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

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

                                    FORM 10-K
                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934


                   For The Fiscal Year Ended December 31, 2000

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



                  For the Transition Period From _____ to ____

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


                         Commission File Number 0-29048


                           ACCENT COLOR SCIENCES, INC.
             (Exact name of registrant as specified in its charter)

           Connecticut                                     06-1380314
  (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                       Identification No.)

        800 Connecticut Boulevard, East Hartford, Connecticut     06108
               (Address of principal executive office)         (Zip Code)

       Registrant's telephone number, including area code: (860) 610-4000

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

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

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. |_|

       The aggregate market value of common stock held by non-affiliates
           of the registrant as of February 28, 2001 was $2,547,906.

       The number of shares outstanding of the registrant's common stock
                    as of February 28, 2001 was 27,163,181.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

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                           ACCENT COLOR SCIENCES, INC.

                                    FORM 10-K

                      For The Year Ended December 31, 2000

                                      INDEX

Part I

Item 1.     Business........................................................   1

Item 2.     Properties......................................................   8

Item 3.     Legal Proceedings...............................................   8

Item 4.     Submission of Matters to a Vote of Security Holders.............   8

Part II

Item 5.     Market for Registrant's Common Stock and Related Stockholder
            Matters.........................................................   8

Item 6.     Selected Financial Data.........................................   9

Item 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations.......................................   9

Item 8.     Financial Statements and Supplementary Data.....................  14

Item 9.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure........................................  28

Part III

Item 10.    Directors and Executive Officers of the Registrant..............  28

Item 11.    Executive Compensation..........................................  29

Item 12.    Security Ownership of Certain Beneficial Owners and Management..  33

Item 13.    Certain Relationships and Related Transactions..................  34

Part IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on
            Form 8-K........................................................  34

Signatures  ................................................................  37


<PAGE>

                                     PART I

Item 1. Business

GENERAL
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Accent Color Sciences, Inc. ("Accent Color" or the "Company") designs,  develops
and manufactures  products  integrating  high-speed ink jet printing technology.
Through 2000, the Company's primary focus was on the development and manufacture
of  high-speed,  highlight  color  printing  systems  (Truecolor  Systems(TM) ).
Truecolor Systems are used in combination with high-speed monochrome printers in
the  transactional  printing market in the printing of documents such as billing
statements,  account  balance  statements and customer  correspondence.  Late in
2000,  the  Company  announced  its  intention  to refocus  its  business on the
industrial  printing  market  where the  Company has  identified  a need for the
integration  of ink jet printing into product  production  lines for printing on
packaging and other  applications.  This refocusing effort was necessitated by a
decline  in  orders  for  Truecolor   Systems  late  in  2000   attributable  to
disappointing  sales results for Truecolor Systems through the Company's primary
OEM customer,  International  Business Machines Corporation ("IBM"), and changes
in the  marketing  plan  of its  other  principal  customer,  Xerox  Corporation
("Xerox").  The Company has achieved limited initial successes in the industrial
printing market.  However, the refocusing of its business from the transactional
printing market to the industrial printing market presents numerous  challenges,
which are discussed further in this report.

Prior to the  downturn in its  transactional  printing  market,  the Company had
already begun to investigate  opportunities  to diversify its markets,  based on
its core engineering  technology.  During the first quarter of 2000, the Company
entered  into  negotiations  with  Philip  Morris to  develop a digital  ink jet
package  printing  system,  which  culminated in a funded  development  contract
signed  during June of 2000. In addition to Philip  Morris,  the Company has had
discussions  with  several  other  large  corporations  interested  in using the
Company's  ink  jet  integration  and  manufacturing  services  to  develop  new
products.  On January  24,  2001,  the Company  has  announced  that it had been
selected by a major  telecommunications  equipment  manufacturer  to support the
development of ink jet based circuit board  printing  systems.  Discussions  are
proceeding with additional  prospective  clients. The Company also has entered a
new line of business  which  sells  certain of its ink jet  components  to other
companies who are looking to quickly bring to market a product.

The Company was  incorporated  in Connecticut  in 1993. The Company's  corporate
offices are located at 800 Connecticut  Boulevard,  East Hartford,  Connecticut.
The  Company's  telephone  number  there is (860)  610-4000.  The  Company  also
maintains a web site containing product and corporate information. The Company's
web site address is http://www.accentcolor.com. The information contained in the
Company's web site should not be considered a part of this Form 10-K.

INDUSTRIAL PRINTING AND PACKAGING PRINTING OVERVIEW
--------------------------------------------------------------------------------

Industrial  printing  is  defined as high  quality,  fast,  low cost  functional
printing on any substrate.  Printing is a critical element in producing packaged
goods.  By integrating  ink jet printing  technology  into the production  line,
manufacturers  are better able to coordinate  their printing  requirements  with
their  production  needs and allow them to respond  in a more  timely  manner to
regulatory requirements, language requirements,  alternate ingredients and other
factors affecting package printing.

According to I. T. Strategies,  Inc., a consulting firm  specializing in digital
printing,  the overall  industrial  printing market is greater than $900 billion
worldwide  with the  majority  of printing  done by  traditional  presses.  Most
package printing is currently performed by converters, companies that specialize
in obtaining the appropriate paper board, and then printing and cutting to size,
and  finally  delivering  to the  packaged  goods  factory  for use.  Converters
typically use classical press technology,  like  flexographic,  lithographic and
gravure  systems (see the figure  below).  These  presses are  analogue  systems
requiring  lengthy set up times,  and  designed to print long runs.  Traditional
press  technologies  offer  excellent  image quality and large color  selection.
However,  they  suffer  significantly  in  their  inability  to  print  variable
information  and thus  limit  the real  use of  "just in time"

                                   [GRAPHIC]

<PAGE>

philosophies in packaged goods factories.

Industrial  printing is  fractured  into over 60 segments  based upon the use of
print or by the  product.  This has  historically  been a deterrent to companies
trying to move into this market.  Large  printing  companies  (both  traditional
press and digital  print) have focused on industries  where the same product can
be sold over and over again.  This market  requires  common  modules that can be
customized to meet the production  lines  requirements.  Large digital  printing
companies have  historically  competed with  traditional  printing  companies to
serve this business.  The focus of our product is to combine the best of digital
printing with  traditional  presses.  Traditional  presses will still be used to
print long runs of complex  graphics  to serve as a  "common"  base for  diverse
local markets,  while our digital  technology will provide the finishing  touch.
This hybrid system  provides  significant  benefits to factories.  For instance,
most cigarette brands are sold worldwide,  and require local language for health
hazard  warnings  and  other   requirements.   In  order  to  accomplish   this,
manufacturers   must  maintain  a  large  inventory  of  pre-printed   boxes  to
accommodate  the  daily  manufacturing  requirements.   By  removing  the  local
languages  from the  preprinted  cigarette  boxes,  the factory can purchase and
store a single  box per  brand.  Digital  package  printing  can then be used to
provide  the  variable  information  depending  upon the  needs of a  particular
packaging line. Thus traditional  press technology is used for what it does best
and digital  technologies  are used for what they can  provide.  Our system will
most likely be used for new  requirements and will supplement the performance of
traditional printing processes.

Some of the key marketplace trends which are driving the application for digital
printing to the industrial print market are:

o    Move to digital and the use of the  internet in product  creation,  storage
     and communication;

o    Efficiencies of creating and printing digitally;

o    Just in time manufacturing and Quick Response marketing;

o    Mass customization;

o    Short turn around;

o    Growing importance of point of purchase marketing; and

o    Expanding capabilities of digital printers.

Traditional  methods of carton package  printing cause operating  inefficiencies
and  increased  costs in  food,  tobacco  and  pharmaceutical  factories.  These
traditional  methods require  manufacturers  to pre-print and store packaging in
advance of their production needs. The  inefficiencies  and higher costs of this
process result from  additional  warehouse  space and the manpower  required for
managing the  packaging  materials.  Higher costs are also  incurred  through an
inability to  capitalize  on market price  fluctuations  of  ingredients  due to
pre-printed packaging of ingredients.  Government  regulations in many countries
are  creating  changes  in  packaging  requirements  for  many  industries.  The
flexibility of digital,  high-speed ink jet technology enables  manufacturers to
meet  changing  regulations  while  minimizing  their capital  expenditures  and
inventory scrap.

The use of digital,  high speed ink jet  technology in carton  package  printing
lines can  enable  manufacturers  to print  their  packaging  in time with their
cartoning  of goods.  Through the  application  of digital  printing  processes,
ingredients,   messages  and  languages  can  be  changed  as  required  by  the
manufacturer just prior to the cartoning process.

TRANSACTIONAL PRINTING OVERVIEW
--------------------------------------------------------------------------------

As a result of its initial focus, the Company designed,  manufactured,  and sold
Truecolor  Systems(TM),  its line of  innovative,  high-speed,  highlight  color
printing    systems.    These   systems   are   integrated   with    high-speed,
continuous-forms,  monochrome printers and are installed in businesses requiring
high volume  transaction  printing  applications.  Highlight color adds value to
printed documents such as billing statements,  account balance  statements,  and
customer  correspondence  by  drawing  attention  to  remittance   requirements,
marketing messages,  or customer service information.  The Company sells related
consumables (wax-based inks) and spare parts, both of which generate a recurring
revenue stream based on the installed base and usage of Accent Color's Truecolor
Systems.  This business is organized as an OEM supplier to IBM and Xerox. During
2000,  the Company  developed and launched a Value - Engineered  (VE) version of
its product that delivered ample margins.  However, the market has not developed
as well as expected. Additional orders are unlikely in the foreseeable future.

Correspondence  and billing statements are a primary source of communications to
customers   for   many   industries   like   banking,    securities,    finance,
telecommunications,  and utilities.  As these companies look for ways to improve
customer communications,  cross-sell their various product offerings, and expand
their  business  via  targeted   prospects,   printed  matter  is  viewed  as  a
cost-effective and efficient method to increase customer satisfaction,  revenue,
and  profits.  Adding  color to a statement  costs  $0.005-$0.01,  making this a
cost-effective way to deliver messages.


                                       2
<PAGE>

According to CAP Ventures,  a printing  industry  market research firm, the 1997
year-end installed base of high-speed,  monochrome printers in the United States
was approximately  15,000, and the installed base of these printers is projected
to grow at a four-year  compounded  annual  growth rate (CAGR) of  approximately
5.7% to 18,000 systems by the year 2001.

High volume transaction applications are typically found in large corporate data
centers  or  outsourcing  service  bureaus.  The  application  requirements  are
characterized   by  print  volumes   exceeding  one  million  pages  per  month,
time-critical  print windows,  low cost, and  customer-unique  page information.
Accent  Color's  products are sold,  supported and serviced by companies who are
known and trusted in the  marketplace.  The transaction  printing market segment
produces   mission-critical   documents  that  require  system  reliability  and
round-the-clock support.

DOWNTURN IN TRANSACTIONAL PRINTING MARKET
--------------------------------------------------------------------------------

During 2000 the  Company  manufactured  and sold  Truecolor  Systems  which were
marketed as the IBM(R) InfoPrint (TM) 4000 Hi-Lite Color post processor and sold
in combination with IBM's high-speed  monochrome printers to IBM customers.  The
Company also sold Truecolor Systems to Xerox. However, the Company experienced a
severe downturn in its market for Truecolor Systems towards the end of 2000 when
both IBM and Xerox  indicated that neither of them would be ordering  additional
Truecolor Systems in the foreseeable future.

Xerox

The Company believes that the Xerox decision,  not to order additional Truecolor
Systems,  was based on internal  difficulties which it is currently facing. As a
consequence of this decision,  the Company entered into  negotiations with Xerox
culminating  in a  settlement  agreement  under  which the  Company  would cease
shipments of Truecolor  Systems to Xerox (including  several systems  previously
covered by noncancelable orders which Xerox was not willing to accept) in return
for a cash  payment of  $381,585,  which the Company has received in March 2001.
This settlement terminates the Company's  relationship with Xerox, although, the
Company intends to be available  should Xerox ever reconsider its decision,  and
launch the Xerox product based on the Company's Truecolor System.

IBM

The decision by IBM not to order additional  Truecolor Systems, at least for the
foreseeable  future,  coupled  with  Xerox's  decision to suspend its  marketing
plans,  has resulted in a substantial  decrease in revenues in contrast with the
year 2000. In recognition of the effect on the Company of these developments IBM
extended until June 30, 2001, the Company's  secured  indebtedness to IBM, which
at December  31, 2000  included a loan of $2.5  million and accrued  interest of
approximately  $250,000.  The  Company  is  currently  in  discussion  with  IBM
concerning both its outstanding debt  obligations and its supplier  relationship
with the Company.

The Company's  primary objective in its negotiations with IBM has been to secure
an  opportunity  for the  Company  to pursue  its  prospects  in the  industrial
printing market, in keeping with the Company's  previously  announced refocusing
of its business on that market.  This  opportunity  also remains  subject to the
Company's  ability to obtain  additional  financing or a strategic  relationship
which  provides  required  capital and other  support  necessary  to sustain the
Company during the development  phase of its entry into the industrial  printing
market.  The  Company is  currently  working  with its  investment  bankers  and
advisors to structure necessary  understandings with its trade creditors, and to
secure an understanding with IBM in order to position the Company to effectively
seek the additional  capital and/or strategic  relationship  necessary for it to
pursue its business objectives within the industrial printing field.

ACS Truecolor System
--------------------------------------------------------------------------------

Notwithstanding the lack of current sales  opportunities,  the Company continues
to offer  Truecolor  Systems for marketing under the corporate logos and product
identifications  of the  Company's  OEM  customers.  The  selling  price  of the
Company's  Truecolor  Systems to its OEM  customers  has ranged from $117,000 to
$156,000 depending on model, options, terms and conditions of purchase.

The version of the  Truecolor  System  sold by IBM as the "IBM(R)  InfoPrint(TM)
Hi-Lite  Color  post  processor"  attaches  directly  to the  IBM  3900  and IBM
InfoPrint 4000 continuous form production  printing systems. It is configured to
print at the same speed as the IBM production  printing system (up to 501 images
per minute) at 240 or 300 dots per inch resolution.  The continuous form version
of the Truecolor System is designed to match the monthly production  capacity of
the Infoprint 4000 system.

The version of the Truecolor  System developed for Xerox as the "Xerox Docuprint
CF Color  post  processor"  attaches  directly  to the  Xerox  Docuprint  500 CF
continuous forms  production-printing  system.  It is configured to print at the
same speed as the Xerox production printing system (up to 501 images per minute)
at 240 or 300 dots per inch  resolution.  The  continuous  forms  version of the
Truecolor  System is designed to match the  monthly  production  capacity of the
Xerox Docuprint 500 system.


                                       3
<PAGE>

Consumables and Spare Parts
--------------------------------------------------------------------------------

The Company's product offerings include consumables, such as standard and custom
color hot melt ink, and spare parts.  Currently the Company provides consumables
to IBM for resale to end users operating the installed base of Truecolor Systems
sold through IBM.

PRODUCT DEVELOPMENT
--------------------------------------------------------------------------------

The engineering goals at Accent Color are focused on the following areas:

Aggressively Pursue Diversification Efforts

The  Company's  present   objective  is  to  find   opportunities  for  specific
applications  in the  high-speed  industrial  printing  market that will lead to
significant product manufacturing. These programs would comprise the repackaging
or  modifications  of  existing  modules  to meet a specific  application.  This
activity is being pursued  through direct  discussions  with key companies.  Two
contracts are in process. The systems envisioned as a result of this engineering
activity  will provide a simple and easy means for  manufacturing  firms to gain
the benefits of digital printing, without the risk of production line shut down.
The product line is unique in that it provides high quality,  high speed digital
printing in an in-line  (hybrid) system that is designed to be customized to fit
existing production lines.

Specifically, companies can gain rapid benefits using digital printing for:

o    Variable listing of ingredients;

o    Local language requirements;

o    On-product advertising;

o    Just in time packaging supply; and

o    Short run or customization.

Developing Technologies for Future Generation Products

In addition to enhancing its current products,  the Company believes that in the
long-term,  its future  success  will  depend  upon its  ability to develop  new
products as well.  Accordingly,  the Company is working  closely  with  printing
technology  suppliers,  to define technology  requirements  necessary for future
products.  These  technologies  include printing  capabilities of higher speeds,
greater resolution, lower cost and less complexity.

The Company expended  approximately $2.3 million,  $2.9 million and $4.2 million
on  engineering  and research and  development  in the years ended  December 31,
2000, 1999 and 1998, respectively.  As of December 31, 2000, Accent Color had 20
employees contributing to engineering and development activities.

MANUFACTURING AND ASSEMBLY
--------------------------------------------------------------------------------

The Company's  manufacturing  strategy has been to design a product based upon a
relatively  small number of discrete modules that can be subassembled and tested
by other  parties.  Other  than the  patented  ink jet  printheads  supplied  by
Spectra,  the  Company  believes  these  modules  can  be  readily  procured  on
competitive  terms.  Initially,  a substantial amount of assembly is done by the
Company prior to the completion  and  implementation  of subcontract  agreements
with those  suppliers of the major modules that the Company has  determined  are
suitably  qualified.   The  Company  has  identified   subcontract-manufacturing
companies  to be the primary  manufacturers  of the major  modules of  Truecolor
Systems.  The Company plans to use the same product  manufacturing  strategy for
products  developed  for the  industrial  printing  products.  The  Company  has
implemented a formal  quality  control  program to inspect  parts  received from
subcontractors to determine whether they comply with Company specifications. The
Company monitors  adherence to these  procedures  through site visits and direct
supervision.

The Company has made  product  assurance  and quality a priority in its business
strategy.  In pursuit of this goal, the Company has adopted a formal approach to
documentation control, design, manufacturing and business process definition and
has implemented an integrated  business  system  software  package to manage key
processes. Until products are developed for the industrial printing markets, the
Company  does not expect to have  significant  manufacturing  operations.  As of
December  31,  2000 the Company had 4  employees  engaged in  manufacturing  and
operations.

MARKETING, PRODUCT SUPPORT, SALES AND TRAINING
--------------------------------------------------------------------------------

The Company's  diversification efforts require marketing and selling at both the
management  and technical  levels of the companies that will be users of digital
industrial  printing.  This effort will be  supported by a staff that is able to
generate  the


                                       4
<PAGE>

necessary  collateral  material and support for the  technical  approaches  that
provide the Company its competitive  advantages.  The package printing marketing
will address the following potential packaging printing opportunities:

o    Warning labels on pharmaceutical and cigarette packaging;

o    Ingredients labeling on food packaging;

o    Couponing for food and pharmaceutical industries;

o    Marketing messages on food packaging;, and

o    Language options for all industries.

MARKET OUTLOOK:

Accent  Color  estimates  the food,  tobacco &  pharmaceutical  package  printer
business  to consist of over 8,000  packaging  lines,  of which  about 5,000 use
cartons and are potential  customers for the Company's  initial  product system.
These  estimates  are  based  on the  listing  of the  1,000  Largest  Companies
(Industry  Week  magazine).  The Company  expects the  pharmaceutical  packaging
business  to  adopt  designs  initially  engineered  for the  food  and  tobacco
industries.

New computer  production  integration  standards  and methods,  developed by the
38-company  consortium CIP3 (Cooperation for Integration of Prepress,  Press and
Postpress),  are expected to promote  data  linkage  across every phase of print
production.  Broad adoption of CIP3 will bring to print and packaging production
the  automation,  information  access and  efficiency  already being realized in
numerous other industries.  Some of these advantages are particularly  important
to package printers.  The National Association for Printing Leadership estimated
that it expects the  percentage  of printers  offering  digital  printing  would
nearly double from 1999 to 2001. This data link provides  additional support for
our hybrid system. With the digital access to information  available,  factories
will need printing  devices to enable the use of this information  network.  The
hybrid system we propose will provide  unique  advantages  over other  potential
solutions.

The Company's prospective product is intended to provide a simple and easy means
for  manufacturing  firms to engage  digital  printing.  These  systems  are not
expected to directly affect the production up time of a manufacturing line.

Each end use customer may have  different  requirements  of the system  (package
size, print speed, and how the system integrates into the packaging line). A key
value of Accent  Color is the  Company's  willingness  and ability to modify the
basic unit to meet the specific needs of existing and prospective customers. The
system is designed  to print  information  that,  when made  variable,  provides
significant  financial benefits.  For example, by making the list of ingredients
variable data, companies can adjust their food formulations based upon commodity
pricing  of  alternate  ingredients.  By  making  the  ingredients,  nutritional
information,  and product size  statements  digital,  companies that  distribute
product to various  countries can consolidate all of their packaging to a single
style and print the variable information in the local language.  Prominent local
language promotes sales, reduces misunderstandings that can create lawsuits, and
encourages regional sales and marketing programs on the carton. Many areas (EEU,
Asia) require local languages on packaging. Large distributors (Wal-Mart Stores,
K-Mart  Corporation,   and  food  stores)  require   specialized   packaging  to
distinguish  the product  they carry from that which a  competitor  carries.  By
creating  a common  label,  and  making  the  distributor  specific  information
variable,  manufacturers  can  provide  better  just in time  support  for these
distributors,  and  enhance  sales and  marketing  actions.  Large  distributors
require a 2 - 3 week supply of  specially  marked  packaging.  This is currently
performed  through  short  runs with  digital  plates,  etc.  The use of digital
printing of variable data at the factory can create substantial  savings in food
and tobacco packaging.

The pharmaceutical  package printing market is similar in hardware and technical
requirements  to the  food/tobacco  package  printing  market.  As with food and
tobacco package printing,  the system is designed to print information that when
made variable  provides  significant  financial  benefits to the companies.  The
initial  focus  will  be  on  over  the  counter  medications.   By  making  the
ingredients,  medical warnings,  and product size statements digital,  companies
that  distribute  product  to various  countries  can  consolidate  all of their
packaging  to a single  style and print the  variable  information  in the local
language.  As in the  food/tobacco  market,  prominent  local language  promotes
sales,  reduces  misunderstandings  that can  create  lawsuits,  and  encourages
regional sales and marketing programs on the carton.

In recent years,  drug and device  companies have placed  greater  importance on
packaging,  which serves both as a means to protect the manufacturer and promote
the product. The U.S.  pharmaceuticals  packaging market is expected to increase
to $4.2 billion in 2002,  according to The  Freedonia  Group,  Inc., a Cleveland
based research firm. With increasing  competition from generic  pharmaceuticals,
drug  manufacturers  may be  expected  to look  for  savings  in  operating  and
production  costs,  and  packaging  is  sure  to be  considered.  The  Packaging
Machinery Manufacturers Institute of Arlington, VA expects an increase in demand
for  packaging  machinery  between  12% and  15% in 2000  over  1999,  with  the
strongest demand for coding and printing  machines.  Several factors are driving
the strong demand,  including an influx of new products,  a need for more speed,
efficiency and a greater return on investment,  and regulations that promote the
use of new technologies.


                                       5
<PAGE>

CUSTOMERS
--------------------------------------------------------------------------------

Industrial Printing

The Company  searches out and creates  partnerships  with major  corporations to
develop unique  applications  for ink jet technology  that lead to products that
provide high value to the partner.  The Company has developed a partnership with
Philip  Morris to  develop  and market  systems  into the  industrial  packaging
market,  which provides users with  operational  benefits,  tied to just in time
production.  The development of a high speed, high image quality, in-line hybrid
digital  printing  system for printing  variable  information  on cartons in the
food,  tobacco and  pharmaceutical  industries creates a new market estimated by
Accent Color to be a $2-$4 billion opportunity.  The relationship between Accent
Color and Philip Morris (including Kraft Foods) provides a unique opportunity at
developing the product and capitalizing on this market.

Recently,  the Company announced that it was selected by a subsidiary of a major
telecommunications  equipment  manufacturer to support the development of an ink
jet based circuit printing systems.  The Company's activities will be focused on
the  development of a multi-jet  system  prototype  designed to demonstrate  the
ability  of  the  technology  to  satisfy  the   manufacturer's   circuit  board
manufacturing requirements.

Transaction Printing

The  Company's  supply  agreement  with Xerox has been  terminated on negotiated
terms for the reasons  discussed above.  Production of Truecolor Systems for IBM
has been suspended,  at least temporarily,  as the Company is in discussion with
IBM concerning  supply  arrangements and the Company's  secured debt to IBM. See
"Downturn in Transactional Printing Market" above.

BACKLOG
--------------------------------------------------------------------------------

The  Company  measures  backlog  based on  purchase  orders or  commitments  for
Truecolor Systems, consumables and spare parts that have not yet been shipped. A
substantial amount of the Company's backlog can be modified or canceled prior to
30  days  before  shipment  without  penalty,  except  for the  recovery  of the
Company's actual costs. Accordingly, the Company believes that backlog cannot be
considered  a  meaningful  indicator  of  future  financial  performance.  As of
December  31, 2000 the Company had a backlog for the year 2001 of  approximately
$400,000 in contrast to a backlog in excess of  $10,000,000  as of December  31,
1999.

COMPETITION
--------------------------------------------------------------------------------

Overall Accent Color Integration Business

Ink jet  integration  in the field of  industrial  printing is a relatively  new
concept  but  may  be  expected  to  become  highly   competitive.   Print  head
manufacturers may decide to move into custom  integration.  Prominent print head
developers,  such as Spectra, HP, Xaar, Hitachi, Trident, Epson, have moved away
from custom hardware and focused on print head performance and production yield.
However, a recently formed head producer (Aprion - formerly part of Scitex), has
taken the approach of engaging  corporate  partners for specific fields (such as
textile printing, and book printing).

Other companies are moving into the custom integration and development field:

o    Cambridge  Consulting Group has formed a small company named INCA to assist
     companies in the integration of Xaar printheads.

o    Torrey  Pines has moved  from  designing  only  laser  printing  systems to
     offering ink jet design, test, and integration services.

o    Mutoh has developed large format graphics printers using Epson technology.

Package Printing Business

This industry currently employs ink jet technologies for low resolution printing
of date codes. No system is currently  available to print significant amounts of
digital information at high speed and high resolution.  However, the Company may
face competition from major companies that provide some form of printing to this
industry including Markem, Trident, VideoJet, and Marsh.


                                       6
<PAGE>

Competition  may also come from  press  manufacturers.  Heidelberg  has  already
demonstrated  a system that uses an offset press to print an image,  followed by
an ink  jet  device  to add the  variable  information.  The use of a press  for
package  creation  is  typically  performed  by a  company  other  than the food
producer.  This approach does not offer real just in time benefits (reduction of
inventory, quick change capabilities). However, it will be available and will be
competing with the basic concept of declaring certain information  "variable" on
a package.

Transaction Printing Business

Suppliers to the  transactional  printing  market compete on the basis of speed,
print quality, functionality,  reliability, cost per page and color variety. The
Company  competes,  in  significant  part, on the basis of advanced  proprietary
technology in the areas of paper handling,  ink jet color printing and interface
software which allows the Company's products to print variable data, in multiple
standard or custom  colors at high  speeds.  Other  companies  with little or no
advance notice could  introduce  products or product  improvements  based on new
technologies.

Competition in the markets for the Company's products is highly fragmented.  The
Xerox 4890 (a similar product is also marketed by Xerox as the DocuPrint  390HC)
is a highlight  color printer,  which prints in black and one color per job (out
of a limited  palette).  It is capable of  printing 92 pages per minute but does
not offer custom  colors.  Oce Printing  Systems GmbH ("Oce") has introduced two
products,  the  DSC210 and the DC155.  The DSC210 is a  continuous  forms-based,
while the DC155 is a  cut-sheet  system.  Both are based on  electrophotographic
imaging.  However,  both  systems  provide  only one  highlight  color  and have
dramatically reduced print speeds when highlight colors are used, thus rendering
them less  than  ideal  for the high  volume  transaction  printing  market.  In
addition,  there are full color digital printing systems available which operate
at print speeds of up to 100 pages per minute, including the Xeikon DCP/50D, IBM
Infoprint  Color 100, and the Xerox DocuColor 100. These systems have relatively
high per page  print  costs  and  operate  at much  lower  speeds  than  typical
applications  in  the  transaction   printing  segment   require,   making  them
impractical for high-volume print jobs.

Scitex Digital  Printing  offers a product based on liquid  ink-jet  technology,
which can print at high speed and in multiple colors. This system, though, would
require a potential user  currently  using  electrophotographic  systems such as
those  from IBM,  Xerox and Oce to  completely  change  equipment  and  re-train
operators to use a different  process.  The Company  believes  that the cost and
disruption of such an implementation  would be prohibitive  except in very large
applications.

In addition to direct  competition  from other firms utilizing  high-speed color
technologies,  there exists  potential  direct  competition from firms improving
technologies  used in  low-speed  to  medium-speed  color  printers and indirect
competition from firms producing pre-printed forms.

INTELLECTUAL PROPERTY
--------------------------------------------------------------------------------

The Company's ability to compete effectively depends, in part, on the ability of
the Company to maintain the proprietary  nature of its  technology.  The Company
relies, in part, on proprietary  technology,  know-how and trade secrets related
to certain  aspects of its  principal  products and  operations.  To protect its
rights in these areas, the Company generally  requires its OEM customers and its
suppliers to enter into nondisclosure  agreements.  As of December 31, 2000, the
Company has been granted four patents by the U.S.  Patent and  Trademark  Office
relative to the  mechanical  design of the  Company's  paper  handling and color
printing system, which form the core of the Truecolor Systems.

The Company has an exclusive  right to supply  products which include  Spectra's
ink jet  printheads to print color on the  black-on-white  output from specified
high-speed  printers marketed by Xerox,  IBM, Oce and certain other parties.  To
the extent that wax-based inks and ink jet printheads purchased from Spectra are
covered under patents or licenses,  the Company relies on Spectra's rights under
such patents and licenses and Spectra's  willingness  and ability to enforce its
patents and maintain its licenses.

EMPLOYEES
--------------------------------------------------------------------------------

As of February  28,  2001,  the  Company  employed  31  individuals,  of whom 20
employees were engaged in engineering and research and development,  4 employees
in  manufacturing  and operations,  2 employees in marketing  activities,  and 5
employees in general administration. The Company's employees are not represented
by a collective bargaining organization, and the Company has never experienced a
work stoppage.  The Company believes that its relationship with its employees is
good.


                                       7
<PAGE>

Item 2. Properties

The  Company's  facilities  are  located at 800  Connecticut  Boulevard  in East
Hartford, Connecticut and presently consist of approximately 19,560 square feet.
The Company  believes that these facilities will meet the Company's needs for at
least  the next 12  months.  The  Company  leases  this  facility  under a lease
amendment that expires on December 31, 2005.

Item 3. Legal Proceedings

The Company is not a party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of fiscal 2000.

                                     PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's  Common Stock began  trading  publicly on the National tier of the
NASDAQ Stock Market under the ticker symbol  "ACLR" on December 18, 1996.  Prior
to this date,  there was no public market for the Common Stock.  Effective March
17, 1999,  the Company was delisted  from the NASDAQ Stock Market as the Company
was not in  compliance  with NASDAQ's  minimum bid price and net tangible  asset
level. The Company's Common Stock is now trading on the OTC Bulletin Board under
the same ticker symbol.  The table below sets forth the per share quarterly high
and low sales prices of the Common Stock for the two most recent fiscal years.

                            COMMON STOCK INFORMATION
                            ------------------------

        Year Ended 12/31/00                    High               Low
        -------------------                    ----               ---

          First Quarter                       $1.44              $.42

          Second Quarter                       $.89              $.44

          Third Quarter                        $.69              $.41

          Fourth Quarter                       $.42              $.05

        Year Ended 12/31/99                    High               Low
        -------------------                    ----               ---

          First Quarter                        $.81              $.13

          Second Quarter                       $.84              $.16

          Third Quarter                        $.77              $.38

          Fourth Quarter                       $.72              $.41

As of February 28, 2001 there were 2,592 stockholders of record, including those
stockholders  whose  certificates  were held by nominees.  The Company has never
declared or paid cash  dividends  on its Common  Stock.  The  Company  currently
intends to retain any earnings  for use in its business and does not  anticipate
paying any cash dividends on its Common Stock in the foreseeable future.


                                       8
<PAGE>

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
                                                                             For the year ended December 31,
                                                       ----------------------------------------------------------------------------
                                                           1996            1997            1998            1999            2000
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
Statement of Operations Data:
Sales                                                  $         --    $      1,578    $      8,220    $      7,344    $     14,579
Costs and expenses:
     Costs of production                                      1,272           7,397           9,836           6,864          10,733
     Research and development                                 6,932           8,786           4,249           2,850           2,279
     Marketing, general and administrative                    4,394           4,439           3,822           2,900           3,100
     Related party administrative expense                        25              --              --              --              --
                                                       ------------    ------------    ------------    ------------    ------------
                                                             12,623          20,622          17,907          12,614          16,112
                                                       ------------    ------------    ------------    ------------    ------------
Other (income) expense:
     Interest expense                                           656             246             200             450             393
     Interest income                                           (113)           (599)           (117)            (37)            (48)
                                                       ------------    ------------    ------------    ------------    ------------
                                                                543            (353)             83             413             345
                                                       ------------    ------------    ------------    ------------    ------------
Net loss before extraordinary item                          (13,166)        (18,691)         (9,770)         (5,683)         (1,878)
                                                       ------------    ------------    ------------    ------------    ------------
Extraordinary item:
     Loss on early extinguishment of debt,
        net of income taxes of nil                             (573)             --              --              --              --
                                                       ------------    ------------    ------------    ------------    ------------
Net loss                                                    (13,739)        (18,691)         (9,770)         (5,683)         (1,878)
                                                       ------------    ------------    ------------    ------------    ------------
Non-cash imputed dividend on preferred stock                     --              --            (920)         (1,627)             --
                                                       ------------    ------------    ------------    ------------    ------------
Net loss applicable to common stock                    $    (13,739)   $    (18,691)   $    (10,690)   $     (7,310)   $     (1,878)
                                                       ============    ============    ============    ============    ============

Net loss (basic and diluted) per common share:         $      (3.57)   $      (1.77)   $       (.87)   $       (.44)   $       (.08)

Weighted average common
  shares outstanding                                      3,852,982      10,566,890      12,330,903      16,647,285      24,152,015
                                                       ============    ============    ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                       ----------------------------------------------------------------------------
                                                           1996            1997            1998            1999            2000
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
Balance Sheet Data:
Cash and cash equivalents                              $     20,289    $      4,006    $      1,048    $      2,574    $      1,089
Working capital (deficit)                                    18,189           4,836           2,646            (681)         (2,055)
Total assets                                                 26,951          12,407           6,860           5,848           3,646
Short-term debt                                               1,000              --              --           2,368           2,500
Long-term debt, less current portion                          1,272              --           2,236              --              --
Total shareholders' equity (deficit)                         19,345           7,270          (1,307)         (4,150)         (3,793)
</TABLE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW
--------------------------------------------------------------------------------

Accent Color designs,  manufactures and sells  innovative,  high-speed,  ink jet
color  printing  systems and offers ink jet  integration  services.  In 2000 the
product  reengineering  effort was  delivered  on time and the cost targets were
met,  resulting in meeting the gross margin objectives and achieving  profitable
second and third quarters.  However, the demand for the highlight  transactional
printer fell sharply in the fourth quarter. Xerox did not launch its product and
IBM continues to sell and install  their  printers,  but has finished  inventory
available  as it enters  2001.  It is highly  unlikely  that IBM will  place any
orders for printers for 2001.

The current  plan is to scale back  operations  for the  transactional  printing
business, and to secure additional funding for the development of the industrial
printing market.

The Company's  approach to the industrial  printing market will be significantly
different than its approach to transactional printing. Since the device will not
be  integrated  with another  printer,  Accent Color will be able to offer total
printing  solutions  directly to the end user. This should enable the Company to
capture more of the profit opportunity. Accent Color intends to do business with
a larger  number of clients and will not be dependent  on just two  customers as
the Company has been  previously  with  transactional  printing.  The industrial
printing opportunity has been sized by consultants as being substantially larger
than the  transactional  printing market.  The opportunity is also more diverse.
Accent  Color  currently is  reviewing  projects  that not only jet ink but also
solvent,  powdered metal,  oil and glue. This is made possible through the years
of experience the Company has in the  electrical  and mechanical  integration of
ink jet technology.

Accent Color also sells  related  consumables  and spare parts.  Currently,  the
consumables  sold by the Company are  wax-based  inks,  which it acquires from a
vendor.  The sale of  consumables  and spare  parts has  continued  to  generate
revenue.


                                       9
<PAGE>

RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

Total Net Sales. Prior to December 31, 1999, the Company had adopted a policy of
deferring  revenue on its  Truecolor  Beta  systems and to systems sold to Xerox
until the systems were  accepted.  As of December 31, 2000 and 1999, the Company
had deferred  revenue of $0 and $874,000  related to Truecolor  Systems shipped.
Total net sales were  $14,579,000  for the year ended December 31, 2000 compared
to $7,344,000 for the year ended  December 31, 1999. Of the sales  recognized in
2000,   $874,000  resulted  from  deferred  revenues  recorded  in  1999,  while
recognized sales in 1999 included $595,000 of deferred revenue recorded in 1998.
Printer sales represented 69% of total net sales for the year ended December 31,
2000, while sales of consumables and spare parts  represented  24%.  Development
revenue accounted for 7% of total sales. As of December 31, 1999,  printer sales
were 74% of total net sales and consumables and spare parts represented 26%.

Printers.  Printer sales were  $10,087,000  for the year ended December 31, 2000
and $5,446,000 for the year ended December 31, 1999. Sales for 2000 consisted of
69 new systems and 3 system upgrades. Following is a summary of system shipments
and system revenue for the year ended December 31, 2000:

<TABLE>
<CAPTION>
                                                                     Units                     Dollars
                                                         -----------------------------      -------------
                                                             New              System        New Systems &
                                                           Systems           Upgrades          Upgrades
                                                         -----------       -----------       -----------
<S>                                                              <C>               <C>       <C>
         Deferred revenue as of December 31, 1999                  7                 0       $   874,000

           Plus: Shipments in 2000                                69                 3         9,213,000

           Less: Revenue recognized in 2000                      (76)              (3)       (10,087,000)
                                                         -----------       -----------       -----------

         Deferred revenue as of December 31, 2000                  0                 0       $         0
                                                         ===========       ===========       ===========
</TABLE>

Consumables  and Spare  Parts  Sales.  Consumables  and spare  parts  sales were
$3,545,000  for the year ended  December 31, 2000 compared to $1,890,000 for the
year ended December 31, 1999.  This increase was attributed to our OEM customers
ordering  spare parts and ink for their  inventories  to service  the  increased
number of printers that have been installed.

Other Sales. Development revenue for the industrial printing application for the
year ended  December,  31, 2000 was  $598,000  compared to $0 for the year ended
December,  31, 1999.  Additionally,  the company recorded as revenue $340,000 of
deposits on cancelled orders in the year ended December 31, 2000.

Costs of Production.  Costs of production  were  $10,733,000  for the year ended
December 31, 2000 and  $6,864,000  for the year ended  December  31,  1999.  The
increase was  attributed to the cost of goods sold related to an increase in the
number of printers  sold and an increase  in  inventory  reserves to reflect the
decline in value of the inventory used to produce printers.

Research and Development  Expenses.  Research and development expenses primarily
consist of the cost of personnel and  equipment  needed to conduct the Company's
research and development  efforts,  including  prototype  systems.  Research and
development  expenses were  $2,279,000  for the year ended  December 31, 2000 as
compared to $2,850,000  for the year ended  December 31, 1999.  The decrease was
attributable  to a  reduced  focus on the  design  of the VE  printer  which was
primarily the focus during 1999.

Marketing,   General  and  Administrative  Expenses.   Marketing,   general  and
administrative expenses were $3,100,000 for the year ended December 31, 2000, as
compared to $2,900,000 for the year ended  December 31, 1999.  This increase was
primarily  due to increased  efforts in  marketing,  travel and were offset by a
decrease in occupancy expenses.

Interest Expense and Other (Income)  Expense.  Interest expense was $393,000 for
the year ended  December  31,  2000,  as compared to $451,000 for the year ended
December 31, 1999.  Interest  income was $48,000 for the year ended December 31,
2000,  and $37,000 for the year ended December 31, 1999. The decrease was due to
a reduction of the interest expense associated with capital leases.

Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998

Total Net Sales.  Prior to the quarter ended  December 31, 1998, the Company had
adopted a policy of deferring  revenue on its Truecolor  system until expiration
of the product's warranty period. This policy was adopted because the system was
sold with a 90-day warranty to IBM and the Company had not established  adequate
warranty  experience as of that date to estimate future  warranty costs.  During
the quarter ended December 31, 1998, the Company, in accordance with its revenue
recognition  policy  on  printer  sales,  determined  that it now  had  adequate
warranty  experience to begin  recognizing  revenue upon shipment of printers to
its primary OEM customer. The Company continued to defer revenue on shipments to
its second OEM customer until systems were accepted. As of December 31, 1999 and
1998,  the Company had  deferred  revenue of $874,000  and  $595,000  related to
Truecolor  Systems  shipped.  Total net sales were $7,344,000 for the year ended
December 31, 1999


                                       10
<PAGE>

compared  to  $8,220,000  for the year ended  December  31,  1998.  Of the sales
recognized in 1999,  $595,000  resulted from deferred revenues recorded in 1998,
while recognized sales in 1998 included  $2,496,000 of deferred revenue recorded
in 1997.  Printer  sales  represented  74% of total net sales for the year ended
December 31, 1999 while sales of consumables and spare parts represented 26%. As
of December 31, 1998,  printer sales were 81% of total net sales and consumables
and spare parts represented 19%.

Printers. Printer sales were $5,446,000 for the year ended December 31, 1999 and
$6,654,000  for the year ended  December 31, 1998.  Of the sales  recognized  in
1999,  $595,000  resulted  from  deferred  revenue  recorded in 1998 compared to
$2,496,000  from 1997.  Sales for 1999  consisted of 41 new systems and 3 system
upgrades.  A total of 43 systems and 3 system upgrades were shipped during 1999,
of  which  2  systems  shipped  in  1999  were  recorded  as  deferred  revenue.
Additionally,  5 systems shipped in 1998 remained in deferred revenue. Following
is a summary of system  shipments and system revenue for the year ended December
31, 1999:

<TABLE>
<CAPTION>
                                                               Units                 Dollars
                                                     --------------------------   -------------
                                                         New           System     New Systems &
                                                       Systems        Upgrades       Upgrades
                                                     -----------    -----------    -----------
<S>                                                          <C>             <C>   <C>
          Deferred revenue as of December 31, 1998             5              0    $   595,000

            Plus: Shipments in 1999                           43              3      5,725,000

            Less: Revenue recognized in 1999                 (41)            (3)    (5,446,000)
                                                     -----------    -----------    -----------

          Deferred revenue as of December 31, 1999             7              0    $   874,000
                                                     ===========    ===========    ===========
</TABLE>

As of December 31, 1999 the Company has orders and  contractual  commitments for
the year 2000 in excess of $10 million from its primary OEM customers.

Consumables  and Spare  Parts  Sales.  Consumables  and spare  parts  sales were
$1,890,000  for the year ended  December 31, 1999 compared to $1,566,000 for the
year ended December 31, 1998.

Costs of  Production.  Costs of production  were  $6,864,000  for the year ended
December 31, 1999 and  $9,836,000  for the year ended  December  31,  1998.  The
decrease  was  attributed  to the cost of goods sold  related to fewer  sales of
printers,  reduced  overhead  spending  mainly in payroll and related  costs and
partially  offset  by an  increase  in the use of ink due to a higher  number of
printers now being utilized by customers.

Research and Development  Expenses.  Research and development expenses primarily
consist of the cost of personnel and  equipment  needed to conduct the Company's
research and development  efforts,  including  manufacturing  prototype systems.
Research and  development  expenses were  $2,850,000 for the year ended December
31, 1999 a decrease of 33% from $4,249,000 for the year ended December 31, 1998.
This  decrease  was  attributed  to the Company  directing  its  efforts  toward
production and market development with less significant emphasis on research and
development.  The decrease in research and development was primarily  attributed
to three major factors:  (i) a reduction in payroll and related costs due to the
reduction of personnel in 1999, (ii) a reduction in design and development costs
paid to Spectra  associated  with the  development of ink jet printheads for the
enhanced  wide-head  version  of the  Truecolor  Model HC2  system,  and (iii) a
decrease in general design and development costs.

Marketing,   General  and  Administrative  Expenses.   Marketing,   general  and
administrative  expenses were $2,900,000 for the year ended December 31, 1999, a
decrease from $3,822,000 for the year ended December 31, 1998. This decrease was
primarily  due to a  reduction  in  payroll-related  costs  as a  result  of the
reduction in  administrative  personnel in 1999 and a reduction in  professional
service  costs.  These items were offset by an  increase  in  technical  support
expenses of approximately $174,000.

Interest Expense and Other (Income)  Expense.  Interest expense was $451,000 for
the year ended December 31, 1999, an increase of 126% from $200,000 for the year
ended  December 31, 1998.  This increase was due to the  Company's  interest and
debt  amortization for the full year on the outstanding loan from IBM as well as
the interest and debt  amortization on the interim  financing of September 1999.
Interest  income was $37,000 for the year ended December 31, 1999, a decrease of
68% from  $117,000  for the year ended  December  31,  1998.  This  decrease  in
interest  income was  attributed to having less cash available for investment in
1999 as compared to 1998.


                                       11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

The  Company's  need for  additional  funding  is  critical  as it  attempts  to
diversify its  operations  into the  industrial  printing  market.  To date, the
Company has financed its operations  through customer  payments,  borrowings and
the sale of debt and /or equity securities. The Company is aggressively pursuing
additional   funding  at  this  time  to   finance   the   Company   during  its
diversification  efforts.  Failure to acquire additional  financing will have an
adverse effect on the ability of the Company to continue as a going concern.

On January 13, 1998, the Company completed a private equity financing  providing
net  proceeds to the Company of $3.9  million.  Pursuant to the  financing,  the
Company issued 4,500 shares of Series B Convertible  Preferred  Stock at a price
of $1,000 per share and warrants to purchase the  Company's  common  stock.  The
warrants  issued are  exercisable  into  300,000  shares of common stock with an
exercise price of $2.75 and an expiration date of January 9, 2003. Additionally,
warrants  exercisable into 115,385 shares of common stock with an exercise price
of $2.50 and an expiration  date of January 9, 2003 were issued to the placement
agent for services  provided.  As of December 31, 2000, there were 958 shares of
Series B preferred stock outstanding.

On July 21, 1998,  the Company  entered into a loan agreement with IBM to borrow
$2.5 million at a fixed interest rate of 10% per year. Interest payments are due
quarterly  beginning  October 1, 1998.  The loan was  originally  due in full on
December 31, 2000 and is secured by the assets and intellectual  property of the
Company. As part of the loan agreement, the Company issued a warrant to IBM that
provides  the right to purchase  500,000  shares of common  stock at an exercise
price of $2.50 per  share,  until the  warrant  expires  on July 21,  2003.  The
warrant was valued at  $325,000,  which was  allocated  to common  stock with an
equivalent discount on the loan. The discount was amortized over the life of the
loan resulting in a non-cash charge to interest  expense.  Amortization  expense
was  $132,203  and  $132,204  for the year  ended  December  31,  2000 and 1999,
respectively. As of December 31, 2000, the Company was unable to repay the loan,
and IBM granted a six month extension until June 30, 2001.

On September 7, 1999, the Company  received  $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In  conjunction  with this sale of
common stock the Company issued 550,000  warrants to purchase common stock at an
exercise  price of the lower of $.50 per share of common  stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.

On the same day, the Company also sold a Series A Convertible  Subordinated Note
with a face value of $550,000 to Orbis  Pension Fund  Trustees.  In  conjunction
with the sale of the Note,  the  Company  issued  275,000  warrants  to purchase
common  stock.  It  also  issued  275,000  warrants  to  purchase  common  stock
contingent  upon the  Noteholder  converting  its  notes to  common  stock.  The
warrants  were  issued at an  exercise  price of the lower of $0.50 per share of
common  stock or the per share common stock  equivalent  price in the  Company's
next  equity  offering in which the Company  receives  net  proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.

The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock,  provided that both this conversion  price and the shares
simultaneously  sold were subject to adjustment should the Company's next equity
financing  resulting in net proceeds to the Company of at least $1,100,000 be at
a common share  equivalent  price of less than $0.50 per share.  Therefore,  the
financing  completed  by the  Company on  December  7, 1999  discussed  in below
paragraphs  resulted  in  adjustments  with  respect  to the  September  7, 1999
financing  consisting of the issuance of an additional 275,000 shares to the PMG
Eagle Fund without further  consideration thereby adjusting the overall costs of
shares acquired by the PMG Eagle Fund to $0.40 per share,  and the adjustment of
the conversion  price under the Series A Convertible  Subordinated  Note sold to
Orbis Pension Fund Trustees and the exercise price under the warrants  issued to
both purchasers to $0.40 per common share with corresponding  adjustments in the
number of shares  into  which such Note  could be  converted  and for which such
warrants  could be  exercised.  Simultaneous  with the closing of the  Company's
offering of Series C  convertible  preferred  stock  described in the  following
paragraphs,  Orbis  Pension Fund  Trustees  converted  the Series A  Convertible
Subordinated Note into 1,375,000 shares of the Company's common stock.

On  December  7, 1999,  the Company  completed  an offering of 33,589  shares of
series C convertible preferred stock. The shares of preferred stock were sold at
a  purchase  price of $100 per  share.  The  Company's  net  proceeds  from this
issuance was $2,894,822. The series C preferred stock is convertible at any time
into shares of the Company's  common stock at a fixed  conversion price of $0.40
per share. The number of shares reserved for issuance pursuant to the conversion
of the 33,589  shares of  outstanding  series C  preferred  stock was  8,397,250
shares  of  common  stock.  In  connection  with the  issuance  of the  series C
preferred  stock, the Company issued warrants to acquire 71,473 shares of common
stock at an  exercise  price of $.40 per  share  as  partial  consideration  for
placement agent services.

Series C holders are  entitled to receive  cumulative  dividends at a rate of 8%
per year of the  initial  purchase  price of $100 per  share  but only  upon the
occurrence  of a Liquidation  Event,  provided that any such dividend is coupled
with an  equivalent  ratable  dividend  to the holders of the series B preferred
stock. A "Liquidation  Event" is defined to include a merger (except a merger in
which Accent Color is the surviving entity), consolidation, dissolution, winding
up or sale of substantially all of the


                                       12
<PAGE>

assets of the  company,  unless the  holders of at least 75% of the series B and
series C stock  determine that any such event is not a Liquidation  Event. As of
December  31,  2000  there  are  18,474  shares  of  series  C  preferred  stock
outstanding.

Operating  activities  consumed  $1.4  million in cash in 2000  compared to $2.2
million in 1999. This change was primarily  attributed to the decreased net loss
of the Company.

The Company had no significant capital  expenditure  commitments at December 31,
2000.  However,  at December  31,  2000,  the  Company  has accrued  outstanding
purchase commitments of $566,000 for certain printer and spare parts.

During the years from 1997 to 2000,  the Company  adjusted its  staffing  levels
from 140  employees  as of December  31, 1997 to 31 employees as of December 31,
2000.

As of December 31, 2000, the Company's  primary source of liquidity was cash and
cash equivalents  totaling $1.1 million.  Based on the current operating plan of
the Company,  the primary  requirements  for cash through the  remainder of 2001
will be to fund operating losses due to  diversification  efforts in development
and research  and payment of maturing  debt.  The  Company's  currently  planned
research and development  activities are focused on  transferring  the technical
strengths of the Company into industrial printing markets.

Based on its current  operating  plan, the Company  anticipates  that additional
financing will be required to finance its  operations,  repayment of outstanding
debt and capital expenditures.  Additional financing options may involve (1) the
investment  of  additional  funds in the Company by a  strategic  partner in the
industrial printing marketplace,  and/or (2) one or more additional offerings of
the Company's debt and/or equity securities in a private or public offering. The
Company's  currently  anticipated levels of revenue and cash flow are subject to
many  uncertainties  and cannot be assured.  The amount of funds required by the
Company  will  depend  on  many  factors,  especially  the  development  of  the
industrial printing business. Other factors include engineering and customer and
technical support requirements. The inability to obtain additional financing and
to generate  sufficient  cash from operations will require the Company to reduce
or eliminate expenditures for research and development,  production or marketing
of its products,  or otherwise to curtail or  discontinue  its  operations.  The
Company  expects that quarterly net losses will continue  through the end of the
year 2001.

FACTORS AFFECTING FUTURE RESULTS
--------------------------------------------------------------------------------

In the  foregoing  management's  Discussion  and  Analysis  Section,  and in the
documents that we incorporate  by reference,  the Company makes  forward-looking
statements that relate to the Company's future plans,  objectives,  expectations
and  intentions  that  involve  risks and  uncertainties.  Such  forward-looking
statements  are made pursuant to the "safe harbor"  provisions of Section 21E of
the Securities  Exchange Act of 1934, as amended,  which were enacted as part of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
contained in the foregoing discussion include marketing, revenue and expenditure
expectations,  and other strategies and anticipated events. Without limiting the
foregoing, the words "believes",  "anticipates",  "plans", "expects" and similar
expressions  are intended to identify  forward-looking  statements.  There are a
number of  important  factors that could cause  actual  events or the  Company's
actual results to differ materially from those indicated by such forward-looking
statements.

These factors  include,  without  limitation,  (i) the ability of the Company to
secure  strategic   relationships  with  our  previously  announced  development
partners in the industrial printing marketplace; (ii) the ability of the Company
to identify and procure  additional  customers and/or strategic  partners in the
industrial printing marketplace  (including the food, tobacco and pharmaceutical
package  printing  business  segments);  (iii) the  ability  of the  Company  to
succesfully  reengineer  and modify our  existing  high-speed  ink jet  printing
technologies to complement existing productions lines in the industrial printing
marketplace;  (iv) the Company's  expectations with regard to the growing demand
for  high-speed  digital  printing  applications  in  the  industrial  packaging
marketplace;  (v) the need to reach an  accommodation  with our  secured  lender
(IBM) concerning indebtedness of $2.7 million for which repayment is due on June
30, 2001; (vi) the need to raise additional debt or equity capital sufficient to
fund our refocused  business plan and pursue industrial  printing  opportunities
while supporting current transactional  printing programs,  (vii) the dependence
of the Company on third party  suppliers  for certain key  technology  elements;
(viii) our ability to adequately  protect our  intellectual  property  rights in
both our current programs and the industrial printing marketplace;  and (ix) the
potential fluctuations in the Company's quarterly results of operations.

INFLATION
--------------------------------------------------------------------------------

Although certain of the Company's  expenses  increase with general  inflation in
the economy,  inflation has not had a material impact on the Company's financial
results to date.


                                       13
<PAGE>

Item 8. Financial Statements and Supplementary Data


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
  of Accent Color Sciences, Inc.


     In our opinion,  the accompanying balance sheets and the related statements
of operations,  shareholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Accent Color Sciences,  Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
auditing  standards  generally  accepted in the United States of America,  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 our opinion.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company has suffered  recurring  losses and negative
cash flows from  operations  that raise  substantial  doubt about the  Company's
ability to continue as a going  concern.  The Company's  plans in regard to this
matter are  described  in Note 1. The  financial  statements  do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 27, 2001


                                       14
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                         2000                    1999
                                                                     ------------            ------------
<S>                                                                  <C>                     <C>
Assets
Current assets:
     Cash and cash equivalents                                       $  1,089,488            $  2,573,764
     Accounts receivable                                                  915,405                  64,544
     Inventories (Notes 2 and 4)                                          682,682               1,863,850
     Prepaid expenses and other current assets                            122,725                 111,262
                                                                     ------------            ------------
          Total current assets                                          2,810,300               4,613,420

Fixed assets, net (Notes 2 and 3)                                         758,999               1,156,189
Other assets, net (Note 2)                                                 77,171                  78,446
                                                                     ------------            ------------
          Total assets                                               $  3,646,470            $  5,848,055
                                                                     ============            ============

Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
     Obligations under capital leases (Note 10)                      $     53,052            $     23,116
     Short-term debt, net of discount (Note 5)                          2,500,000               2,367,797
     Accounts payable                                                     870,237                 516,429
     Accrued expenses (Notes 2 and 6)                                   1,441,733                 758,139
     Customer advances and deposits (Note 2)                                   --                 755,000
     Deferred revenue (Note 2)                                                 --                 874,000
                                                                     ------------            ------------
          Total current liabilities                                     4,865,022               5,294,481
                                                                     ------------            ------------
Obligations under capital leases (Note 10)                                 70,068                      --
Other long-term liabilities (Notes 9 and 10)                              126,059                 390,708
                                                                     ------------            ------------
          Total non-current liabilities                                   196,127                 390,708
                                                                     ------------            ------------
          Total liabilities                                             5,061,149               5,685,189
                                                                     ------------            ------------
Commitments and contingencies (Note 10)

Mandatorily redeemable convertible preferred stock (Note 8)             2,378,494               4,313,367
                                                                     ------------            ------------
Shareholders' equity (deficit) (Notes 7 and 9)
        Common stock, no par value, 50,000,000
        shares authorized, 27,163,181 and 21,072,578
        shares issued and outstanding                                  51,383,707              49,147,942
     Accumulated deficit                                              (55,176,880)            (53,298,443)
                                                                     ------------            ------------
        Total shareholders' equity (deficit)                           (3,793,173)             (4,150,501)
                                                                     ------------            ------------

        Total liabilities, convertible preferred stock and
        Shareholders' equity (deficit)                               $  3,646,470            $  5,848,055
                                                                     ============            ============
</TABLE>

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


                                       15
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                         For the year ended December 31,
                                                                                 2000                 1999                 1998
                                                                             ------------         ------------         ------------
<S>                                                                          <C>                  <C>                  <C>
Revenue (Note 2)                                                             $ 14,579,183         $  7,343,675         $  8,219,586
                                                                             ------------         ------------         ------------
Costs and expenses:
    Costs of production                                                        10,733,230            6,863,864            9,836,379
    Research and development                                                    2,279,785            2,850,456            4,248,779
    Marketing, general and administrative                                       3,099,645            2,899,397            3,822,113
                                                                             ------------         ------------         ------------
                                                                               16,112,660           12,613,717           17,907,271
                                                                             ------------         ------------         ------------
Other (income) expense:
     Interest expense                                                             393,028              450,611              199,572
     Interest income                                                              (48,068)             (37,174)            (117,404)
                                                                             ------------         ------------         ------------
                                                                                  344,960              413,437               82,168
                                                                             ------------         ------------         ------------
Net loss                                                                       (1,878,437)          (5,683,479)          (9,769,853)
                                                                             ------------         ------------         ------------
Imputed dividend on preferred stock                                                    --           (1,626,967)            (920,000)
                                                                             ------------         ------------         ------------
Net loss applicable to common stock                                          $ (1,878,437)        $ (7,310,446)        $(10,689,853)
                                                                             ============         ============         ============

Net loss (basic and diluted) per common share (Note 2):
                                                                             $       (.08)        $       (.44)        $       (.87)
                                                                             ============         ============         ============

Weighted average common shares
  Outstanding (Note 2)                                                         24,152,015           16,647,285           12,330,903
                                                                             ============         ============         ============
</TABLE>

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


                                       16
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                          For the year ended December 31,
                                                                                  2000                 1999                 1998
                                                                              -----------          -----------          -----------
<S>                                                                           <C>                  <C>                  <C>
Cash flows from operating activities:
  Net loss                                                                    $(1,878,437)         $(5,683,479)         $(9,769,853)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization                                                650,941              893,516            1,208,368
     Expense  related to stock,  warrants  and  options
       granted                                                                     29,645               92,205               13,054
     Loss on disposal of fixed assets                                              39,813              165,134                4,552
  Changes in assets and liabilities:
     Accounts receivable                                                         (850,861)           1,257,238             (881,848)
     Inventories                                                                1,181,168              405,166            2,342,200
     Prepaid expenses and other assets                                            (11,463)             105,302              106,742
     Accounts payable and accrued expenses                                      1,037,402             (276,024)            (350,484)
     Customer advances and deposits                                              (755,000)             755,000              (85,600)
     Deferred revenue                                                            (874,000)             279,000           (1,901,000)
     Other long-term liabilities                                                       --             (232,870)              87,061
                                                                              -----------          -----------          -----------
       Net cash used in operating activities                                   (1,430,792)          (2,239,812)          (9,226,808)
                                                                              -----------          -----------          -----------
Cash flows from investing activities:
  Proceeds from sale of fixed assets                                               95,762              138,283               58,475
  Purchases of fixed assets                                                      (107,674)            (287,085)            (168,776)
  Cost of patents                                                                      --               (7,661)             (19,524)
                                                                              -----------          -----------          -----------
       Net cash used in investing activities                                      (11,912)            (156,463)            (129,825)
                                                                              -----------          -----------          -----------
Cash flows from financing activities:
  Payment of capital lease obligations                                            (48,170)             (64,014)             (66,167)
  Net proceeds from issuance of convertible debt                                       --              493,088                   --
  Proceeds from issuance of warrants                                                   --               80,000              325,000
  Net proceeds from issuance of common stock                                           --              502,719                   --
  Proceeds from exercise of options and warrants                                   95,562                   --               44,625
  Net proceeds from issuance of preferred stock                                   (88,964)           2,894,821            3,921,037
  Proceeds from long-term debt                                                         --                   --            2,175,000
  Common stock issued to service provider                                              --               15,000                   --
                                                                              -----------          -----------          -----------
       Net cash (used in) provided by financing
         activities                                                               (41,572)           3,921,614            6,399,495
                                                                              -----------          -----------          -----------
       Net increase (decrease) in cash and cash
         equivalents                                                           (1,484,276)           1,525,339           (2,957,138)
       Cash and cash equivalents at beginning of period                         2,573,764            1,048,425            4,005,563
                                                                              -----------          -----------          -----------
       Cash and cash equivalents at end of period                             $ 1,089,488          $ 2,573,764          $ 1,048,425
                                                                              ===========          ===========          ===========
Supplemental disclosure
  Cash paid for:
     Interest                                                                 $   260,825          $    77,591          $    75,089
                                                                              ===========          ===========          ===========
</TABLE>

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


                                       17
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
             STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                             Common Stock                          Accumulated
                                                                Shares            Amount              Deficit              Total
                                                              ----------       ------------        ------------        ------------
<S>                                                           <C>              <C>                 <C>                 <C>
December 31, 1997                                             11,989,855       $ 45,114,633        $(37,845,111)       $  7,269,522

Proceeds from sale of warrants                                        --            810,000                  --             810,000
Imputed dividend on mandatorily
   redeemable convertible preferred stock                             --           (920,000)                 --            (920,000)
Exercise of options                                               37,500             44,625                  --              44,625
Conversion of mandatorily
   redeemable convertible preferred stock                        814,526            933,669                  --             933,669
Warrants issued with debt                                             --            325,000                  --             325,000
Net loss
                                                                      --                 --          (9,769,853)         (9,769,853)
                                                              ----------       ------------        ------------        ------------
December 31, 1998                                             12,841,881         46,307,927         (47,614,964)         (1,307,037)

 Conversion of mandatorily
   redeemable convertible preferred stock                      5,420,697          1,631,151                  --           1,631,151

 Common stock issued to service provider                          60,000             15,000                  --              15,000
 Proceeds from sale of common stock                            1,375,000            502,719                  --             502,719
 Conversion of note                                            1,375,000            493,088                  --             493,088
 Warrants issued with debt                                            --             80,000                  --              80,000
 Accretion to carrying value for preferred
    stock                                                             --             47,761                  --              47,761
Warrants issued and repriced                                                         70,386                                  70,386
Net loss
                                                                      --                 --          (5,683,479)         (5,683,479)
                                                              ----------       ------------        ------------        ------------
December 31, 1999                                             21,072,578         49,147,942         (53,298,443)         (4,150,501)

Conversion of mandatorily
   redeemable convertible preferred stock                      5,643,746          1,845,909                  --           1,845,909
Common stock issued to service provider                           10,000              4,844                  --               4,844
Exercise of stock options                                        436,857             95,562                  --              95,562
Adjustment due to cancellation of options                             --            289,450                  --             289,450
Net loss
                                                                      --                 --          (1,878,437)         (1,878,437)
                                                              ----------       ------------        ------------        ------------
December 31, 2000                                             27,163,181       $ 51,383,707        $(55,176,880)       $ (3,793,173)
                                                              ==========       ============        ============        ============
</TABLE>

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


                                       18
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


1. Formation and Operations of the Company

Accent Color Sciences,  Inc. (the "Company") was  incorporated in Connecticut in
1993. The Company designs,  manufactures and sells innovative high-speed,  color
printers ("Truecolor Systems") to attach to high-speed, black-on-white printers.
The Company also sells related consumables and spare parts.

During the first  quarter of 1998,  the Company  introduced  to the market a new
enhanced  version of its  product,  the  wide-head  Truecolor  System,  which it
shipped throughout the year. For the year ended December 31, 2000, $14.0 million
or 96% of total sales were  attributed to the Company's  primary OEM  customers.
For the year ended  December 31,  1999,  $7.3 million or 99% of total sales were
attributed to the Company's two primary OEM customers.

Based on its current  operating  plan, the Company  anticipates  that additional
financing  will  be  required  to  finance  its  operations,  repayment  of  its
outstanding debt and capital  expenditures.  The Company's currently anticipated
levels of revenue and cash flow are subject to many  uncertainties and cannot be
assured.  The  amount  of funds  required  by the  Company  will  depend on many
factors, including the ability to generate revenues from the industrial printing
market,  the settlements  with current OEM customers,  engineering and technical
support  requirements.  The  inability  to obtain  additional  financing  and to
generate  sufficient  cash from operations will require the Company to reduce or
eliminate expenditures for research and development,  production or marketing of
its products, or otherwise to curtail or discontinue its operations. The Company
expects  that  quarterly  net losses will  continue  through the end of the year
2001.

2. Summary of Significant Accounting Policies

Significant  accounting  policies followed in the preparation of these financial
statements are as follows:

Use of Estimates

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

Revenue Recognition

Revenue  was  generally  recognized  upon  product  shipment.  The  Company  has
established warranty policies that, under specific conditions,  enable customers
to return products.  The Company  provides for potential  returns and allowances
and  warranty  costs  at the time of  revenue  recognition.  Prior to 2000,  the
Company  had  deferred  revenue  on  product  shipments  until the OEM  customer
accepted the machines.  By 2000, the Company had sufficient  experience with its
OEM customers to recognize  revenue when  machines were shipped.  As of December
31, 2000 and 1999, the Company had deferred  revenue of $0 and $874,000  related
to Truecolor Systems shipped. In addition,  estimated warranty costs of $176,457
and  $230,025  were  accrued by the  Company as of  December  31, 2000 and 1999,
respectively.  Warranty  expense was  $(30,981),  $19,529,  and $180,251 for the
years ended December 31, 2000, 1999, and 1998, respectively.

Cash and Cash Equivalents

Cash and  cash  equivalents  include  cash on  deposit  with  banks,  as well as
short-term investments with original maturities of 90 days or less.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.

Fixed Assets

Fixed assets are stated at cost and are depreciated  over their estimated useful
lives using the  straight-line  method.  The estimated  useful lives are between
three and five years.  Leasehold  improvements are amortized over the shorter of
the term of the lease or the useful life of the asset.

Patent

Patent costs of $81,059 as of December  31, 2000 and 1999,  are  capitalized  as
incurred and are amortized, once issued, using the straight-line method over the
shorter of the legal term or estimated useful life. Accumulated amortization was
$3,887, $2,613, and $1,823, at December 31, 2000, 1999 and 1998, respectively.


                                       19
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


Income Taxes

The Company uses the  liability  method of accounting  for income taxes,  as set
forth in Statement of Financial  Accounting  Standards No. 109,  "Accounting for
Income  Taxes."  Under this  method,  deferred  tax assets and  liabilities  are
recognized for the expected  future tax  consequences  of temporary  differences
between the carrying amounts and the tax basis of assets and liabilities.

Research and Development Expenditures

Research and development expenditures are charged to expense as incurred.

Customer Deposits

Based on sales contracts with customers, the Company is entitled to a percentage
of the sales price upon  receipt of firm  purchase  orders.  As of December  31,
2000, the Company did not have any customer deposits on hand.  Customer deposits
of $755,000 were deferred at December 31, 1999.

Stock-Based Compensation

The Company applies APB Opinion 25 and related interpretations in accounting for
its Stock  Incentive  Plan.  Under APB 25, when the  exercise  price of employee
stock  options  equals the market price of the  underlying  stock on the date of
grant, no compensation  expense is recognized.  Additional  disclosures required
under  Financial   Accounting  Standard  No.  123  "Accounting  for  Stock-Based
Compensation," are included in Note 9, Stock Incentive Plan.

Net Loss Per Common Share

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 128,
"Earnings  per Share,"  for all  periods  presented.  Basic  earnings  per share
computations  are  determined  based on the  weighted  average  number of shares
outstanding  during the period. The effect of the exercise and conversion of all
securities,  including stock options and warrants would be antidilutive and thus
is not included in the diluted earnings per share calculation.

3. Fixed Assets

                                                              December 31,
                                                            2000         1999
                                                        ----------   ----------
      Equipment                                         $1,593,706   $1,607,175
      Computers                                            754,240      814,441
      Furniture and fixtures                               325,233      339,519
      Leasehold improvements                               272,873      507,115
      Purchased software                                   357,838      357,838
      Assets held for sale                                  50,000      143,852
      Capital leases - equipment                           423,630      294,397
                                                        ----------   ----------
                                                         3,777,522    4,064,337
      Less: accumulated depreciation and amortization    3,018,523    2,908,148
                                                        ----------   ----------
                                                        $  758,999   $1,156,189
                                                        ==========   ==========

The Company  entered into capital leases of $148,174 for the year ended December
31, 2000.  Amortization expense for capital leases amounted to $48,310,  $73,846
and $78,887 for the years ended December 31, 2000, 1999, and 1998, respectively.
Depreciation  expense was $469,153,  $686,676 and $1,068,241 for the years ended
December 31, 2000, 1999 and 1998, respectively.

4. Inventories

Inventories consist of the following:

                                                        December 31,
                                                    2000            1999
                                                 ----------      ----------
     Raw materials and components                $  559,393      $  692,397
     Work-in-process                                 10,000         268,206
     Finished goods                                 113,289         903,247
                                                 ----------      ----------
                                                 $  682,682      $1,863,850
                                                 ==========      ==========

The  Company  has  been  actively  negotiating  with its OEM  customers  and has
determined  that  neither  OEM  customer  will  be  ordering   printers  in  the
foreseeable future.  Therefore, as of December 31, 2000 the Company has reported
related inventory at net realizable value.


                                       20
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


5. Debt

The following table summarizes the Company's current outstanding debt:

<TABLE>
<CAPTION>
                                            Stated Interest                              December 31,
                                                  Rate           Maturity             2000          1999
                                                  ----           --------             ----          ----
<S>                                              <C>         <C>                  <C>           <C>
    Debt, net of unamortized
      discount of $0 and $132,203                10.00%      December 31, 2000    $ 2,500,000   $ 2,367,797
</TABLE>

IBM Loan Agreement

On July 21, 1998, the Company  entered into a loan agreement with  International
Business Machines Corporation ("IBM") to borrow $2.5 million at a fixed interest
rate of 10% per year. Interest payments are due quarterly since October 1, 1998.
The loan was due in full on  December  31,  2000  and is  collateralized  by the
assets and intellectual  property of the Company. As part of the loan agreement,
the Company issued a warrant to IBM that provides the right to purchase  500,000
shares of  common  stock at an  exercise  price of $2.50  per  share,  until the
warrant  expires on July 21, 2003. The fair value of the warrant using an option
pricing model was determined to be $325,000, which was allocated to common stock
with an equivalent  discount on the loan.  The discount was  amortized  over the
life  of  the  loan  resulting  in  a  non-cash  charge  to  interest   expense.
Amortization  expense was $132,203 for both of the years ended December 31, 2000
and 1999. The Company is not in compliance  with the debt covenant  stating that
bailees   must  be  notified  in  writing  that   inventory   held  by  them  is
collateralized  by the loan with IBM.  As of  December  31, 2000 the Company was
unable to repay the loan and IBM granted an extension to June 30, 2001.

Series A Convertible Subordinated Note

On September 7, 1999, the Company  received  $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In  conjunction  with this sale of
common stock the Company issued 550,000  warrants to purchase common stock at an
exercise  price of the lower of $.50 per share of common  stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.

On the same day, the Company also sold a Series A Convertible  Subordinated Note
with a face value of $550,000 to Orbis  Pension Fund  Trustees.  In  conjunction
with the sale of the Note,  the  Company  issued  275,000  warrants  to purchase
common  stock.  It  also  issued  275,000  warrants  to  purchase  common  stock
contingent  upon the  Noteholder  converting  its  notes to  common  stock.  The
warrants  were  issued at an  exercise  price of the lower of $0.50 per share of
common  stock or the per share common stock  equivalent  price in the  Company's
next  equity  offering in which the Company  receives  net  proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.

The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock,  provided that both this conversion  price and the shares
simultaneously  sold were subject to adjustment should the Company's next equity
financing  resulting in net proceeds to the Company of at least $1,100,000 be at
a common share  equivalent  price of less than $0.50 per share.  Therefore,  the
financing  completed by the Company on December 7, 1999 (see note 7) resulted in
adjustments  with respect to the September 7, 1999  financing  consisting of the
issuance of an additional  275,000 shares to the PMG Eagle Fund without  further
consideration  thereby adjusting the overall costs of shares acquired by the PMG
Eagle Fund to $0.40 per share,  and the adjustment of the conversion price under
the Series A Convertible  Subordinated  Note sold to Orbis Pension Fund Trustees
and the exercise price under the warrants issued to both purchasers to $0.40 per
common share with  corresponding  adjustments in the number of shares into which
such Note could be converted  and for which such  warrants  could be  exercised.
Simultaneous with the closing of the Company's  offering of Series C convertible
preferred stock  described in note 7, Orbis Pension Fund Trustees  converted the
Series A Convertible  Subordinated  Note into 1,375,000  shares of the Company's
common stock.


                                       21
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


6. Accrued Expenses

                                                    2000            1999
                                                 ----------      ----------
     Accrued purchase commitments                $  566,000      $        0
     Accrued compensation                           289,246         165,448
     Accrued interest                               253,472         253,472
     Warranty reserve                               176,457         230,025
     Other                                          156,558         109,193
                                                 ----------      ----------
                                                 $1,441,733      $  758,138
                                                 ==========      ==========

7. Shareholders' Equity

Capital Stock Transactions

On September 15, 1994, the following  changes in the Company's capital structure
occurred: (i) the Company's Board of Directors declared a 450-for-1 split of the
common  stock,  effective  upon the amendment of the  Company's  Certificate  of
Incorporation,  (ii) the  authorized  number of common  shares was  increased to
1,000,000  and (iii) the par value of the common  stock was changed from $.01 to
no par value.

In January  1995,  the  Company's  Board of  Directors  amended the  articles of
incorporation  to increase the authorized  shares of common stock from 1,000,000
to 2,000,000.  In April 1996,  under the consent of the Board of Directors,  the
number of authorized  shares of common stock was increased from 2,000,000 shares
to  25,000,000  shares.  In May 1998 the number of  authorized  shares of common
stock was  increased to  35,000,000.  On October 8, 1996,  as  authorized by the
Board of  Directors,  the Company  split its common stock  3-for-1.  In November
1999, the number of authorized common shares was increased to 50,000,000.

Common Stock

In June 1996,  pursuant to a private  placement  offering,  the  Company  issued
2,625,000 shares of common stock for $4.00 per share.  This offering resulted in
net proceeds of $9,460,044 to the Company.  Stock purchase warrants  exercisable
into 300,000  common  shares with an exercise  price of $4.00 and an  expiration
date of June 28, 2001 were issued to the placement agent in connection with this
offering.

On December 23, 1996, the Company  completed an initial public offering pursuant
to which  3,450,000  common stock shares were issued at $8.00 each  resulting in
net proceeds of $24,409,464 to the Company.

On October 16, 1997, the Company completed a private  placement  offering ("Unit
Offering")  of 437,913  units of its common stock at a price of $10.95 per unit,
or $3.65 per share.  Each unit  consisted  of three shares of common stock and a
warrant  exercisable into one share of common stock. The Unit Offering  resulted
in net proceeds of  approximately  $4,486,000 to the Company.  The warrants were
issued  with an  exercise  price of $4.74 per share  and an  expiration  date of
October 16, 2002.  Additionally,  warrants  exercisable  into 102,500  shares of
common stock were issued to the placement  agents for services  provided.  These
warrants  were  granted  with an  exercise  price  of  $4.74  per  share  and an
expiration date of October 16, 2002.

On May 25, 1999, the Company issued 60,000 shares of common stock to a financial
advisor for his efforts to find  funding  for the  Company,  whereby the Company
recorded $15,000 of compensation expense.

On September 7, 1999, the Company  received  $502,719 from the sale of 1,100,000
shares of common stock to the PMG Eagle Fund. In  conjunction  with this sale of
common stock the Company issued 550,000  warrants to purchase common stock at an
exercise  price of the lower of $.50 per share of common  stock or the per share
common stock equivalent price in the Company's next equity offering in which the
company receives net proceeds of at least $1,100,000.

On the same day, the Company also sold a Series A Convertible  Subordinated Note
with a face value of $550,000 to Orbis  Pension Fund  Trustees.  In  conjunction
with the sale of the Note,  the  Company  issued  275,000  warrants  to purchase
common  stock.  It  also  issued  275,000  warrants  to  purchase  common  stock
contingent  upon the  Noteholder  converting  its  notes to  common  stock.  The
warrants  were  issued at an  exercise  price of the lower of $0.50 per share of
common  stock or the per share common stock  equivalent  price in the  Company's
next  equity  offering in which the Company  receives  net  proceeds of at least
$1,100,000. The Note accrued interest at the rate of 7% per year.

The conversion price of the Series A Convertible Subordinated Note was $0.50 per
share of common stock,  provided that both this conversion  price and the shares
simultaneously  sold were subject to adjustment should the Company's next equity
financing  resulting in net proceeds to the Company of at least $1,100,000 be at
a common share  equivalent  price of less than $0.50 per share.  Therefore,  the
financing  completed  by the Company on December 7, 1999  discussed in the above
paragraphs  resulted  in  adjustments  with  respect  to the  September  7, 1999
financing  consisting of the issuance of an additional 275,000 shares to the


                                       22
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


PMG Eagle Fund without further consideration thereby adjusting the overall costs
of shares acquired by the PMG Eagle Fund to $0.40 per share,  and the adjustment
of the conversion price under the Series A Convertible Subordinated Note sold to
Orbis Pension Fund Trustees and the exercise price under the warrants  issued to
both purchasers to $0.40 per common share with corresponding  adjustments in the
number of shares  into  which such Note  could be  converted  and for which such
warrants  could be  exercised.  Simultaneous  with the closing of the  Company's
offering of Series C  convertible  preferred  stock  described in the  following
paragraphs,  Orbis  Pension Fund  Trustees  converted  the Series A  Convertible
Subordinated Note into 1,375,000 shares of the Company's common stock.

Warrants

As of December  31, 2000 and 1999,  the Company  had  outstanding  common  stock
purchase  warrants  exercisable  into an aggregate of  4,225,112  and  4,268,347
shares, respectively. Such shares have been authorized and reserved.

The following summarizes the activity of outstanding warrants:

<TABLE>
<CAPTION>
                                                       Shares under warrant      Exercise price       Warrants
                                                                                  (per share)        Exercisable
----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>                   <C>
Outstanding at December 31, 1997                             1,143,227          $ 1.31 - $ 8.08       1,143,227

     Anti-dilution adjustments pursuant to warrant
agreements                                                      68,995          $ 3.41 - $ 7.04

     Granted in preferred stock offering                       300,000                     2.75
     Granted to advisors in preferred stock offering           115,385                     2.50
     Granted pursuant to IBM loan agreement                    500,000                     2.50
     Granted to an employee                                    100,000                     1.00
                                                             ---------

Outstanding at December 31, 1998                             2,227,607          $ 1.00 - $ 7.04       2,227,607
                                                             =========

     Anti-dilution adjustments pursuant to warrant
agreements                                                     594,267          $ 1.00 - $ 4.96

     Granted to Interim Financing Holders                    1,375,000                     0.40
     Granted to advisors in preferred stock offering            71,473                     0.40
                                                             ---------

Outstanding at December 31, 1999                             4,268,347          $ 0.40 - $ 4.96       4,268,347
                                                             =========

     Expired warrants in 2000                                  (43,235)                    1.02
                                                             ---------

Outstanding at December 31, 2000                             4,225,112          $ 0.40 - $ 4.96       4,225,112
                                                             =========
</TABLE>

Pursuant to provisions in certain warrant agreements,  anti-dilution adjustments
are to be made to the  exercise  price  and/or the number of shares  purchasable
under the warrant in certain  circumstances.  During 1999, adjustments were made
for certain warrants in connection with stock issued to an advisor,  the interim
financing  agreement,  re-pricing  of warrants  of an advisor and the  preferred
stock offering.  All shares and per share conversion amounts are adjusted in the
table above.

8. Mandatorily Redeemable Convertible Preferred Stock

Mandatorily   redeemable  convertible  preferred  stock  consists  of  Series  B
Convertible Preferred Stock ("Series B Stock" and Series C Convertible Preferred
Stock ("Series C Stock").

As of December 31, 2000,  there were  2,666,670  shares of common stock reserved
for issuance  pursuant to the conversion of the outstanding 958 shares of Series
B Stock.

On  December  7, 1999,  the Company  completed  an offering of 33,589  shares of
Series C Stock.  The shares of stock  were sold at a purchase  price of $100 per
share. The Company's net proceeds from this issuance were $2,894,822. Additional
issuance  costs of $88,964 were incurred in the year 2000. The Series C Stock is
convertible  at any time into shares of the  Company's  common  stock at a fixed
conversion  price of $0.40 per share. As of December 31, 2000,  15,115 shares of
Series C Stock have been


                                       23
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


converted  to 3,778,750  shares of common  stock.  As of December 31, 2000,  the
Company has reserved  4,618,500 shares of common stock for issuance  pursuant to
the  conversion  of the  remaining  18,474  shares  of  Series C Stock  that are
outstanding.

Series C Stock holders are entitled to receive cumulative dividends at a rate of
8% per year of the  initial  purchase  price of $100 per share but only upon the
occurrence  of a Liquidation  Event,  provided that any such dividend is coupled
with an  equivalent  ratable  dividend to the  holders of the Series B Stock.  A
"Liquidation  Event" is defined  to  include a merger  (except a merger in which
Accent Color is the surviving entity), consolidation, dissolution, winding up or
sale of substantially all of the assets of the company, unless the holders of at
least 75% of the Series B and Series C Stocks  determine  that any such event is
not a Liquidation Event.

A  reconciliation  of  mandatorily   redeemable   convertible   preferred  stock
outstanding is as follows:

<TABLE>
<CAPTION>
                                               Series B Stock             Series C Stock           Total
                                               --------------             --------------           -----
                                             Shares       Amount       Shares       Amount
                                             ------       ------       ------       ------
<S>                                          <C>      <C>              <C>       <C>            <C>
   December 31, 1999                         1,628    $ 1,418,545      33,589    $ 2,894,822    $ 4,313,367

   Series B Stock conversions                 (670)      (583,799)         --             --       (583,799)

   Series C Stock conversions                   --             --     (15,115)    (1,262,110)    (1,262,110)

   Issuance costs for Series C Stock            --             --          --        (88,964)       (88,964)
                                             -----    -----------      ------    -----------    -----------
   December  31, 2000                          958    $   834,746      18,474    $ 1,543,748    $ 2,378,494
                                             =====    ===========      ======    ===========    ===========
</TABLE>

9. Stock Incentive Plan

In January 1995, the Company's Board of Directors  adopted and approved the 1995
Stock  Incentive  Plan (the "Plan") for directors,  officers,  key employees and
other  persons.  The Plan  permits the  granting  of  incentive  stock  options,
non-statutory  stock options,  stock  appreciation  rights and restricted  stock
awards to  purchase up to 300,000  shares of common  stock.  In April 1996,  the
number of shares  increased to 1,500,000.  In May 1997, the number of shares was
increased to 2,000,000.  In November 1999, the number of shares was increased to
4,000,000. Such shares have been authorized and reserved.

Initially,  options vested 20% each year, so that the options or any unexercised
portion  thereof,  would  be fully  exercisable  after a  period  of five  years
following the date of their grant. In April 1996, the original vesting period of
five years was  modified  to three  years  with  options  vesting  33% each year
following the date of their grant. All options previously granted are subject to
this modification.  In certain circumstances,  at the discretion of the Board of
Directors,  options  are  granted  with a vesting  schedule  of other than three
years. Stock options under the Plan have terms ranging from five to ten years.

The 1995 Stock Incentive Plan activity is summarized as follows:

<TABLE>
<CAPTION>
                                                        For the year ended               For the year ended
                                                        December 31, 2000                December 31, 1999
                                                  -----------------------------    -----------------------------
                                                                    Weighted                         Weighted
                                                                     Average                          Average
                                                    Shares       Exercise Price      Shares       Exercise Price
                                                  ----------       ----------      ----------       ----------
<S>                                               <C>              <C>             <C>              <C>
Outstanding at beginning of period                 3,157,750       $     0.55       1,681,475       $     1.23

     Granted                                         331,750             0.93       2,037,775             0.23
     Exercised                                      (436,857)            0.22               0               --
     Canceled                                       (325,326)            0.70        (561,500)            1.45
                                                  ----------       ----------      ----------       ----------
Outstanding at period end                          2,727,317             0.63       3,157,750             0.55
                                                  ==========                       ==========

Options exercisable at period end                  1,488,655             0.76         785,004             1.02
                                                  ==========                       ==========
Weighted average fair value of options
granted during the period                         $     0.77                       $     0.21
                                                  ==========                       ==========
</TABLE>


                                       24
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


The following summarizes additional  information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                                       Options Outstanding                                  Options Exercisable

                              Number                                                      Number
                          Outstanding at      Weighted Average      Weighted          Exercisable at        Weighted
                           December 31,    Remaining Contractual     Average           December 31,          Average
     Exercise Prices           2000                 Life          Exercise Price           2000           Exercise Price
     ---------------           ----                 ----          --------------           ----           --------------
<S>                         <C>                     <C>               <C>              <C>                     <C>
         $0.22              1,335,643               7.95              0.22                555,393              0.22
          0.23-0.63            60,000               5.01              0.45                 33,333              0.48
          0.73                  4,275               8.03              0.73                  1,426              0.73
          0.83                 25,000               8.08              0.83                  5,000              0.83
          0.91                135,662               6.99              0.91                104,392              0.91
          0.92                192,000               8.45              0.92                 30,000              0.92
          1.00                820,237               5.25              1.00                604,944              1.00
          1.19                114,000               4.15              1.19                114,000              1.19
          2.31                  1,000               7.05              2.31                    667              2.31
          3.13                 39,500               1.92              3.13                 39,500              3.13
                            ---------                                                   ---------
                            2,727,317               6.82              0.63              1,488,655              0.76
                            =========                                                   =========
</TABLE>

Had compensation  expense been recognized based on the fair value of the options
at their grant dates,  as prescribed in Financial  Accounting  Standard No. 123,
the  Company's  net loss and net loss (basic and  diluted)  per share would have
been as follows:

<TABLE>
<CAPTION>
                                                                         Year ended            Year ended
                                                                     December 31, 2000      December 31, 1999
                                                                     -----------------      -----------------
<S>                                                                    <C>                   <C>
Net loss:
     As reported                                                       $  (1,878,437)        $  (7,310,446)
     Pro forma under FAS 123                                           $  (2,440,199)        $  (7,753,650)

Pro forma net loss (basic and diluted) per share (unaudited):
     As reported                                                       $        (.08)        $        (.44)
     Pro forma under FAS 123                                           $        (.10)        $        (.47)
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option  pricing  model with the  following  assumptions  used for
grants  during the  applicable  period:  dividend  yield of 0% for both periods;
risk-free  interest rates ranging from 6.01% to 6.77% for options granted during
the year ended  December 31, 2000 and 4.76% to 6.10% for options  granted during
the year ended December 31, 1999; expected volatility factors of 101% during the
year ended  December 31, 2000 and 98% for the year ended  December 31, 1999; and
an  expected  option  term  ranging  from five to ten years for the years  ended
December 31, 2000 and 1999.

10. Commitments and Contingencies

Operating Leases

At December 31,  2000,  the Company was  committed  under  operating  leases for
equipment and facilities  with initial terms of more than one year. The original
facility  lease  agreement  was amended on June 1, 1999 and  provided  for equal
lease payments through the expiration of the lease on December 31, 2000. At that
time,  the lease was extended for five years and the square footage was reduced.
Rental  expense  related to operating  leases was $449,053 in 2000,  $609,644 in
1999, $729,573 in 1998.


                                       25
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


Minimum lease payments under the noncancelable leases are as follows:
                   2001                                         $   307,423
                   2002                                             296,065
                   2003                                             282,744
                   2004                                             254,371
                   2005                                             254,371
                                                                -----------
                     Total minimum obligations                  $ 1,394,974
                                                                ===========

Capital Lease Obligations

The Company is obligated under capital leases for certain office  equipment that
expire on various dates  through the year 2003.  Future  minimum lease  payments
under these leases are as follows:

                   2001                                         $    53,052
                   2002                                              41,694
                   2003                                              28,373
                   2004                                                  --
                   2005                                                  --
                                                                -----------
                        Total minimum obligations                   123,119

                        Less: current portion                        53,052
                                                                -----------
                                                                $    70,067
                                                                ===========

On January 8, 1996, the Company signed a seven-year  agreement with a vendor for
the supply of inks and  printheads.  The  agreement  provides  the Company  with
worldwide  rights,  as defined.  The Company must pay the vendor  royalties  and
license fees through certain volume purchase levels. The agreement also includes
certain  exclusivity   features  that  benefit  the  Company.  To  maintain  the
exclusivity  rights,  quarterly  payments of $250,000  were  required  beginning
January 1, 1996 and ending on October 1, 1997, and the Company must purchase all
ink and printhead  requirements  from the vendor and purchase  specified minimum
amounts  each  year.  The  Company  is  currently  not in  compliance  with such
specified  minimum volume amounts  necessary to maintain  exclusivity  and is in
discussion  with Spectra to  establish a revised  requirement  for  exclusivity,
however,  management  believes there is no material adverse financial impact for
the  Company.  The  Company has the option to  terminate  the  exclusive  rights
leaving all other aspects of the agreement unchanged. It is the Company's intent
to maintain such rights.

At December 31, 2000 the Company has accrued outstanding purchase commitments of
$566,000 for certain printer and spare parts.

11. Income Taxes

Deferred tax assets and liabilities are as follows:

                                                          December 31,
                                                     2000              1999
                                                 ------------      ------------
           Gross deferred tax assets:
                Carryforwards:
                     Research tax credits        $  1,729,000      $  1,589,000
                     Net operating losses          19,716,000        19,455,000
                Other assets                          890,000           603,000
                                                 ------------      ------------
           Gross deferred tax assets               22,335,000        21,647,000
                                                 ------------      ------------
           Gross deferred tax liabilities             (31,000)          (31,000)
                                                 ------------      ------------
           Valuation allowance                    (22,304,000)      (21,616,000)
                                                 ------------      ------------
                                                 $         --      $         --
                                                 ============      ============

The Company has provided a valuation  allowance  for the full amount of deferred
tax assets in excess of deferred tax liabilities  since the realization of these
future  benefits  cannot be  reasonably  assured  as of the end of each  related
period.  If the Company achieves  profitability,  the deferred tax assets may be
available to offset future income taxes.


                                       26
<PAGE>

                           ACCENT COLOR SCIENCES, INC.
                          NOTES TO FINANCIAL STATEMENTS


At December 31, 2000, the Company had  approximately  $51 million of federal net
operating   loss   carryforwards   that  expire  in  years  2008  through  2019,
approximately $50 million of state net operating loss  carryforwards that expire
in years 2000 through 2004 and research and development tax credit carryforwards
of approximately $1.7 million that expire in years 2009 through 2019.

As defined in the Internal  Revenue Code,  certain  ownership  changes limit the
annual  utilization of federal net operating loss and tax credit  carryforwards.
During 1996, the Company  experienced  such an ownership  change that limits the
amount of federal net operating loss carryforwards and research tax credits that
can be utilized in any one taxable  year.  At December 31, 2000 the  approximate
annual  limitation  is $4.6 million for net  operating  loss  carryforwards  and
research tax credits  incurred prior to the ownership  change.  Depending on the
number of shares of common  stock issued upon  conversion  of Series B Stock and
Series C Stock , or  exercise  of  outstanding  warrants  and the timing of such
conversions  (see notes 7 and 8), the  transactions may result in further annual
limitations of net operating loss carryforwards.

12. Disclosure about Fair Value of Financial Instruments

The carrying amount of cash,  accounts  receivable,  prepaid expenses,  accounts
payable,  accrued expenses,  customer advances and deposits and deferred revenue
approximates fair value because of the short-term nature of those instruments.

The estimated  fair value of the Company's  debt (see note 5)  approximates  its
carrying value as of December 31, 2000 and December 31, 1999.

13. Related Party Transactions

The advisor for the Company's private financing in 1999 was granted a warrant to
purchase  commons stock. A fund managed by the advisor  purchased  stock and was
awarded a warrant to purchase stock as part of the 1999 private  financing.  The
founder, chairman, and Chief Executive Officer of the advisor is a member of the
Company's  Board of  Directors.  Several  corporate  officers,  directors  and a
partner of the advisor  purchased Series C Stock, at the same price as purchased
by  other  investors  (see  note  8),  as part  of the  1999  private  placement
financing.

A member of the  Company's  Board of Directors  is a partner with the  Company's
primary legal firm.

14. Subsequent Events

The Company has been actively  negotiating  to settle its contracts with its OEM
customers as these  customers  could not commit to future  orders for  Truecolor
Systems.  On March 6, 2001, Xerox paid the Company $381,585 to release them from
their existing  contracts and any future  orders.  Any ongoing need by Xerox for
parts or service will be paid at the Company's prevailing rates.

Negotiations are ongoing with IBM and a final settlement has not been reached.


                                       27
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

     None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Following is  information  concerning  each  Director and  Executive  Officer of
Accent Color Sciences as of February 28, 2001 including name, age, position with
the Company and business experience during the last five years:

     Donald R. Allred,  age 43,  became a Vice  President of the Company in June
2000 and became Chief  Operating  Officer in January 2001. For the past 5 years,
Mr. Allred has been a member of the  management  team at Accent Color  Sciences.
Mr. Allred has been involved in the  development  of ink jet technology for over
23 years. He was an integral part of the developments at Burroughs  Corporation,
which led to the  introduction  of the first  automated  digital check endorsing
equipment.  Mr. Allred managed the  engineering  test and QA labs for Burroughs'
Special  Printers  Engineering  group.  Mr.  Allred  was also a key  development
scientist at Exxon Printing  Systems (now  Dataproducts  Corp.).  While at Exxon
(Dataproducts),  Mr. Allred was a member of the team of scientists that invented
and  introduced  the first  hot melt ink jet  printing  system.  He was also the
Technical  Director for Scitex Medical  Systems,  a start up subsidiary that was
subsequently  sold.  Mr. Allred holds a Bachelor of Science degree in chemistry,
and a Master of Science  degree in Industrial  Chemistry  from the University of
Central  Florida.  Mr.  Allred  holds  several  patents  in the field of ink jet
systems,  is a member  of the ANSI  standards  group  IT9.3,  and is a  frequent
presenter at technical symposiums.

     Joseph T. Brophy,  age 67,  became a director of the Company in March 1998.
Mr. Brophy retired as President of Travelers  Insurance Company, a subsidiary of
The Travelers  Corporation,  in 1993.  Since then, he has served as a consultant
with Actuarial  Sciences  Associates  working with major companies such as AT&T,
Equifax and others in developing their business  strategies for health care. His
prior experience with The Travelers  included  service as its Chief  Information
Officer in charge of data processing  operations.  Mr. Brophy is a fellow of the
Society of Actuaries,  holds  memberships in the American  Academy of Actuaries,
New York  Academy  of  Sciences,  Acoustical  Society of  America  and  American
Arbitration  Association.  He has received  awards  including the  Distinguished
Information  Sciences Award from the Data Processing  Management  Association in
1986 and the  Award of  Achievement  in  Managing  Information  Technology  from
Carnegie Mellon and American  Management  Systems in 1987. Mr. Brophy  currently
serves as a trustee of St. Joseph  College and as a director of the  Connecticut
Opera. He has also served as a director of LIMRA International, Inc., trustee of
RPI-Hartford  Graduate  Center,  and  director  of the  Connecticut  Academy for
Education in  Mathematics,  Sciences  and  Technology  and the Greater  Hartford
Chamber of  Commerce.  He is  currently an owner,  director  and  co-founder  of
Solution Point,  an information  company that provides  decision  support tools,
analysis and data for  employers and health  systems.  Mr. Brophy is a cum laude
graduate of Fordham  University,  from which he received a Bachelors  of Science
degree.  He has also  attended NYU  Graduate  School and  completed  the Advance
Management Program at the Sloane School, MIT.

     Charles E. Buchheit,  age 60, became President and Chief Executive  Officer
of the  Company in May 1998 after  becoming a director  of the  Company in March
1998. Mr. Buchheit served as a Corporate Officer and Division President at Moore
Corporation  from  1995 to 1997,  where he also  served as a member of the Moore
Executive  Committee.  At Moore,  Mr.  Buchheit  developed  Integrated  Customer
Solutions,  a division  which had the capability of managing all forms of print.
Prior to that time, Mr.  Buchheit was a Corporate  Officer and Vice President at
Xerox  Corporation from 1989 to 1995. At Xerox, he was responsible for launching
the multi-billion dollar Docutech program worldwide.  From 1975 to 1989, he held
several  executive  positions  at IBM  Corporation,  including  Group  Marketing
Executive,   Director  of  Operations  and  Director  of  Product  Programs  and
Practices.  At IBM, Mr. Buchheit was responsible for the worldwide  marketing of
mainframes,  system software, storage and printing devices. He has served on the
Board of Directors  for Infomart  and NEPS, a wholly owned  subsidiary  of Moore
Corporation,  and is currently a member of the Board of  Directors  for Intercon
Associates, Incorporated.

     Richard J.  Coburn,  age 69, has been  Chairman of the Board since May 1996
and is a  co-founder  of the  Company.  Mr.  Coburn  served as  President of the
Company  from May 1993 until May 1996 and served as Chief  Executive  Officer of
the Company from May 1993 until August 1996.  From 1991 until 1993,  Mr.  Coburn
worked as an independent  consultant to development stage companies.  Mr. Coburn
was a  co-founder  of  KCR  Technology,  Inc.,  a  manufacturer  of  high-speed,
monochrome   printers,   and  served  in  various  roles,  both  consulting  and
managerial,  including  President,  from 1977 to 1991.  Mr.  Coburn was also the
founder of Coburn Technology, Inc., a developer of a xerographic printer product
for word processing,  the rights to which were sold to Wang Laboratories,  Inc.,
and served as its President from 1974 to 1977. From 1968 to 1974, Mr. Coburn was
President of  Scan-Optics,  Inc., a manufacturer of data capture  equipment,  of
which he was a co-founder and


                                       28
<PAGE>

currently serves as a director.  Prior to 1968, Mr. Coburn had served in various
engineering management positions in the aerospace industry . Mr. Coburn received
his degree in engineering from Yale University.

     Ronald C.  Derby,  age 66,  has been the  Chief  Financial  Officer  of the
Company  since  March , 2000.  Mr.  Derby  served  as  Financial  Principal  and
Compliance Officer of Advisor's Capital  Investments,  Inc. since February 1995.
Prior  to that he was the  Controller  of  ScanCode,  a mail  sorting  equipment
manufacturer  from 1993 to 1995.  He was  Director  of  Marketing  and later the
Controller of KCR Technology,  Inc., a high speed printer  manufacturer in 1987.
He was on the founding staff of California Computer Products, Inc. (CalComp). In
his 24 years at CalComp Mr. Derby was an engineer,  marketing trainer,  director
of marketing and director of strategic planning. He is currently on the Board of
Directors of Advisor's Capital Investments,  Inc. Mr. Derby has Series 7, Series
24, Series 27, Series 63 and Series 65 securities  licenses.  He has a Master of
Business Administration degree from California State  University-Fullerton and a
Master of  Science  degree in  electrical  engineering  from The  University  of
Southern California.

     Richard A.  Hansen,  age 61,  became a director  of the  Company in January
2000.  Currently  Mr.  Hansen is  Chairman  and Chief  Executive  Officer of the
investment-banking  firm, Pennsylvania Merchant Group, which he founded in 1986.
Mr. Hansen also founded Radnor Venture Partners.  Prior to forming  Pennsylvania
Merchant Group, Ltd., Mr. Hansen served as a Vice President with Kidder, Peabody
& Co. and as a Senior  Vice  President  with Blyth  Eastman  Dillion  (which was
acquired by PaineWebber Group Inc.). Prior to his investment-banking career, Mr.
Hansen worked for Air Products & Chemicals.  Currently, Mr. Hansen serves on the
Board of Directors of Ultralife Batteries and Computone Corporation.  Mr. Hansen
received his  undergraduate  degree in  mechanical  engineering  from  Rochester
Institute  of  Technology  and  his  Master  of  Science  degree  in  industrial
administration from Purdue University.

     Norman L.  Milliard,  age 58, has been Vice  Chairman and Chief  Technology
Officer of the Company  since May 1998.  Mr.  Milliard  served as President  and
Chief  Executive  Officer of the Company  from May 1996  through  May 1998.  Mr.
Millard was elected a director of the Company in 1995.  Mr.  Milliard  served as
Vice  President  of the  Company  from  January  1994 until May 1996.  From 1988
through 1993, Mr.  Milliard  served as head of the Special  Product Group at AEG
Schneider  Automation,  Inc. (formerly Modicon,  Inc.), an industrial automation
company, and as the Director of Engineering and Operations for KCR Technology, a
manufacturer of high-speed, monochrome printers, from 1982 to 1988. Mr. Milliard
founded  two  companies  in the  electronic  music  field  and holds a number of
patents in both the printing and electronic music fields.  Mr. Milliard received
his degree in physics,  with honors,  from The Citadel,  the Military College of
South Carolina.

     Willard F.  Pinney,  Jr., age 57, has been  Secretary of the Company  since
December 1993 and became a director of the Company in 1996.  Mr. Pinney has been
a partner  since 1973 in the  Connecticut  law firm of Murtha  Cullina LLP which
serves as counsel to the Company.  He received  his degree in political  science
from Yale University and his J.D., with honors,  from the University of Michigan
Law School.

     Robert H. Steele,  age 62,  became a director of the Company in 1996 and is
Chairman of the Executive Compensation  Committee.  Mr. Steele is currently Vice
Chairman  of John  Ryan  Company,  a  banking  services  company,  of  which  he
previously  served as Senior Vice  President  since 1992.  Mr.  Steele served as
President of RHS  Consulting,  Inc., a business  consulting  firm, in 1991. From
1985 to 1990, Mr. Steele was Chairman and Chief Executive  Officer of Dollar Dry
Dock Bank of New York.  Mr.  Steele also served as President  and CEO of Norwich
Savings  Society.  Mr.  Steele is a former  U.S.  Congressman  from the State of
Connecticut and currently serves as a director of Moore Medical Corp., a medical
supplies  distributor,   Scan-Optics,  Inc.,  a  manufacturer  of  data  capture
equipment,   NLC  Insurance   Companies,   SmartServ  Online,  Inc.,  an  online
information  provider  and the  New  York  Mercantile  Exchange,  a  commodities
exchange.  Mr. Steele received his undergraduate degree from Amherst College and
his Master's  Degree from Columbia  University  and holds an honorary  Doctor of
Laws from Sacred Heart University.

Section 16(a) Beneficial Ownership Reporting Compliance

     Pursuant to a review of the Company's  records,  all required filings under
Section 16(a) of the Securities  Exchange Act were made in compliance  with this
section with the exception of one delinquent  filing.  Donald R. Allred became a
Vice President of the Company on June 14, 2000 and was required to file a Form 3
by June 24, 2000, but instead filed this form on July 17, 2000.

Item 11. Executive Compensation

A.)  General.

The following tables provide certain information relating to the compensation of
the  Company's  Chief  Executive  Officer and its other most highly  compensated
executive officers for the year ended December 31, 2000.


                                       29
<PAGE>

B.)  Summary Compensation Table

The  following  Summary  Compensation  Table sets forth  information  concerning
compensation for the Chief Executive Officer and the Company's other most highly
compensated  executive  officers whose total salary and bonus for the year ended
December 31, 2000 exceeded $100,000 (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                      Annual Compensation                                   Long-Term
                                                      -------------------                              Compensation Awards
                                                                                                       -------------------

                                                                                                            Securities

                                                                                    Other Annual            Underlying
                                                                                  Compensation ($)
                                                                                  ----------------
      Name & Principal Position        Year        Salary($)        Bonus ($)                             Options/SARs(#)
      -------------------------        ----        ---------        ---------                             ---------------
<S>                                    <C>          <C>             <C>              <C>                      <C>
       Richard J. Coburn               2000         120,000          31,000              --                   310,000

          Chairman                     1999         120,000          44,731              --                   250,000

                                       1998         121,923             500              --                   120,000 (1)


       Charles E. Buchheit             2000         250,000         251,000 (3)      27,028 (2)               694,143

          President and CEO            1999         250,000         119,731          20,265 (2)               650,000

                                       1998         166,667             500          19,547 (2)               610,000 (1)(4)


       Norman L. Milliard              2000         132,712             500           7,651 (5)               260,000

          Vice Chairman and CTO        1999         150,000          61,462          20,927 (5)                75,000

                                       1998         181,344             500              --                   220,000 (1)


       Donald R. Allred                2000         129,423          53,836              --                   250,000

          Vice President
</TABLE>

(1)  Includes  the  re-pricing  of  previously  granted  options  to  the  named
     executive officers were 60,000 for Mr. Coburn, 255,000 for Mr. Buchheit and
     110,000 for Mr. Milliard.

(2)  Consists of various living expense  reimbursements to Mr. Buchheit pursuant
     to his employment agreement with the Company.

(3)  Includes $92,000 applied to exercise price of options  exercised during the
     year 2000.

(4)  Includes a warrant  to  purchase  100,000  shares of the  Company's  Common
     Stock, commencing on September 29, 1998, at an exercise price of $ 1.00 per
     share and expiring in 2003.

(5)  Reflects various living expenses of Mr. Milliard pursuant to his employment
     agreement with the Company.


                                       30
<PAGE>

C.)  Option Grants in Last Fiscal Year

The following table contains information concerning the stock option grants made
to each of the Named  Executive  Officers in fiscal 2000. No stock  appreciation
rights were granted during such year.

<TABLE>
<CAPTION>
                                                                                                    Potential Realizable Value
                                                                                                    at Assumed Annual Rates of
                                 Number of         % of Total                                        Stock Price Appreciation
                                Securities        Options/SARs                                              for Option
                                Underlying         Granted to     Exercise or                                Term (2)
                                Options/SAR       Employees in   Base Price per   Expiration        ---------------------------
     Name                        Grants (#)       Fiscal Years   Share ($/Sh)(1)     Date             5% ($)            10% ($)
--------------------------------------------------------------------------------------------------   ------            -------
<S>                                <C>               <C>               <C>         <C>               <C>               <C>
Donald R. Allred                   132,000           44.48%            .92         03/27/10          76,527            193,933

Ronald C. Derby                     30,000           10.11%            .92         03/27/05           7,641             16,884

Norman L. Milliard                  45,000           15.16%           1.00         03/27/05           7,944             21,809
</TABLE>

(1)  All options  were  granted at the fair market value on the date of grant as
     determined by the Board of Directors.

(2)  The 5% and 10% assumed  annual rates of compound  stock price  appreciation
     are mandated by rules of the Securities and Exchange  Commission and do not
     reflect the  Company's  estimates  or  projections  of future  Common Stock
     prices.  There can be no assurance provided to any executive officer or any
     other  holder of the  Company's  securities  that the  actual  stock  price
     appreciation  over the term will be at the  assumed  5% or 10% levels or at
     any other  defined  level.  Unless  the market  price of the  Common  Stock
     appreciates over the option term; no value will be realized from the option
     grants made to the executive officers.

D.)  Aggregate  Option  Exercise  in Last  Fiscal  Year and Option  Values as of
     December 31, 2000

The following Named Executive  Officers  exercised stock options during the year
ended December 31, 2000. The following table provides information  regarding the
number of shares underlying both exercisable and unexercisable  stock options as
of December 31, 2000 and the values of unexercised  "in-the-money" options as of
that date. An option is "in-the-money" if the per share fair market value of the
underlying share exceeds the option's exercise price per share.

<TABLE>
<CAPTION>
                                                        ------------------------------------------------------------
                                                           Number of Securities           Value of Unexercised
                                                          Underlying Unexercised              In-the-Money
                                                              Options/SARs at                Options/SARs at
                                                             December 31, 2000            December 31, 2000 (1)
                        --------------------------------------------------------------------------------------------
                           Number of
                            Shares
                          Acquired on       Value       Exercisable    Unexercisable    Exercisable  Unexercisable
                           Exercise       Realized          (#)             (#)             ($)           ($)
                        --------------------------------------------------------------------------------------------
<S>                         <C>            <C>            <C>             <C>                <C>           <C>
Donald R. Allred               --             --           83,334         166,666            --            --

Charles E. Buchheit         310,857        $92,278        102,477         491,666            --            --

Richard J. Coburn              --             --          168,334         141,166            --            --

Ronald C. Derby                --             --           30,000            --              --            --

Norman L. Milliard             --             --          204,167          55,833            --            --
</TABLE>

(1)  Based on the  closing  price of the Common  Stock at  December  31, 2000 of
     $0.0469.


                                       31
<PAGE>

E.)  Long-Term Incentive Plan Awards

     No long-term  incentive plan awards were made to any of the Named Executive
Officers in the last fiscal year.

F.)  Defined Benefit or Actuarial Plan Disclosure

     Not applicable.

G.)  Compensation of Directors

Directors of the Company who are not employees of the Company  receive a monthly
retainer of $750 and a per meeting fee of $750 for each  meeting of the Board of
Directors and any committee  meetings  attended in person by such director.  The
Company also reimburses  directors for reasonable  travel  expenses  incurred in
order to attend meetings.

Under its 1995  Stock  Incentive  Plan,  the  Company  has  established  a stock
incentive  program  for  non-employee  directors,  whereby  each  newly  elected
director receives an initial option to purchase 5,000 shares of Common Stock and
will receive an option to purchase an additional 5,000 shares of Common Stock on
the date of the annual  meeting of the Board each year  through  2000 as long as
the director remains in office. These options are exercisable at the fair market
value of the shares on the date of grant.

The Company,  as permitted by  Connecticut  law,  has  purchased  directors  and
officers liability  insurance  policies covering all of the Company's  directors
and  officers on an annual  basis.  The premiums for this policy paid or accrued
during 2000 was approximately $70,600.

H.)  Employment  Contracts and  Termination of Employment and  Change-in-Control
     Arrangements

Charles  E.  Buchheit  and  Norman L.  Milliard  have  entered  into  employment
agreements  with the Company.  Both agreements have a three-year term and expire
on April  14,  2001  and  June 30,  2001,  respectively.  If  either  employment
agreement was  terminated  without  "cause," as defined in the  agreements,  Mr.
Buchheit  would be  entitled  to receive (i) his base salary for the longer of a
two-year  period  commencing  on the date of  termination  or the balance of the
three-year term, the employment term; (ii) any accrued  vacation;  (iii) payment
of health  benefits for the balance of the  employment  term; and (iv) immediate
vesting in all  outstanding  options.  Mr. Milliard would be entitled to receive
his base salary and payment of health benefits for the balance of the three-year
term. Mr. Buchheit's  current base salary is $250,000 and Mr. Milliard's current
base salary is $100,000.

The employment  agreements  restrict Mr. Buchheit and Mr. Milliard from directly
or  indirectly  competing  with the  Company  through the  participation  in the
development or distribution  of any product related to the Company's  product or
processes during the term of the agreement and for a period of one year after if
they  voluntarily  resign  from the  Company or are  terminated  for cause.  The
Employment  Agreements do not otherwise  restrict Mr.  Buchheit and Mr. Milliard
from pursuing any other business interests that do not directly compete with the
Company.

I.)  Report on Repricing of Options/SARs

Not applicable.

J.)  Compensation Committee Interlocks and Insider Participation in Compensation
     Decisions

None of the executive  officers of the Company served during 2000 as a member of
the Compensation  Committee of any other company,  except for Richard Coburn who
serves on the executive  compensation  committee of Scan Optics,  Inc. Executive
Compensation  Committee members,  Robert H. Steele, Joseph P. Brophy and Willard
F. Pinney,  Jr.,, are outside directors,  except that Willard F. Pinney, Jr., is
Secretary  of the Company and a partner of Murtha  Cullina  LLP,  counsel to the
Company.

K.)  Board Compensation Committee Report on Executive Compensation

Not applicable.


                                       32
<PAGE>

L.)  Performance Graph

Not applicable.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The  following  table sets forth  certain  information  as of February  28, 2001
regarding the  beneficial  ownership of the  Company's  Common Stock by (i) each
person (or group of affiliated persons) known by the Company to own more than 5%
of the  outstanding  shares of Common  Stock,  (ii) each of the directors of the
Company and each  nominee  for  election  as  director,  (iii) each of the Named
Executive  Officers and (iv) all directors and executive officers of the Company
as a group.

                                                    Number of
                                                      Shares
                                                   Beneficially    Percentage of
Name and Address (1)                                 Owned (2)     Common Stock
--------------------                                 ---------     ------------

Charles E. Buchheit(3)                               924,191            3.3%

Richard J. Coburn(4)                                 635,970            2.3%

Richard A. Hansen(5)                                 419,956            1.5%

Joseph T. Brophy (6)                                 330,649            1.2%

Norman L. Milliard (7)                               212,334              *

Robert H. Steele (8,9)                               209,118              *

Willard F. Pinney, Jr. (8,10)                        144,799              *

Donald R. Allred (11)                                127,851              *

Ronald C. Derby (12)                                  30,000              *

All directors and officers of the Company
  as a group (9 persons) (13)                      3,034,868            10.5%

PMG Eagle Fund (14)                                2,595,000            9.3%

Orbis Pension Trustees Ltd (15)                    2,687,500            9.6%

----------

*    Less than 1%

(1)  The address of all persons who are  executive  officers or directors of the
     Company  is in  care  of  the  Company,  800  Connecticut  Boulevard,  East
     Hartford, Connecticut 06108.

(2)  Unless  otherwise  noted,  each person or group  identified  possesses sole
     voting  and  investment  power  with  respect  to such  shares,  subject to
     community property laws where applicable. Shares not outstanding but deemed
     beneficially  owned by virtue of the right of a person or group to  acquire
     them within 60 days of February 28, 2001 ("currently  exercisable options")
     are treated as outstanding  only for purposes of determining the amount and
     percent  owned by such  person or group.

(3)  Includes  413,334  shares of Common Stock subject to currently  exercisable
     options  granted  pursuant  to the 1995 Stock  Incentive  Plan and  100,000
     shares of Common Stock subject to currently exercisable warrants.

(4)  Includes  175,001  shares of Common Stock subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan.

(5)  Includes  20,214  shares of Common Stock and 12,388  shares of Common Stock
     subject to currently  exercisable  warrants  held by Mr.  Hansen's  wife as
     custodian for their minor  children.  Includes 5,000 shares of Common Stock
     subject to currently exercisable options granted pursuant to the 1995 Stock
     Incentive Plan. Includes 346,535 shares of Common


                                       33
<PAGE>

     Stock subject to currently  exercisable warrants held by PMG Capital Corp.,
     of which Mr. Hansen is President.

(6)  Includes  40,000  shares of Common Stock  subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan. Includes 250,000
     shares of Common  Stock that is issuable  upon  conversion  of the Series C
     Stock.

(7)  Includes  210,834  shares of Common Stock subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan.

(8)  Includes  70,000  shares of Common Stock  subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan.

(9)  Includes 17,118 shares of Common Stock owned by Mr. Steele's wife and 1,500
     shares of Common Stock subject to currently  exercisable warrants issued to
     Mr. Steele's wife, as to all of which he disclaims beneficial ownership.

(10) Includes  30,000  shares of Common Stock  subject to currently  exercisable
     options granted to Murtha Cullina LLP, counsel to the Company, of which Mr.
     Pinney  is a  partner.  Includes  25,000  shares of  Common  Stock  that is
     issuable upon conversion of the Series C Stock.

(11) Includes  84,001  shares of Common Stock  subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan.

(12) Includes  30,000  shares of Common Stock  subject to currently  exercisable
     options granted pursuant to the 1995 Stock Incentive Plan.

(13) Includes 1,128,170 shares of Common Stock subject to currently  exercisable
     options granted  pursuant to the 1995 Stock Incentive Plan,  275,000 shares
     of Common Stock issuable upon  conversion of the Series C Stock and 460,423
     shares of Common Stock subject to currently exercisable warrants.

(14) The  address  of PMG Eagle  Fund is in care of Citco  Fund  Services  Ltd.,
     Corporate Centre,  West Bay Road, P.O. Box 31106 SMB, Grand Cayman,  Cayman
     Islands. Includes 687,500 shares subject to currently exercisable warrants.

(15) The address of Orbis  Pension  Trustees Ltd is 1 Connaught  Place,  London,
     England W2-2DY.  Includes  687,500 shares subject to currently  exercisable
     warrants.

Item 13. Certain Relationships and Related Transactions

Willard F. Pinney,  Jr. is a partner of the law firm Murtha  Cullina LLP,  which
serves as legal counsel to the Company.


                                     PART IV

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

(a)  Financial Statements and Schedules

     The  financial  statements as set forth under Item 8 of this report on Form
     10-K are incorporated herein by reference.

     Financial  statement  schedules have been omitted since they are either not
     required, not applicable, or the information is otherwise included.

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed  during the last  quarter of fiscal  year
     2000.


                                       34
<PAGE>

(c)  Exhibit Listing

      Exhibit   Exhibit
        No.
      -------   -------
        3.1     Restated Certificate of Incorporation of the Company, as amended
                (1).

        3.2     Certificate   of   Amendment   to   Restated    Certificate   of
                Incorporation, dated Nov. 29, 1999 (1).

        3.3     Certificate of Designations,  Preferences and Rights of Series B
                Convertible Preferred Stock (1).

        3.4     Certificate of Designations,  Preferences and Rights of Series C
                Convertible Preferred Stock, dated Nov. 29, 1999 (1).

        3.5     Bylaws of the Company, as amended on Dec. 29, 1996 (2).

        4.1     Letter agreement with holders of Series B Convertible  Preferred
                Stock  modifying  rights to conform  with  Series C  Convertible
                Preferred Stock (1).

        10.1    Product  Development and  Distribution  Agreement dated February
                16, 1996 between the Company and Xerox Corporation (3).

        10.2    Letter of  Understanding  dated July 2, 1996 between the Company
                and Xerox Corporation  supplementing the Product Development and
                Distribution Agreement (3).

        10.3    Amendment  to Product  Development  and  Distribution  Agreement
                between the Company and Xerox  Corporation  dated Feb.  29, 1996
                (3).

        10.4    Product  Purchase  Agreement  dated Apr.  16,  1996  between the
                Company and International Business Machines Corporation (3).

        10.5    Letter  Agreement   supplementing   Product  Purchase  Agreement
                between  the  Company  and   International   Business   Machines
                Corporation dated Feb. 23, 1996 (3).

        10.6    OEM Supply  Agreement dated Jan. 8, 1996 between the Company and
                Spectra, Inc.(3) .

        10.7    Amendment No. 1 to the OEM Supply  Agreement dated July 12, 1996
                between the Company and Spectra, Inc. (3).

        10.8    Lease Agreement dated Feb. 16, 1996 between the Company and John
                Hancock Mutual Life Insurance company (3).

        10.9    Accent  Color  Sciences,  Inc.  1995 Stock  Incentive  Plan,  as
                amended through Nov. 29, 1999 (1).

        10.10   Employment Agreement dated Dec. 14, 1993 between the Company and
                Norman L. Milliard (3).

        10.11   Amendment No. 1 to Employment  Agreement between the Company and
                Norman L. Milliard dated as of Jan. 1, 1995 (3).

        10.12   Form of  nondisclosure  agreement  between  the  Company and its
                employees (3).

        10.13   Form of  Registration  Rights  Agreement  Relating  to  Warrants
                issued in  connection  with Series IV  Debentures of the Company
                (3).

        10.14   Form of Registration Rights Agreement Relating to sale of Common
                Stock of the Company (3).

        10.15   Registration Rights Agreement Relating to Warrants issued by the
                Company to Xerox Corporation (3).

        10.16   Form of  Registration  Rights  Agreement  Relating  to  Warrants
                issued pursuant to sale of Interim Notes (3).


                                       35
<PAGE>

        10.17   Form of Securities  Purchase  Agreement dated as of Jan. 9, 1998
                (4).

        10.18   Form of  Warrant  issued  in  connection  with the 1998  Private
                Placement (4).

        10.19   Form of Registration  Rights  Agreement dated as of Jan. 9, 1998
                (4).

        10.20   Employment  Agreement  dated Apr.  15, 1998  between  Charles E.
                Buchheit and the Company (5).

        10.21   Loan Agreement  between the Company and  International  Business
                Machines Corporation (6).

        10.22   Promissory Note between the Company and  International  Business
                Machines Corporation (6).

        10.23   Security   Agreement   between  the  Company  and  International
                Business Machines Corporation (6).

        10.24   Purchase Agreement for Series A Convertible  Subordinated Notes,
                Common Stock and Warrants, dated Sept. 7, 1999 (7).

        10.25   Form of Series A Convertible Subordinated Note (7).

        10.26   Form of  Warrant  to  Purchase  Common  Stock  of  Accent  Color
                Sciences, Inc. (7).

        10.27   Registration Rights Agreement, dated Sept. 7, 1999 (7).

        10.28   Third Amendment to the Apr. 11, 1996 Product Purchase  Agreement
                Between  International  Business Machines Corporation and Accent
                Color Sciences, Inc. (7).

        10.29   Letter dated July 21, 1999  containing  variations  to agreement
                between Accent Color and SET dated Aug. 27, 1997 (7).

        10.30   Form of Securities  Purchase Agreement dated as of Nov. 30, 1999
                (8).

        10.31   Form of Warrant Agreement dated as of Nov. 30, 1999 (8).

        10.32   Form of Registration  Rights Agreement dated as of Nov. 30, 1999
                (8).

        10.33   Xerox  Release  and  Settlement  Agreement  as of March 6,  2001
                (filed herewith).

        23      Consent of PricewaterhouseCoopers LLP (filed herewith).

        24      Power of attorney  pursuant to which this Form 10-K is signed by
                our directors (filed herewith).

(1) incorporated by reference from Accent Color's  registration  statement filed
as Form S-3/A on Form S-2 (file no. 333-30130) on Feb. 24, 2000.

(2) incorporated by reference from Accent Color's registration statement on Form
S-3 (file no. 333-43467) filed on Dec. 30, 1997, as amended.

(3) incorporated by reference from Accent Color's  registration  statement (file
no. 333-14043) on Form S-1 filed on Oct. 15, 1996, as amended.

(4) incorporated by reference from Accent Color's  registration  statement (file
no. 333-45321) on Form S-3 filed on Jan. 30, 1998, as amended.

(5) incorporated by reference from Accent Color's  quarterly report on Form 10-Q
for the quarter ended June 30, 1998.

(6) incorporated by reference from Accent Color's  quarterly report on Form 10-Q
for the quarter ended Sept. 30, 1998.

(7) incorporated by reference from Accent Color's  quarterly report on Form 10-Q
for the period ended Sept. 30, 1999.

(8) incorporated by reference from Accent Color's  registration  statement (file
no. 333-30130) on Form S-3 filed on Feb. 11, 2000.


                                       36
<PAGE>

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,  in the  City of East
Hartford, State of Connecticut, on March 28, 2001.

                                       ACCENT COLOR SCIENCES, INC.


                                       By /s/ Charles E. Buchheit
                                          -------------------------------------
                                          Charles E. Buchheit
                                          President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of  Registrant  and in
the capacities indicated on March 28, 2001.

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

/s/ Charles E. Buchheit
--------------------------
    Charles E. Buchheit       President, Chief Executive Officer  March 28, 2001
                              (Principal Executive Officer)


/s/ Ronald C. Derby
--------------------------
    Ronald C. Derby           Chief Financial Officer             March 28, 2001
                              (Principal Financial and
                              Accounting Officer)


          *
--------------------------
    Joseph T. Brophy                 Director                     March 28, 2001


          *
--------------------------
    Richard J. Coburn                Director                     March 28, 2001


           *
--------------------------
    Richard A. Hansen                Director                     March 28, 2001


          *
--------------------------
    Norman L. Millard                Director                     March 28, 2001


          *
--------------------------
    Willard F. Pinney, Jr.           Director                     March 28, 2001


          *
--------------------------
    Robert H. Steele                 Director                     March 28, 2001


*By: Charles E. Buchheit
--------------------------
     Charles E. Buchheit

     Attorney-in-fact


                                       37