TAB PRODUCTS CO, 10-K405, 1999-08-20

TAB PRODUCTS CO
10-K405, 1999-08-20
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------

FORM 10-K

(Mark One)

/X/ Annual Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 1999

/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from to

COMMISSION FILE NUMBER 1-7736
------------------------

TAB PRODUCTS CO.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)

DELAWARE 94-1190862
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

1400 PAGE MILL RD.
PALO ALTO, CALIFORNIA 94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(650) 852-2400
(COMPANY'S TELEPHONE NUMBER--INCLUDING AREA CODE)

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

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- ---------------------------------- ------------------------------------
<S> <C>
Common stock, $.01 par value American Stock Exchange
</TABLE>

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

Indicate by check mark whether the Company (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 Company
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 Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the voting stock held by non-affiliates of the
Company as of June 30, 1999 was approximately $12,618,723. Shares of common
stock held by each officer and director and by each person or group who owns 5%
or more of the outstanding common stock have been excluded in that such persons
or groups may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. The number of
shares of the Company's Common Stock outstanding as of June 30, 1999 was
5,027,689.

DOCUMENTS INCORPORATED BY REFERENCE

To the extent stated herein, portions of the Definitive Proxy Statement,
which will be filed within 120 days after the end of the Company's fiscal year,
for the Annual Meeting of Stockholders ("Proxy Statement") to be held on October
7, 1999, are incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS

GENERAL

Tab Products Co. (the "Company") operates in a single industry that
manufactures and markets document management solutions, including professional
services and products. The Company sells its offerings to, among other entities,
government agencies and the insurance, finance and health care organizations.
The Company was incorporated in February, 1954, and subsequently reorganized as
a corporation under Delaware law in September, 1986.

BUSINESS STRATEGY

The Company's primary business strategy is to address each client's unique
needs in Document Management utilizing a consultative approach that integrates
all services and products into a total systems solution. The Company believes
that its extensive knowledge of paper-based systems and document management
technology give it a significant advantage over its competition. Additionally,
it possesses a wealth of internal knowledge regarding the individual legal and
regulatory requirements of four major industry segments: insurance, government,
finance and health care. The Company capitalizes on this knowledge by developing
client solutions in those industries.

PRINCIPAL PRODUCTS AND SERVICES

The Company provides solutions--in the form of both professional services
and products--that are designed to help its clients organize, control and find
their critical documents. By leveraging its 50 years of expertise in managing
paper records and files, the Company effectively supports those clients who wish
to integrate their paper-based systems into emerging technologies.

The Company's principal products and services are:

- Document Management Software

- Records Management Supplies

- Multimedia Storage & Furniture

- Professional Services

- OEM Products

1. DOCUMENT MANAGEMENT SOFTWARE

The Company's technology-based automated tracking solutions are designed to
provide clients full control of all their paper-based records, from the time
those records are created through the time they are destroyed. These
products include:

FILE TRACKER-TM- FOR WINDOWS-REGISTERED TRADEMARK---A barcode-based software
system that provides users with information regarding all current location
of files. The system consists of File Tracker software, barcode labels and
barcode readers, all integrated to provide an easy-to-use, powerful system.

All File Tracker software systems include on-site consultation,
customization and training from an experienced document management
specialist. A fully-staffed support organization is available through a
toll-free number to provide expert advice on all File Tracker issues.

TABQUIK-REGISTERED TRADEMARK- COMPUTERIZED COLOR LABELING SYSTEM--Automated
labeling software and a patented application system that provides easy,
on-site production and application of custom-printed color labels and
barcoding for folders or other media. TABQUIK is a customizable filing
solution available in a Windows environment, appropriate for organizations
of all sizes, from the small office to the large corporation.

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The Company also offers customized labels provided directly to the client
from TAB, based on electronic submission of client data; and FilePak, a
cost-effective folder-labeling solution when a high degree of customization
is not required.

The Company believes that its business is not seasonal.

2. RECORDS MANAGEMENT SUPPLIES

The Company provides a complete line of filing supplies, each of which can
be used alone or integrated with other TAB products, systems and services.
These products include:

End Tab Folders, Roll Labels, Classification Folders, Expansion Pockets,
Filing System Guides, X-ray Jackets, Small Document Pockets,
Pressure-sensitive Pockets and Fasteners, Oversized Pockets with flap, 2-tab
Folders and Mylar-strip Folders.

The Company will also provide custom-made supplies tailored to fit clients'
specific needs.

3. MULTIMEDIA STORAGE & FURNITURE

The Company provides both stationary and mobile records storage systems.
Mobile shelving systems, combined with expertise in design and
implementation, provide the most efficient system for filing and use of
storage space. Mobile Products include:

Side-Trac-Registered Trademark---A high-density, custom storage solution
with cabinets arranged in two compact rows. The front cabinets glide from
side to side on wheels, creating access to the cabinets in back.

TAB-TRAC-REGISTERED TRADEMARK---A high-density, custom storage solution that
uses carriages on tracks to create aisles only where and when they are
needed. This eliminates the need for fixed aisles and yields up to 100%
greater storage capacity. Based on the client's needs, stored materials are
moved either by mechanical-assist systems or electric motors.

Stationary Products include:

SPACEFINDER CABINETS--Slim, durable and mobile-ready cabinets, appropriate
for use when floor space, strength and economy are the key determinants.

HARMONY-TM- CABINETS--A complete line of durable, maximum-capacity,
pre-configured cabinets that blend harmoniously into any office environment
and can be color-coordinated perfectly with other TAB equipment and
furniture.

DESIGNER SERIES-TM- CABINETS--A high-quality, fully customizable cabinet
solution that can accept any combination of components, thus offering
unlimited flexibility and potential for growth. Designer cabinets are also
mobile-ready, making it possible to quickly and easily increase storage
density.

TWINFILE-REGISTERED TRADEMARK---A compact, modular, rotating filing unit
that provides more linear filing inches per square foot than almost any
other filing system.

UNIT SPACEFINDER--A filing system using TAB's "capsule concept," whereby the
identification of records is in plain view from any position. Unit
Spacefinder requires very little floor space and allows multiple users to
access files simultaneously.

OPEN SHELF FILING--An economical, easy-to-assemble shelving system for
facilities with limited floor space. Units are available in letter and legal
size, with single- or double-faced sections, and are designed to grow with
an organization's storage needs.

MODULAR OFFICE FURNITURE--The Company markets a line of modular office
furniture components that may be put together in a limitless number of
productive configurations. They include office panel

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systems and clustered workcenters with related components. This product line
is directed at the established market for the open office environment.

4. PROFESSIONAL SERVICES

The Company's Professional Services organization provides a broad range of
integrated service and support programs to fit the specific needs of its
clients. These services are offered through the Company's own technical
personnel and through its direct management of specialized service
suppliers. Services include:

CONSULTING SERVICES--Using a thorough needs-assessment analysis, the
Company's consultants work closely with clients to standardize their file
structures and reduce duplicate files by designing and implementing an
efficient records-classification and data-storage system. This increases the
clients' productivity and provides significant space savings. TAB's
Consulting Services also help clients design a strategy for implementing
imaging systems in their organizations.

FILE-CONVERSION SERVICES--TAB provides full planning and implementation of
the process by which client transform their documents from one medium to
another, such as changing from top-tab vertical drawers to side-tab
color-code, or from paper to optical-image format. This change is designed
to produce a system that is more appropriate for the client's current needs,
thus providing a greater degree of efficiency in both storing and locating
critical records and documents.

IMAGING SERVICES--Imaging conversions involve the use of integrated
technology with an emphasis on the documents with the files as well as a
higher level of indexing, often including a conversion to color-code or
archive. In addition to handling all phases of integration into the chosen
technology, it is also necessary to archive the original documents into a
traditional hard copy system.

FIELD SERVICES--TAB provides comprehensive, nationwide, on-site support for
the imaging technology systems used to store critical documents (CD-ROM,
Optical Disks and tape). Effective June 1, 1999, the Field Services
organization was sold to Bell and Howell Document Management Products
Company. For additional financial information about the sale of this
operation, see note 14 to the Consolidated Financial Statements.

5. OEM PRODUCTS

FORMS HANDLING EQUIPMENT--The Company manufactures a line of forms handling
equipment, including continuous forms bursters, decollators and mergers. The
distribution rights for these products have been granted to
Bescorp-Registered Trademark- Inc.

The Company also manufacturers a full range of high speed mailing systems,
including InfoSeal-Registered Trademark-, a high speed mailing system
developed in conjunction with Transkrit-Registered Trademark- Corp., which
uses a proprietary technique for folding and sealing computer-generated
mailing pieces. These products are directly marketed and sold by Transkrit
Corp.

COMPETITION

Primary competitive factors in these markets are product quality, product
design, service and price. The Company believes that its products' quality, high
level of service and systems approach to its products and services give it a
strong competitive position.

The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative document management solutions that
may be less costly or provide additional features. Such competition could result
in lower gross margins in the future, if the Company's average selling prices
decrease faster than its costs, and could result in lost sales.

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MARKETING AND SALES

The Company's products are marketed in the United States, Canada, Europe and
Australia through its sales branches, telesales, independent sales offices and
distributors. In other geographic areas, products are sold exclusively through
independent distributors. The Company is currently pursuing a strategy to refine
and expand its distribution channels. It is reorienting its direct channel from
local distribution centers to sales execution centers and focusing them on major
accounts. The Company is also seeking to expand its call center operations and
direct reorder business through this efficient distribution method. In
conjunction with handling inbound sales activity, a new initiative is underway
to generate sales through the use of outbound telemarketing.

In June 1998, the Company notified its existing independent distributors
(indirect channel) that effective June 1, 1999 the existing distributor contract
would be canceled. A new contract was offered that eliminated the exclusive
territory rights in the existing contract with other material terms and
conditions remaining substantially the same. By February 1999, approximately one
third of the current independent distributors adopted the new contract. In March
1999, the Company proposed an alternative contract that allowed the independent
distributors exclusivity on existing and designated customers, but eliminated
exclusivity on a territory basis. The Company believes the removal of
exclusivity is crucial to the Company's ability to serve its larger nationwide
customers where an independent's resources cannot support the customer's
professional services, technology and project management needs. As of May 31,
1999 approximately 96% of the current independent distributors have signed the
revised contract. The signed distributors represented approximately 99% of the
total sales for this channel. The Company is also seeking to expand its indirect
distribution with the addition of dealers in Branch territories to focus on
small to mid-size customers. This will allow the Company to institute electronic
commerce as part of its distribution channel fabric. These changes may result in
temporary or permanent loss of sales people and independent distributors and the
resultant loss of revenue they currently generate. This result could have a
material adverse effect on the Company's business, results of operations and
financial condition.

The Company has three foreign subsidiaries which market their products and
services in Canada, Australia and Europe, while foreign sales in the remainder
of the world are conducted through a Foreign Sales Corporation. Foreign revenues
were $29,351,000, $30,349,000 and $30,006,000 for the years ended May 31, 1999,
1998 and 1997, respectively. Foreign operating income was $1,550,000, $1,703,000
and $2,240,000 for the years ended May 31, 1999, 1998 and 1997, respectively.
Total identifiable assets (excluding cash) and liabilities in foreign countries
were $11,042,000 and $2,811,000, respectively, at May 31, 1999 compared with
$12,425,000 and $2,905,000 at May 31, 1998. Transaction and exchange losses
included in earnings, amounted to approximately $89,000, $102,000, and $18,000
in fiscal 1999, 1998 and 1997, respectively.

CUSTOMERS

The Company focuses on customers that have a high volume of paper-based
documents where access to those documents is critical to their business
operations. The Company's primary customers include government agencies, health
care, insurance, financial services and industrial companies. The Company's
largest customer is the U.S. Government (including its agencies and GSA
subcontractors). No single customer accounted for greater than 10% of
consolidated revenues in fiscal years 1999, 1998 and 1997.

BACKLOG

The backlog of orders has historically not been a significant factor in
understanding the business of the Company because the order-to-ship cycle was
primarily completed within 30 days and revenue is generally recognized upon
product shipment. The Branch Channel shift to projects with large customers has
created a lengthening order-to-execution period. Additionally, the professional
services component of project sales is recognized as revenue when the project is
completed, resulting in a longer order-to-revenue

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cycle. Due to this shift in Branch sales strategy, the Company may experience
the need for additional working capital to support the longer
order-to-collection cycle being experienced.

INTELLECTUAL PROPERTY

The Company holds several patents and trademarks in the United States,
Canada, Europe and Australia. The Company does not consider any of its patents
to be material to its business.

The Company relies on a combination of patents, contractual rights,
trademarks, copyright and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect its intellectual property
rights. The Company has been notified in the past and the Company may be
notified in the future of claims that they may be infringing upon patents or
other intellectual property rights owned by third parties. There can be no
assurance that in the future any patents held by the Company will not be
invalidated, that patents will be issued for any of the Company's pending
applications or that any claims allowed from existing or pending patents will be
of sufficient scope or strength or be issued in the primary countries where the
Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents.

MANUFACTURING

Products are manufactured through the use of in-house production facilities
in Mayville, Wisconsin and Turlock, California and contractor production
facilities. Raw materials for the Company's manufacturing are purchased directly
by the Company; whereas, contract manufacturers purchase raw materials for
production. The majority of raw materials is purchased domestically and is
considered to be widely available. It is not anticipated that the availability
of raw materials will be a significant factor in the Company's business.
Subsequent to May 31, 1999, the Company announced the closure of its paper
manufacturing facility in Turlock, California and the transfer of the assets and
inventory to its facility in Mayville, Wisconsin. The closure and transfer of
assets should be completed by September 1999.

There can be no assurance that the Company's manufacturing facilities will
achieve or maintain acceptable manufacturing volumes in the future. The
inability of the Company to achieve planned volumes from its manufacturing
facilities could have an adverse effect on the Company's business, financial
condition and results of operations. Any problems experienced by the Company in
its current or future transitions to new processes and products could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company purchases several critical components from single or sole source
vendors for which alternative sources are not currently developed. Development
of alternative suppliers would require a significant amount of time to qualify
in the case of certain of the Company's components. The Company does not
maintain long-term supply agreements with any of these vendors. The inability to
develop alternative sources for these single or sole source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect the Company's
business, financial condition and results of operations.

RESEARCH AND DEVELOPMENT

The Company's research and development activities are primarily related to
the development of new products and the improvement of existing products in the
mobile storage, high speed mailing and forms handling equipment areas.
Expenditures for research and development were $1.0 million, $.9 million and $.8
million in fiscal years 1999, 1998 and 1997, respectively.

EMPLOYEES

At May 31, 1999, the Company employed approximately 1,054 full-time
employees. None of the Company's employees is represented by a collective
bargaining unit.

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EXECUTIVE OFFICERS

At July 31, 1999 the following individuals were executive officers of the
Company:

<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Philip C. Kantz.............................. 55 Director; President and Chief Executive Officer

Mr. Kantz has been Director, President and Chief Executive Officer since January 27, 1997. Previously, he was
President and Chief Executive Officer of The Sandros Enterprise from February 1995 to January 1997 and Chief
Executive Officer and a director of Transcisco Industries, Inc. from February 1994 to January 1995. Mr. Kantz is a
member of 3COM Corporation's Board of Directors.

David J. Davis............................... 43 Senior Vice President, Operations and Chief Financial
Officer

Mr. Davis became Chief Financial Officer in May, 1998 and was appointed Senior Vice President, Operations in
June, 1997. Previously, he was Vice President and Corporate Controller at PLM International, Inc. from January
1994 to June 1997.

Joanne P. Grba............................... 39 Vice President, Marketing

Ms. Grba was appointed Vice President, Marketing for the Company in July 1997. Previously, she was an independent
marketing consultant from January 1997 to July 1997. Before that she was Director of Business Development of Cisco
Systems, Inc. from January 1996 to December 1996; Vice President, Marketing of TGV, Inc. from October 1995 to
January 1996 and Director of Marketing of FTP Software, Inc. from February 1993 to October 1995.

Thomas J. Rauscher........................... 44 Vice President, Manufacturing and Distribution

Mr. Rauscher became Vice President, Manufacturing and Distribution in January 1996. Previously, he was Vice
President, Operations at Fisher Hamilton from October 1980 to January 1996.

Joel L. Sitak................................ 31 Vice President, North American Sales

Mr. Sitak was appointed Vice President, North American Sales for the Company in May 1998. Previously, he was
President and General Manager, Tab Products of Canada, Limited from June 1997 to May 1998, Vice President, Sales,
Tab Products of Canada, Limited from July 1995 to June 1997 and Regional Manager, Tab Products of Canada, Limited
from November 1993 to July 1995.

Robert J. Sexton............................. 65 Treasurer and Secretary

Mr. Sexton has acted as Secretary since March 1991 and Treasurer since July 1982.

William R. Kinzie............................ 53 Chief Accounting Officer and Controller

Mr. Kinzie became Chief Accounting Officer and Controller in June 1998. Previously, he served in the position of
Controller at One Touch Systems from October 1995 to June 1998 and was self-employed as a consultant in the area
of finance and accounting from June 1995 to October 1995. He served as Controller at Photonics Corporation from
June 1994 to June 1995.

Nancy R. Green............................... 49 Assistant Treasurer and Assistant Secretary

Ms. Green became Assistant Treasurer and Assistant Secretary in July 1991 and previously served the Company as
Director of Treasury from October 1990 to July 1991.
</TABLE>

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The executive officers of the Company are elected each year at the Annual
Organizational Meeting of the Board of Directors, which will be held this year
on October 7, 1999.

ITEM 2. PROPERTIES

The Company's Corporate Headquarters are located at 1400 Page Mill Road,
Palo Alto, California. The facility comprises three buildings which total
105,000 square feet. The Company is currently leasing one of these buildings
(approximately 50,000 square feet) to a tenant until January 2004. The buildings
are owned by the Company but are subject to land leases from Stanford
University. The land leases expire in 2011 and 2012, at which time both the land
and improvements will revert to Stanford University.

The Company owns a 356,000 square foot building located on 14 acres of land
in Mayville, Wisconsin. The Mayville facility serves as a central warehousing,
manufacturing and distribution center. Approximately 200,000 square feet of the
facility is used as warehouse space. Approximately 50,000 square feet of the
facility is used for the production of paper products (primarily file folders)
and the attachment of color-coded labeling systems. Approximately 60,000 square
feet is used for the production of panel systems furniture. The Company also
owns 16 acres of undeveloped land near the current facility.

The Company owns a 45,000 square foot building located on 4 acres of land in
Lomira, Wisconsin. The facility is used for the manufacture of
TAB-TRAC-Registered Trademark- mobile filing storage units and other light
manufacturing and assembly operations.

The Company owns two manufacturing buildings located on 16 acres of land in
Turlock, California. One building is a 67,000 square foot paper products plant
which is used for the manufacture of file folders. The other building consists
of 104,000 square feet and is used for the manufacture of the Company's high-
speed mailing systems product line and forms handling equipment.

The Company leases office space for its sales and service branches in
numerous cities throughout the United States, Canada, Europe and Australia, most
of which are in major metropolitan areas. Tab Products of Canada, Limited leases
60,000 square feet of office space in a building in North York, Ontario, Canada
which expires in October 2000. Tab Products (Europa) B.V. leases a 9,000 square
foot building in Amsterdam, Netherlands which expires in August 2001. Tab
Products Pty Ltd leases a 22,000 square foot building in St. Leonards, Australia
which expires in June 2000. These buildings serve as general office, sales and
warehouse facilities.

In management's opinion, all buildings, machinery and equipment are in good
condition and are maintained and repaired on a basis consistent with sound
operations. The properties and equipment are deemed adequate and suitable for
their purposes.

ITEM 3. LEGAL PROCEEDINGS

The Company is not involved in any material legal proceeding.

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

The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended May 31, 1999.

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PART II

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

The Company's stock is traded on the American Stock Exchange (AMEX) and its
trading symbol is TBP. Information with respect to per share common stock
dividends paid by the Company and the price ranges per share for each quarter
during the fiscal years ended May 31, 1999 and 1998 are set forth below.

TAB PER SHARE COMMON STOCK DIVIDENDS AND PRICE RANGES

<TABLE>
<CAPTION>
DIVIDENDS PRICE RANGE PER SHARE
---------- ----------------------------------------
1999 1998 1999 1998
---- ---- ------------------ -------------------
HIGH LOW HIGH LOW
-------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Quarter Ended
August 31..................... $.05 $.05 $14 7/8 $9 1/2 $12 3/8 $ 9 1/8
November 30................... $.05 $.05 $11 5/8 $6 1/2 $14 7/8 $11 1/8
February 28................... $.05 $.05 $ 7 1/4 $5 $14 5/8 $11 3/16
May 31........................ $.05 $.05 $ 7 3/16 $4 5/8 $15 7/16 $12 1/2
</TABLE>

At May 31, 1999, the Company had approximately 1,000 holders of record and
approximately 5,000 beneficial owners of Tab Products Co. common stock.

The Company's loan covenants contain certain restrictions on the payment of
dividends--see Note 4 of Notes to Consolidated Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA

TAB PRODUCTS CO.
CONSOLIDATED SELECTED FINANCIAL DATA, FIVE YEARS ENDED MAY 31

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 155,620 $ 165,943 $ 154,451 $ 152,698 $ 149,951

Earnings before income taxes......................... 592 4,590 6,657 4,887 2,157

Net earnings......................................... 162 2,435 3,761 2,761 1,219

Net earnings per share

Basic.............................................. .03 .48 .77 .57 .25

Diluted............................................ .03 .46 .75 .57 .25

Book value per share................................. 8.58 8.69 9.03 8.55 8.21

Dividends per share.................................. .20 .20 .20 .20 .20

Current assets....................................... 51,354 53,778 51,405 48,715 51,333

Working capital...................................... 26,962 31,785 28,463 27,424 30,082

Net cash provided by operating activities............ 7,776 7,673 8,167 11,344 8,109

Purchase of property, plant and equipment, net....... 5,052 4,927 3,309 2,825 1,946

Depreciation and amortization........................ 4,802 7,018 4,001 4,065 4,215

Long-term debt, non-current.......................... 3,953 7,391 10,828 14,141 18,733

Stockholders' equity................................. 43,128 44,897 44,527 41,462 39,828

Total assets......................................... 75,328 77,488 80,699 79,127 81,649

Current Ratio........................................ 2.1 2.4 2.2 2.3 2.4

Return on equity..................................... 0% 5% 9% 7% 3%
</TABLE>

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

This report, including without limitation the following section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"foreseeable," "estimates," and similar expressions or variations of such words
are intended to identify forward-looking statements, but are not the exclusive
means of identifying forward-looking statements in this report. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical are forward-looking
statements.

Although forward-looking statements in this report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
in "Business Environment and Risk Factors" as well as those discussed elsewhere
in this report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this report. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report, which attempt to advise
interested parties of the risks and factors that may affect the Company's
business, financial condition, results of operations and prospects.

The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of the Company.

FINANCIAL CONDITION

At May 31, 1999 the Company had cash and short-term investments of $9.9
million, a decrease of $2.2 million from $12.1 million at May 31, 1998. Working
capital at May 31, 1999 was $27.0 million, a decrease of $4.8 million from the
working capital of $31.8 million reported a year earlier. The current ratio of
2.1 at May 31, 1999 decreased from the current ratio of 2.4 at May 31, 1998. The
decrease in cash and working capital is primarily due to the capital
expenditures required for infrastructure improvements and the repayment of
long-term debt. The Company believes that the cash and cash equivalents,
available credit facilities and operational cash flows will adequately finance
anticipated growth, capital expenditures and repayment of debt obligations for
the foreseeable future. The Company intends to invest cash in excess of current
operating requirements in short-term, interest-bearing, investment-grade
securities or its own stock under an authorized stock repurchase plan described
below.

During fiscal 1999 net cash provided from operating activities was $7.8
million, an increase of $0.1 million compared to the $7.7 million generated in
fiscal 1998.

During fiscal 1999, the Company invested approximately $5.1 million in
property, plant and equipment which primarily represented investments in
manufacturing equipment and management information systems. Capital expenditures
for fiscal 2000, which will consist primarily of investments in manufacturing
equipment and management information systems, are expected to be approximately
$2.0 to $3.0 million.

At May 31, 1999, the Company had $4.0 million of long-term debt outstanding
which bears interest at rates ranging from 6.9% to 8.7%. In fiscal 1999 the
Company made $3.4 million in scheduled debt repayments.

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The Company also has available an unsecured revolving line of credit of $15
million as of May 31, 1999, which expires October 31, 2000. The credit line does
not require compensating balances and there were no borrowings under the line at
May 31, 1999.

Pursuant to the Agreement for Purchase and Sale of Assets (the "Agreement"),
by and between the Company and Bell & Howell Document Management Products
Company, a wholly-owned subsidiary of Bell & Howell Company ("Bell & Howell"),
the Company has sold its Field Services Group to Bell & Howell. The Company's
Field Service Group consists of assets that include existing service contracts
and certain related tangible and intangible assets and certain liabilities. The
price of the Purchased Assets, as defined in the Agreement, consists of an
initial cash payment from Bell & Howell to the Company of $11,200,000, the
assumption of liabilities and obligations of the Company valued at an estimated
$4,300,000 and up to an additional $3,500,000 payable to the Company subject to
certain adjustments for changes in certain accounts attributable to the Field
Service Group. The sale was effective as of June 1, 1999. In order for the
Company to obtain consent for the sale from one of its lenders, the Company
chose to place a portion of the cash payment received from Bell & Howell in a
restricted bank account and pledge the funds as collateral for the existing
loan. In exchange for the pledge of collateral the lender modified the covenants
of the loan and approved the sale transaction.

In July 1998, the Company authorized a stock repurchase program for 300,000
shares of Common Stock. The authorization was effective until July 1999. During
the year, the Company purchased 146,200 shares of Common Stock under the
Company's repurchase program at a cost of $955,000. The remaining unused portion
of this authorization of 153,800 shares expired in July 1999. Subsequently the
Company's Board of Directors approved a new authorization to repurchase 300,000
shares of Common Stock that is effective until July 2000. The Company intends to
finance such purchases from the Company's internally-generated funds.

At May 31, 1998, the Company's additional minimum liability for its defined
benefit plan was in excess of the net transition obligation and was recorded as
a non-cash charge of $2.4 million to stockholders' equity, net of tax benefits
of $1.6 million, in accordance with Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions." As of May 31, 1999 there has been
no significant change in this liability.

RESULTS OF OPERATIONS

TOTAL REVENUES--Total revenues for fiscal 1999 of $155.6 million were $10.3
million or 6.2% lower than the $165.9 million in fiscal 1998. The decreased
revenues were attributable to lower sales of information & records management
supplies, records storage solution products and professional services offset
partially by increased sales of technology-based software solutions as a result
of changes in the company branch strategy to focus on Fortune 1000 customers and
issues related to the independent distributor contract negotiations. Revenues in
fiscal 1998 of $165.9 million were $11.4 million or 7.4% higher than the $154.5
million recorded in fiscal 1997. The fiscal 1998 increased revenues were
attributable to increased volume in professional services, technology-based
software solutions, information and records management supplies, and records
storage solution products. International revenues were 19%, 18% and 19% of
consolidated revenues in fiscal 1999, 1998 and 1997, respectively.

COST OF REVENUES--Cost of revenues, as a percentage of revenues, for fiscal
1999, 1998 and 1997 was 61.6%, 59.6% and 59.7%, respectively. The increase in
the percentage for fiscal 1999 as compared to fiscal 1998 was due primarily to a
decrease in manufacturing efficiencies due to lower than planned volume. The
decrease in the percentage for fiscal 1998 as compared to fiscal 1997 was due
primarily to increased list prices and continued efforts in reducing product
costs.

OPERATING EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND
DEVELOPMENT)--Operating expenses, as a percentage of revenues, for fiscal 1999,
1998 and 1997 were 37.8%, 37.2% and 35.3%, respectively. Total operating
expenses for fiscal 1999 were $58.8 million, a decrease of $3.0 million as

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compared to total operating expenses of $61.8 million in fiscal 1998. The
decrease in operating expenses was primarily attributable to decreased
commission compensation due to lower revenues offset partially by increased
retirement benefit costs, recruiting and training costs.

Operating expenses for fiscal 1998 of $61.8 million represented an increase
of $7.2 million as compared to total operating expenses of $54.6 million in
fiscal 1997. The increase in operating expenses was primarily attributable to
increased salaries and related expenses to support the Company's revenue growth
and the Company's decision to replace its current technology infrastructure to
align with its strategic focus, improve operational performance and achieve year
2000 compliance. The pre-tax charge in fiscal 1998 was $2.7 million related to
technology infrastructure.

INTEREST EXPENSE--Interest expense, net for fiscal 1999 was $0.3 million
lower than the net interest expense for fiscal 1998. Net interest expense for
fiscal 1998 was $0.3 million lower than the net interest expense for fiscal
1997. The decrease in interest expense in both years was primarily because of
decreased levels of long-term debt due to scheduled debt repayments.

INCOME TAXES--Income taxes, as a percentage of pre-tax earnings, for fiscal
1999 was 72.6%, an increase of 25.7 percentage points as compared to the
effective tax rate of 46.9% in fiscal 1998. The increase in the effective tax
rate was primarily due to the proportionately greater impact of state taxes,
non-deductible goodwill and foreign taxes due to lower pre-tax income in the
current year. For fiscal 1998, income taxes increased 3.4 percentage points as
compared to the effective tax rate of 43.5% in fiscal 1997. The increase in the
effective tax rate was primarily due to the increase in foreign taxes as well as
the proportionately greater impact of state taxes, goodwill and foreign taxes
due to lower pre-tax income in fiscal 1997.

COMPETITION

CURRENT DEVELOPMENTS

On June 22, 1999, the Company announced the consolidation of its paper
manufacturing operations to its main plant located in Mayville, Wisconsin. The
Company will close its paper manufacturing facility located in Turlock,
California and transfer the inventory and equipment to Mayville by the end of
August 1999. As a result of the consolidation, the Company will record a pre-tax
charge of approximately $500,000 in the first quarter of fiscal year 2000.

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In July 1999, the Company approved a new authorization to repurchase 300,000
shares of Common Stock. The authorization is effective until July 2000.

MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE

The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 99 for 1999). On January 1, 2000, any clock
or date recording mechanism, including date sensitive software which uses only
two digits to represent the year, may recognize a date incorrectly (e.g.,
interpret the two digits 00 as the year 1900 rather than the year 2000). This
could result in a system failure or miscalculations causing disruption of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar activities.

The Company has undertaken a program to address Year 2000 compliance with
respect to the following: (i) the Company's information technology hardware and
software ("IT systems"); (ii) the Company's non-information technology systems,
such as buildings, plants, equipment, telephone systems, and other
infrastructure systems that may contain microcontroller technology ("non-IT
systems"); and (iii) exposure from third parties with which the Company does
business.

The Company's plan with regard to the Year 2000 issue for each of the above
involves the following phases: (i) assessment of systems to determine the extent
to which the Company may be vulnerable to the Year 2000 issue; (ii) the
development of remedies to address problems discovered in the assessment phase;
(iii) the testing of such remedies; and (iv) the preparation of contingency
plans to address potential worst case scenarios should the remedies not be
successful.

The Company has analyzed most of its IT systems in an effort to identify any
systems that are not Year 2000 compliant and implemented any changes required to
make such systems Year 2000 compliant. The result to date of the analysis is
that most of the IT systems used by the Company are not Year 2000 compliant. A
Company-wide enterprise software solution was chosen as the primary means to
achieve Year 2000 compliance. The software was selected not only to achieve Year
2000 compliance, but also to add functionality and efficiency in the business
processes of the Company. The software is being implemented in stages and in
each of the Company's operating locations. The first stage, which comprises most
of the manufacturing, sales and financial modules, was completed in April 1999.
The second stage includes project accounting, human resources and the remaining
manufacturing operations. This stage is planned to be completed by the end of
August 1999. Remediation and testing of IT systems not replaced are planned to
be completed by September 1999.

The Company is assessing its significant non-IT systems that may contain
embedded microcontrollers to determine what remediation efforts may be
necessary. The assessment was planned to be completed by July 1999. To date,
certain non-IT systems have been tested and most such tested non-IT systems have
been evaluated as being Year 2000 compliant. Remediation plans for those systems
not Year 2000 compliant are planned to be in place by July 1999.

The Company is taking steps designed to assess the Year 2000 readiness of
certain suppliers whose possible lack of Year 2000 readiness could, in the
Company's judgment, cause a materially adverse impact on the Company's business,
results of operations or financial condition. The Company has conducted
extensive inquiries of such suppliers compliance status during the fiscal year
and expects to complete the inquiries prior to November 30, 1999.

The Company believes that its most reasonably likely worst case Year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. It is clear that the
Company has the least ability to assess and remediate the Year 2000 problems of
third parties and the Company believes the risks are greatest with
infrastructure (e.g. electricity supply, water and sewer service),
telecommunications, transportation supply chains and critical suppliers of
materials.

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The Company's production is conducted in domestic and foreign facilities.
Each location relies on local private and governmental suppliers for
electricity, water, sewer and other needed supplies. Failure of an electricity
grid or an uneven supply of power, as an example, would be a worst case scenario
that would completely shut down the affected facilities. Electrical failure
could also shut down airports and other transportation facilities. The Company
does not currently maintain facilities which would allow it to generate its own
electrical or water supply in lieu of that supplied by utilities. To the extent
possible, the Company is working with the infrastructure suppliers for its
manufacturing sites, major subcontractor sites and relevant transportation hubs
to seek to better ensure continuity of infrastructure services. Contingency
planning regarding major infrastructure failure generally emphasizes planned
increases in inventory levels of specific products.

A worst case scenario involving a critical supplier of materials would be
the partial or complete shutdown of the supplier and its resulting inability to
provide critical supplies to the Company on a timely basis. The Company does not
maintain the capability to replace most third party supplies with internal
production. Where efforts to work with critical suppliers to ensure Year 2000
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and in certain
limited situations includes a planned increase in the level of inventory
carried.

The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur. This
contingency planning will continue through 1999 as the Company learns more about
the preparations and vulnerabilities of third parties regarding Year 2000
issues. Due to the large number of variables involved, the Company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.

The total Year 2000 remediation project is estimated to cost approximately
$2.2 million of which approximately $2 million has been spent to date. Since the
system replacement costs are related to an overall systems initiative, the Year
2000 compliance costs cannot be reasonably determined. The costs and time
schedules for the IT systems and non-IT systems changes are based on
management's best estimates.

The Company's technology products are believed to be Year 2000 compliant.
For most of the Company's products the Year 2000 issue does not apply. Products
such as file supplies, furniture, forms handling equipment, file storage
equipment and mobile file equipment have no date-related processing, hence are
not affected by the arrival of the Year 2000.

TRENDS

Recent market research indicates there may be an accelerated move to digital
technologies, such as imaging, by large paper intensive organizations. This
trend could result in a weakening of demand for the Company's paper-based
records management supplies and records storage products. Failure of the Company
to match the changing market with new document management products and services
in the digital arena could materially adversely affect the Company's business,
results of operations, financial condition and prospects.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company's fiscal year ending May 31, 2000. The Company is
currently evaluating the impact of SFAS No. 133 on its financial statement and
related disclosures.

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BUSINESS ENVIRONMENT AND RISK FACTORS

The Company's future operating results may be affected by various trends and
factors which the Company must successfully manage in order to achieve favorable
operating results. In addition, there are trends and factors beyond the
Company's control which affect its operations. Such trends and factors include,
but are not limited to, adverse changes in general economic conditions or
conditions in the specific markets for the Company's products, governmental
regulation, fluctuations in foreign exchange rates, and other factors, including
those listed below.

DISTRIBUTION CHANNELS

The Company is currently pursuing a strategy to refine and expand its
distribution channels. The Branch direct sales strategy has been shifted to
focus on projects with larger customers that bundle products and services as a
way of providing value-added solutions to the Company's customers.

The Company is also expanding its call center operations and direct
replenishment business through this efficient distribution method. In
conjunction with handling inbound sales activity an initiative is underway to
generate sales through the use of outbound telemarketing.

In June 1998, the Company notified its existing independent distributors
(indirect channel) that effective June 1, 1999 the existing distributor contract
would be canceled. A new contract was offered that eliminated the exclusive
territory rights in the existing contract with other material terms and
conditions remaining substantially the same. By February 1999, approximately one
third of the current independent distributors adopted the new contract. In March
1999, the Company proposed an alternative contract that allowed the independent
distributors exclusivity on existing and designated customers, but eliminated
exclusivity on a territory basis. The Company believes the removal of
exclusivity is crucial to the Company's ability to serve its larger nationwide
customers where an independent's resources cannot support the customer's
professional services, technology and project management needs. As of May 31,
1999 approximately 96% of the current independent distributors have signed the
revised contract. The signed distributors represent approximately 99% of the
total sales for this channel. The Company is also seeking to expand its indirect
distribution with the addition of dealers in Branch territories to focus on
small to mid-size customers.

These changes in distribution may disrupt the selling process of the Company
resulting in lower sales. Additionally, the sales cycle for larger scale
projects is substantially longer than the Company's historical sales-to-delivery
cycle resulting in additional working capital requirements. Market penetration
of larger customers may not happen as quickly as anticipated and may result in
higher selling costs.

RETAINING AND ATTRACTING QUALIFIED PERSONNEL

The Company's future performance may depend in significant part upon
attracting and retaining key senior management, sales, manufacturing, marketing
and technical support personnel. Competition for such personnel is intense and
the inability to retain its current key personnel or to attract, assimilate or
retain other highly qualified personnel in the future on a timely basis could
have a material adverse effect on the Company's business, results of operations
and financial condition.

FLUCTUATIONS IN OPERATING RESULTS

Factors affecting the Company's operating results and gross margins include
the volume of product sales, competitive pricing pressures, the ability of the
Company to match supply with demand, changes in product and customer mix, market
acceptance of new or enhanced versions of the Company's products and services,
changes in the channels through which the Company's products and services are
distributed, timing of new product announcements and introductions by the
Company and its competitors, fluctuations in product costs, variations in
manufacturing cycle times, fluctuations in manufacturing utilization, the

16
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ability of the Company to achieve manufacturing volumes with its new and
existing products, increased research and development expenses, exchange rate
fluctuations, a change in the Company's effective tax rate and changes in
general economic conditions. All of these factors are difficult to forecast and
these or other factors can materially affect the Company's quarterly or annual
operating results or gross margins.

COMPETITION

DEPENDENCE ON SOLE SOURCE SUPPLIERS

NEW PROCESSES AND PRODUCTS AND MANUFACTURING VOLUMES

BACKLOG

The backlog of orders has historically not been a significant factor in
understanding the business of the Company because the order-to-ship cycle was
primarily completed within 30 days and revenue is generally recognized upon
product shipment. The Branch channel shift to projects with large customers has
created a lengthening order-to-execution period. Additionally, the professional
services component of project sales is recognized as revenue when the project is
completed resulting in a longer order-to-revenue cycle. Due to this shift in
Branch sales strategy the Company may experience the need for additional working
capital to support the longer order-to-collection cycle being experienced.

GOVERNMENT SALES

Government revenues primarily expose the Company to risks from reductions in
budget allocations to support regulation and administrative offices. The current
reinventing government initiative opens opportunities to help the government
streamline workflow processes, reduce paperwork and increase customer service
which may provide short-term opportunities for the Company. However, the
long-term effect of a government initiative to streamline processes could have a
negative impact on the Company's business, financial condition and results of
operations.

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PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION

The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company has been notified in the
past and the Company may be notified in the future of claims that they may be
infringing upon patents or other intellectual property rights owned by third
parties. There can be no assurance that in the future any patents held by the
Company will not be invalidated, that patents will be issued for any of the
Company's pending applications or that any claims allowed from existing or
pending patents will be of sufficient scope or strength or be issued in the
primary countries where the Company's products can be sold to provide meaningful
protection or any commercial advantage to the Company. Additionally, competitors
of the Company may be able to design around the Company's patents.

EURO CONVERSION

In January 1999, certain member countries of the European Union established
permanent, fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro). The transition period for the
introduction of the Euro is scheduled to phase in over a period ending January
1, 2002, with the existing currency being completely removed from circulation on
July 1, 2002. The timing of phasing out all uses of the existing currencies will
comply with the legal requirements and also be scheduled to facilitate optimal
coordination with the plans of our vendors, distributors and customers. Work
related to the introduction of the Euro and the phasing out of the other
currencies includes converting information technology systems; recalculating
currency risk; and taking action, if needed, regarding continuity of contracts;
and modifying our processes for preparing tax, accounting, payroll and customer
records. Management believes the introduction of the Euro and the phasing out of
the other currencies will not have a material impact on the Company's
Consolidated Financial Statements.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International sales accounted for approximately 19% and 18%, respectively,
of the Company's total revenues in fiscal 1999 and 1998. Fluctuations in
currencies could adversely affect the Company's business, financial condition
and results of operations. In addition, gains and losses on the conversion to
United States dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's results of operations. Because sales
of the Company's products have been denominated to date primarily in United
States dollars, increases in the value of the United States dollar could
increase the price of the Company's products so that they become relatively more
expensive to customers in the local currency of a particular country, leading to
a reduction in sales and profitability in that country. The Company is subject
to the risks of conducting business internationally, including foreign
government regulation and general geopolitical risks such as political and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. Manufacturing and sales of the Company's products may also be
materially adversely affected by factors such as unexpected changes in, or
imposition of, regulatory requirements, tariffs, import and export restrictions
and other barriers and restrictions, longer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. In addition, the laws of certain foreign countries in which
the Company's products are or may be developed, manufactured or sold, may not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States and thus make piracy of the Company's products a more
likely possibility. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, financial condition or
results of operations.

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MANAGEMENT OF GROWTH

The Company has increased its expense levels to support its planned growth.
The Company expects to continue to increase its operating expenses by hiring
additional personnel to support expected growth, increased marketing efforts and
additional research and development activities. If the Company does not achieve
increased levels of revenues commensurate with these increased levels of
operating expenses, or if the Company's revenues decrease or do not meet the
Company's expectations for a particular period, the Company's business,
financial condition and results of operations will be materially adversely
affected.

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ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to fluctuations in interest
rates and in foreign currency exchange rates.

The Company's exposure to market risk due to fluctuations in interest rates
relates primarily to its short-term investment portfolio, which consists of
corporate debt securities, which are classified as available-for-sale and were
reported at an aggregate fair value of $2.9 million as of May 31, 1999. These
available-for-sale securities are subject to interest rate risk in as much as
their fair value will fall, if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from the levels
prevailing at May 31, 1999, the fair value of the portfolio would not decline by
a material amount. The Company does not use derivative financial instruments to
mitigate the risks inherent in these securities. However, the Company does
attempt to reduce such risks by typically limiting the maturity date of such
securities to no more than nine months, placing its investments with high credit
quality issuers and limiting the amount of credit exposure with any one issuer.
In addition, the Company believes that it currently has the ability to hold
these investments until maturity, and therefore, believes that reductions in the
value of such securities attributable to short-term fluctuations in interest
rates would not materially affect the financial position, results of operations
or cash flows of the Company. To the extent that the Company invests the
proceeds from the sale of the Field Services Group in instruments subject to
market risk, its overall exposure to market risk will correspondingly increase.

The Company's exposure to market risk due to fluctuations in foreign
currency exchange rates relates primarily to the intercompany balance with its
Canadian subsidiary. Although the Company transacts business with various
foreign countries, settlement amounts are usually based on local currency.
Transaction gains or losses have not been significant in the past and there is
no hedging activity on Canadian dollars or other currencies. Based on the
intercompany balance of $0.9 million at May 31, 1999, a hypothetical 10% adverse
change in Canadian dollars against U.S. dollars would not result in a material
foreign exchange loss. Consequently, the Company does not expect that reductions
in the value of such intercompany balances or of other accounts denominated in
foreign currencies, resulting from even a sudden or significant fluctuation in
foreign exchange rates, would have a direct material impact on the Company's
financial position, results of operations or cash flows.

Notwithstanding the foregoing analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of certain of
the Company's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, international demand
for the Company's products could be affected by foreign currency exchange rates.
In addition, interest rate fluctuations may affect the buying patterns of the
Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the general condition of the U.S., foreign
and global economies, which could materially and adversely affect the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements included with this Form 10-K are set
forth under Item 14.

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

Not Applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The section entitled "Election of Directors," which appears in the Company's
Proxy Statement for the Company's 1999 Annual Meeting of Stockholders is
incorporated herein by reference. For information with respect to the executive
officers of the Company, see "Executive Officers" in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

The information related to executive compensation which appears in the
Company's Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
in the section entitled "Executive Compensation and Other Matters" is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Stock Ownership of Certain Beneficial Owners and
Management" which appears in the Company's Proxy Statement for the Company's
1999 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section entitled "Certain Relationships and Related Transactions" which
appears in the Company's Proxy Statement for the Company's 1999 Annual Meeting
of Stockholders is incorporated herein by reference.

PART IV

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

A. The following documents are filed as part of this report:

<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report............................................................... 26
Consolidated Statements of Earnings for the three years ended May 31, 1999................. 27
Consolidated Balance Sheets at May 31, 1999 and 1998....................................... 28
Consolidated Statements of Stockholders' Equity for the three years ended May 31, 1999..... 29
Consolidated Statements of Cash Flows for the three years ended May 31, 1999............... 30
Statement of Accounting Policies........................................................... 31-32
Notes to Consolidated Financial Statements................................................. 33-46

2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

Independent Auditors' Report............................................................... 47
Schedule for the three years ended May 31, 1999:
Schedule II Valuation and Qualifying Accounts.............................................. 48
</TABLE>

All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.

3. EXHIBITS

See Index to Exhibits on pages 22 and 23. The Exhibits listed in the
accompanying Index are referenced as part of this report.

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B. Reports on Form 8-K:

The Company filed one report on Form 8-K on June 15, 1999 related to the
Agreement for Purchase and Sale of Assets with Bell and Howell Document
Management Products Company and filed an amendment thereto under Item 7 dated
July 30, 1999.

EXHIBITS:

<TABLE>
<C> <S>
3.1 Certificate of Incorporation (Exhibit 3.1 of 1993 Form 10-K)(2)
3.2 Certificate of Designation, Preferences and Rights of the Terms of the Series A
Preferred Stock (Exhibit 3.2 filed with Form 10-Q for the quarter ended November 30,
1996)(2)
3.3 Second Amended and Restated Bylaws of the Company dated October 17, 1996 (Exhibit 4
of Form 8-K dated October 17, 1996)(2)
4.1 Form of Rights Agreement between the Company and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (including as Exhibit A the form of Certificate of
Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as
Exhibit B the form of Right Certificate, and as Exhibit C the Summary of Terms of
Rights Agreement) (Exhibit 1 of Form 8-K dated October 17, 1996)(2)
10.1 Tab Products Co. 1981 Incentive Stock Option Plan (Exhibit 10 of the 1983 Form
10-K)(1)(2)
10.2 Amended 1981 Incentive Stock Option Plan (Exhibit 10 of the 1987 Form 10-K)(1)(2)
10.3 1991 Stock Option Plan (Exhibit 10.1 of the 1991 Form 10-K)(1)(2)
10.4 Note Agreement of Tab Products Co. dated as of March 20, 1992 in the aggregate
principal amount of $15,000,000 (Exhibit 10.5 of the 1992 Form 10-K)(2)
10.5 Amendment dated July 27, 1993 to Note Agreement of Tab Products Co. dated as of March
20, 1992 (Exhibit 10.16 filed with the 1993 Form 10-K)(2)
10.6 Note Agreement of Tab Products Co. dated October 7, 1993 (Exhibit 10.20 filed with
Form 10-Q for the quarter ended August 31, 1993)(2)
10.7 Letter dated October 7, 1993 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.21 filed with Form 10-Q for the quarter ended August 31, 1993)(2)
10.8 Letter dated October 27, 1993 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.27 filed with the 1994 Form 10-K)(2)
10.9 Letter dated June 15, 1995 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.32 filed with the 1995 Form 10-K)(2)
10.10 Letter dated July 21, 1995 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.33 filed with the 1995 Form 10-K)(2)
10.11 Letter dated December 13, 1995 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.35 filed with Form 10-Q for the quarter ended November 30, 1995)(2)
10.12 Letter dated August 20, 1996 amending the Prudential Note Agreement dated March 20,
1992 (Exhibit 10.37 filed with the 1996 Form 10-K)(2)
10.13 Form of Indemnity Agreement between the Company and each of its Executive Officers
and Directors (Exhibit 10.38 filed with Form 10-Q for the quarter ended November 30,
1996) (1), (2)
10.14 Outside Directors' Option Plan and Agreement (Exhibit 10.41 filed with Form 10-Q for
the quarter ended November 30, 1996)(1)(2)
10.15 Employment Agreement between the Company and Philip C. Kantz (Exhibit 10.42 filed
with Form 10-Q for the quarter ended February 28, 1997)(1)(2)
10.16 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit
10.43 filed with Form 10-Q for the quarter ended February 28, 1997)(1)(2)
10.17 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit
10.44 filed with Form 10-Q for the quarter ended February 28, 1997)(1)(2)
</TABLE>

22
<PAGE>
<TABLE>
<C> <S>
10.18 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit
10.45 filed with Form 10-Q for the quarter ended February 28, 1997)(1)(2)
10.19 Bank of America Business Loan Agreement dated November 1, 1998 (Exhibit 10.1 filed
with form 10-Q for the quarter ended November 30, 1998)(2)
10.20 Lease Agreement dated January 29, 1999 (Exhibit 10.1 filed with form 10-Q for the
quarter ended February 28, 1999)(2) 10.21 Letter dated May 28, 1999 amending the
Prudential Note Agreement dated March 20, 1992
10.21 Letter dated May 28, 1999 amending the Prudential Note Agreement dated March 20, 1992
10.22 Bank of America Amendment No.1 dated May 31, 1999 to Business Loan Agreement dated
November 1, 1998
10.23 Bank of America Amendment No.2 dated May 31, 1999 to Business Loan Agreement dated
November 1, 1998
10.24 Form of Change of Control Agreement between the Company and named Executive Officers
10.25 Sale of Field Service Group as reported on Form 8-K/A (filed July 30, 1999)(2)
23.1 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>

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

(1) Compensatory Plan or Arrangement

(2) Incorporated by reference from the noted previously filed document.

23
<PAGE>
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, and State of California, on this twentieth day of August, 1999.

TAB PRODUCTS CO.

/s/ PHILIP C. KANTZ
--------------------------------------
Philip C. Kantz
PRESIDENT AND CHIEF EXECUTIVE OFFICER

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

<TABLE>
<CAPTION>
NAME AND TITLE DATE
- ------------------------------------------------ ------------------

<S> <C>
/s/ HANS A. WOLF August 20, 1999
- --------------------------------------
Hans A. Wolf, Chairman of the Board

/s/ PHILIP C. KANTZ August 20, 1999
- --------------------------------------
Philip C. Kantz, Director; President and
Chief Executive Officer

/s/ DAVID J. DAVIS August 20, 1999
- --------------------------------------
David J. Davis, Senior Vice President,
Operations and Chief Financial Officer

/s/ WILLIAM R. KINZIE August 20, 1999
- --------------------------------------
William R. Kinzie, Controller and
Chief Accounting Officer

/s/ ROBERT R. AUGSBURGER August 20, 1999
- --------------------------------------
Robert R. Augsburger, Director

/s/ DR. KATHRYN S. HANSON August 20, 1999
- --------------------------------------
Dr. Kathryn S. Hanson, Director

/s/ JERRY K. MYERS August 20, 1999
- --------------------------------------
Jerry K. Myers, Director
</TABLE>

24
<PAGE>
TAB PRODUCTS CO.

CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
FORM 10-K ITEM 14

FISCAL YEARS ENDED MAY 31, 1999, 1998 AND 1997

25
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Tab Products Co.:

We have audited the accompanying consolidated balance sheets of Tab Products
Co. and its subsidiaries as of May 31, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended May 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tab Products Co. and its
subsidiaries as of May 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Jose, California
June 28, 1999

26
<PAGE>
TAB PRODUCTS CO.

CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED MAY 31
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................ $ 155,620,000 $ 165,943,000 $ 154,451,000
Costs and expenses:
Cost of revenues.............................................. 95,879,000 98,913,000 92,270,000
Selling, general and administrative........................... 57,849,000 60,912,000 53,765,000
Research and development...................................... 966,000 889,000 785,000
-------------- -------------- --------------
Total costs and expenses........................................ 154,694,000 160,714,000 146,820,000
-------------- -------------- --------------

Operating income................................................ 926,000 5,229,000 7,631,000

Interest and other, net......................................... (334,000) (639,000) (974,000)
-------------- -------------- --------------

Earnings before income taxes.................................... 592,000 4,590,000 6,657,000

Provision for income taxes...................................... 430,000 2,155,000 2,896,000
-------------- -------------- --------------

Net earnings.................................................... $ 162,000 $ 2,435,000 $ 3,761,000
-------------- -------------- --------------
-------------- -------------- --------------

Earnings per share
Basic......................................................... $ .03 $ .48 $ .77
Diluted....................................................... $ .03 $ .46 $ .75

Shares used in computation
Basic......................................................... 5,090,000 5,102,000 4,879,000
Diluted....................................................... 5,122,000 5,286,000 5,017,000
</TABLE>

See accompanying Statement of Accounting Policies and Notes to Consolidated
Financial Statements.

27
<PAGE>
TAB PRODUCTS CO.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MAY 31
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 6,972,000 $ 7,199,000
Short-term investments............................................................ 2,941,000 4,896,000
Accounts receivable, less allowances for doubtful accounts of $936,000 and
$947,000........................................................................ 26,397,000 24,943,000
Inventories....................................................................... 8,834,000 11,015,000
Prepaid income taxes and other expenses........................................... 6,210,000 5,725,000
-------------- --------------

Total current assets.............................................................. 51,354,000 53,778,000

Property, plant and equipment, net................................................ 19,642,000 19,063,000
Goodwill, net..................................................................... 3,131,000 3,683,000
Other assets...................................................................... 1,201,000 964,000
-------------- --------------
$ 75,328,000 $ 77,488,000
-------------- --------------
-------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 3,437,000 $ 3,437,000
Accounts payable.................................................................. 7,648,000 6,257,000
Compensation payable.............................................................. 2,086,000 3,910,000
Other accrued liabilities......................................................... 11,221,000 8,389,000
-------------- --------------

Total current liabilities......................................................... 24,392,000 21,993,000
-------------- --------------
Long-term debt.................................................................... 3,953,000 7,391,000
-------------- --------------
Deferred taxes and other noncurrent liabilities................................... 3,855,000 3,207,000
-------------- --------------

Commitments and contingencies (Note 9)

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized--500,000
shares, issued--none
Common stock, $.01 par value, authorized--25,000,000 shares, issued--
1999--7,606,116 shares, 1998--7,601,616 shares.................................. 76,000 76,000
Additional paid-in capital........................................................ 15,255,000 15,219,000
Retained earnings................................................................. 63,031,000 63,885,000
Treasury stock, 1999--2,578,427 and 1998--2,432,227 shares........................ (32,320,000) (31,365,000)
Accumulated other comprehensive loss.............................................. (2,914,000) (2,918,000)
-------------- --------------
Total stockholders' equity........................................................ 43,128,000 44,897,000
-------------- --------------
$ 75,328,000 $ 77,488,000
-------------- --------------
-------------- --------------
</TABLE>

See accompanying Statement of Accounting Policies and Notes to Consolidated
Financial Statements.

28
<PAGE>
TAB PRODUCTS CO.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ACCUMULATED
NUMBER OF ADDITIONAL OTHER TOTAL
SHARES PAID-IN RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK GAIN (LOSS) INCOME (LOSS)
----------- ----------- ---------- ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 1, 1996......... 4,851,951 $ 73,000 $12,705,000 $59,689,000 $(31,365,000) $ 360,000
Net earnings................... 3,761,000 $ 3,761,000
Dividends, $.20 per share...... (977,000)
Translation adjustment......... (324,000) (324,000)
Stock options exercised and tax
benefit on disqualified
common stock dispositions.... 81,625 1,000 604,000
----------- ----------- ---------- ---------- ----------- -------------- --------------
BALANCES, MAY 31, 1997......... 4,933,576 74,000 13,309,000 62,473,000 (31,365,000) 36,000 $ 3,437,000
--------------
--------------
Net earnings................... 2,435,000 $ 2,435,000
Dividends, $.20 per share...... (1,023,000)
Minimum pension liability
changes...................... (2,418,000) (2,418,000)
Translation adjustment......... (536,000) (536,000)
Stock options exercised and tax
benefit on disqualified
common stock dispositions.... 235,813 2,000 1,910,000
----------- ----------- ---------- ---------- ----------- -------------- --------------
BALANCES, MAY 31, 1998......... 5,169,389 76,000 15,219,000 63,885,000 (31,365,000) (2,918,000) $ (519,000)
--------------
--------------
Net earnings................... 162,000 $ 162,000
Dividends, $.20 per share...... (1,016,000)
Minimum pension liability
changes...................... 37,000 37,000
Translation adjustment......... (33,000) (33,000)
Stock options exercised and tax
benefit on disqualified
common stock dispositions.... 4,500 36,000
Common stock repurchases....... (146,200) (955,000)
----------- ----------- ---------- ---------- ----------- -------------- --------------
BALANCES, MAY 31, 1999......... 5,027,689 $ 76,000 $15,255,000 $63,031,000 $(32,320,000) $ (2,914,000) $ 166,000
----------- ----------- ---------- ---------- ----------- -------------- --------------
----------- ----------- ---------- ---------- ----------- -------------- --------------
</TABLE>

See accompanying Statement of Accounting Policies and Notes to Consolidated
Financial Statements.

29
<PAGE>
TAB PRODUCTS CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings......................................................... $ 162,000 $ 2,435,000 $ 3,761,000
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization........................................ 4,802,000 7,018,000 4,001,000
Deferred income taxes................................................ (100,000) (1,506,000) 73,000
Other................................................................ (88,000) 381,000 200,000
Changes in operating assets and liabilities: Accounts receivable,
net................................................................ (1,482,000) 237,000 (2,029,000)
Inventories.......................................................... 2,225,000 122,000 (205,000)
Prepaid income taxes and other expenses.............................. (17,000) (1,815,000) (490,000)
Other assets......................................................... 38,000 551,000 361,000
Accounts payable..................................................... 1,389,000 (302,000) 895,000
Compensation payable................................................. (1,897,000) (407,000) 811,000
Other accrued liabilities............................................ 2,744,000 959,000 789,000
------------- ------------- -------------
Net cash provided by operating activities............................ 7,776,000 7,673,000 8,167,000
------------- ------------- -------------

INVESTING ACTIVITIES
Purchases of property, plant and equipment, net...................... (5,052,000) (4,927,000) (3,309,000)
Purchases of short-term investments.................................. (4,428,000) (9,282,000) (7,198,000)
Sales of short-term investments...................................... 6,383,000 7,972,000 5,934,000
------------- ------------- -------------
Net cash required by investing activities............................ (3,097,000) (6,237,000) (4,573,000)
------------- ------------- -------------

FINANCING ACTIVITIES
Repayment of debt.................................................... (3,437,000) (3,313,000) (3,813,000)
Issuance of common stock............................................. 36,000 1,910,000 491,000
Purchase of treasury stock........................................... (955,000) -- --
Dividends paid....................................................... (1,016,000) (1,023,000) (977,000)
------------- ------------- -------------
Net cash required by financing activities............................ (5,372,000) (2,426,000) (4,299,000)
------------- ------------- -------------
Effect of exchange rate changes on cash.............................. 466,000 (379,000) (58,000)
------------- ------------- -------------
Decrease in cash and cash equivalents................................ (227,000) (1,369,000) (763,000)
Cash and cash equivalents at beginning of year....................... 7,199,000 8,568,000 9,331,000
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 6,972,000 $ 7,199,000 $ 8,568,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying Statement of Accounting Policies and Notes to Consolidated
Financial Statements.

30
<PAGE>
TAB PRODUCTS CO.

STATEMENT OF ACCOUNTING POLICIES

The Company's significant accounting policies are summarized below to assist
the reader in reviewing the financial statements and other data contained in
this report.

PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly-owned.
Intercompany transactions have been eliminated in consolidation.

ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses as of the dates and for the periods presented. Such
estimates include the allowance for doubtful accounts, inventory valuation and
obligations for postretirement health care and pension benefits. Actual results
could differ from those estimates.

TRANSLATION OF FOREIGN CURRENCIES--Operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency
for each subsidiary. Assets and liabilities of the foreign subsidiaries are
translated into U.S. dollars at the exchange rates in effect as of the balance
sheet dates, and results of operations for each subsidiary are translated using
the average rates in effect for the periods presented. Translation adjustments
are reported as a separate component of accumulated other comprehensive income
(loss). Foreign currency transaction gains and losses are included in net
earnings.

CASH AND CASH EQUIVALENTS are highly liquid investments purchased with an
original maturity of three months or less.

SHORT-TERM INVESTMENTS represent debt securities which are stated at fair
value. The difference between amortized cost (cost adjusted for amortization of
premiums and accretion of discounts which are recognized as adjustments to
interest income) and fair value representing unrealized holding gains or losses,
if material, are recorded as a separate component of stockholders' equity until
realized. While the Company's intent is to hold debt securities to maturity,
they are classified as available-for-sale because the sale of such securities
may be required prior to maturity. Any gains and losses on the sale of debt
securities are determined on a specific identification basis. Unrealized holding
gains and losses were not material for any periods presented.

INVENTORIES are valued at the lower of cost or market. Cost of merchandise
inventories purchased for resale is determined on the last-in, first-out (LIFO)
method for domestic inventories, which was approximately $843,000 at May 31,
1999 ($1,424,000 at May 31, 1998). Cost of the remainder of the inventories is
determined on the first-in, first-out (FIFO) method.

PROPERTY, PLANT AND EQUIPMENT, including significant improvements to
existing facilities are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
which are as follows: Field service parts 3-5 years; land improvements 10-30
years; buildings 20-50 years; machinery and equipment 3-15 years; furniture and
fixtures 3-10 years. Leasehold improvements are amortized over the shorter of
their useful lives or the term of the lease.

GOODWILL represents the excess of the purchase price over the estimated fair
value of net assets of acquired businesses. Goodwill is being amortized on a
straight-line basis over periods not exceeding 25 years. Goodwill amortization
amounted to $496,000, $598,000 and $496,000 in fiscal years 1999, 1998 and 1997,
respectively. The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable.

REVENUE RECOGNITION--Revenues on product sales are recognized upon product
shipment. Installation related to products and services revenues are recognized
when complete. Equipment service revenues are recognized ratably over the
contractual period or as the services are performed.

31
<PAGE>
TAB PRODUCTS CO.

STATEMENT OF ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE (EPS) are computed as basic EPS using the average number
of common shares outstanding and diluted EPS using the average number of common
and dilutive common equivalent shares outstanding, in accordance with SFAS 128
(see Note 13).

STOCKHOLDERS' EQUITY--Shares of the Company which are repurchased are
treated as Treasury stock and are accounted for under the cost method.

INCOME TAXES--Deferred income taxes are provided for temporary differences
between financial statements and income tax reporting, in accordance with SFAS
109.

STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.

COMPREHENSIVE INCOME--Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. For the Company, comprehensive
income consists of its reported net income or loss, adjustments to the minimum
defined benefit retirement obligation and the change in the cumulative foreign
currency translation adjustment during a period.

SEGMENT REPORTING--The Company adopted Financial Accounting Standards Board
Statement No.131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131") in fiscal 1999 that requires certain financial and
descriptive information about operating segments profit or loss, certain
specific revenue and expense items and segment assets.

CONCENTRATIONS OF CREDIT RISK--Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and trade accounts receivable.
The Company places its cash and cash equivalents and short-term investments with
what it believes are high credit quality financial institutions. The Company
sells its products primarily to companies in North America, Europe and
Australia. The Company maintains reserves for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.

RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal
year ending May 31, 2000. The Company is currently evaluating the impact of SFAS
No. 133 on its financial statements and related disclosures.

32
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SHORT-TERM INVESTMENTS

The Company's short-term investments have been classified as
available-for-sale securities. The amortized cost of available-for-sale
securities at May 31, 1999 and May 31, 1998 are presented in the table which
follows. Available-for-sale securities are classified as current assets and
mature generally within six months. For each category of investment securities
the amortized cost approximates fair market value.

<TABLE>
<CAPTION>
MAY 31
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Corporate obligations............................................. $ 2,441,000 $ 3,923,000
U.S. Government obligations....................................... 500,000 973,000
------------ ------------
$ 2,941,000 $ 4,896,000
------------ ------------
------------ ------------
</TABLE>

2. INVENTORIES

<TABLE>
<CAPTION>
MAY 31
---------------------------
1999 1998
------------ -------------
<S> <C> <C>
Finished goods................................................... $ 2,415,000 $ 4,265,000
Work in process.................................................. 2,538,000 2,704,000
Raw material..................................................... 3,881,000 4,046,000
------------ -------------
$ 8,834,000 $ 11,015,000
------------ -------------
------------ -------------
</TABLE>

If the inventories for which the LIFO method is used were valued under the
FIFO method, such inventories would have been higher by $476,000 at May 31, 1999
and $763,000 at May 31, 1998. The liquidation of certain LIFO inventory
increased earnings before income tax by $287,000 in 1999, by $427,000 in 1998
and had no significant impact on earnings in 1997.

3. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
MAY 31
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Land and improvements......................................... $ 980,000 $ 990,000
Buildings and improvements.................................... 19,978,000 19,486,000
Machinery and equipment....................................... 18,764,000 17,572,000
Furniture and fixtures........................................ 18,755,000 17,031,000
Leasehold improvements........................................ 430,000 332,000
Field service spare parts..................................... 4,074,000 3,814,000
-------------- --------------
62,981,000 59,225,000
Accumulated depreciation and amortization..................... (43,339,000) (40,162,000)
-------------- --------------
$ 19,642,000 $ 19,063,000
-------------- --------------
-------------- --------------
</TABLE>

33
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT

<TABLE>
<CAPTION>
MAY 31
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Unsecured term loans............................................ $ 6,375,000 $ 9,500,000
Unsecured term loan from bank................................... 1,015,000 1,328,000
------------- -------------
Total debt...................................................... 7,390,000 10,828,000
Current portion................................................. (3,437,000) (3,437,000)
------------- -------------
Long-term debt.................................................. $ 3,953,000 $ 7,391,000
------------- -------------
------------- -------------
</TABLE>

The Company has $6,375,000 of unsecured term loans outstanding: $3,500,000
at 8.7% with principal payments through fiscal 2001 and $2,875,000 at 6.9% with
principal payments through fiscal 2003. The Company also has a $1,015,000
unsecured term loan outstanding from a bank with principal payments through
fiscal 2003. Interest on the bank loan is at the bank's reference rate (7.75% at
May 31, 1999) plus .50%. The Company, at its discretion, can select other
interest rate methods for this bank loan. These interest rate methods include a
fixed rate option, long-term rate option and an offshore rate option. The term
loans contain restrictions with respect to certain payments (including
dividends), additional debt, creation of liens and guarantees and maintenance of
minimum quick assets and stockholders' equity. The Company was not in compliance
with one of its covenants at May 31, 1999 for which a waiver was received from
the lender.

The Company has an unsecured revolving line of credit of $15 million with a
bank, as of May 31, 1999, which expires October 31, 2000. Borrowings are
available at the bank's reference rate (7.75% at May 31, 1999) or at certain
rate options, such as fixed rate, long-term rate and offshore rate options which
may be lower. The Company had no borrowings outstanding under this line as of
May 31, 1999.

The Company also has a non-revolving line of credit of $1.5 million with a
term repayment option with a bank, as of May 31, 1999, which expires October 31,
1999. Borrowings are available at the bank's reference rate (7.75% at May 31,
1999) plus .25% or at certain rate options, such as fixed rate and offshore rate
options which may be lower. The Company had no borrowings outstanding under this
line as of May 31, 1999.

Required annual principal payments of long-term debt are payable as follows:
2000-$3,437,000; 2001-$1,937,000; 2002-$1,062,000 and 2003-$954,000.

Cash paid for interest which approximates interest expense was $967,000,
$1,190,000 and $1,515,000 for fiscal years 1999, 1998 and 1997, respectively.

34
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. OTHER ACCRUED LIABILITIES

<TABLE>
<CAPTION>
MAY 31
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Payroll and related benefits..................................... $ 2,298,000 $ 2,416,000
Deferred service contract income................................. 5,438,000 3,105,000
Dividends........................................................ 251,000 258,000
Amount due to independent sales reps............................. 794,000 750,000
Other............................................................ 2,440,000 1,860,000
------------- ------------
$ 11,221,000 $ 8,389,000
------------- ------------
------------- ------------
</TABLE>

6. INCOME TAXES

Earnings before income taxes and the provision for income taxes are
comprised of the following:

<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Earnings before income taxes:
Domestic......................................... $ (700,000) $ 3,008,000 $ 4,648,000
Foreign.......................................... 1,292,000 1,582,000 2,009,000
------------ ------------- ------------
$ 592,000 $ 4,590,000 $ 6,657,000
------------ ------------- ------------
------------ ------------- ------------
Provision for income taxes:
Current:
Federal........................................ $ 46,000 $ 2,372,000 $ 1,685,000
State.......................................... 2,000 621,000 398,000
Foreign........................................ 482,000 668,000 740,000
------------ ------------- ------------
530,000 3,661,000 2,823,000
------------ ------------- ------------
Deferred:
Federal........................................ (51,000) (1,167,000) 13,000
State.......................................... 29,000 (325,000) 32,000
Foreign........................................ (78,000) (14,000) 28,000
------------ ------------- ------------
(100,000) (1,506,000) 73,000
------------ ------------- ------------
$ 430,000 $ 2,155,000 $ 2,896,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>

35
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)
The following is a reconciliation of the effective income tax rates, for
financial statement purposes.

<TABLE>
<CAPTION>
PERCENTAGE OF PRE-TAX EARNINGS
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States statutory rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit............ 3.4 4.2 4.3
Non-deductible goodwill.......................................... 26.1 4.2 2.6
Foreign taxes.................................................... 5.9 1.8 --
Other............................................................ 2.2 1.7 1.6
--- --- ---
Effective tax rate............................................... 72.6% 46.9% 43.5%
--- --- ---
--- --- ---
</TABLE>

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating losses and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MAY 31
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS
Post-retirement benefit obligation.............................. $ 529,000 $ 527,000
Reserves not currently deductible............................... 1,785,000 2,490,000
Vacation accrual................................................ 505,000 438,000
Allowance for doubtful accounts................................. 232,000 305,000
Pension obligation.............................................. 897,000 460,000
Unrealized foreign exchange losses.............................. 436,000 442,000
Other........................................................... 237,000 136,000
------------- -------------
4,621,000 4,798,000
------------- -------------

DEFERRED TAX LIABILITIES
Differences between book and tax basis of property.............. (1,754,000) (1,921,000)
Other........................................................... (163,000) (241,000)
------------- -------------
(1,917,000) (2,162,000)
------------- -------------
Net deferred tax assets......................................... $ 2,704,000 $ 2,636,000
------------- -------------
------------- -------------

MAY 31
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET DEFERRED TAX ASSETS (LIABILITIES) WERE COMPRISED OF THE
FOLLOWING:
Current assets.................................................. $ 2,393,000 $ 3,076,000
Non-current assets (liabilities)................................ 311,000 (440,000)
------------- -------------
Net deferred tax assets......................................... $ 2,704,000 $ 2,636,000
------------- -------------
------------- -------------
</TABLE>

36
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)
The Company has not provided for income taxes on undistributed earnings of
certain foreign subsidiaries which the Company intends to reinvest indefinitely.
Cash payments for income taxes were: $50,000, $2,984,000 and $2,581,000 in 1999,
1998 and 1997, respectively.

7. EMPLOYEE BENEFIT PLANS

The Company maintains a defined benefit pension plan for substantially all
domestic employees. Plan benefits are based on compensation and length of
service and provide for normal retirement at age 65. The Company's policy is to
make annual contributions to the pension plan between the ERISA minimum and the
maximum tax deductible amount allowed.

In fiscal 1999 the Company suspended its defined benefit pension plan to
limit both new participation and further pension credit for current
participants. The result of the suspension is that after March 31, 1999 no new
participants will be eligible to join the plan. Also after March 31, 1999 active
participants in the plan will not receive any future pension benefit credits.
Active participants in the plan as of March 31, 1999 will be eligible, upon
retirement, to receive a pension based upon the pension credits they have earned
through March 31, 1999. The pension plan other than these changes remains the
same.

The plan's assets are invested in short-term money market instruments, fixed
income securities and common stock.

37
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans funded status:

<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CHANGES IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year........................ $ 28,448,000 $ 21,315,000
Service cost................................................... 712,000 758,000
Interest cost.................................................. 1,832,000 1,665,000
Curtailments................................................... (3,072,000) --
Actuarial (gain) loss.......................................... (733,000) (131,000)
Assumption change.............................................. (1,007,000) 5,595,000
Benefits paid.................................................. (875,000) (754,000)
------------- -------------
Benefit obligation at end of year.............................. 25,305,000 28,448,000
------------- -------------
CHANGES IN PLAN ASSETS:
Fair value at beginning of year................................ 23,313,000 21,444,0000
Actual return on plan assets................................... 715,000 2,386,000
Adjustment..................................................... (180,000) 237,000
Benefits paid.................................................. (875,000) (754,000)
------------- -------------
Fair value at end of year...................................... 22,973,000 23,313,000
------------- -------------
Funded status.................................................. (2,332,000) (5,135,000)
Unrecognized prior service cost................................ -- 210,000
Unrecognized net transition obligation......................... -- 201,000
Unrecognized actuarial loss.................................... 3,968,000 7,493,000
------------- -------------
Net amount recognized.......................................... $ 1,636,000 $ 2,769,000
------------- -------------
------------- -------------
Accrued benefit liability...................................... $ (2,332,000) $ (1,672,000)
Intangible assets.............................................. -- 411,000
Accumulated other comprehensive income......................... 3,968,000 4,030,000
------------- -------------
Net amount recognized.......................................... $ 1,636,000 $ 2,769,000
------------- -------------
------------- -------------

WEIGHTED-AVERAGE ASSUMPTIONS AS OF MAY 31:
Discount rate.................................................. 7.00% 6.75%
Expected return on assets...................................... 9.50% 9.50%
Rate of compensation increase.................................. 5.00% 5.00%
</TABLE>

38
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net pension cost was $1,133,000, $450,000 and $395,000 for fiscal years
1999, 1998 and 1997, respectively, and included the following components.

<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC COSTS:
Service cost..................................... $ 712,000 $ 758,000 $ 729,000
Interest cost.................................... 1,832,000 1,665,000 1,537,000
Expected return on plan assets................... (2,185,000) (2,024,000) (1,912,000)
Amortization of unrecognized transition
obligation..................................... 18,000 22,000 22,000
Prior service amortization....................... 16,000 19,000 19,000
Recognized net actuarial loss.................... 363,000 10,000 --
Curtailment loss................................. 377,000 -- --
------------- ------------- -------------
Net periodic cost................................ $ 1,133,000 $ 450,000 $ 395,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

At May 31, 1999, the Company's additional minimum liability for its defined
benefit plan was in excess of the net transition obligation and was recorded as
a non-cash charge of $2,381,000 (May 31, 1998-- $2,418,000) to stockholders'
equity, net of tax benefits of $1,587,000, (May 31, 1998--$1,612,000) in
accordance with SFAS No. 87, "Employers' Accounting for Pensions."

The Company also provides a 401(k) Plan (tax deferred savings plan) for its
domestic employees. The plan provides that the Company make contributions in
either cash or common stock, at its option, equal to 50% of minimum
contributions made by participating employees up to a maximum of 2% of
employee's salary. The plan also provides for additional Company contributions
up to a maximum of 75% of participating employees' minimum contributions, for
each fiscal year in which net earnings are 5% or more of revenues. Company
contributions charged to earnings were $449,000, $460,000 and $445,000 for
fiscal years 1999, 1998 and 1997, respectively. The plan was enhanced effective
June 1, 1999 to provide for an increase in the Company match to a maximum of 3%
of employee's salary. Certain additional transitional contributions will also be
made to employee accounts on June 1, 1999, 2000 and 2001 for eligible plan
participants as of March 31, 1999.

The Company has a plan that provides certain health care benefits for all of
its retired employees who meet certain age and service requirements while
working for the Company. Generally, Company-provided health care coverage is
coordinated with Medicare upon the retiree reaching the age of 65.

Net postretirement benefit costs were $270,000, $233,000 and $172,000 for
fiscal years 1999, 1998 and 1997, respectively. The Company's postretirement
health care plans are not funded.

39
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Accumulated postretirement benefit obligation:

<TABLE>
<CAPTION>
MAY 31
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Changes in benefit obligation:
Benefit obligation at beginning of year........................... $ 1,965,000 $ 1,556,000
Service cost...................................................... 116,000 85,000
Interest cost..................................................... 126,000 132,000
Actuarial (gain) loss............................................. (26,000) 448,000
Benefits paid..................................................... (246,000) (256,000)
------------ ------------
Benefit obligations at end of year................................ 1,935,000 1,965,000
Unrecognized prior service cost................................... 57,000 67,000
Unrecognized net actuarial loss................................... (724,000) (788,000)
------------ ------------
Accrued post-retirement benefit cost.............................. $ 1,268,000 $ 1,244,000
------------ ------------
------------ ------------
</TABLE>

Net post-retirement benefit costs consisted of the following components:

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost............................................. $ 116,000 $ 85,000 $ 38,000
Interest cost on accumulated postretirement benefit
obligation............................................. 126,000 132,000 123,000
Net amortization and deferrals........................... 28,000 16,000 11,000
---------- ---------- ----------
Net postretirement benefit costs......................... $ 270,000 $ 233,000 $ 172,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of June 1, 1998 was 9% decreasing linearly
each successive year until it reaches 5% in 2003, after which it will remain
constant. A one-percentage-point increase in the assumed health care cost trend
rates would increase the accumulated postretirement benefit obligation, service
cost and interest cost components of the net periodic postretirement benefit
cost by approximately 13%, 20% and 12%, respectively. The impact of a 1%
decrease in the trend rates would decrease these components 10%, 16% and 8%,
respectively. The assumed discount rate used in determining the accumulated
post-retirement benefit obligation was 7% for fiscal 1999 and 6.75% for fiscal
1998.

8. STOCK OPTION PLANS AND STOCK PURCHASE RIGHT PLAN

Under the 1991 Employee Stock Option Plan (the Option Plan), the Company may
grant options to purchase shares of common stock to employees at prices not less
than the fair market value at date of grant for incentive stock options and not
less than 85% of fair market value for non-statutory stock options. These
options generally expire 10 years from the date of grant. They generally become
exercisable 25% per year over a 4-year period for options granted prior to
fiscal 1999 and, for those options granted thereafter, 37 1/2% of grant becomes
exercisable 18 months after the date of grant with the remainder of the grant
becoming exercisable ratably by quarter so as to be fully exercisable 5 years
from the date of grant.

40
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK OPTION PLANS AND STOCK PURCHASE RIGHT PLAN (CONTINUED)
The Tab Products Co. 1996 Outside Directors' Option Plan (the Directors'
Plan) was adopted by the Company in fiscal 1996 and approved by stockholders at
the Annual Stockholders' Meeting on October 17, 1996. Under the Directors' Plan,
an initial grant of 10,000 shares was automatically granted to all existing
outside directors at the date of stockholder approval and to all future new
outside directors at the date they are appointed as directors. The options are
granted at the fair market value at date of grant, expire 10 years from the date
of grant and become exercisable 25% per year over a 4-year period.

Under the Directors' Plan outside directors of the Company are automatically
granted additional options annually, to purchase 2,000 shares of common stock of
the Company at the fair market value at the date of grant for each year that
such person remains a director of the Company. The grant date will be the date
of the Annual Stockholders' Meeting. Annual options granted under the plan are
immediately exercisable and expire 10 years from the date of grant. The total
shares authorized under the plan is 150,000 of which 10,000 shares were granted
in both fiscal years 1999 and 1998 and 50,000 shares were granted in fiscal
1997. All options issued under the Directors' Plan are non-qualified options.

On January 27, 1997 250,000 shares of common stock were granted to the
Company's President and Chief Executive Officer, of which 242,000 shares were
granted under Non-qualified Option Agreements. These shares were granted
separate from the Company's 1991 Employee Stock Option Plan. The shares were
granted at the fair market value at the date of grant ($9.25). These options
generally expire 10 years from the date of grant and become exercisable in
twelve quarterly installments from the grant date, except for 100,000 shares
that become exercisable in 50,000 share increments four and five years from the
grant date or sooner upon the achievement of certain business milestones.

In October 1996, the Company declared a dividend of one Preferred Stock
Purchase Right (Right) for each outstanding share of common stock. The Right
entitles a stockholder to purchase one one-hundredth of a share of preferred
stock at $35 per Right exercisable after a person acquires 15% or more of TAB's
common stock or announces a tender offer which could result in such person
owning 15% or more of the common stock. Each one one-hundredth of a share of
preferred stock has terms designed to make it substantially the economic
equivalent of one share of common stock. Under certain circumstances, if a
person acquires 15% or more of the common stock, the Rights permit the holders
to purchase TAB common stock having a market value of twice the exercise price
of the Rights, in lieu of the preferred stock. In addition, in the event of
certain business combinations, the Rights permit purchase of the common stock of
an acquiring person at a 50% discount. Rights held by an acquiring person will
become null and void in both cases. The Rights are subject to redemption by the
Company's Board of Directors for $.001 for each Right. The Rights expire on
October 23, 2006.

41
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK OPTION PLANS AND STOCK PURCHASE RIGHT PLAN (CONTINUED)
Option activity under the plans is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding, June 1, 1996 (3,750 exercisable at a weighted
average price of $6.38)....................................... 686,250 $ 6.08
Granted (weighted average fair value of $2.26).................. 343,500 8.69
Exercised....................................................... (81,625) 6.03
Canceled........................................................ (171,750) 6.00
---------- ------
Outstanding, May 31, 1997 (207,125 exercisable at weighted
average price of $6.26)....................................... 776,375 7.26
Granted (weighted average fair value of $2.82).................. 70,000 10.25
Exercised....................................................... (235,813) 6.09
Canceled........................................................ (98,812) 6.98
---------- ------
Outstanding, May 31, 1998 (149,125 exercisable at weighted
average price of $7.58)....................................... 511,750 8.26
Granted (weighted average fair value of $2.92).................. 186,500 10.63
Exercised....................................................... (4,500) 6.00
Canceled........................................................ (38,125) 10.02
---------- ------
Outstanding, May 31, 1999 (282,875 exercisable at weighted
average price of $7.91)....................................... 655,625 $ 8.84
---------- ------
---------- ------
</TABLE>

Additional information regarding options outstanding as of May 31, 1999 is
as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------------
WEIGHTED AVG.
RANGE OF REMAINING WEIGHTED AVG. WEIGHTED AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- -------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$5.00 - $ 6.38 102,875 7.4 $ 5.72 65,375 $ 6.04
$6.50 - $ 7.63 127,500 7.2 $ 6.86 82,500 $ 6.82
$9.13 - $ 9.50 293,750 7.7 $ 9.26 123,750 $ 9.26
$11.88 - $12.50 131,500 9.0 $ 12.28 11,250 $ 11.89
----------- -----------
$5.00 - $12.50 655,625 7.8 $ 8.84 282,875 $ 7.91
----------- -----------
----------- -----------
</TABLE>

At May 31, 1999, 356,468 and 80,000 shares were available for future grants
under the Option Plan and Directors' Plan, respectively.

ADDITIONAL STOCK PLAN INFORMATION

As discussed in the Statement of Accounting Policies, the Company continues
to account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board No. 25, Accounting for Stock Issued
to Employees and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.

42
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK OPTION PLANS AND STOCK PURCHASE RIGHT PLAN (CONTINUED)
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards.

These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 12 months following vesting; stock volatility, 36.4% in fiscal 1999, 32.9%
in fiscal 1998 and 30.8% in fiscal 1997; risk free interest rates, 5.29% in
fiscal 1999, 5.66% in fiscal 1998 and 6.25% in fiscal 1997 and a dividend rate
of 2.5% in fiscal years 1999, 1998 and 1997. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the awards had been amortized to
expense over the vesting period of the awards, pro forma net income (loss) would
have been ($55,000) ($.01 basic and diluted loss per share) in fiscal 1999,
$2,242,000 ($.44 basic and $.42 diluted per share) in fiscal 1998 and $3,541,000
($.73 basic and $.71 diluted per share) in fiscal 1997. The impact of
outstanding non-vested stock options granted prior to fiscal 1996 has been
excluded from the pro forma calculation; accordingly, the fiscal 1999, 1998 and
1997 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.

9. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are obligated under leases of certain
office and warehouse facilities expiring at various dates through 2012. The
future minimum rental payments under these lease agreements at May 31, 1999 are
as follows:

<TABLE>
<S> <C>
2000............................................ $1,899,000
2001............................................ 1,481,000
2002............................................ 869,000
2003............................................ 413,000
2004............................................ 139,000
Thereafter...................................... 137,000
---------
$4,938,000
---------
---------
</TABLE>

Total rentals charged to expense amounted to $2,869,000 in 1999, $2,620,000
in 1998 and $2,632,000 in 1997.

10. MAJOR CUSTOMER

No single customer accounted for greater than 10% of consolidated revenues
in fiscal years 1999, 1998 and 1997.

43
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. SEGMENT REPORTING

The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" during fiscal 1999. SFAS No. 131 establishes
standards for reporting information about operating segments in financial
statements. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or chief decision making group, in deciding
how to allocate resources and in assessing performance. The President and Chief
Executive Officer is the Company's chief decision maker. The Company operates
and is managed internally by four geographic operating segments. The operating
segments include United States, Canada, the Netherlands and Australia. Outside
the United States, each operating segment has a general manager that reports to
the Chief Executive Officer. Within the United States, the Vice Presidents of
Operations, Marketing and Sales report directly to the Chief Executive Officer.

Information about segments for the years ended May 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
United States............................. $ 126,269,000 $ 135,594,000 $ 124,445,000
Canada.................................... 18,664,000 21,943,000 19,537,000
Netherlands............................... 7,067,000 4,441,000 5,245,000
Australia................................. 3,620,000 3,965,000 5,224,000
-------------- -------------- --------------
Consolidated Total........................ $ 155,620,000 $ 165,943,000 $ 154,451,000
-------------- -------------- --------------
-------------- -------------- --------------

1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Income (Loss) before income taxes:
United States............................. $ 38,000 $ 3,467,000 $ 4,936,000
Canada.................................... (520,000) 1,354,000 852,000
Netherlands............................... 1,457,000 77,000 536,000
Australia................................. (383,000) (308,000) 333,000
-------------- -------------- --------------
Consolidated Total........................ $ 592,000 $ 4,590,000 $ 6,657,000
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>

1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Depreciation and amortization:
United States............................. $ 3,790,000 $ 5,994,000 $ 2,838,000
Canada.................................... 414,000 400,000 386,000
Netherlands............................... 55,000 54,000 57,000
Australia................................. 47,000 74,000 72,000
-------------- -------------- --------------
Consolidated Total........................ $ 4,306,000 $ 6,522,000 $ 3,353,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

44
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Long-lived assets:
United States................................................ $ 19,692,000 $ 18,890,000
Canada....................................................... 786,000 781,000
Netherlands.................................................. 133,000 118,000
Australia.................................................... 232,000 238,000
------------- -------------
Consolidated Total........................................... $ 20,843,000 $ 20,027,000
------------- -------------
------------- -------------
</TABLE>

Geographic revenues are based on the country from which customers are
invoiced. Income before tax is net sales less operating expenses, interest or
other expenses, but prior to income taxes.

12. PER SHARE INFORMATION

Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period while diluted earnings per
share also includes the dilutive impact of stock options. Basic and diluted
earnings per share for the fiscal years ended May 31, 1999, 1998 and 1997,
respectively, are calculated as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding.............................. 5,090 5,102 4,879
Net earnings..................................................... $ 162 $ 2,435 $ 3,761
Basic earnings per share......................................... .03 .48 .77
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding.............................. 5,090 5,102 4,879
Dilutive effect of options....................................... 32 184 138
--------- --------- ---------
Total.......................................................... 5,122 5,286 5,017
Net earnings..................................................... $ 162 $ 2,435 $ 3,761
Diluted earnings per share....................................... $ .03 $ .46 $ .75
--------- --------- ---------
--------- --------- ---------
</TABLE>

45
<PAGE>
TAB PRODUCTS CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. SELECTED QUARTERLY DATA (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
EARNINGS (LOSS) PER
NET SHARE
GROSS EARNINGS ----------------------
FISCAL QUARTER ENDED REVENUES PROFIT(1) (LOSS) BASIC DILUTED
- ------------------------------------------ ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
1999
August 31................................. $ 38,128 $ 14,251 $ 5 $ .00 $ .00
November 30............................... 39,272 15,051 79 .02 .02
February 28............................... 40,575 15,885 280 .06 .06
May 31.................................... 37,645 14,554 (202) (.04) (.04)
---------- --------- ----------- --------- -----
$ 155,620 $ 59,741 $ 162 .03 .03
---------- --------- ----------- --------- -----
---------- --------- ----------- --------- -----

1998
August 31................................. $ 39,443 $ 15,922 $ 886 $ .18 $ .17
November 30............................... 41,573 17,516 1,404 .28 .27
February 28............................... 41,096 17,289 1,402 .27 .26
May 31.................................... 43,831 16,303 (1,257) (.24) (.24)
---------- --------- ----------- --------- -----
$ 165,943 $ 67,030 $ 2,435 .48 .46
---------- --------- ----------- --------- -----
---------- --------- ----------- --------- -----
</TABLE>

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

(1) Revenues less cost of revenues.

14. SUBSEQUENT EVENTS

Pursuant to an Agreement for Purchase and Sale of Assets (the "Agreement"),
by and between the Company and Bell & Howell Document Management Products
Company, a wholly-owned subsidiary of Bell & Howell Company ("Bell & Howell"),
the Company sold its Field Services Group to Bell & Howell on June 1, 1999. The
price of the Purchased Assets, as defined in the Agreement, consists of an
initial cash payment of $11,200,000, the assumption of certain liabilities and
obligations of the Company valued at an estimated $4,300,000 and up to an
additional $3,500,000 payable to the Company for changes in certain accounts
attributable to the Field Service Group. In order for the Company to obtain
consent for the sale from one of its lenders, the Company chose to place a
portion of the cash payment received from Bell & Howell in a restricted bank
account and pledge the funds as collateral for the existing loan. In exchange
for the pledge of collateral the lender modified the covenants of the loan and
approved the sale transaction.

In July 1998, the Company authorized a stock repurchase program for 300,000
shares of Common Stock. The authorization was effective until July 1999. During
fiscal 1999, the Company purchased 146,200 shares of Common Stock under the
Company's authorized repurchase program at a cost of $955,000. The remaining
unused portion of this authorization of 153,800 shares has expired. In July
1999, the Company approved a new authorization to repurchase 300,000 shares of
Common Stock. The authorization is effective until July 2000.

46
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Tab Products Co.:

We have audited the consolidated financial statements of Tab Products Co.
and its subsidiaries as of May 31, 1999 and 1998, and for each of the three
years in the period ended May 31, 1999, and have issued our report thereon dated
June 28, 1999; such financial statements and report are included in this Annual
Report on Form 10-K. Our audits also included the financial statement schedule
of Tab Products Co., for the years ended May 31, 1999, 1998 and 1997, listed in
Item 14(a)(2). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth herein.

DELOITTE & TOUCHE LLP

San Jose, California
June 28, 1999

47
<PAGE>
TAB PRODUCTS CO. AND SUBSIDIARY COMPANIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS UNCOLLECTIBLE
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE OF PERIOD EXPENSES RESERVE PERIOD
- --------------------------------------------------------------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended May 31, 1999........................................ $ 947,000 $ 380,000 $ 391,000 $ 936,000

Year ended May 31, 1998........................................ $ 769,000 $ 462,000 $ 284,000 $ 947,000

Year ended May 31, 1997........................................ $ 620,000 $ 400,000 $ 251,000 $ 769,000
</TABLE>

<PAGE>

[LETTERHEAD]

June 1, 1999

MS. LAURA COLLINS
Vice President Business Development
BELL & HOWELL
5215 Old Orchard Road
Skokie, Illinois 60077

Re: TAB PRODUCTS COMPANY

Ladies and Gentlemen:

Reference is made to the note agreement dated as of March 20, 1992 by
and between Tab Products Company (the "Company") and The Prudential Insurance
Company of America ("Prudential") and to the note agreement dated as of
October 7, 1993 between the Company and Prudential (collectively referred to
as the "Agreements"). Please be advised that upon the receipt of $6,625,000
in immediately available funds at account number 14934-00003 at Bank of
America wired as indicated on the following page, the Agreements shall be
amended so as to eliminate therefrom any prohibition on the proposed sale of
assets to you by the Company. The foregoing shall be effective only if the
referenced amount is received in such account on or before June 4, 1999.

Sincerely,

THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA

By: /s/ Joseph Y. Alouf
--------------------
Its: Vice President
--------------------

<PAGE>

WIRING INSTRUCTIONS:

Bank of America
Routing: ABA #121000358
Account Number 1497-83982

For further credit to:
Account Name: Tab Products
Account Number: 14934-00003

<PAGE>

[PRUDENTIAL LETTERHEAD]

May 28, 1999

TAB PRODUCTS CO.
TAB CANADA LIMITED
1400 Page Mill Road
Palo Alto, California 94304

Ladies and Gentlemen:

Reference is made to the Note Agreement between Tab Products Co. (the
"Company") and The Prudential Insurance Company of America ("Prudential")
dated as of (i) March 20, 1992 (the "1992 Agreement"), pursuant to which the
Company issued and sold and Prudential purchased the Company's 8.73% Senior
Notes due March 20, 2001 in the principal amount of $15,000,000 and (ii)
October 7, 1993 (the "1993 Agreement"), pursuant to which the Company issued
and sold and Prudential purchased the Company's 6.90% Senior Guaranteed Notes
due September 20, 2002. The 1992 Agreement and the 1993 Agreement are
together referred to as the "Agreements," and each is an "Agreement."
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the applicable Agreement.

Pursuant to the request of the Company and the provisions of paragraph
11C of each Agreement, Prudential and the Company agree with respect to each
Agreement as follows:

1. Paragraph 6C of each Agreement is amended by deleting the reference
therein to "$2,000,000" and substituting therefor a reference to
"$4,000,000".

2. Paragraphs 6F and 6G are deleted in their entirety from each
Agreement.

3. Paragraph 6L of each Agreement is hereby amended and restated in
its entirety as follows:

"6L. FIXED CHARGE COVERAGE. Permit its Fixed Charge Coverage
Ratio calculated at the end of each fiscal quarter commencing with
the fiscal quarter ending May 30, 1994, on the basis of the
consolidated results of operations of the Company and its
Subsidiaries, to be less than (A) 1.15 from May 30, 1994 through
and including May 30, 1997; (B) 1.00 from May 31, 1997 through
February 28, 1998; (C) 1.15 from March 1, 1998 through February 28,
1999; and (D) .50 at all times thereafter"

<PAGE>
TAB PRODUCTS CO.
TAB CANADA LIMITED
May 28, 1999
Page 2

4. Paragraph 6M of each Agreement is hereby amended and restated in
its entirety as follows:

"6M. TOTAL LIABILITIES. Permit the ratio of (i) Total Liabilities
to (ii) Consolidated Tangible Net Worth to exceed at any time (A)
during the period from June 1, 1995 through May 30, 1996, 1.60; (B)
during the period June 1, 1996 through February 28, 1999, 1.35 and
(C) thereafter, 1.75."

5. Clause (xvi) of paragraph 7A of each Agreement is amended and
restated in its entirety as follows:

"(xvi) (a) the Canada Guaranty, for any reason other than
satisfaction in full of the obligations of the Company guaranteed
thereunder, ceases to be in full force and effect or is declared
null and void, or the validity or enforceability thereof is
contested in a judicial proceeding, or the Guarantor denies that it
has any further liability under the Canada Guaranty, or the
Guarantor shall default in the performance or observance of any of
its obligations under the Canada Guaranty, and such default shall
not have been cured or waived within 30 days or (b) the Control
Agreement, for any reason other than payment in full of the Notes
and all other amounts due under this Agreement, ceases to be in
full force and effect or is declared null and void, or the validity
or enforceability thereof is contested in a judicial proceeding, or
the Company asserts it has no liability thereunder or the Company
or Bank of America NT&SA (or any successor) defaults in the
performance or observance of any of its obligations thereunder and
such default has not been cured or waived;"

6. Paragraph 10B of each Agreement is amended by adding thereto the
following defined term.

"'CONTROL AGREEMENT' shall mean that certain account control
agreement dated as of May 28, 1999, by and among the Company, The
Prudential Insurance Company of Agreement and Bank of America
NT&SA, pursuant to which the Company has pledged the subject
deposit account (which has been initially funded with $6,625,000 of
cash) as collateral for the Notes and certain other notes."

7. Each Agreement is further amended by adding thereto new paragraphs
12A and 12B as follows:

"12A GRANT OF SECURITY INTEREST. The Company hereby grants to The
Prudential Insurance Company of America, together with its
successors, assigns, and transferees, a security interest in the
Company's deposit account no 14934-00003 (the "Account") with Bank
of America NT&SA, together

<PAGE>
TAB PRODUCTS CO.
TAB CANADA LIMITED
May 28, 1999
Page 3

with the financial assets (as such term is defined in Division 8 of
the Uniform Commercial Code of the State of California) and other
assets from time to time in said account and the proceeds thereof,
to secure all of the Company's obligations under the Notes and this
Agreement (including, without limitation, principal, interest yield
maintenance amounts and premiums, fees and expenses), as well as
all obligations arising under or in connection with another note
agreement between the Company and The Prudential Insurance Company
of America."

"12B. DIRECTION TO RELEASE FUNDS FROM ACCOUNT. In connection with
each required principal prepayment of the Notes, Prudential agrees
that promptly following its confirmation of receipt and payment of
such account it will provide its consent to Bank of America NT&SA
to release to the Company from the Account such prepaid principal
amount, provided that no Event of Default then exists under the
Agreement."

The foregoing amendments shall not be effective until the Company and
Bank of America NT&SA have executed and delivered to Prudential the Control
Agreement in the form attached hereto as an exhibit and there has been
deposited into the account referenced therein $6,625,000 in cash.

If you agree with the foregoing, please sign below and return a copy of
this letter to the undersigned. Upon such execution, this letter shall
become a binding agreement between the Company and Prudential amending the
1992 Agreement and the 1993 Agreement in the manner and to the extent herein
provided, subject to satisfaction of the condition precedent set forth above.
Except as otherwise set forth herein, the 1992 Agreement and the 1993
Agreement shall each continue unmodified and in full force and effect.

Very truly yours,

THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA

By /s/ Joseph Y. Alouf
---------------------
Vice President

<PAGE>
TAB PRODUCTS CO.
TAB CANADA LIMITED
May 28, 1999
Page 4

Accepted and Agreed:

TAB PRODUCTS CO.

By: /s/ David J. Davis
----------------------
Its: SVP Operations & CFO
----------------------

The undersigned, as a guarantor of the 6.90% Notes pursuant to its Guaranty
thereof dated October 7, 1993, expressly agrees with and consents to the
amendments set forth in this letter and confirms that its Guaranty remains in
full force and effect as originally executed and is expressly reaffirmed
hereby.

TAB CANADA LIMITED

By: /s/ Robert J. Sexton
----------------------
Its: Secretary & Treasurer
----------------------

<PAGE>

ACCOUNT CONTROL AGREEMENT

May 28, 1999

THIS ACCOUNT CONTROL AGREEMENT ("Agreement") is entered into by THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA ("Creditor"), whose address is c/o
Prudential Capital Group, Four Embarcadero Center, Suite 2700, San Francisco,
California 94111, TAB PRODUCTS COMPANY, a Delaware corporation ("Debtor")
whose address is 1400 Page Mill Road, Palo Alto, CA 94304, and BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association ("Depository Institution") whose address is 530 Lytton Avenue,
2nd Floor, Palo Alto, CA 94301.

RECITALS:

1. Depository Institution and Debtor have entered into a customer
agreement (as from time to time amended, supplemented restated or modified,
the "Customer Agreement"), pursuant to which Depository Institution has
established its deposit account number 14934-00003 in the name of Debtor with
an initial aggregate investment in the amount of $6,625,000 (the "Account");

2. Debtor and Creditor have entered into a Note Agreement, dated as
of March 20, 1992, and a Note Agreement, dated as of October 7, 1993 (each as
amended, including without limitation, by the Amendment Letter, dated as of
the date hereof, pursuant to which Debtor has granted in favor of Creditor a
security interest in the Account, the money and other property from time to
time in said account and proceeds thereof, and as the same from time to time
may be further amended, supplemented, restated or modified, individually a
"Note Agreement" and collectively the Note Agreements); and

3. Creditor, Debtor and Depository Institution are entering into
this Agreement to provide for the control of the Account and to perfect the
security interest of Creditor in the Account as more fully described in the
Note Agreement.

NOW, THEREFORE, the parties hereto agree as follows:

SECTION 1. THE ACCOUNT. Depository Institution hereby represents
and warrants to Creditor and Debtor that (i) the Account has been established
in the name of Debtor as recited above, (ii) the Customer Agreement, the
property contained in the Account are valid and legally binding obligations
of Depository Institution, and (iii) except for the claims and interest of
Creditor and of Debtor in the Account, Depository Institution does not know
of any claim to or interest in the Account or in any property carried therein.

SECTION 2. NO WITHDRAWALS AFTER RECEIPT OF NOTICE OF EXCLUSIVE
CONTROL. Debtor shall not, and Depository Institution shall not permit, the
withdrawal or payment of any amount deposited in the account or proceeds
thereof from the Account other than interest earned by debtor from time to
time in respect of amounts in the Account. Subject in all cases to the
immediately preceding sentence, until such time as Depository Institution
shall have received a Notice of Exclusive Control (as such term is defined in
Section 4 below), Depository Institution shall comply with the instructions
and directions ("Entitlement Orders") of Debtor. After Depository
Institution receives a Notice of Exclusive Control, notwithstanding the
provisions of Section 3 below, Depository Institution shall (i) neither
accept nor comply with any Entitlement Order from Debtor with respect to the
Account or withdrawing any amounts deposited therein assets from the Account
nor deliver any such property (including interest) to Debtor

<PAGE>

without the specific prior written consent of Creditor, and (ii) comply with
Entitlement Orders originated by Creditor concerning the Account without
further consent by Debtor.

SECTION 3. PRIORITY OF LIEN. Depository Institution hereby
acknowledges that it has received notice of the existence of the Note
Agreements and of the security interest of Creditor in the Account and
recognizes the security interest granted therein to Creditor by Debtor.
Depository Institution hereby waives and releases all liens, encumbrances,
claims and rights of setoff it may have against the Account or any property
carried in the Account or any credit balance in the Account and agrees that,
except for payment of its customary fees and commission pursuant to the
Customer Agreement, it will not assert any such lien, encumbrance, claim or
right against the Account or any amounts in the Account or any credit balance
in the Account. Depository Institution will not agree with any third party
that Depository Institution will comply with Entitlement Orders concerning
the Account originated by such third party without the prior written consent
of Creditor and Debtor.

SECTION 4. CONTROL. Except as otherwise provided in Sections 2 and
3 above, Depository Institution shall follow the instructions of Debtor, or
its authorized representatives, and comply with Entitlement Orders concerning
the Account from Debtor, or its authorized representatives, until such time
as Creditor delivers a written notice to Depository Institution which states
that (a) an Event of Default (as such term is defined in either Note
Agreement) has occurred and is continuing and (b) that Creditor is thereby
exercising exclusive control over the Account. Such notice may be referred
to herein as the "Notice of Exclusive Control." After Depository Institution
receives a Notice of Exclusive Control, it will immediately cease complying
with Entitlement Orders concerning the Account originated by Debtor or its
representatives and will immediately comply solely with the Entitlement
Orders concerning the Account originated by Creditor or its representatives.

SECTION 5. LIMITATION OF RESPONSIBILITY OF DEPOSITORY INSTITUTION.
Except for permitting a withdrawal or payment in violation of Section 2
above, Depository Institution shall have no responsibility or liability to
Creditor for making withdrawals of parts or all of the amounts held in the
Account at the instruction of Debtor, or its authorized representatives,
which are received by Depository Institution before Depository Institution
receives a Notice of Exclusive Control. Depository Institution shall have no
responsibility or liability to Debtor for complying with a Notice of
Exclusive Control or complying with Entitlement Orders concerning the Account
originated by Creditor. Depository Institution shall have no independent
duty to investigate or make any determination as to whether an Event of
Default exists, and shall comply with a Notice of Exclusive Control. Neither
this Agreement nor either Note Agreement imposes or creates any obligation or
duty of Depository Institution other than those expressly set forth herein.

SECTION 6. INDEMNITY. The Debtor shall at all times indemnify and
hold harmless the Depository Institution (and Depository Institution's
directors, officers, employees and agents) from and against any and all
claims, actions and suits arising out of the terms of this Agreement or the
Note Agreements, or the compliance of the Depository Institution with the
terms thereof, and from and against any and all liabilities, losses, damages,
costs, charges, counsel fees and disbursements and other expenses of every
nature and character arising by reason of same, except to the extent that
such arises from the Depository Institution's gross negligence or willful
misconduct.

SECTION 7. TAX REPORTING. All items of income, gain, expense and
loss recognized in the Account shall be reported to the Internal Revenue
Service and all state and local taxing authorities under the name and
taxpayer identification number of Debtor.

<PAGE>

SECTION 8. CUSTOMER AGREEMENT. This Agreement supplements the
Customer Agreement between Debtor and Depository Institution. In the event
of a conflict between this Agreement and the Customer Agreement, the terms of
this Agreement will prevail. Regardless of any provision in the Customer
Agreement, the State of California shall be deemed to be the Depository
Institution's location for the purposes of this Agreement and the perfection
and priority of Creditor's security interest in the Account.

SECTION 9. TERMINATION. The rights and powers granted herein to
Creditor have been granted in order to perfect its security interest in the
Account, are powers coupled with an interest and will neither be affected by
the bankruptcy of Debtor nor by the lapse of time. The obligations of
Depository Institution under Sections 2, 3 and 4 above shall continue in
effect until the security interest of Creditor in the Account has been
terminated pursuant to the terms of the Note Agreement and Creditor has
notified Depository Institution of such termination in writing, which
Creditor agrees to do promptly upon request of Debtor following such
termination. Upon receipt of such notice the obligations of Depository
Institution under Sections 2, 3 and 4 above with respect to the operation and
maintenance of the Account after the receipt of such notice shall terminate,
Creditor shall have no further right to originate Entitlement Orders
concerning the Account and Depository Institution may take such steps as
Debtor may request to vest full ownership and control of the account in
Debtor, including, but not limited to, transferring all of the property
deposited or contained in the Account to another deposit account in the name
of Debtor or its designee.

SECTION 10. THIS AGREEMENT. This Agreement, the schedules and
exhibits hereto and the agreements and instruments required to be executed
and delivered hereunder set forth the entire agreement of the parties with
respect to the subject matter hereof and supersede and discharge all prior
agreements (written or oral) and negotiations and all contemporaneous oral
agreements concerning such subject matter and negotiations. There are no
oral conditions precedent to the effectiveness of this Agreement.

SECTION 11. AMENDMENTS. No amendment, modification or termination
of this Agreement or waiver of any right hereunder shall be binding on any
party hereto unless it is in writing and is signed by the party to be charged.

SECTION 12. SEVERABILITY. If any term or provision set forth in
this Agreement shall be invalid or unenforceable, the remainder of this
Agreement, or the application of such terms or provisions to persons or
circumstances, other than those to which it is held invalid or unenforceable,
shall be construed in all respects if such invalid or unenforceable term or
provision were omitted.

SECTION 13. SUCCESSOR. The terms of this Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their
respective successors or assigns.

SECTION 14. RULES OF CONSTRUCTION. In this Agreement, words in the
singular number include the plural, and in the plural include the singular;
words of the masculine gender include the feminine and the neuter, and when
the sense so indicates words of the neuter gender may refer to any gender and
the word "or" is disjunctive but not exclusive. The captions and section
numbers appearing in this Agreement are inserted only as a matter of
convenience. They do not define, limit or describe the scope or intent of
the provisions of this Agreement.

SECTION 15. NOTICE. Any notice, request, or other communication
required or permitted to be given under this Agreement shall be in writing
and deemed to have been properly given when delivered

<PAGE>

in person, or when sent by telefacsimile or other electronic means and
electronic confirmation of error-free receipt is received or two days after
being sent by certified or registered United States mail, return receipt
requested, postage prepaid, addressed to the party at the address set forth
next to such parties' name at the heading of this Agreement. Any party may
change its address for notices in the manner set forth above.

SECTION 16. COUNTERPARTS. This Agreement may be executed in any
number counterparts, all of which shall constitute one and the same
instrument, and any party hereto may execute this Agreement by signing and
delivering one or more counterparts.

SECTION 17. CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the law of the State of California.

IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.

CREDITOR

THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA

By /s/ Joseph Y. Alouf
-----------------------------------
Title: Vice President
-------------------------------

DEBTOR

TAB PRODUCTS COMPANY

By /s/ David J. Davis
-----------------------------------
Title: SVP Operations & CFO
-------------------------------

DEPOSITORY INSTITUTION

BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION

By /s/ Chris Giannotti
-----------------------------------
Title: Vice President
-------------------------------

<PAGE>

BANK OF AMERICA
===============================================================================

AMENDMENT TO DOCUMENTS

AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT

This Amendment No. 1 (the "Amendment") dated as of May 31, 1999, is
between Bank of America National Trust and Savings Association (the "Bank")
and Tab Products Co. (the "Borrower").

RECITALS

A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of November 1, 1998 (the "Agreement").

B. The Bank and the Borrower desire to amend the Agreement.

AGREEMENT

1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.

2. AMENDMENTS. The Agreement is hereby amended as follows:

2.1 A new Paragraph 9.2(e) is added to the Agreement, which reads
in its entirety as follows:

"(e) By June 30, 1999, budget report with a fiscal year
ending May 31, 2000."

2.2 In Paragraph 9.3 of the Agreement, the amount "FIFTEEN MILLION
DOLLARS ($15,000,000)" is substituted for the amount "EIGHT
MILLION DOLLARS ($8,000,000)".

2.3 Paragraph 9.5 of the Agreement, the amount is amended to read
in its entirety as follows:

"9.5 FIXED CHARGE COVERAGE RATIO. To maintain on a
consolidated basis a fixed charge coverage ratio of at least the
amounts indicated for each period specified below:
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----
<S> <C>
From the date of this Agreement
through August 30, 1999 1.0:1.0

From August 31, 1999 and thereafter 1.15:1.0
</TABLE>

'Fixed charge coverage ratio' means the ratio of cash flow to
fixed charges. 'Fixed charges' means the sum of (i) the
principal payments on debt (including, without limitation,
prepayments and regularly scheduled payments of the Senior
Notes and the Senior Guaranteed Notes (both as defined below)
and regularly scheduled payments (but not prepayments) of debt
to the Bank, (ii) interest expense, and (iii) capital lease
expense. 'Cash flow' means (a) the sum of (i) net income after
taxes, (excluding any gain from sale of assets or a portion of
Borrower's business and the resulting tax impact), (ii)
depreciation, (iii) amortization, (iv) interest expense, and
(v) net proceeds received by the Borrower resulting from its
issuance of any equity securities, LESS (b) the sum of (i) any
amounts paid by the Borrower to purchase, redeem or otherwise
acquire any of its shares and (ii) dividends paid by the
Borrower. 'Senior Notes' means the Borrower's 8.73% senior
promissory note(s) in the original principal amount of Fifteen
Million Dollars ($15,000,000) due March 20, 2001, authorized by
and subject to the terms and conditions of that certain Note
Agreement executed as of March 20, 1992, by the Borrower in favor
of The Prudential Insurance Company of America ('Prudential'), as
now in effect and as hereafter amended or restated (the 'Note
Agreement'). 'Senior Guaranteed Notes' means the Borrower's 6.9%
senior promissory note(s) in the original principal amount of
Five Million Dollars ($5,000,000) due September 20, 2002,
authorized by and subject to the terms and conditions of that
certain Note Agreement executed as of October 7, 1993, by the
Borrower in favor of Prudential, as now in effect and as
hereafter amended or restated (the 'Guaranteed Note Agreement').
This ratio will be calculated at the end of each fiscal quarter,
using the results of that quarter and each of the 3 immediately
preceding quarters."

2.4 A new Paragraph 9.9(f) is added to the Agreement, which reads
in its entirety as follows:

-1-
<PAGE>

"(f) Additional liens permitted to pledge cash or marketable
securities in favor of Prudential Capital Group as
collateral for the outstanding balance of Prudential
Senior Notes, which do not exceed a total principal
amount of Six Million Six Hundred Twenty Five Thousand
Dollars ($6,625,000) outstanding at any one time."

2.5 In Paragraph 9.10 of the Agreement, the amount "FOUR MILLION
DOLLARS ($4,000,000)" is substituted for the amount "FIVE MILLION
DOLLARS ($5,000,000)".

2.1 A new Paragraph 9.22(i) is added to the Agreement, which reads
in this entirety as follows:

"(i) sell Field Services Division to Bell & Howell on or
before June 1, 1999."

3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) there
is no event which is, or with notice or lapse of time or both would be, a
default under the Agreement except those events, if any, that have ben
disclosed in writing to the Bank or waived in writing by the Bank, (b) the
representations and warranties in the Agreement are true as of the date of this
Amendment as if made on the date of this Amendment, (c) this Amendment is
within the Borrower's powers, has been duly authorized, and does not conflict
with any of the Borrower's organizational papers, and (d) this Amendment does
not conflict with any law, agreement, or obligation by which the Borrower is
bound.

4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.

This Amendment is executed as of the date stated at the beginning of
this Amendment.

BANK OF AMERICA Tab Products Co.
NATIONAL TRUST AND SAVINGS ASSOCIATION

X /s/ David J. Davis
X /s/ Chris P. Giannotti ------------------------------
- --------------------------------------- By: David J. Davis, SVP,
By: Chris P. Giannotti, Vice President Operations and Chief
Financial Officer

X /s/ R.J. Sexton
------------------------------
By: R.J. Sexton
Treasurer and Secretary

-2-

<PAGE>

[LETTERHEAD]

AMENDMENT TO DOCUMENTS

AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT

This Amendment No. 2 (the "Amendment") dated as of May 31, 1999, is
between Bank of America National Trust and Savings Association (the "Bank")
and Tab Products Co. (the "Borrower").

RECITALS

A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of November 1, 1998 (the "Agreement").

B. The Bank and the Borrower desire to further amend the Agreement.

AGREEMENT

1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.

2. AMENDMENTS. The Agreement is hereby amended as follows:

2.1 Paragraph 9.5 of the Agreement is amended to read in its
entirety as follows:

"9.5 FIXED CHARGE COVERAGE RATIO. To maintain on a
consolidated basis a fixed charge coverage ratio of at least
2.25:1.0.

'Fixed charge coverage ratio' means the ratio of cash flow to
fixed charges. 'Fixed charges' means the sum of (i) the
principal payments on debt (including, without limitation,
prepayments and regularly scheduled payments of the Senior
Notes and Senior Guaranteed Notes (both as defined below) and
including regularly scheduled payments but not prepayments of
debt to the Bank), (ii) interest expense, and (iii) capital
lease expense. 'Cash flow' means (a) the sum of (i) net income
after taxes, (excluding any gain from sale of assets or a
portion of Borrower's business and the resulting tax impact),
(ii) depreciation, (iii) amortization, (iv) interest expense,
and (v) net proceeds received by the Borrower resulting from
its issuance of any equity securities, LESS (b) the sum of (i)
any amounts paid by the Borrower to purchase, redeem or
otherwise acquire any of its shares and (ii) cash dividends
paid by the Borrower. Notwithstanding the preceding,
prepayments and regularly scheduled payments of the Senior
Notes and the Senior Guaranteed Notes shall be EXCLUDED from
the calculation of 'Fixed Changes' during the period that the
Senior Notes and the Senior Guaranteed Notes are secured by
cash collateral. 'Senior Notes' means the Borrower's 8.73%
senior promissory note(s) in the original principal amount of
Fifteen Million Dollars ($15,000,000) due March 20, 2001,
authorized by and subject to the terms and conditions of that
certain Note Agreement executed as of March 20, 1992, by the
Borrower in favor of The Prudential Insurance Company of
America ('Prudential'), as now in effect and as hereafter
amended or restated (the 'Note Agreement'). 'Senior Guaranteed
Notes' means the Borrower's 6.9% senior promissory note(s) in
the original principal amount of Five Million Dollars
($5,000,000) due September 20, 2002, authorized by and subject
to the terms and conditions of that certain Note Agreement
executed as of October 7, 1993, by the Borrower in favor of
Prudential, as now in effect and as hereafter amended or
restated (the 'Guaranteed Note Agreement'). This ratio will be
calculated at the end of each fiscal quarter, using the results
of that quarter and each of the 3 immediately preceding
quarters."

3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) there
is no event which is, or with notice or lapse of time or both would be, a
default under the Agreement except those events, if any, that have been
disclosed in writing to the Bank or waived in writing by the Bank, (b) the
representations and warranties in the Agreement are true as of the date of
this Amendment as if made on the date of this Amendment, (c) this Amendment
is within the Borrower's powers, has been duly authorized, and does not
conflict with any of the Borrower's organizational papers, and (d) this
Amendment does not conflict with any law, agreement, or obligation by which
the Borrower is bound.

4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.

-1-

<PAGE>

This Amendment is executed as of the date stated at the beginning of
this Amendment.

BANK OF AMERICA Tab Products Co.
NATIONAL TRUST AND SAVINGS ASSOCIATION

/s/ Chris P. Giannotti /s/ David J. Davis
- ------------------------- ---------------------------
By: Chris P. Giannotti, By: David J. Davis, SVP,
Vice President Operations and Chief Financial
Officer

/s/ Robert J. Sexton
---------------------------
By: Robert J. Sexton
Treasurer and Secretary

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Exhibit 10.24

TAB PRODUCTS CO.
CHANGE OF CONTROL AGREEMENT
---------------------------

This Change of Control Agreement (the "Agreement") is effective as of
May , 1999, by and between (the "Employee"), and TAB
Products Co., a Delaware corporation (the "Company").

RECITALS

A. The Employee presently serves at the pleasure of the Board of
Directors of the Company and performs significant strategic and management
responsibilities necessary to the continued conduct of the Company's business
and operations.

B. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to
assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility or occurrence of a Change of
Control (as defined below) of the Company.

C. The Board believes that it is imperative to provide the Employee
with certain severance benefits upon the Employee's termination of employment
following a Change of Control which provide the Employee with enhanced
financial security and provide sufficient incentive and encouragement to the
Employee to remain with the Company following a Change of Control.

D. Certain capitalized terms used in the Agreement are defined in
Section 3 below.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. TERMS OF EMPLOYMENT. The Company and the Employee agree that the
Employee's employment is at will, and that their employment relationship may
be terminated by either party at any time, with or without cause. If the
Employee's employment terminates for any reason, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other
than as provided by this Agreement or in accordance with Company policies
then in effect. The provisions of this Agreement shall terminate on June 1,
2004 (except that the Employee's employment by the Company shall continue to
be "at will"). Any termination of this Agreement shall not affect any
required payment or benefit that accrues prior to such termination.

2. SEVERANCE BENEFITS. Subject to Section 2(b) below,

(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Employee's
employment is terminated within one (1) month prior to or twelve (12) months
following a Change of Control, then the Employee shall be entitled to receive
severance benefits as follows:

<PAGE>

(i) INVOLUNTARY TERMINATION. If the Employee's employment is
terminated as a result of Involuntary Termination (as defined in Section 3(b)
below), then the Employee shall be entitled to the following:

(A) all salary, accrued but unused vacation earned
through the date of Employee's termination and Employee's target bonus for
the year in which termination occurs, pro rated through the date of
Employee's termination;

(B) severance pay in an amount equal to 150% of the
Employee's annual base salary at the time of such termination, plus 150% of
Employee's annual bonus at the "on-target" level for the fiscal year in which
Employee is terminated paid in a lump sum within thirty (30) days of the
Employee's termination;

(C) reimbursement for any COBRA premiums paid by the
Employee for continued group health insurance coverage for a period of twelve
(12) months from the date of the Employee's termination or commencement of
new employment by the Employee, if earlier.

(ii) VOLUNTARY RESIGNATION. If the Employee's employment
terminates by reason of the Employee's voluntary resignation (and is not an
Involuntary Termination or a Termination for Cause), then the Employee shall
not be entitled to receive severance or other benefits following the date of
such termination under the terms of this Agreement, and the Company shall
have no obligation to provide for the continuation of any health and medical
benefit or life insurance plans existing on the date of such termination
except as otherwise required by applicable law.

(iii) DISABILITY; DEATH. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated at any time due to the death of the
Employee, then the Employee shall not be entitled to receive severance or
other benefits following the date of such termination under the terms of this
Agreement, and the Company shall have no obligation to provide for the
continuation of any health and medical benefit or life insurance plans
existing on the date of such termination except as otherwise required by
applicable law.

(iv) TERMINATION FOR CAUSE. If the Employee is terminated
for Cause, then the Employee shall not be entitled to receive any severance
or other benefits following the date of such termination under the terms of
this Agreement, and the Company shall have no obligation to provide for the
continuation of any health and medical benefit or life insurance plans
existing on the date of such termination except as otherwise required by
applicable law.

(v) ACCELERATION OF STOCK OPTIONS. The Employee shall be
entitled to acceleration of vesting for Employee's stock options as provided
under the Company's 1991 Stock Option Plan or any applicable successor plan.

(b) LIMITATION OF PAYMENTS AND BENEFITS.

(i) To the extent that any of the payments and benefits
provided for in this Agreement or otherwise payable to the Employee
constitute "parachute payments" within

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the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), and, but for this Section 2(b), would be subject to the excise
tax imposed by Section 4999 of the Code or any similar or successor
provision, the aggregate amount of such payments and benefits shall be
reduced, but only to the extent necessary so that none of such payments and
benefits are subject to excise tax pursuant to Section 4999 of the Code.

(ii) Within sixty (60) days after the later of termination of
employment or the related Change in Control, the Company shall notify the
Employee in writing if it believes that any reduction in the payments and
benefits that would otherwise be paid or provided to the Employee under the
terms of this Agreement is required to comply with the provisions of
Subsection 2(b)(i). If the Company determines that any such reduction is
required, it will provide the Employee with copies of the information used
and calculations made by the Company to determine the amount of such
reduction. The Company shall determine, in a fair and equitable manner after
consultation with the Employee, which payments and benefits are to be reduced
so as to result in the maximum benefit for the Employee.

(iii) Within thirty (30) days after the Employee's receipt of
the Company's notice pursuant to Subsection 2(b)(ii), the Employee shall
notify the Company in writing if the Employee disagrees with the amount of
reduction determined by the Company, or the selection of the payments and the
benefits to be reduced. As part of such notice, the Employee shall also
advise the Company of the amount of reduction, if any, that the Employee has,
in good faith, determined to be necessary to comply with the provisions of
Subsection 2(b)(i) and/or the payments and benefits to be reduced. Failure
by the Employee to provide this notice within the time allowed will be
treated by the Company as acceptance by the Employee of the amount of
reduction determined by the Company and/or the payments and benefits to be
reduced. If any differences regarding the amount of the reduction and/or the
payments and benefits to be reduced have not been resolved by mutual
agreement within sixty (60) days after the Employee's receipt of the
Company's notice pursuant to Subsection 2(b)(ii), the amount of reduction
and/or the payments and benefits to be reduced as determined by the Employee
will be conclusive and binding on both parties unless, prior to the
expiration of such sixty (60) day period, the Company notifies the Employee
in writing of the Company's intention to have the matter submitted to
arbitration for resolution and proceeds to do so promptly. If the Company
gives no notice to the Employee of a required reduction as provided in
Subsection 2(b)(ii), the Employee may unilaterally determine the amount of
reduction required, if any, and/or the payments and benefits to be reduced,
and, upon written notice to the Company, the amount and/or the payments and
benefits to be reduced will be conclusive and binding on both parties.

(iv) If, as a result of the reductions required by Subsection
2(b)(i), the amounts previously paid to the Employee exceed the amount to
which the Employee is entitled, the Employee will promptly return the excess
amount to the Company.

3. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:

(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of either of the following events:

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(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or

(ii) (A) A merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation; or

(B) the complete liquidation of the Company; or

(iii) There occurs a change in the Board of Directors of the
Company within a two-year period, as a result of which fewer than a majority
of the Directors are Incumbent Directors. For purposes of this Agreement, an
Incumbent Director is any director who is either:

(A) a director of the Company as of the Effective Date
of this Agreement; or

(B) a director who is appointed or nominated for
election to the Board of Directors of the Company by the Board of Directors
or its nominating committee and whose nomination or appointment is approved
by with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such appointment or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to
the Company).

(b) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean
the Employee's resignation within 60 days after any of the following:

(i) Without the Employee's express written consent, the
assignment to the Employee of any significant duties or the significant
reduction of the Employee's duties, either of which is materially
inconsistent with the Employee's position with the Company and
responsibilities in effect immediately prior to such assignment, or the
removal of the Employee from such position and responsibilities, which is not
effected for death, Disability or for Cause;

(ii) Without the Employee's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Employee
immediately prior to such reduction;

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(iii) Any reduction by the Company in an amount greater than
10% in the base salary and/or prospective bonus of the Employee as in effect
immediately prior to such reduction, other than a reduction applied generally
to executive officers of the Company;

(iv) Any reduction by the Company in the kind or level of
employee benefits to which the Employee is entitled immediately prior to such
reduction, other than a reduction applied generally to executive officers of
the Company;

(v) The relocation of the Employee to a facility or a
location more than 40 miles from the Employee's then present location,
without the Employee's express written consent; or

(vi) The failure of the Company to obtain the assumption of
the terms of this Agreement by any successors contemplated in Section 4 below.

PROVIDED, HOWEVER, that the Employee's resignation as a result of any of the
foregoing conditions shall be a voluntary resignation, and not an involuntary
termination, unless the Employee gives written notice of any such
condition(s) to the Board and allows the Company at least 10 days thereafter
to correct such condition(s). It shall also be an Involuntary Termination if
the Company terminates the Employee for any reason other than Disability,
death or for Cause.

(c) CAUSE. For purposes of this Agreement, a termination "for
Cause" occurs if the Employee is terminated for any of the following reasons:

(i) Theft, dishonesty, or intentional falsification of any
employment or Company records;

(ii) Improper disclosure of the Company's confidential or
proprietary information;

(iii) Any action by the Employee that Employee knew or should
have known could have a material detrimental effect on the Company's
reputation or business;

(iv) The Employee's failure or inability to perform any
reasonable assigned duties after written notice from the Company to the
Employee of, and a reasonable opportunity to cure, such failure or inability;
or

(v) The Employee's conviction (including any plea of guilty
or nolo contendere) for any criminal act that impairs his ability to perform
his duties for the Company.

(d) DISABILITY. "Disability" shall mean that the Employee is
unable to perform his duties as an employee of the Company as the result of
his incapacity due to physical or mental illness for 120 days (not
necessarily consecutive) in any one year period. Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Employee's employment. In the
event that the Employee resumes the performance of substantially all of his
duties as an employee of the Company before the termination of his employment
becomes effective, the notice of intent to terminate shall automatically be
deemed to have been revoked.

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4. EMPLOYEE COVENANT REGARDING NONSOLICITATION. For a period of one
(1) year following termination of employment for any reason, the Employee
shall not recruit, solicit, or invite the solicitation of any employees of
the Company to terminate their employment with the Company.

5. SUCCESSORS.

(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and/or assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.

(b) EMPLOYEE'S SUCCESSORS. All rights of the Employee hereunder
shall inure to the benefit of, and be enforceable by, the Employee's personal
or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. Employee shall have no right to assign
any of his obligations or duties under this Agreement to any other person or
entity.

6. NOTICE.

(a) GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.

(b) NOTICE OF TERMINATION. Any termination by the Company for
Cause or by the Employee as a result of a voluntary resignation or an
Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 6 of this Agreement.
Such notice shall indicate the specific termination provision in this
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination under the provision
so indicated, and shall specify the termination date (which shall be not more
than 15 days after the giving of such notice).

7. MISCELLANEOUS PROVISIONS.

(a) NO DUTY TO MITIGATE. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking New Employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.

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(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.

(c) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.

(d) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.

(e) ARBITRATION. In the event of any dispute or claim relating to
or arising out of the Employee's employment relationship with the Company,
this Agreement, or the termination of the Employee's employment with the
Company for any reason (including, but not limited to, any claims of breach
of contract, wrongful termination, fraud or age, race, sex, national origin,
disability or other discrimination or harassment), the Employee and the
Company agree that all such disputes shall be fully, finally and exclusively
resolved by binding arbitration conducted by the American Arbitration
Association in Santa Clara County, California. The Employee and the Company
hereby knowingly and willingly waive their respective rights to have any such
disputes or claims tried to a judge or jury. Provided, however, that this
arbitration provision shall not apply to any disputes or claims relating to
or arising out of the actual or alleged misuse or misappropriation of the
Company's property, including, but not limited to, its trade secrets or
proprietary information.

(f) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (f)
shall be void.

(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

(h) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a
section of this Agreement shall mean the corporation that actually employs
the Employee.

(i) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.

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(j) PRIOR AGREEMENTS. This Agreement shall supersede all prior
arrangements whether written or oral, and understandings, regarding the
subject matter of this Agreement.

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and
year first above written.

COMPANY TAB PRODUCTS CO.

By: __________________________________

Title: _______________________________

EMPLOYEE By: __________________________________

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<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements Nos.
33-11914, 33-11838, 33-45071, 33-62357, 333-20693 and 333-25403 of Tab Products
Co. on Form S-8 of our reports dated June 28, 1999, appearing in this Annual
Report on Form 10-K of Tab Products Co. for the fiscal year ended May 31, 1999.

San Jose, California
August 16, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-1-1998
<PERIOD-END> MAY-31-1999
<CASH> 6,972
<SECURITIES> 2,941
<RECEIVABLES> 27,333
<ALLOWANCES> 936
<INVENTORY> 8,834<F1>
<CURRENT-ASSETS> 51,354
<PP&E> 62,981
<DEPRECIATION> 43,339
<TOTAL-ASSETS> 75,328
<CURRENT-LIABILITIES> 24,392
<BONDS> 3,953
43,661
0
<COMMON> 0
<OTHER-SE> (533)
<TOTAL-LIABILITY-AND-EQUITY> 75,328
<SALES> 121,803
<TOTAL-REVENUES> 155,620
<CGS> 69,605
<TOTAL-COSTS> 95,879
<OTHER-EXPENSES> 58,815
<LOSS-PROVISION> 380
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 592
<INCOME-TAX> 430
<INCOME-CONTINUING> 162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162
<EPS-BASIC> .03
<EPS-DILUTED> .03
<FN>
<F1> Inventory detail at May 31, 1999 was finished goods $2,415;
Work in process $2,538 and raw material $3,881.
</FN>

</TABLE>