label must
be printed and used. Situations requiring on-demand printing include labels that
have addresses, dates of manufacture, unique serial or purchase order
numbers, product ingredients or nutritional information, accurate weights,
expiration dates, and other similar information.

Thermal dye sublimation, a relatively new thermal print process has
recently become commercially viable for applications that call for color
printing on PVC and polyester cards. This capability has given rise to an
industry focused on the on-site creation of full color, photographic quality
plastic cards. These cards can typically be created in less than 30 seconds for
under one dollar, while the user waits. Traditional photographic processes are
both more expensive and take more time. The Company believes that personalized
card applications such as driver's licenses, loyalty cards, school and work
identification cards, security access cards, and financial transaction cards are
well suited to benefit from this technology. Bar codes, smart chip and magnetic
stripe encoding can be used to record such personal data as health records,
financial transactions, security access codes, and vital statistics. Eltron's
sales of card printers increased more than 200% to $9.6 million in 1996, and 50%
to $14.4 million in 1997.

BUSINESS STRATEGY

As a result of its combination of low price, high quality and service, the
Company believes that it is a leading supplier of thermal printers and related
accessories. Utilizing management's experience in the AIDC and computer
peripheral industries, the Company is expanding its line of high quality
printers and related accessories to meet the needs of additional markets and to
position itself as a price and quality leader. The Company's objectives are to
enhance its position as a leading supplier in the AIDC industry; to expand its
product line of on-demand printers for use in additional applications, in label
printing, plastic card printing, and secure identification printing; and to
manufacture and market related supplies. The Company seeks to:

4
5

o Capitalize on Market Understanding To Establish Value Leadership in
Profitable Niches. The Company believes that the success of its current
products is the result of its understanding of customer needs and
competitive market forces. Eltron continuously assesses its position
relative to market needs and intends to sustain its competitiveness
through intelligent product positioning and market understanding. The
Company also intends to take Eltron's products to new markets and
industries which provide opportunities for on-demand and distributed
printing, allowing it to take advantage of its engineering and
technology competencies. Eltron concentrates on providing high quality
at the lowest price, rather than competing solely on product features or
price alone.

o Maintain Aggressive Product Design Cycles. Eltron has demonstrated its
commitment to aggressive product design cycles by bringing to market
more than 40 products since January 1991. The Company believes that a
key factor in developing and maintaining a competitive advantage is its
ability to rapidly transform a product concept into a manufactured
product. The Company believes that reduced design cycles allow it to
better react to ever changing market needs.

o Pursue Simplified Product Design. Eltron's products are designed to be
easily assembled and contain few parts and require little or no
manufacturing adjustment. This design philosophy has guided the Company
from its inception. For example, several models of Eltron desktop
printers can be assembled in approximately 10 minutes. As a result, the
Company is able to produce reliable, high-quality printers at low cost.
This design philosophy will continue to be a priority for new product
development.

o Ensure Quality and Product Reliability. The Company believes that it
must provide reliable, high-quality products and excellent service to
develop and sustain a competitive advantage. Because of the cost savings
it has achieved through its product designs, Eltron has been able to
incorporate high-quality components into its products at comparatively
low cost. Eltron's commitment to quality and reliability is also
evidenced by the Company's ISO 9002 certification in November 1995. The
majority of Eltron's products are warranted for a full year. The Company
believes that it has not experienced significant warranty claims to date
because of its product design strategy, the relatively small number of
moving parts in its printers and the high-quality components it uses.

The Company believes that the strategy summarized above will enable it to
compete in its existing and new markets and plans to implement the strategy in
the following areas:

o Expand Presence and Products in Label and Receipt Printer Markets. The
Company's strategy is to increase its penetration in its current markets
by continuing to reduce the price of its products through design and
manufacturing efficiencies, thereby increasing the affordability of
automatic identification data collection equipment for new customers who
may not have used it previously due to cost. Additionally, the Company
intends to continue to identify new markets and design products and
deliver them to these markets before significant competition has
developed. The Company also believes that its wide range of product
offerings provides an advantage in emerging markets in Latin America and
Asia where bar code labeling has been more recently introduced.

o Expand Presence and Products in Plastic Card Markets. The Company has
applied the same design philosophy, manufacturing techniques and
marketing strategy to it plastic card printers as it did for its bar
code label and receipt printers. The Company believes that providing
highly reliable, user friendly plastic card printers at a low price
point may increase demand. Additionally, the Company believes that it
can increase penetration by identifying new markets and designing
products and delivering them to these markets before significant
competition has developed.

o Expand Manufacturing and Worldwide Distribution of Supplies. The Company
will increasingly seek the benefit of the continuing revenue streams
associated with the ongoing use of consumable printer supplies. The
potential revenue from supplies sold over the life of a printer can
greatly exceed the initial revenue from the printer itself. The Company
believes it has the opportunity to expand its sales of labels, cards,
printer ribbons and other supplies for use with its own growing base of
installed printers, as well as for use with printers manufactured by
others. The Company distributes its supplies through multiple sales
channels which include value added resellers, systems integrators,
original equipment manufacturers, regional and local distributors, and
the

5
6

Company's own sales force. The Company believes it can capitalize on
strong relationships in its channels to offer more products at lower
incremental selling and administrative costs.

o Identify and Enter New Markets. The Company believes that there is a
growing number of printing applications being developed in various
industries which require on-demand or distributed printing. The Company
believes that, by virtue of its ability to manufacture relatively
compact printers at low cost, it is well positioned to benefit from this
trend. The Company also believes that it can build on its design
competencies to address these new markets for on-demand or distributed
printing.

o Expand International Sales. From its inception Eltron has emphasized a
global sales strategy. In the years ended December 31, 1994, 1995, 1996
and 1997, the Company's sales outside of the United States totaled
approximately $8 million, $12 million, $30 million and $37 million,
respectively. The Company distributes its products in more than 80
countries. The Company's objective is to be a worldwide supplier of a
wide range of competitively priced on-demand printers and supplies.
Eltron is the only company in the industry that offers a broad line of
both label and card printers, and the Company believes that this is an
advantage in the markets it serves, and especially in emerging markets
in Latin America and Asia.

THE COMPANY'S KEY MARKETS

The Company's key markets include the package delivery, retail, healthcare,
manufacturing, financial services, school/university and governmental
identification, and security industries worldwide. Eltron is the only company
that offers bar code label and receipt printers and plastic card printers.
Because of this unique range of products, Eltron has the opportunity to increase
sales of its label printers to customers initially buying card printers and also
increase sales of its card printers to customers who initially bought label
printers.

Package Delivery. Package delivery companies are increasingly using
automatic identification data collection technology to track packages from
pickup to delivery. Bar code labels are printed at the shipping location and
encoded with tracking information. The label is scanned by the package pickup
driver and the data is stored in a portable data collection terminal. The data
is either transmitted or later downloaded to the main computer system. The
package is then delivered to the local distribution center for sorting by
destination. The information encoded on the package label facilitates the
continued tracking of the package. This encoded information is used again to
sort and track the package when it arrives at its destination. Portable penpad
computer terminals are used to record the recipient's name and time of delivery,
and this information is then available to the sender for delivery verification.
Examples of companies that have implemented this technology in their operations
include United Parcel Service, Federal Express, Roadway Express and the U.S.
Postal Service, some of which provide their customers with shipping systems
consisting of computers, weighing scales and bar code label printers.

Retail. The retail industry was one of the first to utilize automatic
identification data collection technology. An individual stock-keeping unit
("SKU") is encoded with product identification information. This information is
printed on the product container or onto a label or tag. The encoded product
information is then scanned at the check-out terminal, expediting the check-out
process and reducing the errors incurred in entering the information manually.
An added benefit is that data contained on the SKU is transmitted to the main
computer system for automatic inventory analysis. Desktop and portable label
printers can be used to create substitute labels or tags with incomplete or
missing SKU information, and for creating shelf tags.

Personalized plastic card printing is increasingly being adopted for retail
applications for customer loyalty cards, as well as for employee badges and
identification, time and attendance cards. Loyalty cards are being used
worldwide in a variety of settings from large discount centers to recreation
activities.

Healthcare. Initially healthcare applications utilized bar code labels to
identify and track products, dosage, specimens, and information. Now plastic
card printers are being used to identify and serve patients and healthcare
providers. The use of both of these technologies in the healthcare industry is
growing rapidly because they allow hospitals and healthcare systems to
streamline accounting functions, reduce billing delays and errors and improve
bottom line results; as well as to accurately track patient information and
reduce the possibility of costly and potentially fatal errors. Examples of
healthcare applications include patient admission, laboratory specimen
identification and tracking, pharmacy labels and dispensing, patient
identification, patient records, and insurance eligibility coverage.

6
7

The Company believes that, because of the large number of applications per
patient and the significant liability associated with errors in certain
healthcare applications, an incentive exists for the increased use of automatic
identification data collection technology and personalized plastic cards which
include vital statistics, medical history and coverage eligibility details. The
Company believes that its products provide a means of reducing keystroke,
handwriting or other human error in the healthcare sector.

Manufacturing. The increased efficiencies associated with bar coded
information are especially apparent in the industrial sector. Information
encoded on components can be tracked for a variety of purposes, including
assembly of components, tracking of product, work in progress, inventory control
and warranty information. The Company believes that the industrial market has
not been fully penetrated and many small and mid-sized firms have not yet
employed automatic identification data collection technology.

Financial Services. The Company believes that new technologies exist which
can potentially increase the utility of plastic cards. These technologies
include memory chip or "smart cards," high density magnetic strip encoding and
high density bar codes; all of which enable plastic cards to provide more than
an account number. This increased storage capacity is creating new applications
for plastic cards such as electronic purse or debit cards. The Company believes
that this increased transaction capability will create an increased need for
security. Eltron's plastic card printers provide the ability to print bar codes,
color photographs and graphics; encode magnetic stripes; insert smart chips, all
in the same process at a relatively low cost.

Schools/University and Governmental Identification. Plastic cards are being
used by an increasing number of schools, universities, and governmental agencies
and offices for a variety of applications combined onto one personalized card.
At a university, for example, one card can be used for identification and access
to classes, dormitory, library, laboratories and extracurricular events. When a
smart chip option is included the user also can transact cafeteria charges and
bookstore purchases.

Security and Access Control. A growing number of firms are implementing
access control systems that feature encoded identification badges. These badges
may be used to unlock a door in a card access control system or as a form of
identification with corporate name, logo, and individual name and photograph.
The plastic card printer and software application are the two main components
that allow for complete personalization of cards on demand. Access control is
often required in educational environments, primarily universities, for access
to dormitories, cafeterias, libraries and other facilities. Healthcare
institutions control access to certain areas where, for example, prescription
drugs are stored.

PRODUCTS

Since its inception, the Company has sought to develop and introduce a full
line of affordable printers and related accessories. At December 31, 1997, the
Company's main printer product offerings were as follows:

Desktop Printers

o The Companion Plus. Compact 2" wide direct thermal receipt printer for
receipt printing in retail stores, financial transaction receipts,
mailing, small parcel shipping, and specimen labeling.

o Orion. Announced in October 1997. The Company's third generation direct
thermal 4" wide label printer. The unique openACCESS(TM) design enables
easy label loading and minimizes label jams.

o Eclipse. New thermal transfer and direct thermal low cost 4" wide label
printers in a rugged metal enclosure. Industrial class product at
desktop pricing levels.

o LP/TLP 2622. On-demand desktop direct thermal and thermal transfer 2"
wide label printers for a wide variety of low duty cycle business
applications.

o LP/TLP 2642. On-demand desktop direct thermal and thermal transfer 4"
wide label printers for a wide variety of low duty cycle business
applications.

7
8

o LP/TLP 3642. On-demand desktop direct thermal and thermal transfer 4"
wide label printers with 300 dpi print resolution for a wide variety of
high image quality business applications.

Industrial Printers

o Strata. These rugged direct thermal and thermal transfer 8.5" wide label
printers are used for wide web label printing applications such as
chemical drum and pallet labeling.

o LP/TLP 2046. Industrial class direct thermal and thermal transfer 4"
wide label printers for heavy duty cycle applications.

o The QualaBar Series. Family of industrial direct thermal and thermal
transfer label printers with print widths from 4" to 8.4", speeds from 2
inches per second to 10 inches per second, 203 and 300 dot per inch
configurations, integrated verification models, and a variety of memory
and label stock handling options.

o The ThermaBar Series. Rugged direct thermal and thermal transfer
industrial 6" and 8.5" wide label printers with integrated verification
systems.

Portable Label Printers

o Transport. Direct thermal portable 4" wide label printer. Durable, light
weight, with optional IR interface. Designed for remote and mobile label
printing applications.

Plastic Card Printers

o The P300. Monochrome (1000 cards/hour) and full color (100 cards/hour)
low cost desktop plastic card printers for on-demand access control,
identification, and loyalty card printing applications. Options include
magnetic strip encoding and smart card encoding support.

o The P400. Full color (80 cards/hour with dual sided printing) desktop
plastic card printers for on-demand access control, identification, and
loyalty card applications. Options include magnetic stripe encoding and
smart card encoding support.

o The P500. Full color (100 cards/hour with overlamination) plastic card
printers for durable access control, identification, and loyalty card
applications. Options include magnetic stripe encoding and smart card
encoding support.

o The P600. Full color (180 cards/hour) high performance plastic card
printers for access control, identification, and loyalty card
applications. Options include magnetic stripe encoding and smart card
encoding support.

Secure Identification Printing Systems.

The Max3000 is a single process secure ID card printing system for
maximum security, durability and tamper resistant card requirements such
as driver's licenses. Integrates printing, lamination, rotary
die-cutting and optional magnetic encoding of 3M Secure Card media.

RESEARCH AND PRODUCT DEVELOPMENT

The Company devotes significant resources to new product development and
has established an aggressive product development schedule. Since its inception,
Eltron has sought to shorten the time required to take a product concept and
turn it into a manufactured product. Eltron refers to this period as the product
design cycle. By focusing on reducing the product design cycle, Eltron has been
able to introduce more than 40 products since its inception in 1991. At December
31, 1997, the Company employed 64 individuals in new product design, engineering
and development. Eltron provides its engineering department with computer-aided
design tools and processes to improve design efficiency and allow the department
to compress product development cycles. Eltron engineers design all firmware,
hardware, software, mechanisms, mechanical parts and enclosures used in its
printers and other products.

8
9

SALES AND MARKETING

Because the Company's products are frequently combined with products from
other manufacturers to form an integrated system, the Company sells its products
through a worldwide network of authorized distributors, value added resellers,
systems integrators, and original equipment manufacturers. These sales channels
provide the software, configuration, installation, integration, and support
services required by end users within various market segments.

In the United States, the Company sells primarily through over 350 national
and regional distributors, value added resellers and systems integrators. Value
added resellers and systems integrators are selected to specialize in specific
industries and sell in relatively small geographic areas. The Company does not
grant specific territories to its domestic resellers. The Company works to
ensure the expertise of its resellers and has made an effort to ensure that they
are knowledgeable regarding the Company's products. Sales to original equipment
manufacturers are managed by the Eltron sales force.

At December 31, 1997, the Company employed 65 individuals in sales,
marketing and customer service in the United States. United States field sales
personnel are located in Connecticut, Florida, Georgia, Illinois, Minnesota,
Montana and New Jersey. Eltron's internal sales force is responsible for
expanding and improving the sales volume generated by its sales channels. The
sales force is also responsible for communicating the Company's capabilities to
existing and potential customers, coordinating orders, and solving application
and implementation challenges for resellers and end users. The inside sales
group coordinates and processes orders and seeks to ensure customer satisfaction
through the timely communication of product information.

Outside the United States, the Company sells through more than 150
resellers located in 80 countries who purchase, warehouse and sell printers,
accessories, supplies and other integrated system components. Eltron's
international distributors cover specific countries throughout the world. These
distributors have been qualified by the Company and are encouraged to attend
annual training seminars at the Company's headquarters. The Company enters into
written distribution agreements with most of its distributors on a non-exclusive
basis.

The Company currently employs 34 individuals outside of the United States
in sales and marketing functions. These individuals work from regional offices
in Wokingham, England; Varades, France; Boulogne Billancourt, France; Hong Kong,
China; and Singapore.

The Company extends credit based on an ongoing evaluation of each
customer's financial condition and generally does not require collateral. The
Company maintains reserves for potential credit losses which to date have been
within management's expectations. The Company extends credit to its domestic
customers for a term of 30 days and, in accordance with local business
practices, may extend credit to its international customers for a term of up to
60 to 90 days.

For the years ended December 31, 1995, 1996 and 1997, the Company's sales
to UPS accounted for approximately 38%, 31% and 24%, respectively. If UPS
reduces its level of its historical purchases, such reduction would have a
material adverse affect on the Company's financial position, results of
operations and cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Dependence On Significant
Customer."

The Company's marketing operations include product management,
marketing services and technical support.

The product management group initiates the development of new products and
product enhancements to meet customer needs, and manages product introductions
and positioning. The product management group also focuses on
strategic planning and market definition and analyzes the Company's competitive
strengths and weaknesses. This group identifies and evaluates market
opportunities for current, planned and potential products, and gathers and
analyzes competitive and market intelligence.

The marketing services group is responsible for advertising and public
relations activity. This group creates advertising, brochures and product
documentation, maintains the Eltron web site, manages trade show exhibits, and
places articles highlighting applications of Eltron's products in trade and
industry publications.

The technical support group provides, among other things, a hotline
staffed by technical personnel.

BACKLOG

The Company generally ships customer orders within 14 days of receipt of an
order,

9
10
except in cases where a customer requests that orders be sent at a particular
time to meet the customer's needs. Aside from long term orders received from UPS
which totaled approximately $9 million at December 31, 1997, the amount of the
non-UPS backlog is generally at an insignificant level. For information
concerning orders from UPS, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Dependence on Significant
Customer."

COMPETITION

Many companies are engaged in the design, manufacture and marketing of
automatic identification data collection equipment and plastic card printing.
The Company considers its direct competition in label printer markets to be the
providers of direct thermal and thermal transfer printing systems and supplies
designed for the on-demand label printing environment. To a lesser extent the
Company also competes with companies engaged in the design, manufacture and
marketing of standard computer and label printers which employ alternative
printing technologies. In card printer markets the Company considers its direct
competition to be the providers of thermal plastic card printing systems and
supplies designed for the on-demand printing environment.

There are a number of factors involved in the manufacture, marketing and
sale of on-demand thermal label and plastic card printers, such as price, ease
of use, product quality, product reliability, market position, sales channels,
product innovation, time to market, service and technical support. The Company
believes that it presently competes favorably with respect to these factors.

The Company competes against several companies across its product line, as
no one competitor offers the breadth of products that the Company offers. For
low cost desktop label printer products, Eltron's principal competitors are
Cognitive Solutions, a subsidiary of Axiohm Transaction Solutions, Inc.; Tokyo
Electric Company; Seiko; and Microcom. Datamax Corporation and Zebra
Technologies, Inc. have also recently announced products to compete in the low
cost desktop label printer markets. In the higher performance printer markets,
Eltron's principal competitors are Datamax Corporation; Intermec Corporation, a
subsidiary of Unova, Inc.; Monarch Marking Systems, a subsidiary of Paxar, Inc.;
Sato; Tokyo Electric Company; and Zebra Technologies. Each of these companies
manufactures a series of printers that competes with one or more of the
Company's products in the higher performance printer category. Several of these
companies, and others against which the Company competes, have substantially
greater financial, technical, market position and other resources than the
Company.

The Company's principal competitors in the plastic card market include
Datacard, Inc., a privately-held manufacturer of card personalization systems
and transaction terminals, and Fargo, Inc., a privately-held manufacturer of wax
thermal transfer and dye sublimation color page printers and ID card printers.

Various other competitive methods of bar code printing exist and the
Company continually assesses these technologies to determine if they are
suitable for low-cost bar code printing. Currently, the Company believes that
direct thermal and thermal transfer print technology provide the best low-cost,
high quality printing solution for its target markets. If other technologies
were to evolve or become available to the Company, it is possible that those
technologies would be incorporated into its products if management believed they
were suitable for low-cost bar code printing. Alternatively, if such
technologies were to evolve or become available to the Company's competitors,
the Company's products may become obsolete, which would have a material adverse
affect on the Company's financial position, results of operations and cash
flows.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards portions of the hardware designs and operating software
incorporated into its products as proprietary and attempts to protect them with
a combination of patents, trademarks and trade secret laws, employee and
third-party nondisclosure agreements and similar means. The Company has 2
patents and 3 pending patents pertaining to its products. Despite the Company's
efforts to protect its intellectual property rights, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or otherwise obtain and use, to the Company's detriment,
technology and information that the Company regards as proprietary. Moreover,
the laws of certain countries do not afford the same protection to the Company's
proprietary rights as do United States laws. There can be no assurance that
legal protections relied upon by the Company to protect its proprietary position
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.

10
11

The Company currently holds United States trademarks on the Company's
"Eii," "Eltron," "Eltron BarCode Professional," "Eltron Companion,"
"TigerWriter," "Privilege" and "Russet" logos and the name "Eltron". The Company
actively protects these trademarks, which it believes have significant goodwill
value. Eltron relies on a combination of trade secrets, copyright laws and
contractual rights to establish and protect its proprietary rights in its
products.

The Company from time to time receives notices from third parties claiming
infringement by the Company's products of third party patent and other
intellectual property rights. Regardless of its merit, responding to future
claims or lawsuits could be time-consuming and, to avoid litigation, require the
Company to enter into royalty and licensing agreements which may not be on terms
acceptable to the Company. If a successful claim is made against the Company,
the Company may have to pay a settlement or judgment and if the Company fails to
develop or license a substitute technology, the Company's business, financial
position, results of operations and cash flows could be adversely affected.

EMPLOYEES

The Company believes that the continued dedication of the Company's
employees is important to its long-term growth and success, and since its
inception has sought to obtain the trust and respect of its employees by
providing open communications, a clean and safe workplace and competitive
benefits.

As of December 31, 1997, the Company employed approximately 486 persons, 10
were part-time. Of these employees, 99 were employed in sales and marketing
functions, 325 were employed in engineering and manufacturing functions, while
the remaining 62 employees performed general and administrative functions. None
of the Company's employees is covered by collective bargaining agreements. The
Company considers its relationship with its employees to be excellent.

ITEM 2. PROPERTIES

The Company's corporate headquarters are located in Simi Valley, California.
The Company's facilities are listed as follows:

Square Footage
---------------------------------------------------------------------
Manufacturing,
Production & Administrative,
Location Warehouse Research & Sales Total Lease Expires
- -------- ---------------------------------------------------------------------

Simi Valley, California USA 37,500 30,000 67,500 January 1999
Simi Valley, California USA 35,000 -- 35,000 July 1998
Greenville, Wisconsin USA 27,000 3,000 30,000 March 2007
Wokingham, Berkshire, UK 16,000 11,000 27,000 October 2010
Varades, France 13,535 6,465 20,000 August 2000
Boulogne Billancourt, France -- 3,120 3,120 Monthly renewal
Floersheim, Germany* -- 1,500 1,500 Monthly renewal
Singapore -- 1,800 1,800 Monthly renewal
Hong Kong and Mainland China** -- 6,700 6,700 December 1999
------ ------- -------
Total 129,035 63,585 192,620

*Operations handled out of European headquarters effective first quarter
of 1998.

**Eltron-Chinetek Joint Venture headquarters in Hong Kong and 5 additional sales
offices in China.

See Footnote 11 to the Company's Consolidated Financial Statements for further
discussion of lease commitments.

See Footnote 15 to the Company's Consolidated Financial Statements for a
discussion of the purchase of new facilities in Camarillo, California.

ITEM 3. LEGAL PROCEEDINGS

None.

11
12

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

None.

PART II

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

PRICE RANGE OF COMMON STOCK

The Common Stock began trading on The Nasdaq National Market on February 9,
1994 under the symbol "ELTN." The following table sets forth the high and low
last sale prices of the Common Stock on The Nasdaq National Market for the
periods indicated:

HIGH LOW
---- ---

1996
First Quarter................................................... 37 3/4 29 1/4
Second Quarter.................................................. 33 3/4 23 3/4
Third Quarter................................................... 33 3/8 21 3/4
Fourth Quarter.................................................. 38 1/2 18 1/4

1997
First Quarter................................................... 26 19 1/4
Second Quarter.................................................. 31 18 1/2
Third Quarter................................................... 36 1/8 26 1/4
Fourth Quarter.................................................. 35 25 3/4

The last sale price of the Common Stock on March 18, 1998 on The Nasdaq
National Market was $23.25 per share. The Company had 62 shareholders of record
and approximately 3,000 beneficial shareholders as of March 18, 1998.

The Company has never paid cash dividends on its Common Stock and does
not currently anticipate that it will do so in the foreseeable future. The
Company plans to retain earnings to finance the Company's operations.

12
13

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain selected consolidated financial
information, which should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related notes thereto included elsewhere
herein. The selected consolidated financial data for each of the five years in
the period ended December 31, 1997 have been derived from the Company's audited
consolidated financial statements.

Year Ended December 31,
---------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ -------------

CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales .......................... $17,989,005 $29,276,490 $ 54,971,064 $ 88,509,582 $ 105,028,976
Cost of sales .................. 10,961,012 16,253,100 30,123,477 50,171,082 59,521,222
----------- ----------- ------------ ------------ -------------
Gross profit ................... 7,027,993 13,023,390 24,847,587 38,338,500 45,507,754
Selling, general and
administrative expense ........ 3,983,624 5,803,352 11,270,292 16,398,967 19,893,724
Research and product
development expense ........... 1,592,022 1,885,320 2,932,003 5,308,736 7,126,739
Write off of acquired in process
technology and other costs
associated with acquisition .. -- -- -- 3,528,555 --
----------- ----------- ------------ ------------ -------------
Income from operations ......... 1,452,347 5,334,718 10,645,292 13,102,242 18,487,291
Other (income) expense, net .... 379,490 115,800 (115,171) (211,486) (132,164)
----------- ----------- ------------ ------------ -------------
Income before provision for
income taxes .................. 1,072,857 5,218,918 10,760,463 13,313,729 18,619,456
Provision for income taxes ..... 72,473 1,595,714 3,640,762 6,215,173 6,982,295
----------- ----------- ------------ ------------ -------------
Net income ..................... $ 1,000,384 $ 3,623,204 $ 7,119,701 $ 7,098,556 $ 11,637,161
=========== =========== ============ ============ =============
Net income per common share
Basic ......................... $ 0.33 $ 0.64 $ 1.07 $ 0.98 $ 1.57
=========== =========== ============ ============ =============
Diluted ....................... $ 0.28 $ 0.58 $ 0.97 $ 0.91 $ 1.49
=========== =========== ============ ============ =============
Weighted average number of
shares outstanding
Basic ......................... 3,000,000 5,627,406 6,682,779 7,226,352 7,394,641
=========== =========== ============ ============ =============
Diluted ....................... 3,542,344 6,211,796 7,348,966 7,821,379 7,801,982
=========== =========== ============ ============ =============

December 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ -------------

CONSOLIDATED BALANCE SHEET DATA:
Working capital.............. $2,553,277 $10,462,799 $31,535,828 $34,624,655 $44,955,509
Total assets................. 7,655,197 19,494,002 45,624,225 54,245,059 66,861,748
Shareholders' equity ........ 1,969,269 11,779,835 36,185,179 43,551,234 56,669,372

13
14

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

GENERAL

The Company's products are sold through multiple distribution channels that
include value added resellers, systems integrators, original equipment
manufacturers and national and regional distributors located in more than 80
countries. Industries for which the Company believes its printers are
particularly well-suited include shipping and package delivery, retail
distribution and point of sale, healthcare, manufacturing, financial services,
security and governmental identification. The Company currently focuses its
sales efforts in these markets, although it continues to explore the potential
for new markets in which it can apply its expertise in the design and
manufacture of thermal printers.

Eltron's objective is to expand its position as a leading supplier of
thermal printers, supplies and related accessories designed for use in on-demand
and distributed printing applications. The Company believes that it is able to
maintain a competitive advantage through both internal development efforts and
strategic acquisitions and alliances.

The acquisition of RJS in early 1996 has been accounted for as a pooling of
interests for financial reporting purposes. The accompanying financial
statements are based on the assumption that the two companies were combined at
the beginning of the year, and all financial statements for prior periods
presented have been restated to give effect to the combination. In connection
with the acquisition, RJS changed its fiscal year end from September 30 to
December 31, which conforms to Eltron's year end. The consolidated financial
statements for all years prior to 1996 have not been restated to reflect RJS'
change in fiscal year. The 1995 financial statements include RJS' results of
operations on a September 30 fiscal year end basis and Eltron's results of
operations on a December 31 calendar year basis.

In January, 1998, Printronix Inc., a leading manufacturer of computer
printers, acquired the assets and rights to the bar code verification business
and the RJS name from Eltron for approximately $2.8 million. Eltron retained the
rights to the in-line verification technology for use in its line of integrated
verified printing systems, as well as the QualaBar and ThermaBar industrial
thermal printer lines.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain
information derived from the Company's Consolidated Statements of Income
expressed as percentages of sales. The table also presents information on the
Company's consolidated results of operations expressed as a percentage increase
or decrease relative to the results of the previous period.

PERCENTAGE INCREASE
OVER RESULTS
PERCENTAGE OF SALES FOR PRIOR PERIOD
------------------------ -------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----

Sales 100% 100% 100% 61% 19%
Cost of Sales 55 57 57 67 19
--- --- ---
Gross profit 45 43 43 54 19
Operating Expenses:
Selling, general and administrative 21 19 19 46 21
Research and product development 5 6 7 81 34
Write off of acquired in process technology
and other costs associated with acquisitions -- 4 -- NM --
--- --- ---
Other (income) expense, net NM NM NM NM NM
--- --- ---
Income before provision for income taxes 20 15 18 24 40
Provision for income taxes 7 7 7 71 12
--- --- ---
Net income 13% 8% 11% --% 64%
=== === ===

NM = not meaningful

14
15

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

Sales for 1997 totaled $105 million, an increase of $16.5 million, or 19%,
over sales of $88.5 million for 1996. This was primarily due to increased sales
of thermal label printers, plastic card printers and media to new and existing
Eltron customers worldwide. 1997 was a record year for sales, exceeding $100
million for the first time.

Sales of card printers increased 50% from $9.6 million in 1996 to $14.4
million in 1997. Sales of label printers to customers other than United Parcel
Service (UPS) increased 34% from $28.9 million in 1996 to $38.9 million in 1997.
International sales in 1997 were 34% of total sales, up from 27% in 1996.

In 1997 sales to UPS were $25.7 million, or 24% of total sales, compared to
$27.3 million, or 31% of total sales in 1996. Although the Company received a
$10 million follow on order from UPS in October of 1997, and had a backlog of
orders from UPS of approximately $9 million as of December 31, 1997, there is no
obligation on the part of UPS to place any further orders with Eltron. The
Company has derived a significant portion of its revenues from UPS and may
continue to be dependent on UPS, or other significant customers, in the future,
the loss of which could materially and adversely affect the Company's financial
position, results of operations and cash flows. No customer other than UPS
contributed greater than 10% of the Company's net sales in 1996 or 1997.

Gross profit for 1997 totaled $45.5 million, compared to $38.3 million in
1996, an increase of $7.2 million or 19%. Gross margin for 1997 was 43%, the
same as was reported for 1996. However, higher margins resulting from a
favorable product mix during the earlier part of 1997 were offset, primarily by
lower margin products shipped to UPS in late 1997. Gross margin in the later
part of 1997 was also affected by start-up costs related to the Company's latest
UPS program and by a provision of approximately $544,000 taken for certain
excess inventory components associated with the phase out of a prior UPS
program.

Sales to high volume customers and OEMs, and sales of supplies are typically
transacted at a price which yields a lower than average gross margin. Management
currently believes that sales to high volume and OEM customers, as well as sales
of supplies, may increase in the future and that, as a result, the 43% gross
margin exhibited in 1997 may not necessarily be maintained in the future.

Selling, general and administrative expenses in 1997 were $19.9 million or
19% of sales compared to $16.4 million or 19% in 1996. These increases are
primarily attributable to costs associated with the company's overseas
expansion, including its office in Singapore, a new distribution center in the
United Kingdom, a new sales office in France and an extension to the card
printer facility, also in France. In 1997 the Company created business groups
for label printers, card printers, supplies and service. Costs associated with
the forming of these new groups also contributed to the increase in expenses
from 1996 to 1997. The Company currently anticipates that selling, general and
administrative expenses will increase in future quarters but may decrease as a
percentage of sales. The actual amount spent will depend on a variety of
factors, including the Company's level of operations, and the number of new
markets the Company attempts to enter.

Research and development increased 34% in 1997 to $7.1 million, up from $5.3
million in 1996. This increase related primarily to increased efforts to develop
new products. As a percentage of sales, these expenses increased to 7% in 1997,
from 6% in 1996. The Company currently anticipates that research and product
development expense will increase in future quarters and may increase as a
percentage of sales. The actual amount spent will depend on a variety of
factors, including the Company's level of operations and the number of product
development projects that it embarks upon.

In 1996, operating results were impacted by legal and other costs associated
with business combinations, either attempted or completed, which totaled
approximately $1 million and the write-off of acquired in-process technology
valued at $2.5 million in connection with the purchase of Privilege, S.A. These
costs were related to specific transactions and therefore are non-recurring.
There were no such costs in 1997.

Net interest income totaled $233,000 in 1997, an increase of $33,000 over
net interest income of $200,000 in 1996. The increase in interest income was
primarily due to an increase in invested capital. See "Liquidity and Capital
Resources."

15
16

The provision for income taxes for 1997 was $7 million or 37.5% of pretax
income. The effective tax rate for 1997 was adversely affected, in part, by a
retroactive increase in French corporate income taxes imposed by the French
government. The provision for income taxes for 1996 was $6.2 million, or
approximately 46% of pretax income, which includes the tax effect of $3.5
million of expenses related to the write-off of acquired in-process technology
and acquisition costs which are not deductible for income tax purposes, the
utilization of certain tax credits and the reduction of deferred tax asset
reserves. Excluding the effects of non-recurring charges, the Company's
effective tax rate for 1996 would have been 37%.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995

Sales for 1996 totaled $88.5 million, an increase of $33.5 million or 61%
over sales for 1995, which totaled $55.0 million. This increase in sales can be
attributed to an increase in the number of printers sold resulting from wider
market acceptance of the Company's established lines of bar code printers,
increased acceptance of its recently introduced plastic card printers, as well
as higher than anticipated demand from the Company's largest customer, United
Parcel Service and its designated marketing partners ("UPS"). 1996 sales were
also bolstered by the inclusion of a full year's operations for Donner, as
compared to four months in 1995, which accounted for $3 million of the 1996
sales increase. Sales were also aided by the acquisition of Privilege, effective
January 1, 1996, which accounted for $9.6 million of the 1996 sales increase.

Throughout 1996, sales were enhanced by increased sales to either UPS or its
designated sub-contractors, which contributed approximately $27 million and
$20.8 million to sales in 1996 and 1995, respectively. The Company has derived a
significant portion of its revenues from UPS and may in the future be dependent
on UPS, or other significant customers, the loss of any one of which could
materially adversely affect the Company's financial position, results of
operations and cash flows. No customer other than UPS contributed greater than
10% of the Company's net sales during 1996.

Gross profit for 1996 totaled $38.3 million, an increase of $13.5 million or
54% over gross profit for 1995. As a percentage of revenues, gross profit
decreased 2% to 43% in 1996 from 45% in 1995. This decrease can be attributed
primarily to an increase in sales to high volume customers and OEMs which are
typically transacted at a price which yields a lower gross margin, although the
incremental selling costs associated with these transactions are generally less
than those associated with a non-OEM sale.

Selling, general and administrative expenses as a percentage of sales were
19% and 21% for 1996 and 1995, respectively. In 1996, selling, general and
administrative expenses increased 46% in absolute dollars to $16.4 million up
from $11.3 million in 1995. These increases primarily reflect sales and
marketing efforts focused on the Company's domestic and European sales channels.

Research and development expenses increased 81% in 1996 to $5.3 million, up
from $2.9 million in 1995. This increase related primarily to additional efforts
to develop new products. As a percentage of sales, these expenses increased to
6% in 1996, from 5% in the previous year.

Operating results were also impacted by legal and other costs associated
with business combinations, either attempted or completed, in 1996 which totaled
approximately $1 million and the expensing of acquired in-process technology
valued at $2.5 million in connection with the purchase of Privilege, S.A. These
costs were related to specific transactions and therefore are non-recurring.

Net interest income totaled $211,000 in 1996, a decrease of $167,000 over
net interest income of $378,000 for the previous year. This decrease in interest
income was primarily due to a decrease in invested capital.

The provision for income taxes for 1996 was $6.2 million, or approximately
46% of pretax income, which includes the tax effect of $3.5 million of expenses
related to the write-off of acquired in-process technology and acquisition costs
which are not deductible for income tax purposes, the utilization of certain tax
credits and the reduction of deferred tax asset reserves. The Company's
provision for income taxes for 1995 was $3.6 million or 34% of pretax income.
The Company's provision for income taxes was higher as a percentage of pretax
income in 1996 as a result of non-recurring costs associated with the
acquisitions of Privilege and RJS which were not deductible for tax purposes. If
these costs had not been incurred in 1996, the Company's effective tax rate
would have been 37%.

16
17

YEAR 2000 COMPLIANCE

During 1997, the Company began the implementation of a year 2000 compliant
enterprise-wide information system. The Company has also initiated an assessment
project, both within the Company and with is business partners, which addresses
those other significant systems that may have year 2000 compliance issues. The
Company presently believes that with the implementation of the new system and
modification to existing software, year 2000 compliance will not pose a
significant operational challenge for the Company. However, if these
modifications are not completed on a timely basis, including implementation by
its business partners, the Company's financial position, results of operations,
and cash flows will be materially and adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

In 1997, operating activities provided cash totaling $5.5 million as
compared to $2.5 million generated in 1996 and $2.4 million of cash used during
1995. Overall increases in operating cash flow in 1997 were partially offset by
increases in accounts receivable and inventories of $4.1 million and $5 million,
respectively.

In 1997, investing activities used cash totaling $3.8 million, as compared
to $869,760 and $14.4 million used in 1996 and 1995, respectively. During 1997,
cash was used primarily to purchase $5 million in equipment for business
expansion and the ongoing implementation of a new information system. In
addition, net sales of short term investments generated approximately $1.3
million of cash during 1997.

In 1997, financing activities generated cash totaling $1 million. Cash from
financing activities was generated primarily from the sale of the Company's
Common Stock through the exercise of stock options.

In 1997, Eltron entered into an agreement for a revolving line of credit
with a bank. The revolving credit facility allows Eltron to borrow up to $8
million on an unsecured basis. Borrowings under the revolving credit facility
bear interest at the Bank's prime rate. Under the terms of the revolving credit
facility, Eltron is not able to enter into certain transactions or declare
dividends without receiving prior written consent from the Bank and is required
to comply with certain covenants as well as maintain certain debt to net worth
ratios, current ratio and minimum net worth requirements. The revolving credit
agreement expires in May 1998 and the Company believes that it will be
successful in entering into a new credit agreement with a bank, with terms
similar to those in the current agreement. There was no utilization of the
credit line during 1997.

The Company did not have any significant capital commitments as of December
31, 1997.

In February 1998, the Company completed the purchase of a building in
Camarillo, California for approximately $7.8 million in cash. This building will
serve as the Company's new world headquarters and provide expanded manufacturing
capacity. The Company believes that it can refinance the building during 1998
through Industrial Development Bonds or through a conventional commercial real
estate loan. Upon completion of various modifications to the building, the
Company anticipates moving into the building near the end of 1998 or in early
1999.

The Company believes that cash provided by operating activities, existing
cash and short-term investments will be sufficient to fund the Company's capital
needs for the foreseeable future.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130, which requires
companies to adopt its provisions for fiscal years beginning after December 15,
1997, establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. Management does not believe the adoption of SFAS No. 130 will
have a material effect on its consolidated financial statements.

17
18

information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided. Management is currently evaluating the requirements of adopting SFAS
No. 131 and the effects, if any, on the Company's current reporting and
disclosures.

CAUTIONARY STATEMENTS AND RISK FACTORS

In addition to historical information, this Annual Report contains forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those stated appear elsewhere in this Annual Report and as
stated below. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to publicly release any
revision to these forward-looking statements. Readers should also carefully
review any risk factors described in other documents the Company may file from
time to time with the Securities and Exchange Commission. In addition to the
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors.

DEPENDENCE ON SIGNIFICANT CUSTOMER

For the years ended December 31, 1995, 1996 and 1997, UPS or its designated
marketing partners, accounted for approximately $20.8 million, $27.3 million and
$25.7 million, respectively, of the Company's total sales. UPS has no
contractual obligation to place any further orders with the Company. The
Company's financial position, results of operations and cash flows are
substantially dependent on future sales to UPS. If UPS reduces the level of its
historical purchase orders, this reduction would have a material adverse affect
on the Company's financial position, results of operations and cash flows and
adversely affect the market price of the Company's Common Stock.

POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE

The Company's quarterly operating results can fluctuate significantly
depending upon a variety of factors, including the mix of products shipped, the
changes in product prices by the Company and its competitors, the seasonality of
certain segments of the Company's markets, the lack of a meaningful backlog of
orders, the availability and costs of components, the historical
disproportionate level of orders received and sales made by the Company during
the last few weeks of each fiscal quarter, the market acceptance of new
products, and changes in general economic conditions. Because of these and other
factors, any inaccuracies in forecasting could adversely affect the Company's
financial position, results of operations and cash flows. Quarterly results are
not necessarily indicative of future performance for any particular period, and
there can be no assurance that the Company can maintain the levels of revenue
and profitability experienced over the past three years on a quarterly or annual
basis.

ABILITY TO SUSTAIN GROWTH RATE

In 1995, 1996 and 1997, the Company achieved annual sales growth of 88%, 61%
and 19% respectively. In the opinion of management, these growth percentages can
primarily be attributed to initial market penetration by the Company and the
acquisitions of Donner and Privilege during 1995 and 1996 respectively.
Management believes that as the Company's markets mature that, in the absence of
future acquisitions, the Company will not be able to sustain its historic high
growth rate. Shareholders and investors should not rely on the continuation of
the Company's historic high growth rate in making their investment decisions.

MANAGEMENT OF RAPIDLY CHANGING BUSINESS, ACQUISITIONS

The Company experienced rapid growth during 1995 and 1996, partly as a
result of various acquisitions. Future acquisitions, if any, may strain the
operational, administrative and financial resources of the Company. To manage
its growth effectively, the Company will be required to continue to implement
and improve its operating and financial systems and to expand, train and manage
its employee base. There can be no assurance that the management skills and
systems currently in place will be adequate if Eltron continues to grow at an
accelerated rate.

MANAGEMENT OF INVENTORY

The Company's market requires that its products be shipped very quickly
after an order is received. Since purchased

18
19

component and manufacturing lead times are typically much longer than the
shorter time demanded for completing orders placed for the Company's products,
the Company is required to stock adequate inventories of both components and
finished goods, and must accurately forecast demand for its many products.
Inaccurate forecasts of customer demand, restricted availability of purchased
components, supplier quality control problems, production equipment problems,
cargo-carrier strikes or damage to products during manufacture could result in a
buildup of excess components or finished goods and an inability to deliver
product on a timely basis, either of which could have a material adverse affect
on the Company's financial position, results of operations and cash flows.

HIGHLY COMPETITIVE INDUSTRY

The Company's markets are highly competitive and the Company expects that
competition will continue to increase as additional foreign and domestic
companies expand into the Company's markets. The Company competes with a number
of companies, many of which have greater financial, technical and marketing
resources than the Company.

The Company believes its ability to successfully compete depends on a
number of factors, both within and outside its control, including product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; strategic relationships with suppliers; timing of new product
introductions by the Company and its competitors; general market and economic
conditions; and government actions worldwide.

An important part of the Company's marketing strategy is to provide
competitively priced, quality products. This strategy is dependent, in part,
upon the Company's ability to engineer and design into its products high
quality, low cost components. While the Company has reduced prices on certain of
its products in the past and will likely continue to do so in the future, such
price reductions are highly dependent upon such future engineering designs
being timely completed and the pricing of components by its vendors. Price
reductions, if not offset by similar reductions in the cost of goods sold, will
negatively affect gross margin and may adversely affect the Company's financial
position, results of operation and cash flows.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company's sales outside of the United States totaled approximately $12
million, $30 million and $37 million in 1995, 1996 and 1997, respectively. The
Company expects that international sales will continue to represent a
significant portion of its revenues. International sales are subject to inherent
risks, including fluctuations in local economies, difficulties in staffing and
managing foreign operations, fluctuating exchange rates, difficulty of inventory
management, difficulty in accounts receivable collection, costs and risks
associated with localizing products for foreign markets, unexpected changes in
regulatory requirements, tariffs and other trade barriers, and burdens of
complying with a variety of foreign laws. There can be no assurance that these
factors will not have a material adverse impact on the Company's ability to
increase or maintain its international sales, or on its financial position,
results of operations, and cash flows.

A substantial portion of the components used in the manufacture of the
Company's products are purchased from entities based in Japan. Fluctuations in
the exchange rate between the U.S. dollar and Japanese yen could result in an
increase in the cost of these components. During 1997 this exchange rate was
generally favorable to the Company. However, if this favorable exchange rate
turns adversely the Company must achieve other cost savings to avoid product
price increases. The Company has not entered into any currency hedging
transactions to date, however, in the future, the Company may seek to hedge
certain transactions.

On January 1, 1999, the member countries of the European Economic Community
will adopt the use of the EURO currency as well as their own currency for
trading purposes. It is uncertain what impact these changes may have on the
Company and its financial position, results of operations and cash flows.

DEVELOPMENT OF MARKETS AND ACCEPTANCE OF PRODUCTS

The Company's continued growth will depend on the Company's ability to
market its existing products and to develop and successfully market new
products. However, the Company's near-term financial results will depend in part
upon increasing market acceptance of, and the Company's ability to expand the
market share for, its current

19
20

products. There can be no assurance that any new products the Company may
introduce will gain market acceptance.

The markets for the Company's products are characterized by a high degree of
competition, rapidly changing technology, frequent new product introductions and
price erosion. Accordingly, the Company believes its future prospects depend on
its ability not only to enhance and successfully market its existing products,
but also to develop and introduce new products in a timely fashion that achieve
market acceptance. There can be no assurance that the Company will be able to
identify, design, develop, market or support such products successfully or that
the Company will be able to respond effectively to technological changes or
product announcements by competitors. Delays in new product introductions or
product enhancements, or the introduction of unsuccessful products, could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.

The Company's current products are primarily used in the bar code market,
which began in the 1960s and has since experienced substantial growth,
particularly since 1989. To the extent the bar code market does not continue to
grow or experiences a significant economic downturn, the Company's ability to
generate revenues could be materially adversely affected. Moreover, even if the
size of the bar code market does increase, there can be no assurance that the
demand for the Company's products will also increase.

RELIANCE ON CERTAIN SUPPLIERS

The Company purchases numerous parts, supplies and other components from
various suppliers, which the Company assembles into its products. Although there
are at least two sources for many of such parts, supplies and components, the
Company currently relies on a single source of supply, Mitsubishi Electronics,
for the main microprocessor used to control its printers. Additionally, the
Company is heavily dependent on Rohm Co., Ltd. and Kyocera Industrial Ceramics
CP, its primary supply sources for print heads, and NMB Technologies, Inc., its
primary supply source for motors. As such, the Company is vulnerable to limits
in supply and pricing and product changes by these suppliers. Although
management believes that such changes could be accommodated by the Company, they
may necessitate changes in the Company's product design or manufacturing
methods, and the Company could experience temporary delays or interruptions in
supply while such changes are incorporated. Further, because the order time for
microprocessors, print heads and motors averages four months, the Company could
also experience delays or interruptions in supply in the event the Company is
required to find a new supplier for any of these components. Any future
disruptions in supply of suitable parts and components from the Company's
principal suppliers could have a material adverse effect on the Company's
financial position, results of operations and cash flows.

The Company does not maintain back-up tooling for many of the Company's
molded plastic components. Should a mold break or become unusable, repair or
replacement could take several months. The Company does not always maintain
sufficient inventory to allow it to fill customer orders without interruption
during the time that would be required to obtain an adequate supply of molded
plastic products. Accordingly, an extended interruption in the supply of any
such components could adversely affect the Company's financial position, results
of operations and cash flows.

SHAREHOLDER RIGHTS PLAN

In March 1998, the Company's Board of Directors approved the adoption of a
Shareholder Rights Plan pursuant to which the Company will declare a
distribution of one Preferred Share Purchase Right ("Right") on each outstanding
share of Common Stock as of April 3, 1998. The Rights will be attached to the
Company's Common Stock and will trade separately and be exercisable only in the
event that a person or group acquires or announces the intent to acquire 15% or
more of the Company's Common Stock. Each Right will entitle the shareholder to
buy one one-hundredth of a share of new series of junior participating preferred
stock at an exercise price of $120 per Right. The Rights expire on April 3,
2008.

The Shareholder Rights Plan is intended to protect the Company's
shareholders against abusive takeover tactics and to ensure that each
shareholder is treated fairly in any transaction involving an acquisition of
control of the Company, such as partial two-tiered tender offers that do not
treat all shareholders fairly and equally. The Rights do not affect any takeover
proposal which the Board believes is in the best interests of the Company's
shareholders.

Pursuant to the Rights Plan, if the Company is acquired in a merger or other
business combination transaction after a person or group has acquired 15% or
more of the Company's outstanding Common Stock, each Right will entitle its
holder (other than such person or group) to purchase, at the Right's
then-current exercise price, a number of the acquiring

20
21

company's common shares having a market value of twice such price.

Following an acquisition by a person or group of beneficial ownership of 15%
or more of the Company's Common Stock and before an acquisition of 50% or more
of the Common Stock, the Company's Board of Directors may exchange the Rights
(other than the Rights owned by such person or group), in whole or in part, at
an exchange ratio of one share of Common Stock (or one one-hundredth of a share
of the new series of junior participating preferred stock) per Right. Before a
person or group acquires beneficial ownership of 15% or more of the Company's
Common Stock, the Rights are redeemable for $.0001 per Right at the option of
the Board of Directors.

While the Company is not aware of any current intent to acquire a sufficient
number of shares of the Company's Common Stock to trigger exercisability of the
Rights, existence of the Rights could discourage offers for the Company's Common
Stock that exceed the current market price of the Common Stock , but that the
Board of Director deems inadequate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The financial statements and financial statement schedule of the Company are
annexed to this Report as pages 26 through 43. An index to such material
appears on page 23.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to the directors and
executive officers of the Company is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or about April 10, 1998.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item with respect to executive compensation
is incorporated by reference from the Company's definitive proxy statement,
expected to be filed with the Commission on or about April 10, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item with respect to security ownership is
incorporated by reference from the Company's definitive proxy statement,
expected to be filed with the Commission on or about April 10, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item with respect to certain relationships
and transactions is incorporated by reference from the Company's definitive
proxy statement, expected to be filed with the Commission on or about April 10,
1998.

PART IV

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

(a) The following documents are filed as part of this Report:
1. Financial Statements and Financial Statements Schedules.
See Index to Consolidated Financial Statements at Page 23 of
this Report.
(b) Financial Statement Schedules
1. Schedule II - Valuation and Qualifying Accounts.
(c) Exhibits are annexed to this Report - see "Index to Exhibits".

21
22

SIGNATURES

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

ELTRON INTERNATIONAL, INC.

By: /s/ Donald K. Skinner
--------------------------------
Donald K. Skinner
Chairman of the Board
Chief Executive Officer

In accordance with the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the capacities and
on the dates stated.

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

/s/ Donald K. Skinner Chairman of the Board and Chief Executive March 31, 1998
- -------------------------------- Officer (Principal Executive Officer)
Donald K. Skinner

/s/ Hugh K. Gagnier President, Chief Operating Officer and March 31, 1998
- -------------------------------- Director
Hugh K. Gagnier

/s/ Roger Hay Vice President Finance and Chief March 31, 1998
- --------------------------------- Financial Officer (Principal Financial
Roger Hay and Accounting Officer)

/s/ Robert G. Bartizal Director March 31, 1998
- ---------------------------------
Robert G. Bartizal

/s/ George L. Bragg Director March 31, 1998
- ----------------------------------
George L. Bragg

/s/ William R. Hoover Director March 31, 1998
- -----------------------------------
William R. Hoover

22
23

ELTRON INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Reports of Independent Public Accountants ............................................ 24
Consolidated Balance Sheets as of December 31, 1996 and 1997 ......................... 26
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 27
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1995, 1996 and 1997 .............................................................. 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997 .................................................................... 29
Notes to Consolidated Financial Statements ........................................... 30

FINANCIAL STATEMENT SCHEDULE

Schedule II Valuation and Qualifying Accounts ........................................ 43

23
24

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Eltron International, Inc.:

We have audited the consolidated balance sheets of Eltron International,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the two years in the period ended December 31, 1997, and the related
financial statement schedule as listed in the index on page 23 of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We previously audited and reported on the consolidated statements of
income, shareholders' equity and cash flows of Eltron International, Inc. for
the year ended December 31, 1995 prior to their restatement for the 1996 pooling
of interests with RJS, Inc. and subsidiary ("RJS"). The contribution of RJS to
the combined revenues and net income represented approximately 23% and 11% of
the respective restated totals for the year ended December 31, 1995. Separate
financial statements of RJS included in the related restated consolidated
statements of income, shareholders' equity and cash flows were audited and
reported on separately by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for RJS, is based
solely on the report of the other auditors. We also audited the combination of
the accompanying consolidated statements of income, shareholders' equity and
cash flows for the year ended December 31, 1995 after restatement for the
pooling of interests in 1996; in our opinion, such consolidated statements have
been properly combined on the basis described in Note 1 of the notes to
consolidated financial statements.

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 and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Eltron International,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

COOPERS & LYBRAND L.L.P.

Woodland Hills, California
February 24, 1998

24
25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of RJS, Incorporated:

We have audited the consolidated statements of income and retained
earnings, and cash flows of RJS, Incorporated and subsidiary (the "Company")
for the year ended September 30, 1995 (not presented separately herein).
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.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the operations of the Company and its
subsidiary and their cash flows for the year ended September 30, 1995 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE L.L.P.
Los Angeles, California
November 22, 1995

25
26

ELTRON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS

December 31,
---------------------------
1996 1997
---------- ----------

CURRENT ASSETS:
Cash ......................................................... $ 1,291,396 $ 3,770,139
Short term investments ....................................... 7,945,254 6,696,105
Accounts receivable, net of allowance for doubtful accounts of
$452,234 and $341,343, respectively ........................ 16,331,124 20,575,443
Inventories .................................................. 16,947,780 21,417,152
Prepaid expenses and other current assets .................... 700,145 835,410
Deferred tax asset ........................................... 1,291,468 1,803,553
----------- ------------
Total current assets ..................................... 44,507,167 55,097,802

PROPERTY AND EQUIPMENT, net ...................................... 7,724,700 10,384,651
DIFFERENCE BETWEEN COST AND FAIR VALUE OF NET ASSETS ACQUIRED .... 1,125,164 735,482
OTHER ASSETS ..................................................... 888,028 643,813
----------- ------------
$54,245,059 $ 66,861,748
=========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable ............................................. 6,881,637 5,928,560
Accounts payable to shareholder .............................. 160,082 --
Accrued liabilities .......................................... 1,179,415 1,594,072
Income tax payable ........................................... -- 361,659
Accrued compensation ......................................... 1,311,862 959,120
Earn-out obligation .......................................... -- 954,313
Deferred service contract revenue ............................ 349,516 344,569
Total current liabilities ................................ 9,882,512 10,142,293

LONG TERM OBLIGATIONS............................................. 811,313 50,083
COMMITMENTS

SHAREHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized of
which none are outstanding
Common stock, no par value:
Authorized -- 30,000,000 shares
Issued and outstanding - 7,302,294 and 7,455,920 shares,
respectively ............................................. 24,238,345 26,000,480
Cumulative translation adjustment ............................ 25,400 (255,758)
Retained earnings ............................................ 19,287,489 30,924,650
----------- ------------
Total shareholders' equity ............................... 43,551,234 56,669,372
----------- ------------
$54,245,059 $ 66,861,748
=========== ============

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

ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
-------------------------------------------------
1995 1996 1997
------------ ------------ -------------

SALES .......................................... $ 54,971,064 $ 88,509,582 $ 105,028,976
COST OF SALES .................................. 30,123,477 50,171,082 59,521,222
------------ ------------ -------------
Gross profit .................................. 24,847,587 38,338,500 45,507,754
OPERATING EXPENSES:
Selling, general and administrative ........... 11,270,292 16,398,967 19,893,724
Research and product development .............. 2,932,003 5,308,736 7,126,739
Write-off of acquired in-process technology and
other costs associated with acquisitions..... -- 3,528,555 --
------------ ------------ -------------
INCOME FROM OPERATIONS ......................... 10,645,292 13,102,242 18,487,291
OTHER (INCOME) EXPENSE:
Interest, net ................................. (378,458) (199,505) (232,753)
Other, net .................................... 263,287 (11,982) 100,589
------------ ------------ -------------
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 10,760,463 13,313,729 18,619,456
PROVISION FOR INCOME TAXES ..................... 3,640,762 6,215,173 6,982,295
------------ ------------ -------------
NET INCOME ..................................... $ 7,119,701 $ 7,098,556 $ 11,637,161
============ ============ =============
NET INCOME PER COMMON SHARE
Basic ....................................... $ 1.07 $ 0.98 $ 1.57
============ ============ =============
Diluted ..................................... $ 0.97 $ 0.91 $ 1.49
============ ============ =============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic ....................................... 6,682,779 7,226,352 7,394,641
============ ============ =============
Diluted ..................................... 7,348,966 7,821,379 7,801,982
============ ============ =============

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

27
28
ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock Cumulative
---------------------------- Translation Retained
Shares Amount Adjustment Earnings Total
------------ ------------ ------------ ------------ ------------

BALANCE, December 31, 1994 6,061,324 $ 6,702,308 $ (11,050) $ 5,088,577 $ 11,779,835
Issuance of common
stock, net of
offering costs of
$1,198,575 ........... 850,000 16,651,425 -- -- 16,651,425
Retirement of warrants -- (274,527) -- -- (274,527)
Exercise of stock
options .............. 244,494 266,428 -- -- 266,428
Tax benefit resulting
from exercise
of options .......... -- 645,000 -- -- 645,000
Translation adjustment . -- -- (2,683) -- (2,683)
Net income ............. -- -- -- 7,119,701 7,119,701
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 7,155,818 23,990,634 (13,733) 12,208,278 36,185,179
Adjustment to retained
earnings as a result
of business
combination .......... -- -- -- (19,345) (19,345)
Exercise of stock
options .............. 169,337 447,215 -- -- 447,215
Cancellation of shares
in connection
with RJS merger....... (22,861) (775,581) -- -- (775,581)
Tax benefit resulting
from exercise of
options .............. -- 576,077 -- -- 576,077
Translation adjustment.. -- -- 39,133 -- 39,133
Net income ............. -- -- -- 7,098,556 7,098,556
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 7,302,294 24,238,345 25,400 19,287,489 43,551,234
Exercise of stock
options .............. 161,087 1,012,309 -- -- 1,012,309
Cancellation of shares
issued in connection
with RJS merger ...... (7,461) (253,016) -- -- (253,016)
Tax benefit resulting
from exercise of
options............... -- 1,002,842 -- -- 1,002,842
Translation adjustment.. -- -- (281,158) -- (281,158)
Net income ............. -- -- -- 11,637,161 11,637,161
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 7,455,920 $ 26,000,480 $ (255,758) $ 30,924,650 $ 56,669,372
========= ============ ============ ============ ============

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

28
29
ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
------------------------------------------------
1995 1996 1997
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 7,119,701 $ 7,098,556 $ 11,637,161
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Write off of purchased in process technology ..... -- 2,500,000 --
Depreciation and amortization .................... 580,306 1,441,350 2,336,840
Provision for losses on inventory ................ 113,228 343,885 543,975
Amortization of the difference between cost and
fair value of net assets acquired .............. 56,000 235,041 389,682
Provision for doubtful accounts .................. 31,163 124,775 86,100
Deferred income taxes ............................ (517,398) 586,852 (512,085)
Changes in assets and liabilities, net of
businesses acquired:
Accounts receivable ............................ (3,150,979) (6,094,240) (4,330,419)
Inventories .................................... (6,517,763) (5,413,779) (5,013,347)
Prepaid expenses and other assets .............. (797,490) 922,117 (144,066)
Accounts payable ............................... 958,786 1,735,829 (953,077)
Accounts payable to shareholder ................ 898,562 (1,656,827) (160,082)
Accrued liabilities and compensation ........... 618,966 551,296 254,998
Accrued taxes payable .......................... (1,775,239) -- 1,364,501
Deferred service contract revenue .............. 16,000 134,516 (4,947)
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,366,157) 2,509,371 5,495,234

CASH FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................ (2,955,760) (5,280,209) (4,996,791)
Cash paid in connection with acquisition of
Privilege, SA .................................... -- (3,196,373) --
Purchase of short term investments ................. (20,852,247) (14,930,428) (14,548,701)
Sale of short term investments ..................... 9,409,582 22,537,250 15,797,850
------------ ------------ ------------
Net cash used in investing activities .............. (14,398,425) (869,760) (3,747,642)

CASH FROM FINANCING ACTIVITIES:
Net repayments under line of credit ................ (887,911) (768,000) --
Cash proceeds from stock sales, net ................ 16,651,425 -- --
Common stock purchased in connection with RJS merger -- (775,581) --
Payments to retire warrants ........................ (274,527) -- --
Proceeds from exercise of stock options ............ 266,428 447,215 1,012,309
Repayments of long term debt ....................... -- (20,037) --
------------ ------------ ------------
Net cash provided by (used in) financing activities. 15,755,415 (1,116,403) 1,012,309
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. (2,683) 39,133 (281,158)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ...................... (1,011,850) 562,341 2,478,743
CASH BALANCE, beginning of year ...................... 1,740,905 729,055 1,291,396
------------ ------------ ------------
CASH BALANCE, end of year ............................ $ 729,055 $ 1,291,396 $ 3,770,139
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest and taxes paid:
Interest paid ..................................... $ 119,767 $ 29,311 $ 50,226
Taxes paid ........................................ 6,374,000 5,089,531 6,201,884
Non-cash transactions:
Tax benefit resulting from exercise of options .... 645,000 576,077 1,002,842
Assumption of liabilities and obligations in
connection with acquisition of Donner Media, Inc. 1,009,606 -- --
Assumption of liabilities and obligations in
connection with acquisition of Privilege, SA ... -- 1,323,000 --
Cancellation of shares issued in connection with
RJS merger ..................................... -- -- (253,016)

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

29
30

ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Eltron International, Inc. and subsidiaries (the "Company" or "Eltron")
design, manufacture and market a full range of direct thermal and thermal
transfer bar code printers, plastic card printers, related accessories and
support software. Eltron also manufactures and distributes a full range of
supplies designed for use with its printers. These products are sold by the
Company through multiple distribution channels that include value added
resellers, systems integrators, original equipment manufacturers and independent
distributors located throughout the world. Industries for which the Company
believes its printers are particularly well-suited include shipping and package
delivery, retail distribution and point of sale, healthcare, manufacturing,
financial services and local, state and Federal identification cards including
driver's licenses. The Company currently focuses its sales efforts in these
markets, although it continues to explore the potential for new markets.

Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS") in a
business combination accounted for as a pooling of interests. The accompanying
financial statements are based on the assumption that the two companies were
combined at the beginning of the year, and all financial statements for prior
periods presented have been restated to give effect to the combination. The
consolidated financial statements for all years prior to 1996 have not been
restated to reflect RJS' change in fiscal year. The 1995 financial statements
include RJS' results of operations on a September 30 fiscal year end basis and
Eltron's results of operations on a December 31 calendar year basis. Earnings
per share data reflect the shares issued in the merger for all periods
presented. Prior to February 1996, Eltron and RJS in the normal course of
business entered into certain transactions for the purchase and sale of
merchandise. These intercompany transactions have been eliminated in the
accompanying financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The consolidated financial statements include the accounts of Eltron
International, Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

b. Estimates

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

c. Short Term Investments

The Company considers all highly liquid investments purchased with original
maturity of three months or less to be cash equivalents.

The Company has classified its short term investments, including those with
an original maturity of 90 days or less, as "available for sale" and
accordingly, carries such securities at aggregate fair value. At December 31,
1997, the Company's short term investments consisted primarily of municipal
bonds and selected bond funds. The aggregate fair value of the Company's short
term investments approximated their amortized cost basis. At December 31, 1997,
all of the Company's short term investments had maturities of less than one
year.

d. Revenue Recognition

Revenue is recognized upon shipment. Currently, the Company generally does
not provide its customers with the right of return. The Company sells extended
service contracts for its products. Revenue for such contracts is recognized on
a straight line basis over the life of the contract.

e. Warranty

The Company provides a warranty of up to one year on certain components of
its printers. A provision for warranty

30
31

expense is recorded at the time of shipment. To date, the Company has not
experienced any significant warranty claims.

f. Research and Product Development

Research and product development costs are expensed as incurred.

g. Difference Between Cost and Fair Value of Net Assets Acquired

Difference between cost and fair value of net assets acquired represents the
difference between the purchase price and the fair value of assets acquired in
business combinations accounted for as a purchase. The Company amortizes the
difference between cost and fair value of net assets acquired on a straight-line
basis over the period for which such additional value is expected to be
realized, typically three to five years. The Company continually evaluates
whether changes have occurred that would suggest that such additional value may
not be realized over the remaining amortization period. If this review indicates
that the remaining estimated useful life of the difference between cost and fair
value of net assets acquired requires revision or is not recoverable, the
carrying amount is reduced by the estimated shortfall. To date, the Company has
not revised the carrying amount of the difference between cost and fair value of
net assets acquired. Accumulated amortization of the difference between cost and
fair value of net assets acquired is as follows:

DECEMBER 31,
----------------------------
1996 1997
----------- -----------

Excess cost over fair value of net assets acquired $ 1,823,989 $ 1,771,450
Accumulated amortization of excess cost over fair value
of net assets acquired (698,825) (1,035,968)
----------- -----------
$ 1,125,164 $ 735,482
=========== ===========

h. Translation of Foreign Currencies

The functional currency of each of the Company's foreign subsidiaries is its
local currency. All assets and liabilities of the Company's foreign subsidiaries
are translated at current exchange rates while revenues and expenses are
translated at average rates in effect for the period; the resulting gains and
losses are included in a separate component of shareholders' equity. Transaction
gains (losses) are included in the accompanying income statements and were not
significant in 1995, 1996 and 1997. Until the acquisitions of Russet, Ltd. and
Privilege, S.A. in November of 1994 and January of 1996, respectively, the
Company conducted its international business transactions exclusively in U.S.
dollars. The Company has not entered into any currency hedging transactions to
date, however, in the future, the Company may seek to hedge certain
transactions.

i. Sales and Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, short term
investments and trade accounts receivable. The Company places its cash and short
term investments in a variety of financial instruments such as market rate
accounts, municipal bonds, selected bond funds and U.S Government agency debt
securities. The Company, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.

The Company's largest customer, United Parcel Service, either directly or
through certain of its marketing partners ("UPS") accounted for approximately
$20.8 million, $27.3 million and $25.7 million of the Company's sales for the
years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1996
and 1997, accounts receivable from United Parcel Service totaled approximately
$2.4 million and $4.4 million, respectively.

j. Advertising

Advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 1995, 1996 and

31
32

1997 totaled $797,000, $1,624,000 and $1,955,000, respectively.

k. Income Taxes

The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

l. Net Income Per Common Share

During the year end December 31, 1997, the company adopted SFAS No. 128,
"Earnings per Share." In accordance with SFAS No. 128, basic net income per
common share is computed using the weighted average number of shares of common
stock and diluted net income per common share is computed using the weighted
average number of shares of common stock and common equivalent shares
outstanding. Common equivalent shares related to stock options and warrants are
excluded from the computation when their effect is antidilutive.

m. Accounting for Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees."

n. Reclassifications

Certain amounts in the prior period financial statements have been
reclassified to conform to the current period's presentation.

o. Long Term Assets

The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any are recognized when the expected
non-discounted future operating cash flows derived from such assets are less
than their carrying value.

p. Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement requires companies to
adopt its provisions for fiscal years beginning after December 15, 1997,
requires publicly-held companies to report financial and other information about
key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided. Management is currently evaluating the requirements of adopting SFAS
No. 131 and the effects, if any, on the Company's current reporting and
disclosures.

32
33

3. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of the following:

December 31,
---------------------------
1996 1997
----------- -----------

Subassemblies and raw materials $10,958,660 $13,698,636
Work in process ............... 1,924,981 2,411,237
Finished goods ................ 4,064,139 5,307,279
----------- -----------
$16,947,780 $21,417,152
=========== ===========

4. PROPERTY AND EQUIPMENT

Property and equipment stated at cost consists of the following:

December 31,
------------------------------
1996 1997
------------ ------------

Tooling and machinery ......................... $ 6,386,954 $ 8,566,595
Office equipment .............................. 3,720,350 5,988,410
Leasehold improvements ........................ 80,261 598,876
------------ ------------
10,187,565 15,153,881
Less, accumulated depreciation and amortization (2,462,865) (4,769,230)
------------ ------------
Net property and equipment .................... $ 7,724,700 $ 10,384,651
============ ============

Depreciation of property and equipment is computed using the straight-line
method over the following estimated useful lives:

Machinery and manufacturing equipment............................ 3 to 10 years
Furniture and office equipment................................... 3 to 7 years

The Company capitalizes tooling costs once a product design has been
finalized. Tooling costs are amortized to cost of sales on a straight-line basis
over the greater of estimated product life, generally three years, or the ratio
of current revenues to the total of current and anticipated future revenues.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the asset life or lease term. Major replacements or betterments of property
and equipment are capitalized. Costs of normal repairs and maintenance are
charged to expense as incurred.

5. PUBLIC OFFERINGS, CHANGES IN CAPITALIZATION AND WARRANTS

In connection with the Company's February 1994 initial public offering, the
Company sold, for $110, to Cruttenden Roth Incorporated ("Cruttenden") , the
underwriter, warrants to purchase up to 220,000 shares of the Company's Common
Stock, at an exercise price of $3.60 per share. The Cruttenden warrants are
exercisable for a period of up to four years beginning February 9, 1995 and are
not transferable, except to officers of Cruttenden. In addition, the Company has
granted certain rights to the holders of the Cruttenden warrants to register the
Common Stock underlying Cruttenden warrants under the Securities Act of 1933, as
amended. None of the Cruttenden warrant had been exercised as of December 31,
1997. On February 26, 1998, the Cruttenden warrants were exercised.

On May 31, 1995, the Company completed a follow on public offering (the
"Offering") of 850,000 shares of its Common Stock at $21.00 per share, raising
approximately $16.7 million. Approximately, $274,000 of the proceeds from the
Offering were used to retire warrants to purchase up to 15,832 shares of the
Company's common stock issued to Silicon Valley Bank in connection with its 1993
line of credit agreement.

On April 18, 1995, the Company's Board of Directors declared a 2-for-1
forward stock split of the Company's Common Stock, which was effective on May 1,
1995. All common share data and per share data included in the accompanying
financial statements and notes thereto have been adjusted to reflect this stock
split.

33
34

6. BUSINESS COMBINATIONS

Donner Media, Inc.

Effective September 1, 1995, the Company purchased 80% of the outstanding
capital stock of Donner Media, Inc. ("Donner"), a manufacturer of pressure
sensitive labels located in Appleton, Wisconsin for $250,000 in cash. The
Company also entered into an agreement (the "Agreement") to acquire the
remaining 20% of Donner's outstanding capital stock. Under the terms of the
Agreement the Company has committed to purchase Donner's remaining capital stock
on September 1, 1998 for the greater of (i) the incremental value of such shares
as determined in accordance with the valuation methodology set forth in the
Agreement or (ii) $1 million in cash. The amount recorded in the accompanying
financial statements related to this payment is based upon management's
judgments regarding such factors as future competitive conditions and product
costs, which can be difficult to predict. Actual results could differ from those
estimates. The net present value of this estimated payment, calculated at an
effective interest rate of 9% per annum, has been included in "Long Term
Obligation" and "Earn-out Obligation" on the accompanying Consolidated Balance
Sheets as of December 31, 1996 and 1997, respectively.

The acquisition has been accounted for as a purchase for financial reporting
purposes and, accordingly, the results of operations for Donner are included
with those of the Company from September 1, 1995. Revenues for the period from
September 1, 1995 to December 31, 1995, totaled $1.1 million. A portion of the
purchase price has been allocated to the assets and liabilities of Donner based
on their estimated respective fair values. The purchase price and expenses
associated with the acquisition exceeded the fair value of Donner's net assets
by approximately $1 million which has been included in "Difference Between Cost
and Fair Value of Net Assets" on the accompanying Consolidated Balance Sheets.

Acquisition of Privilege, S.A.

At January 1, 1996, the Company purchased all of the outstanding capital
stock of Privilege, S.A. ("Privilege"), a French company primarily engaged in
the design, manufacture and distribution of custom plastic card printers. This
transaction has been accounted for as a purchase for financial reporting
purposes. Acquired in-process technology valued at $2.5 million was expensed
immediately. The purchase price paid by Eltron was approximately $3.2 million in
cash and the assumption of approximately $1.3 million in trade liabilities and
debt. The assets acquired by Eltron consisted of trade receivables, inventories,
equipment and technology.

The estimated fair values of the assets of Privilege acquired are summarized
as follows:

Trade receivables.................................................... $ 964,000
Inventories.......................................................... 370,000
Equipment and other tangible assets.................................. 328,000
In process research and development projects......................... 2,500,000
Cost in excess of net assets acquired................................ 397,000
----------
Total................................................. $4,559,000
==========

The results of operations relating to Privilege are included with those of
the Company from January 1, 1996. Net revenues generated from Privilege
operations totaled approximately $7.8 million for the period from January 1 to
December 31, 1996.

Merger with RJS, Incorporated

Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS") in
a business combination accounted for as a pooling of interests. RJS is a
manufacturer of bar code label printers, bar code verifiers and verified
printing systems located in Monrovia, California. In accordance with the terms
of the merger, Eltron paid $776,000 in cash (in lieu of 22,861 shares of Eltron
Common Stock) and issued 322,991 shares of its Common Stock to the shareholders
of RJS as consideration for all of the outstanding capital stock of RJS.

34
35
The accompanying financial statements are based on the assumption that the
two companies were combined at the beginning of the year, and all financial
statements for prior periods presented have been restated to give effect to the
combination. Earnings per share data reflects the shares issued in the merger
for all periods presented. Prior to February 1996, Eltron and RJS, in the normal
course of business, entered into certain transactions for the purchase and sale
of merchandise. These intercompany transactions have been eliminated in the
accompanying financial statements.

In connection with the merger, RJS changed its fiscal year end from
September 30 to December 31, which conforms to Eltron's year end. During the
three months ended December 31, 1995, RJS reported sales of $3 million and a net
loss of $19,000. In order to reflect this change in fiscal year-end, retained
earnings has been decreased by RJS' net loss for the three months ended December
31, 1995. The consolidated financial statements for all periods prior to 1996
have not been restated to reflect RJS' change in fiscal year and include RJS'
results of operations on a September 30 fiscal year end basis and Eltron on a
December 31 calendar year basis.

Prior to the merger, RJS had a $2,000,000 line-of-credit facility with a
bank. The credit facility was collateralized by accounts receivable, inventories
and property and equipment. Immediately upon the merger of Eltron and RJS, the
RJS line of credit was paid in full, and the line terminated. The weighted
average borrowing rate for 1995 and 1996, on the above credit facility, was
9.3%.

A reconciliation of net sales and net income previously reported to net
sales and net income as adjusted to reflect the merger is as follows:

Year Ended December 31,
-----------------------
1995
-----------------------

Sales:
As previously reported:
By Eltron $42,361,064
By RJS 12,610,000
-----------
As restated $54,971,064

Net Income:
As previously reported:
By Eltron $ 6,369,701
By RJS 750,000
-----------
As restated $ 7,119,701

Joint Venture with Chinetek

In June 1997, Eltron entered into an agreement with Beijing based Chinetek
Group to form a joint venture, Eltron-Chinetek, Co. Ltd., to expand Eltron's
market in China. The joint venture will initally establish five offices located
in the major Chinese industrial centers of Beijing, Shenyang, Shenzhen, Shanghai
and Hong Kong. Headquarters are in Hong Kong. Each company owns a 50% share in
the joint venture. Revenues are recognized by the Company as products are
shipped from the joint venture and collectability is deemed probable; revenues
were not significant in 1997. Profit is eliminated on Eltron shipments to the
joint venture. Eltron's investment was initially $100,000, with an additional
$150,000 of capital to be invested during 1998. The investment in
Eltron-Chinetek Co. Ltd. is being treated as a marketing expense to be written
off over a 2 year period.

7. RELATED PARTY TRANSACTIONS

The Company was party to a manufacturing and marketing agreement with a
shareholder, Taiwan Semiconductor Co. Ltd. ("TSC"), from January of 1991 until
June of 1996. The agreement provided TSC with the non-exclusive right to
manufacture printers and printer components for the Company as well as the
exclusive right to market and distribute certain Eltron products in the
continent of Asia. Under the terms of the agreement, TSC was required to pay the
Company a royalty equal to 3.5% of gross revenues derived from sales of Eltron
products and could either: (i) manufacture the Eltron products which are sold in
Asia or (ii) purchase the products from Eltron.

For the years ended December 31, 1995 and 1996, the Company purchased
subassemblies and components totaling $7,899,775 and $3,717,825, respectively
from TSC (of which $5,153,426 and $2,899,148 are recorded in cost of goods sold)
and received royalties of $4,624 and $0 respectively.

8. EMPLOYEE BENEFIT PLAN

35
36

The Company has a 401(k) savings and profit sharing plan that is available
to substantially all of its employees. Under the plan, employees can make
voluntary contributions not to exceed the lesser of an amount equal to 15% of
their compensation or limits established by the Internal Revenue Code. The
Company, at its discretion, matches a portion of the employees' annual
contributions, which vests over time. Contributions made by employees are vested
immediately. Company contributions during each of 1995, 1996 and 1997 were
$18,000, $0 and $26,000, respectively.

9. INCOME TAXES

The sources of income before provision for income taxes were as follows:

December 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------

Domestic ................................... $10,682,567 $12,437,699 $16,306,913
Foreign .................................... 77,896 876,030 2,312,543
----------- ----------- -----------
Income before provision for income taxes.. $10,760,463 $13,313,729 $18,619,456
=========== =========== ===========

The provision (benefit) for income taxes is comprised of the following:

December 31,
-------------------------------------------
1995 1996 1997
----------- ---------- -----------

Current:
Federal ............. $ 3,151,148 $4,442,295 $ 5,336,718
State ............... 884,204 817,077 1,152,698
Foreign ............. 72,808 355,871 1,004,964
Deferred:
Federal ............. (395,000) 428,430 (276,309)
State ............... (72,398) 171,500 (235,776)
----------- ---------- -----------
Provision for income taxes $ 3,640,762 $6,215,173 $ 6,982,295
=========== ========== ===========

36
37

A reconciliation of the provision for income taxes to the amount computed at
the Federal statutory rate is as follows:

December 31,
-----------------------------------------------
1995 1996 1997
----------- ----------- -----------

Federal income tax provision at statutory rate
of 34% .................................... $ 3,658,557 $ 4,526,667 $ 6,330,615
Effect of graduated tax rates ................. -- 133,138 186,195
Foreign tax rate differential ................. -- -- 212,686
Effect of tax rate difference for Foreign Sales
Corporation ................................. (69,372) (49,372) --
State taxes, net of Federal benefit ........... 535,876 798,000 947,567
Write off of acquired in process technology and
other non-deductible expenses resulting from
acquisitions ............................... -- 1,088,000 --
Utilization of net operating loss carryforwards (130,701) -- --
Tax credits ................................... (287,413) (345,060) (429,206)
Interest income exempt from Federal tax ....... (161,131) (71,000) (142,421)
Change in valuation allowance for deferred tax
assets ...................................... (78,820) -- (424,452)
Other, net .................................... 173,766 134,800 301,311
----------- ----------- -----------
Provision for income taxes ............ $ 3,640,762 $ 6,215,173 $ 6,982,295
=========== =========== ===========
Effective tax rate ............................ 33.8% 46.7% 37.5%
=========== =========== ===========

The components of the Company's deferred tax assets and liabilities are
as follows:

December 31,
---------------------------
1996 1997
------------ ------------

Deferred tax assets:
Expenses deductible in future years ... $ 694,423 $ 994,799
Federal benefit of state tax liability 318,900 370,450
Net operating loss carryforwards ...... 1,325,000 1,221,524
----------- -----------
Gross deferred tax asset ............ 2,338,323 2,586,773
Valuation allowance for deferred assets (851,000) (426,548)
----------- -----------
Net deferred tax asset .............. 1,487,323 2,160,225
----------- -----------
Deferred tax liabilities:
Depreciation and amortization ......... (195,855) (356,672)
----------- -----------
Net deferred tax liability .......... (195,855) (356,672)
----------- -----------
Net deferred tax ........................ $ 1,291,468 $ 1,803,553
=========== ===========

As of December 31, 1997 the Company had net operating loss carryforwards
available to offset future Federal taxable income which totaled approximately
$1,385,000. These loss carryforwards expire through 2002. At December 31, 1997,
the Company also had tax loss carryforwards totaling approximately $820,000
available to offset future taxable income in Germany. A valuation allowance has
been recorded against the German tax loss carryforwards as a result of
uncertainties related to their future realization. The valuation allowance for
deferred taxes decreased approximately $424,000 during the year ended December
31, 1997, primarily as a result of the recognition of a deferred tax asset
related to the write-off of trade receivables from one of the Company's former
subsidiaries.

A valuation allowance for deferred tax assets, other than from German tax
loss carryforwards, has not been recorded as a result of the Company's increased
earnings capacity which, in the opinion of management, is sufficient to ensure
utilization of recorded deferred tax assets in future periods.

37
38
10. NET INCOME PER COMMON SHARE

In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
statement requires dual presentation of newly defined basic and diluted earnings
per share ("EPS") on the face of the income statement for all entities with
complex capital structures. The following table provides a reconciliation of the
numerator and denominators of the basic and diluted per-share computations for
the years ended December 31, 1995, 1996 and 1997:

Income Shares Per Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------

Year Ended December 31, 1995:
Basic EPS...................................... $7,119,701 6,682,779 $ 1.07
Effect of dilutive securities - stock options
and warrants................................ -- 666,187
----------- ---------
Diluted EPS.................................... $7,119,701 7,348,966 $ 0.97

Year Ended December 31, 1996:
Basic EPS...................................... $7,098,556 7,224,686 $ 0.98
Effect of dilutive securities - stock options
and warrants................................. -- 596,693
----------- ---------
Diluted EPS.................................... $7,098,556 7,821,379 $ 0.91

Year Ended December 31, 1997:
Basic EPS...................................... $11,637,161 7,394,641 $ 1.57
Effect of dilutive securities - stock options
and warrants................................. -- 407,381
----------- ---------
Diluted EPS.................................... $11,637,161 7,801,982 $ 1.49

The computation for diluted number of shares excludes unexercised stock options
and warrants which are antidilutive. The number of such shares was 12,000,
10,000 and 129,950 for the years ended December 31, 1995, 1996 and 1997,
respectively.

11. LINE OF CREDIT

12. COMMITMENTS AND CONTINGENCIES

The Company has entered into non-cancelable operating leases for its
warehouse and office space as well as certain equipment. Lease terms generally
range from three to ten years; certain building leases contain options for
renewal and are subject to escalation clauses tied to the Consumer Price Index.
During 1997, the Company entered into new lease agreements for facilities in
France, Wisconsin and England. Rental expense under the Company's operating
lease agreements was $580,311, $645,347 and $939,253 respectively for the years
ended December 31, 1995, 1996 and 1997. The Company's leases for its main
warehouse and office facilities in Simi Valley, California expire in January of
1999. In February 1998, the Company completed the purchase of a building in
Camarillo, California. The Company plans to move to the new building in late
1998. The Company's future minimum non-cancelable rental commitments on these
leases at December 31, 1997 are as follows:

Year ending December 31,
- ------------------------

1998 ...................... $ 946,964
1999 ...................... 606,802
2000 ...................... 588,130
2001 ...................... 421,098
2002 ...................... 375,756
Thereafter ................ 590,780
----------
$3,529,530
==========

From time to time certain legal actions may arise in the ordinary course of
the Company's business. To date, such legal actions have not had a material
adverse affect on the Company's financial position, results of operations and
cash flows.

13. STOCK OPTION PLANS

The Company adopted stock option plans in 1992, 1993 and 1996 (the 1992
Stock Option Plan, 1993 Stock Option Plan and the 1996 Stock Option Plan).
Incentive and nonqualified options under these plans may be granted to
employees, officers and consultants of the Company. There are 1,601,000 shares
of common stock reserved for issuance

38
39
under these plans of which 790,390 shares have been exercised. The exercise
price of the options are determined by a committee of the board administering
the plans. Generally the Company issues stock options at an exercise price equal
to or greater than fair market value. Outstanding options generally become
exercisable over four years.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) encourages but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized for the Company's stock-based compensation plans under the provisions
of SFAS No. 123. Had compensation costs for the Company's stock option and
purchase plans been determined based upon the methodology prescribed under SFAS
123, the Company's net income and earnings per share would approximate the
proforma amounts below (in thousands except per share data):

As Reported Pro Forma
----------- -----------

Year Ended December 31, 1995:
Net income ............................. $ 7,119,701 $ 6,849,290
Net income per common share - basic .... 1.07 1.02
Net income per common share - diluted... 0.97 0.93

Year Ended December 31, 1996:
Net income ............................. $ 7,098,556 $ 6,147,644
Net income per common share - basic..... 0.98 0.85
Net income per common share - diluted... 0.91 0.79

Year Ended December 31, 1997:
Net income ............................. $11,637,161 $10,266,067
Net income per common share - basic..... 1.57 1.39
Net income per common share - diluted... 1.49 1.32

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.

39
40
A summary of the status of the Company's stock options as of December 31,
1995, 1996 and 1997 and the changes during the year ended on those dates is
presented below:

1995 1996 1997
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
-------- --------- -------- --------- -------- ----------

Balance, beginning ............ 592,960 $ 1.68 584,602 $ 6.92 785,185 $ 15.01
Options granted ............... 245,896 $ 13.51 373,420 $ 22.21 264,900 $ 24.90
Options canceled .............. (9,760) $ 1.09 (3,500) $ 2.78 (104,025) $ 21.93
Options exercised ............. (244,494) $ 0.61 (169,337) $ 23.71 (161,087) $ 6.28
-------- ------- -------- ------- ------- -------
Balance, end .................. 584,602 $ 6.92 785,185 $ 15.01 784,973 $ 20.58
======== ======== ========
Options exercisable at year end 22,063 118,290 204,664
======== ======== ========
Options available for grant........ 103,012 225,012 25,637

Weighted average fair value of
options granted during the year.... $ 6.53 $ 10.65 $ 10.36
======= ======= =======

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

Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Number Average Weighted Number Weighted
of Shares Remaining Average of Shares Average
Range of Exercise Outstanding Contractual Exercise Outstanding Exercise
Price at 12/31/97 Life Price at 12/31/97 Price
----------- ----------- -------- ----------- ---------

$0.61 to $0.61..... 9,038 5.2 $ 0.61 9,038 $ 0.61
$3.00 to $3.88..... 54,500 6.4 $ 3.59 15,000 $ 3.29
$4.75 to $4.75..... 13,000 6.6 $ 4.75 6,500 $ 4.75
$9.38 to $10.88.... 64,660 6.6 $ 9.72 35,501 $ 9.77
$18.00 to $26.38... 513,825 8.5 $22.05 126,125 $22.46
$29.94 to $34.75... 129,950 9.8 $30.28 12,500 $33.53
------- --- ------ ------- ------
$0.61 to $34.75.... 784,973 8.3 $20.58 204,664 $18.00

The fair value of options was calculated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 55% for 1995 and 1996 and 49% for 1997
(iii) weighted average risk-free interest rates of 6.3% for 1995 and 1996 and
6.1% for 1997, (iv) weighted average expected life of 3.5 years for 1995, 1996
and 1997, and (v) assumed forfeiture rate of 6%.

40
41

14. INTERNATIONAL SALES AND FOREIGN OPERATIONS

The Company operates in one business segment. Transfers between geographic
areas are made at prices reflecting market conditions. Geographic information
including sales and transfers between geographic areas is presented below:

December 31,
--------------------------------------------
1995 1996 1997
----------- ----------- -----------

Revenues from unaffiliated customers:
---------------------------------------------------
United States..................................... 42,971,064 58,199,248 68,370,757
Europe............................................ 10,617,073 25,765,766 33,243,792
Other............................................. 1,382,927 4,544,568 3,414,427
----------- ----------- ------------
Total........................................... $54,971,064 $88,509,582 $105,028,976
=========== =========== ============
Transfers between geographic regions:
---------------------------------------------------
United States..................................... -- 1,696,682 10,134,871
Europe............................................ 1,168,854 3,651,203 4,113,913
Other............................................. -- -- 643,302
----------- ----------- ------------
Total........................................... $ 1,168,854 $ 5,347,885 $ 14,892,086
=========== =========== ============
Total revenues:
---------------------------------------------------
United States..................................... 42,971,064 59,895,930 78,505,628
Europe............................................ 11,785,927 29,416,969 37,357,705
Other............................................. 1,382,927 4,544,568 4,057,729
Intersegment eliminations......................... (1,168,854) (5,347,885) (14,892,086)
----------- ----------- ------------
Total........................................... $54,971,064 $88,509,582 $105,028,976
=========== =========== ============
Net income (loss) :
---------------------------------------------------
United States..................................... 7,125,534 6,157,583 10,291,412
Europe............................................ (5,833) 940,973 1,345,749
Other............................................. -- -- --
----------- ----------- ------------
Total........................................... $ 7,119,701 $ 7,098,556 $ 11,637,161
=========== =========== ============
Identifiable assets:
---------------------------------------------------
United States..................................... 43,818,089 49,097,711 60,943,913
Europe............................................ 1,806,136 5,133,348 5,891,790
Other............................................. -- 14,000 26,045
----------- ----------- ------------
Total........................................... $45,624,225 $54,245,059 $ 66,861,748
=========== =========== ============
U.S. export sales to unaffiliated customers by
destination of sale:
---------------------------------------------------
Europe............................................ 7,181,631 13,299,596 15,220,000
Other............................................. 1,382,927 4,544,568 1,880,627
----------- ----------- ------------
Total........................................... $ 8,564,558 $17,844,164 $ 17,100,627
=========== =========== ============

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Summarized quarterly financial information for fiscal years 1997 and 1996
are as follows:

Quarter Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ----------- ------------ -----------

Fiscal year 1996
Net revenues $ 19,019,000 $22,730,000 $24,013,000 $22,748,000
Gross profit 8,768,000 9,940,000 9,958,000 9,672,000
Net income (loss) (743,000) 2,824,000 2,676,000 2,341,000
Net income (loss) per
share - Basic (0.10) 0.39 0.37 0.32
Net income (loss) per (0.10) 0.36 0.34 0.30
share - Diluted
Fiscal year 1997
Net revenues $ 23,170,000 $27,513,000 $25,609,000 $28,737,000
Gross profit 10,310,000 12,077,000 11,612,000 11,508,000
Net income 2,608,000 3,354,000 3,506,000 2,169,000
Net income per share - Basic 0.36 0.46 0.47 0.29
Net income per share - Diluted 0.34 0.43 0.44 0.28

41
42

The Company's quarterly operating results can fluctuate significantly
depending upon a variety of factors, including the mix of products shipped, the
changes in product prices by the Company and its competitors, the seasonality of
certain segments of the Company's markets, the lack of a meaningful backlog of
orders, the availability and costs of components, the historical
disproportionate level of orders received and sales made by the Company during
the last few weeks of each fiscal quarter, the market acceptance of new
products, and changes in general economic conditions. Because of these and other
factors, any inaccuracies in forecastings could adversely affect the Company's
financial position, results of operations and cash flows. Quarterly results are
not necessarily indicative of future performance for any particular period, and
there can be no assurance that the Company can maintain the levels of revenue
and profitability experienced over the past three years on a quarterly or annual
basis.

16. SUBSEQUENT EVENTS (UNAUDITED)

Sale of Verification Business to Printronix

In January , 1998, Printronix Inc, a leading manufacturer of computer
printers, acquired the assets and rights to the bar code verification business
and the RJS name from Eltron for approximately $2.8 million. Eltron retained the
rights to the in-line verification technology for use in its line of integrated
verified printing systems, as well as the QualaBar and ThermaBar industrial
thermal printer lines.

Purchase of New World Headquarters Building

In February 1998, the Company completed the purchase of a building in
Camarillo, California for approximately $7.8 million in cash. This 145,000
square foot building will serve as the Company's new world headquarters and
provide expanded manufacturing capacity.

Shareholder Rights Plan

In March 1998, the Company's Board of Directors approved the adoption of
a Shareholder Rights Plan pursuant to which the Company will declare a
distribution of one Preferred Share Purchase Right ("Right") on each outstanding
share of Common Stock as of April 3, 1998. The Rights will be attached to the
Company's Common Stock and will trade separately and be exercisable only in the
event that a person or group acquires or announces the intent to acquire 15% or
more of the Company's Common Stock. Each Right will entitle the shareholder to
buy one one-hundredth of a share of new series of junior participating preferred
stock at an exercise price of $120 per Right. The Rights expire on April 3,
2008.

42
43

ELTRON INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997

BALANCE AT BALANCE AT
BEGINNING CHARGED TO COST AND END OF
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD
- ----------- ------------ ----------- ---------- ------------

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS:

Year Ended December 31, 1995 $ 237,305 $ 10,163 $ 32,000 $ 215,468
Year Ended December 31, 1996 215,468 236,766 -- 452,234
Year Ended December 31, 1997 452,234 86,100 196,991 341,343

ALLOWANCE FOR INVENTORY OBSOLESCENCE:

Year Ended December 31, 1995 $ 19,622 $113,228 -- $ 132,850
Year Ended December 31, 1996 132,850 343,885 -- 476,735
Year Ended December 31, 1997 476,735 543,975 -- 1,020,710

VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS:

Year Ended December 31, 1995 $1,065,388 -- $214,388 $ 851,000
Year Ended December 31, 1996 851,000 -- -- 851,000
Year Ended December 31, 1997 851,000 -- 424,452 426,548

43
44
INDEX TO EXHIBITS

2.1 Stock Purchase Agreement Among Eltron International, Inc. and
Donner Media, Incorporated and All of the Shareholders of Donner
Media, Incorporated dated September 29, 1995 (without exhibits
and schedules).(6)

2.2 Contrat de Vente d'Actions Privilege S.A., registered January
30, 1996.(8)

2.3 Agreement of Merger and Plan of Reorganization dated February
29, 1996 by and among Eltron International, Inc., Eltron
Acquisition Corp., RJS Incorporated and the shareholders of RJS,
Incorporated (without exhibits and schedules).(1)

2.4 Amendment dated March 1, 1996 to Agreement of Merger and Plan of
Reorganization dated February 29, 1996 by and among Eltron
International, Inc., Eltron Acquisition Corp., RJS, Incorporated
and the shareholders of RJS, Incorporated.(7)

3.1 Amended and Restated Articles of Incorporation of the Company(2)

3.2 Bylaws of the Company as amended to date.(2)

3.3 Amendment to Amended and Restated Articles of Incorporation
filed January 18, 1994.(4)

3.4 Amendment to Amended and Restated Articles of Incorporation
filed May 9, 1995 relating to a 2-for-1 stock split.(3)

4.1 Form of Common Stock Certificate(5)

10.1 Agreement and Plan of Merger dated as of April 10, 1995, among
the Company, Eltron, Incorporated by Donald K. Skinner.(3)

10.2 Employment Agreement dated as of January 1, 1997 between Donald
K. Skinner and the Company.(8)

10.3 Employment Agreement dated as of January 1, 1997 between Hugh K.
Gagnier and the Company.(8)

10.4 Employment Agreement dated as of January 1, 1997 between Patrice
Foliard and the Company.(8)

44
45

10.5 Standard Offer Agreement and Escrow Instructions for Purchase of
Real Estate dated as of December 30, 1997 between Eltron
International, Inc. and Benchmark Holding Group. (filed
herewith)

10.6 Asset Purchase and Sale Agreement, dated January 16, 1998, by
and among RJS, Inc., Eltron International, Inc. and Verification
Systems International, Inc. (concerning sale of RJS' assets)
(without exhibits and schedules) (filed herewith).

21.1 List of Subsidiaries. (filed herewith)

23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith)

27.1 Financial Data Schedule. (filed herewith)

(1) Previously filed as an exhibit to the Company's Form 8-K filed March 12,
1996

(2) Previously filed with the Securities and Exchange Commission on November
26, 1993 as exhibits to the Company's Registration Statement on Form SB-2
(33-72200-LA)

(3) Previously filed with the Securities and Exchange Commission on May 9, 1995
as exhibits to the Company's Registration Statement on Form SB-2
(33-91480).

(4) Previously filed with the Securities and Exchange Commission on January 21,
1994 as exhibits to Amendment No. 1 to the Company's Registration Statement
on Form SB-2 (33-72200-LA).

(5) Previously filed with the Securities and Exchange Commission on February 8,
1994 as exhibits to Amendment No. 2 to the Company's Registration Statement
on Form SB-2 (33-72200-LA).

(6) Previously filed with the Securities and Exchange Commission on March 20,
1996 as exhibits to Amendment No. 1 to the Company's Registration Statement
on Form S-3 (333-2530).

(7) Previously filed with the Securities and Exchange Commission on May 14,
1996 as exhibits to Company's Form 8-K-A.

(8) Previously filed with the Securities and Exchange Commission on March 31,
1997 as exhibits to Company's Form 10-K.