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, 1998 or

[ ] Transition report pursuant to Section 13 or 15(d) of the 
    Securities Exchange Act of 1934

     For the transition period from       to____

Commission file number:  0-9919 

                                    PSC Inc.
              ----------------------------------------------------
              Exact name of registrant as specified in its charter

       New York                                            16-0969362
------------------------------                          ------------------
State or other jurisdiction of                          IRS Employer ID No.
incorporation or organization

  675 Basket Road, Webster, New York                         14580
--------------------------------------                      ------
Address of principal executive offices                      Zip Code

Registrant's telephone number, including area code:  716-265-1600


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

                                      None
                                      ----

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

                          Common Stock, $.01 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.

                                  Yes X No ____

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


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As of March 26,  1999,  the  aggregate  market value of the voting stock held by
non-affiliates  of  the  registrant  was  approximately   $83,980,278   (Assumes
officers, directors and any shareholder holding 5% of the outstanding shares are
affiliates.)

As of March 26, 1999, there were outstanding 11,900,175 shares of Common Stock.

Documents incorporated by reference:
Portions of PSC Inc.'s Proxy  Statement for the Annual Meeting of Shareholders  
to be held on May 12, 1999 are  incorporated  into Part III of this Form 10-K.



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                                TABLE OF CONTENTS

                                     PART I
                                                                         PAGE
Item   1:  Business.....................................................    4
Item   2:  Properties...................................................   17
Item   3:  Legal Proceedings............................................   17
Item   4:  Submission of Matters to a Vote of Security Holders..........   17
                Executive Officers of Registrant........................   18

                                     PART II

Item   5:  Market for Registrant's Common Equity and Related
              Security Holder Matters...................................   21
Item   6:  Selected Financial Data......................................   22
Item   7:  Management's Discussion and Analysis of Financial
              Condition and Results of Operations.......................   23
Item   8:  Financial Statements and Supplementary Data..................   29
Item   9:  Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure....................   29

                                    PART III

Item  10:  Directors and Executive Officers of the Registrant...........   29
Item  11:  Executive Compensation.......................................   29
Item  12:  Security Ownership of Certain Beneficial Owners and
              Management................................................   29
Item  13:  Certain Relationships and Related Transactions...............   29

                                     PART IV

Item  14:  Exhibits, Financial Statement Schedules and Reports
              on Form 8-K...............................................   30


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                                     PART I

                                ITEM 1: BUSINESS
Company Overview

         PSC  Inc.,   together   with  its   subsidiaries,   (the  Company)  was
incorporated in the State of New York in 1969. The Company designs, manufactures
and  markets  a broad  line of laser  and  non-laser  based  handheld  and fixed
position bar code scanners,  bar code engines,  verifiers,  integrated sortation
and  point-of-sale  (POS)  scanning and automated  dimensioning  systems for the
worldwide Automatic Identification and Data Capture (AIDC) market. The Company's
products serve as the "front end" of terminals or host computers and are used to
identify, capture, process and transmit data. The Company has developed products
for  AIDC at  every  stage  of the  product  supply  chain  from  raw  material,
manufacturing   and  warehousing,   to  logistics,   transportation,   inventory
management  and POS. The  Company's  products are used  throughout  the world in
automated data collection solutions in the food, general retail, health care and
other industries, and in government.

         The Company has  positioned  itself within the AIDC industry by selling
both  domestically  and  internationally.   International  sales  accounted  for
approximately  52%  of  the  Company's  1998  total  sales.  The  Company  has a
diversified customer base comprised of original equipment  manufacturers (OEMs),
value-added resellers (VAR's),  distributors,  system integrators and end users.
The  Company's  distribution  relationships  have  enabled it to  introduce  its
products  (generally  under non-PSC  labels) to new vertical  markets,  and have
fostered  the   development  of  strategic   relationships   with  leading  AIDC
participants and end users.  The Company  operates within one industry  segment:
automatic identification and data capture.

         In  September  1997,  the  Company  completed  a private  placement  of
Convertible  Preferred  Shares with Hydra  Investissements  S.A.,  a  Luxembourg
corporation.  The net  proceeds  to the  Company  from the  offering  were $10.2
million.  The  Company  used the  proceeds  to  repay a  portion  of its  senior
revolving credit facility.

         In 1996, the Company acquired  Spectra-Physics  Scanning Systems, Inc.,
TxCOM S.A.  and  related  businesses  (Spectra).  Spectra was one of the world's
leading  manufacturers  of countertop  and  in-counter  fixed  position bar code
scanners  for retail POS  applications.  The  purchase  price was  approximately
$140.0  million and was  accounted for as a purchase and is included in the 1996
Consolidated Financial Statements since the date of acquisition.

         The Company's corporate headquarters are located in the Rochester,  New
York suburb of Webster. The Company designs,  manufactures,  sells,  distributes
and services its products from world-class  manufacturing facilities in Webster,
New York  and  Eugene,  Oregon.  The  Company  has  sales  and  service  offices
throughout Europe, Asia, Australia and the Americas.

Markets
         The Company  currently  focuses on retail and commercial and industrial
applications for the AIDC market.

Retail
         The retail segment  consists of many  applications of bar code scanning
devices  used to track the flow of goods,  equipment,  employees  and  customers
throughout  the  retail  environment.  The  most  traditional  and  identifiable
application  of bar code scanners and scanning  systems is in front end checkout
applications,  such as in grocery stores, in which an employee uses a stationary
or  handheld  scanner to read  product  identifiers  encoded in a bar code.  The
retail segment has,  however,  expanded beyond this base with regard to both the
types of retail stores employing scanners and scanning systems,  and the uses to
which these  stores put the  scanners  and  scanning  systems.  Discount,  drug,
do-it-yourself,  convenience,  department  and  specialty  retail stores now use
scanners in such diverse ways as price verification,  shelf stocking,  inventory
tracking     and      replenishment,      receiving,      coupon     redemption,
promotion/merchandising and frequent shopper programs.
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         The Company is currently  active in most retail  applications and sells
its  countertop,  in-counter and handheld bar code scanners to customers in most
retail segments. In addition,  the Company has begun to target  systems-oriented
and segment-specific  products. One such product currently being marketed by the
Company is U-Scan(R)  Express  Self-Checkout  System, an automated grocery store
self-checkout  system  developed and licensed to the Company by Optimal Robotics
Corporation.   The  U-Scan(R)  Express  Self-Checkout  System,  which  has  been
installed in several major  supermarket  chains and is currently being tested by
several  national mass  merchandise  chains,  is designed to permit  supermarket
customers to scan, bag and pay for purchases  with little or no assistance  from
store personnel.

Commercial and Industrial

         The  commercial  and  industrial  segment is comprised  of  commercial,
manufacturing,  warehousing  and  distribution  applications of bar code systems
within retail, service, manufacturing, logistics, health care and transportation
businesses and  organizations.  These industries have adopted bar code standards
and  installed bar code systems in order to increase  productivity  and increase
the   reliability  of  data   transactions.   Automated   data   collection  and
communication  is now used, for example,  to track insurance forms and financial
documents,  record quality levels of manufactured items, sort parcels,  mail and
airline  baggage,  prepare  shipping  manifests  and  catalog  blood and  plasma
inventories. Automatic dimensioning of cartons allows shippers to maximize loads
and more accurately  invoice  shipping costs. The Company is currently active in
several of these applications across a variety of market segments.

Company Products and Services

         The  Company  offers  a wide  range of laser  based  bar code  scanning
products such as handheld, countertop, in-counter, fixed position and unattended
scanners  and scan  engines for use by  business,  industry  and  government  in
multiple  applications.  To ensure  the  quality  of bar codes  themselves,  the
Company  offers a full line of  barcode  verifiers.  In  addition,  the  Company
markets a full  line of  accessories,  software  and  supplies  to  support  its
products.  This line includes such items as cables,  stands,  printers,  mounts,
electronic   article   surveillance   antennas,   AC  power  supplies,   product
documentation and software configurations, carrying cases, batteries and battery
chargers.  An early  entrant in the AIDC  industry,  the Company is committed to
ongoing  innovation in product design,  manufacturing,  product  performance and
customer satisfaction.

         The Company's products include:

Fixed Position Scanners:  Retail

360-Degree  Scanner and  Scanner/Scale  (Magellan SL(TM) Scanner).  In 1997, the
Company  introduced the Magellan  SL(TM)  Scanner.  The Magellan SL Scanner is a
variant of the  original  Magellan(R)  line,  the  industry's  first  360-degree
scanner and  scanner/scale.  The Magellan SL has a smaller  size to  accommodate
installation  in the  narrower  check-stands  common in  Europe,  Asia and large
cities  throughout  the world.  The  Magellan  SL with all the  benefits  of the
original Magellan, is capable of simultaneously  reading the bottom and all four
sides  of  grocery  store  items,  a  full  360  degrees,   thereby   increasing
productivity  and  improving  ergonomics  by reducing  the need for  checkers to
twist,  turn or lift items for  scanning.  The Magellan SL is available  with an
integrated,  30 pound  capacity  scale  which  allows  retailers  to combine the
scanner  and  scale   functions  into  a  single  unit.  Both  the  scanner  and
scanner/scale   are  designed  for  easy  installation  into  new  and  existing
check-stands.  A key feature of the Magellan SL  Scanner/Scale  is the L-shaped,
All-Weighs(TM)   Platter.  With  the  All-Weighs  Platter,  the  scanner/scale's
vertical  window and frame are an integral part of the scale  weighing  platter,
allowing   checkers  to  lean  oversized  items  against  the  vertical  window,
intentionally or unintentionally, and get an accurate weight. As in the original
Magellan,   an  integrated  electronic  article  surveillance  antenna  is  also
available  for  use  in  deactivating   RF-based  security  tags.   Magellan  SL
autodiscriminates UPC/EAN and up to three industrial bar codes, and is available
with advanced  Edge(TM)  decoding software that enables the scanner to read torn
and disfigured labels.  Magellan SL also reads UPC/EAN and Code 128 supplemental
codes, such as those found on books, periodicals and coupons.

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<PAGE>

High Performance  Horizontal  Scanner (HS1250).  The Company sells the HS1250, a
compact,  high performance  horizontal scanner for grocery,  drug,  discount and
home improvement store applications. The HS1250 reads UPC/EAN and industrial bar
codes and features advanced Edge decoding software. It is also available with an
integrated  electronic  article  surveillance  antenna  for use in  deactivating
RF-based  security  tags. The scanner  includes an integrated  mount to simplify
installation. A sleep mode, which turns off the motor and laser after periods of
inactivity, reduces power consumption and prolongs the life of the scanner.

High Performance  Vertical  Scanners (VS1000 and VS1200).  The Company sells the
VS1000  and  VS1200  compact  vertical  scanners  which  include  scan  geometry
optimized  for vertical  scanning  applications  in limited  space areas such as
pharmacies,  variety and convenience stores.  These products permit bar codes to
be read  whether  the  handler  is  presenting  the bar code to the  scanner  or
sweeping  the bar code across the scanner in a continuous  movement.  The VS1000
autodiscriminates up to four bar code types and reads UPC/EAN and industrial bar
codes.  The VS1200,  in addition to the above features,  also  incorporates  the
Company's  advanced  Edge  decoding  software.  The  VS1200 is well  suited  for
performance  demanding  applications in supermarkets and hypermarkets.  Both the
VS1000 and VS1200 are available with an optional  integrated  electronic article
surveillance antenna for use in deactivating RF-based security tags.

Compact Scanners (Duet(TM) and VS800). The Duet(TM) Scanner,  announced in 1997,
is a compact "dual action" scanner that combines features of both countertop and
handheld  scanners.  Standard  bar  coded  items are  presented  or swept by the
scanner's  19 line  omni-directional  scan window.  Pick lists and large,  bulky
goods are easily processed using Duet's Targeted Handheld Mode by simply picking
up the scanner and pointing it at a bar code.  With an  innovative  scan pattern
and a 9" depth-of-field, Duet provides superior performance and fast throughput.
The ergonomic design of the Duet Scanner makes it exceptionally  easy to use and
easy on the user.

The VS800 is the company's  newest fixed  position  scanner.  Announced in 1998,
this  compact  scanner is perfect  for  situations  where space is at a premium.
Fully adjustable and able to be mounted in a wide variety of  orientations,  the
VS800 provides aggressive,  highly affordable hands-free scanning performance in
a very small  package.  The VS800 is  ideally  suited  for  convenience  stores,
pharmacies, specialty retailers and small grocers.

Retail Automation Systems

         The Company is currently marketing the U-Scan(R) Express  Self-Checkout
System,  a stand-alone  self-checkout  system,  to major  supermarkets  and mass
merchandisers  in the U.S.  Designed  and  licensed  to the  Company  by Optimal
Robotics  Corporation,  a  Montreal-based  company,  the system is targeted  for
retail  store  express  lanes  and  incorporates  scanning,  interactive  video,
security  system and money  tendering  (cash,  credit or debit)  into a complete
stand-alone unit. The U-Scan(R) Express is designed to permit customers to scan,
bag and pay for their own  purchases  with  little or no  assistance  from store
personnel, thereby speeding checkout and improving store productivity.  To date,
the U-Scan(R) Express System has been installed in a number of major supermarket
chains  nationwide and  discussions are underway for future  installations  with
several large food and non-food retailers.

Handheld Scanners

Light  Industrial/Commercial  Scanners (5300 HP). The Company's high performance
5300 HP handheld  scanners are based on its 5301 scan engine platform.  The 5300
HP series was designed for the light  industrial,  commercial and special retail
environments  where  performance is critical.  These high  performance  scanners
provide snappy  scanning of "real world" bar code labels.  Depending on the size
and quality of bar codes, one model in the Series can read bar codes having bars
or spaces  with a  dimension  as  narrow as 2  millimeters  (.002  inches).  A 2
millimeter dimension bar code is common on small jewelry items or on the side of
a printed  circuit  board  which  can then be  tracked  through a  manufacturing
process.  A higher  powered laser in the 5300 HP series permits bar code reading
in bright  sunlight,  thereby allowing the operator to read through a windshield
for vehicle identification or through a glass showcase to read price tags.

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<PAGE>

Ruggedized  Industrial  Scanners (5300 IP). Like the 5300 HP, the Company's high
performance  5300 IP  handheld  scanners  are  based  on its  5301  scan  engine
platform.  The 5300 IP series scanners were designed for extreme  durability and
performance  for  jobs in  demanding  environments.  They are  ideal  for use in
warehouses,  distribution centers,  automotive plants,  utilities,  cold storage
warehouses and at chemical plants.  They can withstand rugged conditions such as
multiple six foot drops to concrete and  temperatures as low as -22oF (-30oC) as
are  encountered  in walk-in  freezers.  In 1997,  the  Company  introduced  the
AutoRange(TM)  scanner which is essentially two scanners in one. This scanner is
ideally suited for warehouse and  distribution  center  applications for reading
bar code labels at long distances as well as up close.

5300 series  scanners are designed with an open slot in the scanner  handle that
accommodates  circuit  boards  with  additional  capabilities  such  as  decode,
interface   and   optional   memory,   thus   enabling   the  Company  to  offer
custom-manufactured scanners that OEMs then sell under their private labels. The
Company's  lifetime warranty on the scanning mechanism in each model of the 5300
series reflects the Company's confidence in the quality of these products.

Retail, POS and Commercial Scanners (QuickScan(TM) and SP400). The QuickScan(TM)
is a full feature,  full function,  full performance  scanner  incorporating the
Company's smaller scan engine platforms.  The Quick Scan GP(TM) provides general
performance  scanning  in lower  volume  POS and  commercial  applications  with
consistent bar code placement and location.  The QuickScan  HP(TM) addresses the
scanning requirements for higher volume retail and commercial applications where
handling mixed and inconsistently  marked items requires greater  depth-of-field
and enhanced  scanning  performance.  The  QuickScan  EP(TM)  provides  extended
performance  and  longer  range  scanning  applications  up to  five  feet.  The
QuickScan(TM)  6000  Plus  was  designed  specifically  for the  retail  POS and
features an  unprecedented  combination:  the  superior  performance  and rugged
design of a high-end  POS scanner,  priced  affordably.  Its advanced  ergonomic
design was  developed  with operator  comfort in mind -- a critical  factor that
ensures prolonged operator  productivity.  The size and shape of QuickScan makes
it comfortable to hold independent of handedness and hand size.

Announced in 1998,  the  QuickScan(TM)  1000 Scanner  provides the same superior
scan performance of the QuickScan 6000 Plus in a sleek triggerless  design.  The
QuickScan 1000 is an ergonomically designed triggerless laser scanner, ideal for
use  in  both  hands-free   (with  optional   countertop   stand)  and  handheld
applications.  LaserSense(TM)  automatic wake-up software provides for fast wake
up and immediate  read through the scanner's 10"  depth-of-field.  The QuickScan
1000 scanner also features a 650 nm (nominal)  laser option,  perfect for use in
bright light  environments.  With snappy  performance in hands-free and handheld
applications, the QuickScan 1000 is the perfect laser scanner.

The  QuickScan  200(TM)  Scanner,  which  was  also  announced  in  1998,  is  a
lightweight,  ergonomic, handheld CCD (charge coupled device) scanner for retail
and light commercial applications.  The QuickScan 200 offers the ability to read
all major retail and industrial bar code  symbologies and  autodiscriminate  any
four at a time.  Five single and six dual  interfaces are  available.  With dual
interfaces,  changing the  interface is as easy as changing the cable.  Standard
with the QuickScan  200 is a 5 foot cable with power off the terminal.  An RS232
version is available with optional  external power. The QuickScan 200 comes with
a one year warranty, and is backed by the Company's quality and reliability.

The SP400 offers  higher  performance  levels by combining a visible laser diode
light source,  patented signal processing  technology,  long  depth-of-field and
wide-angle reading. The SP400 family includes a variety of models for retail and
industrial applications.  The SP400 EP (Extreme Performance) scanner is the only
handheld  scanner on the market to offer a true seal against  windblown dust and
rain. This feature,  combined with other enhancements to the housing,  gives the
SP400 EP the highest rating in the industry for ruggedness and  durability,  and
makes it ideal for outdoor use.

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Fixed Position Scanners: Commercial and Industrial

Miniature Scanners: The LazerData(R) 9000, 11000 and 12000 offer a complete line
of  compact,  versatile,   industrial  miniature  line  scanners  aimed  at  the
high-speed  automated  sorting or  identification  applications in the demanding
environments of the manufacturing and material handling markets.  The LD11000 is
our most  compact  and  economical  industrial  line  scanner.  It is capable of
reading  narrow bars  ranging from 6 to 20 mils over a 10"  depth-of-field  with
scan  rates as high as 600 scans per  second.  When  greater  scan  coverage  is
required,  the LD12000 is the scanner of choice.  With scan  windows as great as
12" and two rastering  patterns,  the LD12000 can locate bar codes anywhere on a
carton.  Both models come with LDHost, an easy to use versatile software package
that makes configuring the scanners for a customer's  application a breeze.  For
the most demanding applications, the LD9000 is selected. With read ranges out to
26",  depth-of-fields  of 24" and scan  rates up to 2000 scans per  second,  the
LD9000 offers the performance of many larger high-performance line scanners.

High-End  Line  Scanners:  With the  addition of  LazerData  16000 to the LD8000
family of line  scanners,  the  Company  now  offers the most  complete  line of
high-end line scanners.  The LD16000 is exceptional for reading bar codes on the
side of  packages,  where as, the LD8000 is perfect for reading bar codes on the
front and back.  In  addition,  the LD8000 is an integral  component of the fast
growing tunnel scanning market.  Features include  auto-focusing  and Time Slice
Decoding  (TM) (TSD) which allows the scanner to read only a small  portion of a
code on each of several  successive  scans and  reconstruct the entire bar code.
With scan rates from 330 to 1600 scans per second and carton tracking,  there is
a LD16000 or LD8000 for any customer requirement.

Mid Range  Omnidirectional  Scanning:  The  LazerData  8000LX  offers a low cost
omnidirectional scanning solution by creating an "X" pattern using only a single
laser. To achieve greater  depths-of-field,  increased scan coverage, or to scan
more than one face of the carton at a time, the LD8000LX can be chained together
providing a single output to the customer.  With TSD and tracking built into the
scanner,  more than one bar code can be in the scan zone at one time  maximizing
the system throughput. The LD8000LX can read bar code labels moving at speeds of
up to 500 feet per minute.

Omnidirectional  Scanners.  The model 990  SureScan(R) is a high-speed  modular,
omnidirectional  scanner for use in large volume distribution centers. It may be
equipped with TSD software to read randomly  oriented bar codes as, for example,
labels on packages  tumbling down a chute at speeds up to 600 feet per minute at
a distance of 30 inches.  The model 990 can also be  configured  with up to four
multiplexed scanners.

Carton Dimensioning System. The SureCube(TM) is an automated carton dimensioning
system which measures the volume of cartons over  conveyors or in-motion  scales
for  material  handling  systems.  The  system can be  supplied  with a bar code
scanner for identifying  and  dimensioning or integrated with an in-motion scale
to provide a completely automated system for identifying,  sizing,  weighing and
sorting of cartons.  It captures  the carton data  regardless  of the  location,
orientation  or  angle  of the  carton.  This  is  especially  useful  in  large
warehouses, package delivery services and other shipping companies.

Scanning Tunnel Systems.  By using multiple  scanners oriented around a conveyor
belt, PSC offers a unique solution to solve high-speed  sortation problems where
cartons may have a bar code label on any  surface of a carton,  even the bottom,
or multiple  labels on multiple sides of the carton.  With the  ScanManager(TM),
this system can track up to 16 cartons at one time at conveyor  speeds up to 300
feet per minute.

Scan Engines

         The  Company's  scan  engines  are   self-contained  bar  code  reading
components,  which OEMs build into a variety of  products.  The  Company's  scan
engines  incorporate  all of the electronic,  optical and mechanical  components
required for laser scanning in a single package which can be easily  integrated.
The various  models  manufactured  by the Company are based on its 5301  "large"
platform,  the  smaller  5303  version  or the  miniaturized  Minuet(TM)  Direct

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Illumination(TM)  bar code engine or LM500.  The 5301 platform is about the size
of a deck of playing cards and occupies a volume of 10 cubic inches. In response
to industry demands for a smaller scanning platform,  the Company introduced the
5303 scan engine, which is about half the footprint of the 5301 and occupies 3.5
cubic inches.  The Company  introduced  an even smaller scan engine,  the Minuet
Direct  Illumination bar code engine. This miniature engine has a volume of only
1.2 cubic inches. In a Direct Illumination bar code engine system,  there are no
reflective optics;  the laser is mechanically  swept to directly  illuminate the
bar code.  The Minuet Direct  Illumination  can  significantly  enhance bar code
reading  performance  in a  variety  of  OEM  products  such  as  portable  data
collection devices; laptop, handheld and palmtop computers;  diagnostic and test
equipment;  and ticket issuing  machines.  The newest edition to the scan engine
family is the LM500 Plus Scan Module.  Introduced in 1998, the LM500 Plus is the
lightest scan engine in its class and features RapidStart(TM)  circuitry for the
fastest start-of-scan in the industry with very low power consumption.

Quick Check(R) Verifiers

         The Company's  line of Quick  Check(R)  verifiers is designed to ensure
that the customer is producing,  using and  receiving  quality bar code symbols.
Quick  Check  verifiers  can  display a simple  pass/fail  report  or  provide a
detailed quality  analysis.  These verifiers are sold as handheld,  desktop,  PC
based or  printer/labeler  mounted  on-line  models.  They analyze bar codes for
traditional  print quality such as wide to narrow  ratio,  print  contrast,  bar
growth or loss, dimensions and formats, or analyze based upon quality parameters
found in the American National  Standards  Institute (ANSI),  European Committee
for  Standardisation  (CEN)  and  International   Standards  Organization  (ISO)
guidelines such as edge  determination,  reflectance  minimum,  symbol contrast,
modulation,  decodability and edge contrast minimum.  When mounted on-line,  the
Quick Check  verifier  results can  automatically  control the user's system and
cause it to pause,  reprint,  shutdown  or  activate  an alarm.  All Quick Check
verifiers are designed and  manufactured  to meet  national,  international  and
industry specified  standards (such as those created by the Uniform Code Council
and the Automatic Identification  Manufacturers,  Inc.) and provide traceability
to the National  Institute of Standards and Technology  (NIST) for compliance to
ISO 9000 and QS 9000 requirements.

Sales and Marketing

         The Company sells its products domestically and internationally through
a diversified  customer base  comprised of OEMs,  third party  resellers and end
users. International sales increased from approximately $55.2 million, or 38% of
net sales,  in 1996 to  approximately  $112.0  million,  or 52% of net sales, in
1998.  Management believes that the international  markets for bar code products
are less  developed and intends to broaden its  international  sales and provide
additional sales and marketing support to its international operations.

         The Company's OEM  customers  and third party  resellers  serve various
vertical markets and submarkets and a wide variety of end users.  They introduce
the Company's  products to their end users through their  established  sales and
distribution  networks,  thus  sparing the Company the expense of  supporting  a
large in-house sales force. By forming  strategic  relationships  with major OEM
customers,  the Company has been able to conduct  joint  development  and design
customer-specific  products  and  applications  and thereby  further  expand its
market presence and broaden its distribution network.

         In addition to its sales and marketing  staff in Webster,  New York and
Eugene,  Oregon,  the Company has regional sales  representatives  in the United
States and sales  offices  throughout  Europe and the Asia Pacific  regions that
provide sales,  service and support to the Company's  domestic and international
customers.

         Foreign sales of the Company's products are subject to the normal risks
of  foreign  operations,  such as  currency  fluctuations,  protective  tariffs,
export/import controls and transportation delays and interruptions.  Because the
Company's  products are  manufactured in the United States,  the Company's sales
and results of operations  could be affected by fluctuations in the value of the
U.S. dollar.

         The Company's marketing  operations include product management,  market
management,  new business  development and marketing  communications.  Marketing
personnel identify new business opportunities,  develop business plans, identify
new product and market requirements, manage product positioning/introduction and
provide tactical sales support activities. They interact regularly with external
parties such as OEMs,  VARs,  distributors,  systems  integrators and end users,
technical partners and standards  committees.  The marketing  personnel also, in
conjunction  with  outside  vendors,  conduct  customer  surveys and  coordinate

                                       9
<PAGE>
advertising and public relations. This group creates advertising,  brochures and
documentation,  manages  trade show  exhibits and places  articles  highlighting
applications of the Company's products in trade and industry publications.

Customer Support and Service

         The  Company is  dedicated  to  providing  consistently  high  customer
service on a national and  international  basis. The Company  maintains a highly
responsive customer support and service  organization that bridges the Company's
marketing,  engineering and  manufacturing  functions.  The customer support and
service personnel receive  extensive  training in all of the Company's  products
and assist customers with ordering,  product  scheduling,  coordinating  service
repairs,  procuring  replacement  parts,  and  managing  warranties  and service
contracts.  The Company's Webster, New York and Eugene,  Oregon customer support
and service organizations have met ISO 9001 quality registration levels.

Customers

         The Company  sells its products to OEMs,  VARs,  distributors,  systems
integrators and end users.  During 1998,  1997 and 1996, no individual  customer
accounted  for greater than 10% of net sales.  The Company's  arrangements  with
major customers are generally nonexclusive.

Engineering, Research and Product Development

         The  Company's  engineering,  research and product  development  (ER&D)
programs are aimed at applying its  technology to develop new products,  improve
its existing  products'  reliability,  ergonomics  and  performance,  and reduce
manufacturing and related support costs.  Current programs focus on new advances
in fixed and portable bar code  scanning,  retail  applications,  such as retail
self-checkout  systems,  and new generations of laser and CCD scan engines.  The
Company also carries on significant  development programs in electronics design,
bar code acquisition and decoding, RF communications,  optical signal detection,
software,  network  architectures,  advanced mechanical structures and automated
manufacturing  methods.  Computer-aided design and computer-aided  manufacturing
tools  assist the  Company's  research  and  development  efforts by  permitting
computer  simulation  of  proposed  products.  These tools  include  electronics
circuit  modeling,  optics  analysis and  three-dimensional  mechanical  product
modeling.

         Substantially  all  of  the  Company's   research  and  development  is
performed by its own staff. The Company believes its technical  strengths are in
the specialty  disciplines  of lasers,  electro-optics,  video  imaging,  signal
processing, decoding and software development.

         The Company's ER&D expenses were  approximately  $15.7  million,  $13.4
million, and $11.1 million in 1998, 1997, and 1996,  respectively.  Such amounts
do  not  include  expenditures  by the  Company  for  manufacturing  engineering
activities.

Manufacturing and Suppliers

         The Company designs,  engineers and manufactures  substantially  all of
its  scanning  products at its  Webster,  New York  headquarters  or its Eugene,
Oregon facility.  The Company's  design and process approach allows  end-of-line
configuration of generic modules to meet a multitude of specific customer needs.
Statistical  methods are used throughout the factory and with critical suppliers
in order to control  important  processes.  The Company  makes  extensive use of
computer integrated systems and software for purposes of resource planning, such
as  material   requirements,   assembly  planning  and  scheduling,   and  order
management.

         The Company  seeks to design and  manufacture  products  that  optimize
performance,  quality,  reliability,  durability and versatility.  These designs
facilitate  cost-efficient  materials  sourcing and  assembly  methods with high
standards of  workmanship.  The Company has invested and will continue to invest
in capital  equipment such as printed  circuit board surface mount machines that
automate production,  increase capacity and reduce direct labor costs.  Computer
operated  equipment  is used for testing at all levels of  production  to assure
repeatable,  reliable performance and accurate data collection.  The Company has
designed  many of its own tools,  fixtures and test  equipment.  The Quick Check
product is manufactured by an independent  third party. The Company believes its
relationship   with  this  manufacturer  to  be  good,  and  the  loss  of  this
manufacturer would not have a material effect on the Company.

                                       10
<PAGE>

         The Company does not have long-term  supply contracts with its vendors.
The Company currently relies on single suppliers,  some of whom manufacture at a
number of  locations,  for some key  components  of its  products.  The  Company
believes that maintaining  ongoing  relationships with single suppliers who have
proven  that they are  capable of meeting the  Company's  standards  of quality,
on-time  delivery and cost  containment  has enabled it to increase the value of
its  product to its  customers.  Although  the  Company  maintains  30 to 60 day
inventories  of key  components  and  alternative  sources of key  materials are
available,  the Company  could incur  set-up  costs and delays in  manufacturing
should it  become  necessary  to  replace  key  vendors  due to work  stoppages,
shipping delays,  quality problems,  financial  difficulty or other factors, and
under  certain  circumstances,  these  costs and  delays  could  have a material
adverse effect on the Company's operations.

Competition

         The AIDC industry is highly competitive with rapid technological change
and  intellectual  property  developments  being key  competitive  factors.  The
Company  also  competes  on  the  basis  of  innovative  design,   high  quality
manufacturing,  and  technical  expertise  in scanning  and wireless RF systems,
level of sales and support  services,  price and overall product  functionality,
and  fitness  for use.  Failure  to keep pace  with  product  and  technological
advances  could  negatively  affect  the  Company's   competitive  position  and
prospects  for  growth.  Many firms  manufacture  and  market  bar code  reading
equipment  utilizing  laser  technology.  In addition,  the  Company's  bar code
reading  equipment also competes with devices which utilize  technologies  other
than  laser  scanners  such  as  CCDs  and  optical  wands.  The  Company  faces
competitive  pressures from various companies in each of its product categories.
Many  of  the  Company's   competitors  have  substantially  greater  financial,
manufacturing,  research  and  development,  and  marketing  resources  than the
Company.  The Company  believes its principal  competitors  for its handheld bar
code scanner products are Symbol  Technologies,  Inc.  (Symbol),  and Metrologic
Instruments Inc. (Metrologic).  The Company's principal competitors in the fixed
position scanner market are Accu-Sort Systems,  Inc. and CI/Matrix.  The Company
believes its principal  competitors  for its line of in-counter  and  on-counter
scanner products are NCR Corporation,  Fujitsu Ltd.,  Symbol,  Scantech B.V. and
Metrologic.  The  principal  competitors  for its line of verifiers  are Stratix
(formerly Bar Code Systems) and RJS Inc. The Company's principal  competitor for
POS self-checkout systems is Productivity Solutions, Inc.

         No  assurance  can be given  that the  Company  will be able to compete
successfully  against  current and future  competitors  or that the  competitive
factors  faced by the  Company  will not have a material  adverse  effect on the
Company's operations.

Intellectual Property

         The Company  believes that certain of its products are  proprietary and
consequently relies on a combination of United States and foreign patent,  trade
secret,  copyright and  trademark  law to establish and protect its  proprietary
rights. The Company currently holds more than 230 United States patents and also
has certain foreign patents pertaining to various  technologies  associated with
its products.  These patents  expire on various dates between 2003 and 2015. The
Company  currently  has a number of patent  applications  pending  in the United
States and in a number of foreign  countries.  In addition,  the Company expects
that its continuing research and development efforts will result in the creation
of new proprietary rights for which it will seek patent protection.

         The Company maintains an active program to obtain patents and otherwise
protect its intellectual property.  Nevertheless,  its competitors could develop
technology or know-how or obtain patents that could limit the Company's  ability
to compete in the future. Similarly,  others could challenge the validity of the
Company's  patents or assert that the Company is infringing on their proprietary
rights. The Company believes that its patents are valid and enforceable and does
not believe that it is infringing on the proprietary rights of others. While the
Company  believes that its patents provide it with  competitive  advantages with
respect to the  products  they cover,  the  Company  relies  primarily  upon the
technical know-how, competence, innovative skills and marketing abilities of its
engineers and other employees.

         The Company currently holds certain trademarks that are registered with
the  United  States  Patent  and  Trademark  Office  and a number of common  law
trademarks and valuable trade secrets.  It also has certain  foreign  trademarks
and has numerous domestic and foreign trademark registrations pending.

                                       11
<PAGE>

Employees

         As of March 1, 1999,  the Company  had  approximately  1,200  full-time
employees.  In  addition,  the Company at various  times makes use of  temporary
labor in its  manufacturing  operations.  Approximately 10% of the work force is
located outside the United States,  based in offices  throughout  Europe and the
Asia Pacific  regions.  The Company believes that its future success will depend
in part on its  ability to recruit and  maintain  highly  qualified  management,
marketing,  technical  and  administrative  personnel.  None  of  the  Company's
employees  is  represented  by a  labor  union.  Management  believes  that  its
relationship with employees is good.

Government Regulation

         Certain   products  of  the  Company   must  comply  with   regulations
promulgated  by the  United  States  Food and Drug  Administration's  Center for
Devices and Radiological  Health (CDRH), the Federal  Communications  Commission
(FCC),  as well as,  Underwriters  Laboratories  (UL),  the  Canadian  Standards
Association (CSA), the European Community Standards (CE), TUV Rheinland (Europe)
and TUV Product Services,  which are corresponding  agencies for certain foreign
countries.   The  regulations  are  in  the  areas  of  laser  light  emissions,
intentional  or  non-intentional  RF energy  emissions,  standards  for weighing
instruments and European  electromagnetic  compatibility  (EMC) directives.  The
regulations  mandate,  among other items, warning labels,  safety features,  and
establish  certain  levels  for  laser  power,  weight  measuring,  voltage  and
electromagnetic  fields.  The Company's  operations  are also subject to certain
federal,   state  and  local  requirements  relating  to  environmental,   waste
management,  health  and  safety  regulations.   Management  believes  that  the
Company's  business  is  operated  in  compliance  with  applicable  government,
environmental,  waste management, health and safety regulations. There can be no
assurance  that  future  regulations  will not require the Company to modify its
products to meet revised energy output or other requirements.  Failure to comply
with  future  regulations  could  result  in a  material  adverse  effect on the
Company's results of operations.

         All products  manufactured  by the Company are produced  under  quality
systems  compliant to ISO 9001. The Company  received its ISO 9001  registration
from National Quality  Assurance,  USA Inc. (NQA, USA), an accredited  registrar
that performs assessments of management systems against requirements of national
and international standards.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS  UNDER  SECURITIES  LITIGATION REFORM
ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS

         From time to time, the Company or its representatives  have made or may
make  forward-looking  statements,  orally or in writing.  Such  forward-looking
statements  may be  included  in,  but not  limited  to,  press  releases,  oral
statements  made with the  approval  of an  authorized  executive  officer or in
various filings made by the Company with the Securities and Exchange Commission.
The words or phases "will likely  result," "are  expected to," "will  continue,"
"is anticipated,"  "estimate,"  "project" or similar expressions are intended to
identify  "forward-looking   statements"  within  the  meaning  of  the  Private
Securities Litigation Reform Act of 1995 (the Reform Act). The Company wishes to
ensure that such statements are accompanied by meaningful cautionary statements,
so as to maximize to the fullest  extent  possible the  protections  of the safe
harbor established in the Reform Act.

         Accordingly,  such  statements  are  qualified  in  their  entirety  by
reference  to  and  are  accompanied  by the  following  discussion  of  certain
important factors that could cause actual results to differ materially from such
forward-looking   statements.  The  risks  included  here  are  not  exhaustive.
Furthermore,  reference  is also made to other  sections  of this  report  which
include  additional  factors which could adversely impact the Company's business
and financial performance.  Moreover, the Company operates in a very competitive
and rapidly changing environment.  New risk factors emerge from time to time and
it is not possible for  management to predict all such risk factors,  nor can it
assess the  impact of all such risk  factors on the  Company's  business  or the
extent to which any factor, or combination of factors,  may cause actual results
to differ  materially  from those contained in any  forward-looking  statements.
Accordingly,   forward-looking  statements  should  not  be  relied  upon  as  a
prediction of actual results.

                                       12
<PAGE>

         Shareholders  should be aware that while the Company does, from time to
time,  communicate with securities analysts,  it is against the Company's policy
to  disclose to such  analysts  any  material  non-public  information  or other
confidential commercial information. Accordingly, shareholders should not assume
that the  Company  agrees  with any  statement  or report  issued by any analyst
irrespective  of the content of such  statement or report.  Accordingly,  to the
extent that  reports  issued by  securities  analysts  contain any  projections,
forecasts or opinions, such reports are not the responsibility of the Company.

RISK FACTORS

Debt Service. The Company incurred  substantial  indebtedness in connection with
the  acquisition  of Spectra,  of which,  $93.2  million was  outstanding  as of
December 31, 1998. The indebtedness could have important consequences, including
the following:  (i) the Company's ability to obtain additional  financing in the
future  for  working  capital,  capital  expenditures,  acquisitions  or general
corporate purposes may be impaired;  (ii) a substantial portion of the Company's
cash flow from  operations  must be  dedicated to the payment of interest on the
indebtedness,  thereby  reducing  the funds  available  to the Company for other
purposes;  (iii) the agreements  governing the Company's long-term  indebtedness
contain  certain  restrictive  financial and operating  covenants;  (iv) certain
indebtedness  under the senior debt will be at variable  rates of interest which
would cause the Company to be vulnerable to increases in interest rates; (v) all
of  the   indebtedness   outstanding   under  the  senior  debt  is  secured  by
substantially  all the assets of the Company;  (vi) the Company is substantially
more leveraged than certain of its competitors  which might place the Company at
a competitive disadvantage;  (vii) the Company may be hindered in its ability to
adjust  rapidly  to  changing   market   conditions  and  (viii)  the  Company's
substantial  degree of leverage could make it more  vulnerable in the event of a
downturn in general economic conditions or its business.

         As a  result  of the  indebtedness  incurred  in  connection  with  the
acquisition of Spectra, a substantial portion of the Company's cash flow will be
devoted to debt service.  The ability of the Company to continue making payments
of principal and interest will be largely  dependent  upon its future  financial
performance.

Technological  Change. The market for the Company's products is characterized by
rapidly changing  technology,  evolving industry standards,  changes in customer
requirements,  and  frequent new product  introductions  and  enhancements.  The
Company's  future  success  will  depend on its  ability to enhance  its current
products,  to develop new products on a timely and cost-effective  basis, and to
respond  to  changing  customer  requirements  and  technological  developments.
Certain of the  Company's  competitors  spend  larger  amounts on  research  and
development  efforts than the Company.  Any failure by the Company to anticipate
or respond adequately to changes in technology and customer preferences,  or any
significant delay in product development or introduction,  could have a material
adverse effect on the Company's  financial  condition and results of operations.
There can be no assurance  that the Company will be successful in developing and
marketing  on a timely or  cost-effective  basis,  product  enhancements  or new
products that respond to technological  advances by others, or that such product
enhancements or new products will achieve market acceptance.

Dependence on Intellectual  Property Rights.  The Company's success is dependent
in part on its ability to obtain patent  protection  for its products,  maintain
trade secret protection and operate without infringing on the proprietary rights
of others.  The Company  currently  owns over 230 United States  patents  having
expiration  dates  from the year  2003 to the year  2015,  and also has  certain
foreign patents.  The Company has filed,  and intends to file,  applications for
additional patents covering its products.  There can be no assurance that any of
these  patent  applications  will be granted,  or that the Company  will develop
additional  products that are patentable and do not infringe upon the patents of
others,  or that the patents  issued to or licensed by the Company  will provide
the  Company  with a  competitive  advantage  or  adequate  protection  for  its
products. In addition,  there can be no assurance that the Company's competitors
will not develop technology or know-how, to obtain patents, that could limit the
Company's ability to compete in the future or that patents issued to or licensed
by the Company will not be challenged, invalidated or circumvented by others.


                                       13
<PAGE>

Pending Litigation. The AIDC industry is characterized by substantial litigation
regarding  patent  and  other   intellectual   property   rights.   The  Company
aggressively defends its patents and other proprietary rights.

         There is litigation pending in the United States District Court for the
Western  District of New York between the Company and one of its  customers,  on
the one hand, and Symbol  Technologies,  Inc.  (Symbol) on the other,  involving
certain of Symbol's  patents.  In that  action,  the  Company  has also  alleged
violation of the  antitrust  laws and unfair  practices by Symbol and Symbol has
alleged breaches of certain license  agreements  between the Company and Symbol,
including  claims  that  royalties  have been  underpaid.  The  Company has also
assumed the responsibility of defending the action on behalf of its customer and
has provided  certain  rights of  indemnification  to its customer.  The Company
intends to defend  itself and its  customer  vigorously.  Although  the  Company
maintains that Symbol's patents are invalid,  that the Company has not infringed
the patents, or both, and that the Company has not, as was alleged, breached the
Symbol license, nor underpaid royalties,  there can be no assurance that this or
any other action will be decided or settled in the Company's favor.

         On October 22, 1998, the Court granted the Company's motion for partial
summary  judgment on the issue of patent misuse on the part of Symbol and denied
Symbol's  cross  motion.  Accordingly,  PSC is not obligated to pay royalties to
Symbol  under the `297 and `186  patents  pursuant  to  either of its  licensing
agreements for products  manufactured or sold on or after April 1, 1996.  Symbol
has moved for  reconsideration  of the Court's Decision,  and has also moved for
permission  to appeal  immediately,  rather than wait until the end of the case.
These motions were submitted on December 16, 1998. No decision has been rendered
yet.

         There can be no assurance  that others will not assert  claims  against
the Company  that result in  litigation.  Any such  litigation  could  result in
significant  expense,  adversely  impact the Company's  marketing,  give rise to
certain  indemnity  rights on the part of  customers  and divert  the  Company's
attention  from other  matters.  If any of the Company's  products were found to
infringe a third-party  patent,  the third party could be entitled to injunctive
relief,  which  would  prevent  the Company  from  selling  any such  infringing
products.  In addition,  the Company could be required to pay monetary  damages.
Although  the  Company  could  seek a license  to sell  products  determined  to
infringe a third-party patent, there can be no assurance that a license would be
available on terms acceptable to the Company.  The Company could also attempt to
redesign  any  infringing  products so as to avoid  infringement,  although  any
effort  to do so could be  expensive  and  time-consuming,  and  there can be no
assurance the effect would be  successful.  Although the amount of any liability
with  respect  to such  litigation  cannot  be  determined,  in the  opinion  of
management,  such  liability  will not have a  material  adverse  effect  on the
results of  operations,  financial  position  or cash  flows.  See  "Business  -
Intellectual Property."

Competition.  The AIDC industry is highly  competitive with rapid  technological
change, product improvements, new product introduction and intellectual property
developments  representing key competitive factors. The Company also competes on
the basis of innovative design, high quality manufacturing,  technical expertise
in  scanning,  level of sales and support  services,  price and overall  product
functionality,  and  fitness  for use.  Failure  to keep pace with  product  and
technological   advances  could  negatively  affect  the  Company's  competitive
position and prospects for growth.  Several of the  Company's  competitors  have
substantially greater financial,  technical,  marketing and other resources than
the  Company.  As a result,  they may be able to respond  more quickly to new or
emerging  technologies  and to changes in  customer  requirements,  or to devote
greater resources to the development, promotion and sale of their products, than
can the Company.  In addition,  other larger  corporations  could enter the AIDC
industry.  Increased  competition  is likely to result in average  selling price
reductions,  reduced operating margins or loss of market share. No assurance can
be given that the Company will be able to compete  successfully  against current
and future competitors or that the competitive factors faced by the Company will
not adversely affect its business, financial condition or results of operations.
See "Business--Competition."

                                       14
<PAGE>

Product  Transitions.  The Company is dependent upon the introduction of new and
improved  products.  The Company's  financial  performance is dependent upon the
successful introduction of these products. The success will be dependent,  among
other things, upon the ability of the Company to complete development of certain
products,  customer acceptance of and demand for these products, and the ability
of the Company to  efficiently  manufacture  these products and to meet delivery
schedules. The introduction of new and enhanced products requires the Company to
manage the  transition  from older  products in order to minimize  disruption in
customer ordering  patterns,  avoid excess levels of older material  inventories
and ensure  that  adequate  supplies of new  product  can be  delivered  to meet
customer  demand.  There can be no assurance that the Company will  successfully
manage the transition to selling new products. The failure to do so could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

Dependence  on Sales by Third  Parties:  Significant  Customers.  A  significant
portion of the  Company's  net sales is  dependent  upon the ability of its OEM,
VAR,  distributor and systems integrator  customers to develop and sell products
that incorporate the Company's  scanning products.  Factors,  including economic
conditions,  patent  positions,  inventory  positions,  the  ability to sell the
Company's  products  to  end  users,   regulatory   requirements  and  marketing
restrictions  that  adversely  affect the  operations of the Company's OEM, VAR,
distributor and systems integrator  customers can have a substantial impact upon
the Company's  financial results.  No assurances can be given that the Company's
OEM, VAR,  distributor  and systems  integrator  customers  will not  experience
financial or other  difficulties  that could adversely  affect their  operations
and, in turn,  the results of operations of the Company.  During 1998,  1997 and
1996,  no  individual  customer  accounted  for more than 10% of net sales.  See
"Business--Sales and Marketing" and "--Customer Support and Service."

Risks  Associated  with  International   Operations.   The  Company's  sales  to
international  customers  increased from $55.2 million or 38% of total net sales
in 1996 to $112.0  million or 52% of net sales in 1998.  The Company  intends to
continue  to expand its  operations  outside  of the United  States and to enter
additional  international  markets  which will  require  significant  management
attention and financial resources and which will result in a significant portion
of the  Company's net sales being  subject to the normal risks  associated  with
international  sales.  Such  risks  include  unexpected  changes  in  regulatory
requirements,  compliance  costs  associated  with  quality  control  standards,
special  standards  requirements,  longer  accounts  receivable  collections  in
certain geographic regions, tariffs and other barriers, difficulties in staffing
and  managing  international  subsidiary  operations,  potentially  adverse  tax
consequences, country-specific product requirements and political and regulatory
uncertainties.  There can be no  assurance  that these  factors will not have an
adverse   impact  on  the   Company's   ability  to  increase  or  maintain  its
international sales or results of operations.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations" and  "Business--Sales
and Marketing."

Exposure to Currency  Fluctuations.  Historically,  the  Company's  revenue from
international  operations  primarily  has  been  denominated  in  United  States
dollars.  During  1998,  approximately  50% of its  revenue  from  international
operations and approximately 75% of its consolidated revenue were denominated in
United  States  dollars.  The Company  expects that a growing  percentage of its
business will be conducted in currencies other than the United States dollar. As
a  result,  fluctuations  in the  value  of  certain  foreign  currencies  could
materially  affect  the  Company's  business  operating  results  and  financial
condition.  Also, an increase in the value of the United States dollar  relative
to foreign  currencies  could make the Company's  products more  expensive  and,
therefore,  less competitive in certain markets.  Due to the constantly changing
currency  exposures and the volatility of currency exchange rates,  there can be
no assurance that the Company will not experience currency losses in the future,
nor can the Company predict the effect of exchange rate fluctuations upon future
operating results. The Company enters into forward foreign exchange contracts as
a hedge against currency  fluctuations  relating to foreign sales denominated in
foreign   currencies.   The  forward  contracts  generally  have  maturities  of
approximately 30 days and require the Company to exchange foreign currencies for
United  States  dollars at maturity,  at rates agreed to at the inception of the
contracts.  Gains and losses on forward contracts are offset against the foreign
exchange gains and losses on the underlying hedged items and are recorded in the
Consolidated Statements of Operations.

                                       15
<PAGE>

Price. Traditionally, the selling price of the Company's products decreases over
the life of the product.  The Company endeavors to reduce manufacturing costs of
existing   products  and  to  introduce  new   products,   functions  and  other
price/performance-enhancing  features  in order to  mitigate  the effect of such
decreases. To the extent that such cost reductions, product enhancements and new
product  introductions  do not occur in a timely manner or do not achieve market
acceptance,  the  Company's  operating  results could be  materially,  adversely
affected.

Acquisitions.  The  Company  has in the  past  and  may  in the  future  acquire
businesses  or product  lines as a way of expanding  its product  offerings  and
acquiring new technology.  Failure of the Company to identify future acquisition
opportunities  and/or to integrate  effectively  businesses  that it may acquire
could have a material adverse effect on the Company's growth.

Dependence  on Key  Vendors.  The  Company's  ability  to  produce  and ship its
products on schedule is highly dependent on timely receipt of an adequate supply
of components and materials from its key vendors.  The Company  currently relies
on single suppliers, some of whom manufacture at a number of locations, for some
of the key  components  of its  products.  The Company  could incur  significant
set-up costs and experience  delays in  manufacturing  should it be necessary to
replace key vendors due to work stoppages,  shipping delays,  quality  problems,
financial  difficulties  or other factors.  There can be no assurance that these
potential  costs and  delays  would not have a  material  adverse  impact on the
Company's business or results of operations.  See  "Business--Manufacturing  and
Suppliers."

Risks  Associated  with  Significant  Suppliers  in the Year 2000.  The  Company
believes that the area of the greatest  potential risk  associated with the Year
2000 relates to  significant  suppliers'  failing to  remediate  their Year 2000
issues in a timely manner. The Company is conducting formal  communications with
its significant suppliers to determine the extent to which it may be affected by
those parties' plans to remediate  their own Year 2000 issue in a timely manner.
If a number of  significant  suppliers are not Year 2000  compliant,  this could
have a material adverse effect on the Company's results of operations, financial
position or cash flow.  At this point,  the Company has not been  advised by any
significant supplier that it will not be Year 2000 compliant.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Fluctuations  in  Quarterly  Operating  Results.  Historically,  the Company has
experienced  variability  in its quarterly  results and the Company  anticipates
that such  variability  will  continue  in the future as a result of a number of
factors,  many of which are beyond the Company's control.  The factors affecting
this variability include demand for the Company's products,  the size and timing
of large customer  orders,  the entry of new competitors  and new  technological
advances  by  competitors,  changes  in  pricing  policies  by  the  Company  or
competitors, customer order deferrals in anticipation of product enhancements or
new product  offerings by the Company or its competitors,  changes in the mix of
products sold by the Company and general economic factors.

Since customers order products for delivery within 30 to 45 days, backlog is not
a reliable predictor of future results beyond the current quarter. The Company's
expense levels are based, in part, on expectations of future revenue. If revenue
levels are below expectations,  expense levels would be disproportionately  high
as a  percentage  of total  revenue and  operating  results  would be  adversely
affected.  The Company believes that quarterly  period-to-period  comparisons of
its financial  results are not  necessarily  meaningful and should not be relied
upon as an indication of future  performance.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

Government  Regulation.  The Company's  products and  operations  are subject to
regulation  by federal,  state and local  agencies in the United  States and its
products  are  subject to  regulation  in certain  foreign  countries  where the
Company's  products are sold.  While the Company  believes that its products and
operations comply with all applicable regulations,  there can be no assurance of
continued  compliance if these  regulations were to change.  Noncompliance  with
respect  to these  regulations  could  have a  material  adverse  impact  on the
Company's results of operations. See "Business--Government Regulation."


                                       16
<PAGE>

                               ITEM 2: PROPERTIES

         The Company's principal manufacturing,  engineering, and administrative
facility consists of an approximately 132,000 square foot Company-owned building
in Webster, New York, a suburb of Rochester, New York. This facility,  completed
in 1995, was  custom-designed to serve the Company's  operations and to permit a
relatively rapid 45,000 square foot manufacturing  addition. An adjacent 20 acre
parcel of land owned by the Company is also available for expansion. The Company
leases  approximately  28,000  square  feet of  offsite  storage  and shop space
immediately adjacent to its principal facility.  This lease expires December 31,
2001.

         The Company  also owns a 32 acre site in Eugene,  Oregon.  Engineering,
marketing and  administrative  functions  are contained in a seventeen  year old
54,000 square foot facility.  Manufacturing  and  warehousing are contained in a
separate twelve year old 56,000 square foot building.  In addition,  the Company
leases 9,000  square feet of offsite  storage and shop space  approximately  two
miles from the manufacturing facility. This lease expires June 30, 2000.

         Domestically, the Company maintains offices under short-term leases for
individual sales and support personnel in or near Dallas,  Texas;  Dayton, Ohio;
Denver,  Colorado;  Miami,  Florida and Skaneateles,  New York in order to serve
North, Central and South America.

         Internationally,  the  Company  maintains  offices  in or  near  Tokyo,
Beijing, Sydney, Hong Kong, London, Paris, Milan, Frankfurt,  Brussels,  Madrid,
Malmo and Ontario.  These  offices  house from one to 25 people in 300 to 12,000
square foot facilities under short-term leases.

         All of the  Company's  locations are in good  condition and  management
believes  that  the  Company  has  sufficient  manufacturing  capacity  for  the
foreseeable future.

                            ITEM 3: LEGAL PROCEEDINGS

         There is litigation pending in the United States District Court for the
Western District of New York located in Rochester,  New York between the Company
and one of its  customers,  Data  General,  on the one hand,  and  Symbol on the
other,  involving certain of Symbol's patents.  In that action,  the Company has
also alleged  violations of the antitrust  laws and unfair  practices by Symbol.
Symbol  has  alleged  patent   infringement  and  breaches  of  certain  license
agreements between the Company and Symbol,  including claims that royalties have
been  underpaid.  The Company has assumed the  responsibility  of defending  the
action on behalf of Data General.

         On October 22, 1998, the Court granted the Company's motion for partial
summary  judgment on the issue of patent misuse on the part of Symbol and denied
Symbol's  cross  motion.  Accordingly,  PSC is not obligated to pay royalties to
Symbol  under the `297 and `186  patents  pursuant  to  either of its  licensing
agreements for products  manufactured or sold on or after April 1, 1996.  Symbol
has moved for  reconsideration  of the Court's Decision,  and has also moved for
permission  to appeal  immediately,  rather than wait until the end of the case.
These motions were submitted on December 16, 1998. No decision has been rendered
yet.

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

         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of the period ended December 31, 1998.


                                       17
<PAGE>
                        EXECUTIVE OFFICERS OF REGISTRANT

The Company's executive officers as of December 31, 1998, were as follows.

Name                       Age         Officer/Position

Robert C. Strandberg       41..........President and Chief Executive Officer

Edward J. Biernat          44..........Vice President, Quality

Charles E. Biss            46..........Vice President, Verification

Cecil F. Bowes             55..........Vice President, Sales-The Americas, 
                                       Asia Pacific

Nigel P. Davis             48..........Vice President, Sales - Europe, 
                                       Middle East, Africa

G. William Hartman         53..........Vice President, Automation

Dennis T. Hopwood          49..........Vice President, Human Resources

Linda J. Miller            38......... Vice President, Marketing

William L. Parnell, Jr.    42..........Vice President, Operations

Brad R. Reddersen          46..........Vice President, Chief Technology Officer

Matt D. Schler             43..........Vice President, Engineering and 
                                       Product Development

Michael J. Stachura        43..........Vice President, Finance

Roger D. Tedford           45..........Vice President, Chief Information Officer

William J. Woodard         47.........Vice President, Chief Financial Officer 
                                      and Treasurer


                                       18
<PAGE>


     Robert C.  Strandberg  has  served  as the  President  and Chief  Executive
Officer of the Company  since May 1997 and was  Executive  Vice  President  from
November 1996 until May 1997. Prior to joining the Company,  Mr.  Strandberg was
Chairman of the Board of  Directors,  President and Chief  Executive  Officer of
Datamax International  Corporation ("Datamax"),  Orlando,  Florida, from 1991 to
1996. Datamax designs and manufactures thermal printers.  Mr. Strandberg holds a
B.S.  degree in  Operations  Research and  Industrial  Engineering  from Cornell
University  and an M.B.A.  degree  from  Harvard  Graduate  School  of  Business
Administration.

     Edward J.  Biernat has served as Vice  President,  Quality,  since  January
1996.  Prior to joining  the  Company,  Mr.  Biernat  was the Manager of Quality
Systems for Thin Film  Technology,  a division of Bausch and Lomb, Inc. based in
Rochester,  New York  (1989-1996).  Mr. Biernat holds B.S. degrees in Electrical
and Mechanical Engineering from Clarkson University.

     Charles E. Biss has served as Vice  President,  Verification  since January
1996, as General Manager,  Verification  Products (1995-1996) and as Product and
Technical  Support  Manager  (1985-1995).  Mr.  Biss has served the Company in a
variety  of  technical  and  production  related  roles  since  1973.  Mr.  Biss
represents  the  Company on a number of  national  and  international  standards
creating committees  relating to bar codes and the automatic  identification and
data capture industry.  He received his B.S. degree in Photographic  Science and
Engineering from Rochester Institute of Technology.

     Cecil F. Bowes has served as Vice  President,  Sales - The  Americas,  Asia
Pacific since December 1996. Prior thereto, he was Group Director, North America
for Spectra-Physics  Scanning Systems, Inc. ("Spectra") from November 1990 until
December 1996. Mr. Bowes holds a B.S. degree in Education from the University of
Dayton.

     Nigel P. Davis has served as Vice President,  Sales - Europe,  Middle East,
Africa since July 1996.  Prior thereto,  he was Group Director - Europe,  Middle
East, Africa for Spectra from March 1993 to May 1996.

     G. William Hartman has served as Vice President, Automation since September
1997.  Prior to joining  the  Company,  he was Senior Vice  President  and Chief
Operating  Officer of Datamax from 1991 to 1996. Mr. Hartman holds a B.S. degree
in Mechanical  Engineering  from the  University  of Utah and an M.S.  degree in
Mechanical Engineering from Villanova University.

     Dennis T. Hopwood has served as Vice President,  Human Resources since July
1997. Prior thereto, he was Vice President, Human Resources for Spectra from May
1986 to January  1997.  Mr.  Hopwood holds a B.S.  degree in Sociology  from the
University of Idaho and an M.S. degree in Higher Education  Administration  from
the University of Wisconsin.

     Linda J. Miller has served as Vice  President,  Marketing since April 1998.
Prior to joining the Company, Ms. Miller was Vice President of Business Planning
and Development for Champion  Products,  which she joined in 1992 as Director of
Sales Planning. Ms. Miller holds a B.S. degree in Industrial Administration from
General Motors Institute and an M.B.A. degree from the University of Michigan.

     William L. Parnell has served as Vice President,  Operations  since October
1996. Prior thereto, he was Vice President - Operations of Spectra from November
1990 until October 1996. Mr. Parnell received a B.S. degree in Physics from Utah
State University and an M.B.A. degree from the University of Washington.

     Brad R. Reddersen has served as Vice President,  Chief  Technology  Officer
since November 1997 and was Vice President,  Engineering and Product Development
from December 1996 to October 1997.  Prior thereto,  he was Vice President,  New
Products of Spectra  from  October  1993 until  December  1996.  From 1985 until
October 1993 he served  Spectra's  predecessor  in a variety of roles  including
Acting Vice President,  Research and Development and Product Marketing  Manager.
Mr. Reddersen  received a B.S. degree in Physics from Harvey Mudd College and an
M.S. degree in Optical Engineering from the University of Rochester.

                                       19
<PAGE>

     Matt D.  Schler  has  served as Vice  President,  Engineering  and  Product
Development  since  November  1997.  Prior  thereto,  he was Vice  President  of
Engineering at Percon Inc., a manufacturer  of bar code reading  products,  from
February 1997 to November 1997 and Vice  President of New Products,  Engineering
Manager of Spectra from March 1992 until  January 1997.  Mr.  Schler  received a
B.S. degree in Electrical Engineering from University of Colorado.

     Michael J. Stachura has served as Vice  President,  Finance since September
1997.  Prior thereto,  he was Vice President,  Corporate  Controller of Genencor
International, Inc. from January 1991 until August 1997. Mr. Stachura received a
B.S. degree in Accounting from Canisius College.

     Roger D. Tedford has served as Vice President,  Chief  Information  Officer
since  November  1996.  Prior  thereto,  he was Vice  President,  Treasurer  and
Secretary  of Spectra  from  November  1990 until  November  1996.  Mr.  Tedford
received  a  B.A.  degree  in  Accounting/Finance  and  an  M.B.A.  degree  from
California University at Fullerton.

     William J. Woodard has served as Vice President,  Chief  Financial  Officer
and Treasurer  since October 1996.  Prior thereto,  he served as Vice President,
Finance and Treasurer from August 1994 until September 1996. Previously,  he was
Vice President and Chief Financial Officer,  Champion Products (1987-1994).  Mr.
Woodard,  a certified public  accountant,  attended St.  Bonaventure  University
where he received a B.B.A. degree in Accounting.

                                       20
<PAGE>

                                     PART II

                 ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY
                      AND RELATED SECURITY HOLDER MATTERS

     The Company's  common shares trade on The Nasdaq Stock  Market(R) under the
symbol PSCX. The following table sets forth, for the periods indicated, the high
and low sale prices for the common shares.

                                                     High                Low
1998
    Fourth Quarter..............................     $11.50             $6.50
    Third Quarter...............................     $ 9.38             $6.00
    Second Quarter..............................     $12.25             $8.63
    First Quarter...............................     $13.38             $9.13

1997
    Fourth Quarter..............................     $13.50             $9.13
    Third Quarter...............................     $10.13             $6.63
    Second Quarter..............................     $ 7.88             $6.13
    First Quarter...............................     $ 9.00             $6.88


     As of December 31, 1998, there were  approximately  1,465 holders of record
of common shares.

     The  Company  has not  paid  any  cash  dividends  since  1979 and does not
anticipate paying cash dividends in the foreseeable future. The Company's senior
debt and subordinated term loan agreements restrict payment of dividends.


                                       21
<PAGE>

                         ITEM 6: SELECTED FINANCIAL DATA
                (All amounts in thousands, except per share data)

         The selected  consolidated  financial data presented  below for each of
the five years in the period ended  December 31, 1998 have been derived from the
Company's consolidated financial statements,  which statements have been audited
by Arthur Andersen LLP,  independent public  accountants,  as indicated in their
reports  thereon.  The selected  consolidated  financial  data should be read in
conjunction  with  the  Consolidated  Financial  Statements  and  Notes  thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                  ----------------------------------------------------------------------------
                                                     1998        1997             1996           1995            1994
<S>                                                  <C>         <C>             <C>             <C>             <C>            
     Net sales ...................................   $217,223    $207,840        $146,051        $87,516         $60,447
     Cost of sales ...............................    126,350     122,995  (1)     83,675         50,634          32,198
                                                    ----------------------------------------------------------------------------
        Gross profit .............................     90,873      84,845          62,376         36,882          28,249
     Operating expenses:
        Engineering, research and development.....     15,665      13,429          11,069          4,962           3,810
        Selling, general and administrative.......     42,069      43,743          37,855         23,024          16,031
        Acquisition related restructuring and
          other costs ............................         --          --          70,068 (2)         --           6,894  (3)
        Severance and other costs.................         --       4,191  (1)         --             --              --
        Amortization of intangibles from
           business acquisitions..................      6,822       6,715           3,564            877             485
                                                  ----------------------------------------------------------------------------
     Income/(loss)  from operations...............     26,317      16,767        (60,180)          8,019           1,029
     Interest and other income/(expense)..........    (9,833)    (12,016)         (5,747)            676             110
     income/(expense)............................. ----------------------------------------------------------------------------
     Income/(loss) from continuing operations
          before income tax provision/(benefit)...     16,484       4,751  (1)   (65,927) (2)      8,695           1,139  (3)
     Income tax provision/(benefit)...............      5,968       1,761        (24,393)          3,246             527
                                                  ----------------------------------------------------------------------------
     Income/(loss) from continuing operations....      10,516       2,990        (41,534)          5,449             612
     Loss from discontinued operations...........          --       (101)         (5,446)             --              --
                                                  ============================================================================
       Net income/(loss).........................     $10,516      $2,889  (1)  $(46,980) (2)    $ 5,449           $ 612  (3)
                                                  ============================================================================
      Net income/(loss) per common and 
       common equivalent share:
       Basic:
         Continuing operations ..................       $0.90       $0.27         $(3.96)          $0.58           $0.08
         Discontinued operations ................           --      (0.01)         (0.52)             --              --
                                                  ============================================================================
         Net income/(loss).......................       $0.90       $0.26  (1)    $(4.48) (2)      $0.58           $0.08  (3)
                                                  ============================================================================
       Diluted:
         Continuing operations..................        $0.75       $0.25         $(3.96)          $0.54           $0.08

         Discontinued operations................           --      (0.01)          (0.52)             --              --
                                                  ============================================================================
         Net income/(loss).....................         $0.75       $0.24  (1)    $(4.48) (2)      $0.54           $0.08  (3)
                                                  ============================================================================
 
    Weighted average number of common and
      common equivalent shares:
      Basic....................................        11,713      11,197          10,490          9,329           7,319
      Diluted .................................        13,993      11,843          10,490         10,013           7,617
</TABLE>


(1)      Severance and other costs reduced 1997 income before income taxes, net 
         income, basic EPS and diluted EPS by $5.2 million,
         $3.3 million, $0.29 and $0.28, respectively.
(2)      The  acquisition  related  restructuring  and other costs  reduced 1996
         income before income  taxes,  net income,  basic EPS and diluted EPS by
         $70.1 million, $44.2 million, $4.21 and $4.21, respectively.
(3)      The  acquisition  related  restructuring  and other costs  reduced 1994
         income before income  taxes,  net income,  basic EPS and diluted EPS by
         $6.9 million, $4.5 million, $0.61 and $0.59, respectively.


                                       22
<PAGE>
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                           ---------------------------------------------------
                                             1998       1997       1996       1995       1994
<S>                                      <C>        <C>        <C>        <C>        <C> 
     Cash and cash equivalents........   $  6,180   $  2,271   $ 10,838   $  5,538   $  2,720
     Working capital..................     16,827     12,112     13,320     20,397      8,014
     Total assets.....................    171,263    172,798    183,361     71,237     52,763
     Long-term debt, including current 
     maturities......................      93,208    108,554    127,453        623     13,609
     Total shareholders' equity.......     44,199     29,330     15,301     53,327     22,233

</TABLE>
            ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The  following  discussion  should  be read  in  conjunction  with  the
Consolidated  Financial  Statements and the Notes thereto appearing elsewhere in
this report.

Results of Operations

         The  following  table  sets  forth,  for the years  indicated,  certain
consolidated financial data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                ------------------------------------------------------------------------
                                                         1998                     1997                     1996
                                                -----------------------  -----------------------   ---------------------
                                                                        (dollars in thousands)
<S>                                                   <C>         <C>     <C>            <C>       <C>            <C>   
Net sales .........................................   $ 217,223   100.0%  $ 207,840      100.0%    $ 146,051      100.0%

Cost of sales .....................................     126,350    58.2     122,995       59.2        83,675       57.3

                                                      ---------    -----   ---------     -----      ---------     -----
  Gross profit ....................................      90,873    41.8      84,845       40.8        62,376       42.7

Operating expenses:
  Engineering, research and development ...........      15,665     7.2      13,429        6.5        11,069        7.6

  Selling, general and  administrative ............      42,069    19.4      43,743       21.0        37,855       25.9

  Severance and other costs .......................        --       --        4,191        2.0        --             --

  Acquisition related restructuring and other costs        --       --           --        --         70,068       48.0

  Amortization of intangibles from business
     acquisitions .................................       6,822     3.1       6,715        3.2         3,564        2.4

                                                      ---------    -----     ---------    -----     ---------      -----
Income/(loss)  from  operations ...................      26,317    12.1      16,767        8.1       (60,180)     (41.2)

Interest and other income/(expense) ...............      (9,833)   (4.5)    (12,016)      (5.8)       (5,747)      (3.9)

                                                      ---------    -----     ---------    -----      ---------     -----
Income/(loss) from continuing operations
before income tax provision/(benefit) .............      16,484      7.6       4,751       2.3       (65,927)     (45.1)
Income tax  provision/(benefit) ...................       5,968      2.7       1,761       0.9       (24,393)     (16.7)

                                                      ---------    -----     ---------    -----     ---------      -----
Income/(loss) from continuing operatoins ..........      10,516      4.9       2,990       1.4       (41,534)     (28.4)

Loss from discontinued operations .................         --       --         (101)       --        (5,446)      (3.7)
                                                      =========    =====     =========    =====      =========     =====
Net income/(loss) .................................   $  10,516      4.9%     $ 2,889 (1)  1.4%      $(46,980)(2)  (32.1%)
                                                      =========     =====     =========    =====     =========     =====
</TABLE>
(1)      Severance  and other costs  reduced 1997 income before income taxes and
         net income by $5.2 million and $3.3 million, respectively.
(2)      The acquisition related restructuring and other costs reduced 1996 
         income before income taxes and net income by $70.1 million and 
         $44.2 million, respectively.

                                       23
<PAGE>

Overview

During  1998,  PSC  Inc.  (the  Company)   achieved   record  results  from  the
reorganization  activities it began in 1997.  Profits and sales  reached  record
highs. The Company streamlined operations,  reduced operating expenses and debt,
and leveraged core  competencies in technology.  A stronger  financial  position
enabled the Company to increase investments in product development and marketing
to drive future profitable revenue growth.

Some of the key results of the Company's 1998 efforts include the following:
o Earnings per diluted share improved by 39% to a record $0.75 
o Sales reached a record high of $217.2  million 
o SG&A  declined to 19.4% of sales 
o More than a dozen new products were introduced  across the entire product line
o Long-term debt decreased by $17.3 million or 18% 
o Four quarters of EBITDA  reached $40.1 million

With its stronger financial position,  established  earnings record,  market and
technological  leadership,  and  new  product  introductions,  the  Company  has
established  the base to generate  future sales  growth and  improved  financial
results.

For the Year ended December 31, 1998

Net sales of $217.2  million for the year ended  December 31, 1998  increased 5%
over 1997.  The  increase in net sales is  primarily  due to higher sales of the
Magellan  Scanner line,  industrial  automation  products and U-Scan(R)  Express
Self-Checkout  Systems  products  offset by lower  handheld  scanner  and engine
sales.  International  net sales increased 18% over the prior year primarily due
to the  introduction  of new products and the continued  growth in the Company's
European  customer sales, and represented 52% of net sales in 1998 versus 46% in
1997.

Gross profit of $90.9 million for the year ended  December 31, 1998 increased 7%
over 1997. As a percentage of sales,  gross profit was 41.8% in 1998 compared to
40.8% in 1997.  Gross profit dollars and percentage  increased  primarily due to
the change in product mix, as higher margin fixed position products  represented
a greater percentage of total sales.

In 1998,  the Company  continued its  commitment  to new products.  Engineering,
research and  development  (ER&D)  expenses of $15.7  million for the year ended
December 31, 1998 increased $2.2 million or 17%. As a percentage of sales,  ER&D
increased to 7.2% from 6.5% in 1997.  The 1998 dollar and  percentage  increases
were primarily due to additional investments to develop new products and enhance
existing products.

Selling,  general and  administrative  (SG&A)  expenses of $42.1 million for the
year ended  December 31, 1998  decreased  $1.7 million or 4%. As a percentage of
sales,  SG&A  declined to 19.4% in 1998 from 21.0% in 1997.  The 1998 dollar and
percentage  decreases were  primarily  attributed to the  implementation  of the
reorganization program during the second quarter of 1997.

The  Company's  effective  tax  rate  was  36.2%  in 1998  versus  37.1% in 1997
primarily due to larger Foreign Sales  Corporation  benefits realized during the
current year. In 1998, the Company  recorded a $6.0 million income tax provision
due to an increase in pretax income.

                                       24
<PAGE>

For the Year ended December 31, 1997

Net sales of $207.8  million for the year ended  December 31, 1997 increased 42%
over 1996.  The  increase  in net sales is  primarily  due to the  inclusion  of
Spectra-Physics Scanning Systems, Inc. (Spectra) product sales for the full year
in 1997 and  increased  sales volume  offset by lower  average  selling  prices.
International  net sales  increased 73% over the prior year primarily due to the
Spectra acquisition and represented 46% of sales versus 38% in 1996.

Gross profit of $84.8 million for the year ended December 31, 1997 increased 36%
over 1996. As a percentage of sales,  gross profit was 40.8% in 1997 compared to
42.7% in 1996.  The  increase in gross profit  dollars is  primarily  due to the
inclusion  of Spectra for the full year while the  decrease in gross profit as a
percentage  of sales is primarily  due to the $1.0 million  inventory  write-off
recorded in the second quarter for the  discontinuation  of certain  products to
streamline  the  Company's  product  lines,  a change in the mix of products and
lower selling prices for handheld and fixed position scanner products.

Engineering,  research and development  (ER&D) expenses of $13.4 million for the
year ended  December 31, 1997  increased $2.4 million or 21%. As a percentage of
sales,  ER&D was 6.5%  versus  7.6% in 1996.  The  dollar  increase  in 1997 was
primarily due to the inclusion of Spectra for the full year in 1997. As a result
of  efficiencies  developed  due  to  the  integration  of  Spectra,  ER&D  as a
percentage of sales declined in 1997.

Selling,  general and  administrative  (SG&A)  expenses of $43.7 million for the
year ended December 31, 1997 increased $5.9 million or 15.6%. As a percentage of
sales,  SG&A  declined  to 21.0% in 1997  from  25.9% in 1996.  The 1997  dollar
increase  is due to the  inclusion  of  Spectra  for the full year in 1997.  The
decrease in SG&A as a percentage of sales is a result of efficiencies  developed
due to the  integration  of Spectra.  In addition,  the Company is now operating
under the  Spectra-Symbol  License  Agreement,  which results in a lower royalty
expense.

The  Company's  effective  tax rate was 37.1% in 1997 versus  37.0% in 1996.  In
1997,  the  Company  recorded a $1.8  million  income tax  provision  due to the
increase in pretax income.

During the second quarter of 1997, the Company  recorded a pretax charge of $4.2
million for severance and other costs. Of the total charge,  approximately  $2.3
million was  associated  with the Severance  Agreement with the former CEO, $1.2
million was for employee  severance  and benefit  costs for the  elimination  of
approximately 30 positions  including several senior executives and $0.7 million
was  for  the  centralization  of  research  and  development  efforts  and  the
relocation of  manufacturing  of certain product lines between the Company's two
manufacturing  facilities.  Accrued expenses for these activities as of December
31,  1998 was  approximately  $0.7  million,  of which $0.1  million  related to
long-term  contractual  obligations.  These  costs and the  inventory  write-off
reduced 1997 income before income taxes,  net income,  basic EPS and diluted EPS
by $5.2 million, $3.3 million, $0.29 and $0.28, respectively.

During the third quarter of 1996, the Company  recorded a pretax charge of $10.0
million for the cost of  restructuring  its  existing  operations  with those of
Spectra,  which was acquired in July 1996. The restructuring  program,  in part,
provided for employee severance and benefit costs for the elimination of certain
positions.  As of December 31, 1998, all positions targeted in the restructuring
program have been eliminated.  Restructuring actions are expected to be complete
by the end of  1999.  Excluding  $0.2  million  reversed  in 1998,  the  Company
recorded  charges  against the accrual of $0.5  million,  $3.7  million and $5.3
million in 1998, 1997 and 1996,  respectively.  The amount of the  restructuring
accrual at December 31, 1998 was  approximately  $0.3 million,  which relates to
current  contractual  obligations.  There  have been no other  reallocations  or
reestimates to date.

Discontinued Operations

During the third quarter of 1996,  the Company  adopted a plan to dispose of its
TxCOM  subsidiary.  TxCOM was  acquired  as a part of the  Spectra  acquisition.
Results from  operations of TxCOM were a gain of $0.2 million in 1997 and a loss
of $0.2  million  in 1996.  Disposal  of TxCOM,  which  occurred  in June  1997,
resulted in the recording of losses of $ 0.3 million in 1997 and $5.2 million in
1996.  These losses include the write-down of the assets to their net realizable
value  and the costs of  disposing  of the  subsidiary,  net of  applicable  tax
benefits.

                                       25
<PAGE>
Liquidity and Capital Resources

Current  assets  increased  $6.8 million from December 31, 1997 primarily due to
increased cash balances and increased  levels of accounts  receivable  resultant
from  higher  sales  during the  fourth  quarter of 1998  versus  1997.  Current
liabilities  increased  $2.1 million from December 31, 1997  primarily due to an
increase in the current portion of long-tem debt and accrued  expenses offset by
a reduction in acquisition  related  restructuring  costs. As a result,  working
capital increased $4.7 million in 1998.

In 1997,  current assets  declined $3.2 million from December 31, 1996 primarily
due to decreased  cash balances  which were  utilized to reduce the  outstanding
balance of the revolving credit facility, offset by increased levels of accounts
receivable  from  increased  sales in Europe where  customers have longer credit
terms.  Current  liabilities  declined  $2.0  million  from  December  31,  1996
primarily due to reduced accrued expenses and acquisition related  restructuring
costs,  offset by an increase in the current  portion of  long-term  debt.  As a
result, working capital decreased $1.2 million in 1997.

Property, plant and equipment expenditures totaled $5.8 million in 1998 and $6.6
million  in 1997.  The 1998  expenditures  primarily  related  to  manufacturing
equipment and new product tooling.  The 1997  expenditures  primarily related to
manufacturing and research equipment and new product tooling.

In  September  1997,  the Company  completed a private  placement of equity with
Hydra  Investissements  S.A.,  a Luxembourg  Corporation  (the  Purchaser).  The
Company  issued and sold 110 thousand  shares of Series A Convertible  Preferred
Shares (the Preferred  Shares) which are convertible  into 1,375 thousand Common
Shares.  In  connection  with the issuance of the  Preferred  Shares,  a warrant
evidencing  the right to purchase an aggregate of 180 thousand  Common Shares of
the Company was issued to the  Purchaser.  This warrant has an exercise price of
$8.00 per share and may be exercised before September 10, 2001. As a result, the
Purchaser  is the  beneficial  owner  of 1,555  thousand  Common  Shares  of the
Company.  The net proceeds to the Company from the offering were $10.2  million.
The Company  used the  proceeds  for  working  capital  purposes  and to repay a
portion of its senior revolving credit facility.

The long-term  debt-to-capital  percentage was 64.1% at December 31, 1998 versus
76.6% at December 31, 1997 due to both a reduction  in  long-term  debt by $17.3
million and an increase in retained  earnings  resultant from 1998 net income of
$10.5  million.  At December 31, 1998,  liquidity  immediately  available to the
Company  consisted of cash and cash equivalents of  approximately  $6.2 million.
The Company has  outstanding  credit  facilities  totaling  $93.2  million and a
revolving  line  of  credit  totaling  $20.0  million,  of  which,  there  is no
outstanding  balance. The Company believes that its cash resources and available
credit  facilities,  in addition to its operating cash flows,  are sufficient to
meet its requirements for the next 12 months.

In the opinion of  management,  inflation  has not had a material  effect on the
operations of the Company.

Market Risk

At December 31, 1998,  the Company had  outstanding  foreign  currency  exchange
contracts to sell $2.2 million of various currencies. The difference between the
fair  value  of  these  outstanding  contracts  and  the  contract  amounts  was
immaterial.   A  hypothetical  10%  fluctuation  in  exchange  rates  for  these
currencies would change the fair value by approximately  $0.2 million.  However,
since these  contracts  hedge foreign  currency  denominated  transactions,  any
change in the fair  value of the  contracts  would be offset by  changes  in the
underlying value of the transactions being hedged.

The net assets of the  Company's  foreign  subsidiaries  at  December  31,  1998
totaled  $9.4  million.  The  potential  loss  in net  assets  resulting  from a
hypothetical  10%  adverse  change in quoted  foreign  currency  exchange  rates
amounts to $0.9 million.

                                       26
<PAGE>

At December 31, 1998, the Company had interest rate swap agreements  aggregating
a notional principal amount of $60.0 million. These swaps effectively change the
Company's  payment of interest on $60.0  million of variable  rate debt to fixed
rate debt.  Based on the fair value of these  interest  rate swap  agreements at
December 31, 1998,  it would have cost the Company $0.5 million to terminate the
agreements.  A  hypothetical  1% decrease in the 30 day  commercial  paper rates
would decrease the fair value by approximately $0.9 million.

The fair value of long-term fixed interest rate debt is subject to interest rate
risk.  Generally,  the fair value of fixed  interest  rate debt will increase as
interest  rates fall and decrease as interest  rates rise.  The  estimated  fair
value of the Company's total long-term debt was $94.1 million, including current
maturities,  at December 31, 1998. A  hypothetical  1% increase from  prevailing
interest  rates at December 31, 1998 would result in a decrease in fair value of
long-term debt by approximately $1.5 million.

Year 2000

The Year 2000 problem is the result of many existing  computer  programs written
in two digits,  rather than four, to define the  applicable  year.  Accordingly,
date-sensitive  software or hardware may not be able to distinguish  between the
year 1900 and year  2000,  and  programs  that  perform  arithmetic  operations,
comparisons or sorting of date fields may begin yielding incorrect results. This
potentially could cause a system failure or  miscalculations  that could disrupt
operations, including, among other things, an inability to process transactions,
send invoices,  or engage in normal business activities.  These Year 2000 issues
affect virtually all companies and organizations.

The Company has developed a three-phase plan to address its Year 2000 issues:

         (1)  Identification  of  software  and  hardware.   This  includes  the
              following:

               (a)   Applications  and  information  technology  (IT) equipment,
                     which includes all mainframe,  network and desktop software
                     and  hardware,  custom and  packaged  applications,  and IT
                     embedded systems;

               (b)   Non-information  technology (non-IT) embedded systems. This
                     includes  non-IT  equipment and machinery.  Non-IT embedded
                     systems,  such as  security,  fire  prevention  and climate
                     control systems typically include embedded technology; and

               (c)   Vendor relationships. This includes significant third-party
                     vendors and supplier interfaces.

               Both   domestically   and   internationally,   the   Company  has
               substantially completed the identification stage.

         (2)   Assessment  of the software and hardware  identified.  This phase
               includes the  evaluation of the software and hardware  identified
               for Year 2000  compliance,  the  determination of the remediation
               method  and  resources  required,   and  the  development  of  an
               implementation  plan.  A  significant  portion of the  assessment
               stage has been  completed.  The Company  expects this phase to be
               fully completed by the end of March 1999.

         (3)   Implementation of a remediation plan. This phase includes testing
               some  modifications/upgrades in a Year 2000 simulated environment
               and vendor  interface  testing,  if  necessary.  The  Company has
               commenced implementation,  both domestically and internationally,
               and expects this phase to be completed by the end of August 1999.
               The  Company's  remediation  plan for its Year  2000  issue is an
               ongoing  process  and the  estimated  completion  dates above are
               subject to change.

                                       27
<PAGE>


Overall,  at this time, the Company  believes that its systems will be Year 2000
compliant in a timely manner for several reasons.  Several significant operating
systems  are  already  compliant.  Internationally,  the  Company  is  currently
implementing  new computer  systems that were developed in the United States and
are currently Year 2000 compliant.  To the extent that current systems that will
not be replaced have been determined to be non-compliant, the Company is working
with the suppliers of such systems to obtain  upgrades  and/or  enhancements  to
ensure Year 2000 compliance. Also, comprehensive testing of all critical systems
is planned to be conducted in a simulated Year 2000 environment.

The  Company  believes  that  it will  not be  required  to  modify  or  replace
significant  portions of the  products it  presently  develops  and  provides to
customers  as such  products  are not  date  dependent  and,  accordingly,  will
function  properly with respect to dates in the Year 2000. All new products will
be Year 2000 ready when released.

At this stage in the process,  the Company has not  identified  any  significant
risks.  However,  the Company  believes that the area of the greatest  potential
risk relates to  significant  suppliers'  failing to  remediate  their Year 2000
issues in a timely manner. The Company is conducting formal  communications with
its significant suppliers to determine the extent to which it may be affected by
those parties' plans to remediate  their own Year 2000 issue in a timely manner.
If a number of  significant  suppliers are not Year 2000  compliant,  this could
have a material adverse effect on the Company's results of operations, financial
position or cash flow.  At this point,  the Company has not been  advised by any
significant supplier that it will not be Year 2000 compliant.

The  Company  is  developing  its  contingency  plans and  expects  to have them
completed by June 1999. To mitigate the effects of the Company's or  significant
suppliers'  potential  failure  to  remediate  the Year  2000  issue in a timely
manner,  the Company  will take  appropriate  actions.  Such actions may include
having arrangements for alternate suppliers, using manual intervention to ensure
the  continuation  of  operations  where  necessary and  scheduling  activity in
December 1999 that would  normally occur at the beginning of January 2000. If it
becomes  necessary  for the  Company to take  these  corrective  actions,  it is
uncertain, until the contingency plans are finalized,  whether this would result
in significant  delays in business  operations or have a material adverse effect
on the Company's results of operations, financial position or cash flows.

Based upon the Company's current estimates,  incremental  out-of-pocket costs of
its Year 2000 program are expected not to be material.  These costs are expected
to be incurred  primarily in fiscal 1999 and will be associated  primarily  with
the  remediation  of existing  computer  software and  hardware.  Such costs are
estimated to be approximately  $0.5 million.  Such costs do not include internal
management time,  which the Company does not separately  track, nor the deferral
of other  projects,  the effects of which are not expected to be material to the
Company's results of operations or financial condition. The Company's total Year
2000 project  costs  include the estimated  costs and time  associated  with the
impact of third-party Year 2000 issues based on presently available information.
However,  there can be no guarantee that other  companies upon which the Company
relies  will be able to address in a timely  manner  their Year 2000  compliance
issues,  the effects of which may be an adverse impact on the Company's  results
of operations.

Euro Conversion

On  January  1,  1999,  11 of the 15  member  countries  of the  European  Union
established  fixed conversion rates between their existing legacy currencies and
the euro.  The legacy  currencies  will remain in effect until July 1, 2002,  at
which  time,  the  legacy  currencies  will no  longer be legal  tender  for any
transactions.  The  Company  has not  yet  determined  the  impact  of the  euro
conversion.  However, the Company believes, but can give no assurance,  that the
conversion  will not have a material  adverse  impact to results of  operations,
financial position or cash flows.

                                       28
<PAGE>

               ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This item is  submitted as a separate  section of this  report.  See Exhibits in
Part IV.
              ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements on accounting and financial disclosure matters.

                                    PART III

           ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this item is presented  under the caption
entitled "Election of Directors - Information  Concerning Nominees for Directors
and  Other  Incumbent  Members  of the  Board  of  Directors"  contained  in the
definitive  proxy  statement  issued in  connection  with the Annual  Meeting of
Shareholders  to be held May 12,  1999 and is  incorporated  in this  report  by
reference  thereto.   The  information   regarding  Executive  Officers  of  the
Registrant is found in Part I of this report.

                         ITEM 11: EXECUTIVE COMPENSATION

         The  information  required by this item is presented  under the caption
entitled  "Executive  Officer  Compensation"  contained in the definitive  proxy
statement  issued in connection  with the Annual Meeting of  Shareholders  to be
held May 12,  1999 and is  incorporated  in this  report by  reference  thereto,
except,  however,  the sections entitled  "Corporate  Performance Graph" and the
"Report  of the  Compensation  Committee  of the  Board  of  Directors"  are not
incorporated in this report by reference.

     ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this item is presented  under the caption
entitled  "Security  Ownership  of Certain  Beneficial  Owners  and  Management"
contained in the definitive proxy statement issued in connection with the Annual
Meeting of  Shareholders  to be held May 12,  1999 and is  incorporated  in this
report by reference thereto.

             ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this item is presented  under the caption
"Executive  Officer  Compensation  - Interest of  Directors  and  Management  in
Certain  Transactions"  contained in the definitive  proxy  statement  issued in
connection  with the Annual Meeting of  Shareholders to be held May 12, 1999 and
is incorporated in this report by reference thereto.


                                       29
<PAGE>


                                     PART IV

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

(a) 1    Financial Statements                                       Page

         Report of Independent Public Accountants..................     36

         Consolidated Financial Statements.........................     37

         Notes to Consolidated Financial Statements................     41

(a) 2    Financial Statement Schedules:

         Included in Part IV of this report:

         Schedule II       Valuation and Qualifying Accounts.......     61

         Other schedules are omitted because of the absence of conditions  under
         which they are required or because the required information is given in
         the consolidated financial statements or notes thereto.

(a) 3    Exhibits:

2.1      Stock Purchase Agreement among BTR Dunlop Inc., Electro Corporation and
         LazerData  Holdings,  Inc.  dated  December 21, 1994  (incorporated  by
         reference to Exhibit 2.1 of the  Company's  Current  Report on Form 8-K
         dated December 21, 1994).

2.2      Asset and Stock  Purchase  Agreement  among PSC Inc.,  Spectra-Physics,
         Inc. and Spectra-Physics  Holdings, S.A. dated May 20, 1996, as amended
         by letter dated July 12, 1996 (incorporated by reference to Exhibit 2.1
         of the  Company's  Current  Report on Form 8-K dated July 29, 1996 (the
         "1996 8-K")).

3.1      Restated  Certificate of  Incorporation of the  Company and amendments 
         thereto (incorporated by  reference to Exhibit  3.1 of  the  Company's 
         Quarterly Report on Form  10-Q for the  quarter ended June 30, 1996).

3.2      Certificate of Amendment of Certificate  of  Incorporation  of PSC Inc.
         filed with the Secretary of State of the State of New York on September
         5, 1997  (incorporated  by  reference  to Exhibit 3.1 of the  Company's
         Current  Report on Form 8-K dated as of  September  10, 1997 (the "1997
         Form 8-K")).

3.3      Certificate of Amendment of Certificate  of  Incorporation  of PSC Inc.
         filed with the  Secretary of State of the State of New York on December
         30, 1997  (incorporated  by reference  to Exhibit 3.3 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1997
         (the "December 31, 1997 Form 10-K")).

3.4      Bylaws  of  the  Company  as  currently  in  effect (incorporated by
         reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1994).

4.1      Form of Certificate for Common  Shares of the Company  (incorporated by
         reference  to  Exhibit  4.3 of  the Company's Registration Statement on
         Form S-3, effective March 24, 1995 No. 33-89178).

4.2      Form of the 11.25% Senior  Subordinated Note of SpectraScan,  Inc., due
         June 30, 2006 (Notes were issued to seven  Purchasers  in the aggregate
         principal amount of $30,000,000)  (incorporated by reference to Exhibit
         4.1 of the 1996 8-K).

                                       30
<PAGE>

4.3      Form of Note Guarantee dated July 12, 1996 made by PSC Inc. and each of
         the domestic  subsidiaries of PSC Inc. to each of the purchasers of the
         Senior  Subordinated Notes (incorporated by reference to Exhibit 4.2 of
         the 1996 8-K).

4.4      Form of  Warrant  issued  to the  Purchasers  named  in the  Securities
         Purchase  Agreements dated July 12, 1996 (Warrants were issued to seven
         Purchasers  for an aggregate of 975,000  common  shares of the Company)
         (incorporated by reference to Exhibit 4.3 of the 1996 8-K).

4.5      Subordinated  Installment  Promissory Note of PSC Acquisition,  Inc.
         issued to Spectra-Physics,Inc. on July 12, 1996 in the principal amount
         of $5,000,000(incorporated by reference to Exhibit 4.4 of the 1996 8-K)

4.6      Note Guarantee dated July 12, 1996 made by PSC Inc. to Spectra-Physics,
         Inc. (incorporated  by reference to Exhibit 4.5 of the 1996 8-K).

4.7      Form of  Certificate  for  Preferred  Stock  issued to Hydra  
         Investissements  S.A. on  September  10, 1997  (incorporated  by
         reference to Exhibit 4.1 of the 1997 Form 8-K).

4.8      Form of Warrant issued to Hydra  Investissements  S.A. on September 10,
         1997  (incorporated by reference to Exhibit 4.2 of the 1997 Form 8-K).

4.9      Form of Rights Agreement dated as of December 30, 1997 between PSC Inc.
         and ChaseMellon  Shareholder  Services,  L.L.C., as Rights Agent, which
         includes as Exhibit A - Form of Right Certificate;  Exhibit B - Summary
         of  Rights  to  Purchase  Preferred  Stock;  and  Exhibit  C - Form  of
         Certificate of Amendment  designating the relative rights,  preferences
         and  limitations  of the Series B  Preferred  Shares  (incorporated  by
         reference to Exhibit 4.1 of the  Company's  Current  Report on Form 8-K
         dated December 30, 1997).

10.1*    Severance  Agreement  between the Company and L.  Michael  Hone,  dated
         April 30,  1997  (incorporated  by  reference  to  Exhibit  10.1 of the
         Company's  Quarterly Report on Form 10-Q for the quarter ended April 4,
         1997).

10.2*    Agreement  between the Company and Robert S. Ehrlich as of June 2, 1997
         (incorporated  by reference to Exhibit 10.2 of the Company's  Quarterly
         Report on Form 10-Q for the  quarter  ended  July 4, 1997 (the "July 4,
         1997 Form 10-Q")).

10.3*    Agreement  between the Company and Robert S. Ehrlich as of June 2, 1998
         (incorporated  by reference to Exhibit 10.2 of the Company's  Quarterly
         Report on Form 10-Q for the  quarter  ended  July 3, 1998 (the "July 3,
         1998 Form 10-Q")).

10.4*    First Amendment to Agreement between the Company and Robert S. Ehrlich 
         as of December 11, 1998..............................................62

10.5*    Form of  Change-in-Control/Severance  Agreement between the Company and
         certain of its executive officers (incorporated by reference to Exhibit
         10.3 of the  Company's  Annual  Report on Form 10-K for the fiscal year
         ended December 31, 1996 (the "December 31,1996 Form 10-K")).

10.6*    Form of third party severance letter between  Spectra-Physics  Scanning
         Systems, Inc. and certain executive officers (incorporated by reference
         to Exhibit 10.4 of the December 31, 1996 Form 10-K).

10.7*    Employment  Agreement between the Company and Robert C. Strandberg,  as
         of June 2, 1997 (incorporated by reference to Exhibit 10.1 of the 
         July 4, 1997 Form 10-Q).

10.8*    Employment  Agreement between the Company and Robert C. Strandberg,  as
         of June 2, 1998 (incorporated by reference to Exhibit 10.1 of the 
         July 3, 1998 Form 10-Q).

                                       31
<PAGE>

10.9*  First  Amendment  to   Employment  Agreement  between  the  Company   and
       Robert C. Strandberg, as of December 11, 1998..........................66

10.10* Severance  and  Consulting  Agreement  between the  Company and Jay M. 
       Eastman  dated as of July 15, 1997 (incorporated  by reference to Exhibit
       10.6 of the December 31, 1997 Form 10-K).

10.11* Employment Agreement between the Company and Nigel P. Davis dated 1998...
       .......................................................................68

10.12*   Form of Indemnification Agreement between the Company and its Directors
         and  Officers  (incorporated  by  reference  to  Exhibit  10.10  to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1991).

10.13*   Plan for Deferral of  Directors'  Fees dated as of March 4, 1992  
         (incorporated  by reference to Exhibit 10.2 of the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1992).

10.14*   Director  Compensation  Plan dated as of May 7, 1998  (incorporated  by
         reference  to  Exhibit  10.3 of the July 3, 1998 Form 10-Q).

10.15*   Amended and Restated 1987 Stock Option Plan  (incorporated by reference
         to Exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q for the
         quarter ended June 30, 1994).

10.16*   1994 Stock  Option Plan  (incorporated  by reference to Exhibit 4.1 of 
         the  Company's  Registration  Statement on Form S-8 dated June 20, 1995
         No. 33-60389).

10.17*   Amended 1995 Employee Stock Purchase Plan (incorporated by reference to
         Exhibit 10.4 of the July 3, 1998 Form 10-Q).

10.18*   1997 Management Incentive Plan (incorporated by reference to Exhibit 
         10.12 of the Company's December 31, 1997 Form 10-K).

10.19*   Third  Restatement of the PSC Inc. 401(k) Plan dated as of July 1, 1997
        (incorporated by reference to Exhibit 10.13 of the Company's December 31
         1997 Form 10-K).

10.20    Credit  Agreement dated July 12, 1996 among PSC  Acquisition,  Inc., as
         Borrower, PSC Inc. and Guarantor, the Initial Lenders named therein and
         Fleet Bank as Initial Issuing Bank and Administrative  Agent,  together
         with  Form of Term A Note,  Form  of Term B Note  and  Form of  Working
         Capital  Note  (incorporated  by  reference to Exhibit 10.2 of the 1996
         8-K).

10.21    First Amendment dated as of September 27, 1996 to the Credit  Agreement
         dated as of July 12, 1996 among PSC Scanning  Inc.,  as  Borrower,  PSC
         Inc., as Guarantor,  the financial institutions party thereto and Fleet
         Bank as initial Issuing Bank and administrative  agent (incorporated by
         reference to Exhibit  10.1 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended  September 27, 1996 (the "September 27, 1996
         Form 10-Q")).

10.22    Second Amendment dated as of July 4, 1997 to the Credit Agreement dated
         as of July 12, 1996 among PSC Scanning Inc., as Borrower,  PSC Inc., as
         Guarantor,  the financial  institutions party thereto and Fleet Bank as
         initial  Issuing  Bank  and  administrative   agent   (incorporated  by
         reference to Exhibit 10.3 of the July 4, 1997 Form 10-Q).

10.23    Amendment  Three  dated as of August 13,  1997 to the Credit  Agreement
         dated as of July 12, 1996 among PSC Scanning  Inc.,  as  Borrower,  PSC
         Inc., as Guarantor,  the financial institutions party thereto and Fleet
         Bank as initial Issuing Bank and administrative  agent (incorporated by
         reference to Exhibit  10.5 of the  Company's  Quarterly  Report on Form
         10-Q/A  for the  quarter  ended  July 4, 1997  (the  "July 4, 1997 Form
         10-Q/A")).

                                       32
<PAGE>

10.24    Fourth  Amendment  dated as of April 8,  1998 to the  Credit  Agreement
         dated as of July 12, 1996 among PSC Scanning  Inc.,  as  Borrower,  PSC
         Inc., as Guarantor,  the financial institutions party thereto and Fleet
         Bank as initial Issuing Bank and administrative  agent (incorporated by
         reference to Exhibit  10.1 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended April 3, 1998).

10.25    Consent dated as of December 8, 1997 to the Credit  Agreement  dated as
         of July 12, 1996 among PSC Scanning  Inc.,  as Borrower,  PSC Inc.,  as
         Guarantor,  the financial  institutions party thereto and Fleet Bank as
         initial  Issuing  Bank  and  administrative   agent   (incorporated  by
         reference  to Exhibit  10.18 of the  Company's  December  31, 1997 Form
         10-K).

10.26    Securities  Purchase  Agreement  dated  July 12,  1996  among PSC Inc.,
         SpectraScan,  Inc. and Equitable Life  Assurance  Society of the United
         States  (separate but identical  Securities  Purchase  Agreements  were
         addressed to each of the Other  Purchasers  of the Senior  Subordinated
         Notes) (incorporated by reference to Exhibit 10.1 of the 1996 8-K).

10.27    Amendment  No.  1  dated  October  10,  1996  to  Securities   Purchase
         Agreements  among PSC Inc.,  PSC  Scanning  Inc.,  and  Equitable  Life
         Assurance   Society  of  the  United  States  (separate  but  identical
         amendments were addressed to each of the other purchasers of the Senior
         Subordinated  Notes)  (incorporated by reference to Exhibit 10.2 of the
         September 27, 1996 10-Q).

10.28    Amendment  No. 2 dated July 4, 1997 to Securities  Purchase  Agreements
         among PSC Inc., PSC Scanning Inc., and Equitable Life Assurance Society
         of the United States (separate but identical  amendments were addressed
         to each of the  other  purchasers  of the  Senior  Subordinated  Notes)
         (incorporated  by  reference  to Exhibit  10.4 of the July 4, 1997 Form
         10-Q).

10.29    Amendment No. 3 dated August 18, 1997 to Securities Purchase Agreements
         and Warrants  among PSC Inc.,  PSC Scanning  Inc.,  and the  Purchasers
         named in the Securities Purchase Agreements  (incorporated by reference
         to Exhibit 10.6 of the July 4, 1997 Form 10-Q/A).

10.30    Consent dated as of December 29, 1997 to Securities Purchase Agreements
         and Warrants  among PSC Inc.,  PSC Scanning  Inc.,  and the  Purchasers
         named in the Securities Purchase agreements  (incorporated by reference
         to Exhibit 10.23 of the Company's December 31, 1997 Form 10-K).

10.31    Stock and Warrant  Purchase  Agreement  dated  September 4, 1997 by and
         between  PSC Inc.  and  Hydra  Investissements  S.A.  (incorporated  by
         reference to Exhibit 10.1 of the 1997 Form 8-K).

10.32    Registration  and Investor Rights Agreement dated September 10, 1997 by
         and between PSC Inc. and Hydra  Investissements  S.A.  (incorporated by
         reference to Exhibit 10.2 of the 1997 Form 8-K).

22.1     Subsidiaries of Registrant...........................................86
 .
24.1     Consent of Independent Public Accountant, dated March 30, 1999.......87
(b):     Reports on Form 8-K:  None

*        Management contract or compensatory plan or arrangement

                                       33
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated:   March 30, 1999     PSC Inc.

                            /s/ Robert C. Strandberg                           
                                     Robert C. Strandberg
                                     President and Chief Executive Officer


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

Date:  March 30, 1999      Principal Executive Officer

                           /s/ Robert C. Strandberg                             
                                    Robert C. Strandberg
                                    President and Chief Executive Officer


Date:  March 30, 1999      Chief Financial Officer

                           /s/ William J. Woodard                               
                                    William J. Woodard
                                    Vice President, Chief Financial Officer
                                    and Treasurer


Date:  March 30, 1999     Principal Accounting Officer

                          /s/ Michael J. Stachura                              
                                   Michael J. Stachura
                                   Vice President, Finance



                                       34
<PAGE>

Date:  March 30, 1999              /s/ Jay M. Eastman                 
                                   -----------------------------------
                                            Jay M. Eastman
                                            Director

Date:  March 30, 1999              /s/ Robert S. Ehrlich              
                                   -----------------------------------
                                            Robert S. Ehrlich
                                            Director, Chairman of the Board

Date:  March 30, 1999              /s/ James W. Henry                 
                                   -----------------------------------
                                            James W. Henry
                                            Director

Date:  March 30, 1999              /s/ Donald K. Hess                 
                                   -----------------------------------
                                            Donald K. Hess
                                            Director

Date:  March 30, 1999              /s/ Thomas J. Morgan               
                                   -----------------------------------
                                            Thomas J. Morgan
                                            Director

Date:  March 30, 1999              /s/ James C. O'Shea                
                                   -----------------------------------
                                            James C. O'Shea
                                            Director

Date:  March 30, 1999              /s/ Jack E. Rosenfeld              
                                   -----------------------------------
                                            Jack E. Rosenfeld
                                            Director

Date:  March 30, 1999              /s/ Justin L. Vigdor               
                                   -----------------------------------
                                            Justin L. Vigdor
                                            Director

Date:  March 30, 1999              /s/ Romano Volta          
                                   --------------------------
                                            Romano Volta
                                            Director


                                       35
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of PSC Inc.:

We have audited the accompanying  consolidated balance sheets of PSC Inc. (a New
York  corporation)  and  subsidiaries  as of December 31, 1998 and 1997, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of PSC Inc. and subsidiaries as of
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting principles.

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

ARTHUR ANDERSEN LLP
Rochester, New York
January 29, 1999


                                       36
<PAGE>
<TABLE>

                            PSC INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (All amounts in thousands, except per share data)
<CAPTION>
                                                                                                   December 31,
                                                                                           ------------------------------
                                                                                                 1998            1997
                                                                                           -------------    -------------
                                     ASSETS
<S>                                                                                             <C>              <C>    
Current Assets:
  Cash and cash equivalents .............................................................       $ 6,180          $ 2,271
  Accounts receivable, net of allowance for doubtful accounts
    of $1,492 and $1,169 in 1998 and 1997, respectively .................................        37,121           35,094
  Inventories, net ......................................................................        17,250           17,723
  Prepaid expenses and other ............................................................         2,946            1,569
                                                                                           -------------    -------------
     Total current assets ...............................................................        63,497           56,657
Property, Plant and Equipment, net ......................................................        35,397           35,469
Deferred Tax Assets .....................................................................        21,244           23,576
Intangible and Other Assets, net ........................................................        51,125           57,096
                                                                                           =============    =============
     Total assets .......................................................................      $171,263         $172,798
                                                                                           =============    =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt .....................................................       $14,402          $12,406
  Accounts payable ......................................................................        18,190           18,000
  Accrued expenses ......................................................................         8,035            7,405
  Accrued payroll and related employee benefits .........................................         5,628            5,559
  Accrued acquisition related restructuring costs .......................................           415            1,175
                                                                                           -------------    -------------
     Total current liabilities ..........................................................        46,670           44,545
Long-Term Debt, less current maturities .................................................        78,806           96,148
Other Long-Term Liabilities .............................................................         1,588            2,775
Commitments and Contingencies

Shareholders' Equity:
   Series A convertible preferred shares, par value $.01; 110 shares authorized,
     issued and outstanding ($11,000 aggregate liquidation value) .......................             1                1
   Series B preferred shares, par value $.01; 175 authorized, 0 shares
     issued and outstanding .............................................................            --               --
   Undesignated preferred shares, par value $.01; 9,715 authorized, 0 shares
     issued and outstanding .............................................................            --               --
   Common shares, par value $.01; 40,000 authorized, 11,869
     and 11,390 issued at December 31, 1998 and 1997, respectively ......................           119              114
   Additional paid-in capital ...........................................................        70,068           66,734
   Retained earnings/(Accumulated deficit) ..............................................      (26,027)         (36,543)
   Accumulated other comprehensive income/(loss) ........................................           275            (739)
   Less -- 39 treasury shares, repurchased at cost ......................................         (237)            (237)
                                                                                           -------------    -------------
     Total shareholders' equity .........................................................        44,199           29,330
                                                                                           =============    =============
     Total liabilities and shareholders' equity .........................................      $171,263         $172,798
                                                                                           =============    =============
</TABLE>

        See accompanying notes to the Consolidated Financial Statements.

                                       37
<PAGE>
<TABLE>

                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (All amounts in thousands, except per share data)
<CAPTION>
                                                                             Year Ended December 31,
                                                                  -----------------------------------------------
                                                                      1998             1997             1996
                                                                  ------------     -------------    -------------
<S>                                                                  <C>               <C>              <C>     
Net Sales ......................................................     $217,223          $207,840         $146,051
Cost of Sales ..................................................      126,350           122,995           83,675
                                                                  ------------     -------------    -------------
      Gross profit .............................................       90,873            84,845           62,376

Operating Expenses:
      Engineering, research and development ....................       15,665            13,429           11,069
      Selling, general and administrative ......................       42,069            43,743           37,855
      Amortization of intangibles resulting from business
             acquisitions ......................................        6,822             6,715            3,564
      Severance and other costs ................................           --             4,191               --
      Acquisition related restructuring and other costs ........           --                --           70,068
                                                                  ------------     -------------    -------------
           Income/(loss) from operations .......................       26,317            16,767         (60,180)

Interest and Other Income/(Expense):
     Interest expense ..........................................     (10,246)          (12,563)          (5,835)
     Interest income ...........................................          238               440              568
     Other income/(expense) ....................................          175               107            (480)
                                                                  ------------     -------------    -------------
                                                                      (9,833)          (12,016)          (5,747)
                                                                  ------------     -------------    -------------

Income/(Loss) from Continuing Operations Before
     Income Tax Provision/(Benefit) ............................       16,484             4,751         (65,927)
Income Tax Provision/(Benefit) .................................        5,968             1,761         (24,393)
                                                                  ------------     -------------    -------------
Income/(Loss) from Continuing Operations .......................       10,516             2,990         (41,534)

Discontinued Operations:
     Gain/(loss) from discontinued operations, net of tax ......           --               164            (229)
     Loss on disposal of discontinued operations ...............           --             (265)          (5,217)
                                                                  ------------     -------------    -------------
Total Loss from Discontinued Operations ........................           --             (101)          (5,446)
                                                                  ============     =============    =============
Net Income/(Loss) ..............................................      $10,516            $2,889       $ (46,980)
                                                                  ============     =============    =============

Net Income/(Loss) Per Common and
      Common Equivalent Share:
Basic:
     Continuing operations .....................................        $0.90            $0.27          $(3.96)
      Discontinued operations ..................................           --            (0.01)           (0.52)
                                                                  ============     =============    =============
      Net income/(loss) ........................................        $0.90             $0.26          $(4.48)
                                                                  ============     =============    =============
Diluted:
     Continuing operations .....................................        $0.75            $0.25          $(3.96)
      Discontinued operations ..................................           --            (0.01)           (0.52)
                                                                  ============     =============    =============
      Net income/(loss) ........................................        $0.75             $0.24          $(4.48)
                                                                  ============     =============    =============
Weighted Average Number of Common
      and Common Equivalent Shares Outstanding:
      Basic ....................................................       11,713            11,197           10,490
      Diluted ..................................................       13,993            11,843           10,490
</TABLE>

        See accompanying notes to the Consolidated Financial Statements.


                                       38
<PAGE>
<TABLE>
                            PSC INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                           (All amounts in thousands)
<CAPTION>
                                                                            Year Ended December 31,
                                            ----------------------------------------------------------------------------------------
                                                        1998                           1997                          1996
                                            -----------------------------    -------------------------     -------------------------
                                               Shares         Amount          Shares         Amount         Shares        Amount
                                              ----------    ------------     ---------    -------------    ---------    ------------
<S>                                                 <C>              <C>                           <C>                          <C>
Series A Convertible Preferred Shares:
   Balance, beginning of year ............          110              $1            --              $--           --             $--
   Issuance of preferred shares ..........           --              --           110                1           --              --
                                              ----------    ------------     ---------    -------------    ---------    ------------
   Balance, end of year ..................          110              $1           110               $1           --             $--
                                              ==========    ============     =========    =============    =========    ============
Common Shares:
   Balance, beginning of year ............       11,351            $114        11,122             $112        9,946            $100
   Issuance of shares pursuant to
      Employee Stock Purchase Plan .......          107               1            67                1           26              --
   Issuance of restricted stock awards, net          62               1             7               --           --              --
   Issuance of common shares .............           --              --            --               --          977              10
   Exercise of options ...................          310               3           155                1          173               2
                                              ==========    ============     =========    =============    =========    ============
   Balance, end of year ..................       11,830            $119        11,351             $114       11,122            $112
                                              ==========    ============     =========    =============    =========    ============
Additional Paid-In Capital:
   Balance, beginning of year ............                      $66,734                        $54,891                     $ 45,881
   Issuance of shares pursuant to
      Employee Stock Purchase Plan .......                          737                            390                          201
   Exercise of options ...................                        1,983                          1,150                        1,079
   Issuance of restricted stock awards, net                         590                             70                           --
   Deferred compensation for restricted stock
      awards, net of amortization ........                        (459)                           (70)                           --
   Issuance of common shares, net ........                           --                             --                        6,990
   Issuance of preferred shares, net .....                           --                          9,595                           --
   Issuance of warrants ..................                           --                            617                          600
   Tax benefit from exercise or early
      disposition of stock options .......                          483                             91                          140
                                                            ============                  =============                 ============
   Balance, end of year ..................                      $70,068                        $66,734                     $ 54,891
                                                            ============                  =============                 ============
Retained Earnings/(Accumulated Deficit):
   Balance, beginning of year ............                    $(36,543)                      $(39,432)                      $ 7,548
   Net income/(loss) .....................                       10,516                          2,889                     (46,980)
                                                            ============                  =============                 ============
   Balance, end of year ..................                    $(26,027)                      $(36,543)                    $(39,432)
                                                            ============                  =============                 ============
Accumulated Other Comprehensive
   Income/(Loss):
   Balance, beginning of year ............                       $(739)                        $(  33)                         $ 35
   Foreign currency translation adjustment                          702                          (706)                         (68)
   Unrealized gain on securities .........                          312                             --                           --
                                                            ------------                  -------------                 ------------
   Balance, end of year ..................                         $275                         $(739)                       $( 33)
                                                            ============                  =============                 ============
Treasury Shares:
   Balance, beginning of year ............                       $(237)                         $(237)                       $(237)
   Shares repurchased ....................                           --                             --                           --
                                                            ============                  =============                 ============
   Balance, end of year ..................                       $(237)                         $(237)                       $(237)
                                                            ============                  =============                 ============
Comprehensive Income/(Loss):
   Net Income/(Loss) .....................                      $10,516                         $2,889                    $(46,980)
   Other comprehensive income/(loss), net of
  tax:
      Foreign currency translation adjustment                       702                          (706)                         (68)
      Unrealized gain on securities ......                          312                             --                           --
                                                            ============                  =============                 ============
   Comprehensive Income/(Loss) ...........                      $11,530                         $2,183                    $(47,048)
                                                            ============                  =============                 ============
</TABLE>
        See accompanying notes to the Consolidated Financial Statements.

                                       39
<PAGE>
<TABLE>
                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (All amounts in thousands)
<CAPTION>
                                                                               Year Ended December 31,
                                                                       ----------------------------------------
                                                                             1998        1997            1996
                                                                       ------------   -----------   -----------
<S>                                                                        <C>            <C>        <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ...................................................      $10,516        $2,889     ($46,980)
Adjustments to reconcile net income/(loss) to
    net cash provided by operating activities:
        Depreciation and amortization ...............................       13,399        13,735         9,169
        Loss on disposition of assets ...............................            9           109         3,860
        Acquired research and development write-off .................           --            --        60,100
        Loss on disposal of discontinued operations .................           --           265         5,217
        Deferred tax assets .........................................        2,332         1,197      (23,033)
        (Increase) decrease in assets:
           Accounts receivable, net .................................      (2,029)       (6,705)         1,760
           Inventories ..............................................          473           581       (1,199)
           Prepaid expenses and other ...............................      (1,377)            80         (147)
        Increase (decrease) in liabilities:
           Accounts payable .........................................          190         2,467         1,461
           Accrued expenses .........................................          630       (3,190)       (5,535)
           Accrued payroll and related employee benefits ............        (477)       (1,855)         6,272
           Accrued acquisition related restructuring costs ..........        (819)       (3,830)         4,278
                                                                       ------------   -----------   -----------
             Net cash provided by operating activities ..............       22,847         5,743        15,223
                                                                       ------------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................      (5,792)       (6,557)       (4,843)
Cash paid for acquisition of business ...............................           --            --      (10,124)
Additions to intangible and other assets ............................      (1,559)         (343)       (1,238)
Issuance of notes for stock option activity .........................           --            --         (382)
Repayment of notes for stock option activity ........................          325           278            --
Proceeds from sale of marketable securities .........................           --            --         4,167
                                                                       ------------   -----------   -----------
             Net cash used in investing activities ..................      (7,026)       (6,622)      (12,420)
                                                                       ------------   -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt .........................................       11,500         5,000            --
Payment of long-term debt ...........................................     (26,846)      (23,899)         (105)
Additions to other long-term liabilities ............................           --         1,398           648
Payment of other long-term liabilities ..............................        (476)         (655)            --
Exercise of options and the issuance of common shares and warrants ..        2,725         1,542         1,882
Issuance of preferred shares and warrants, net ......................           --        10,213            --
Tax benefit from exercise or early disposition of stock options .....          483            91           140
                                                                       ------------   -----------   -----------
             Net cash (used in) provided by financing activities ....     (12,614)       (6,310)         2,565
                                                                       ------------   -----------   -----------
Foreign currency translation ........................................          702       (1,378)          (68)
                                                                       ------------   -----------   -----------
Net Increase (Decrease) in Cash and Cash Equivalents ................        3,909       (8,567)         5,300

CASH AND CASH EQUIVALENTS:
                Beginning of year ...................................        2,271        10,838         5,538
                                                                       ============   ===========   ===========
                End of year .........................................       $6,180       $ 2,271       $10,838
                                                                       ============   ===========   ===========
Supplemental disclosures of cash flow information:
  Interest paid .....................................................      $10,059       $13,804        $3,994
  Income taxes paid .................................................       $2,455         $ 438         $ 833
  Capital leases ....................................................        $  --         $  --          $ 35
</TABLE>

        See accompanying notes to the Consolidated Financial Statements.

                                       40
<PAGE>
                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


1.  DESCRIPTION OF BUSINESS

         PSC Inc. (the Company)  designs,  manufactures and markets a broad line
of handheld and fixed position bar code readers, verifiers, integrated sortation
and  point-of-sale  scanning  systems.  The Company has  developed  products for
automatic  data  collection at every stage of the product  supply chain from raw
material, manufacturing and warehousing, to logistics, transportation, inventory
management and  point-of-sale.  These products are used  throughout the world in
food, general retail, health care and other industries, and in government.

         The Company's corporate headquarters are located in the Rochester,  New
York suburb of Webster. The Company designs,  manufactures,  sells,  distributes
and services its products from world-class  manufacturing facilities in Webster,
New York and Eugene,  Oregon. These products are sold through original equipment
manufacturers,  value-added resellers,  distributors,  systems integrators and a
professional sales force worldwide. The Company has sales and service operations
in the Americas, Europe, Asia and Australia.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The consolidated  financial statements include the accounts of PSC Inc.
and its wholly-owned  subsidiaries.  All significant  intercompany  accounts and
transactions have been eliminated in consolidation.

Cash and Cash Equivalents

         Cash and cash  equivalents are highly liquid  investments with original
maturities  of  three  months  or  less.  The  cost  of  the  cash   equivalents
approximates fair market value.

Inventories

         Inventories  are  valued  at the  lower  of cost or  market  using  the
first-in,  first-out method. Inventory costs comprise material, direct labor and
overhead.

Property, Plant and Equipment

         Property,  plant and equipment is recorded at cost and includes certain
capitalized  leases.  For  financial   reporting   purposes,   depreciation  and
amortization  are computed  using the  straight-line  method over the  following
estimated useful lives:

         Building and improvements .....................    10-40 years
         Office furniture and equipment ................      3-7 years
         Production equipment ..........................      3-8 years
         Leasehold improvements ........................     5-15 years

         Equipment under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.



                                       41
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

Intangibles Resulting from Business Acquisitions

         Intangibles resulting from business  acquisitions  represent the excess
purchase  price  over the fair value of net assets  acquired  and are  amortized
using the  straight-line  method over five to 10 years,  their current estimated
useful lives.

Other Intangibles

         Other intangibles,  which consist of technology and license agreements,
patents and  trademarks,  are recorded at cost.  Amortization is calculated on a
straight-line  basis over periods ranging from two to five years,  their current
estimated useful lives.

         The  Company   reviews  its  long-lived   assets,   including   certain
intangibles and goodwill,  in accordance with Statement of Financial  Accounting
Standards No. 121,  "Accounting  for the  Impairment  of  Long-lived  Assets and
Long-lived Assets to be Disposed of," for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  If such events or changes in circumstances are present,  a loss is
recognized to the extent the carrying value of the asset is in excess of the sum
of the undiscounted  cash flows expected to result from the use of the asset and
its eventual disposition.

Income Taxes

         Income  taxes  are  accounted  for  in  accordance  with  Statement  of
Financial  Accounting  Standards No. 109 (SFAS No. 109),  "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability  method of  accounting  for
income  taxes.  Under the asset and  liability  method,  deferred tax assets and
liabilities are recognized for temporary differences between financial statement
and  income  tax  bases of assets  and  liabilities.  Deferred  tax  assets  and
liabilities  are measured using tax rates expected to apply to taxable income in
the years  that the  temporary  differences  are  expected  to be  realized.  In
addition,  the  amount of any  future tax  benefits  is  reduced by a  valuation
allowance until it is more likely than not that such benefits will be realized.

Net Income per Common and Common Equivalent Share

         Net  income  per common and  common  equivalent  share is  computed  in
accordance  with Statement of Financial  Accounting  Standards No. 128 (SFAS No.
128),  "Earnings Per Share." SFAS No. 128 requires a dual  presentation of basic
and diluted  earnings per share on the  consolidated  statements of  operations.
Basic  EPS is  computed  by  dividing  reported  earnings  available  to  common
shareholders by the weighted average number of common shares  outstanding during
the year. No dilution for common share  equivalents is included.  Diluted EPS is
computed by dividing reported earnings  available to common  shareholders by the
weighted  average  number of common and  common  equivalent  shares  outstanding
during the year.

Comprehensive Income

      During  1998,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  No.  130 (SFAS No.  130),  "Reporting  Comprehensive  Income,"  which
requires  comprehensive  income  and  its  components  to be  presented  in  the
financial  statements.  Comprehensive  income  consists of net  income,  foreign
currency translation adjustments and unrealized gains on securities, net of tax,
and is presented in the  consolidated  statements of shareholders'  equity.  The
adoption of SFAS No. 130 had no impact on total shareholders' equity.



                                       42
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


Foreign Currency Translation

         The financial statements of foreign operations are translated into U.S.
dollars in accordance with Statement of Financial  Accounting  Standards No. 52,
"Foreign  Currency  Translation."  Accordingly,  all assets and  liabilities are
translated  at year-end  exchange  rates.  The gains and losses that result from
this  process are  recorded in  accumulated  other  comprehensive  income in the
consolidated balance sheets.  Operating  transactions are translated at weighted
average rates prevailing during the year.
Transaction gains and losses are reflected in net income and were not material.

Derivatives

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No. 133 (SFAS No.  133),  "Accounting  for
Derivative  Instruments  and  Hedging  Activities."  SFAS  No.  133  establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance  sheet as either an asset or  liability  measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge  accounting  criteria are met. SFAS
No. 133 is effective  for all fiscal  quarters of fiscal years  beginning  after
June 15, 1999 and cannot be applied retroactively.  SFAS No. 133 must be applied
to derivative  instruments that were issued,  acquired or substantively modified
after  December  31,  1997.  The Company has not yet  quantified  the impacts of
adopting SFAS No. 133 on the financial  statements  and has not  determined  the
timing of or method of adopting SFAS No. 133.

         The Company monitors its exposure to interest rate and foreign currency
exchange risk. The Company has limited  involvement  with  derivative  financial
instruments  and does  not use  them for  trading  purposes.  The  Company  uses
derivative  instruments  solely to reduce the  financial  impact of these risks.
Cash flows from  interest  rate swap  agreements  and foreign  currency  forward
exchange contracts are classified in the same category as the item being hedged.

Interest Rate Risk:

         The  Company's  exposure  to  interest  rate  changes  relates  to  its
long-term  debt. The Company has entered into interest rate swap agreements with
its senior  lending  banks in  accordance  with the terms of the  senior  credit
agreement.  The Company uses these  interest rate swap  agreements to reduce its
exposure to interest  rate  changes.  The  differentials  to be received or paid
under these  interest  rate swap  agreements  are  recognized  as a component of
interest expense in the consolidated statements of operations.

Foreign Currency Exchange Rate Risk:

         The Company's  exposure to foreign  currency  relates  primarily to its
international subsidiaries.  Sales to certain countries are denominated in their
local  currency.  The Company  enters into  foreign  currency  forward  exchange
contracts to minimize the effect of foreign  currency  fluctuations  relating to
these  transactions  and  commitments  denominated  in foreign  currencies.  The
foreign  exchange  contracts  generally have maturities of approximately 30 days
and  require  the Company to exchange  foreign  currencies  for U.S.  dollars at
maturity, at rates agreed to at the inception of the contracts. Gains and losses
on forward contracts are offset against the foreign exchange gains and losses on
the underlying  hedged items and are recorded in the consolidated  statements of
operations.


                                       43
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

Fair Value of Financial Instruments

         The carrying amounts of cash and cash equivalents,  trade  receivables,
other current assets, accounts payable, and amounts included in accruals meeting
the definition of a financial  instrument  approximate fair value because of the
short-term maturity of these instruments.  The notional amounts, carrying values
and  related  estimated  fair  values  for  the  Company's  remaining  financial
instruments are as follows:
<TABLE>
<CAPTION>
                                                   1998                                            1997
                                -------------------------------------------  -----------------------------------------
                                Notional        Carrying          Fair        Notional        Carrying          Fair
                                Amount           Amount          Value        Amount           Amount          Value
                                -----------     -----------    ----------    -----------    ------------    ----------
<S>                              <C>            <C>            <C>              <C>          <C>              <C>     
Long-term debt,                                                                 
  including current
  portion ...................    $  --          $93,208        $94,145          $  --        $108,554         $108,554
Interest rate swap                               
  agreements ................    $60,000        $  --            $ 522          $73,250        $   --           $  451
Foreign currency                                                                
  exchange contracts ........    $ 2,241        $  --            $( 7)          $  --          $   --           $   --
</TABLE>

         The fair value of long-term debt is based on borrowing  rates currently
available  to the Company for loans with similar  terms and average  maturities.
Interest rate swap  agreements  are estimated by obtaining  quoted market prices
from brokers and reflecting the cost to terminate the agreements. The fair value
of the Company's foreign currency exchange contracts  represents the gain on the
original  contract  amount  adjusted  using the year-end  closing spot  exchange
rates.

Product Warranty

         The  Company's  products  have a  warranty  period of 12 to 30  months.
Estimated warranty costs are provided at the time of sale. The Company maintains
an accrual for warranty  claims and adjusts this accrual  periodically  based on
historical experience and known warranty claims.

Research and Development Costs

         All research and development costs are expensed as incurred.

Revenue Recognition

         Revenue from sales of the  Company's  scanning  products is  recognized
upon  shipment.  In  conjunction  with these sales,  field  service  maintenance
agreements  are entered  into for certain  products.  Maintenance  revenues  are
deferred and recognized ratably over the term of the related maintenance period,
which is typically one to three years.

Use of Estimates

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

                                       44
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

Reclassification

         Certain amounts in prior years have been reclassified to conform to the
current year presentation.

3.  ACQUISITIONS AND DISPOSITIONS

         On July 12, 1996,  the Company  completed its purchase  agreement  with
Spectra-Physics AB of Sweden to acquire Spectra-Physics  Scanning Systems, Inc.,
TxCOM S.A. and related businesses (Spectra). Spectra, which was headquartered in
Eugene,  Oregon, was one of the world's leading  manufacturers of countertop and
in-counter   fixed   position  bar  code   scanners  for  retail   point-of-sale
applications.  The purchase price was approximately $140.0 million. The purchase
was funded by $125.0  million in cash,  $10.0  million in the  Company's  common
shares less a $3.0 million  discount as the shares were  unregistered and a $5.0
million subordinated promissory note. The $125.0 million cash portion was funded
by a  combination  of the  Company's  cash,  senior  debt  ($92.5  million)  and
subordinated  debt ($30.0  million).  The  acquisition  was  accounted  for as a
purchase and is included in the 1996 consolidated financial statements since the
date of acquisition.  The Company  allocated $60.1 million of the purchase price
to acquired  in-process  research  and  development  as  required  by  generally
accepted accounting principles,  resulting in a one-time charge to the Company's
earnings in the third  quarter of 1996.  The  remaining  excess of the  purchase
price over the fair value of net assets acquired was approximately $58.0 million
and is being amortized on a straight-line basis over 10 years.

         The  following  table sets  forth the  unaudited  pro forma  results of
operations  of the Company for the year ended  December 31, 1996.  The unaudited
pro forma results of operations  assume that the  operations of the Company were
combined  with  those of Spectra as if the  acquisition  occurred  on January 1,
1995. The unaudited pro forma results of operations  are presented  after giving
effect to  certain  adjustments  for  depreciation,  amortization  of  goodwill,
interest  expense on the  acquisition  financing and related income tax effects.
The  unaudited  pro forma  results  of  operations  were  based  upon  currently
available  information and upon certain  assumptions  that the Company  believes
were reasonable. The unaudited pro forma results do not purport to be indicative
of the  results  that  actually  would have been  achieved  during  the  periods
indicated and are not intended to be indicative of future results.

                                                             Pro Forma
                                                  Twelve Months Ended 12/31/96
                                                 ------------------------------
  Net sales .....................................            $210,961
  Income/(loss) from operations .................            (51,800)
  Income/(loss) from continuing operations ......            (40,148)
  Total loss from discontinued operations .......             (5,446)
  Net income/(loss) .............................            (45,594)
  Net income/(loss) per common and common
    equivalent share:
  Basic:
     Continuing operations ......................            $ (3.83)
     Discontinued operations ....................              (0.52)
                                                               ------
     Net income/(loss) ..........................            $ (4.35)
                                                             ========
  Diluted:
     Continuing operations ......................            $ (3.83)
     Discontinued operations ....................              (0.52)
                                                               ------
     Net income/(loss) ..........................            $ (4.35)
                                                             ========
  Weighted average shares outstanding:
     Basic ......................................              10,490
     Diluted ....................................              10,490


                                       45
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


         In connection with the acquisition,  liabilities  assumed and cash paid
were as follows:

           Fair value assets acquired ...........  $161,162
           Liabilities assumed ..................    17,138
                                                     ------
           Total consideration paid .............   144,024
           Less issuance of stock ...............     7,000
           Less amounts borrowed ................   126,900
                                                    -------
           Net cash paid for acquisition ........   $10,124
                                                    =======

4.  INVENTORY

         Inventory consists of the following at December 31:

                                         1998              1997
                                     ------------      ------------
         Raw materials .............     $11,231           $10,979
         Work-in-process ...........       2,888             3,727
         Finished goods ............       3,131             3,017
                                     ============      ============
                                         $17,250           $17,723
                                     ============      ============

5.  PROPERTY, PLANT AND EQUIPMENT

         Property,  plant and  equipment,  at cost,  consist of the following at
December 31:

                                                      1998              1997
                                                 ------------      ------------
         Land .................................      $ 2,312           $ 2,312
         Building and improvements ............       18,114            17,782
         Office furniture and equipment .......       13,347            11,169
         Production equipment .................       19,702            16,529
         Leasehold improvements ...............          561               701
                                                 ------------      ------------
                                                      54,036            48,493
         Less:  accumulated depreciation 
                and amortization ..............       18,639            13,024
                                                 ============      ============
                                                     $35,397           $35,469
                                                 ============      ============

     Depreciation  expense for 1998,  1997 and 1996 amounted to $5,855,  $6,478,
and $4,947,  respectively.  Amortization  of capital lease assets is included in
depreciation expense.


                                       46
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


6.  INTANGIBLE AND OTHER ASSETS

         Intangible and other assets consist of the following at December 31:

                                                      1998          1997
                                                 ------------  ------------
         Intangibles resulting from 
             business acquisitions ..............    $66,749       $66,846
         Other intangibles ......................      3,522         2,565
         Other assets ...........................      1,273           691
                                                 ------------  ------------
                                                      71,544        70,102
         Less:  accumulated amortization ........     20,419        13,006
                                                 ------------  ------------
                                                     $51,125       $57,096
                                                 ============  ============

         Amortization  expense  for  1998,  1997 and 1996  amounted  to  $7,413,
$7,257, and $4,222, respectively.

7.  ACCRUED EXPENSES

         Accrued expenses consist of the following at December 31:

                                                1998              1997
                                            -----------       ------------
         Accrued warranty ................      $1,738             $1,818
         Accrued royalty .................       1,412                862
         Accrued taxes ...................       1,098              (348)
         Accrued relocation ..............         292                939
         Deferred revenue ................         629                758
         Other expenses ..................       2,866              3,376
                                            ===========       ============
                                                $8,035             $7,405
                                            ===========       ============

8.  LONG-TERM DEBT

         Long-term debt consists of the following at December 31:

                                                  1998               1997
                                              -----------       ------------
         Senior term loan A ..............       $37,000           $ 47,000
         Senior term loan B ..............        23,000             24,000
         Senior revolving credit .........            --              3,000
         Subordinated term loan ..........        29,547             29,488
         Subordinated promissory note ....         3,438              4,688
         Other ...........................           223                378
                                              -----------       ------------
                                                  93,208            108,554
           Less:  current maturities .....        14,402             12,406
                                              -----------       ------------
                                                 $78,806           $ 96,148
                                              ===========       ============


                                       47
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


         During  1996,  the Company  negotiated a series of debt  agreements  in
connection  with the funding of its  acquisition  of  Spectra.  Term loan A is a
senior  loan with five  lenders,  having a final  maturity  in June  2001,  at a
current floating interest rate of 7.0%, paid quarterly, and a swapped fixed rate
of 7.4%. Term loan B is a senior loan with four lenders, having a final maturity
in December 2002, at a current  floating  interest rate of 7.5%, paid quarterly,
and a  swapped  fixed  rate of 7.9%.  The  swaps,  which  were  entered  into on
September 30, 1998, expire on September 30, 2000 for both loans.

         The Company has revolving credit facilities with the term loan lenders,
which mature in 2001,  totaling  $20.0  million.  As of December  31, 1998,  the
Company had no borrowings outstanding under these facilities. The unused portion
of the  revolving  credit  facility  is subject to a  commitment  fee of between
0.375% and 0.5%. The senior debt facilities have collateral in all of the assets
of the Company.

         The  subordinated  term loan is from five  lenders,  at a fixed rate of
11.25%,  paid  quarterly,  with principal  payments  starting in June 2003 and a
final maturity in June 2006. This debt has an associated unamortized discount of
$453,  which has been  netted  against  the total  outstanding  balance of $30.0
million.

         The  subordinated  promissory  note  matures  in 2001 and has a current
floating interest rate of 8.75%, paid quarterly.  The subordinated term loan and
promissory note are unsecured.

         The other debt is principally composed of capital lease obligations.

         The senior debt and subordinated term loan agreements  restrict payment
of dividends,  limit stock  repurchases  and require the  maintenance of certain
financial ratios.  The Company was in compliance with all of these covenants and
ratios as of December 31, 1998.

         Long-term debt maturities are as follows for years ending December 31:

               1999                          $14,402
               2000                           16,281
               2001                           22,449
               2002                           10,507
               2003                            7,507
               Thereafter                     22,062
                                     ================
                                             $93,208
                                     ================

         The Company is a guarantor under a mortgage  agreement through February
2001 relating to its former  principal  manufacturing facility up to $500.



                                       48
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


9.  INCOME TAXES

         The  provision  for  (benefit  from)  income  taxes  consisted  of  the
following for the years ended December 31:

                                  1998              1997              1996
                            -------------      -------------     --------------
         Current:
           Federal .........      $1,943               $244           $(1,589)
           State ...........         110                 59                 65
           Foreign .........       1,583                261                164
         Deferred:
           Federal .........       2,299              1,658           (21,176)
           State ...........          33              (461)            (1,857)
                            =============      =============     ==============
                                  $5,968             $1,761          $(24,393)
                            =============      =============     ==============

         A reconciliation between the statutory U.S. federal income tax rate and
the Company's effective tax rate is as follows for the years ended December 31:

                                     1998           1997          1996
                                  ---------     ----------     ----------
Statutory U.S. federal rate .....    35.0%          34.0%          34.0%
Change in valuation reserve .....       --             --           2.3%
State income taxes, net of
  federal income tax benefit ....     0.4%           4.2%           1.8%
Goodwill amortization ...........     0.8%           2.7%           0.2%
FSC benefit .....................   (4.7%)         (3.7%)         (0.1%)
Foreign income taxes in excess
  of U.S. rate ..................     3.7%           0.2%           0.1%
Meals and entertainment .........     0.6%           2.1%           0.3%
Miscellaneous items, net ........     0.4%         (2.4%)         (1.6%)
                                  ---------     ----------     ----------
                                     36.2%          37.1%          37.0%
                                  ==========    ===========    ===========

         The deferred tax assets/(liabilities) are comprised of the following at
December 31:

                                                      1998          1997
                                                  -----------    ------------
Intangibles resulting from business acquisitions .   $17,229         $18,834
Tax credit carryforwards .........................     1,914           1,271
Net operating loss carryforwards .................     1,211              --
Inventory reserve ................................     1,103           1,018
Warranty reserve .................................     1,091           1,170
Severance accrual ................................       229           1,072
Acquisition related restructuring and other costs        157             494
Other, net .......................................     (124)           1,283
                                                  -----------    ------------
                                                      22,810          25,142
Less:  valuation allowance .......................   (1,566)         (1,566)
                                                  ===========    ============
Net deferred tax asset ...........................   $21,244         $23,576
                                                  ===========    ============


                                       49
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


         In  assessing  the  realizability  of deferred  tax assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred  tax assets will not be  realized.  Management  considers,  among other
things,  the scheduled  reversal of deferred tax  liabilities,  projected future
taxable  income,   tax  planning   strategies  and  positions  taken  by  taxing
authorities on various issues related to the  deductibility  of certain costs in
making this  assessment.  The Company has a valuation  allowance  to reflect the
estimated  realizable  amount of deferred tax assets and it primarily relates to
state tax benefits.

         At December 31, 1998, the Company has net operating loss  carryforwards
of $1,211 for federal income tax purposes,  which are available to offset future
federal  taxable  income  through  2018.  Other tax credits of $1,914  primarily
represent  state  investment  tax credit and  federal  general  business  credit
carryforwards which expire between 2010 and 2018.

10.  COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

         Certain  equipment  and  properties  are  rented  under   noncancelable
operating leases that expire at various dates through 2003. Total rental expense
under operating leases was approximately  $2,581,  $2,214,  and $1,214,  for the
years ended December 31, 1998, 1997 and 1996, respectively.

         Future  minimum lease payments  required under these  agreements are as
follows for the years ending December 31:

                 1999            $2,269
                 2000             1,520
                 2001             1,190
                 2002               443
                 2003               107
                              ----------
                                 $5,529
                              ==========

Employment and Consulting Agreements

         The Company has an  employment  agreement  with the President and Chief
Executive  Officer and a consulting  agreement with the Chairman of the Board of
Directors  which  terminate on December 31, 2000 and for which the Company has a
minimum commitment aggregating  approximately $770 plus benefits at December 31,
1998. The commitment is payable ratably over the term of the contracts.

Royalty Agreements

         The  Company  currently  has  cross-license   agreements  with  certain
industry competitors. Under these agreements,  royalties are paid by the Company
on sales of certain  licensed  products.  Royalty expense under these agreements
was included in selling,  general and  administrative  expense in 1998, 1997 and
1996.


                                       50
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


Legal Matters

         The automatic identification and data capture industry is characterized
by  substantial  litigation  regarding  patent and other  intellectual  property
rights.  There is litigation pending in the United States District Court for the
Western  District of New York between the Company and one of its  customers,  on
the one hand, and Symbol  Technologies,  Inc.  (Symbol) on the other,  involving
certain of Symbol's  patents.  In that  action,  the  Company  has also  alleged
violation of the  antitrust  laws and unfair  practices by Symbol and Symbol has
alleged breaches of certain license  agreements  between the Company and Symbol,
including  claims  that  royalties  have been  underpaid.  The  Company has also
assumed the responsibility of defending the action on behalf of its customer and
has provided  certain  rights of  indemnification  to its customer.  The Company
intends to defend  itself and its  customer  vigorously.  Although  the  Company
maintains that Symbol's patents are invalid,  that the Company has not infringed
the patents, or both, and that the Company has not, as was alleged, breached the
Symbol license, nor underpaid royalties,  there can be no assurance that this or
any other action will be decided or settled in the Company's favor.

         On October 22, 1998, the Court granted the Company's motion for partial
summary  judgment on the issue of patent misuse on the part of Symbol and denied
Symbol's  cross  motion.  Accordingly,  PSC is not obligated to pay royalties to
Symbol  under the `297 and `186  patents  pursuant  to  either of its  licensing
agreements for products  manufactured or sold on or after April 1, 1996.  Symbol
has moved for  reconsideration  of the Court's Decision,  and has also moved for
permission  to appeal  immediately,  rather than wait until the end of the case.
These motions were submitted on December 16, 1998. No decision has been rendered
yet.

         There can be no assurance  that others will not assert  claims  against
the Company  that result in  litigation.  Any such  litigation  could  result in
significant  expense,  adversely  impact the Company's  marketing,  give rise to
certain  indemnity  rights on the part of  customers  and divert  the  Company's
attention  from other  matters.  If any of the Company's  products were found to
infringe a third-party  patent,  the third party could be entitled to injunctive
relief,  which  would  prevent  the Company  from  selling  any such  infringing
products.  In addition,  the Company could be required to pay monetary  damages.
Although  the  Company  could  seek a license  to sell  products  determined  to
infringe a third-party patent, there can be no assurance that a license would be
available on terms acceptable to the Company.  The Company could also attempt to
redesign  any  infringing  products so as to avoid  infringement,  although  any
effort  to do so could be  expensive  and  time-consuming,  and  there can be no
assurance the effect would be  successful.  Although the amount of any liability
with  respect  to such  litigation  cannot  be  determined,  in the  opinion  of
management,  such  liability  will not have a  material  adverse  effect  on the
results of operations, financial position or cash flows.


                                       51
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


11.      SHAREHOLDERS' EQUITY

Preferred Shares

         In September 1997, the Company  completed a private placement of equity
with Hydra Investissements S.A., a Luxembourg  Corporation (the Purchaser).  The
Company  issued  110  shares  of  Series A  Convertible  Preferred  Shares  (the
Preferred Shares) which are convertible into 1,375 Common Shares.  The Preferred
Shares are  convertible  at anytime at the  option of the  holders  into  Common
Shares of the  Company.  The  conversion  price is $8.00 per Common Share or one
Preferred  Share for 12.5 Common  Shares.  In  connection  with the  issuance of
Preferred Shares, a warrant evidencing the right to purchase an aggregate of 180
Common  Shares of the Company was issued to the  Purchaser.  This warrant has an
exercise  price of $8.00 per  share and may be  exercised  at  anytime  prior to
September 10, 2001. As a result,  the Purchaser  beneficially  owns 1,555 Common
Shares of the Company.  The net  proceeds to the Company from the offering  were
$10.2  million.  The Company  used the proceeds to repay a portion of its senior
revolving credit facility.

Shareholder Rights Plan

         In December  1997,  the Company  adopted a  Shareholder  Rights Plan in
which one  Preferred  Share  Purchase  Right (the  Right) was  granted  for each
outstanding  Common Share.  The Rights are exercisable only if a person or group
acquires or tenders an offer that would  result in the  beneficial  ownership of
20% or more of the then  outstanding  Common  Shares of the Company.  Each Right
entitles the holder to purchase one  one-thousandth  of a share of the Company's
Series  B  Preferred   Shares  at  a  purchase   price  of  $45.  Under  certain
circumstances,  the  Rights  are  redeemable  at a price of $0.01 per Right and,
unless redeemed  earlier,  will expire in December 2007. There were no issued or
outstanding Series B Preferred Shares at December 31, 1998 or 1997.

Stock Option Plan

         Options under the  Company's  Stock Option Plan (SOP) may be granted to
employees,  consultants,  directors and officers and may vest over time or based
upon the  performance of the Company's  stock, or both, at the discretion of the
Board of  Directors.  Options must be issued at an exercise  price not less than
fair  market  value on date of grant and  expire  five to 10 years  from date of
grant unless employment is terminated or death occurs earlier.

         In  accordance  with the  provisions  of the SOP,  the Company may make
loans to  participants  to finance the exercise  price and related  income taxes
upon the exercise of an option.  During 1998 and 1997, the Company received loan
repayments from participants totaling $364 and $278, respectively.

         The Company accounts for its SOP and Employee Stock Purchase Plan under
APB Opinion No. 25,  "Accounting for Stock Issued to Employees,"  under which no
compensation  cost was  recognized.  In October  1995,  Statement  of  Financial
Accounting  Standards  No.  123  (SFAS No.  123),  "Accounting  for  Stock-Based
Compensation,"  was issued.  This  statement  encourages,  but does not require,
companies to use the fair value based method to measure compensation cost, which
is then  recognized over the service period  (usually the vesting  period).  The
Company continues to measure  compensation cost using the intrinsic value method
as prescribed by APB Opinion No. 25. Had compensation  cost for these plans been
determined based on the fair value at the grant dates for awards consistent with
SFAS No. 123, the  Company's  pro forma  amounts for net income and earnings per
share would have been as follows:


                                       52
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

                                             1998       1997         1996
                                             ----       ----         ----
Net income/(loss) as reported ............ $10,516     $2,889     $(46,980)
Net income/(loss) pro forma .............. $ 9,483     $2,175     $(48,501)
Net income/(loss) per common and common
    equivalent share as reported:
    Basic ................................  $0.90       $0.26      $(4.48)
    Diluted ..............................  $0.75       $0.24      $(4.48)
Net income/(loss) per common and 
    common equivalent share pro forma:
    Basic ................................  $0.81       $0.19      $(4.62)
    Diluted ..............................  $0.68       $0.18      $(4.62)

         SFAS No. 123 has been  applied  only to options  granted  and  Employee
Stock Purchase Plan purchases after January 1, 1995. As a result,  the pro forma
compensation  expense may not be representative of that to be expected in future
years.

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996:

                                      1998          1997            1996
                                      ----          ----            ----
 Risk free interest rate ..........   4.53%          6.19%           5.95%
 Expected dividend yield ..........      --             --              --
 Expected lives ................... 4 years        4 years         4 years
 Expected volatility ..............     51%            45%             45%
 Fair value of options granted ....   $3.99          $2.89           $3.31

         The  following  is a summary  of stock  option  activity  and  weighted
average exercise prices in the Company's SOP for the years ended December 31:
<TABLE>
<CAPTION>
                                                       1998                          1997                          1996
                                             --------------------------    --------------------------    -------------------------
                                                            Weighted                      Weighted                     Weighted
                                                            Average                        Average                      Average
                                              Shares         Price          Shares          Price         Shares         Price
                                             ---------   ---------------   ---------    ------------     ---------    -----------
<S>                                             <C>            <C>             <C>            <C>           <C>           <C>  
Options outstanding at beginning of
    period ................................     3,046           $7.76          2,818           $8.33        2,138         $8.41
Options granted ...........................       391            8.92          1,087            6.98          953          7.78
Options exercised .........................     (310)            6.42          (155)            7.51        (173)          6.27
Options forfeited/canceled ................     (100)            7.28          (704)            9.00        (100)          8.06
                                             =========    =============    ==========    ============    =========    ============
Options outstanding at end of period ......     3,027          $7.98           3,046          $7.76         2,818         $8.33
                                             =========    =============    ==========    ============    =========    ============
Number of options at end of period:
   Exercisable ............................     1,820          $8.18           1,884          $8.06         1,630         $5.02
   Available for grant ....................         4                            394                          784


</TABLE>


                                       53
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


         The following is a summary of stock options outstanding and exercisable
for the year ended December 31, 1998:
<TABLE>
<CAPTION>

                                        Options Outstanding                           Options Exercisable
                     --------------------------------------------------------   -----------------------------
                                         Weighted          Weighted Average                     Weighted 
     Range of                             Average             Remaining                         Average
Exercise Pricese                      Exercise Price      Contractual Life                   Exercise Price
   Per Share            Shares           per Share            (in years)          Shares        per Share
-------------------  ------------   -------------------  --------------------   ----------- -----------------
   <S>                  <C>               <C>                     <C>              <C>            <C>  
   $5.75 - $13.06       3,027             $7.98                   4.9              1,820          $8.18
</TABLE>

         During the twelve month period  ended  December 31, 1998,  33 forfeited
options were  cancelled  due to the  expiration of the 1987 Stock Option Plan in
December 1997. These options are not available for future grants.

         The Company was able to realize an income tax benefit in 1998, 1997 and
1996 from the exercise or early  disposition  of stock  options.  For  financial
reporting purposes,  this benefit resulted in a decrease in current income taxes
payable and an increase in additional paid-in capital.

Restricted Stock Awards

     The Company  granted 62 and 7  restricted  shares to certain key  employees
from the SOP at an  average  share  price of $10.89 and $10.00 in 1998 and 1997,
respectively.  Shares  were  awarded  in the name of the  employee,  who has all
rights of a shareholder,  subject to certain restrictions on transferability and
a risk of  forfeiture.  Restricted  stock awards are  dependent  upon  continued
employment,  and in the  case of  performance  shares,  achievement  of  certain
performance  objectives.  If the performance  objectives are not met, the shares
will expire in 2002.  Deferred  compensation  was  recorded  as a  reduction  to
shareholders'  equity in the  consolidated  balance  sheets  based on the market
value of the shares on the date of grant and is  adjusted  based on the  closing
price of the Company's Common Shares at the end of each fiscal quarter. Deferred
compensation  is amortized  ratably over the  restriction  periods,  which range
between  two and four  years.  Compensation  expense  was  included  in selling,
general and administrative in the consolidated  statements of operations and was
not material.

Warrants

         In  connection  with  the  issuance  of  Preferred  Shares,  a  warrant
evidencing  rights to purchase an aggregate of 180 Common  Shares of the Company
was issued and sold to the Purchaser of the Preferred  Shares.  This warrant has
an exercise price of $8.00 per share and may be exercised prior to September 10,
2001.

         The acquisition of Spectra was financed,  in part, by the  subordinated
term loan. In connection with the subordinated  term loan,  warrants  evidencing
rights to purchase an aggregate of 975 Common  Shares of the Company were issued
and sold to the purchasers of the subordinated term loan. These warrants have an
exercise  price of $8.00 per share and may be exercised at anytime prior to July
12, 2006.

         The  holders  of  these  warrants  have  certain  rights   relating  to
registration and to the repurchase by the Company of the warrants and the shares
issued upon the exercise of the warrants under certain circumstances.


                                       54
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


Employee Stock Purchase Plan

         The Company has an Employee  Stock Purchase Plan (the Plan) under which
600 Common Shares can be issued. Under the terms of the Plan, eligible employees
may purchase the Company's Common Shares semi-annually on approximately  January
1 and July 1 through payroll deductions.  The purchase price is the lower of 85%
of the fair  market  value of the  shares  on the  first or last day of each six
month  offering  period.  Employees  purchased  approximately  107  shares at an
average  price of $6.92 per share,  67 shares at an  average  price of $5.81 per
share and 26 shares at an average price of $7.82 per share during 1998, 1997 and
1996, respectively. The Plan expires on December 31, 2000.

         The fair value of the purchase  rights is estimated on the first day of
the  offering  period  using the  Black-Scholes  option  pricing  model with the
following weighted average assumptions for grants in 1998, 1997 and 1996:

                                         1998            1997          1996
                                         ----            ----          ----
   Risk free interest rate ..........   5.19%           5.12%         5.89%
   Expected dividend yield ..........      --              --            --
   Expected lives ...................  6 mos.          6 mos.        6 mos.
   Expected volatility ..............     51%             45%           45%
   Fair value of purchase rights ....   $3.35           $2.06         $2.54

12.      ACCUMULATED OTHER COMPREHENSIVE INCOME

         Accumulated  other  comprehensive  income consists of the following for
the year ended December 31, 1998:

                                Foreign                        Accumulated Other
                                Currency        Unrealized       Comprehensive
                              Translation         Gain on            Income
                               Adjustment       Securities
                             ---------------   --------------  ----------------
Balance, beginning of year .         $(739)             $ --            $(739)
Current period change ......            702              312             1,014
                             ===============   ==============  ================
Balance, end of year .......          $(37)             $312             $ 275
                             ===============   ==============  ================

13.      NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

                                                  Year Ended December 31, 1998
                                       ---------------------------------------- 
                                         Income          Shares      Per-Share
                                       (Numerator)     (Denominator)    Amount
                                       -------------   -------------  ---------
Basic EPS:
Income available to
  common shareholders ................   $10,516          11,713        $0.90
                                                                      =========
Effect of dilutive securities:
   Options ...........................      --                 704
   Warrants ..........................      --                 201
   Preferred shares ..................      --               1,375
                                       -------------   -------------
Diluted EPS:
Income available to common
  shareholders and assumed conversions   $10,516          13,993        $0.75
                                       =============   =============  =========

                                       55
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

                                         Year Ended December 31, 1997
                               -----------------------------------------------
                                   Income         Shares         Per-Share
                                 (Numerator)   (Denominator)       Amount
                                -------------  -------------   ---------------

Basic EPS:
Income available to
  common shareholders              $2,889         11,197           $0.26
                                                               ===============
Effect of dilutive securities:
   Options                           --               195
   Warrants                          --                29
   Preferred shares                  --               422
                                -------------  -------------
Diluted EPS:
Income available to common
  shareholders and assumed 
  conversions                     $2,889         11,843           $0.24
                                =============  =============   ===============


                                      Year Ended December 31, 1996
                               -----------------------------------------------
                                    Income         Shares         Per-Share
                                 (Numerator)    (Denominator)       Amount
                                -------------   -------------   --------------
Basic EPS:
Income available to
  common shareholders             $(46,980)        10,490          $(4.48)
                                =============   =============   ==============
Diluted EPS:
Income available to common
  shareholders and assumed 
  conversions                     $(46,980)        10,490          $(4.48)
                                =============   =============   ==============

         Basic EPS were  computed by dividing  reported  earnings  available  to
common  shareholders  by weighted  average shares  outstanding  during the year.
Diluted EPS for the years 1998,  1997 and 1996 were  determined on the following
assumptions:  1) Preferred Shares and related warrants issued in connection with
the private  placement of equity were  converted  upon issuance on September 10,
1997  and  January  1,  1998  and 2)  warrants  issued  in  connection  with the
acquisition  of Spectra were  converted  on July 12,  1996,  January 1, 1997 and
January 1, 1998.

         Options to purchase  469,  1,148 and 2,495 shares of common stock at an
average  price of $9.93,  $9.52,  and $9.70 per share were  outstanding  for the
years ending  December  31, 1998,  1997,  and 1996,  respectively,  but were not
included in the computation of diluted EPS since the options' exercise price was
greater than the average market price of Common Shares.

14.      401(k) PLAN

         The  Company's  401(k)  plan is  available  to U.S.  employees  meeting
certain  service  and  eligibility  requirements.  The  Company  pays a  monthly
matching  contribution  equal  to 50% of the  employees'  contributions  up to a
maximum of 6% of their eligible  compensation.  Plan expense was $761, $717, and
$377 for 1998, 1997 and 1996, respectively.



                                       56
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


15.      SEVERANCE AND OTHER COSTS

         During the second quarter of 1997, the Company recorded a pretax charge
of  $5.2  million  for  severance   and  other  costs.   Of  the  total  charge,
approximately $2.3 million was associated with the Severance  Agreement with the
former CEO,  $1.2 million was for employee  severance  and benefit costs for the
elimination of approximately 30 positions including several senior executives, a
$1.0 million inventory  write-off for the  discontinuation  of certain products,
and $0.7 million for the centralization of research and development  efforts and
the relocation of  manufacturing  of certain product lines between the Company's
two manufacturing  facilities.  Of the $4.2 million  originally accrued in 1997,
the  Company  recorded  charges  against  the  accrual of $2.2  million and $1.3
million in 1998 and 1997, respectively.  The accrual as of December 31, 1998 was
approximately  $0.7  million,   of  which  $0.1  million  related  to  long-term
contractual obligations.

16.      ACQUISITION RELATED RESTRUCTURING AND OTHER COSTS

         During the third quarter of 1996, the Company  recorded a pretax charge
of $10.0  million for the cost of  restructuring  its existing  operations  with
those of Spectra  which was  acquired in July 1996.  Of the total  restructuring
charge,  approximately  $5.0  million  was  associated  with the  closing of the
Company's Sanford,  Florida manufacturing  facility, $3.6 million was related to
the write-off of previously  existing  intangible  and tangible  assets and $1.4
million  was  recorded  for  employee   severance  and  benefit  costs  for  the
elimination of seven positions.  As of December 31, 1998, all positions targeted
in the restructuring program were eliminated. Restructuring actions are expected
to be completed by the end of 1999. Excluding $0.2 million reversed in 1998, the
Company recorded  charges against the accrual of $0.5 million,  $3.7 million and
$5.3 million in 1998, 1997 and 1996, respectively.  The restructuring accrual as
of December 31, 1998 was  approximately  $0.3 million,  which relates to current
contractual obligations.  There have been no  other reallocations or reestimates
to date.

         In addition,  in the third quarter of 1996, the Company allocated $60.1
million of the  Spectra  purchase  price to  acquired  in-process  research  and
development  projects,  which  represents  the estimated  fair values related to
these  projects  determined  by  an  independent  appraisal.   Proven  valuation
procedures and techniques  were utilized in determining the fair market value of
each intangible asset. The development  technologies were evaluated to determine
that there were no  alternative  future  uses.  Such  evaluation  consisted of a
specific review of the efforts, including the overall objectives of the project,
progress  toward the  objectives  and  uniqueness of  developments  toward these
objectives.  To bring these projects to fruition, high risk developmental issues
need to be  resolved  which  will  require  substantial  additional  effort  and
testing. Therefore,  technological feasibility of these new products has not yet
been achieved. As these projects have not reached technological  feasibility and
alternative  future  use of these  developmental  technologies,  apart  from the
objectives of the individual projects, does not exist, these costs were expensed
as of the acquisition  date. The  acquisition  related  restructuring  and other
costs reduced 1996 income before income taxes, net income, basic EPS and diluted
EPS by $70.1 million, $44.2 million, $4.21 and $4.21, respectively.

17.      DISCONTINUED OPERATIONS

         In June 1997, the Company disposed of its TxCOM  subsidiary,  which was
acquired  as part of the  Spectra  acquisition.  For 1997 and 1996,  results  of
operations  were  reported  as  discontinued   operations  in  the  Consolidated
Statement of Operations. The Company recognized a net gain on operations of $164
in 1997 and a net loss on operations of $229 in 1996. Disposal of TxCOM resulted
in the  recording  of losses of $265 and $5,217 in 1997 and 1996,  respectively.
These losses include the write-down of the assets to their net realizable  value
and the costs of disposing of the subsidiary, net of applicable tax benefits.

                                       57
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


16.      SIGNIFICANT CUSTOMER INFORMATION

         The  Company  sells its  products  principally  to  original  equipment
manufacturers,  value-added  resellers,  distributors  and systems  integrators.
During 1998,  1997 and 1996, no individual  customer  accounted for greater than
10% of net sales. The Company's  arrangements with major customers are generally
nonexclusive.
<TABLE>

17.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>

                                                             First        Second         Third         Fourth
                                                            Quarter       Quarter       Quarter        Quarter
                                                           ----------    ----------    -----------   ------------
  Year Ended December 31, 1998
  -------------------------------------------------
<S>                                                          <C>           <C>            <C>            <C>    
  Net sales .............................................    $53,628       $51,877        $52,807        $58,911
  Gross profit ..........................................     21,685        21,866         22,468         24,854
  Net income ............................................      2,230         2,695          2,727          2,864

  Net  income per common and 
        common equivalent share (1):
     Basic ..............................................      $0.19         $0.23          $0.23          $0.24
     Diluted ............................................      $0.16         $0.19          $0.20          $0.21


  Year Ended December 31, 1997
  -------------------------------------------------
  Net sales .............................................    $54,236       $47,301        $53,191        $53,112
  Gross profit ..........................................     22,701        17,913         22,167         22,064
  Income (loss) from continuing operations ..............        886       (3,246)          2,542          2,808
  Loss from discontinued operations .....................       (16)          (85)             --             --
   Net income (loss) ....................................        870       (3,331)          2,542          2,808

  Net  income (loss) per common and
          common equivalent share (1):
  Basic:
     Continuing operations ..............................      $0.08       $(0.29)          $0.23          $0.25
     Discontinued operations ............................         --        (0.01)             --             --
                                                           ----------    ----------    -----------   ------------
     Net income (loss) ..................................      $0.08       $(0.30)          $0.23          $0.25
                                                           ==========    ==========    ===========   ============
  Diluted:
     Continuing operations ..............................      $0.08       $(0.29)          $0.22          $0.20
     Discontinued operations ............................         --        (0.01)             --             --
                                                           ==========    ==========    ===========   ============
     Net income (loss) ..................................      $0.08       $(0.30)          $0.22          $0.20
                                                           ==========    ==========    ===========   ============
</TABLE>

(1)  Earnings  per share are  computed  independently  for each of the  quarters
     presented  whereby the sum of the quarterly  earnings per share in 1998 and
     1997 does not equal the total computed for the respective years.

                                       58
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)


20.      OPERATIONS BY GEOGRAPHIC AREA

         During 1998,  the Company  adopted  Statement  of Financial  Accounting
Standards No. 131 (SFAS No. 131),  "Disclosures  About Segments of an Enterprise
and Related  Information," which requires public business  enterprises to report
certain  information  about  operating  segments.  It also  requires that public
business  enterprises  report  certain  information  about  their  products  and
services,  the geographic areas in which they operate and their major customers.
SFAS No. 131 was issued  effective for fiscal years beginning after December 15,
1997.

         The Company is engaged in a single reportable segment, specifically the
design,  manufacture  and  marketing  of handheld  and fixed  position  bar code
readers,  verifiers,  integrated  sortation and point-of-sale  scanning systems.
Operations in this business  segment are summarized below by geographic area and
by  products.  The  Company's  operations  in  Europe  and Rest of  World  (ROW)
primarily  consist  of selling  and  performing  field  service  maintenance  on
products designed and manufactured in the United States.

         Sales are allocated to geographic areas based on customer location.  In
determining earnings before provision for income taxes for each geographic area,
sales  and  purchases  between  areas  have been  accounted  for on the basis of
internal transfer prices set by the Company. Certain U.S. operating expenses are
allocated between  geographic areas based upon the percentage of geographic area
revenue to total revenue.

         Long-lived assets represent  tangible assets used in operations in each
geographic area.
<TABLE>
<CAPTION>

                                     North
 Year Ended December 31, 1998       America            Europe              ROW           Eliminations           Total
-----------------------------   ---------------    -------------      -------------    ----------------    --------------
<S>                                   <C>               <C>                <C>                  <C>             <C>     
Sales to unaffiliated    
   customers ..................       $119,266          $70,599            $27,358              $   --          $217,223
Transfers between
   geographic areas ...........         51,155               --                 --            (51,155)                --
                                ---------------    -------------      -------------    ----------------    --------------
Total net sales ...............        170,421           70,599             27,358            (51,155)           217,223
                                ===============    =============      =============    ================    ==============
Long-lived assets .............        $34,301            $ 843              $ 253              $   --           $35,397
                                ===============    =============      =============    ================    ==============

                                     North
Year Ended December 31, 1997        America           Europe              ROW           Eliminations           Total
---------------------------      --------------    --------------    ---------------   ----------------    ---------------
Sales to unaffiliated
   customers ..................       $120,606           $57,518            $29,716             $   --           $207,840
Transfers between
   geographic areas ...........         39,820               157                 --           (39,977)                 --
                                 --------------    --------------    ---------------   ----------------    ---------------
Total net sales ...............        160,426            57,675             29,716           (39,977)            207,840
                                 ==============    ==============    ===============   ================    ===============
Long-lived assets .............        $34,502             $ 622              $ 345             $   --            $35,469
                                 ==============    ==============    ===============   ================    ===============

</TABLE>

                                       59
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                (All amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                       North       
Year Ended December 31, 1996          America        Europe        ROW      Eliminations    Total
------------------------------     --------------  -----------   --------- --------------- ---------
<S>                                      <C>          <C>         <C>               <C>    <C>     
Sales to unaffiliated
   customers                             $96,321      $31,968     $17,762           $   -- $146,051
Transfers between
   geographic areas                       18,165           --          --         (18,165)       --
                                   --------------  -----------   --------- --------------- ---------
Total net sales                          114,486       31,968      17,762         (18,165)  146,051
                                   ==============  ===========   ========= =============== =========
Long-lived assets                        $34,965        $ 601      $   46           $   --  $35,612
                                   ==============  ===========   ========= =============== =========
</TABLE>

Sales are summarized by product as follows:

                   1998              1997             1996
               --------------    -------------    --------------
Scanners .....      $197,096         $190,723          $136,711
Service ......        20,127           17,117             9,340
               ==============    =============    ==============
                    $217,223         $207,840          $146,051
               ==============    =============    ==============


                                       60
<PAGE>

                                   SCHEDULE II

                            PSC INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                           (All amounts in thousands)

<TABLE>
<CAPTION>

                                               1998           1997           1996
                                            ------------   ------------   --------------
<S>                                           <C>            <C>             <C> 
Accounts Receivable Reserve-
BALANCE, at beginning of year                 $1,169         $1,101          $387
  Provision for doubtful accounts                   469            346        168
  Write-offs of doubtful accounts,
     net of recoveries                            (146)          (278)       (200)
  Other                                         --             --             746        (1)
                                            ============   ============   ==============
BALANCE, at end of year                       $1,492         $1,169        $1,101
                                            ============   ============   ==============


Restructuring Reserves-
BALANCE, at beginning of year                 $1,234         $5,064        $   786
  Addition to restructuring reserves            --             --            9,968
  Usage of restructuring reserves                 (619)       (3,830)       (5,690)
  Reversal of excess restructuring reserves       (200)        --             --
                                            ============   ============   ==============
BALANCE, at end of year                        $  415        $1,234        $5,064
                                            ============   ============   ==============
</TABLE>

(1) Amount represents the reserve recorded in connection with the acquisition of
Spectra.


                                       61