UNITED STATES SECURITIES AND EXCHANGE COMMISSION
			      Washington, D.C. 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       December 31, 1996


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


Commission File No.                   0-5265


				 SCAN-OPTICS, INC.

	      (Exact name of registrant as specified in its charter)

	       Delaware                                06-0851857

(State or other jurisdiction of                 (I.R.S. Employer Identification
 incorporation or organization)                           Number)

169 Progress Drive, Manchester, CT                        06040

(Address of principal executive offices)                  Zip Code

				  (860) 645-7878
	       (Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:      Common stock,
								$.02 par value

							       (Title of Class)

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

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

The aggregate market value of the voting stock (common) held by non-affiliates
of the registrant:   $40,950,031 as of March 26, 1997.

The number of shares of common stock, $.02 par value, outstanding as of March
26, 1997 was 6,970,218.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement, relating to the 1997 Annual Meeting
of Stockholders, which will be filed pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year, are incorporated by reference and included in the following:

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



<PAGE>

				      PART I

ITEM 1 - BUSINESS

Scan-Optics, Inc. (the Company) was incorporated in Delaware in 1968 and has
its principal office at 169 Progress Drive, Manchester, Connecticut 06040.

The Company designs, manufactures, markets and services information processing
systems that are used for business solutions, imaging, data capture, document
processing and the management of information to meet business requirements. The
Company's Series 7000 Network Image Scanners and Series 9000 optical character
recognition (OCR) and intelligent character recognition (ICR) scanners deliver
cost-effective, high volume imaging solutions.  Its UNIX and PC-based post-
scanning systems offer verification, image storage and retrieval, and document
management in an open-systems environment.  The Company's professional services
integrates applications, scanning platforms and networked tools to deliver a
total turn-key system solution and maintains these systems to deliver
continuous results throughout the installation life.

TARGET SOLUTIONS

Health Care and Insurance Processing Solutions
The Company has been providing health care related information systems since
1985.  These applications include processing customer satisfaction forms,
patient encounter forms, and Health Care Financing Administration (HCFA) forms.
To ease the implementation for customers, the systems are designed to utilize
industry standard components wherever feasible, including processing on
industry standard client/server, open LAN-based systems designed specifically
to improve the efficiency of health claim form reporting and processing.  The
Company's goal in providing this solution is to minimize the customer
investment involved with processing paper health claim forms.

Order Processing Solutions
The Company has been providing applications for order entry for over 16 years.
At one customer site, order entry software processes over 800,000 orders daily.
Order entry is a key operational requirement for any successful company. The
Company's systems fulfill this requirement in an efficient, timely, and cost-
effective manner.  The Company enjoys the reputation as a leading supplier of
high speed order entry software.

Tax and Financial Services Processing Solutions
The Company has had significant experience in processing taxes at various state
governments as well as at the Internal Revenue Service.  Since the IRS SCRIPS 
implementation over two hundred fifty million (250,000,000) tax documents have
been processed by the Company's Series 9000 systems.  These Series 9000 
systems use application programs developed and supported by the Company. The 
Company has 26 years of experience in tax processing.


PRODUCTS
The Company designs, manufactures, markets and services information processing
systems which use "state of art" technology for imaging, automated data
capture, document processing and the management of information.  These systems
employ high speed paper movement, OCR/ICR, high speed image capture, image
storage and retrieval systems, image information processing, key-entry,
microfilming, ink jet printing, high-speed paper handling with multi-pocket
page and/or document sorting, local area networking, client/server PC
processing, communications software and software/hardware integration
technologies to assure a complete approach to engineering solutions for data
processing.

These key product disciplines translate integration skills that leverage the
core competencies of the Company to provide broader solution alternatives.
These core competencies include:

Document Scanning
Character Recognition (OCR, ICR, Barcode, Marksense, etc.)
High Speed Paper Handling
Image Enhancement Algorithms and Image Quality
Key-From-Image and Data Entry
Customer Relations with Post Installation Support
Value Added Engineering Services and Solutions

CORE COMPETENCIES

Document Scanning
The Company has been addressing the high-speed, high-volume, page/document
processing market place since its inception in 1968.  During 1992, the Company
introduced the generation of scanners called the Series 9000 system.  This
system launched the Company into the full page image and recognition (ICR)
market.  Full page document processing includes front and back imaging, OCR
reading, serialization and microfilming of a document in a single pass.  During
1994, the Company introduced the Model 7800 scanner which is an image product
that can be utilized to improve Customer Service, Order Processing, and
Microfilm Replacement.

Character Recognition
As with the scanners, the Company has been providing its own developed
character recognition since 1968.  This recognition has always included the
basic in-line recognition of machine printed, handprinted, and mark sense
forms.  With the introduction of the Series 9000 system, the Company has
expanded this recognition to include barcode, patch code, special educational
score testing analysis, and special stamp recognition.  In addition to these
recognition processes, the Company has integrated and developed neural
recognition technologies that support both in-line and post capture
recognition.

High Speed Paper Handling
The Company is a leader in patented high speed paper handling systems.   The
Series 9000 scanner has over 150 systems installed worldwide.  The Company has
over 350 scanning systems installed worldwide processing 17.5 million pieces of
paper on a daily basis.

Image Enhancement Algorithms and Image Quality
Image enhancement algorithms and image quality are priority development
activities for the Company.  Image enhancement starts at the scanner capture
system.   The Company provides the fastest page capture and image system on the
market today.  This processing is carried forward into the Company's Key-From-
Image and Image Storage and Retrieval Systems.  Management believes that the
Company's image quality is among the best in the industry.  Electronic image
processing and storage are rapidly overtaking the use of microfilm and the
Company is on the leading edge of this technology with its hardware and
application software solutions.

Key-From-Image and Data Entry
The Company has been providing complete hardware and software solutions using
Key-From-Image (KFI) and Data Entry since 1976.  This KFI and Data Entry
solution remains important today, using the latest open network and platform
designs with Windows, UNIX, Novell, TCP/IP, NT, and other industry standard
components.  By combining the high-speed scanning systems with the flexibility
of KFI and Data Entry, customers are able to lower their overall data capture
and document processing costs while improving the level of data accuracy.

Customer Relations with Post Installation Support
29 Years of Customized Software Solutions
Customized software support has provided service to the Company's customers
since 1968.  The Company's scanners and assorted network system products
provide the hardware platforms for delivering advanced high-volume forms
processing, imaging, and document management system solutions, especially in
Health Care, Order Entry, and Tax Processing.  This customized software support
enables the Company to provide full production-ready application systems
tailored to the customer's specific needs.

This support is provided through professional services offered by the Company.
These services offer a total package of Application Services including:
specifications, design, development, installation, training, support and
project management.  The Company also provides individual, custom software
services as requested by the customer.  In this way, the Company can either
provide the entire package of software support or simply provide those services
that the customer desires.

29 Years of Hardware Support
The Company has been offering service and maintenance support to its broad
customer base since 1968.  This support is available with either leased or
purchased systems in both domestic and international markets.  Service is
provided through a network of over 100 service centers in North America, the
United Kingdom and Germany.  The Company provides on-site and on-call service
with response times of two hours or less.  The Company focuses on comprehensive
diagnostic routines, modular design and preventative maintenance procedures to
assure its users of high system availability to perform mission critical
applications.

Service revenue accounted for 34%, 34% and 38% of the Company's total revenue
for 1996, 1995 and 1994, respectively.


Value Engineering Services and Solutions
The Company has been supplying engineering services and solutions to meet
customer needs since introducing its first fully integrated solution in 1976.
The solutions include scanning, recognition, Key-From-Image, data entry, and
communications.  During 1993, the Company was selected to develop a prototype
system to process medical claims for a health care agency in Japan.  This
system was designed with 36 stacker pockets for sorting forms; expanded paper
handling capabilities for light-weight, flimsy forms; high resolution image
cameras to permit recognition of complex Japanese kanji characters; and
software forms recognition for up to 20,000 different form formats.

The Company has been involved in special recognition techniques to process
order forms that contain stamps.  These stamps are used as an entry into a
sweepstake contest or to select ordered items for a record or book club.  The
stamps are of a multitude of colors and are successfully processed through the
Company's special recognition features.  In addition to stamp processing, the
Company has been engaged in recognition analysis for educational test scoring.
This process is accomplished in full duplex mode at a transport speed of 50
inches per second.

SIGNIFICANT CUSTOMERS

In 1996, one customer accounted for approximately 38% of consolidated revenues.
In 1995, this same customer accounted for 31% of consolidated revenues.  Two
customers accounted for approximately 22% of consolidated revenues in 1994,
each at 11%.

CHANNELS OF DISTRIBUTION

The Company is augmenting its practice of selling directly to end-users and
distributors to respond to new opportunities in the marketplace.  The focus on
providing more complete solutions to  customers has stimulated the pooling of
resources with selected system integration firms and specialized niche
suppliers.  The cooperative effort with system integrators and other vendors
has introduced the Scan-Optics logo to new markets both domestically and
internationally.

BACKLOG

The backlog for the Company's products and services as of December 31, 1996 and
1995 was approximately $31,058,000 and $12,483,000 respectively.  The backlog
consists of equipment, software and services to be sold and noncancelable
rentals and maintenance due on existing rental and maintenance contracts.  The
Company normally delivers a system within 30 to 180 days after receiving an
order, depending upon the degree of software customization required.

MANUFACTURING

Manufacture of the Company's products requires the fabrication of sheet metal
and mechanical parts, the subassembly of electronic and mechanical parts and
components, and operational and quality control testing of components,
assemblies and completed systems. The Company's products consist of both
standard and Company-specified mechanical and electronic parts, sub-assemblies
and major components, including microcomputers. Most parts are purchased,
including many complex electronic and mechanical sub-assemblies. The Company
also purchases major standard components, including magnetic tape and disk
storage drives, display terminals, and microcomputers. An important aspect of
the Company's manufacturing activities is its quality control program which
uses computer-controlled testing equipment.

The Company has not experienced significant shortages of any components or
subassemblies; however, alternate sources for such components and subassemblies
have been developed.

COMPETITION

The Company competes with service providers utilizing multiple vendor
architectures.  The Company differentiates its solutions by offering a total
system, including post installation of hardware and software services.  The
Company focuses on industry specific "application" areas with solutions
utilizing image and data entry/data capture systems provided by the Company.

PATENTS

The Company currently has five United States patents in force which expire
between 2003 and 2013. The patents are on mechanical systems, electronic
circuits, electronic systems and software algorithms which are used throughout
the product lines. In May 1996, the Company submitted a patent application on
a software algorithm to improve recognition results through the use of
contextual editing.  The Company expects to continue to apply for patents on
its new technological developments when it believes they are significant.

EMPLOYEES

As of December 31, 1996 the Company employed 298 persons, including 22 with
administrative and support responsibilities, 136 in marketing, sales, software
and service activities and 140 in engineering and production capacities. The
Company considers its employee relations to be good. The Company has not
experienced any work stoppages.

PRODUCT DEVELOPMENT

In June 1992, the Company introduced the Series 9000 Scanner.  The Series 9000
integrates the latest in character recognition, image capture, and paper
handling technology into a high speed scanner.  During 1993, the Company
introduced several options for this scanner.  These options permit character
recognition and image processing on the "reverse side" of documents; a special
small document stacker module; and the ability to recognize several industry
standard bar-codes.

The Series 9000 interfaces with other company products to provide multi-media
data entry and image storage retrieval.  During 1994, the Company developed and
delivered a network-based scanning, recognition and data entry product - the
Series 7000 - which addresses requirements for a distributed solution.

In April 1995, the Company introduced the Model 7800 Scanner.  The Model 7800
is the world's fastest full-page image scanner, capable of capturing up to 200
full size pages per minute.  It is based on Scan-Optics' high-end, industry
proven Series 9000.  In April 1996, the model 7800 was recognized at an
industry trade show with the "Showstopper Award" for outstanding product.

In August 1995, the Company signed a license agreement to sell and support the
ImageEMC product.  As part of the agreement, the Company took over support
requirements of the currently installed customer base and hired development and
support personnel from TCSI Corporation. The product was enhanced to accept
images and data from Scan-Optics scanners.  Any enhancements made to the
product are owned by the Company.   This product provides a total solution for
processing health care claim forms (HCFA 1500's).  The product is a
client/server architecture and operates on industry standard hardware and
software platforms.

In July 1996, the Company introduced a high-speed neural networked based
handprint recognition system for use in the Series 9000 scanner.  The In-Line
Neural Classifier operates at speeds of up to 7500 characters per second while
achieving a 50% reject rate reduction and 10% substitution rate reduction over
the current handprint recognition engine.  The classifier is based on a special
neural network algorithm which is resistant to overtraining making it an ideal
candidate for character recognition systems.

The Company considers product development to be a significant element in
maintaining market share.  During the years ended December 31, 1996, 1995 and
1994, the Company's research and development expenses were $4,142,000,
$4,574,000, and $5,690,000, respectively.  Some portion of these amounts were
funded under the development agreements described below.

The Company intends to continue its program of development of additional
options and capabilities for its existing products as well as the development
of new products which exploit the Company's core competencies: document
scanning, character recognition, high speed paper handling, image enhancement,
key-from-image and data entry, customer relations and value engineering
services and solutions.

FUNDED DEVELOPMENT AGREEMENTS

During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period.  Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products.  The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights.  Royalties and other
considerations, up to a maximum of 130% of the amount advanced to the Company,
were required to be paid based on sales of the new product technology through
the termination dates of the agreements, June 30, 1995 and December 31, 1996.
As of December 31, 1996, the Company had repaid or accrued $4,738,500, 100% of
the maximum potential royalty.

During 1993, the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product.  The Company recorded
revenue related to this development agreement of $370,000 in 1994 and $790,000
in 1993 .  These revenues offset related costs incurred to develop the
modifications and enhancements.  Two prototype systems were delivered in the
first quarter of 1994 and successfully passed customer acceptance testing.  An
initial production contract was awarded for delivery in the fourth quarter of
1994.  The ownership of the technologies created as a result of this
development agreement remains with the Company.  No royalties or other
considerations are required as a part of this agreement.

During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product.  The Company recorded
revenue related to these development agreements of $336,000 in 1995, and
$364,000 in 1996.  These revenues offset related costs incurred to develop the
modifications and enhancements.  The ownership of the technologies created as a
result of this development agreement remains with the Company.  No royalties or
other considerations are required as a part of this agreement.

EFFECTS OF ENVIRONMENTAL LAWS

The effect of federal and state environmental regulations on the Company's
operations is insignificant.

GEOGRAPHICAL SEGMENTS

Sales of equipment to customers in the international market represent an
important source of the Company's revenues.  The Company has international
distributors located in 46 countries and covering six continents. The Company
does not believe that there are any special additional risks attendant to sales
in its present international markets.

The following table sets forth certain information relating to export sales for
the three most recent fiscal years ended December 31:

Export sales
<TABLE>
<CAPTION>
<S>                         <C>               <C>              <C>
(thousands)                      1996              1995             1994
 Latin America and
  South America              $    113    1%    $    375    2%   $  1,577   15%
 Europe                           433    2%       1,468    9%      2,187   21%
 Pacific Rim                   18,281   97%      14,143   89%      6,745   64%
			     $ 18,827          $ 15,986         $ 10,509
</TABLE>

Export sales represented 62%, 58% and 39% of net sales for the three years
ended December 31, 1996, 1995 and 1994, respectively.


ITEM 2 - PROPERTIES

The Company's world headquarters and manufacturing facility is located in a
newly renovated eighty-four thousand square foot, one-story building in
Manchester, Connecticut, leased for a term expiring in December 2006.  The
Company also leases two sales, support, and research and development
facilities: one in Irvine, California of four thousand square feet expiring in
December 1998 and one in Berkeley, California of two thousand square feet
expiring in December 1997.

The Company leases office space throughout the United States for sales, service
and administrative functions. Office space for administration and equipment
demonstration is also leased by Scan-Optics, Ltd., in the United Kingdom and
Scan-Optics (Canada), Ltd., both wholly-owned subsidiaries.


<PAGE>
ITEM 3 - LEGAL PROCEEDINGS

There are certain claims pending against the Company which arose in the normal
course of business.  In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.

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

The Company did not submit any matter during the fourth quarter of 1996 to a
vote of the stockholders.

EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT

Officers of the Company are set forth in the schedule below.


<TABLE>
<CAPTION>
									       
								      Officer
Name                           Age      Principal Occupation:         Since:    
<S>                           <C>       <C>                           <C>    

Richard I. Tanaka              68       Chairman of the Board of
					Directors                               
								      1989

James C. Mavel                 51       President, Chief Executive Officer,
					and Director                  
								      1996

Robert L. Bell                 45       Vice President -
					Product Engineering                     
								      1993

William H. Cuddy               61       Corporate Secretary                     
								      1984

Richard C. Goyette             45       Vice President -
					Sales and Marketing                     
								      1996

Clarence W. Rife               57       Vice President -
					Customer Relations                      
								      1975

John B. Sayre                  61       Vice President -
					Manufacturing                           
								      1988

Michael J. Villano             37       Chief Financial Officer
					and Vice President                      
								      1992
</TABLE>

<PAGE>

Dr. Tanaka joined the Company in September 1989 as Chairman of the Board, Chief
Executive Officer and President. Throughout 1996, Dr. Tanaka held the title of
Chairman of the Board of Directors and Chief Executive Officer.  Dr. Tanaka
currently holds the title of Chairman of the Board.  Prior to joining the
Company, Dr. Tanaka was President of Lundy Electronics and Systems, Inc., a
division of TransTechnology Corp. from 1987 to 1989 and from 1980 to 1986 he
was President and CEO of Systonetics, Inc.

Mr. Mavel joined the Company in January 1996 as President and Chief Operating 
Officer.  In June, 1996, Mr. Mavel became a director of the Company.  On
December 31, 1996, Mr. Mavel was promoted to President and Chief Executive 
Officer.  Prior to joining the Company,  from 1992 through 1995, Mr. Mavel
was Vice President and General Manager of the Imaging Systems Division of
Unisys.  From 1991 to 1992, he was Group Vice President of the Financial
Information Systems Division of National Data Corporation.

Mr. Bell joined the Company in August 1993 as Vice President - Product
Engineering.  Prior to this date, he was a consultant for the design and
development of information networks from 1991 to 1992 and from 1989 to 1991 he
was President of Bluebonnet, a research organization for advanced
telecommunications systems.  From 1979 to 1989 he held various positions with
Recognition International, Inc.

Mr. Cuddy has been a partner in the law firm of Day, Berry and Howard since
1968. He was elected to the position of Corporate Secretary in September 1984.

Mr. Goyette joined the Company in March 1996 as Vice President - Sales and
Marketing.  Prior to joining the Company,  from 1993 through 1995, Mr. Goyette 
was Vice President of the Imaging Systems Group of Unisys.  From 1992 to 1993, 
he was Vice President of the Software Products Group of Unisys.  From 1990 to 
1992 he was Vice President of Corporate Information Productivity Systems of 
Unisys.

Mr. Rife has been employed by the Company since 1969 and was elected to the
position of Vice President in 1975.  He is currently Vice President - Customer
Relations.

Mr. Sayre joined the Company in December 1988 as Vice President -
Manufacturing. Prior to this date he held various management positions with
Pratt and Whitney, Division of United Technologies Corporation, from 1985 to
1988 and previously with LTV/Republic Steel from 1980 to 1985.

Mr. Villano joined the Company in 1986 and in 1988 was named Assistant
Controller.  In 1989 he was promoted to the position of Controller, in February
1992 was named Vice President and Controller and in March 1994 was named Chief
Financial Officer and Vice President.

The executive officers are elected for a one year term at the Directors'
meeting following the Annual Meeting of Stockholders each year. There are no
family relationships between any of the listed officers and directors.

<PAGE>
				     PART II


ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
	      EQUITY AND RELATED STOCKHOLDER MATTERS


COMMON STOCK MARKET PRICES AND DIVIDENDS


The following is a two year history of Common Stock prices for each quarter.
The table sets forth the high and low closing quotations per share for the
periods indicated of the Common Stock in the over-the-counter market based upon
information provided by the National Association of Securities Dealers, Inc.
The closing quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not represent actual
transactions. There were 1,341 Common stockholders of record at December 31,
1996.

The Company has not paid dividends on its Common Stock and the Board of
Directors of the Company has no intention of declaring dividends in the
foreseeable future. The declaration and payment of dividends in the future
will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings, financial condition, capital
requirements and other factors.


<TABLE>
<CAPTION>
Quarter Ended       March 31               June 30             September 30       December 31
		 High       Low         High       Low       High          Low    High      Low
<S>             <C>       <C>         <C>        <C>        <C>          <C>       <C>        <C>                  
1996             4 5/8       3         5 1/4      3 3/8      4 3/8        3 1/4     4 1/4      3 
1995             6 1/4     4 3/4       5 3/4      4 1/8      5 1/8        3 5/8     3 5/8     2 1/8

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
ITEM 6 - SELECTED FINANCIAL DATA
--------------------------------


SCAN-OPTICS, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF OPERATIONS                                                                                                    
	     
SELECTED FINANCIAL DATA                                                                                  
	      

(thousands, except share data)         1996        1995        1994       1993      1992 
------------------------------------------------------------------------------------------
<S>                                <C>         <C>         <C>        <C>        <C>  
Total Revenues                     $  46,034   $  42,084   $  43,889  $  36,381  $  37,893 
				   =========   =========   =========   ========   ========
							       
Income (loss) before
  income taxes                     $   3,265   $  (1,327)  $   1,244  $    (932) $  (1,493)
Income taxes (benefit)                    (9)        (72)        (40)        49        118 
				   ---------   ---------   ---------   --------   --------

Net Income (Loss)                  $   3,274   $  (1,255)  $   1,284  $    (981) $  (1,611)
				   =========   =========   =========   ========   ========
							       
Earnings (loss) per share          $    0.49   $   (0.19)  $    0.19  $   (0.15) $   (0.25)
				   =========   =========   =========   ========   ========
Average common and common
equivalent shares outstanding       6,715,462  6,620,270   6,859,544  6,345,137  6,321,922


SELECTED BALANCE SHEET DATA                                                                              
		 
							       
<S>                                <C>         <C>         <C>        <C>        <C>  
     Total assets                  $  31,121   $  29,514   $  29,619  $  27,878  $  26,995
     Working capital               $  17,318   $  14,239   $  14,015  $  13,135  $  13,042
     Total stockholders' equity    $  21,207   $  17,751   $  18,731  $  17,097  $  18,012

The Company has not paid any dividends for the five year period ended December 31, 1996.   

The above financial data should be read in conjunction with the related consolidated financial
statements and notes thereto.
</TABLE>
<PAGE>

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

RESULTS OF OPERATIONS -- 1996 VS. 1995

OUTLOOK

The forward-looking statements contained in this Outlook and elsewhere in this 
document are based on current expectations.  As such, actual results may 
differ materially.

In 1996, Scan-Optics derived 38% of its total revenue from one customer.  The
Company expects this customer to continue to represent over 30% of its total
revenue in each of the next two fiscal years.  It is expected that by 1999, the
majority of the program will be complete.  Additional orders with this customer
are anticipated, but at a greatly reduced sales level.

Four major initiatives currently underway are expected to compensate for this
anticipated decline in revenues. The first initiative is in the health care
industry, combining our ImageEMC system with our high performance image capture
transports, to process HCFA Medicare claim forms as well as other types of
medical claim forms.  The Company has focused on and has experienced success
with this vertical line of business and believes it provides an opportunity for
growth.

The second initiative consists of the Company's development of target market
data capture applications that, combined with its other high speed transports
and archival systems, will provide cost effective solutions.  The current focus
is on the transportation, order entry, tax, health care and exam scoring
markets.  The Company expects to continue to emphasize its "Solutions that
Work" focus on these targeted markets for the foreseeable future.  As other
market opportunities emerge, the Company will evaluate the potential of using
its products and services to provide "Solutions that Work" in these new
markets.

The third initiative is further expansion into the international marketplace.
The Company has successfully penetrated the Japanese market and has experienced
strong sales activity through relationships with highly qualified and
productive distributors.  Over the next two years, the Company will focus on
developing comparably strong relationships in Europe, South America and other
Pacific Rim countries.

The fourth initiative relates to the expansion of some of the Company's core
competencies in an effort to add revenues and profits.  The Company believes
that the hardware service, manufacturing and custom engineering organizations
have potential to leverage their individual expertise, experience and cost
effectiveness to other entities.

The Company believes that success in achieving these initiatives will help
offset the foreseen reduction in sales for the customer described above. The
ability for the Company to achieve the above expectations could be impacted by
increased competition or a slowdown in the growth within the scanning and
imaging market, alternate forms of processing and changes in the economic
climates of foreign markets as well as that of the United States.


Total revenues increased $4.0 million from 1995.

Net sales increased $2.6 million or 9.5% from the prior year.  North American
sales were relatively flat and international sales increased $2.8 million or
17.8% from 1995.   International sales in the Pacific Rim showed another year
of growth from 1995 to 1996.  Sales to Japanese distributors increased sales
volume in this marketplace by 27% or $4.1 million mainly due to the increase in
orders from 1995 levels with the Japanese government.  Sales to Latin and South
America decreased $.3 million and sales to Europe decreased $1.0 million from
1995 to 1996, due to the absence of a focused sales program.

Service revenues increased $1.4 million from 1995 to 1996. Customer hardware
service revenue decreased $.2 million due to the replacement of older product
lines with current product which requires less maintenance than earlier product
lines. Software service revenue increased $.9 million due to software becoming
a larger component of the customer solution.  Engineering revenue increased $.7
million from 1995 to 1996 due to a new product development agreement completed
in the third quarter of 1996.  (See Note G of the Consolidated Financial
Statements.)

Cost of sales were approximately the same as the 1995 level.  However, the
gross margin percentage increased 5.7% from 29.5% in 1995 to 35.2% in 1996.
The increase in gross margin is mainly due to a $1.9 million decrease in
manufacturing costs, reflecting the manufacturing efficiencies achieved from
increased production and purchasing volumes.  Additionally, the Company's
required sales discounts decreased due to the completion of two major research
and development agreements. (See Note G of the Consolidated Financial
Statements.)

Marketing and service expenses decreased by $.7 million in 1996 principally due
to a decrease in salaries and fringe benefits resulting from a reduction in the
work force in late 1995.

Research and development expenses decreased $.4 million from 1995 mainly due to
the decrease in engineering staff resulting from a reduction in the work force
in late 1995.

General and administrative expenses increased $.8 million compared to the prior
year mainly due to a $.3 million expense related to the incentive compensation
plan, which was based upon the achievement of predetermined net income targets.
Legal fees increased $.2 million from 1995.  Also, salaries and related
benefits increased $.3 million due to the addition of James Mavel, the
Company's new President in January 1996.

Interest expense decreased $.4 million due to the significant decrease in the
average outstanding loan balance for 1996, which was $1.1 million compared to
$5.3 million in 1995.

							      
<PAGE>

RESULTS OF OPERATIONS -- 1995 VS. 1994

Total revenues decreased $1.8 million from 1994.

Net sales increased $.7 million from the prior year.  North American sales
decreased $4.6 million and international sales increased $5.3 million from
1994.  The North American sales decreased due to the completion of the primary
implementation of the IRS SCRIPS award in 1994.  International sales in the
Pacific Rim showed significant growth from 1994 to 1995.  Sales to a Japanese
health agency increased sales volume in this marketplace by 123% or $8.3
million.  Sales to Latin America and South America decreased 76% or $1.2
million.  Sales to Europe decreased 80% or $1.8 million over the prior year.
These decreases are reflective of large non-recurring sales which occurred in
the prior year.

Service revenues decreased $2.3 million from 1994 to 1995. Customer service
revenue decreased $1.5 million due to the replacement of older product lines
with current product which requires less maintenance than earlier product
lines. Software service revenue decreased $.3 million due to the decrease in
North American sales during the year.  Engineering revenue decreased $.5
million from 1994 to 1995 due to the completion of a significant product
development agreement.

Cost of sales increased $1.9 million from 1994 to 1995.  The gross margin
percentage decreased 5.3% from 34.8% in 1994 to 29.5% in 1995.  The decrease in
gross margin is due to the shift in revenue mix from domestic sales to
international sales, particularly to the Pacific Rim.  Sales to a Japanese
health agency, due to the volume of orders, carried a lower margin percentage.
Additionally, unabsorbed manufacturing expenses increased in 1995 due to the
fluctuations in production volume throughout the year.

Marketing and service expenses decreased by $.7 million in 1995 principally due
to staffing reductions related to changes in the installed base of serviced
equipment.

Research and development expenses decreased $1.1 million from 1994 mainly due
to the decrease in engineering staff resulting from the corporate
reorganization as well as a decrease in the utilization of outside consultants.

General and administrative expenses increased $.5 million compared to the prior
year mainly due to a $.2 million increase in legal expenses, and a $.1 million
increase in the Company's contribution to the 401(k) plan.  Additionally,
outside recruiting firms were utilized in 1995 to fill open positions in upper
management.

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $1.0 million from 1995 to 1996 for the
reasons discussed below.

Total Company borrowings decreased $.2 million to $.1 million at December 31,
1996.  The average borrowing level for 1996 was $1.1 million compared to $5.3
million for 1995.  The change in borrowing level is due in part to the increase
in sales realized in 1996 as well as the benefit of a reduction in operating
expenses that occurred in late 1995.  On March 12, 1997, the Company received a
commitment letter from the bank extending the maturity date of the outstanding
line of credit to May 28, 1998.  The line of credit was reduced from $6 million
to $4 million ($2 million each for the international and domestic lines) which
is reflective of the Company's current cash availability and projected cash
flow requirements for the next twelve months.  Management believes that the
line of credit provides the Company with sufficient financial resources to meet
its working capital requirements.  (See Note C of the Consolidated Financial
Statements.)

Operating activities provided $3.1 million of cash in 1996 compared to $2.4
million in 1995.  The increase of $.7 million is mainly attributable to the
$3.3 million of net income realized in 1996 compared to the net loss of $1.3
million in 1995.  The effect of the net income increase was offset by
fluctuations in other balance sheet items as discussed below.

Non-cash expenses recorded in 1996 were $3.5 million vs. $2.5 million in 1995.
These expenses relate to depreciation of fixed assets which is discussed in net
plant and equipment below, amortization of customer service spare parts
inventory, provisions for losses on accounts receivable and provisions for
inventory obsolescence.

Accounts receivable decreased $1.0 million from 1995 mainly due to a $.9
million decrease in systems currently undergoing acceptance testing. The
Company's revenue recognition policy  relating to sales of certain equipment
records revenue upon acceptance of the related application software.

Total inventories increased $1.2 million from 1995 levels.  Manufacturing
inventories increased  $2.0 million during the year mainly due to increases in
work-in-process of $3.3 million reflecting increased production volumes.
Finished goods inventory decreased $1.3 million due to the Company's focused
effort to reduce inventory levels. Customer service inventory decreased $.8
million from 1995, mainly due to increased amortization of parts inventory
compared to the prior year, as well as a transfer to the Manufacturing
department for use in the Manufacturing process.

Net plant and equipment increased $.4 million in 1996.  The major components of
this increase include $1.2 million of capitalized leasehold improvements
related to the consolidation of facilities in Manchester, Connecticut.  Other
additions of $1.4 million include the capitalization of  customer support
equipment and engineering test equipment.  Offsetting the plant and equipment
increases were $.7 million of asset disposals in 1996 and depreciation recorded
of $1.5 million which was $.3 million higher than 1995 expense levels.

Other assets increased $.1 million due to an increase in the cash surrender
value of the Company's  officers' life insurance policies.

Accounts payable and accrued expenses increased $1.8 million from 1995 levels.
Although accounts payable decreased $.4 million due to improvements in the
just-in-time inventory procurement process and improvements in cash flow,
accrued expenses increased $2.2 million mainly due to increases in accrued
wages of $1.0 million, reflecting a $.8 million incentive compensation accrual
and a $.2 million increase in accrued commissions.  Other increases included
additional sales and use tax accruals, royalties payable and other
miscellaneous reserves.

Customer deposits decreased $3.6 million reflective of a change in the
negotiated payment terms with the customer which decreased the deposit
percentage and shortened the payment terms.



<PAGE>

	       ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


<PAGE>


			  Report of Independent Auditors


Stockholders and Board of Directors
Scan-Optics, Inc.

We have audited the accompanying consolidated balance sheets of Scan-Optics,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996.  Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Scan-
Optics, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.  Also, in our opinion, the related 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 therein.


						    Ernst & Young LLP


Hartford, Connecticut
January 31, 1997, except for the second paragraph of
   Note C, as to which the date is March 12, 1997

<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES                                            
CONSOLIDATED BALANCE SHEETS                                             
			      
						       December 31                   
(thousands, except share data)                      1996           1995
---------------------------------------------------------------------------
<S>                                               <C>            <C>                              
Assets                                          
Current Assets:                                         
  Cash and cash equivalents                       $  1,279       $    281 
  Accounts receivable, less allowance of $673                                                 
    in 1996 and $413 in 1995                         9,262         10,297 
  Inventories                                       14,920         13,746 
  Prepaid expenses and other                         1,274          1,261 
						   -------        --------
    Total current assets                            26,735         25,585 
			      
Plant and equipment:                                            
  Equipment                                         14,094         14,097 
  Leasehold improvements                             3,980          2,837 
  Office furniture and fixtures                      1,248          1,215 
						   -------        --------
						    19,322         18,149 
  Less allowances for depreciation and                  
   amortization                                     15,147         14,340 
						   -------        --------
						     4,175          3,809 

Other assets                                           211            120 
						   -------        --------
Total Assets                                     $  31,121       $ 29,514 
						   =======        ========

<PAGE> 

							  December 31                     
(thousands, except share data)                       1996           1995
---------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current liabilities:                
  Notes payable to bank                          $      98       $    305
  Accounts payable                                   2,470          2,862 
  Salaries and wages                                 1,940            909 
  Taxes other than income taxes                        682            338 
  Income taxes                                         207            185 
  Customer deposits                                  2,323          5,900 
  Other                                              1,697            847 
						   ------------------------
    Total current liabilities                        9,417         11,346 
			      
  Other liabilities                                    497            417 
			      
			      
Stockholders' Equity                                            
  Preferred stock, par value $.02 per share,                                          
   authorized 5,000,000 shares; none                                         
    issued or outstanding                                             
  Common stock, par value $.02 per share,                                             
   authorized 15,000,000 shares;                                             
    issued, 6,945,701 shares in 1996 and                                            
     6,935,184 shares in 1995                          139            139 
  Common stock Class A Convertible, par                                                 
   value $.02 per share, authorized 3,000,000                                               
    shares; available for issuance 2,145,536
    shares; none issued or outstanding                                              
  Capital in excess of par value                    34,297         34,271 
  Retained-earnings deficit                        (10,159)       (13,433)
  Foreign currency translation adjustments            (292)          (315)
  Unearned ESOP compensation                          (132)          (265)
						   --------        -------  
						    23,853         20,397 
  Less cost of common stock in treasury,                                              
    413,500 shares                                   2,646          2,646 
						   --------        -------
      Total stockholders' equity                    21,207         17,751 
						   --------        -------
  Total Liabilities and Stockholders' Equity     $  31,121       $ 29,514 
						   ========        =======
See accompanying notes.                                         
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES                                         
CONSOLIDATED STATEMENTS OF OPERATIONS                                                                    
				      
								      
						Year Ended December 31
(thousands, except share data)                 1996      1995      1994
--------------------------------------------------------------------------
<S>                                          <C>       <C>       <C>
Revenues                                                                                                 
	      
  Net sales                                  $ 30,275  $ 27,642  $ 26,988
  Service revenues                             15,671    14,309    16,616
  Other operating revenues                         88       133       285
					     --------  --------  ---------
    Total revenues                             46,034    42,084    43,889

Costs and Expenses
  Cost of sales                                19,622    19,487    17,584  
  Marketing and service expenses               15,046    15,769    16,437
  Research and development expenses             4,142     4,574     5,690
  General and administrative expenses           3,939     3,142     2,637
  Interest expense                                102       488       376
					     --------  --------  ---------
    Total costs and expenses                   42,851    43,460    42,724
					     --------  --------  ---------
Operating income (loss)                         3,183    (1,376)    1,165
								      
Other income, net                                  82        49        79
					     --------  --------  ---------
Income (loss) before income taxes               3,265    (1,327)    1,244
					     ========  ========  =========
								      
  Income tax benefit                               (9)      (72)      (40)
					     ------------------  ---------
Net Income (Loss)                            $  3,274  $ (1,255) $  1,284
					     ==================  =========

  Earnings (loss) per share                  $   0.49  $  (0.19) $   0.19
					     ==================  =========
								      
Average common and common equivalent shares  6,715,462 6,620,270 6,859,544

See accompanying notes.                                                                                  
</TABLE>                      

<PAGE>
<TABLE>
<CAPTION>                                                               
SCAN-OPTICS, INC. AND SUBSIDIARIES                                                                 
CONSOLIDATED STATEMENTS OF                                                                         
STOCKHOLDERS' EQUITY                                                                                                               
									       Foreign
						       Capital in  Retained-   Currency     Unearned
				      Common Stock      Excess of  Earnings  Translation      ESOP     Treasury
(thousands, except share data)     Shares     Amount    Par Value   Deficit   Adjustments      Comp.      Stock         Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>       <C>         <C>         <C>          <C>        <C>           <C>
Balance January 1, 1994            6,779,568  $  135    $  33,931   $(13,462)   $    (331)   $   (530)  $ (2,646)     $17,097

  Issuance of common stock upon                                 
   exercise of stock options         126,512       3          271                                                         274
  Unearned ESOP compensation                                                                                                      
   amortization                                                                                   133                     133
  Net income                                                           1,284                                            1,284
  Foreign currency translation
   adjustments                                                                        (57)                                (57)
------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994          6,906,080     138       34,202    (12,178)        (388)       (397)    (2,646)      18,731

  Issuance of common stock upon    
   exercise of stock options          29,104       1           69                                                          70
  Unearned ESOP compensation   
   amortization                                                                                   132                     132
  Net loss                                                            (1,255)                                          (1,255)
  Foreign currency translation 
   adjustments                                                                         73                                  73
------------------------------------------------------------------------------------------------------------------------------

Balance December 31, 1995          6,935,184     139       34,271    (13,433)        (315)       (265)    (2,646)      17,751


  Issuance of common stock upon
   exercise of stock options          10,517                   26                                                          26
  Unearned ESOP compensation
   amortization                                                                                   133                     133
  Net income                                                           3,274                                            3,274
  Foreign currency translation 
   adjustments                                                                         23                                  23
--------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996          6,945,701  $  139    $  34,297   $(10,159)   $    (292)   $   (132)   $(2,646)     $21,207

											  
See accompanying notes.                                                                                                            

</TABLE>                           
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES                                                                 
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                   
						       Year Ended December 31                             
				
(thousands)                                          1996           1995           1994    
----------------------------------------------------------------------------------------
<S>                                               <C>            <C>            <C>
Operating Activities
  Net income (loss)                               $  3,274       $ (1,255)      $  1,284
  Adjustments to reconcile net income (loss) to            
    net cash provided by operating activities:         
    Depreciation                                     1,524          1,214          1,198
    Amortization                                     1,123          1,034            923
    Provision for losses on accounts receivable        711            236    
    Provision for inventory obsolescence               127                           477
    Changes in operating assets and liabilities:                                     
      Accounts receivable                              324         (1,409)          (115)
      Inventories, prepaid expenses and other       (2,437)          (735)        (2,392)
      Accounts payable and accrued expenses          1,833           (206)          (534)
      Income taxes                                      22             10            (26)
      Customer deposits                             (3,577)         3,735            542
      Other                                            145           (230)          (115)
						  ---------        -------       --------
    Net cash provided by operating activities        3,069          2,394          1,242

Investing Activities                                                                    
  Purchases of plant and equipment                  (1,890)          (401)        (1,870)
						  ---------        -------       --------
    Net cash used by investing activities           (1,890)          (401)        (1,870)

Financing Activities
  Proceeds from issuance of common stock                26             70            274
  Proceeds from borrowings                          22,631         31,777         25,219
  Principal payments on borrowings                 (22,838)       (33,737)       (24,970)
						  ---------       --------       -------
 Net cash provided (used) by financing activities     (181)        (1,890)           523

Increase (decrease) in cash and cash equivalents       998            103           (105)

Cash and Cash Equivalents at Beginning Of Year         281            178            283
						  ----------      --------       --------
Cash and Cash Equivalents at End of Year          $  1,279       $    281       $    178
						  ==========      ========       ========
					
Supplemental Cash Flow Information                                                              
  Interest paid                                   $    129       $    502       $    342 
						  ==========      ========       ========
  Income taxes paid                               $     26       $     59       $     79 
						  ==========      ========       ========

See accompanying notes.
</TABLE>

<PAGE>

SCAN-OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- Accounting Policies

Organization: The Company designs and manufactures information processing
systems used for imaging, data capture, document processing and information
management.  The Company's systems, software and services are marketed world-
wide to commercial and government organizations either directly by the Company
sales organization or through distributors.  The Company's business is
vulnerable to a number of factors beyond its control.  These include (1) the
effect of a weakening in the domestic and international economies which
potentially impacts  capital investments by customers, (2) the cyclical nature
of funding within federal and state government agencies, (3) competition from
similar products, (4) the implementation of other technologies which may
provide alternative solutions, and (5) the stability of sole source suppliers.

Basis of Presentation: The consolidated financial statements include the
accounts of Scan-Optics, Inc. and its subsidiaries, all wholly-owned.  All
intercompany accounts and transactions are eliminated in the consolidated
financial statements.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes.  While management believes that the
estimates and related assumptions used in the preparation of these financial
statements are appropriate, actual results could differ from those estimates.

Cash Equivalents: Highly liquid investments purchased with maturities of three
months or less are considered cash equivalents.

Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market.

Plant and Equipment: Plant and equipment is stated on the basis of cost.
Depreciation is computed principally using the straight-line method over
periods of 3 to 10 years. Leasehold improvements are amortized over the useful
life of the improvements or the life of the lease, whichever is shorter.

Revenue Recognition: Revenues from maintenance and application software
services are recognized as earned.  Revenues relating to sales of certain
equipment (principally optical character recognition equipment) are recognized
upon acceptance of the related application software.

Income Taxes: Deferred income taxes are provided for differences between the
income tax and the financial reporting bases of assets and liabilities at the
statutory tax rates that will be in effect when the differences are expected to
reverse.

Stock Based Compensation:  The Company generally grants stock options to key
employees and members of the board of directors with an exercise price equal to
the fair value of the shares on the date of grant.  The Company accounts for
stock option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants.  Therfore, the Company has elected the disclosure
provisions only of FASB Statement No. 123.

Earnings (Loss) Per Share: Earnings (loss) per share amounts are computed
using weighted average common and common equivalent shares outstanding during
the year assuming conversion of the common stock equivalents into common stock,
if dilutive, at the weighted average market price of the stock for the year.
All shares held by the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding.

Foreign Currency Translation:  The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with FASB Statement No.
52, Foreign Currency Translation.  All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using the average exchange
rate for the year.  The gains and losses resulting from the changes in exchange
rates from year to year have been reported separately as a component of
stockholders' equity.

Reclassifications:  Certain 1995 and 1994 amounts have been reclassified to
conform to current year presentation.


NOTE B -- INVENTORIES

The components of inventories were as follows:

<TABLE>
<CAPTION>
									  December 31
(thousands)                                                            1996           1995
<S>                                                               <C>            <C>
Finished goods                                                     $  1,534       $  2,823
Work-in-process                                                       6,084          2,820
Service parts                                                         4,276          5,043
Materials and component parts                                         3,026          3,060
								    $14,920        $13,746
</TABLE>



NOTE C -- CREDIT ARRANGEMENTS

The Company has a line of credit agreement (Agreement) with a bank which
expires on May 29, 1997.  The Agreement has two components, a $3 million line
(international) guaranteed by a third party bank which is collateralized by
international accounts receivable and inventory, and which bears interest at
prime (8 1/4% at December 31, 1996); and a $3 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and which bears
interest at prime plus 1/2% (8 3/4% at December 31, 1996). The weighted average
interest rate on borrowings during 1996 and 1995 was 8.6% and 9.1%
respectively.  The unused portion of the $3 million domestic line is subject to
a commitment fee of 3/4% per annum. Borrowings under the Agreement are subject
to various limitations based upon percentages of eligible receivables and
inventories of the Company. The available balance on the total line of credit
was $5,902,000 at December 31, 1996. In addition, the Agreement contains
covenants which, among other things, require the maintenance of specified
working capital, debt to equity ratios, net income levels and tangible net
worth levels.

On March 12, 1997, the Company received a commitment letter from the bank
extending the maturity date of the outstanding line of credit to May 28, 1998.
The line of credit was reduced from $6 million to $4 million ($2 million each
for the international and domestic lines) which is reflective of the Company's
current cash availability and projected cash flow requirements for the next
twelve months.  The commitment letter is subject to the extension of the
guarantee by the third party bank on the international line.  The Company
expects that the guarantee will be extended.

The carrying value of the notes payable to bank approximates its fair value.

NOTE D -- CAPITAL STOCK

The Board of Directors is authorized to issue shares of the Company's preferred
stock in series, to establish from time to time the number of shares to be
included in each series and to fix the designation, powers, preferences and
other terms and conditions with respect to such stock. No shares have been
issued to date.

Class A stock has the same rights as common stock, except that its holders may
not vote for the election of directors, and it is convertible into common stock
on a share for share basis.  On September 2, 1994, all outstanding shares of
Class A stock were converted to common stock.

At December 31, 1996, the Company had reserved 1,333,907 shares of common stock
for the exercise of warrants (18,000) and the issuance or exercise of stock
options (1,315,907).

NOTE E -- COMMON STOCK WARRANTS

Warrants outstanding generally have anti-dilution provisions and expire in
1998.

						Price Per Share        Shares

Warrants outstanding January 1, 1993                   $3.63           18,000
Granted in 1993                                        $5.38           25,000

Warrants outstanding December 31, 1994, 1995         $3.63 - $5.38     43,000

Expired in 1996                                        $5.38           25,000

Warrants outstanding December 31, 1996                 $3.63           18,000


<PAGE>
NOTE F -- STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options.  Under APB No. 25, because
the exercise price of the Company's stock options equals market price of the
underlying stock on the date of grant, no compensation expense is recognized.

The Company has five stock option plans for key employees and board members.
Options granted under the plans are for a period of ten years and at prices not
less than the fair market value of the shares at date of grant except that the
price for non-qualified options may not be less than the par value of the
stock. Options for employees are not exercisable for one year following the
date of grant and then are exercisable in such installments during the period
prior to expiration as the Stock Option Committee shall determine.  Options for
Directors are not exercisable until six months after the grant thereof.
Options may be exercised from time to time, in part or as a whole, on a
cumulative basis as determined by the Stock Option Committee under all stock
option plans.

The following schedule summarizes the changes in stock options for each of the
three years in the period ended December 31, 1996:

<TABLE>
<CAPTION>
<S>                                                      <C>             <C>
							  Number of         Option Price
							     Shares          Per Share

Outstanding January 1, 1994
  (559,388 exercisable)                                     784,111       $1.25  to $9.63
  Granted                                                   153,500        5.75  to  9.00
  Exercised                                                (126,512)       1.25  to  3.63
  Cancelled                                                 (36,582)       3.13  to  6.00

Outstanding December 31, 1994
  (531,273 exercisable)                                     774,517        1.50 to   9.63
  Granted                                                    91,000        2.13  to  6.00
  Exercised                                                 (29,104)       2.00  to  3.25
  Cancelled                                                 (49,698)       2.00  to  9.25

Outstanding December 31, 1995
  (587,260 exercisable)                                     786,715        1.50  to  9.63
  Granted                                                   124,000        3.25  to  4.75
  Exercised                                                 (10,517)       1.50  to  3.25
  Cancelled                                                 (41,484)       2.13  to  9.63

Outstanding December 31, 1996
  (567,991 exercisable)                                     858,714       $1.50  to $9.63
</TABLE>


At December 31, 1996 there were 457,193 options available for grant.

Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model.

Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility.  The assumptions used in the
valuation model were: risk free interest rate - 7%, expected life - 10 years
and expected volatility  range of .449 to .592.

Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

For the purpose of pro forma disclosures, the estimated fair value of the stock
options is expensed ratably over the vesting period which is 36 months.  The
Company's pro forma information follows:

<TABLE>
<CAPTION>
								  December 31
(thousands)                                                   1996            1995
<S>                                                        <C>            <C>

Net income (loss), as previously reported                   $  3,274       $ (1,255)
Stock option expense                                             153            101
Pro forma net income (loss)                                 $  3,121       $ (1,356)

Earnings (loss) per share, as previously reported           $    .49       $   (.19)
Stock option expense                                             .02            .02
Pro forma earnings (loss) per share                         $    .47       $   (.21)

</TABLE>

<PAGE>
NOTE G -- RESEARCH AND DEVELOPMENT AGREEMENTS

During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period.  Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products.  The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights.  Royalties and sales
discounts, up to a maximum of 130% of the amount advanced to the Company, were
required based on sales of the new product technology through the termination
dates of the agreements, June 30, 1995 and December 31, 1996.  As of December
31, 1996, the Company had repaid or accrued $4,738,000 or 100% of the maximum
potential obligation.

During 1993, the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product.  The Company recorded
revenue related to this development agreement of $370,000 in 1994 and $790,000
in 1993.  These revenues offset related costs incurred to develop the
modifications and enhancements.  Two prototype systems were delivered in the
first quarter of 1994 and successfully passed customer acceptance testing.  An
initial production contract was awarded for delivery in the fourth quarter of
1994.  The ownership of the technologies created as a result of this
development agreement remains with the Company.  No royalties or other
considerations are required as a part of this agreement.

During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product.  The Company recorded
revenue related to this development agreement of $336,000 in 1995 and 364,000
in 1996.  These revenues offset related costs incurred to develop the
modifications and enhancements.  The ownership of the technologies created as a
result of this development agreement remains with the Company.  No royalties or
other considerations are required as a part of this agreement.

NOTE H -- EMPLOYEE BENEFITS

The Company maintains a Retirement Savings Plan for United States employees.
Under this plan, all employees may contribute up to 15% of their salary to a
retirement account up to the maximum amount allowed by law. The Company
contributed an amount equal to 50% of the first 4% contributed by the
participant in 1996 and 1995, and 25% of the first 4% in 1994. The Company's
contributions to this plan were $189,000, $205,000 and $107,000 for 1996, 1995
and 1994, respectively.

The Company sponsors an Employee Stock Ownership Plan (the Plan) covering
substantially all full-time employees. The Plan, which is a tax qualified
employee benefit plan, was adopted by the Board of Directors of the Company on
January 29, 1988 to provide retirement benefits for employees. The Plan
borrowed $1,325,000 to purchase 260,000 shares of the Company's stock to be
allocated to participants ratably over a ten year period.  The ESOP loan was
guaranteed by the Company and the outstanding balance of the loan was repaid in
1991.  At December 31, 1996, there were 26,000 unallocated shares.  In 1996,
1995 and 1994 the expenses related to the Plan were $132,481 in each year.

NOTE I -- INCOME TAXES

The Company has approximately $5,300,000, $4,300,000 and $2,900,000 of net
operating loss carryforwards for federal, state and foreign income tax
purposes, respectively,  which are scheduled to expire periodically between
1997 and 2010.  For financial reporting purposes a valuation allowance has been
recognized to offset the deferred tax assets related to those carryforwards and
other temporary differences.

Significant components of the Company's deferred tax liabilities and assets
were as follows:

<TABLE>
<CAPTION>
							     December 31
(thousands)                                              1996           1995
<S>                                                  <S>            <S>
 Deferred tax assets:
   Net operating losses                               $  3,108       $  3,422
   Depreciation                                            106             99
   Inventory valuation                                     101            831
   Accounts receivable reserves                            231            167
   Revenue recognition                                      13             13
   Vacation accrual                                        245            258
   Other                                                   258            279
      Total deferred tax assets                          4,062          5,069

 Deferred tax liabilities:
   Depreciation and other                                 (390)           (82)
   Inventory                                              (156)
   Sales type lease                                        (73)

Valuation allowance                                     (3,443)        (4,987)
      Net deferred taxes                               $     0        $     0
</TABLE>


For financial reporting purposes, income (loss) before income taxes is set
forth in the following tabulation:

<TABLE>
<CAPTION>
							   Year Ended December 31
<S>                                               <C>             <C>          <C>
(thousands)                                           1996          1995          1994
Domestic                                           $  4,523        $  (407)     $ 2,150
Foreign                                              (1,258)          (920)        (906)
						   $  3,265        $(1,327)     $ 1,244
</TABLE>

<PAGE>
Income taxes (benefit) are summarized as follows:

<TABLE>
<CAPTION>
							   Year Ended December 31
<S>                                               <C>             <C>          <C>
(thousands)                                            1996           1995           1994
Currently payable
 (refundable):
Foreign                                            $    (69)       $  (132)     $    (100)
State                                                    60             60             60
						   $     (9)       $   (72)      $    (40)
</TABLE>


A reconciliation of the effective tax rate to the statutory rate is as follows:

							Year Ended December 31
<TABLE>
<CAPTION>
<S>                                                  <C>             <C>            <C>
						       1996            1995           1994
Statutory federal income tax rate                       34%            (34%)           34%
State income taxes, net of federal benefit               2               5              5
Foreign income taxes (benefit)                          (2)            (10)            (8)
Net operating loss carryforward
 (benefit) limitation                                  (34)             34            (34)
							 0%             (5%)           (3%)
</TABLE>


NOTE J -- LEASE COMMITMENTS

The Company's principal lease commitments are for its corporate office and
manufacturing facility in Manchester, Connecticut and its research and
development facilities in Irvine and Berkeley, California. The Manchester
lease expires on December 31, 2006, the Irvine lease expires on December 31,
1998 and the Berkeley lease expires on December 14, 1997. Minimum rental
payments for all noncancelable leases which are operating leases with terms
equal to or in excess of one year as of December 31, 1996 are as follows:

								    Operating
(thousands)                                                           Leases

	 1997                                                          $  418
	 1998                                                             415
	 1999                                                             374
	 2000                                                             338
	 2001                                                             348
	 Thereafter                                                     1,800

	 Total minimum lease payments                                 $ 3,693

Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$678,000, $887,000, and $808,000, respectively.

NOTE K -- CONTINGENCIES

There are certain claims pending against the Company which arose in the normal
course of business.  In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.


NOTE L -- SEGMENT INFORMATION

Export sales by geographic area were as follows:

<TABLE>
<CAPTION>
							   Year Ended December 31
(thousands)                                             1996           1995           1994
<S>                                                <S>          <S>             <S>
Latin America and South America                     $    113     $      375      $   1,577
Europe                                                   433          1,468          2,187
Pacific Rim                                           18,281         14,143          6,745
						    $ 18,827       $ 15,986      $  10,509
</TABLE>


In 1996 and 1995, one customer accounted for approximately 38% and 31% of
consolidated revenues, respectively.  Two customers accounted for approximately
22% of consolidated revenues in 1994, each at 11%.


NOTE M -- BILL AND HOLD TRANSACTIONS

Revenue relating to sales of certain equipment (principally optical character
recognition equipment) are recognized upon acceptance of the related
application software.  When customers, under the terms of specific orders or
contracts, request that the Company manufacture and invoice the equipment on a
bill and hold basis, the Company recognizes revenue based upon an in-house
acceptance test that is certified by the customer.  Revenues recorded during
1996 and 1995 included bill and hold transactions of $10.8 million and $5.7
million, respectively.  Accounts receivable included bill and hold receivables
of $4.9 million and $1.6 million at December 31, 1996 and 1995, respectively.


NOTE N -- FOURTH QUARTER ADJUSTMENTS (unaudited)

Fourth quarter 1996 net income of $2.1 million includes charges to expense of
$1.5 million.  The major components of these charges include  incentive
compensation of $.8 million and  the write off of older products used for
demonstration and customer support that are no longer used of $.3 million.
These adjustments reduced fourth quarter net income by $.22 per share.

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

None.

				     PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information pertaining to Directors and additional information pertaining to
Executive Officers is included, under the caption "Governance of the Company",
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 15, 1997 and is incorporated herein by reference and made a
part hereof.

ITEM 11 - EXECUTIVE COMPENSATION

This information is included, under the caption "Executive Compensation", in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 15, 1997 and is incorporated herein by reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is included, under the caption "Share Ownership of
Management", in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 15, 1997 and is incorporated herein by
reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is included, under the caption "Certain Transactions", in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 15, 1997 and is incorporated herein by reference.

<PAGE>
				     PART IV

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

(a) The following consolidated financial statements and report of independent
auditors of the Company and its subsidiaries are included in Item 8:

	       (1)  Report of Independent Auditors:

		     Consolidated Balance Sheets at December 31, 1996 and 1995

		     Consolidated Statements of Operations for the years ended
		     December 31, 1996, 1995 and 1994

		     Consolidated Statements of Stockholders' Equity for the
		     years ended December 31, 1996, 1995 and 1994

		     Consolidated Statements of Cash Flows for the years ended
		     December 31, 1996, 1995 and 1994

		     Notes to Consolidated Financial Statements - December 31,
		     1996

	       (2)  The following consolidated financial statement schedule is
		     included in Item 14(d):

			       Schedule II -- Valuation and Qualifying Accounts


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

	(3)            Listing of Exhibits

	       *3.1(a) Certificate of Incorporation, including amendments
		       thereto (filed as Exhibit 3.1 to the Company's
		       Registration Statement on Form S-1, File No. 2-70277).

	       *3.1(b) Amendments to Certificate of Incorporation adopted May
		       17, 1984, included in Exhibits A, B, C and D in the
		       Company's proxy statement dated April 17, 1984 for the
		       Annual Meeting of Stockholders held May 17, 1984.

	       *3.1(c) Amendment to Article Tenth of the Certificate of
		       Incorporation included as Exhibit A in the Company's
		       proxy statement dated April 16, 1987 for the Annual
		       Meeting of Stockholders held May 19, 1987.

	       *3.2(a) By-laws of the Company (filed as Exhibit 3.2 to the
		       Company's Registration Statement on Form S-1, File 
		       No. 2-70277).

	       *3.2(b) Amendments to By-laws of the Company adopted May 17,
		       1984, included in Exhibits A and B in the Company's
		       proxy statement dated April 17, 1984 for the Annual
		       Meeting of Stockholders held May 17, 1984.

	       *3.2(c) Amendment to By-laws of the Company adopted at the
		       meeting of the Board of Directors on January 28, 1991,
		       included as Exhibit 3.2(c) in the Company's Annual
		       Report on Form 10K filed for the year ended December 31,
		       1991.

	     *+10.1    The Scan-Optics, Inc. 1979 Incentive and Non-Qualified
		       Stock Option Plan included in Exhibit B in the Company's
		       Proxy statement dated June 8, 1979 for the Annual
		       Meeting of Stockholders held on June 27, 1979.

	    * +10.2    The Scan-Optics, Inc. 1984 Incentive and Non-Qualified
		       Stock Option Plan included in Exhibit E in the Company's
		       Proxy statement dated April 19, 1984 for the Annual
		       Meeting of Stockholders held on May 17, 1984.

	    * +10.3    The Scan-Optics, Inc. 1987 Incentive and Non-Qualified
		       Stock Option Plan included in Exhibit B in the 
		       Company's Proxy statement dated April 16, 1987 for the
		       Annual Meeting of Stockholders held on May 19, 1987.

	    * +10.4    The Scan-Optics, Inc. 1990 Incentive and Non-Qualified
		       Stock Option Plan included in Exhibit A in the Company's
		       Proxy statement dated April 30, 1990 for the Annual
		       Meeting of Stockholders held on June 12, 1990.

	    * +10.5    The Scan-Optics, Inc. 1990 Stock Option Plan for Outside
		       Directors included in Exhibit B in the Company's Proxy
		       statement dated April 30, 1990 for the Annual Meeting of
		       Stockholders held on June 12, 1990.

	    * +10.6    Employment agreement between Richard I. Tanaka and Scan-
		       Optics, Inc. effective September 5, 1989, included as
		       Exhibit 10.7 in the Company's Annual Report on Form 10-K
		       filed for the year ended December 31, 1991.

	    * +10.7    Severance agreement between Clarence W. Rife and Scan-
		       Optics, Inc. dated December 17, 1986, included as
		       Exhibit 10.8 in the Company's Annual Report on Form 10-K
		       filed for the year ended December 31, 1991.

	    * +10.8    Executive severance agreement between certain officers
		       and Scan-Optics, Inc. dated July 28, 1992, included as
		       Exhibit 10.8 in the Company's Annual Report on Form 10-K
		       filed for the year ended December 31, 1992.

	      +10.9    Amendment No.1 to Employment Agreement, dated as of 
		       December 31, 1996, between Scan-Optics, Inc. and 
		       Richard I. Tanaka.

	      +10.10   Employment agreement, effective as of December 31, 1996,
		       between Scan-Optics, Inc, and James C. Mavel

	       11.     Computation of earnings per share for the last three
		       fiscal years.

	     * 22.     List of subsidiaries of the Company, included as Exhibit
		       10.8 in the Company's Annual Report on Form 10-K filed
		       for the year ended December  31, 1993.

	       23.     Consent of Independent Auditors.

	       27.     Financial Data Schedule.

       *      Exhibits so marked have heretofore been filed by the Company
with the Securities and Exchange Commission and are incorporated herein by
reference.

	+       Management contract for compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14(c) of this
report.

	      (b)      Reports on Form 8-K

		       No report on Form 8-K was filed for the quarter ended
		       December 31, 1996.

	      (c)      Exhibits

		       The exhibits required by this item are included herein.

	      (d)      Financial Statement Schedule

		       The response to this portion of Item 14 is submitted as
		       a separate section of this report.

<PAGE>
				    SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCAN-OPTICS, INC.
Registrant
				  By: /ss/
				      James C. Mavel
				      President, Chief Executive Officer,
				      and Director
				      Date:      March 24, 1997

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
Registrant in the capacities and on the dates indicated.


	     /ss/
James C. Mavel                        President, Chief Executive Officer,
				      and Director
				      (Principal Executive Officer)
				      Date:      March 24, 1997

	     /ss/
Michael J. Villano                    Chief Financial Officer and Vice
				      President
				      (Principal Financial and
				       Accounting Officer)
				      Date:      March 24, 1997

	     /ss/
Richard I. Tanaka                     Chairman of the Board of Directors
				      Date:      March 24, 1997
	     /ss/
Logan Clarke, Jr.                     Director   March 24, 1997

	     /ss/
Richard J. Coburn                     Director   March 24, 1997

	     /ss/
E. Bulkeley Griswold                  Director   March 24, 1997

	     /ss/
Lyman C. Hamilton, Jr.                Director   March 24, 1997

	     /ss/
Robert H. Steele                      Director   March 24, 1997

A majority of the Directors





<PAGE>
<TABLE>
<CAPTION>                                                                                
SCHEDULE II

SCAN-OPTICS, INC. AND SUBSIDIARIES                                                                       
VALUATION AND QUALIFYING ACCOUNTS                                                                        
THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994                                                  
(thousands)                                                                          

COLUMN A                           COLUMN B            COLUMN C       COLUMN D    COLUMN E     
						     Additions                                 
				   Balance at  Charged to Charged to              Balance 
				   Beginning   Costs and  Other                   at End of    
Description                        of Period   Expenses   Accounts  Deductions(1) Period  
--------------------------------------------------------------------------------------------
<S>                                <C>         <C>        <C>       <C>           <C>
Year ended December 31, 1996:                                                             
     Reserve for doubtful accounts $    413    $  711               $      451    $  673 

Year ended December 31, 1995:                                                             
     Reserve for doubtful accounts $    279    $  236               $      102    $  413 

Year ended December 31, 1994:                                                             
     Reserve for doubtful accounts $    313                         $       34    $  279 

(1)  Uncollectible accounts written off, net of recoveries                       
</TABLE>     
					   
<PAGE>