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

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

                                   Form 10-K

         FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
                 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(k) OF THE SECURITIES EXCHANGE ACT
              OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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Commission file number: 0-20215

                           MICROTOUCH SYSTEMS, INC.
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                Massachusetts                                    04-2802971
(State or other jurisdiction of incorporation
 or organization)                                   (I.R.S. Employer Identification No.)

        300 Griffin Brook Park Drive
                 Methuen, MA                                       01844
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

                                (978) 659-9000
             (Registrant's telephone number, including area code)

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

  Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$0.01 par value

  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 voting stock held by nonaffiliates of the
registrant as of February 11, 2000, was approximately $82,599,000 (based on
the last price of such stock as reported by NASDAQ Stock Market on such date).

  The number of shares outstanding of each of the registrant's classes of
capital stock, as of February 11, 2000 was:

                  Common Stock, $0.01 par value     6,527,684

  Portions of the Registrant's proxy statement for the Annual Meeting of
Stockholders to be held June 22, 2000 are incorporated by reference into Part
III of this Form 10-K.

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Item 1. Business

General

  MicroTouch Systems, Inc (the "Company" or "MicroTouch") is a leading
supplier of touch and pen sensitive input systems including touchscreens and
electronic whiteboards. The Company's principal products are its touch
sensitive screens, which are based on the Company's two primary technologies--
analog capacitive sensing (referred to as ClearTek(R)) and resistive membrane
(known as TouchTek(TM)). In both the capacitive and resistive membrane cases,
the screens are configured to CRT monitors and flat panel displays. The
Company believes its touchscreens are well suited for a wide variety of
markets and applications where ease of use, speed, accuracy and durability are
desirable.

  Over the last decade, the use of personal computers has grown in a wide
range of applications. As a result, demand has increased for products that
make these systems more accessible to a broader range of users. For example,
the development of graphical user interfaces ("GUIs"), such as Microsoft
Windows, has allowed information to be displayed in an easy to understand
graphic manner. Touch products address this demand by allowing both trained
and untrained computer users to interact with computers in a natural and
intuitive manner.

  Touchscreens allow individuals to access information and interact with a
computer simply by touching the computer's screen with a finger. Because
pointing is a natural instinct, touchscreens offer a highly intuitive computer
interface. Touchscreens are designed to allow users to interact with their
system without the use of a keyboard, mouse or trackball. Accordingly, the
ease of use offered by touchscreen-based systems makes them well suited both
for applications for the general public and for specialized applications for
trained computer users.

  The Company has expanded its product line primarily through internal
development as well as acquisitions in the past. Technologies acquired through
acquisition include ThruGlass and resistive membrane technology. Over the past
four years, the Company has developed and marketed a new product referred to
as an electronic P.C. whiteboard. This new product, marketed under the
trademark of Ibid(TM), allows the user to write or draw information on a
whiteboard and then to electronically view and transfer the written
information to a desktop or notebook P.C.

  The discussion contained in this section and elsewhere in this Annual Report
on Form 10-K may contain forward-looking statements based on the current
expectations of the Company's management. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements, which may be made to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.

Strategy

  MicroTouch's objective is to be the leading worldwide supplier of touch
products and to exploit opportunities in other touch and related markets
through the development and acquisition of complementary technologies and
product lines. The key elements of the Company's strategies are as follows:

  Focus on Vertical Markets. The Company's strategy for its touch products is
to focus on vertical markets in which the Company believes touch technology
offers significant benefits and appeals to a broad customer base. The
Company's sales force is organized into geographic territories that focus on
customers within these distinct vertical markets. In addition, specialized
experts exist within the sales force for several of the vertical markets
including point-of-sale cash registers, interactive kiosks, medical
applications, mobile information devices and gaming and entertainment
equipment.

  Target Developers of End User Applications. The Company directs its sales
efforts for its touch products toward original equipment manufacturers (OEMs),
value added resellers (VARs), system integrators and high-

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volume end users, which the Company believes are best able to develop and
market applications for the Company's targeted vertical markets. The Company
seeks to have its products designed into the end user systems or products of
these customers.

  Provide Flexible Product Offerings. The Company works closely with its
customers to understand their businesses and product requirements. The Company
offers its ClearTek and TouchTek touchscreens, and TouchPen sensors in a
variety of standard and customized configurations to meet the diverse needs of
the markets which it serves. The ThruGlass products which allow for gloved
touch operation of a computer through up to an inch of glass, can also be
customized to meet the requirements of emerging end-user applications.

  Enhance and Expand Technology. The Company's traditional technology is its
proprietary analog capacitive sensing technology. MicroTouch seeks to improve
its products by enhancing this technology through the development of new glass
coating techniques, custom ASICs, controllers, software algorithms and
software drivers. The Company also seeks to develop new technologies through
internal development, licensing or acquisitions. The Company has developed
TouchPen, a touch and stylus sensitive device used for pen-based applications.
The Company also markets ThruGlass, which allows touch to be sensed through
other conductive media. During the past two years, the Company has
significantly enhanced its resistive membrane technology through product
development programs similar to those undertaken for the capacitive product
line. Finally, the electronic whiteboard product was developed based on
resistive technology obtained in the 1995 Touch Technology acquisition, a
business engaged in the development and marketing of touch sensitive screens
primarily using resistive membrane technology.

  Pursue New Market Opportunities. The Company is currently applying its
existing technologies to new market opportunities where it believes these
technologies can have significant growth potential. These opportunities
include consumer devices for resistive technology and, with respect to
TouchPen applications, use for pen computing, videoconferencing and image
manipulation in interactive kiosks.

  Expand International Markets. The Company has increased its international
presence through the opening of foreign sales offices and manufacturing
facilities. The Company currently has touchscreen sales and manufacturing
facilities in the United Kingdom and Australia and sales offices in France,
Germany, Italy, Spain, Japan, Taiwan, Korea and Hong Kong. The Company's
international sales, including U.S export sales, increased from $57.4 million
in 1997 to $71.4 million in 1998 and to $76.0 million in 1999.

Technology

  Analog Capacitive Technology. The Company's primary touchscreen technology
is its proprietary analog capacitive sensing technology. This technology
creates a uniform voltage field on the conductive surface of the touch sensor.
When a finger comes into capacitive contact with the conductive layer, it
draws a small amount of current to the point of contact. A controller attached
to the conductive surface determines the point of contact by measuring the
relative current flows from the four corners of the surface.

  The Company implements this technology on a glass panel that has a
transparent conductive coating fused to its surface. In most of the Company's
products, a proprietary glass overcoat is then laid over the conductive
coating for additional protection. The conductive glass panel, or sensor, is
driven at its four corners by an A/C sine wave voltage which is dispersed
linearly over the sensor by an electrode pattern located on the perimeter of
the sensor. When a user touches the screen, the controller determines the
point of contact and transmits the location to the computer for processing.

  The Company's analog capacitive sensing technology has many favorable
attributes, including:

    High Touch Sensitivity. Because the Company's touchscreens rely on
  capacitive contact rather than activation by pressure, they offer a high
  degree of sensitivity to input from a finger. This is important in
  applications characterized by continuous usage such as cash registers,
  where a requirement to exert pressure on the screen might be uncomfortable
  over time and slow down input and, therefore, customer service.

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    Fast Touch Speed. The Company's proprietary software algorithms enable
  the controller to detect quickly a touch on the screen. This capability can
  enable operators of products such as touch-based cash registers to input
  numbers as quickly as they could using buttons or keypads.

    High Resolution. The Company's touchscreens have a resolution of at least
  1,024 by 1,024 points. Because the controller averages the entire area of
  finger contact and reports a single point, even a finger is able to obtain
  pixel-level control of the cursor on a display. This resolution allows for
  the creation of detailed menus and greater flexibility in screen design.

    Resistant Properties. The capacitive nature of the Company's touchscreens
  allows them to function unimpaired even when contaminants such as water,
  dirt or grease build up on the surface. This is an important feature in
  factory environments, public locations and restaurants.

    Durability. With its proprietary glass overcoat, the Company's capacitive
  touchscreens are scratch, wear and chemical resistant. In addition, the
  glass sensor may be optically bonded to the computer screen in a process
  designed to give structural support to the screen. Durability is an
  important feature in applications such as entertainment and point of sale,
  which are characterized by frequent use.

    Ease of Integration. The Company's glass sensors are easily fabricated
  into a variety of shapes and sizes and are readily installed in displays in
  a manner that results in a professional looking fit and finish.

  Resistive Membrane Technology. The Company's TouchTek "resistive membrane"
technology has several attributes that are similar to those of its capacitive
systems. TouchTek screens work by creating a uniform voltage field on a glass
substrate. When a plastic top sheet is compressed into contact with the glass
layer, current is drawn from each side of the glass layer in proportion to the
distance from the edge. An electronic controller calculates the position of
the finger based on the current flows. Some of the Company's resistive
products fall into a category known as 5-wire resistive and the Company has
recently placed more emphasis on offering 4-wire resistive products for
certain specialty consumer device applications as customer requirements
dictate.

  ThruGlass Technology. MicroTouch's ThruGlass technology operates by
projecting voltage fields out from the conductive surfaces of transparent
glass connected to a controller. When an individual touches the surface in
front of the projected capacitive touchscreen, minute changes in the voltage
field are detected and the touch is assigned to a location on the sensor.

  TouchPen Technology. TouchPen utilizes a modified form of the Company's
analog capacitive technology to sense both a finger and a pen touch.
TouchPen's controller is able to electrically distinguish the hand from the
pen signal, allowing it to reject the hand signal when writing. The touch
performance of TouchPen is equal to the Company's analog capacitive ClearTek
product, while the pen offers even higher resolution of 2,048 by 2,048 to
capture handwriting.

  There are several alternative touch technologies currently in use by other
manufacturers. These technologies include (i) resistive membrane products
similar to the Company's; (ii) scanning infrared, which uses a grid of
infrared beams; (iii) surface acoustic wave or "SAW" screens, which are based
on the transmission of acoustic waves across a glass overlay; (iv) guided
acoustic wave or "GAW" screens, which are based on the transmission of
acoustic waves through a glass surface; and (v) piezo technology, in which
piezo, or pressure, sensors convert touch forces into electrical signals.


Products

 Markets, Applications and Customers

  The Company sells its products into a variety of markets, including self-
service kiosks, point of information displays, point of sale equipment, gaming
and entertainment systems, industrial and medical systems and training and
business systems. Specific customer applications include; airline and movie
theatre ticketing, exhibits and trade shows, tourist information centers,
museum exhibit guides, restaurant and merchandise cash registers,

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customer self service, casino video gaming machines, bartop entertainment
gaming, children's entertainment kiosks, process control, video banking and
ATM's, financial trading and portable information devices.

 Touchscreens

  The Company's principal product line over the last several years has been
the ClearTek 2000 Touch Screen. The Company recently introduced its next
generation capacitive product, the ClearTek 3000 Touch Screen, in a variety of
configurations, including kits comprised of touch sensors and controllers or
chipsets, and fully configured touchscreen monitors. In addition, the Company
customizes its products to accommodate particular customer needs.

  The new ClearTek 3000 Touch Screen system has a resolution of 1,024 by 1,024
points and interprets the entire area of touch contact as a single point,
giving a finger the ability to select targets as small as a single pixel. The
screen detects a touch in as little as 8-12 milliseconds making it fast in
operations such as hitting buttons on a touchscreen-based cash register. The
TouchTek resistive touchscreen systems utilize a conductively coated plastic
top sheet over a conductively coated and rigid bottom sheet, usually glass.
Resistive kits are configured similarly to capacitive kits. The principal
elements of both the ClearTek 3000 and the TouchTek product lines include the
following:

  Sensors. The Company's glass sensors, which are installed on the face of
computer screens, are offered in a large number of curved and flat screen
sizes, as well as in custom sizes. Screens may be optically bonded to monitors
through a process developed by the Company to fill the space between the
touchscreen and the monitor with a transparent bonding compound. Optically
bonded sensors increase optical clarity and provide greater structural
support. The Company's ClearTek sensors are overcoated with the Company's
exclusive glass top-coating for added durability and optical clarity.

  Controllers. Controllers offered by the Company have USB, serial, PC bus,
ADB or TTL interfaces and will operate with any of the Company's touchscreens.
Capacitive chipsets, which include a proprietary ASIC, are sold to larger
volume OEMs for incorporation into the electronics of their systems.

  Software Drivers and Tools. GUI drivers and software tools provided by the
Company include an MS-DOS mouse emulator; Windows, OS/2, Macintosh, Windows
NT, Amiga, and various UNIX drivers; and an MS-DOS software tool for creating
and defining touch zones.

  Options. The Company sells a variety of options and accessories, including
power supplies, cables and privacy shields, and also offers retrofitting and
optical bonding services.

 Touch Enabled Monitors

  The Company also sells several lines of fully integrated standard monitors
which range in size from 13 to 27 inches and support popular graphics
standards. These monitors are typically purchased from display manufacturers
and equipped by the Company with an optically bonded sensor and a controller.
The Company also provides independent integration services for monitor
customers primarily through third party suppliers.

 Electronic Whiteboard

  The Company markets a line of electronic PC whiteboards including both
personal (2 foot by 3 foot) boards as well as larger (3 foot by 4 foot and 4
foot by 6 foot) conference room boards The Company's electronic whiteboard
product is a variation of the resistive membrane technology used in the
TouchTek line.

Sales and Marketing

  MicroTouch markets and sells its touch products primarily through VARs, OEMs
and systems integrators, and to high volume end-users. The Company employs a
direct sales force for domestic sales and certain

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international regions, and supports its marketing efforts with trade show
attendance, telemarketing, advertising and public relations.

  As of December 31, 1999, the Company's sales and support function consisted
of 118 persons. The sales force is organized into several geographic sales
groups, each focusing on a separate set of regional customers, and is
augmented by several vertical market specialists.

  The Company markets its touch products in Europe through its U.K.
subsidiary, MicroTouch Systems, Ltd. MicroTouch Systems, Ltd. sells through
various European distributors and sells direct in the U.K., Germany, France,
Spain and Italy. This subsidiary also assembles touch monitors from
touchscreen kits exported from the U.S. and monitors purchased in Europe.
During 1998, the Company established a direct sales office in Spain. In Japan,
the Company sells its products through MicroTouch Systems, KK. In 1994
MicroTouch established a direct sales and manufacturing presence to serve the
Australian and New Zealand touchscreen markets providing a base from which to
continue sales of MicroTouch products primarily to the Australian gaming
market. The Company opened a sales office in Taiwan in 1995, in Korea and Hong
Kong in 1997, and in Singapore in 1999. The Company's total international
sales, including U.S. export sales, accounted for approximately 45%, 49% and
48% of total sales in 1997, 1998 and 1999, respectively.

  The Company plans to continue to increase its sales presence, both
domestically and overseas, in an effort to broaden its potential customer base
and to intensify its efforts in its targeted markets. As part of this plan,
the Company intends to increase its worldwide sales force and add additional
distributors and agents.

  The Company offers a 30-day money back guaranty on its touchscreen products
to first-time buyers. This offer pertains only to the first unit purchased and
is void if the unit is altered by the customer in any way. Additionally, the
Company generally replaces products not meeting its specifications that are
returned by any customer within 30 days of receipt. The Company provides
reserves for estimated returns and believes that such reserves are adequate.
The amount of product returns was approximately $4.5 million, $4.9 million and
$5.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively. While the Company believes that its reserves for product returns
are adequate, there can be no assurance that the Company will not experience
increased product returns. Any such increase in product return claims could
have a material adverse effect on the Company's results of operations.

  The Company's customers generally provide direct support to end users for
the Company's products while MicroTouch, in turn, supports its resellers with
application engineers and phone support from its customer service group of
trained technicians. The Company typically offers its customers a product
warranty of up to five years. While the Company believes that its reserves for
warranty claims are adequate, there can be no assurance that the Company will
not experience increased warranty claims. Any such increase in warranty claims
could have a material adverse effect on the Company's results of operations.

Research and Development

  The Company's future success depends in large part upon the timely
enhancement of existing products and the continued development of new products
to address new market opportunities. Accordingly, the Company intends to
continue to devote significant resources to increasing the performance of its
existing products, especially its capacitive and resistive technologies,
developing new products from its existing technologies and developing new
technologies. The Company has, in the past, augmented and may continue to
augment its research and development efforts through the acquisition or
licensing of new technologies. The Company's research and development efforts
in the touchscreen area are primarily focused on expanding the range of
configurations offered, enhancing product features, expanding the capability
of drivers to interact with different types of computer operating systems and
refining existing products to increase manufacturing efficiency and reduce
costs. The Company's development efforts are also directed toward improving
the product features and enhancing the underlying technology of its various
product lines. There can be no assurance that the Company

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will successfully complete such development efforts or that these product
developments will achieve market acceptance.

  As of December 31, 1999, 83 full-time employees of the Company were engaged
in research and development activities. In addition, the Company frequently
engages independent consultants to supplement its own research and development
efforts and to gain access to expertise in specific technical areas.

Proprietary Rights and Licenses

  The Company relies on a combination of patents, trade secrets and know-how
to establish and protect its proprietary rights.

  The Company acquired exclusive rights to its core analog capacitive
technology under a worldwide license from Peptek, Inc. and its affiliate, Mr.
Jim Zeeger (the "Peptek License"). Under the Peptek License, the Company has
the exclusive right to use all technology covered by the patent claims in the
manufacture and sale of the Company's touchscreen and similar products. The
patents licensed under the Peptek License include claims of rights to the
configuration of the electrodes installed around the perimeter of the glass
sensor of a touchscreen and in the method used to determine the point of
finger contact on the surface of the glass sensor. The Peptek License requires
the Company to pay royalties based on annual product sales and sublicensing
revenues and includes minimum royalty payment provisions. The Peptek License
may be terminated by the licensor only in the event of a breach of the license
agreement by the Company, which is not remedied within applicable cure periods
and in the event of the Company's bankruptcy.

  MicroTouch holds exclusive rights to the patents covering its core
proprietary technology until the respective expiration dates of such patents,
which currently range from 2000 to 2015. The Company also owns certain other
patents and patent applications, related primarily to improvements on, and
extensions of, its core technology, as well as certain software algorithms
used with the Company's products. The Company holds two patents, one of which
will expire in the Year 2000, which cover the configuration of the electrodes
installed around the perimeter of the glass sensor used in the Company's
analog capacitive products. Several other patents related to the Company's
core analog capacitive technology will expire during 2000. Although the
Company has developed considerable know-how and has substantial experience in
the field of analog capacitive technology, which it believes will enable the
Company to compete effectively in the future, the expiration of patents
covering the Company's core proprietary technology during the next several
years may lead to the development by third parties of products that are
competitive with those of the Company. The successful development and
marketing by third parties of competitive products could have a material
adverse effect on the Company's business, financial condition and results of
operations.

  The Company acquired exclusive rights to use its ThruGlass proprietary
technology in the touchscreen field, including rights under pending patent
applications, under a worldwide license from Moonstone Designs, Ltd. (the
"Moonstone License"). Under the Moonstone License, the Company has the
exclusive right to use all technology covered by the claims of any patent that
may issue in the manufacture and sale of the Company's projected capacitive
products. There can be no assurance that such patents will issue or that the
claims under such patents may not be reduced from the claims in the patent
applications.

  The Company acquired exclusive rights to use certain force based proprietary
technology in the touchscreen field, including rights under three patents,
under a worldwide license. The Company has the exclusive right to use all
technology covered by the claims of the patents in the manufacture and sale of
the Company's products.

  Other rights held by the Company include nonexclusive rights to use its
resistive technology, including rights under several patents acquired in 1995.
In addition, two patents have been granted and applications for two additional
U.S. patents on various technology related to whiteboard products have been
submitted. The Company was also granted three patents covering software for
Internet public access computers and kiosks during 1998.

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  The Company typically requires persons such as customers, licensees and
employees who have access to proprietary information concerning the Company's
products to sign nondisclosure agreements that prohibit the use of the
Company's proprietary information other than for the specific purpose for
which it was provided.

  Other companies are engaged in the development of technologies that may
result in products competitive with those made by the Company. These
development efforts may result in proprietary technology, and possibly
patents, that could impair the value of, or render obsolete, technology owned
or licensed by the Company. Furthermore, there can be no assurance that any
patent owned or licensed by the Company will withstand challenges or otherwise
provide the Company with adequate protection from competitors, or that the
Company will be able to afford the expense of enforcing these patents.

Manufacturing

  MicroTouch's touchscreen manufacturing operations consist primarily of the
procurement of glass (coated and fabricated to its specifications) and the
manufacture of touch sensors from that glass, the procurement and testing of
electronic components specified or designed by MicroTouch, and, in some cases,
the integration, including optical bonding, of touchscreen monitors. The
majority of the manufacturing activities for both capacitive and resistive
touchscreens are performed at the Company's principal facility in Methuen,
Massachusetts. The Company also exports touchscreen kits to its foreign
operations for final integration with monitors for distribution in Europe,
Japan, the Pacific Rim and Australia. In addition, certain resistive products
are manufactured in Austin, Texas on a special project basis.

  Although the Company generally uses standard parts for its products, certain
components, such as ASICs and the coated glass used in the production of touch
sensors are currently available only from a single source. In the event that
suppliers are unable to fulfill the Company's requirements, the resulting
interruption in production would have an adverse impact on the Company's
operating results. While the Company maintains some inventory of ASICs, coated
glass and other components, the inventory amounts maintained are not
sufficient to eliminate the potential impact of prolonged supply
interruptions. While the Company believes that there are other companies that
are capable of manufacturing these sole source components, the inability to
obtain sufficient components as required, or to develop alternative sources if
and when needed, would adversely affect the Company's operating results.

Competition

  The markets for touch products are highly competitive and subject to rapid
technological change. The Company believes that the principal competitive
factors in its markets are product characteristics such as touch performance,
durability, optical clarity and price, as well as supplier characteristics
such as quality, service, delivery time and reputation. The Company believes
that it competes favorably with respect to these factors, although there can
be no assurance that the Company will be able to continue to compete
successfully in the future.

  The Company faces competition from several established touch product vendors
as well as a number of smaller companies. Some of these competitors utilize
analog capacitive sensing and resistive membrane technologies similar to the
Company's technologies. Two of the Company's principal touchscreen
competitors, Elo Touch Systems, Inc., and Carroll Touch Technology, both
subsidiaries of Tyco International Ltd., are operations of that larger,
diversified industrial company which has greater financial, technical,
manufacturing and marketing resources than the Company. Elo Touch Systems
markets touchscreens based primarily on resistive and surface acoustic wave
technology, and Carroll Touch Technology markets touchscreens based primarily
on infrared and guided acoustic wave technology. In addition, several
manufacturers, most notably IBM, have developed proprietary touchscreen
products in the past but are not currently marketing proprietary products.
There are several private companies which have marketed resistive touchscreens
for years and who are, therefore, more established in that market segment than
the Company. In the market for pen-based computers, the Company's TouchPen
product competes with digitizers marketed by several companies and could
compete with

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products that may be developed in the future by manufacturers that have more
significant resources than the Company. Products similar to ThruGlass are
marketed by at least one competitor to the Company, especially in the European
market. Several other companies market electronic whiteboard products similar
to those of the Company.

Backlog

  The Company maintains most standard products in inventory and manufactures
other standard, modified standard and custom products pursuant to orders from
customers. Backlog consists of orders for products, which have a scheduled
shipment date within twelve months of the order. Because a large percentage of
the Company's orders require products to be shipped in the same quarter in
which the order was received, and because orders in the backlog may be
canceled and delivery schedules may be changed, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any
succeeding period. As of December 31, 1998 and 1999, the Company had a backlog
of $23.3 million and $21.4 million, respectively.

Employees

  As of December 31, 1999, the Company had 845 full-time employees, of which
536 were engaged in manufacturing, 142 were in sales, marketing and customer
service and 83 were in research and development. The Company considers its
relations with its employees to be good.

Item 2. Properties

  The Company leases approximately 96,000 square feet of office, engineering
and manufacturing space located at 300 Griffin Park, Methuen, Massachusetts.
The lease covering these properties expires in April 2003. The Company also
leases an aggregate of approximately 97,000 square feet of additional space at
its other locations including those in the U.K., France, Germany, Italy,
Japan, Australia, Spain, Hong Kong, Korea, Taiwan and Austin, Texas. In
addition, the Company is leasing approximately 88,000 square feet in
Rochester, New York, the lease for which expires in November, 2002.
Approximately 35,000 square feet of this space is currently sublet and the
Company is attempting to sublease the remaining space.

  During 1998 the Company expanded the building it owns, which is adjacent to
the Methuen, Massachusetts corporate headquarters. This facility now has
70,000 square feet of space and houses the Company's information technology
function, administrative staff and additional touchscreen and whiteboard
manufacturing space. In 1999, the Company leased 44,000 square feet of
warehouse space in Lawrence, Mass.

Item 3. Legal Proceedings

  The Company had been involved in an international arbitration entitled
MicroTouch Systems, Inc. v. Nissha Printing Co. Ltd. ("Nissha"), which was
under the auspices of the International Chamber of Commerce ("ICC"). The case
was based on the Company's claims that Nissha breached non competition
provisions and other terms of a distribution agreement between the Company and
Nissha.

  In January 1997, the Company was informed that while it had won the case
based on the merits of its claims, any recovery of damages was time barred
under the terms of the original agreement between the two parties in the
dispute. As a result, the Company was required to pay a portion ($595,000) of
Nissha's fees and costs associated with the arbitration. The Company expensed
these fees and costs awarded to Nissha as part of its second quarter 1997
financial results, thus completing the Company's involvement in the matter.

  During the period from mid 1995 to early 1997, the Company was involved in a
case entitled Elo Touch Systems, Inc. v. The Graphics Technology Company,
Inc., MicroTouch Systems, Inc. et al, which was in the United States District
Court in Knoxville, Tennessee. The case arose from claims by Elo Touch Systems
("Elo") that The Graphics Technology Company, Inc. (the predecessor to the
Company's Touch Technology business)

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manufactured and sold, and that the Company intended to manufacture and sell
in the future, certain products which infringe certain patent rights held by
Elo. This case was settled by a cross-licensing agreement reached among the
parties during 1997.

  The Company was a plaintiff in a case entitled MicroTouch Systems, Inc. and
Peptek, Inc. v. Elo Touch Systems, Inc. which was in the United States
District Court in Knoxville, Tennessee. The case arose from claims by the
Company and Peptek, Inc. ("Peptek") that Elo manufactured and sold products
that infringed certain patent rights held by Peptek and exclusively licensed
to the Company. This case was settled by a cross-licensing agreement reached
among the parties during 1997.

  The Company has been a defendant in a case entitled Behne v. MicroTouch
Systems, Inc., in the United States District Court in the Northern District of
California. The case arose from claims by Ms. Behne, a former employee of
MicroTouch, regarding gender discrimination, retaliation and misrepresentation
during her employment at the Company. In March, 1999 a jury found the Company
not liable on the discrimination and retaliation claims, but awarded the
plaintiff approximately $2,600,000 in compensatory and punitive damages under
the misrepresentation claim. While the matter continues under the appeals
process, the Company has established a reserve for the full amount of the
initial jury judgement, as well as associated legal fees, in the amount of
$3,303,000, of which approximately $2,900,000 remained in the reserve at
December 31, 1999.

  In addition to the matters described above, the Company is subject to
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of its business activities. Each of
these matters is subject to various uncertainties, and it is possible that
some of these matters may be resolved unfavorably to the Company. The Company
has established accruals for loss contingencies that are probable and
reasonably estimable. Management believes that any liability that may
ultimately result from the resolution of these matters in excess of amounts
provided will not have a material adverse effect on the financial position or
results of operations of the Company.

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

  The Company submitted no matters to a vote of its shareholders during the
fourth quarter of 1999.

                                      10
<PAGE>

                                    PART II

Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters

  The Company's common stock is quoted on the Nasdaq Stock Market under the
symbol "MTSI." The following table sets forth the range of high and low sales
prices per share.

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
      <S>                                                          <C>    <C>
      1999
        First Quarter............................................. $19.56 $11.88
        Second Quarter............................................ $15.56 $12.25
        Third Quarter............................................. $17.50 $14.56
        Fourth Quarter............................................ $17.94 $12.06
      1998
        First Quarter............................................. $19.63 $13.38
        Second Quarter............................................ $20.94 $14.50
        Third Quarter............................................. $18.63 $10.88
        Fourth Quarter............................................ $16.88 $12.25
</TABLE>

  The Company has never paid a cash dividend on its common stock and currently
expects that future earnings will be retained for use in its business. As of
February 11, 2000, the Company had 245 stockholders of record and approximately
4,000 beneficial stockholders.

                                       11
<PAGE>

Item 6. Selected Consolidated Financial Data

  The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 1999 have been derived from the
Company's consolidated financial statements. The consolidated financial
statements for each of the five years in the period ended December 31, 1999
have been audited by Arthur Andersen LLP, independent public accountants. This
data should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto and other financial information appearing elsewhere in
this document.

<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                     ------------------------------------------
                                      1995    1996     1997     1998     1999
                                     ------- ------- -------- -------- --------
                                      (in thousands, except per share amounts)
<S>                                  <C>     <C>     <C>      <C>      <C>
Statement of Operations Data:
Net sales..........................  $76,718 $95,045 $128,481 $144,370 $157,491
Cost of sales......................   47,735  58,995   83,553   88,950  104,323
                                     ------- ------- -------- -------- --------
    Gross profit...................   28,983  36,050   44,928   55,420   53,168
Operating expenses:
  Research and development.........    5,027   7,225    7,985   10,904   12,816
  Sales and marketing..............   11,607  13,568   18,765   21,235   20,862
  General and administrative.......    5,314   6,360    7,944   10,012   11,225
  Amortization of intangible assets
   and purchased technology........      381     460      477      502      333
  Write-off of purchased technology
   and related assets..............    1,985      --       --       --       --
  Purchased in-process research and
   development and related costs...    3,000      --       --       --       --
  Non-recurring charge.............       --      --       --       --    1,950
                                     ------- ------- -------- -------- --------
    Total operating expenses.......   27,314  27,613   35,171   42,653   47,186
                                     ------- ------- -------- -------- --------
Operating income...................    1,669   8,437    9,757   12,767    5,982
Other income, net..................    2,014   1,464      579    1,009    1,249
Arbitration/litigation costs.......    1,019     954      595       --    3,303
                                     ------- ------- -------- -------- --------
Income before provision for income
 taxes.............................    2,664   8,947    9,741   13,776    3,928
Provision for income taxes.........      980   3,250    3,330    4,408    1,257
                                     ------- ------- -------- -------- --------
Net income.........................  $ 1,684 $ 5,697 $  6,411 $  9,368 $  2,671
                                     ======= ======= ======== ======== ========
Earnings per share:
  Basic............................  $  0.21 $  0.74 $   0.81 $   1.22 $   0.39
  Diluted..........................  $  0.20 $  0.71 $   0.77 $   1.20 $   0.38
Weighted average common shares
 outstanding and dilutive potential
 common shares outstanding
  Basic............................    8,114   7,695    7,941    7,672    6,914
  Diluted..........................    8,607   8,066    8,349    7,815    7,065
<CAPTION>
                                                    December 31,
                                     ------------------------------------------
                                      1995    1996     1997     1998     1999
                                     ------- ------- -------- -------- --------
                                                   (in thousands)
<S>                                  <C>     <C>     <C>      <C>      <C>
Balance Sheet Data:
Working capital....................  $55,748 $58,372 $ 63,265 $ 59,060 $ 46,801
Total assets.......................   76,353  85,048   94,837  104,345   97,104
Stockholders' equity...............   63,851  69,170   78,948   78,369   69,508
</TABLE>

                                      12
<PAGE>

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

Results of Operations

  The discussion contained in this section as well as elsewhere in this Annual
Report on Form 10-K may contain forward-looking statements based on the
current expectations of the Company's management. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.

  The following table sets forth for the fiscal periods indicated, the
percentage of total revenues represented by certain items in MicroTouch's
statement of operations:

                         Percentage of Total Revenues

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -------------------------
                                                      1997     1998     1999
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Total Revenues......................................   100.0%   100.0%   100.0%
Cost of Sales.......................................    65.0     61.6     66.2
  Gross Profit......................................    35.0     38.4     33.8
Operating Expenses:
  Research and Development..........................     6.2      7.6      8.1
  Sales and Marketing...............................    14.6     14.7     13.3
  General and Administrative........................     6.2      6.9      7.1
  Amortization of Intangible Assets and Purchased
   Technology.......................................     0.4      0.4      0.2
  Non-recurring Charge..............................     0.0      0.0      1.2
    Total Operating Expenses........................    27.4     29.6     29.9
Operating Income....................................     7.6      8.8      3.9
Other Income, net...................................     0.5      0.7      0.8
Arbitration Litigation Costs........................     0.5      0.0      2.1
Income Before Provision for Income Taxes............     7.6      9.5      2.6
Net Income..........................................     5.0      6.5      1.7
</TABLE>

Years Ended December 31, 1999 and 1998

  Net Sales. Net sales in the year ended December 31, 1999 increased from the
corresponding period of 1998 by $13.1 million, or 9.1%, to $157.5 million. The
increase in net sales primarily reflects increased volumes in North America
and Asia Pacific, offset by decreased volume in Europe. In the year ended
December 31, 1999, sales from international operations were 46.3% of total
sales compared with 47.7% in the comparable period of 1998. This decrease
primarily reflects lower touchscreen volume in Europe, offset by higher
touchscreen volume in Asia Pacific, combined with the impact of increased
sales in North America.

  Gross Profit. Gross profit for the year ended December 31, 1999 decreased
from the year ended December 31, 1998 by $2.3 million or 4.0%, to $53.2
million. As a percentage of net sales, gross profit decreased from 38.4% in
the year ended December 31, 1998 to 33.8% in the year ended December 31, 1999.
The decrease in gross margin percent was primarily due to (a) a change in
product mix reflecting a shift to flat touchscreens, which currently yield a
lower gross profit, (b) the impact of expanding resistive touchscreen
production at the Methuen plant, and (c) continued lower than historical gross
profit in the Factura kiosk business, which has since been divested.

                                      13
<PAGE>

  Research and Development. Research and development expenses for the year
ended December 31, 1999 increased over the corresponding period of 1998 by
$1.9 million, or 17.5%, to $12.8 million. As a percentage of net sales,
research and development expenses increased from 7.6% in the year ended
December 31, 1998 to 8.1% in the year ended December 31, 1999. The increase in
spending both on an absolute dollar basis and as a percentage of net sales
reflects the continued investment in programs to develop improvements in
touchscreen technologies, especially a next generation version of capacitive
and resistive products.

  Sales and Marketing. Sales and marketing expenses of $20.9 million for the
year ended December 31, 1999 remained relatively flat with the corresponding
period of 1998. As a percentage of net sales, sales and marketing expenses
decreased from 14.7% for the year ended December 31, 1998 to 13.3% for the
corresponding period of 1999.

  General and Administrative. General and administrative expenses for the year
ended December 31, 1999 increased from the corresponding period of 1998 by
$1.2 million, or 12.1%, to $11.2 million. As a percentage of net sales,
general and administrative expenses increased slightly from 6.9% for the
fiscal year ended December 31, 1998 to 7.1% for the corresponding period of
1999. The increase in spending both on an absolute dollar basis and as a
percentage of net sales reflects increased Information Technology expenses,
especially costs associated with the establishment of the Company's e-commerce
website, Touchstore.com.

  Amortization of Intangible Assets. For the year ended December 31, 1999,
operating expenses included $333,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $502,000 for the
corresponding period of 1998.

  Non-recurring Factura Charge. During the fourth quarter of 1999, the Company
committed to a plan to dispose of its Factura kiosk business. As a result, the
Company recorded a pre-tax non-recurring charge of $1,950,000 in the fourth
quarter of 1999. On January 18, 2000, the Company completed the sale of
certain of the assets of the Factura division to Factura Corporation, a new
company partially owned by former management of the division. As a result of
this transaction, the Company received cash and promissory notes in the
approximate amount of $400,000 and will receive certain lease payments over a
5-year period. The Company may also receive additional payments based upon the
buyer achieving certain specified revenue levels over the next five years The
non-recurring charge includes (i) $43,000 associated with personnel reductions
of approximately 12 positions at the Factura division prior to the sale, (ii)
$417,000 associated with estimated lease costs for the Factura facility
subsequent to the sale date (net of estimated sublease income), (iii) $210,000
associated with legal and other exit costs, and (iv) $1,280,000 associated
with a loss on the sale of the non-cash assets of the Factura division. No
amounts had been paid as of December 31, 1999. Included in the consolidated
results of operations for 1997, 1998 and 1999 are Factura sales and operating
income, respectively, of $7.7 million and $80,000 in 1997, and Factura sales
and operating losses, respectively, of $6.9 million and $856,000 in 1998 and
$4.4 million and $1.5 million in 1999. The loss on the sale consists primarily
of the writedown to fair value of certain fixed assets and goodwill.

  Operating Income. Operating income for the fiscal year ended December 31,
1999 decreased from the $12.8 million amount reported for fiscal year 1998.
This decrease is primarily due to the decrease in gross percent outlined
above, as well as the non-recurring charge of $1.95 million related to
Factura.

  Other Income, net. Other income in the year ended December 31, 1999 was $1.2
million as compared to $1.0 million for the corresponding period of 1998.
Other income in the 1999 period included $1.1 million in interest income, net
of interest expense, as compared to $1.5 million of net interest income for
the year ended December 31, 1998. Foreign exchange gains were $135,000 in the
year ended December 31, 1999, primarily due to currency fluctuations in the
Far East, as compared to a loss of $340,000 for the corresponding period of
1998.

  Litigation Costs. During the first quarter of 1999, the Company recorded a
charge of $3.3 million related to a judgement against the Company in a
lawsuit. While the matter is continuing in post-trial proceedings, the Company
has established a reserve for the full amount of the judgement, as well as
estimated associated legal fees. (See Note 8 to Consolidated Financial
Statements and "Business--Legal Proceedings".)

                                      14
<PAGE>

  Provision for Income Taxes. The Company's effective tax rate for the years
ended December 31, 1999 and 1998 was 32.0%. The 1999 effective tax rate
differed from the federal statutory rate of 34% primarily as a result of the
benefit related to tax-exempt interest income and the utilization of foreign
net operating losses.

  Geographic Segments. Domestic pre-tax income of $527,000 represented a
decrease of $8.8 million or 94% from 1998. This decrease in pre-tax profit is
primarily the result of the $3.3 million litigation charge, the Factura $1.95
million non-recurring charge, and the impact of reduced gross margin
percentages as discussed above. International pre-tax income of $3.4 million
represented a decrease of $1.0 million or 23% from the corresponding period of
1998. This decrease was primarily due to the impact of reduced gross margin
percentages especially in Europe, as discussed above.

Years Ended December 31, 1998 and 1997

  Net Sales. Net sales in the fiscal year ended December 31, 1998 increased
from the corresponding period of 1997 by $15.9 million, or 12%, to $144.4
million. The increase in net sales primarily reflects increased international
sales volume. Sales from international operations were $68.9 million or 47.7%
of total sales and represented an increase of $15.0 million or 28% over
international sales in the comparable period of 1997. This increase primarily
reflects higher touchscreen volume into the European and Asia Pacific
(excluding Japan) markets.

  Gross Profit. Gross profit for the fiscal year ended December 31, 1998
increased over the fiscal year ended December 31, 1997 by $10.5 million or
23%, to $55.4 million. As a percentage of net sales, gross profit increased
from 35.0% in the fiscal year ended December 31, 1997 to 38.4% in the fiscal
year ended December 31, 1998. The increase in gross margin percent primarily
reflects the impact of a $2.3 million (pretax) special non-recurring charge
related to the Company's whiteboard products in 1997, as well as increased
touchscreen product yields and improved manufacturing efficiencies in 1998.

  Research and Development. Research and development expenses for the fiscal
year ended December 31, 1998 increased over the corresponding period of 1997
by $2.9 million, or 37%, to $10.9 million. As a percentage of net sales,
research and development expenses increased from 6.2% in the fiscal year ended
December 31, 1997 to 7.6% in the fiscal year ended December 31, 1998. The
increase in spending both on an absolute dollar basis and as a percentage of
net sales reflects the initiation of a program to develop a next generation
capacitive product line with improved performance and cost savings over the
existing product line, as well as advancing its resistive technology The
Company expects that total research and development expenses will most likely
increase in the future on an absolute spending basis and as a percentage of
net sales primarily due to the research on the Company's core touchscreen
technology.

  Sales and Marketing. Sales and marketing expenses for the fiscal year ended
December 31, 1998 increased over the corresponding period of 1997 by $2.5
million, or 13%, to $21.2 million. As a percentage of net sales, sales and
marketing expenses increased slightly from 14.6% for the fiscal year ended
December 31, 1997 to 14.7% for the corresponding period of 1998. The increase
in absolute spending in 1998 was also the result of sales costs associated
with supporting large OEM customers and expanding the Company's Internet
presence, as well as the development of a remote sales information systems
sales program.

  General and Administrative. General and administrative expenses for the
fiscal year ended December 31, 1998 increased from the corresponding period of
1997 by $2.1 million, or 26%, to $10.0 million. As a percentage of net sales,
general and administrative expenses increased from 6.2% for the fiscal year
ended December 31, 1997 to 6.9% for the corresponding period of 1998,
primarily as a result of spending to improve systems supporting the Company's
infrastructure in the Information Technology and E-commerce areas and legal
expenses.

  Amortization of Intangible Assets. For the fiscal year ended December 31,
1998, operating expenses included $502,000 of amortization relating to various
acquisitions and purchases of technologies, as compared to $477,000 for the
corresponding period of 1997.

                                      15
<PAGE>

  Operating Income. Operating income for the fiscal year ended December 31,
1998 of $12.8 million represented an increase of $3.0 million, or 31%, over
the fiscal year ended December 31, 1997. This increase is primarily due to the
revenue increase discussed above and the absence of the previously discussed
special whiteboard restructuring charge of $2.3 million taken in 1997.

  Other Income, net. Other income in the fiscal year ended December 31, 1998
was $1.0 million as compared to $0.6 million for the corresponding period of
1997. Other income in the 1998 period included $1.5 million in interest
income, net of interest expenses, as compared to $1.4 million of net interest
income for the fiscal year ended December 31, 1997. Foreign exchange losses
were $340,000 in the fiscal year ended December 31, 1998, primarily due to
currency fluctuations in the Far East, as compared to a loss of $999,000 for
the corresponding period of 1997.

  Arbitration Costs. During 1997, the Company expensed a final payment
amounting to $595,000 in its international arbitration versus Nissha Printing
Company Ltd. (See Note 8 to Consolidated Financial Statements)

  Provision for Income Taxes. The Company's effective tax rate for the fiscal
years ended December 31, 1998 and 1997 was 32.0% and 34.2%, respectively. The
effective tax rates differed from the federal statutory rate of 34% primarily
as a result of the provision for state income taxes partially offset by the
benefit related to tax-exempt interest income.

  Geographic Segments. Domestic pre-tax income of $9.3 million represented an
increase of $1.8 million or 24% over 1997. This increase in pre-tax profit
primarily reflects the impact of the $2.3 million non-recurring charge taken
in 1997. International pretax income of $4.4 million represented an increase
of $2.2 million or 101% over the corresponding period of 1997 on the strength
of the previously discussed international sales increases and improved gross
margins.

Liquidity and Capital Resources

  As of December 31, 1999, the Company had net working capital of $46.8
million, including approximately $19.9 million in cash and marketable
securities. The Company reported a net cash flow from operating activities of
$1.3 million for the year ended December 31, 1999. Additionally, the Company
maintains a $7.5 million bank line of credit, including letters of credit, in
the U.S. and a $2.4 million bank line of credit in the U.K. As of December 31,
1999, the Company had $3.1 million outstanding under the U.S. line of credit
and $1.5 million outstanding under the U.K line of credit.

  The Company's capital expenditures were approximately $7.7 million in 1999.

  During 1999, the Board of Directors of the Company approved additional
extensions to a repurchase program of the Company's common stock, originally
approved in December 1997 and extended during 1998. Under the 1999 extensions,
the amount of common stock to be repurchased is not to exceed $13.0 million.
In the year ended December 31, 1999, the Company repurchased approximately
894,000 shares at an aggregate cost of $12.8 million, of which 168,000 shares
at an aggregate cost of $2.2 million relate to extensions approved in 1998.
These shares have been and will be used for the Company's stock option plans,
employee stock purchase plan and for other corporate purposes, possibly
including acquisitions.

  Pending operational needs, the Company has invested its cash in investment
grade, short term, interest-bearing securities. The Company believes that
these investments, together with anticipated cash flows from operations
pursuant to its current operating plan, will be sufficient to meet the
Company's working capital and capital expenditure requirements at least
through 2001. While the Company regularly evaluates acquisition candidates,
conducts preliminary discussions regarding acquisitions and may pursue
acquisition opportunities available to it, there can be no assurance that any
such acquisition will be made or, if made, whether such acquisition will be
financially successful.

                                      16
<PAGE>

Foreign Exchange Exposure

  Significant portions of the Company's operations are conducted in foreign
countries, including the United Kingdom of Great Britain, Germany, France,
Italy, Spain, Australia, Taiwan, Japan, Hong Kong and Korea. Exchange rate
fluctuations between the U.S. dollar and the currencies of these countries,
including various European currencies and the Australian dollar, result in
fluctuations in the amounts relating to foreign operations reported in the
Company's consolidated financial statements. In general, the Company's policy
is not to enter into derivative financial instruments or other financial
instruments to manage foreign currency exchange rate risk. The Company can
provide no assurances that it will not enter into such financial instruments
in the future.

Supply Exposure

  Although the Company generally uses standard parts for its product, certain
components, such as ASICs, topsheets and the coated glass used in the
production of touch sensors, are currently available only from a single
source. In the event that suppliers are unable to fulfill the Company's
requirements, the resulting interruption in production would have an adverse
impact on the Company's operating results. While the Company maintains some
inventory of ASICs, coated glass and other components, the inventory amounts
maintained are not sufficient to eliminate the potential impact of prolonged
supply interruptions. While the Company believes that there are other
companies that are capable of manufacturing these sole source components, the
inability to obtain sufficient components as required, or to develop
alternative sources if and when needed, would adversely affect the Company's
operating results.

Year 2000 Compliance

  During 1999 the Company completed its Year 2000 readiness program. In
connection with this program, the Company converted or upgraded, and tested,
all systems and products that had material Year 2000 compliance issues. The
Company has not segregated the cost of making these items compliant as the
related software conversion or upgrades were installed by existing employees
and consultants of the Company in conjunction with their normal duties, and
would have been purchased in the normal course of business.

  Subsequent to December 31, 1999, the Company has not experienced any
material Year 2000 transition issues. However, there can be no assurance that
a material customer or vendor will not experience a Year 2000 transition
issue, or that such transition issue will not have a material negative impact
on the Company's consolidated financial position, results of operations, or
cash flow.

                                      17
<PAGE>

Item 8. Financial Statements and Supplementary Data

1.Financial Statements

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
Report of Independent Public Accountants.............................    F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999.........    F-2
Consolidated Statements of Operations and Comprehensive Income for
 each of the three years in the period ended December 31, 1999.......    F-3
Consolidated Statements of Stockholders' Equity for each of the three
 years in the period ended December 31, 1999.........................    F-4
Consolidated Statements of Cash Flows for each of the three years in
 the period ended December 31, 1999..................................    F-5
Notes to Consolidated Financial Statements...........................    F-6
</TABLE>

                                       18
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MicroTouch Systems, Inc:

  We have audited the accompanying consolidated balance sheets of MicroTouch
Systems, Inc (a Massachusetts corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999 These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

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

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTouch
Systems, Inc and subsidiaries as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.

  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                          /s/ Arthur Andersen LLP
                                          -------------------------------------
                                          ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 26, 2000

                                      F-1
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents (Note 1)....................... $  5,471  $  4,329
  Marketable securities (Note 1)...........................   32,191    15,566
  Accounts receivable, net of allowances of $4,955 and
   $1,701 at December 31, 1998 and 1999, respectively......   23,265    30,387
  Inventories (Note 1).....................................   15,954    18,014
  Deferred income taxes (Note 4)...........................    6,837     4,854
  Prepaid expenses and other current assets................    1,217     1,177
                                                            --------  --------
    Total current assets...................................   84,935    74,327
Property and equipment, at cost (Note 1)
  Machinery and equipment..................................   16,070    23,361
  Furniture and fixtures...................................    1,560     1,930
  Leasehold improvements...................................    4,283     4,220
  Land and buildings.......................................    6,426     6,516
                                                            --------  --------
                                                              28,339    36,027
Less--Accumulated depreciation and amortization............   10,887    15,052
                                                            --------  --------
    Net property and equipment.............................   17,452    20,975
Other assets...............................................    1,958     1,802
                                                            --------  --------
Total assets............................................... $104,345  $ 97,104
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable (Note 2)................................... $  3,760  $  4,635
  Accounts payable.........................................    9,336    10,190
  Accrued payroll and related costs........................    3,011     2,763
  Accrued expenses.........................................    9,768     9,938
                                                            --------  --------
    Total current liabilities..............................   25,875    27,526
Long-term notes payable....................................      101        70
                                                            --------  --------
    Total liabilities......................................   25,976    27,596
Stockholders' equity (Note 3)
  Preferred stock, $.01 par value per share--500,000 shares
   authorized, none issued and outstanding at December 31,
   1998 and 1999...........................................       --        --
  Common stock, $.01 par value per share--20,000,000 shares
   authorized, 8,256,128 and 8,379,861 shares issued at
   December 31, 1998 and 1999, respectively................       82        84
  Additional paid-in capital...............................   62,613    64,107
  Treasury stock at cost, 959,576 and 1,853,276 shares at
   December 31, 1998 and 1999, respectively................  (13,503)  (26,292)
  Accumulated other comprehensive loss.....................   (1,382)   (1,621)
  Retained earnings........................................   30,559    33,230
                                                            --------  --------
    Total stockholders' equity.............................   78,369    69,508
                                                            --------  --------
  Total liabilities and stockholders' equity............... $104,345  $ 97,104
                                                            ========  ========
</TABLE>

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

                                      F-2
<PAGE>

                    MICROTOUCH SYSTEMS, INC AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Net sales (Notes 1 and 6)........................ $128,481  $144,370  $157,491
Cost of sales....................................   83,553    88,950   104,323
                                                  --------  --------  --------
    Gross profit.................................   44,928    55,420    53,168
Operating expenses:
  Research and development.......................    7,985    10,904    12,816
  Sales and marketing............................   18,765    21,235    20,862
  General and administrative.....................    7,944    10,012    11,225
  Amortization of intangibles....................      477       502       333
  Non-recurring charge...........................      --        --      1,950
                                                  --------  --------  --------
    Total operating expenses.....................   35,171    42,653    47,186
                                                  --------  --------  --------
      Operating income...........................    9,757    12,767     5,982
Other income, net................................      579     1,009     1,249
Arbitration/litigation costs (Note 8)............      595       --      3,303
                                                  --------  --------  --------
Income before income taxes.......................    9,741    13,776     3,928
Income taxes (Note 4)............................    3,330     4,408     1,257
                                                  --------  --------  --------
Net income....................................... $  6,411  $  9,368  $  2,671
                                                  ========  ========  ========
Earnings per share (Note 1):
  Basic.......................................... $   0.81  $   1.22  $   0.39
  Diluted........................................ $   0.77  $   1.20  $   0.38
Weighted average and dilutive potential common
 shares outstanding (Note 1):
  Basic..........................................    7,941     7,672     6,914
  Diluted........................................    8,349     7,815     7,065
Comprehensive income:
Net income....................................... $  6,411  $  9,368  $  2,671
Currency translation adjustment..................     (558)     (523)      (60)
Unrealized gain (loss) on marketable securities,
 net of tax expense (benefit) of $(10), $70 and
 $(84)...........................................      (21)      148      (179)
                                                  --------  --------  --------
Comprehensive income............................. $  5,832  $  8,993  $  2,432
                                                  ========  ========  ========
</TABLE>

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

                                      F-3
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                       Accumulated
                            Common Stock   Additional     Other                 Treasury Stock          Total
                          ----------------  Paid-in   Comprehensive Retained  --------------------  Stockholders'
                           Shares   Amount  Capital   Income (loss) Earnings    Shares     Amount      Equity
                          --------- ------ ---------- ------------- --------  ----------  --------  -------------
<S>                       <C>       <C>    <C>        <C>           <C>       <C>         <C>       <C>
Balance December 31,
 1996...................  8,220,623  $ 82   $60,096     $   (428)   $17,383     (536,140) $ (7,963)    $69,170
Exercise of stock
 options................                                             (2,551)     310,979     4,560       2,009
Employee stock purchase
 plan...................                         42                               28,112       416         458
Compensation expense
 related to common stock
 options................                         30                                                         30
Effect of exchange rate
 changes................                                    (558)                                         (558)
Tax benefit related to
 exercise of stock
 options and
 disqualifying
 dispositions...........                      1,795                                                      1,795
Unrealized loss on
 securities available
 for sale, net of tax...                                     (21)                                          (21)
Purchase of treasury
 stock..................                                                         (23,000)     (346)       (346)
Net income..............                                              6,411                              6,411
                          ---------  ----   -------     --------    -------   ----------  --------     -------
Balance December 31,
 1997...................  8,220,623    82    61,963       (1,007)    21,243     (220,049)   (3,333)     78,948
Exercise of stock
 options................     15,632             247                     (52)       8,725       111         306
Employee stock purchase
 plan...................     19,873             205                               15,048       227         432
Compensation expense
 related to common stock
 options................                        198                                                        198
Effect of exchange rate
 changes................                                    (523)                                         (523)
Unrealized gain on
 securities available
 for sale, net of tax...                                     148                                           148
Purchase of treasury
 stock..................                                                        (763,300)  (10,508)    (10,508)
Net income..............                                              9,368                              9,368
                          ---------  ----   -------     --------    -------   ----------  --------     -------
Balance December 31,
 1998...................  8,256,128    82    62,613       (1,382)    30,559     (959,576)  (13,503)     78,369
Exercise of stock
 options................     79,719     1       772                                                        773
Employee stock purchase
 plan...................     44,014     1       479                                                        480
Compensation expense
 related to common stock
 options................                         30                                                         30
Effect of exchange rate
 changes................                                     (60)                                          (60)
Tax benefit related to
 exercise of stock
 options and
 disqualifying
 dispositions...........                        213                                                        213
Unrealized loss on
 securities available
 for sale, net of tax...                                    (179)                                         (179)
Purchase of treasury
 stock..................                                                        (893,700)  (12,789)    (12,789)
Net income..............                                              2,671                              2,671
                          ---------  ----   -------     --------    -------   ----------  --------     -------
Balance December 31,
 1999...................  8,379,861  $ 84   $64,107     $ (1,621)   $33,230   (1,853,276) $(26,292)    $69,508
                          =========  ====   =======     ========    =======   ==========  ========     =======
</TABLE>

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

                                      F-4
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
 Net income...................................... $  6,411  $  9,368  $  2,671
 Adjustments to reconcile net income to net cash
  provided by operating activities--
  Depreciation and amortization..................    3,116     5,870     4,959
  Compensation expense related to common stock
   options.......................................       30       198        30
  Tax benefit from exercise of stock options and
   disqualifying dispositions....................    1,795        --       213
  (Increase) decrease in assets--
   Accounts receivable...........................   (1,372)   (5,917)   (7,122)
   Inventories...................................   (3,998)    3,121    (2,060)
   Prepaid expenses and other current assets.....      (52)     (106)       40
   Deferred income taxes.........................   (1,364)       32     1,983
   Other assets..................................      750       (60)     (177)
  Increase (decrease) in liabilities--
   Accounts payable..............................   (1,177)    3,487       854
   Accrued expenses..............................    1,188     2,739       (78)
                                                  --------  --------  --------
    Net cash provided by operating activities....    5,327    18,732     1,313
Cash flows from investing activities:
 Purchase of property and equipment, net.........   (8,551)   (9,540)   (7,688)
 Sale and maturity of marketable securities......   16,287    12,240    17,372
 Purchase of marketable securities...............  (14,967)  (19,006)   (1,387)
                                                  --------  --------  --------
    Net cash provided by (used in) investing
     activities..................................   (7,231)  (16,306)    8,297
Cash flows from financing activities:
 Exercise of stock options and sale of common
  stock, net.....................................    2,467       738     1,253
 Increase in notes payable.......................       --     3,861       844
 Purchase of treasury stock......................     (346)  (10,508)  (12,789)
                                                  --------  --------  --------
    Net cash provided by (used in) financing
     activities..................................    2,121    (5,909)  (10,692)
Effect of exchange rates on cash.................     (558)     (523)      (60)
                                                  --------  --------  --------
Net decrease in cash and cash equivalents........     (341)   (4,006)   (1,142)
Cash and cash equivalents, beginning of period...    9,818     9,477     5,471
                                                  --------  --------  --------
Cash and cash equivalents, end of period......... $  9,477  $  5,471  $  4,329
                                                  ========  ========  ========
Supplemental disclosures of cash flow
 information:
 Interest paid................................... $     30  $    135  $    136
                                                  ========  ========  ========
 Income taxes paid............................... $  3,369  $  1,929  $  4,201
                                                  ========  ========  ========
</TABLE>

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

                                      F-5
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1) Summary of Significant Accounting Policies

 a) Nature of the Business

  MicroTouch Systems, Inc. develops, manufactures and sells touch and pen
input systems, including touch sensitive screens, digitizers for pen
computers, ThruGlass products, and electronic P.C whiteboards.

 b) Principles of Consolidation

  The accompanying consolidated financial statements include the accounts of
MicroTouch Systems, Inc. and its wholly owned subsidiaries (together, the
"Company"). All significant intercompany accounts, transactions and profits
have been eliminated.

 c) Earnings per Share

  In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No 128, Earnings Per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed using the
weighted average number of common shares outstanding during the year and
dilutive potential common shares. Dilutive potential common shares consist of
stock options and are calculated using the treasury stock method. Included in
diluted earnings per share are 408,000, 143,000 and 151,000 dilutive potential
common shares for 1997, 1998 and 1999, respectively. Excluded from diluted
earnings per share were options to purchase 12,000, 585,000 and 943,000 shares
in 1997, 1998 and 1999, respectively. These shares were excluded as the
exercise price was greater than the average market price of the common shares
during the respective years.

 d) Cash and Cash Equivalents

  The Company held no liquid investments with original maturities of less than
90 days at December 31, 1998 or December 31, 1999. Cash equivalents are stated
at cost, which approximates market value.

 e) Marketable Securities

  Marketable securities consist of investment-grade, federal tax-exempt
municipal bonds. The aggregate market value, cost basis, and unrealized gains
and losses of securities available for sale, by major security type, as of
December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                           Gross      Gross
                                   Market                Unrealized Unrealized
                                    Value    Cost Basis    Gains      Losses
                                 ----------- ----------- ---------- ----------
<S>                              <C>         <C>         <C>        <C>
Tax Exempt Securities at
 December 31, 1998.............. $32,191,000 $31,850,000  $344,000   $  3,000
                                 =========== ===========  ========   ========
Tax Exempt Securities at
 December 31, 1999.............. $15,566,000 $15,710,000  $  7,000   $151,000
                                 =========== ===========  ========   ========
</TABLE>

  Securities available for sale in the accompanying balance sheet at December
31, 1998 and 1999 include $7,782,000 and $4,454,000 respectively, with
contractual maturities of one year or less, $23,346,000 and $10,158,000
respectively, with contractual maturities of one through five years and
$1,063,000 and $954,000 respectively, with maturities of more than five years.
Expected maturities may differ from contractual maturities as a result of the
Company's intent to sell these securities prior to maturity and as a result of
call options that enable the issuer to redeem these securities at an earlier
date.

                                      F-6
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 f) Inventories

  Inventories, consisting of material, material overhead, labor and
manufacturing overhead, are stated at the lower of cost (first-in, first-out)
or market and consist of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                         -----------------------
                                                            1998        1999
                                                         ----------- -----------
      <S>                                                <C>         <C>
      Raw materials..................................... $ 6,286,000 $ 5,231,000
      Work-in-process...................................   1,167,000   3,608,000
      Finished goods....................................   8,501,000   9,175,000
                                                         ----------- -----------
                                                         $15,954,000 $18,014,000
                                                         =========== ===========
</TABLE>

 g) Property and Equipment

  The Company provides for depreciation and amortization, using the straight-
line method, through charges to operations in amounts that allocate the cost
of property and equipment over their estimated useful lives. The estimated
useful life for property and equipment is 3 to 7 years except for a building
owned by the Company, the life of which is 25 years.

  Maintenance and repairs are charged to operations as incurred. When property
and equipment is sold or otherwise disposed of, the asset cost and accumulated
depreciation are removed from the accounts, and the resulting gain or loss, if
any, is included in the results of operations.

 h) Revenue Recognition

  The Company recognizes product revenue upon shipment. Service revenues are
recognized as the services are provided. The Company provides allowances for
estimated sales returns and bad debts and provides for the estimated cost of
warranty at the time of product shipment.

 i) Foreign Currency Translation

  The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year end. Revenues and
expenses are translated using exchange rates in effect during the year. Gains
and losses from foreign currency translation are credited or charged to
cumulative translation adjustment included in stockholders' equity in the
accompanying consolidated balance sheets. Gains and losses from foreign
currency transactions are included in other income and amounted to a loss of
approximately $999,000 for the year ended December 31,1997, a loss of
approximately $340,000 for the year ended December 31, 1998 and a gain of
approximately $135,000 for the year ended December 31, 1999.

 j) Use of Estimates in the Preparation of Financial Statements

  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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates.

 k) Disclosures About Fair Value of Financial Instruments

  SFAS No 107, Disclosures About Fair Value of Financial Instruments, requires
that disclosure be made of estimates of the fair value of each class of
financial instrument. Financial instruments held by the Company as of December
31, 1999 consist primarily of cash equivalents and marketable securities,
short-term trade receivables, payables and notes payable for which the
carrying amounts approximate fair values.


                                      F-7
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 l) Capitalized Software Development Costs

  Software development costs for new software and for enhancements to existing
software are expensed as incurred prior to the establishment of technological
feasibility and subsequent to general release of the product. Otherwise
software development costs are capitalized and amortized over the estimated
life of the product. There were no capitalized software costs as of December
31, 1998 and 1999.

 m) Other Assets

  The Company periodically assesses the realizability of its long-lived assets
in accordance with SFAS No 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. At each balance sheet
date, the Company evaluates the realizability of goodwill based on
expectations of non-discounted future cash flows for each subsidiary having a
material goodwill balance. If the sum of the expected non-discounted future
cash flow is less than the carrying amount of goodwill, the Company would
recognize an impairment loss.

 n) Comprehensive Income

  Effective January 1, 1998 the Company adopted the provisions of SFAS No 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. Comprehensive income includes all non-owner related changes in a
company's equity including, among other things, foreign currency translation
adjustments and unrealized gains and losses on marketable securities
classified as available-for-sale. Because cumulative translation adjustments
are considered a component of permanently invested unremitted earnings of
subsidiaries outside of the United States, no taxes are provided on such
amounts.

 o) Recent Accounting Pronouncements

  In March 1998, The American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
computer software costs associated with internal use software to be expensed
as incurred until certain capitalization criteria are met. The adoption of SOP
98-1 did not have a material impact on the Company's financial statements.

  In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires all costs associated with pre-opening, pre-
operating and organization activities to be expensed as incurred. The Company
adopted SOP 98-5 effective January 1, 1999. The adoption of SOP 98-5 did not
have a material impact on the Company's financial statements.

  In June 1998, the FASB issued SFAS No 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No 137, issued in June 1999, deferred the effective date of SFAS No 133 to
fiscal years beginning after June 15, 2000.

2) Line of Credit

  The Company has demand bank lines of credit in the U.S totaling $7,500,000,
including letters of credit, under which the Company may borrow on an
unsecured basis at the bank's prime rate. There was a balance of $2,264,000
outstanding under these lines at December 31, 1998 and $3,105,000 outstanding
at December 31, 1999.

                                      F-8
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The Company has a demand bank line of credit in the United Kingdom in the
amount of approximately $2,400,000 under which the Company may borrow on a
secured basis at a negotiated rate. There was a balance of $1,500,000
outstanding under this line at December 31, 1998 and $1,530,000 outstanding at
December 31, 1999.

3) Stockholders' Equity

 a) Equity Incentive Plans

  In 1992, the stockholders of the Company approved the 1992 Equity Incentive
Plan (the 1992 Plan) which replaced the Company's 1983 Incentive Stock Option
Plan (the 1983 Plan). In June 1997 and 1998, the 1992 Plan was amended by the
stockholders of the Company. The 1992 Plan, as amended, authorizes the grant
of stock options (incentive and non-qualified), stock appreciation rights
(SARs), performance shares or restricted stock (individually and collectively,
the Awards) for the purchase of an aggregate of 2,750,000 shares of common
stock, including shares that are issuable pursuant to outstanding stock
options under the 1983 Plan. Incentive stock options will be granted at not
less than the fair market value at the date of grant. Non-qualified stock
options will be granted at not less than 50% of the fair market value at the
date of grant. Options granted on or before July 31, 1998 vest ratably over
four years. Options granted after July 31, 1998 vest over three years at a
rate of 20% in the first year and 40% in each of the second and third years.
At December 31, 1999, options to purchase 1,472,727 shares of common stock
were outstanding and 341,818 shares of common stock were available for future
grants under the 1992 Plan. As of December 31, 1999, no SARs, performance
shares or other restricted stock have been awarded under the 1992 Plan.

  In 1998, the Board of Directors adopted a new stock option plan (the 1998
Plan). The 1998 Plan authorizes the grant of non-qualified stock options (the
Awards) for the purchase of an aggregate of 1,000,000 shares of common stock.
Options will be granted at not less than the fair market value at the date of
grant and generally vest over three years. At December 31, 1999, options to
purchase 266,800 shares of common stock were outstanding and 733,200 shares of
common stock were available for future grants under the 1998 Plan.

  The Board of Directors has appointed the Compensation Committee (the
Committee) to administer the 1992 Plan and the 1998 Plan. The Committee
generally selects the individuals who will receive the Awards, and the terms
and conditions of those Awards.

  In 1993, options to purchase 200,000 shares were granted to the Company's
Chairman of the Board of Directors under a 10 year performance incentive
agreement pursuant to the 1992 Plan. As of December 31, 1999, 160,000 shares
have been exercised and the remaining 40,000 shares, which are included in the
1992 Plan above, were exercisable under this grant.

  In 1994, the Board of Directors adopted the 1994 Director Stock Option Plan
(the 1994 Plan) which was approved by the stockholders at the 1995 annual
stockholders' meeting The 1994 Plan authorizes the grant of non-qualified
stock options to all directors of the Company who are not employees of the
Company or any of its subsidiaries. An aggregate of 200,000 shares of common
stock have been authorized for issuance under the 1994 Plan. The Board of
Directors administers the 1994 Plan. Under the terms of the 1994 Plan, as
amended, each non-employee director, upon initial election to the Board of
Directors, shall receive options to purchase 10,000 shares of common stock. In
lieu of grants upon election, current directors received initial grants upon
the effective date of the adoption of the 1994 Plan. Immediately following the
annual meeting of the stockholders each year, each non-employee director of
the Company continuing in office shall automatically be granted options to
purchase 5,000 shares of common stock. Options will be granted at not less
than fair market value Options granted before June 24, 1998 generally vested
over two years. Options granted on or after June 24, 1998 vest over three
years. At December 31, 1999, options to purchase 102,500 shares of common
stock were outstanding and 62,500 shares of common stock were available for
future grants under the 1994 Plan.

                                      F-9
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following is a summary of the stock option activity for the years ended
December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                                      Number of  Exercise Price
                                                       Shares      per Share
                                                      ---------  --------------
<S>                                                   <C>        <C>
Outstanding at December 31, 1996..................... 1,169,200  $1.75 - $25.75
  Granted............................................   385,307  15.75 -  31.50
  Terminated.........................................   (60,043)  6.19 -  26.00
  Exercised..........................................  (310,979)  1.75 -  17.81
                                                      ---------
Outstanding at December 31, 1997..................... 1,183,485   1.75 -  31.50
  Granted............................................   516,745  11.81 -  19.25
  Terminated.........................................  (109,873)  7.75 -  31.50
  Exercised..........................................   (24,357)  6.19 -  16.89
                                                      ---------
Outstanding at December 31, 1998..................... 1,566,000   1.75 -  31.50
  Granted............................................   443,350  11.88 -  17.13
  Terminated.........................................   (87,604) 12.81 -  31.50
  Exercised..........................................   (79,719)  1.75 -  15.75
                                                      ---------
Outstanding at December 31, 1999..................... 1,842,027  $1.75 - $31.50
                                                      =========
</TABLE>

  The following is a summary of options outstanding and exercisable at
December 31, 1999:

<TABLE>
<CAPTION>
                             Options Outstanding                  Options Exercisable
                --------------------------------------------- ----------------------------
                  Number                     Weighted Average   Number
   Range of     Outstanding Weighted Average    Remaining     Exercisable Weighted Average
ExercisePrices  At 12/31/99  Exercise Price  Contractual Life At 12/31/99  Exercise Price
--------------  ----------- ---------------- ---------------- ----------- ----------------
<S>             <C>         <C>              <C>              <C>         <C>
$1.75
 -
 $12.81            528,900       $ 9.77            3.9          218,425        $ 5.50
$12.82
 -
 $15.13            384,987        14.86            5.7          201,280         14.87
$15.25
 -
 $15.56            394,946        15.51            5.0           89,616         15.51
$15.63
 -
 $19.75            370,844        18.32            6.3          176,682         18.06
$20.56
 -
 $31.50            162,350        23.64            6.8          104,176         23.49
                 ---------                                      -------
                 1,842,027       $15.01            5.3          790,179        $14.20
                 =========                                      =======
</TABLE>

  The Company accounts for stock options at intrinsic value with disclosure of
the effects of fair value accounting on net income and earnings per share on a
pro forma basis. Had compensation costs for the stock option plans been
determined using the fair value method, the Company's pro forma net loss,
basic and diluted loss per share would have been $0.5 million, $.07 and $.07
respectively for the fiscal year ended December 31, 1999. The Company's pro
forma net income, basic and diluted earnings per share would have been $7.0
million, $.91 and $.89 respectively for the fiscal year ended December 31,
1998 and $3.9 million, $.49 and $.47, respectively for the fiscal year ended
December 31, 1997 Pro forma net income and earnings per share have not been
calculated for options granted prior to January 1, 1995. Pro forma
compensation cost may not be representative of that to be expected in future
years.

  The weighted average fair values of all options granted in 1997, 1998 and
1999 were $9.79, $7.22 and $7.65, respectively. The values were estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1998 and 1999,
respectively: risk free interest rate of 6.3%, 5.7% and 5.1%, expected
dividend yields of zero for all periods, expected option lives of 5 years for
all options granted in 1997 and 1998 and 4 years for options granted in 1999,
and expected volatility of 69%, 66% and 64%.

                                     F-10
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 b) Shareholder Rights Plan

  In January 1996, the Company adopted a Shareholder Rights Plan and declared
a dividend distribution of one right for each outstanding share of the
Company's common stock to stockholders of record on January 19, 1996 and
authorized the issuance of one right for each share of the Company's common
stock issued between January 19, 1996 and the date on which the right becomes
separable from the common stock. Each right entitles the shareholders to buy
from the Company 1/100 of a share of Series A Junior Participating Preferred
Stock, $.10 par value, at a purchase price of $75 per right. The rights will
be exercisable or separable from the common stock until ten business days
after a party acquires beneficial ownership of 20% or more of the Company's
common stock or announces a tender offer for at least 20% of its common shares
outstanding.

  The rights are subject to adjustment and may be redeemed by the Company at a
price of $0.01 per right at any time until the tenth day following the point
at which they become exercisable. In the event that the Company is acquired in
a merger or other business combination transaction, each right, other than
those held by the acquiring party, will entitle its holders to purchase an
amount of shares of the Company's common stock which equals the exercise price
of the rights divided by one-half of the current market price of the common
stock. The rights will expire, unless earlier redeemed or exchanged, on
January 19, 2006, or earlier in certain circumstances.

4) Income Taxes

  The Company accounts for income taxes in accordance with SFAS No 109,
"Accounting for Income Taxes." Provisions for income taxes recognize the tax
effect of all revenue and expense transactions as well as any changes during
the period in deferred tax assets and liabilities. The effects of changes in
tax rates and laws on deferred tax assets and liabilities are reflected in net
income in the period in which such changes are enacted.

  The components of domestic and foreign income before the provision for
income taxes are as follows:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                            ------------------------------------
                                               1997         1998        1999
                                            ----------- ------------ -----------
      <S>                                   <C>         <C>          <C>
      Domestic............................. $ 7,531,000 $  9,336,000 $   527,000
      Foreign..............................   2,210,000    4,440,000   3,401,000
                                            ----------- ------------ -----------
        Total.............................. $ 9,741,000 $ 13,776,000 $ 3,928,000
                                            =========== ============ ===========
</TABLE>

  The provision for federal, state and foreign income taxes consists of the
following:

<TABLE>
<CAPTION>
                                   1997                               1998                               1999
                      --------------------------------- --------------------------------- -------------------------------------
                        Federal      State     Foreign    Federal     State     Foreign     Federal       State       Foreign
                      -----------  ---------  --------- ----------- --------- ----------- ------------  ----------  -----------
<S>                   <C>          <C>        <C>       <C>         <C>       <C>         <C>           <C>         <C>
Current.........      $ 2,903,000  $ 862,000  $ 929,000 $ 2,449,000 $ 247,000 $ 1,680,000 $ (1,567,000) $ (229,000) $ 1,070,000
Deferred/(Prepaid)..   (1,052,000)  (312,000)        --      20,000    12,000          --    1,706,000     277,000           --
                      -----------  ---------  --------- ----------- --------- ----------- ------------  ----------  -----------
                      $ 1,851,000  $ 550,000  $ 929,000 $ 2,469,000 $ 259,000 $ 1,680,000 $    139,000  $   48,000  $ 1,070,000
                      ===========  =========  ========= =========== ========= =========== ============  ==========  ===========
</TABLE>

  Significant items making up net deferred tax assets as of December 31, 1998
and 1999 are as follows:

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                           1998        1999
                                                        ----------- -----------
      <S>                                               <C>         <C>
      Reserves for inventories......................... $ 1,410,000 $   531,000
      Reserves for accounts receivable.................   1,569,000     430,000
      Reserves for warranty............................     790,000     431,000
      Other reserves and accruals......................   3,068,000   3,462,000
                                                        ----------- -----------
        Net deferred tax assets........................ $ 6,837,000 $ 4,854,000
                                                        =========== ===========
</TABLE>


                                     F-11
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The amount computed by applying the federal statutory income tax rate of 34%
to income before provision for income taxes differs from the Company's
provision for income taxes due to the following:

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                        -------------------------------------
                                           1997         1998         1999
                                        -----------  -----------  -----------
      <S>                               <C>          <C>          <C>
      Provision at federal statutory
       rate............................ $ 3,312,000  $ 4,684,000  $ 1,336,000
      State taxes, net of federal
       benefit.........................     479,000      171,000       31,000
      Foreign operating losses not
       (benefited).....................     135,000      138,000     (262,000)
      Tax-exempt interest benefit......    (392,000)    (436,000)    (304,000)
      Foreign sales corporation
       benefit.........................    (551,000)         --      (128,000)
      Other, net.......................     347,000     (149,000)     584,000
                                        -----------  -----------  -----------
                                        $ 3,330,000  $ 4,408,000  $ 1,257,000
                                        ===========  ===========  ===========
</TABLE>

5) Commitments

 a) Royalty Agreement

  The Company is a party to a licensing agreement in which it has acquired the
rights to various touch screen products and technologies. The licensing
agreement provides for the payment of royalties based on annual product sales
and sublicensing revenue and includes minimum royalty payment provisions. The
agreement will be in effect until the expiration of the last-to-expire patent
licensed under this agreement, which is in 2005.

 b) Leased Facilities

  The Company conducts its operations primarily in leased facilities under
operating lease arrangements expiring on various dates through September 2006.
Total rent expense under all leases for the years ended December 31, 1997,
1998 and 1999 was approximately $1,889,000, $1,543,000 and $2,224,000,
respectively.

  Future minimum lease payments for all noncancelable leases are as follows:

<TABLE>
<CAPTION>
Fiscal Year Ending                                                     Amount
------------------                                                   -----------
<S>                                                                  <C>
2000................................................................ $ 1,655,000
2001................................................................   1,505,000
2002................................................................   1,378,000
2003................................................................     708,000
2004................................................................     398,000
2005 and thereafter.................................................     620,000
                                                                     -----------
  Total............................................................. $ 6,264,000
                                                                     ===========
</TABLE>

 c) Post-retirement Benefits

  The Company does not offer any post-retirement or post-employment benefits
to its employees.

6) Segment Information

  Effective January 1, 1998, the Company adopted SFAS No 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No 131
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders It also establishes

                                     F-12
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

standards for related disclosures about products and services, geographic
areas, and major customers. The Company operates in one industry segment
consisting of the development, manufacture and sale of touch sensitive input
systems. The Company's technologies are managed as one segment, or one
strategic unit, because it offers similar products in similar markets and the
factors determining strategic decisions are comparable for all products and
markets.

  Geographic area information for the years ended December 31, 1997, 1998 and
1999 is as follows:

<TABLE>
<CAPTION>
                                      United Kingdom
                                            of           Other
                           Domestic   Great Britain  International Consolidated
                         ------------ -------------- ------------- -------------
<S>                      <C>          <C>            <C>           <C>
Year Ended December 31,
 1997
  Net sales............. $ 74,555,000  $ 35,011,000  $ 18,915,000  $ 128,481,000
  Income (loss) before
   provision for income
   taxes................    7,531,000      (211,000)    2,421,000      9,741,000
  Identifiable assets...   71,649,000    16,235,000     6,953,000     94,837,000
Year Ended December 31,
 1998
  Net sales............. $ 75,511,000  $ 50,108,000  $ 18,751,000  $ 144,370,000
  Income before
   provision for income
   taxes................    9,336,000     4,119,000       321,000     13,776,000
  Identifiable assets...   78,065,000    14,984,000    11,296,000    104,345,000
Year Ended December 31,
 1999
  Net sales............. $ 84,544,000  $ 44,617,000  $ 28,330,000  $ 157,491,000
  Income before
   provision for income
   taxes................      527,000       909,000     2,492,000      3,928,000
  Identifiable assets...   63,786,000    15,468,000    17,850,000     97,104,000
</TABLE>

  Intercompany transfers to the Company's foreign subsidiaries are transacted
at prices intended to allow the subsidiaries' earnings to be comparable to
unaffiliated distributors. Sales to unaffiliated customers outside the United
States, including U.S export sales, were approximately $57,409,000 in 1997,
$71,351,000 in 1998, and $75,952,000 in 1999, which represented 45%, 49% and
48% of net sales, respectively.

  No single customer represented more than 10% of total sales during the years
ended December 31, 1998 or 1999.

7) Retirement Savings Plan

  The Company has a 401(k) employee savings plan established in 1993 covering
substantially all employees. Matching company contributions are at the
discretion of the Board of Directors. Effective in 1998, the Board authorized
matching contributions up to $900 of participants' contributions. Company
contributions and other expenses of the Plan amounted to $156,000 in 1997,
$306,000 in 1998 and $306,000 in 1999.

8) Legal Proceedings

  The Company had been involved in an international arbitration entitled
MicroTouch Systems, Inc v Nissha Printing Co Ltd., ("Nissha") which was under
the auspices of the International Chamber of Commerce ("ICC"). The case was
based on the Company's claims that Nissha breached noncompetition provisions
and other terms of a distribution agreement between the Company and Nissha.

  In January 1997, the Company was informed that while it had won the case
based on the merits of its claims, any recovery of damages was time barred
under the terms of the original agreement between the two parties in the
dispute. As a result, the Company was required to pay a portion of Nissha's
fees and costs related to the

                                     F-13
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

arbitration, in the amount of $595,000. The Company expensed these fees and
costs awarded to Nissha as a part of its second quarter 1997 financial
results. This payment completed the Company's involvement in the matter.

  The Company is a defendant in a case entitled Behne v MicroTouch Systems,
Inc., in the United States District Court in the Northern District of
California. The case arose from claims by Ms Behne, a former employee of
MicroTouch, that the Company had discriminated against her during her
employment at the Company. In March 1999, a jury found the Company not liable
on the discrimination and retaliation claims, but awarded the plaintiff
approximately $2,600,000 in compensatory and punitive damages under a related
misrepresentation claim. While the matter continues under the appeals process,
the Company has established a reserve for the full amount of the initial jury
judgement, as well as associated legal fees, in the amount of $3,303,000, of
which approximately $2,900,000 remained in the reserve at December 31, 1999.
The Company continues to believe that the claims are without merit but no
assurances can be given as to the outcome of this legal matter during the
appeal process.

  The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial position or results of operations of the Company.

9) Non-recurring Charge

  During the fourth quarter of 1999, the Company committed to a plan to
dispose of its Factura kiosk business. As a result, the Company recorded a
pre-tax non-recurring charge of $1,950,000 in the fourth quarter of 1999. On
January 18, 2000, the Company completed the sale of certain of the assets of
the Factura division to Factura Corporation, a new company partially owned by
former management of the division. As a result of this transaction, the
Company received cash and promissory notes in the approximate amount of
$400,000 and will receive certain lease payments over a 5-year period. The
Company may also receive additional payments based upon the buyer achieving
certain specified revenue levels over the next five years.

  The non-recurring charge includes (i) $43,000 associated with personnel
reductions of approximately 12 positions at the Factura division prior to the
sale, (ii) $417,000 associated with estimated lease costs for the Factura
facility subsequent to the sale date (net of estimated sublease income), (iii)
$210,000 associated with legal and other exit costs, and (iv) $1,280,000
associated with a loss on the sale of the non-cash assets of the Factura
division. No amounts had been paid as of December 31, 1999.

  Included in the consolidated results of operations for 1997, 1998 and 1999
are Factura sales and operating income, respectively, of $7.7 million and
$80,000 in 1997, and Factura sales and operating losses, respectively, of $6.9
million and $856,000 in 1998 and $4.4 million and $1.5 million in 1999. The
loss on the sale consists primarily of the writedown to fair value of certain
fixed assets and goodwill.

                                     F-14
<PAGE>

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10) Quarterly Results (Unaudited)

  Financial results by quarter for 1998 and 1999 are summarized below (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                       1998
                                        ------------------------------------
                                         First     Second   Third    Fourth
                                        Quarter   Quarter  Quarter  Quarter
                                        --------  -------- -------- --------
<S>                                     <C>       <C>      <C>      <C>
Net Sales.............................. $ 35,727  $ 37,125 $ 34,948 $ 36,570
Gross Profit...........................   13,043    14,336   13,595   14,446 (a)
Net Income.............................    2,270     2,259    2,341    2,498
Diluted Earnings Per Share............. $   0.28  $   0.28 $   0.30 $   0.33
<CAPTION>
                                                       1999
                                        ------------------------------------
                                         First     Second   Third    Fourth
                                        Quarter   Quarter  Quarter  Quarter
                                        --------  -------- -------- --------
<S>                                     <C>       <C>      <C>      <C>
Net Sales.............................. $ 36,728  $ 41,044 $ 38,552 $ 41,167
Gross Profit...........................   13,638    14,832   13,502   11,196
Net Income (Loss)......................     (277)    2,097    2,167   (1,316)
Diluted Earnings (Loss) Per Share...... $  (0.04) $   0.30 $   0.31 $  (0.20)
</TABLE>
--------
(a) Certain reclassifications have been made to the quarterly 1998 consolidated
    statements of operations to conform to the full year 1998 presentation.

                                      F-15
<PAGE>

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures

  None.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

  The sections entitled "Nomination and Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" contained in the registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 30, 2000, are incorporated herein by reference.

Item 11. Executive Compensation

  The section entitled "Executive Compensation" contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission by April 30, 2000, is incorporated herein
by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The section entitled "Security Ownership of Officers, Directors and
Principal Stockholders" contained in the Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission by April 30, 2000, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

  None.

                                    PART IV

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

  The following documents are filed as a part of this Report:

  (a)(1) Index to Consolidated Financial Statements

  The following consolidated financial statements of MicroTouch Systems, Inc.
and subsidiaries are included pursuant to Item 8:

<TABLE>
<CAPTION>
                                                                       Page in
                                                                       Form 10K
                                                                       --------
<S>                                                                    <C>
Report of Independent Public Accountants.............................    F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999.........    F-2
Consolidated Statements of Operations and Comprehensive Income for
 each of the three years in the period ended December 31, 1999.......    F-3
Consolidated Statements of Stockholders' Equity for each of the three
 years in the period ended December 31, 1999.........................    F-4
Consolidated Statements of Cash Flows for each of the three years in
 the period ended December 31, 1999..................................    F-5
Notes to Consolidated Financial Statements...........................    F-6
</TABLE>

                                     II-1
<PAGE>

  (a)(2) Index to Consolidated Financial Statement Schedules

  The following consolidated financial statement schedules of MicroTouch
Systems, Inc. and subsidiaries are included pursuant to Item 8:

  Schedule II Valuation and Qualifying Accounts for each of the three years
   in the period ended December 31, 1999

  Schedules not listed above have been omitted because they are not
applicable, not required or the information required to be set forth therein
is included in the consolidated financial statements or notes thereto.

  (b) The Company filed no current reports on Form 8-K during the quarter
ended December 31, 1999.

  (c) Exhibits

<TABLE>
   <C>   <S>
    3.1  Restated Articles of Organization, as amended to date (5)

    3.2  Amended and Restated By-laws (1)

    4.1  Shareholder Rights Agreement (5)

   10.1  1992 Equity Incentive Plan (1) (4)

   10.7  Lease Agreement between the Company and Griffin Brook Park Associates
         Joint Venture dated November 6, 1992 (2)

   10.9  Money Market Note dated August 29, 1994 (3)

   10.10 Purchase Agreement between the Company and Griffin Brook Two
         Associates Joint Venture dated August 2, 1995 (5)

   10.11 1994 Directors Stock Option Plan (4) (5)

   10.12 1995 Employee Stock Purchase Plan (4) (5)

   10.13 1998 Employee and Consultant Non-Qualified Stock Option Plan (6)

   10.14 Letter Agreement with Barclays Bank PLC dated April 7, 1998. (6)

   10.15 Letter Agreement with Fleet National Bank dated October 20, 1999.
         Filed herewith.

   21    Subsidiaries of the Registrant.

   23    Consent of Independent Public Accountants. Filed herewith.

   24    Power of Attorney (included on signature page).

   27    Financial Data Schedule. Filed herewith.
</TABLE>
--------
(1) Filed as an exhibit to a Registration Statement on Form S-1 filed on June
    26, 1992 (Registration No 33-47874) and incorporated herein by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Form 10-Q filed for the quarter ended September 30,
    1994 and incorporated herein by reference.
(4) Indicates management contracts or compensatory plans in which the
    executive officers or directors of the Company participate.
(5) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1998 and incorporated herein by reference.

                                     II-2
<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.

                                          MICROTOUCH SYSTEMS, INC.

                                                /s/ D. Westervelt Davis
                                          By: _________________________________
                                                    D. Westervelt Davis
                                                 President, Chief Executive
                                                    Officer and Director
                                                     February 28, 2000


  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Geoffrey P Clear and William T Whelan, and each
of them his true and lawful attorneys-in-fact and agents, each acting alone,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10K, including amendments, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, and hereby
ratifies and confirms all his said attorneys-in-fact and agents, each acting
alone, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.

  Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ James D. Logan             Chairman of the Board of    February 28, 2000
______________________________________  Directors
            James D. Logan

     /s/ D. Westervelt Davis           President, Chief Executive  February 28, 2000
______________________________________  Officer and Director
         D. Westervelt Davis

      /s/ Geoffrey P. Clear            Vice President, Finance     February 28, 2000
______________________________________  and Administration, Chief
          Geoffrey P. Clear             Financial Officer and
                                        Treasurer

    /s/ Edward J. Stewart III          Director                    February 28, 2000
______________________________________
        Edward J. Stewart III

        /s/ Frank Manning              Director                    February 28, 2000
______________________________________
            Frank Manning

         /s/ Peter Brumme              Director                    February 28, 2000
______________________________________
             Peter Brumme
</TABLE>

                                     II-3
<PAGE>

                                                                     SCHEDULE II

                   MICROTOUCH SYSTEMS, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

                             (Amounts in thousands)

<TABLE>
<CAPTION>
                         Balance at Charged to                          Balance at
                         Beginning   Cost and  Charged to   Returns/      End of
                         of Period   Expense     Sales    Write-offs(a)   Period
                         ---------- ---------- ---------- ------------- ----------
<S>                      <C>        <C>        <C>        <C>           <C>
Allowance for Doubtful
 Accounts and Sales
 Returns
Year Ended December 31,
 1997...................  $ 3,940     $ 127     $ 1,249     $   (147)    $ 5,169
Year Ended December 31,
 1998...................  $ 5,169     $ 529     $   305     $ (1,048)    $ 4,955
Year Ended December 31,
 1999...................  $ 4,955     $ 427     $   165     $ (3,846)    $ 1,701
</TABLE>
--------
(a) Effective January 1, 1997, the Company changed its accounting procedures to
    allow the value of product returns to be offset as a credit directly to
    sales, rather than charged against the sales return allowance. The actual
    value of product returns was $4.5 million, $4.9 million and $5.6 million
    for 1997, 1998 and 1999, respectively.
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
 <C>   <S>
  3.1  Restated Articles of Organization as amended to date.(5)

  3.2  Amended and Restated By-laws.(1)

  4.1  Shareholder Rights Agreement.(5)

 10.1  1992 Equity Incentive Plan.(1)(4)

 10.5  License Agreement between the Company, Peptek, Inc and Mr. Jim Zeeger
       dated July 1, 1988.(1)

 10.7  Lease Agreement between the Company and Griffin Brook Park Associates
       Joint Venture dated November 6, 1992.(2)

 10.9  Money Market Note dated August 29, 1994.(3)

 10.10 Purchase and Sale Agreement between the Company and Griffin Brook Two
       Associates Joint Venture dated August 2, 1995.(5)

 10.11 1994 Directors Stock Option Plan.(4)(5)

 10.12 1995 Employee Stock Purchase Plan.(4)(5)

 10.13 1998 Employee and Consultant Non-Qualified Stock Option Plan.(6)

 10.14 Letter Agreement with Barclays Bank PLC dated April 7, 1998.(6)

 10.15 Letter Agreement with Fleet National Bank dated October 20, 1999. Filed
       herewith.

 21    Subsidiaries of the Registrant.

 23    Consent of Independent Public Accountants filed herewith. Filed
       herewith.

 24    Power of Attorney (included on signature page).

 27    Financial Data Schedule. Filed herewith.
</TABLE>

--------
(1) Filed as an exhibit to a Registration Statement on Form S-1 filed on June
    26, 1992 (Registration No. 33-47874) and incorporated herein by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Form 10-Q filed for the quarter ended September 30,
    1994 and incorporated herein by reference.
(4) Indicates management contracts or compensatory plans in which the
    executive officers or directors of the Company participate.
(5) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-K filed for the year
    ended December 31, 1998 and incorporated herein by reference.