UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

--------------------------------------------------------------------------------

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

--------------------------------------------------------------------------------
For the year ended December 31, 1999           Commission file Number  000-21750

                             PRIMESOURCE CORPORATION
             (Exact name of registrant as specified in its charter)

Pennsylvania                                                          23-1430030
------------                                                          ----------
(State or Other Jurisdiction of                                (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

4350 Haddonfield Road, Suite 222, Pennsauken, N.J.                         08109
--------------------------------------------------                         -----
(Address of Principal Executive Offices)                              (Zip Code)

                                  (856)488-4888
                                  -------------
                          Registrant's Telephone Number

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

None

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

Title of Each Class                    Name of Each Exchange on Which Registered
-------------------                    -----------------------------------------
Common Stock $.01 par value per share                                     Nasdaq


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                YES ( X ) NO (  )
                                    -----    ----

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

As of March 27,  2000 the  aggregate  market  value of the voting  stock held by
nonaffiliates was approximately $36.4 million.

As of March 27,  2000 there were  6,486,212  shares of common  stock  issued and
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The definitive  Proxy Statement to be filed pursuant to Regulation 14A under the
Securities  Exchange Act of 1934 (Item 10- Directors  Only, and Items 11, 12 and
13 of Part III). The index of exhibits is located on page 33 of this document.


<PAGE>



                                     PART I.

Certain  statements  contained in this annual report are  forward-looking.  Such
forward-looking  statements  are  subject  to a  number  of  factors,  including
material  risks,  uncertainties  and  contingencies,  which could  cause  actual
results  to  differ  materially  from  those  set  forth in the  forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
Company's ability to successfully  implement its business  strategies  including
successfully  integrating business acquisitions,  the effect of general economic
conditions and technological, competitive and other changes in the industry, the
impact of year 2000 issues and other risks and uncertainties as set forth in the
Company's  periodic  reports and other filings with the  Securities and Exchange
Commission.

ITEM I.  BUSINESS

PrimeSource  Corporation (the "Company") is a major national distributor serving
the printing and publishing  industry.  For approximately 135 years, the Company
or its unincorporated predecessor has been servicing this industry. The Company,
which was  incorporated  under the laws of the  Commonwealth  of Pennsylvania in
1954, was acquired as a wholly-owned subsidiary of Tasty Baking Company ("TBC"),
Philadelphia,  Pennsylvania in 1965. On August 1, 1993, TBC spun-off 100% of the
ownership of the Company in a dividend  distribution of the Company common stock
to the  shareholders  of TBC.  As a result,  the Company  became an  independent
publicly-owned company whose shares are traded on the Nasdaq National Market.

Since becoming a public company,  the Company has had three significant business
combinations.  In 1994,  Momentum  Corporation with sales of approximately  $165
million  merged into the  Company.  In 1996,  the Company  acquired  five of VGC
Corporation's  branch  operations with sales of  approximately  $55 million.  In
1998, the Company  acquired the graphic imaging group of Bell  Industries,  Inc.
with sales of approximately $135 million.  With these acquisitions,  the Company
has a significant presence in all of the major regions in the United States. The
Company believes there will be a continuing consolidation of distributors in the
industry and the Company's  business  strategy will continue to include pursuing
such acquisitions which will either expand the Company's presence in key markets
and/or offer new products and services to the printing and publishing industry.

The Company is  headquartered  in  Pennsauken,  New Jersey.  The  operations are
divided into three  geographic  regions.  The Company  maintains a decentralized
management  structure that allows the operating  regions broad discretion in the
conduct of their respective businesses,  including responsibility for management
of their  suppliers,  customers and employees.  Management is evaluated  against
their  financial  and  non-financial  goals which are  established  on an annual
basis.  The Company  emphasizes  sales growth as well as return on sales and net
assets.  The Company believes it must strive to maximize its long-term return on
capital  employed by quantifying this objective and applying it at the operating
level.  Management  believes that the concept of fostering and  perpetuating the
entrepreneurial  drive of operating  management will continue to be a key factor
in the Company's future success.

The Company presently represents over 500 suppliers,  provides more than 200,000
line items and has a customer  base in excess of 30,000.  No customer  accounted
for more than 5% of the Company's net sales in 1999.

The Company offers  consumables,  such as films,  plates,  blankets,  papers and
chemistries;  scanners, servers, work stations, image setters, computer-to-plate
devices and other digital electronic equipment and the applicable software;  and
press,  bindery  and  other  finishing  machinery.   The  Company  is  the  U.S.
distributor for Xeikon, which manufacturers  on-demand and variable data digital
color  printing  systems  and  supplies.  With the  product  range and  in-house
expertise,  the Company feels it is a premiere  provider of printing  solutions.
The printing industry has transitioned and continues to move through a period of
rapid technological change. Accordingly,  the Company's product mix continues to
evolve,  however,  it  remains  positioned  through  both  product  and  process
knowledge to fully service this market.

In addition,  there has been and continues to be a consolidation of the customer
base.  Many  printing  and imaging  customers  want a single  source for design,
pre-press preparation, and printing. Consolidation eliminates duplicate overhead
costs and creates  larger  entities  capable of  supporting  more  sophisticated
management  techniques,  from  strategic  planning  through  actual  production.
Management  expects to  continue to see this  consolidation  of  customers  into
larger operations offering more services to their customers.


<PAGE>


While  the  Company  sells  primarily  the  same  products  as its  competitors,
generally at similar prices,  the Company  attempts to  differentiate  itself by
providing a  value-added  approach  with  products and  training  and  technical
support that can make its customers more  efficient and effective.  In addition,
the  Company's  broad  geographic  presence  provides an  advantage in servicing
regional and national customers.

There are over 300  independent  dealers in the United States  competing in this
industry  with no dealer  accounting  for more  than 15% of the  total  industry
sales.  The  Company  believes  it is one of the  largest  dealers in the United
States in terms of  annual  sales and  covers a  broader  range of  geographical
markets  in the United  States  than any of its  competitors.  The  Company  has
minimal foreign sales or income.

The Company owns several  trademarks and tradenames.  To the extent  trademarks,
tradenames, or patents are significant to the Company's business, they are owned
by the manufacturers the Company represents.

The  Company  has minimal  backlog.  The nature of its  business is such that it
maintains  substantial  inventories in order to supply its customers immediately
upon receipt of an order.  Approximately  30% of the Company's  inventories  are
consigned  at various  customer  locations.  Usage of consigned  inventories  is
monitored  at least  monthly  through  a  physical  inventory  taken by  Company
personnel.

Company management does not believe that compliance with federal, state or local
laws relating to the protection of the environment  will have a material adverse
effect  on  the  Company's   consolidated   financial  position  or  results  of
operations.

The Company employed 730 employees at December 31, 1999.


<PAGE>


<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT

                                                 BUSINESS EXPERIENCE                                 POSITION HELD
NAME                                 AGE          LAST FIVE YEARS                                         SINCE
------------------------           ------    ----------------------------                    ----------------------
<S>                                   <C>                                                          <C>
James F. Mullan                       60       President and Chief Executive                           1991-Present
President and                                      Officer of Registrant
Chief Executive Officer

John H. Goddard, Jr.                  52       Executive Vice President                            September, 1994-
Executive Vice President                           of Registrant                                            Present


William A. DeMarco                    54       Vice President and Chief Financial Officer          September, 1994-
Vice President and                                 of Registrant                                            Present
Chief Financial Officer



Barry C. Maulding                     54       Vice President, General Counsel                     September, 1994-
Vice President,                                    and Corporate Secretary                                  Present
General Counsel and                                of Registrant
Corporate Secretary
</TABLE>







<PAGE>


ITEM 2.  PROPERTIES

The locations  and primary use of the physical  properties of the Company are as
follows:

<TABLE>
<CAPTION>
                                                                     Approximate
                                                                          Square
Location                                                                 Footage
----------------------------                                         -----------
Corporate Headquarters

<S>                                                                       <C>
       Pennsauken, NJ                                                      8,500

Distribution/Sales Facilities

       Atlanta, GA (Norcross)                                             23,200
       Birmingham, AL                                                     37,000
       Boston, MA (Hingham)                                               13,800
       Chicago, IL (Itasca)                                               49,600
       Cincinnati, OH                                                     35,000
       Dallas, TX                                                         17,500
       Denver, CO                                                         10,000
       Des Moines, IA (Ankeny)                                            14,000
       Houston, TX (Bellaire)                                             10,300
       Jackson, MS (Richland)                                              1,500
       Kalamazoo, MI                                                      14,700
       Kansas City, KS                                                    16,800
       Lancaster, PA (Lititz)                                             14,300
       Las Vegas, NV                                                       6,200
       Los Angeles, CA                                                    44,900
       Miami, FL (Miramar)                                                14,700
       Milwaukee, WI (New Berlin)                                         23,300
       Minneapolis, MN (Roseville)                                        76,800
       Mobile, AL                                                          8,000
       Nashville, TN                                                      16,000
       New Orleans, LA (Harahan)                                           8,800
       Omaha, NE                                                          15,000
       Orlando, FL                                                        14,400
       Pennsauken, NJ                                                     19,500
       Phoenix, AZ                                                        11,500
       Pittsburgh, PA                                                     15,800
       Portland, OR (Wilsonville)                                          8,800
       Sacramento, CA                                                      7,600
       St. Louis, MO                                                      22,000
       San Diego, CA                                                      10,600
       San Jose, CA                                                       21,300
       Seattle, WA (Auburn)                                                8,300
</TABLE>




All  of  the  properties  are  held  under  operating  leases,  except  for  the
Birmingham,  Des  Moines,  St.  Louis and  Seattle  facilities  which are owned.
Management believes that the Company's  properties are generally well maintained
and adequate for current operations and foreseeable expansion.  The inability of
the  Company  to renew  any  short-term  real  property  lease  would not have a
material effect on the Company's results of operations.


<PAGE>


ITEM 3. LEGAL PROCEEDINGS

The  Company  is from time to time  involved  in  litigation  incidental  to the
conduct of its  business.  Management  believes  that none of the  litigation in
which the Company is currently involved would, individually or in the aggregate,
have a material  effect on the  Company's  consolidated  financial  position  or
results of operations and cash flows when resolved in a future period.

The Company,  along with many other  parties,  is a defendant in a  contribution
action to determine  the liability for the state ordered clean up of a landfill.
The Company believes its insurance will cover any costs incurred in this matter.
The Company is also, in general, subject to possible loss contingencies pursuant
to  federal  or  state  environmental  laws  and  regulations.   Although  these
contingencies  could result in future  expenses or  judgments,  such expenses or
judgments  are  not  expected  to  have  a  material  effect  on  the  Company's
consolidated financial position or results of operations.

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

No matter was submitted to a vote of security  holders during the fourth quarter
of the year.


<PAGE>


                                    PART II.

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

The Company's common stock trades on the Nasdaq National Market under the symbol
PSRC.

The following  quarterly  stock price and dividend  information  is provided for
1999 and 1998.

<TABLE>
<CAPTION>
                                               Stock Price
                              ----------------------------        Cash Dividends
                                    High               Low             Per Share
--------------------------------------------------------------------------------
1999
----
<S>                            <C>              <C>                   <C>
   First Quarter               $    7.06        $     5.25            $     .045
   Second Quarter                   8.12              4.84                  .045
   Third Quarter                    8.00              4.50                  .045
   Fourth Quarter                   6.50              4.00                  .045

1998
----
   First Quarter               $   11.50        $     9.37             $    .045
   Second Quarter                  11.50              8.25                  .045
   Third Quarter                    9.75              7.87                  .045
   Fourth Quarter                   8.06              6.25                  .045
</TABLE>



In the first quarter of 2000, the Company  increased the quarterly cash dividend
to $.0475 per share.  The  payment of future cash  dividends  will depend on the
level and growth of the Company's earnings and the Company's needs for cash.

There were approximately 3,100 shareholders of record as of December 31, 1999.

For purposes of computing the aggregate  market value of the voting stock of the
Company held by nonaffiliates, as shown on the cover page of this report, it has
assumed that all the outstanding  shares were held by  nonaffiliates  except for
the shares held by directors and officers of the Company.  However,  this should
not be deemed to constitute an admission  that all directors and officers of the
Company are, in fact,  affiliates  of the  Company,  or that there are not other
persons who may be deemed to be affiliates of the Company.  Further  information
concerning  shareholdings of officers,  directors and principal  shareholders is
included in the Company's  definitive  proxy statement filed with the Securities
and Exchange Commission by April 30, 2000.


<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

This information  should be read in conjunction with the Company's  consolidated
financial statements and notes to such statements included herein.

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                          --------------------------------------------------------------
(in thousands, except per share amounts)        1999         1998(1)      1997(2)      1996         1995 (3)
--------------------------------------------------------------------------------------------------------
Statement of Income Data
<S>                                        <C>          <C>          <C>          <C>          <C>
Net sales ..............................   $ 545,273    $ 453,047    $ 414,867    $ 366,657    $ 357,077
Cost of sales ..........................     452,396      369,844      343,116      301,428      293,790
--------------------------------------------------------------------------------------------------------
Gross profit ...........................      92,877       83,203       71,751       65,229       63,287
Operating expenses .....................      78,699       72,820       63,257       57,033       58,615
--------------------------------------------------------------------------------------------------------
Income from operations .................      14,178       10,383        8,494        8,196        4,672
Interest expense .......................      (5,484)      (3,605)      (2,913)      (1,915)      (2,235)
Gain on sale of capital lease ..........                                 3,658
Loss on business divestiture ...........                                  (401)
Other income-net .......................          78          297          515          421          441
--------------------------------------------------------------------------------------------------------
Income before provision for income taxes       8,772        7,075        9,353        6,702        2,878
Provision for income taxes .............       3,663        2,975        3,862        2,788        1,232
--------------------------------------------------------------------------------------------------------

Net income .............................   $   5,109    $   4,100    $   5,491    $   3,914    $   1,646
========================================================================================================

Per Share Data

Net income per basic share .............   $     .78    $     .63    $     .84    $     .60    $     .25
Net income per diluted share ...........         .78          .62          .83          .60          .25
Cash dividends per share ...............         .18          .18          .18          .18          .38
========================================================================================================

Balance Sheet Data

Working capital ........................   $  94,236    $ 100,602    $  69,151    $  67,040    $  65,168
Total assets ...........................     196,807      190,697      138,491      134,175      119,804
Total long-term obligations ............      62,500       75,205       32,788       36,250       32,202
Shareholders' equity ...................      59,545       55,611       52,548       48,183       45,572
========================================================================================================


<FN>
(1)    Income for 1998,  includes a one-time  restructure  and other  expense of
       $1,050,000  ($634,000  after tax) relating to the  reorganization  of the
       Company into three regions and the integration of an acquisition.

(2)    Income  for  1997,  includes  a charge  to cost of sales  for  $2,300,000
       ($1,381,000  after  tax)  for  the  write-down  of  electronic  equipment
       inventory,  a  $3,658,000  ($2,183,000  after  tax) gain on the sale of a
       capital  lease and a  $401,000  ($241,000  after  tax) loss on a business
       divestiture.

(3)    Income for 1995,  includes a one-time  restructure  expense of $1,315,000
       ($794,000 after tax) relating to the  consolidation of five  distribution
       centers, the realignment of two others, and the centralization of certain
       financial and information services.
</FN>
</TABLE>



<PAGE>



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

Results of Operations

The following  table sets forth for the years  indicated  certain items from the
accompanying  Consolidated Statements of Income expressed as a percentage of net
sales.
<TABLE>
<CAPTION>

                                                   Years Ended December 31,
                                                 --------------------------
                                                  1999      1998      1997
---------------------------------------------------------------------------

<S>                                              <C>       <C>       <C>
Net sales ..................................     100.0%    100.0%    100.0%
Cost of sales ..............................      83.0      81.6      82.7
--------------------------------------------------------------------------
Gross profit ...............................      17.0      18.4      17.3
Selling, general and administrative expenses      13.6      15.2      14.5
Depreciation and amortization ..............        .6        .6        .6
Provision for doubtful accounts ............        .2        .1        .2
Restructure and other ......................                  .2
--------------------------------------------------------------------------
Income from operations .....................       2.6       2.3       2.0
Interest expense ...........................      (1.0)      (.8)      (.7)
Gain on sale of capital lease ..............                            .9
Loss on business divestiture ...............                           (.1)
Other income-net ...........................                  .1        .1
--------------------------------------------------------------------------

Income before provision for income taxes ...       1.6       1.6       2.2
Provision for income taxes .................        .7        .7        .9
--------------------------------------------------------------------------
Net income .................................        .9%       .9%      1.3%
==========================================================================
</TABLE>


COMPARISON OF 1999 TO 1998

Net income for 1999 was  $5,109,000,  or $.78 per  diluted  share,  compared  to
$4,100,000,  or $.62 per diluted share,  in 1998.  Excluding a one-time  pre-tax
restructure  and other charge of $1.05  million in 1998,  the net income in 1998
was $4,734,000, or $.71 per diluted share.

This  increase  in net income for 1999 was the result of  improved  income  from
operations.  During the year, the Company was able to successfully integrate the
acquisition of Bell Industries'  Graphic Imaging Group ("Bell  acquisition") and
complete the  reorganization  of the Company into three  regions.  Excluding the
1998  one-time  charge,  income  from  operations  increased  24% in  1999  from
$11,433,000  in 1998 to  $14,178,000 in 1999, the highest level in the Company's
history.  Including  the  one-time  charge,  1998  income  from  operations  was
$10,383,000.

Sales  for  1999  were   $545,273,000,   a  20%  increase  over  1998  sales  of
$453,047,000.   This  sales  increase  is  primarily  the  result  of  the  Bell
acquisition,  increased  national  account  sales  and over a 200%  increase  in
digital press sales.

Gross  profit as a percent of sales was 17% in 1999  compared  to 18.4% in 1998.
This decrease is primarily the result of changes in product and customer mix and
lower manufacturer rebates.

Selling,  general and  administrative  expenses as a percent of sales  decreased
from 15.2% in 1998 to 13.6% in 1999. In 1998, the Company incurred a restructure
and other charge of $1.05 million related to reorganizing the Company into three
regions  and  integrating  the Bell  operations.  This  percentage  decrease  in
selling,   general  and   administrative   expenses   reflects  the   successful
implementation of this reorganization and integration program.

Depreciation  and  amortization  expense  increased  from  $2,507,000 in 1998 to
$3,096,000 in 1999. This increase is due to additional goodwill  amortization as
a result of the Bell acquisition.


<PAGE>

The  provision  for  doubtful  accounts  increased  from  $440,000  in  1998  to
$1,186,000  in 1999.  This  increase is due to  increased  sales in 1999,  plus,
losses that occurred in transitioning accounts acquired in the Bell acquisition.

Interest  expense  increased from $3,605,000 in 1998 to $5,484,000 in 1999. This
increase is attributable to the debt associated with the Bell acquisition.

The effective income tax rate remained relatively constant between the two years
at 41.8% in 1999 and 42% in 1998. The difference between the effective tax rates
and the federal statutory rate of 34% is primarily attributable to the effect of
state income taxes and non-deductible expenses.

For the year 2000, the Company expects to continue to see strong sales growth in
national  accounts and digital press sales. The Company  continues to review the
substantial   technological  changes  occurring,   and  the  Company's  existing
operating  structure,  to  determine  what  changes can be made to better  serve
customers,  improve efficiencies and/or reduce costs. In addition,  assuming the
printing  industry and the economy  remain stable,  the Company  expects to also
lower its bad debt expense.

COMPARISON OF 1998 TO 1997

Net  income for 1998 was  $4,100,000,  or $.62 per  diluted  share  compared  to
$5,491,000,  or $.83 per diluted share in 1997. Included in the 1998 income is a
restructure  and other  charge of $1.05  million for  aligning  the Company into
three regions and integrating the Bell acquisition.  Included in the 1997 income
is a $3.7 million gain on the sale of a capital lease, a $2.3 million electronic
equipment   inventory   write-down  and  a  $0.4  million  loss  on  a  business
divestiture.  Excluding these one-time items for both years, net income for 1998
was  $4,734,000  or $.71 per diluted  share  compared to  $4,930,000 or $.74 per
diluted share for 1997.

Sales in 1998 were $453,047,000 compared to $414,867,000 in 1997, an increase of
9%.  This  sales  increase  is  primarily  the  result of the Bell  acquisition.
Excluding  the  effect of the Bell  acquisition,  sales of digital  presses  had
strong  growth and  consumable  sales  increased  slightly.  Sales of electronic
prepress systems decreased,  which tended to offset most of the overall internal
sales growth.

Gross profit as a percent of sales was 18.4% in 1998  compared to 17.8% in 1997,
before including the effect of the $2.3 million electronic  equipment  inventory
write-down in 1997. The  improvement in 1998 is primarily the result of stronger
margins from systems  sales,  increased  digital press sales with higher margins
and higher margins from the Bell business.  Including the inventory  write-down,
the gross profit percentage in 1997 was 17.3%.

Selling,  general and  administrative  expenses as a percent of sales  increased
from  14.5%  in 1997 to  15.2%  in  1998.  This  increase  is  primarily  due to
additional  personnel  costs  associated  with  electronic  prepress  sales.  In
addition,  the benefits of integrating the Bell  acquisition did not occur until
1999.

In the fourth  quarter of 1998,  the Company  incurred a  restructure  and other
charge of $1.05 million related to  reorganizing  the Company into three regions
and  integrating  the Bell  operations.  The costs  incurred  were for  employee
severances  and closure of duplicate  facilities.  The Company  anticipates  the
savings from this reorganization  will bring the percentage of selling,  general
and  administrative  expenses to sales to levels  consistent  with or lower than
preceding years.

In 1998, the provision for doubtful accounts decreased to $440,000 from $694,000
in 1997. The Company has benefited from effective credit policies and the strong
economy.

Interest  expense  increased from $2,913,000 in 1997 to $3,605,000 in 1998. This
increase is attributable to the debt associated with the Bell acquisition.

In 1997,  the  Company  sold a  capital  lease  for a gain of $3.7  million  and
disposed of a business operation for a loss of $0.4 million. In 1998, there were
no similar disposals.

The effective  income tax rate  increased from 41.3% in 1997 to 42% in 1998. The
higher rate in 1998 is primarily due to  non-deductible  expenses being a higher
percent of income in 1998 compared to 1997. The difference between the effective
tax rates and the  federal  statutory  rate of 34% for both  years is  primarily
attributable to the effect of state income taxes and non-deductible expenses.

Financial Condition and Liquidity

Cash provided by operating  activities was  $10,196,000 in 1999 and cash used in
operating   activities   was   $2,302,000  and  $1,795,000  in  1998  and  1997,
respectively. The improvement between 1999 and 1998 is primarily attributable to
changes in working capital levels. Changes in assets and liabilities resulted in
a $1.4 million  inflow of cash in 1999  compared to an outflow of $10 million in
1998.  Excluding the impact of changes in assets and liabilities,  the cash flow

<PAGE>

was $8.8 million in 1999, a 15% increase over the $7.7 million in 1998. In 1997,
the cash flow  before the effect of changes in assets and  liabilities  was $4.9
million.

Cash flow used by investing  activities was $487,000 and $45,618,000 in 1999 and
1998,  compared to cash provided by investing  activities of $3,650,000 in 1997.
The large  outflow in 1998 was  primarily  due to the Bell  acquisition  and the
inflow  in 1997 was  primarily  the  result of the  proceeds  from the sale of a
capital lease. In the three years,  property and equipment  expenditures  ranged
between $1.5 and $1.9 million.  The Company had no material capital  expenditure
commitments at December 31, 1999 and expects capital expenditures for 2000 to be
approximately $2 million.

Cash flows from financing  activities were $9,709,000 used in 1999,  $47,920,000
provided  in  1998,  and  $1,855,000  used in 1997.  The  cash  used in 1999 was
primarily the result of reducing debt with cash  provided from  operations.  The
cash  provided  in 1998  was  primarily  from  additional  debt and was used for
acquisitions.  The cash used in 1997 was primarily for the repayment of debt and
was primarily  provided from the proceeds from the sale of the capital lease and
the business divestiture.

The Company's  primary source of debt financing is a revolving  credit agreement
with a commitment of $75 million and $62.5 million  outstanding  at December 31,
1999. In addition, the Company has $7.5 million available under short-term lines
with $1.0 million  outstanding at December 31, 1999. The Company  believes these
sources of  borrowing,  combined  with cash from  operations,  is  sufficient to
support the current capital requirements of the Company.

Year 2000 Issues

The Company's business system required program  modifications  prior to the year
2000 for what is commonly referred to as the "Year 2000 Issue." Similar to other
systems,  the  Company's  system had to be modified to change the date for years
from an  abbreviated  two-digit  number to a  four-digit  number.  Without  this
modification,  the  abbreviated  two-digit  number would have caused many of the
functions  within the system to operate  improperly or  malfunction  in the year
2000.

The above modification was part of an extensive system enhancement. The cost for
the  complete  enhancement  was  approximately  $300,000.  No other  significant
information system additions have been postponed as a result of this project.

To date, the Company has not identified any Year 2000 problems.  The Company has
not  incurred  any  problems  with  its  business  system.  There  have  been no
significant  problems  with  suppliers  or  customers,  or  services  to Company
facilities such as telecommunication or power.

The Company realizes  problems could arise during the year, and will continually
be reviewing its system  during the year to identify  potential  problems.  With
regard to future readiness of suppliers,  customers and service providers, based
on the lack of problems incurred in January,  2000, the Company does not plan on
any additional  testing of their readiness  throughout the remainder of the year
unless  problems start to evolve or such  companies  indicate they have concerns
about their systems.

The Company has not been notified by any current or former customers of any Year
2000 problems with equipment  sold to them by the Company.  If claims related to
this  equipment  were to occur,  the  Company  believes  it would  have  several
defenses  to such  claims,  but it is  presently  unable  to  estimate  what the
aggregate cost of defending and/or settling any such claims would be.

New Accounting Standards

In 1999, the Financial  Accounting Standards Board issued Statement of Financial
Accounting  Standards  ("SFAS") No. 137, "Deferral of the Effective Date of SFAS
133" which defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities",  to all fiscal quarters of all fiscal years
beginning  after June 15, 2000.  SFAS No. 133  establishes  new  procedures  for
accounting for  derivatives  and hedging  activities and supersedes and amends a
number of existing  standards.  The Company  currently  uses  interest rate swap
agreements  ("swaps") to  effectively  fix the interest rate on a portion of the
Company's  floating rate debt. Under current  accounting  standards,  no gain or
loss is  recognized  on  changes in the fair  value of these  swaps.  Under this
statement, gains or losses will be recognized based on changes in the fair value
of the swaps which generally occur as a result of changes in interest rates. The
Company  is  currently  evaluating  the  financial  impact  of  adoption  of the
Statement.  The  adoption  is not  expected  to have a  material  effect  on the
Company's consolidated results of operations, financial position or cash flows.


<PAGE>

Market Sensitive Instruments and Risk Management

The Company utilizes  derivative  financial  instruments to reduce interest rate
risks.  The Company does not hold or issue financial  instruments for trading or
speculative  purposes.  The counterparty is a major commercial bank. At December
31, 1999, the Company had one derivative financial instrument,  an interest rate
swap  agreement  with a  notional  amount of $17  million.  This swap  agreement
effectively  fixes the interest rate on a like amount of the Company's  floating
rate debt at 6.16% plus the  Company's  LIBOR spread in effect at the time.  The
effective  rate was 7.86% at December 31, 1999.  The swap expires on November 6,
2001.  A 100 basis point  downward  parallel  shift in the yield curve would not
have a material  effect on the  Company's  results of  operations,  liquidity or
financial condition.


<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                             PRIMESOURCE CORPORATION

                        Consolidated Statements of Income

                                                           Years Ended December 31,
                                                -----------------------------------
(Thousands of dollars, except per share amounts)     1999         1998         1997
-----------------------------------------------------------------------------------

<S>                                             <C>          <C>          <C>
Net sales ...................................   $ 545,273    $ 453,047    $ 414,867
Cost of sales ...............................     452,396      369,844      343,116
-----------------------------------------------------------------------------------
Gross profit ................................      92,877       83,203       71,751
Selling, general, and administrative expenses      74,417       68,823       60,151
Depreciation and amortization ...............       3,096        2,507        2,412
Provision for doubtful accounts .............       1,186          440          694
Restructure and other .......................                    1,050
-----------------------------------------------------------------------------------
Income from operations ......................      14,178       10,383        8,494
Interest expense ............................      (5,484)      (3,605)      (2,913)
Gain on sale of capital lease ...............                                 3,658
Loss on business divestiture ................                                  (401)
Other income-net ............................          78          297          515
-----------------------------------------------------------------------------------
Income before provision for income taxes ....       8,772        7,075        9,353
Provision for income taxes ..................       3,663        2,975        3,862
-----------------------------------------------------------------------------------

Net income ..................................   $   5,109    $   4,100    $   5,491
===================================================================================

Net income per share

Basic .......................................   $     .78    $     .63    $     .84
Diluted .....................................         .78          .62          .83
===================================================================================

<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                             PRIMESOURCE CORPORATION

                           Consolidated Balance Sheets

                                                                               December 31,
                                                                       --------------------
(Thousands of dollars, except share information)                            1999       1998
-------------------------------------------------------------------------------------------
Assets
Current Assets
<S>                                                                     <C>        <C>
Trade receivables, less allowances of $3,127 and $3,419, respectively   $ 83,012   $ 73,602
Other receivables ...................................................     10,683      9,973
Inventories .........................................................     68,379     69,111
Deferred income taxes ...............................................      3,228      2,852
Other ...............................................................        843        962
-------------------------------------------------------------------------------------------
Total Current Assets ................................................    166,145    156,500
Property and equipment, net .........................................     12,063     12,773
Excess of cost over net assets of businesses acquired,
  net of accumulated amortization of $3,043 and $1,958, respectively      16,427     17,526
Deferred income taxes ...............................................        977      1,567
Long-term receivables ...............................................        585        697
Other assets ........................................................        610      1,634
-------------------------------------------------------------------------------------------
Total Assets ........................................................   $196,807   $190,697
===========================================================================================

Liabilities and Shareholders' Equity
Current Liabilities

Current portion of long-term obligations ............................   $    104   $  1,128
Notes payable .......................................................        953      3,500
Accounts payable ....................................................     45,766     33,745
Book overdraft ......................................................     16,937      9,195
Accrued payroll and benefits ........................................      4,241      3,745
Other accrued liabilities ...........................................      3,908      4,585
-------------------------------------------------------------------------------------------
Total Current Liabilities ...........................................     71,909     55,898
Long-term obligations, net of current portion .......................     62,500     75,205
Accrued pension and other liabilities ...............................      1,068      2,070
Postretirement benefits other than pension ..........................      1,785      1,913
-------------------------------------------------------------------------------------------
Total Liabilities ...................................................    137,262    135,086
-------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $.01 par value, 24,000,000 shares authorized
6,536,212 and 6,536,018 issued and outstanding, respectively ........         65         65
Additional paid-in capital ..........................................     25,725     25,724
Retained earnings ...................................................     33,755     29,822
-------------------------------------------------------------------------------------------
Total Shareholders' Equity ..........................................     59,545     55,611
-------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ..........................   $196,807   $190,697
===========================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                             PRIMESOURCE CORPORATION

                      Consolidated Statements of Cash Flows

                                                                      Years Ended December 31,
                                                                ------------------------------
(Thousands of dollars)                                          1999         1998         1997
----------------------------------------------------------------------------------------------
Operating Activities

<S>                                                        <C>          <C>          <C>
Net income .............................................   $   5,109    $   4,100    $   5,491
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
   Depreciation ........................................       2,003        1,957        1,980
   Amortization ........................................       1,093          550          432
   Provision for doubtful accounts .....................       1,186          440          694
   Pension benefit .....................................        (959)        (218)        (190)
   Gain on sale of capital lease .......................                                (3,658)
   Loss on business divestiture ........................                                   401
   Restructure and other expense .......................                      996
   Other ...............................................         406         (112)        (201)
Changes in assets and liabilities, net of
effects from business combinations/divestitures:
   Receivables .........................................     (11,306)      (1,075)        (574)
   Inventories .........................................         732        2,388       (7,754)
   Other current assets ................................         119          278         (484)
   Income taxes ........................................         843         (668)         100
   Accounts payable and other accrued liabilities ......      11,303      (10,803)       2,255
   Pension and other postretirement benefits ...........        (333)        (135)        (287)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ....      10,196       (2,302)      (1,795)

Investing Activities
Proceeds from sales of property and equipment ..........          67          163          565
Proceeds from sale of capital lease ....................                                 3,151
Purchase of property and equipment .....................      (1,452)      (1,743)      (1,918)
Proceeds from business divestitures ....................                                 2,388
Payments for business acquisitions, net of cash acquired        (100)     (43,946)
Decrease in long-term receivables ......................         112          127           71
Decrease (increase)  in other assets ...................       1,017         (185)        (254)
Other, net .............................................        (131)         (34)        (353)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ....        (487)     (45,618)       3,650

Financing Activities
Net increase (decrease) in short-term borrowings .......      (2,547)       3,500
Proceeds from long-term obligations ....................      92,600      144,300       74,600
Repayment of long-term obligations .....................    (106,329)    (102,429)     (77,048)
Increase in book overdraft .............................       7,742        3,586        1,762
Dividends paid .........................................      (1,176)      (1,175)      (1,172)
Purchase of common stock ...............................                                  (106)
Proceeds from exercise of stock options ................           1          138          109
----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ....      (9,709)      47,920       (1,855)
----------------------------------------------------------------------------------------------

Net change in cash .....................................          --           --           --
Cash at beginning of year ..............................          --           --           --
----------------------------------------------------------------------------------------------
Cash at end of year ....................................   $      --    $      --    $      --
==============================================================================================

<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                             PRIMESOURCE CORPORATION

                 Consolidated Statements of Shareholders' Equity


                                               Common Stock                                   Unamortized
                                             ($.01 Par Value)      Additional                  Restricted
(Thousands of dollars,                 ------------------------       Paid-in      Retained         Stock
 except share information)                 Shares        Amount       Capital      Earnings        Awards         Total
-----------------------------------------------------------------------------------------------------------------------
<S>              <C>                    <C>          <C>           <C>           <C>           <C>           <C>
Balance, January 1, 1997 ...........    6,514,795    $       65    $   25,533    $   22,628    $      (43)   $   48,183
Net income .........................                                                  5,491                       5,491
Cash dividends paid to
   shareholders ($.18 per share) ...                                                 (1,172)                     (1,172)
Stock options exercised and related
   tax benefit, net of shares
   received as payment upon exercise       15,837                         109                                       109
Amortization of restricted

   stock awards ....................                                                                   43            43
Purchase and retirement
   of common stock .................      (14,012)                        (56)          (50)                       (106)
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 .........    6,516,620            65        25,586        26,897          --          52,548
Net income .........................                                                  4,100                       4,100
Cash dividends paid to
   shareholders ($.18 per share) ...                                                 (1,175)                     (1,175)
Stock options exercised and related
   tax benefit, net of shares
   received as payment upon exercise       19,398                         138                                       138
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 .........    6,536,018            65        25,724        29,822          --          55,611
Net income .........................                                                  5,109                       5,109
Cash dividends paid to
   shareholders ($.18 per share) ...                                                 (1,176)                     (1,176)
Stock options exercised ............          200                           1                                         1
Purchase and retirement
   of common stock .................           (6)
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 .........    6,536,212    $       65    $   25,725    $   33,755    $     --      $   59,545
=======================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


                             PRIMESOURCE CORPORATION

                   Notes to Consolidated Financial Statements

1.       Summary of Significant Accounting Policies

         Basis of Consolidation

         PrimeSource  Corporation  (the  "Company")  is a  national  distributor
         serving  the  printing  and  publishing  industries.  The  consolidated
         financial  statements  include  the  accounts  of the  Company  and its
         wholly-owned  subsidiaries.  All significant intercompany  transactions
         and accounts have been eliminated.

         Cash and Cash Equivalents

         The Company  considers all highly  liquid  temporary  cash  investments
         purchased  with  a  maturity  of  three  months  or  less  to  be  cash
         equivalents.  The  Company's  cash  management  program  utilizes  zero
         balance  accounts.  Accordingly,  in  general,  the Company has none or
         minimal cash balances.  Book overdraft  balances have been reclassified
         to a current liability in the accompanying Consolidated Balance Sheets.

         Inventory Valuation

         Inventories  are  stated  at the  lower  of  cost  or  market.  Cost is
         determined using the last-in, first-out (LIFO) and first-in,  first-out
         (FIFO) methods.

         Property and Equipment

         Property  and  equipment  are carried at cost or  assigned  values as a
         result of  acquisitions.  Costs of major  additions,  replacements  and
         betterments are  capitalized,  and maintenance and repairs which do not
         extend the life of the respective assets are expensed as incurred. When
         property is retired or otherwise disposed, the cost of the property and
         the related accumulated depreciation are removed from the accounts, and
         any  resulting  gains or losses are  reflected  in current  operations.
         Depreciation is computed by the straight-line method over the estimated
         useful  lives of the  assets  which  range  from three to ten years for
         machinery  and  equipment  and ten to forty  years  for  buildings  and
         improvements.

         Capital  leases are  included  under  property and  equipment  with the
         corresponding  amortization  included  in  depreciation.   The  related
         financial   obligations  under  the  capital  leases  are  included  in
         long-term  obligations.  Capital  leases are amortized  over the useful
         lives of the respective assets.

         Long-lived  assets  are  reviewed  for  impairment  whenever  events or
         changes  in  circumstances  indicate  the  carrying  amount  may not be
         recoverable.  If the sum of the expected future undiscounted cash flows
         is less than the carrying amount of the asset, a loss is recognized for
         the difference between the fair value and carrying value of the asset.

         Excess of Cost Over Net Assets of Businesses Acquired

         The  excess of the total  acquisition  cost over the fair  value of net
         tangible assets  acquired (the "goodwill  acquired") is being amortized
         by the straight-line  method over periods ranging from fifteen to forty
         years. The Company's policy is to record an impairment loss against the
         goodwill  acquired in the period  when it is  determined  the  carrying
         amount of the net assets may not be recoverable.  The Company  performs
         this  evaluation  on a quarterly  basis.  This  determination  includes
         evaluation  of  factors  such as current  market  value,  future  asset
         utilization,  business climate and future net cash flows  (undiscounted
         and  without  interest)  expected  to  result  from  the use of the net
         assets.

         Revenue Recognition

         Revenue is generally  recognized when products are shipped and title is
         passed to the customer.

         Derivative Financial Instruments

         The  Company  utilizes  derivative  financial   instruments  to  reduce
         interest  rate  risks.  The  Company  does not hold or issue  financial
         instruments for trading or speculative purposes.  The counterparty is a
         major  commercial  bank.  Management  believes losses related to credit
         risk are remote. The instruments are accounted for on an accrual basis.
         The net cash amounts paid or received under such agreements are accrued
         and recognized as an adjustment to interest expense.

         Fair Value of Financial Instruments

         The carrying value of the Company's short-term  financial  instruments,
         such as receivables and notes and accounts  payable,  approximate their
         fair values,  based on the short-term  maturities of these instruments.

<PAGE>


         The carrying value of long-term  investments,  consisting  primarily of
         long-term notes receivable, and long-term debt obligations,  consisting
         primarily of revolving credit debt with interest rates based on current
         short-term  market  rates,  approximates  the market value based on the
         estimated  discounted  value of future cash flows at December  31, 1999
         and 1998. The fair value of derivative  financial  instruments is based
         on the quoted settlement cost on the balance sheet date.

         Concentrations of Credit Risk

         Concentrations  of credit risk with  respect to trade  receivables  are
         limited due to a large  customer  base and its  geographic  dispersion.
         Ongoing  credit  evaluations  of  customers'  financial  condition  are
         performed and, generally, no collateral is required.

         Stock-Based Compensation

         The Company  applies the  intrinsic  value based method  prescribed  in
         Accounting  Principles  Board  Opinion  No. 25 to account  for  options
         granted to employees to purchase common shares.  Statement of Financial
         Accounting  Standards  ("SFAS") No. 123,  "Accounting  for  Stock-Based
         Compensation"  requires that  companies  electing to continue using the
         intrinsic  value method must make pro forma  disclosures  of net income
         and  net  income  per  share  as  if  the  fair-value-based  method  of
         accounting had been applied.

         Income Taxes

         Income tax  expense  is based on pretax  financial  accounting  income.
         Deferred tax assets and liabilities are recognized for the expected tax
         consequences of temporary  differences  between the tax basis of assets
         and liabilities and their reported amounts.

         Net Income Per Common Share

         Basic net income per share is computed  by  dividing  net income by the
         weighted-average number of common shares outstanding during the period.
         Diluted net income per share is computed by dividing  net income by the
         weighted-average  number of common shares outstanding during the period
         adjusted for the number of shares that would have been  outstanding  if
         the dilutive potential common shares had been issued.

         Estimates and Assumptions

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

         Reclassifications

         Certain  reclassifications  of prior  years'  amounts have been made to
         conform to the current year's presentation.

2.       Business Acquisitions

         In  September  1998,  the  Company  acquired  the  net  assets  of Bell
         Industries'  Graphic Imaging Group ("Bell  acquisition")  with thirteen
         locations in the West,  Southwest and Midwest for  approximately  $42.5
         million.  The excess of the  acquisition  costs  over the net  tangible
         assets acquired is included in the  Consolidated  Balance Sheets and is
         being  amortized on a straight-line  basis over 20 years.  Assuming the
         acquisition  had  occurred  at the  beginning  of the  year,  unaudited
         pro-forma  sales and net income for the year ended  December  31, 1998,
         would have been approximately $552.7 million and $4.8 million ($.73 per
         basic share and $.72 per  diluted  share),  respectively.  For the year
         ended  December 31,  1997,  unaudited  pro-forma  sales and net income,
         would have been approximately $571.2 million and $5.9 million ($.90 per
         basic  share  and $.88 per  diluted  share),  respectively.  The  sales
         decrease  between  1997 and  1998  reflects  reduced  sales in the Bell
         business.

         In April 1998,  the  Company  acquired  the assets of Joseph  Genstein,
         Inc., a graphics  distributor in the Pittsburgh area, for approximately
         $1.5 million.  In 1999,  an additional  $100,000 was paid in accordance
         with a contingent  incentive provision under the purchase agreement for
         obtaining a specified sales level after the acquisition.  The excess of
         the  acquisition  costs over the net tangible  assets acquired for this
         acquisition is included in the Consolidated Balance Sheets and is being
         amortized on a straight-line basis over 15 years. The pro-forma results
         of this  acquisition  would  not have had a  significant  impact on the
         Company's consolidated results of operations.

         These   acquisitions   have  been   accounted  for  as  purchases  and,
         accordingly,   are  included  in  operations   from  their   respective
         acquisition dates.


<PAGE>

3.       Restructure and Other

         In 1998, the Company  reorganized  the  operations  into three regions.
         This included  integrating  the Bell  acquisition  operations  into the
         applicable  regions and, where  appropriate,  combining Bell facilities
         with existing  PrimeSource  facilities in the area. In conjunction with
         this  reorganization  in  1998,  the  Company  incurred  $1,050,000  in
         restructure  and other  expenses  composed  of  $600,000  for  employee
         severance compensation for 36 employees,  $350,000 in the write-down of
         a building to net  realizable  value,  and  $100,000 for lease costs on
         vacated  leased  facilities.  At  December  31,  1998,  $54,000  of the
         severance  compensation had been paid. In 1999,  several of the vacated
         leased  facilities were subleased  resulting in a $20,000  reduction in
         this  anticipated  loss.  In  February  2000,  the  building  was  sold
         resulting in an additional loss of $80,000. This net $60,000 additional
         expense was  recognized  in the  Consolidated  Statements  of Income in
         1999.  The  following  table sets forth the  components at December 31,
         1998 and the activity during 1999.

<TABLE>
<CAPTION>
                                           Balance                                                     Balance
                                      December 31,                Cash              Income        December 31,
         (Thousands of dollars)               1998        Expenditures         Adjustments                1999
         -----------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                  <C>                 <C>
          Employee severance                 $ 546              $ (546)              $ ---               $ ---
          Lease obligations                    100                 (80)                (20)                ---
          Asset write-downs                    350                                      80                 430
          ----------------------------------------------------------------------------------------------------
          Total ............                 $ 996              $ (626)               $ 60               $ 430
         =====================================================================================================
</TABLE>
          The asset  write-downs  are  included as a reduction  in property  and
          equipment on the Consolidated Balance Sheets.

4.       Sale of Capital Lease

         In 1997,  the  Company  sold its rights to a building  lease in the Los
         Angeles  California area for  $3,151,000.  The lease had been accounted
         for as a capital lease. The pretax gain on the sale, after  eliminating
         the associated net financial  basis of the lease assets of $695,000 and
         the liability for future lease payments of $1,202,000,  was $3,658,000.
         Subsequent to the sale, the Company's operations  previously located in
         the facility were moved to a new leased facility in the area.

5.       Business Divestitures

         In  1997,  the  Company  completed  the  sale of a  pressroom  material
         converting  operation.  The pretax  loss on the sale was  $401,000.  In
         conjunction  with  the  sale,  the  Company  entered  into  a  supplier
         agreement with the buyer. In 1996, the Company sold  substantially  all
         of the assets of its  Rochester,  New York  subsidiary,  Onandaga Litho
         Supply, Co., Inc. There was no gain or loss on this sale.

6.       Cash Flow Information

         Cash  payments  for  interest and income taxes (net of refunds) for the
         years ended December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)        1999       1998       1997
         --------------------------------------------------------

<S>                                  <C>        <C>        <C>
          Interest ...               $5,687     $3,368     $2,742
          Income taxes                2,750      3,760      3,878
         ========================================================
</TABLE>


         Excluded from the  accompanying  Consolidated  Statements of Cash Flows
         for the year ended  December  31, 1998 are the fair value of the assets
         acquired in the Bell  acquisition  of $55,314,000  and the  liabilities
         assumed or created in the same acquisition of $11,368,000.


<PAGE>


7.       Inventories

         Inventories,  which are  primarily  finished  goods,  at  December  31,
         consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)              1999          1998
         ------------------------------------------------------

<S>                                       <C>           <C>
           Last-in, first-out (LIFO)      $32,400       $33,631
           First-in, first-out (FIFO)      35,979        35,480
         ------------------------------------------------------
           Total inventories .......      $68,379       $69,111
         ======================================================
</TABLE>

         The current  replacement  costs of  inventories  exceeds LIFO values by
         approximately  $5,785,000 and $5,660,000 at December 31, 1999 and 1998,
         respectively.

         In 1997,  the Company  expensed $2.3 million to  write-down  electronic
         equipment  inventory  to current  market  value.  This  amount has been
         recorded in cost of sales in the Consolidated Income Statements.

8.       Property and Equipment

         Property and equipment, net, at December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                  1999        1998
         ------------------------------------------------------------------------

<S>                                                          <C>         <C>
            Land .........................................   $  1,354    $  1,354
            Buildings and improvements ...................      7,300       7,381
            Leased property ..............................        399         399
            Machinery, equipment and other ...............     13,707      14,623
         ------------------------------------------------------------------------
                                                               22,760      23,757
            Less accumulated depreciation and amortization    (10,697)    (10,984)
         ------------------------------------------------------------------------
          Property and equipment, net ....................   $ 12,063    $ 12,773
         ========================================================================
</TABLE>


9.       Notes Payable and Long-Term Obligations

         The long-term obligations of the Company at December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                  1999        1998
         ------------------------------------------------------------------------

<S>                                                          <C>         <C>
          Revolving credit agreement .....................   $ 62,500    $ 74,800
          Term loan (interest rate of 6.03%), principal
            payments of $167 plus interest due quarterly .                    667
          Term loan (interest rate of 6.03%), principal
            payments of,  $134 plus interest due quarterly                    535
          Other miscellaneous obligations ................        104         331
          -----------------------------------------------------------------------
                                                               62,604      76,333
          Less current portion ...........................       (104)     (1,128)
          -----------------------------------------------------------------------
          Net long-term obligations ......................   $ 62,500    $ 75,205
          =======================================================================
</TABLE>

         Maturities of long-term  obligations are $104,000 in 2000,  $62,500,000
         in 2001 and none thereafter.

         The  Company  has an  uncollateralized  $75  million  revolving  credit
         agreement  that expires in May 2001.  Under the terms of the agreement,
         which includes three banks, the Company can borrow at the prime rate or
         the London  Interbank  Offered  Rate (LIBOR) plus between .50% to 1.70%
         depending on certain specified performance levels.

         The  Company  has two  short-term  bank  lines of credit for $5 million
         each.  One  is a  committed  line  established  in  1999  with  a  bank
         commitment  through  June 30, 2000 and an  interest  rate of prime less
         1.5%. The outstanding  balance under this line was $953,000 at December
         31, 1999 and the weighted  average interest rate for 1999 was 6.9%. The
         second  line is an  uncommitted  discretionary  line  that  was for $10
         million in 1998, and was decreased to $5 million in 1999 in conjunction

<PAGE>

         with the issuance of the committed line. The outstanding  balance under
         this  line was none and  $3,500,000  at  December  31,  1999 and  1998,
         respectively.  The  interest  rate on this line is based on an internal
         rate  established by the bank. The weighted  average  interest rate was
         7.2% and 7% for 1999 and 1998, respectively. Under the revolving credit
         agreement,  the total  outstanding  balances  under these lines  cannot
         exceed $7.5 million at any given point.

         The loan agreements provide,  among other terms,  various  requirements
         for tangible net worth and leverage and fixed charge  coverage  ratios.
         At  December  31,  1999,  the  Company  was in  compliance  with  these
         requirements.

         In 1997, the Company  entered into an interest rate swap agreement with
         a notional amount of $17 million. This swap agreement effectively fixes
         the interest rate on a like amount of the Company's  floating rate debt
         at 6.16% plus the  Company's  LIBOR  spread in effect at the time.  The
         effective  rate was 7.86% at December  31,  1999.  The swap  expires on
         November 6, 2001.  The fair value of the swap  agreement,  based on the
         quoted settlement cost to close the contract at December 31, 1999, is a
         liability  of  $139,000.  The fair value of the swap  agreement  is not
         recognized  in  the  consolidated  financial  statements  since  it  is
         accounted for as a hedge.

10.      Provision for Income Taxes

         The income tax provision for the years ended December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)           1999       1998       1997
         -----------------------------------------------------------
         Current:
<S>                                    <C>        <C>        <C>
          Federal ..................   $ 2,762    $ 2,450    $ 3,349
          State ....................       754        644        791
         -----------------------------------------------------------
                                         3,516      3,094      4,140
          Deferred:
          Federal ..................       115        (93)      (229)
          State ....................        32        (26)       (49)
         -----------------------------------------------------------
                                           147       (119)      (278)
         -----------------------------------------------------------
          Provision for income taxes   $ 3,663    $ 2,975    $ 3,862
         ===========================================================
</TABLE>

         Reconciliation  of the  provision  for  income  taxes  computed  at the
         federal  statutory rate of 34% to the actual provision for income taxes
         for the years ended December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                      1999       1998       1997
         --------------------------------------------------------------------------------------

<S>                                                               <C>        <C>        <C>
          Statutory tax provision .............................   $ 2,982    $ 2,406    $ 3,180
          State income taxes, net of federal income tax benefit       519        408        490
          Expenses for which there are no tax benefits ........       179        190        172
          Other, net ..........................................       (17)       (29)        20
          -------------------------------------------------------------------------------------
          Provision for income taxes ..........................   $ 3,663    $ 2,975    $ 3,862
          =====================================================================================
</TABLE>

         Deferred  income  taxes  represent  the  future  tax   consequences  of
         differences  between the tax basis of assets and  liabilities and their
         financial reporting amounts at each year-end. Significant components of
         the  Company's  deferred  tax  assets  (liabilities)  at  December  31,
         consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                            1999       1998
         -----------------------------------------------------------------

<S>                                                     <C>        <C>
          Provision for doubtful accounts ...........   $ 1,238    $   764
          Inventory reserves ........................       857        712
          Postretirement benefits other than pensions       707        758
          Vacation accrual ..........................       424        434
          Pension and employee benefit costs ........       385        774
          Goodwill ..................................       277        313
          Depreciation ..............................      (495)      (422)
          Other, net ................................       812      1,086
         -----------------------------------------------------------------
          Total deferred tax assets .................   $ 4,205    $ 4,419
         =================================================================
</TABLE>




<PAGE>


11.      Net Income Per Share

         The following is a reconciliation of the average shares of common stock
         used to  compute  basic  net  income  per share to the  shares  used to
         compute  diluted  net  income  per  share as shown on the  Consolidated
         Statements of Income for the years ended December 31:

<TABLE>
<CAPTION>
                                                              1999        1998        1997
          --------------------------------------------------------------------------------
          Average shares of common stock outstanding
<S>                                                      <C>         <C>         <C>
          used to compute basic net income per share .   6,536,098   6,526,805   6,509,083
          Dilutive effect of stock options ...........      12,842     122,611     126,751
         ---------------------------------------------------------------------------------
          Average shares of common stock outstanding
          used to compute diluted net income per share   6,548,940   6,649,416   6,635,834
         ---------------------------------------------------------------------------------
          Net income per share:
          Basic ......................................        $.78        $.63        $.84
          Diluted ....................................         .78         .62         .83
          ================================================================================
</TABLE>

          At  December  31,  1999,  there were  outstanding  options to purchase
          589,492  shares of common stock at a range of prices between $5.75 and
          $11.18.  The dilutive effect of stock options is based on the treasury
          method that computes the equivalent  dilutive shares as the difference
          between the option shares and the amount of assumed common shares that
          could be purchased  from the  proceeds  from the exercise of the stock
          options at the then  current  market  price.  To the extent the option
          price  exceeds  the  current  common  stock  price,  the  options  are
          excluded,   as  the  effect  of  including   these  options  would  be
          anti-dilutive,  reducing the number of shares.  The  calculation for a
          year is based on the weighted-average  dilutive shares during the year
          reflecting  both changes in  outstanding  options  during the year and
          changes in the common stock's market price.  At December 31, 1999, the
          option prices were above the common stock's market price, thus none of
          the option shares were included in the calculation.

12.      Defined Benefit Pension Plans

         The  Company   has  a  defined   benefit   pension   plan  that  covers
         substantially all of the Company's  employees.  In general, an employee
         becomes vested after completing five years of service,  and the benefit
         is based on the employee's years of service and compensation during the
         ten years preceding retirement.  Contributions to the plan are based on
         funding  standards   established  by  the  Employee  Retirement  Income
         Security  Act of 1974.  In  addition,  the Company  has a  supplemental
         executive  retirement plan for certain Company executives that provides
         certain additional benefits.

         The components of the net periodic  pension benefit for the years ended
         December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                   1999        1998        1997
         ---------------------------------------------------------------------
<S>                                            <C>         <C>         <C>
          Service cost .....................   $   995     $   982     $   728
          Interest cost ....................     1,874       1,872       1,734
          Expected return on plan assets ...    (3,538)     (2,980)     (2,524)
          Amortization of prior service cost        (9)         (9)         (9)
          Transition cost amortization .....         5           5           5
          Recognized net actuarial gain ....      (286)        (88)       (124)
          --------------------------------------------------------------------
          Net periodic pension benefit .....   $  (959)    $  (218)    $  (190)
          ====================================================================

          Assumptions:

          Discount rate ....................      7.50%       6.50%       7.00%
          Expected return on plan assets ...     10.00%      10.00%      10.00%
          Rate of compensation increase ....      4.00%       4.00%       4.00%
          ====================================================================
</TABLE>



<PAGE>


         The change in the financial status of the plans and amounts  recognized
         in the Company's Consolidated Balance Sheets at December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                1999        1998
         ----------------------------------------------------------------------
          Change in benefit obligation:
<S>                                                        <C>         <C>
          Benefit obligation at beginning of year ......   $ 30,805    $ 26,689
          Service cost .................................        995         982
          Interest cost ................................      1,874       1,872
          Actuarial loss (gain) ........................     (4,811)      2,627
          Benefits paid ................................     (1,579)     (1,365)
          ---------------------------------------------------------------------
          Benefit obligation at end of year ............   $ 27,284    $ 30,805
          ---------------------------------------------------------------------

          Change in Plan assets:

          Fair value of plan assets at beginning of year   $ 36,111    $ 30,507
          Actual return on plan assets .................      3,937       6,953
          Employer contributions .......................         57          16
          Benefits paid ................................     (1,579)     (1,365)
          ---------------------------------------------------------------------
          Fair value of plan assets at end of year .....   $ 38,526    $ 36,111
          ---------------------------------------------------------------------
          Reconciliation of funded status:
          Funded status ................................   $ 11,242    $  5,306
          Unrecognized net actuarial gain ..............    (11,279)     (6,354)
          Unrecognized prior service cost ..............       (200)       (209)
          Unrecognized transition obligation ...........          9          14
          ---------------------------------------------------------------------
          Accrued pension liability ....................   $   (228)   $ (1,243)
          =====================================================================
</TABLE>

         The plans' assets are invested in undivided  interests in several funds
         structured  to  duplicate  the  performance  of various  stock and bond
         indexes.  The accrued pension  liability is included in accrued pension
         and other liabilities on the Consolidated Balance Sheets.

13.      Defined Contribution Pension Plans

         The Company sponsors a number of defined  contribution pension plans in
         the form of IRC 401(k)  plans.  Participation  in one of these plans is
         available to  substantially  all employees.  Company  contributions  to
         these plans are based on a percentage of the employee contributions not
         to exceed certain maximum levels. The cost of these plans was $275,000,
         $290,000 and $296,000 for the years 1999, 1998, and 1997, respectively.

14.      Postretirement Benefits Other Than Pensions

         The Company has two retiree health benefit plans, the Phillips & Jacobs
         Retiree  Health Plan (the "P/J  Retiree  Plan") that  primarily  covers
         retirees and employees who previously  participated  in theTasty Baking
         Company's  Retiree  Medical Plan prior to the  Company's  spin-off from
         Tasty Baking  Company in 1993,  and the Momentum  Retiree  Medical Plan
         (the  "Momentum  Retiree  Plan"),  that primarily  covers  retirees and
         employees who were previously employed by Momentum Corporation prior to
         the merger with the  Company in 1994.  Both plans  provide  health care
         benefits through a health care  administrator and contracts with health
         service  providers.  In addition,  the P/J Retiree Plan  provides  life
         insurance  benefits  through an  insurance  company.  The Company  life
         insurance  premium  contribution  is limited to $20,000 of coverage per
         retiree,  with the retiree  paying the premium for any coverage  beyond
         the $20,000.  The Company's policy is to fund the plans as benefits are
         paid.

         The plans are contributory with ceilings on the Company's contribution.
         In addition,  under the Momentum Retiree Plan, employees who were under
         the age of 55 on December  31, 1992  receive no  contribution  from the
         Company under the plan.


<PAGE>


         Net  periodic  postretirement  benefit  expense  for  the  years  ended
         December 31, included the following components:

<TABLE>
<CAPTION>
         (Thousands of dollars)                          1999     1998     1997
         ----------------------------------------------------------------------
<S>                                                     <C>      <C>      <C>
          Service cost ..............................   $  20    $  20    $  16
          Interest cost .............................      98       80       89
          Recognized net actuarial gain .............     (31)     (76)    (103)
          ---------------------------------------------------------------------
          Net periodic postretirement benefit expense   $  87    $  24    $   2
          ======================================================================
</TABLE>


         The change in the financial status of the plans and amounts  recognized
         in the Company's Consolidated Balance Sheets at December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                           1999       1998
         ----------------------------------------------------------------
         Change in benefit obligation:
<S>                                                    <C>        <C>
          Benefit obligation at beginning of year ..   $ 1,526    $ 1,160
          Service cost .............................        20         20
          Interest cost ............................        98         80
          Actuarial loss (gain) ....................        (9)       325
          Benefits paid ............................      (216)       (59)
         ----------------------------------------------------------------
          Benefit obligation at end of year ........   $ 1,419    $ 1,526
         ----------------------------------------------------------------

          Fair value of plan assets ................      --         --
         ----------------------------------------------------------------
          Reconciliation of funded status:

          Funded Status ............................   $(1,419)   $(1,526)
          Unrecognized net actuarial gain ..........      (366)      (387)
          ---------------------------------------------------------------
          Postretirement benefits other than pension   $(1,785)   $(1,913)
          ===============================================================
</TABLE>

         Assumptions:
         Discount rate
          1999     7.50%
          1998     6.50%
          1997     7.00%

         Medical Trend
          Indemnity Plan                   6.78% in 1999 grading to 5% in 2003
          HMO                              6.64% in 1999 grading to 5% in 2005

         Due to the ceilings on Company  contributions,  the effect of increases
         in health  care cost trend  rates do not have a material  effect on the
         liability or expense.

15.      Stock Compensation

         Stock Options

         The Company's  stock  incentive plans provide for the awarding of stock
         options to  directors,  officers and other key  employees.  All granted
         options,  which vest over a four year  period,  lapse at the earlier of
         the  expiration  of the  option  term (not more than ten years from the
         grant  date)  or  within  three  months  following  the  date on  which
         employment with the Company terminates.


<PAGE>


         Changes in options  outstanding  for the three years ended December 31,
         1999 are:

<TABLE>
<CAPTION>
                                                                  Option Prices
                                                      --------------------------
                                                      Weighted
                                              Options  Average            Range
          ----------------------------------------------------------------------
<S>                                           <C>        <C>        <C>
          Outstanding at January 1, 1997 .    464,849    $6.34      $6.11- 8.06
          ----------------------------------------------------------------------
          Granted ........................     56,500    11.18            11.18
          Exercised ......................    (15,853)    6.15       6.11- 6.97
          Canceled .......................     (7,115)    6.15       6.11- 6.97
          ----------------------------------------------------------------------
          Outstanding at December 31, 1997    498,381     6.89       6.11-11.18
          ----------------------------------------------------------------------
          Granted ........................    101,500     7.41       6.81-11.18
          Exercised ......................    (20,194)    6.25       6.11- 6.97
          Canceled .......................    (16,085)    7.58       6.11-11.18
          ----------------------------------------------------------------------
          Outstanding at December 31, 1998    563,602     6.99       6.11-11.18
          ----------------------------------------------------------------------
          Granted ........................     75,000     5.75             5.75
          Exercised ......................       (200)    6.11             6.11
          Canceled .......................    (48,910)    6.46       6.11-11.18
          ----------------------------------------------------------------------
          Outstanding at December 31, 1999    589,492    $6.88      $5.75-11.18
          ----------------------------------------------------------------------
</TABLE>

         At December 31, 1999,  there were 349,074  options  exercisable  with a
         weighted-average option price of $6.79 and a range from $6.11 to $11.18
         and 9,300 options available for grant. The  weighted-average  remaining
         contractual  life of outstanding  options at December 31, 1999 and 1998
         was 6.8 and 7.3 years, respectively.

         The Company has not recognized  compensation expense in connection with
         stock option grants. Had compensation  expense been determined based on
         the fair value on the grant date of options  granted after December 31,
         1994,  the Company's net income and net income per share on a pro forma
         basis  would have been  reduced  for the years  ended  December  31, as
         follows:

<TABLE>
<CAPTION>
         (Thousands of dollars,
          except per share data)           1999     1998     1997
         --------------------------------------------------------

         Net Income:
<S>                                      <C>      <C>      <C>
                   As reported           $5,109   $4,100   $5,491
                   Pro forma ..           4,906    3,917    5,360
         ========================================================
         Net Income Per Share:
         As reported
                    Basic ....           $  .78   $  .63    $ .84
                    Diluted ..              .78      .62      .83
         Pro forma
                     Basic ....             .75      .60      .82
                     Diluted ..             .75      .59      .81
         ========================================================
</TABLE>

         The  weighted-average  fair  value per share for  options  granted  was
         $1.62, $2.50 and $5.23 for 1999, 1998 and 1997, respectively.  The fair
         value was estimated using the Black-Scholes  option-pricing  model. For
         options granted in 1999, a dividend yield rate of 3.1%,  expected stock
         volatility  of 25% and  risk-free  interest  rate of 6.7%  were used in
         estimating  the value.  For options  granted in 1998, a dividend  yield
         rate of 2.5%,  expected stock volatility of 32% and risk-free  interest
         rate of 5.4% were used.  For options  granted in 1997, a dividend yield
         rate of 1.6%,  expected stock volatility of 45% and risk-free  interest
         rate of 5.8% were used. For all years, an expected option life of seven
         years was used.  Restricted  Stock Awards The Company's stock incentive
         plans provide for the awarding of restricted  stock to officers and key
         employees.  The fair  market  value  of the  stock at the date of grant
         establishes  the  compensation  amount that is amortized to  operations
         over the  restriction  period.  At December 31,  1999,  all awards were
         fully  amortized  and an additional  61,280  shares were  available for
         future awards.


<PAGE>


16.      Leases

         The  Company  leases  certain   distribution  and  office   facilities,
         machinery  and  equipment,   and  automotive  equipment  under  various
         noncancelable lease agreements.  The Company expects that in the normal
         course of  business,  leases that expire will be renewed or replaced by
         other leases.

          Minimum annual rentals payable under  noncancelable  operating  leases
          with a remaining term of more than one year from December 31, 1999 are
          as follows:

<TABLE>
<CAPTION>
         Years Ending December 31,
         (Thousands of dollars)
         --------------------------------------------
<S>        <C>                                <C>
           2000                               $ 2,317
           2001                                 2,243
           2002                                 1,728
           2003                                 1,248
           2004                                   780
           Thereafter                           5,725
         --------------------------------------------
          Total minimum lease payments        $14,041
         ============================================
</TABLE>

         Rent expense, net of noncancelable sublease income of $24,000,  $10,000
         and  none in  1999,  1998,  and  1997,  respectively,  was  $3,203,000,
         $2,851,000 and $2,219,000 for 1999, 1998, and 1997, respectively.

17.      New Accounting Standards

         In 1999, the Financial  Accounting Standards Board issued SFAS No. 137,
         "Deferral of the Effective Date of SFAS 133" which defers the effective
         date of SFAS  No.  133,  "Accounting  for  Derivative  Instruments  and
         Hedging  Activities,"  to  all  fiscal  quarters  of all  fiscal  years
         beginning  after June 15, 2000. SFAS No. 133 establishes new procedures
         for accounting for  derivatives  and hedging  activities and supersedes
         and amends a number of existing  standards.  The Company currently uses
         interest rate swap agreements ("swaps") to effectively fix the interest
         rate on a portion of the Company's  floating  rate debt.  Under current
         accounting  standards,  no gain or loss is recognized on changes in the
         fair value of these swaps.  Under this statement,  gains or losses will
         be  recognized  based on changes  in the fair value of the swaps  which
         generally occur as a result of changes in interest  rates.  The Company
         is  currently  evaluating  the  financial  impact  of  adoption  of the
         Statement.  The adoption is not  expected to have a material  effect on
         the Company's consolidated results of operations, financial position or
         cash flows.

18.      Commitments and Contingencies

         The Company is subject to various  legal  proceedings  and claims which
         have arisen in the ordinary  course of its  business.  The Company does
         not believe  that the ultimate  resolution  of such matters will have a
         material  effect on the Company's  consolidated  financial  position or
         results of operations.

The      Company,   along  with  many  other  parties,   is  a  defendant  in  a
         contribution  action to determine  the  liability for the state ordered
         clean up of a landfill.  The Company  believes its insurance will cover
         any costs  incurred in this  matter.  The Company is also,  in general,
         subject to  possible  loss  contingencies  pursuant to federal or state
         environmental laws and regulations.  Although these contingencies could
         result in future expenses or judgments,  such expenses or judgments are
         not expected to have a material  effect on the  Company's  consolidated
         financial position or results of operations.


<PAGE>


19.      Quarterly Financial Information (unaudited)

         Summarized  unaudited  quarterly  financial  data for the  years  ended
         December 31, 1999 and 1998 are:
<TABLE>
<CAPTION>

         (Thousands of dollars
          except per share data)              First   Second    Third   Fourth    Total
          -----------------------------------------------------------------------------
         Year Ended December 31, 1999

<S>                                        <C>      <C>      <C>      <C>      <C>
          Net sales ...................... $139,434 $133,355 $132,537 $139,947 $545,273
          Gross profit ...................   23,472   23,304   22,527   23,574   92,877
          Net income .....................    1,235    1,295    1,170    1,409    5,109
          Net income per share (1)
            Basic .......................  $    .19 $    .20 $    .18 $    .22 $    .78
            Diluted ......................      .19      .20      .18      .22      .78

          Year Ended December 31, 1998 (2)

          Net sales ...................... $101,528 $104,846 $109,486 $137,187 $453,047
          Gross profit ...................   18,452   19,578   19,608   25,565   83,203
          Net income .....................    1,112    1,270    1,002      716    4,100
          Net income per share (1)
            Basic ........................ $    .17 $    .19 $    .15 $    .11  $   .63
            Diluted ......................      .17      .19      .15      .11      .62
<FN>

         (1)  Due to changes in the weighted average number of basic and diluted
              shares during the periods and  rounding,  the sum of the quarterly
              net  incomes per share will not  necessarily  be equal to the full
              years' income per share.

         (2)  The  operations  of the Bell  acquisition  are  included  from the
              September 14, 1998  acquisition  date.  Income for the quarter and
              year ended  December  31, 1998  includes a  restructure  and other
              expense of $1,050,000 ($634,000 after tax) for the reorganizing of
              the  operations  into three  divisions and the  integration of the
              Bell locations.
</FN>
</TABLE>


<PAGE>


                        Report of Independent Accountants

To the Shareholders and the Board of Directors of PrimeSource Corporation:

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under item 14(a)(1)  present  fairly,  in all material  respects,  the
financial  position  of  PrimeSource   Corporation  and  its  subsidiaries  (the
"Company")  at December 31, 1999 and 1998,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1999 in conformity  with  accounting  principles  generally  accepted in the
United States. In addition,  in our opinion,  the financial  statement  schedule
listed in the  index  appearing  under  item  14(a)(2)  present  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  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 conducted
our audits of these statements in accordance with auditing  standards  generally
accepted in the United States,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
February 22, 2000


<PAGE>




                                    PART III.

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

None.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated  by reference from the definitive  proxy statement to be filed with
the Securities  and Exchange  Commission by April 30, 2000,  except  information
regarding executive officers which appears under Part I.

ITEM 11.  EXECUTIVE COMPENSATION

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 2000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 2000.


<PAGE>


                                    PART IV.

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

(a)(1)   Financial Statements

         The following  financial  statements have been included as part of this
         report:

                                                           Form 10-K
                                                                Page
                                                           ---------
          Consolidated Statements of Income ...................   13
          Consolidated Balance Sheets .........................   14
          Consolidated Statements of Cash Flows ...............   15
          Consolidated Statements of Shareholders' Equity .....   16
          Notes to Consolidated Financial Statements ..........   17
          Report of Independent Accountants ...................   28

(a)(2)   Financial Statement Schedule

         (a)  The following financial statement schedule is submitted herewith:
              -Schedule II Valuation of Qualifying Accounts and Reserves

              All other  schedules for which provision is made in the applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related instructions or are inapplicable,  and therefore have
been omitted.

(a)(3)    Exhibits

         The  required  exhibits  are included at the back of this Form 10-K and
         are  described in the Exhibit  Index  immediately  preceding  the first
         exhibit.

(b)      Reports on Form 8-K
         The  Registrant  did not file a report on Form 8-K during  the  quarter
         ended December 31, 1999. .


<PAGE>


<TABLE>
                    PRIMESOURCE CORPORATION AND SUBSIDIARIES

<CAPTION>
          SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES

Column A                                           Column B             Column C              Column D       Column E
---------------------------------               -----------   --------------------------   ------------   ------------
Classification                                   Balance at                   Charged to                       Balance
                                                  Beginning   Charged to           Other     Deductions         at End
(thousands of dollars)                            of Period     Expenses        Accounts     Write-offs      of Period
----------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 1999
<S>                                                 <C>          <C>                           <C>               <C>
   Allowance for doubtful accounts ..............   $ 3,419      $ 1,186                       $(1,478) (A)      $3,127
   Amortization of goodwill .....................     1,958        1,085                                          3,043
   Inventory reserves ...........................     5,414          352                        (2,477) (B)       3,289
-----------------------------------------------------------------------------------------------------------------------
                                                    $10,791      $ 2,623                       $(3,955)         $ 9,459
-----------------------------------------------------------------------------------------------------------------------


For the year ended December 31, 1998
   Allowance for doubtful accounts ..............   $ 1,913      $   440          $1,295 (C)   $  (229) (A)     $ 3,419
   Amortization of goodwill .....................     1,435          523                                          1,958
   Inventory reserves ...........................     4,664          233           2,000 (C)    (1,483) (B)       5,414
-----------------------------------------------------------------------------------------------------------------------
                                                    $ 8,012      $ 1,196         $ 3,295       $(1,712)         $10,791
-----------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 1997
   Allowance for doubtful accounts ..............   $ 1,787      $   694                         $(568) (A)      $1,913
   Amortization of goodwill .....................     1,102          333                                          1,435
   Inventory reserves ...........................     3,172        2,602         $  (137) (D)     (973) (B)       4,664
-----------------------------------------------------------------------------------------------------------------------
                                                    $ 6,061      $ 3,629         $  (137)      $(1,541)         $ 8,012
-----------------------------------------------------------------------------------------------------------------------
<FN>

(A) Doubtful accounts written off, net of any recoveries.

(B) The disposal of obsolete inventory, net of any recoveries.

(C)  Related to the acquisition of Bell Industries' Graphic Imaging Group.

(D)  Reserve disposed of with the sale of the pressroom material converting
     operation.
</FN>
</TABLE>


<PAGE>


                    PRIMESOURCE CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to 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.

Dated March 27, 2000
                                 /s/ James F. Mullan
                                 -------------------
                                 James F. Mullan
                                 President and
                                 Chief Executive Officer
                                 (principal executive officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  person on the behalf of the  registrant
and in the capacity and on the date indicated.

Dated March 27, 2000
                                 /s/ William A. DeMarco
                                 ----------------------
                                 William A. DeMarco
                                 Vice President, Chief Financial Officer
                                 (principal financial and accounting officer)


DIRECTORS

Richard E. Engebrecht}           /s/ William A. DeMarco
Fred C. Aldridge, Jr.}          -----------------------
Philip J. Baur, Jr.}            William A. DeMarco
John H. Goddard, Jr.}           Attorney in fact
Gary MacLeod}                   Power of Attorney
James F. Mullan}                dated February 29, 2000
Klaus D. Oebel}
Edward N. Patrone}              Date March 27, 2000
John M. Pettine}








<PAGE>


                                  Exhibit Index

Exhibit Number and Description

The  following  Exhibit  Numbers  refer to  Regulation  S-K, Item 601. All other
exhibits are omitted because they are inapplicable.

 2.1      Agreement and Plan of  Reorganization  dated as of May 27, 1994 by and
          between  MOMENTUM  CORPORATION  and  PHILLIPS  & JACOBS,  INCORPORATED
          (filed as Annex A to the Proxy/Prospectus included within registration
          statement No.  33-54913 on Form S-4 filed by the  Registrant on August
          4, 1994)

 2.2      Form of Plan  of  Merger  (filed  as  Annex B to the  Proxy/Prospectus
          included within registration  statement No. 33-54913 on Form S-4 filed
          by the Registrant on August 4, 1994)

 2.3      Asset  Purchase  Agreement  By And Among VGC Corp.,  VGC Holding  USA,
          Inc., NV Koninklijke  KNP BT and  PrimeSource  dated November 1, 1996,
          for  the  purchase  of  the  operating  assets   (excluding   accounts
          receivable) of VGC  Corporation's  branch  operations in  Minneapolis,
          Minnesota;   Milwaukee,   Wisconsin;  Des  Moines,  Iowa;  and  Omaha,
          Nebraska.  (filed as exhibit 2 to Form 8-K dated  November  13,  1996,
          File No. 0-21750)

 2.4      Asset  Purchase  Agreement By And Among  Momentum  Corporation  And TK
          Gray, Inc. And Its Shareholders dated April 15, 1994, for the purchase
          of  substantially  all of the assets and certain of the liabilities of
          TK Gray,  Inc.  (filed as exhibit  2(i) to Form 8-K dated May 2, 1994,
          File No. 0-18112)

 2.5      Asset Purchase  Agreement  between  PrimeSource  Corporation  and Bell
          Industries,   Inc.   dated   August  28,  1998  for  the  purchase  of
          substantially  all the assets and certain  liabilities  of the Graphic
          Imaging Group of Bell Industries, Inc. (filed as exhibit 2 to Form 8-K
          dated September 28, 1998, File No. 000-21750)

 3.1      Amended and  Restated  Articles  of  Incorporation  of the  Registrant
          (filed as Annex C to the Proxy/Prospectus included within registration
          statement No.  33-54913 on Form S-4 filed by the  Registrant on August
          4, 1994)

 3.2      Restated By-laws of the Registrant effective March 2, 1999

 4.1      Form  of  Common  Stock  Certificate  (filed  with  Form 10  filed  by
          Registrant  on May 12,  1993,  (File No.  0-21750 and as  subsequently
          amended on Form 8 filed on May 28, 1993,  Form 8 filed on July 6, 1993
          and Form 8 filed on July 13, 1993)

 4.2      Form of Common Stock Certificate,  effective  September 1, 1994 (filed
          as Exhibit 4.2 to Form 10-K, File No. 0-21750, dated March 30, 1995)

10.1      Form of Phillips & Jacobs,  Inc. 1993 Long Term  Incentive Plan (filed
          as Exhibit 10.1 to Form 10-K, File No. 0-21750, dated March 30, 1995)

10.2      Form of  Phillips  & Jacobs,  Incorporated  Indemnification  Agreement
          (filed with Form 10 filed by  Registrant  on May 12,  1993,  (File No.
          0-21750) and as subsequently  amended on Form 8 filed on May 28, 1993,
          Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993)*

10.3      PrimeSource  Corporation  401(k)  Savings  Plan  (Amended and Restated
          Effective January 1, 1997)*

10.4      Employment  Agreement  between the Registrant  and W.A.  DeMarco dated
          December  31,  1996  (filed as  Exhibit  10.5 to Form  10-K,  File No.
          0-21750, dated March 28, 1997)*

10.5      Employment  Agreement  between the  Registrant  and J.F.  Mullan dated
          December  31,  1996  (filed as  Exhibit  10.6 to Form  10-K,  File No.
          0-21750, dated March 28, 1997)*


<PAGE>

10.6      Form of Tax Matters  Agreement (filed with Form 10 filed by Registrant
          on May 12, 1993,  (File No.  0-21750) and as  subsequently  amended on
          Form 8 filed on May 28, 1993,  Form 8 filed on July 6, 1993 and Form 8
          filed on July 13, 1993)

10.7      Amendment No. 1 to Agreement among Employers  Participating in Certain
          Qualified  Plans  (filed  as  Exhibit  10.14  to the  Proxy/Prospectus
          included within registration  statement No. 33-54913 on Form S-4 filed
          by the Registrant on August 4, 1994)*

10.8      1993  Replacement  Option Plan (P&J Spin-off) for Directors  (filed as
          Annex I to the Proxy/Prospectus included within registration statement
          No. 33-54913 on Form S-4 filed by the Registrant on August 4, 1994)*

10.9      Restated  Momentum   Distribution  Inc.  Supplemental  Benefits  Plan,
          effective  April 22, 1991 (filed as Exhibit  10.13 to Form 10-K,  File
          No. 0-18112 dated March 30 1993)*

10.10     Employment  Agreement between the Registrant and John H. Goddard,  Jr.
          dated December 24, 1996 (filed as Exhibit 10.14 to Form 10-K, File No.
          0-21750 dated March 25, 1998)*

10.11     Form of  Indemnification  Agreement for Directors and certain officers
          effective  September 1, 1994 and  executed in January,  1996 (filed as
          Exhibit 10.22 to Form 10-K, File No. 0-21750, dated March 26, 1996)*

10.12     PrimeSource  Corporation  Pension Plan (filed as Exhibit 10.23 to Form
          10-K, File No. 0-21750, dated March 26, 1996)*

10.13     Credit Agreement dated as of November 1, 1996 by and among PrimeSource
          Corporation,  Dixie Type & Supply Company, Inc., Onondaga Litho Supply
          Co.,  Inc.  and  The  Banks  Party  Hereto  and  PNC  Bank,   National
          Association,  As Agent (filed as Exhibit 10.18 to Form 10-K,  File No.
          0-21750, dated March 28, 1997)

10.14     Employment  Agreement  between the  Registrant and Edward Padley dated
          December  31,  1997  (filed as Exhibit  10.19 to Form  10-K,  File No.
          0-21750 dated March 25, 1998)*

10.15     Employment Agreement between the Registrant and D. James Purcell dated
          December  31,  1997(filed  as  Exhibit  10.20 to Form  10-K,  File No.
          0-21750 dated March 25, 1998)*

21        Subsidiaries of the Registrant

23        Consent of PricewaterhouseCoopers LLP, Independent Accountants

27        Financial Data Schedule for the year ended December 31, 1999

99.1      Undertakings

          *Management   contracts  and/or  compensatory   plans,   contracts  or
          arrangements  in which a  director  and/or a named  executive  officer
          participates.