FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
(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, 1995 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:

                          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 [ ].


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As of March 18,  1996 the  aggregate  market  value of the voting  stock held by
non-affiliates  of  the  registrant  was  approximately   $75,435,000   (Assumes
officers,  directors,  and any shareholder  holding 5% of the outstanding shares
are affiliates.)

As of March 18 1996, there were outstanding 10,001,124 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 April 30, 1996 are incorporated into Part
         III of this Form 10-K.




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                                       3



                                TABLE OF CONTENTS

                                     PART I
                                                                    PAGE
Item   1:  Business................................................    4
Item   2:  Properties..............................................   16
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.............   27
Item   9:  Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure...............   27

                                    PART III

Item  10:  Directors and Executive Officers of the Registrant......   27
Item  11:  Executive Compensation..................................   27
Item  12:  Security Ownership of Certain Beneficial Owners and
              Management...........................................   27
Item  13:  Certain Relationships and Related Transactions..........   27

                                     PART IV

Item  14:  Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K..........................................   28
                                   
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                                       4



                                     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  handheld and fixed position  laser-based  bar code  scanners,  scan
engines and other scanning products for the worldwide  automatic  identification
and data collection  market ("Auto ID"). By identifying,  collecting, processing
and transmitting  data, the Company's scanning products serve as the "front end"
of terminals or host  computers  used by industry,  business and  government  to
manage and control  production,  warehousing,  distribution,  sales and service.
Headquartered in upstate New York, with additional operations in Florida and the
United Kingdom,  the Company serves original equipment  manufacturers  ("OEMs"),
value-added resellers ("VARs"),  distributors and system integrators  throughout
the world.

         The  Company  has  positioned  itself  within the Auto ID  industry  by
selling  both domestically and  internationally,  principally  through  indirect
distribution  channels.  The Company  distributes its scanning  products through
OEMs,  VARs,  distributors and systems  integrators  rather than directly to end
users, thus enabling the Company to avoid  significant  channel  conflicts.  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 Auto ID participants  with
whom PSC conducts joint product  development.  The Company  operates  within one
industry segment:  automatic data collection.  The following is a brief synopsis
of the  Company's  operations  for the last five years,  which should be read in
conjunction  with  the  balance  of  this  report,  including  the  Consolidated
Financial Statements.

         In November 1991, the Company  completed a private placement of 955,000
shares of its Common Stock for aggregate  consideration  of  approximately  $5.0
million.

         In December  1991,   the Company  merged  Optel Systems Inc. into Optel
Bar Code Systems Inc., renaming the surviving company OBCS, Inc. and merged A.D.
Data Systems Corporation into Techtran Inc., renaming the surviving company A.D.
Data Systems Corp.

         In May  1992,  the  shareholders  approved  a change in the name of the
Company from Photographic Sciences Corporation to PSC Inc.

         In  September  1992,  the Company  opened a sales  office in the United
Kingdom that serves as its European headquarters.

         In January  1993,  the Company  purchased  selected  assets and assumed
selected liabilities of BRT Corporation,  a manufacturer of fixed position, high
speed industrial scanners.

         In July 1993, the Company merged its OBCS,  Inc.  subsidiary  into A.D.
Data Systems Corp. and renamed the surviving entity PSC Scanning Systems Inc.

         In December 1993, the Company  completed the sale of certain assets and
certain liabilities of its Switching Systems product line.
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                                       5



         In December  1994,  the Company  completed the  acquisition  of certain
assets  and  certain  liabilities  of  LazerData  Corporation  ("LazerData"),  a
subsidiary of BTR Corporation, located in Sanford, Florida.

         In March 1995, the Company  completed a secondary stock offering of 2.3
million  shares of its Common  Stock.  The net  proceeds to the Company from the
offering were approximately $23.6 million.

         In April 1995,  the Company  completed  the sale of its Image  Products
product group.

     In November, 1995, the Company formed a wholly owned subsidiary,  PSC S.A.,
Inc. to serve as its South and Central American sales headquarters.

RISK FACTORS

         The Company wishes to caution  readers that the following risk factors,
among  others,  could  affect PSC's  actual  consolidated  results for the first
quarter of 1996 and beyond to differ  materially  from  those  expressed  in any
forward-looking statements made by, or on behalf of, PSC.

         Technological   Change.  The  market  for  the  Company's  products  is
characterized by rapidly changing  technology,  evolving industry  standards and
changing customer needs. 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 needs 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  new products or enhancing its existing  products on a
timely  or   cost-effective   basis,  or  that  such  new  products  or  product
enhancements will achieve market acceptance.

         Management  of Growth.  The Company is  experiencing  a period of rapid
growth that could place a significant  strain on its  resources.  A component of
the Company's business strategy is to complement  internal growth with strategic
acquisitions. There can be no assurance that the Company will be able to operate
acquired  businesses  profitably  or  otherwise  implement  its growth  strategy
successfully.  The  Company's  ability to manage its  growth and  integrate  any
newly-acquired  entities  will require it to continue to improve its  operations
and its  financial  and  management  information  systems,  and to motivate  and
effectively  manage its  employees.  If the  Company's  management  is unable to
manage  such growth  effectively,  the quality of the  Company's  products,  its
ability to identify, hire and retain key personnel and its results of operations
could be materially adversely affected.

         Intellectual  Property.  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 the proprietary rights of others. The
Company currently owns 45 U.S. patents having  expirations from the year 2002 to
the year 2013 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  patents  issued to or  licensed  by the  Company  will not be  challenged,
invalidated or circumvented by others. See "Business--Intellectual Property."
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                                       6



         The  Auto  ID  industry  is  characterized  by  substantial  litigation
regarding  patent  and  other   intellectual   property   rights.   The  Company
aggressively  defends its patents and other proprietary rights, and is currently
a plaintiff  in three  lawsuits  alleging  patent  infringements  on the part of
others, and these proceedings involve counterclaims  against the Company.  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
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  effort  would  be  successful.  See  "Business--Legal
Matters".

         Competition.  The Auto ID  industry  is highly  competitive  with rapid
technological  change 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 and
other resources than the Company.  In addition,  other larger corporations could
enter the Auto ID industry.  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".

         Dependence  on Sales  by  Third  Parties:  Significant  Customers.  The
Company's net sales are 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 abilty to sell the Company's products to end
users, regulatory requirements and other 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  1995,  1994 and 1993,  Telxon  Corporation
accounted for 17%, 22% and 16%,  respectively  of the  Company's  net sales.  In
1994, net sales to Intermec,  a division of Western Atlas,  accounted for 10% of
net sales.  A significant  diminution in the sales to or loss of either of these
customers  could  have a material  adverse  effect on the  Company's  results of
operations.  See  "Business--Sales  and Marketing" and  "--Customer  Support and
Services."

         Risks Associated with International Operations.  The Company's sales to
international customers increased from $6.8 million or 18% of total net sales in
1993 to $19.3  million  or 22% of net  sales in 1995.  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  risks  associated  with
international  sales.  Such risks include  changes in  regulatory  requirements,
compliance costs associated with quality control  standards,  special  standards
requirements,  exposure to currency  fluctuations,  exchange rates,  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
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                                       7

ability  to  increase  or  maintain  its  international   sales  or  results  of
operations. See "Business--Sales and Marketing."

         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 effect
on the Company's business or results of operations. See "Business--Manufacturing
and Suppliers."

         Product  Transitions.  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 and results
of operations.

         Fluctuations  in  Operating  Results.  Historically,  the  Company  has
experienced  variability  in its  quarterly  results.  Large  orders  can  cause
favorable or unfavorable variations in quarterly comparisons. In addition, PSC's
results  may vary  significantly  from  quarter  to quarter  depending  on other
factors such as the timing of orders and  shipments,  the level of  development,
sales and marketing expense incurred in anticipation of future revenues, and the
timing of new product and application  announcements and releases by PSC and its
competitors.  Many of these  factors  are  beyond  the  Company's  control.  PSC
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."

         Volatility of Stock Price. The Company's Common Shares have experienced
substantial  price  volatility  and such  volatility  may  occur in the  future,
particularly  as a result  of  quarter-to-quarter  variations  in the  actual or
anticipated  financial  results  of  the  Company,  its  competitors  and  other
companies in the Auto ID industry. In addition, the stock market has experienced
significant price and volume fluctuations that have affected the market price of
many  technology  companies  and have  often  been  unrelated  to the  operating
performance of these companies.  Broad market  fluctuations,  as well as general
economic and political conditions,  may adversely affect the market price of the
Common Shares.

         Significant  Agreement.  The  Company has  entered  into  cross-license
agreements with its principal  competitor in the handheld laser scanning market,
Symbol Technologies,  Inc. ("Symbol"). The agreements limit the Company's annual
sales of licensed  products  in "Asia," as  defined,  to no more than 20% of its
annual  revenues.  In 1995,  the  Company's  sales of licensed  products in Asia
represented 5% of its total sales. In the event of a "change in control" of PSC,
the  agreement  could be  terminated  or the royalty  payable to Symbol could be
increased and the sale of licensed products limited. "Change in control" as used
in the agreement includes the acquisition by another party of 30% or more of the
voting power of the equity  securities of the Company,  the  replacement of over
50% of the  current  Board of  Directors  of the  Company  (other  than with the
approval of two-thirds of the current Board),  the sale of all or  substantially
all of the assets of the  Company or the sale of the  Company's  handheld  laser
scanner business. An early termination of the cross-license agreement could have
a material  adverse effect on the financial  condition and results of operations
of the Company. See "Business -- Intellectual Property."
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                                       8


         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  effect  on the
Company's results of operations. See "Business--Government Regulation."

         Dependence on Key Personnel.  The Company's  future success  depends in
large part on the continued  service of L. Michael Hone,  Chairman of the Board,
President and Chief Executive Officer, as well as on its other key technical and
management  personnel.  Mr.  Hone's  current  employment  agreement  expires  on
December 31, 1999.  The Company is also  dependent on its ability to continue to
attract additional  qualified employees,  particularly design,  process and test
engineers  involved in the manufacture of existing  products and the development
of new products and processes.  The  competition  for such skilled  personnel is
intense and the loss of key employees  could have a material  adverse  effect on
the Company's results of operations. See "Business--Employees" and "Management."

         Anti-Takeover  Effects of Certain  Charter  and Bylaw  Provisions.  The
Company's  Certificate  of  Incorporation  (the  "Certificate")  and Bylaws (the
"Bylaws") contain certain provisions relating to corporate governance and to the
rights of  shareholders.  These  provisions  may be  deemed to have a  potential
"anti-takeover"  effect in that such  provisions  may delay,  defer or prevent a
change in control of the  Company.  The  Certificate  provides  for the Board of
Directors  to be divided  into  three  classes of  directors  serving  staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will  be  elected  each  year.  In  addition,   the  Certificate  provides  that
shareholders  may remove a  director  only for cause and only by the vote of the
holders of two-thirds of the Common Shares of the Company. This provision,  when
coupled with the  provision  of the  Certificate  authorizing  only the Board of
Directors to fill vacant directorships, will preclude shareholders from removing
incumbent  directors  without cause and  simultaneously  gaining  control of the
Board of Directors by filling the  vacancies  created by such removal with their
own nominees,  and will make more  difficult,  and therefore may  discourage,  a
proxy contest to change control of the Company.  The  Certificate  also provides
that special  meetings of the  shareholders of the Company may be called only by
the Board of Directors.  These provisions of the Certificate may be changed only
by the affirmative vote of the holders of two-thirds of the Common Shares of the
Company  entitled  to vote on such  matters  at a meeting  duly  called for such
purpose.  The Bylaws provide that shareholders  seeking to bring business before
an annual  meeting of  shareholders,  or to nominate  candidates for election as
directors at an annual or special  meeting of  shareholders,  must provide prior
written notice thereof, as set forth in the Bylaws.

BAR CODE EQUIPMENT

         The  Company  offers  a wide  range of laser  based  bar code  scanning
products such as scan engines and handheld and fixed  position  scanners for use
by business, industry and government in multiple application areas. 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,
carrying cases,  batteries and battery chargers. An early entrant in the Auto ID
industry,   PSC  is  committed  to  ongoing   innovation   in  product   design,
manufacturing,  product  performance  and  customer  satisfaction.  The Bar Code
Equipment group accounted for 100%, 98%, and 94% of the Company's sales revenues
in 1995, 1994 and 1993, respectively.
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                                       9


         Scan Engines

         PSC's scan engines are self-contained bar code reading components which
manufacturers build into a variety of products. PSC 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 PSC are based on either its 5301 "large"  platform,  its reduced
5303 version,  or the newly introduced Minuet  (TRADEMARK)  DI-1000  (TRADEMARK)
family.  Introduced  in 1991,  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,  in 1993 PSC introduced the 5303 scan
engine  which is about half the  footprint  of the 5301 and  occupies  3.5 cubic
inches.  In 1995,  PSC  introduced  an even  smaller  scan  engine,  the  Minuet
(TRADEMARK)  DI-1000(TRADEMARK) DIRECT  ILLUMINATION(TRADEMARK) Bar Code Engine.
This  miniature  engine,  which  has a volume  of only  1.2  cubic  inches  is a
revolutionary  alternative to conventional reflective scanning mechanisms.  In a
Direct Illumination  (TRADEMARK) bar code engine system, there are no reflective
optics; the laser is mechanically swept to directly illuminate the bar code. The
Minuet  (TRADEMARK)  DI-1000  (TRADEMARK)  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.

         Handheld Scanners

         The Company has  developed  a series of handheld  scanning  products to
meet varying customer needs for performance, size and value.

         5300 HP Light  Industrial/Commercial  Scanners: PSC's high  performance
  5300 HP handheld  scanners  are based on its 5301 scan engine  platform  first
  introduced in 1991. 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 mil. (.002 inches).  A 2 mil.  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.


      5300 IP  Ruggedized  Industrial  Scanners:  Like  the  5300 HP, PSC'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 tough jobs in demanding  environments.  They are ideal for use
  in warehouses,  distribution centers,  automotive plants,  utilities,  in 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.    The IP products
  can  be  manufactured  and  certified  intrinsically  safe  for   use   under
  hazardous conditions such as explosive  environments  found  in coal mines  or
  in volatile chemical environments.

5300 HP/IP  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.
<PAGE>
                                       10


  The Company's lifetime warranty on the scanning mechanism in each model of the
  5300  Series,  its  24-month  warranty  on its HP  scanners  and its  30-month
  warranty  on its IP scanners  (which the  Company  believe to be the among the
  most  favorable  in the  industry)  reflect the  Company's  confidence  in the
  quality of its products.

         QUICK SCAN (TRADEMARK) Retail, POS Service and Commercial Scanners: The
Company  introduced  the  QUICK  SCAN  (TRADEMARK)  in  November  1994 as a full
feature,  full function,  full performance,  scanner incorporating the Company's
small 5303 scan engine  platform  and certain  performance  features of the 5300
Series. The QUICK SCAN GP (TRADEMARK)  provides general performance  scanning in
lower volume  point-of-sale,  point-of-service  and commercial  application with
consistent bar code placement and location. In 1995, the Company added the QUICK
SCAN HP (TRADEMARK),  for higher volume retail and commercial applications where
handling mixed and  inconsistently  marked items requires greater depth of field
and enhanced scanning performance.  The QUICK SCAN EP (TRADEMARK) was also added
in 1995 for extended performance and longer range scanning  applications up to 5
feet. The QUICK SCAN (TRADEMARK) family is positioned as an affordable  scanning
alternative  for the  retail  point of sale  market  and other  price  sensitive
markets such as those in Europe and Latin America.  Smaller than either the 5300
HP or 5300 IP,  Quick Scan was  ergonomically  designed  to be used  in-doors in
"gloveless"  environments.  The size and shape of Quick Scan make it comfortable
to hold independent of handedness and hand size.

         Specialty Handheld Scanners    538X Scanners: 

     These  specialty  scanners  offer custom form factors and optics for unique
applications.  These scanners share certain performance capabilities of the 5300
HP/IP scanners,  but incorporate  the Company's 5303 scan engine  platform.  The
reduced size and weight of this engine  permits its use in a varied line of 538X
scanner  housings,  which  are  ergonomically  adapted  to  customer  needs  and
applications.  Included in this line are the 5380 Back-of-the-Hand  Scanner, the
5381 Palm Top Scanner, and the 5387 SCANDLE (TRADEMARK).

     The 5380 Back-of-the-Hand Scanner has a small profile and weighs only three
ounces,   making  it  particularly   suitable  for  "picking"   applications  in
distribution centers and other hands-free operations. This scanner, which allows
for hands free  scanning,  attaches to a  comfortable  glove that can be worn on
either  hand and can be actuated  manually  with a trigger or  automatically  by
PSC's Autosense  (REGISTERED) feature. Hands free scanning allows an operator to
use both hands to select items from shelves or racks and transmit data regarding
those  items  to a data  terminal.  Depending  on its  configuration,  the  5380
Back-of-the-Hand Scanner can scan over a range of 1 inch to 60 inches.

     The 5381 Palm Top Scanner,  compactly  designed and weighing 4.8 ounces, is
about the size of a TV remote control.  It can be used in either hand and can be
slipped into a shirt pocket or attached to clothing  with a Velcro  (REGISTERED)
patch when not in use. The 5381 is the appropriate  choice for point of sale and
industrial  applications  where size,  weight and accessibility are key factors.
Top and side triggers  have been  provided to allow for ease of scanning  either
vertical or horizontal bar codes by left or right handed  operators over a range
of 1 inch to 60 inches.

     The 5387 SCANDLE  (TRADEMARK) has the approximate size, weight and shape of
a telephone handset. When snapped into place on a small portable computer,  such
as those carried by telephone linemen,  it functions as the computer's  carrying
handle.

     Other Handheld  Scanners:  The Company also  manufactures  and supports its
2200 Series and 4100 Series  handheld  scanners,  both of which were  introduced
prior to 1989.
<PAGE>
                                       11


         Fixed Position Scanners

         With the  acquisition  of LazerData,  the Company now offers a complete
  line of unattended fixed position laser scanners, including embedded miniature
  scanners,  compact line  scanners  and  high-speed  omnidirectional  scanners.
  Included  within  this  range are  scanners  capable of  providing  adjustable
  rastering (simultaneous  up-and-down and side-to-side  scanning),  high-speed,
  long-range scanning and specialty scanning.

         Miniature  Scanners: The PSC 9000E  Scanner  is a  compact,  versatile,
  industrial line scanner intended primarily for high speed automated sorting or
  identification in the demanding environments of the manufacturing and material
  handling  markets.  Through the use of advanced digital signal processors this
  scanner can provide scan rates of between 200 and 1500 scans per second.  Both
  the scan engine and the decoder may be contained in a single unit. Because the
  scanner  can be  programmed  either  locally  or from the host  computer  they
  provide the user with maximum flexibility.

         High-End  Line  Scanners: The  Series  6000  Ranger  and  the  recently
  introduced Series 8000 provide a line of high powered, high speed,  adjustable
  rastering line scanners for demanding  applications,  such as airline  baggage
  handling, overnight package delivery sortation and other high speed sortation.
  It can read bar code  labels  moving at  speeds of up to 400 feet per  minute.
  Features include  auto-focusing and TIME SLICE DECODING  (TRADEMARK)  (T.S.D.)
  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.  By multiplexing
  (interconnecting  two or  more  of  these  scanners  having  varying  scanning
  ranges), a system can be configured to simultaneously read and track bar codes
  as they move past the scanners at different distances.

         Omnidirectional Scanners: The Model 990 SURESCAN (REGISTERED) is a high
  speed modular,  omnidirectional  scanner for use in large volume  distribution
  centers. It may be equipped with TIME SLICE DECODING  (TRADEMARK)  software to
  read randomly oriented bar codes as, for example,  labels on packages tumbling
  down a chute at speeds up to 540 feet per minute at a  distance  of 30 inches.
  The Model 990 can also be configured with up to four multiplexed scanners.

         Specialty Scanners: The Model 3800 Tube Scanner, designed primarily for
industries  such as the  textile  and fiber  industries,  employs a unique  scan
pattern that permits the scanning of a bar code on the inside circumference of a
cylinder  without  having to stop or spin the  cylinder.  The Series 7000 AVI is
designed for  automatic  vehicle  identification.  It reads  special  reflective
labels on vehicles  passing  within 6 feet of the scanner.  With a  weatherproof
housing it is designed for such uses as toll booths,  garages,  freightyards and
railyards.

         Carton Dimensioning System:    The SureCube(TRADEMARK)  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.
<PAGE>
                                       12


         PSC Quick Check (TM) Verifiers

         PSC's line of  QUICKCHECK(TM)  verifiers is designed to ensure that the
customer  is  producing,   using  and   receiving   quality  bar  code  symbols.
QUICKCHECK(TM) verifiers can display a report of a simple pass/fail or provide a
detailed quality  analysis.  These verifiers are sold as handheld,  desk top, 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")  guidelines such as
edge   determination,   reflectance   minimum,   symbol  contrast,   modulation,
decodability and edge contrast minimum. When mounted on-line, the QUICKCHECK(TM)
verifier  results can  automatically  control the user's  system and cause it to
pause,  reprint,  shutdown or activate  an alarm.  The newest  releases in PSC's
QUICKCHECKTM verifier line include models that  use PSC's 4100 handheld laser as
an optical  input  device and a model  based on PC  software.  All  QUICKCHECKTM
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
principally  through  OEMs,  VARs,   distributors   and   systems   integrators.
International  sales increased from  approximately  $6.8 million,  or 18% of net
sales,  in 1993 to  approximately  $19.3  million or 22% of net sales,  in 1995.
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  sells  principally  through  indirect  channels to penetrate a range of
vertical  markets and  submarkets,  thus providing broad market exposure for its
scanning products.  These products are frequently  integrated by an OEM with its
own product or by a reseller  with  product from other  manufacturers  to form a
complete automatic  identification system.  Management believes that this policy
of marketing its products through multiple indirect channels  differentiates PSC
from its principal  competitors who sell not only through indirect  channels but
also to end  users.  In most  cases the  Company's  products  are  resold by its
customers under their own names.

         The Company's  customers serve various  vertical markets and submarkets
and a wide  variety of end users.  They  introduce  PSC'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,  PSC 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, the
Company has ten regional sales  representatives in the United States and a sales
office near Manchester, England that provide sales, service and support to the
Company's `domestic and  international  customers.  

         In November 1995, the Company  formed a  wholly owned  subsidiary,  PSC
S.A.,  Inc.  which is  responsible  for selling to and  supporting the Company's
distribution  network throughout Central and South America. The sales office for
the new subsidiary is located in Miami, Florida.
<PAGE>
                                       13


         Foreign sales of the Company's products are subject to the normal risks
of foreign operations,  such as protective tariffs,  export/import  controls and
transportation delays and interruptions.  The Company's  international sales are
invoiced in U.S.  dollars  except for sales in the United Kingdom where invoices
are  stated  in  pound  sterling  and are  thus  subject  to  currency  exchange
fluctuations.  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,
marketing  services,   technical  services  and  market  development  functions.
Marketing  personnel  specify new  products and product  enhancements  that meet
customer needs and manage product  positioning and introductions.  They interact
regularly with OEMs, VARs, distributors,  systems integrators and end users. The
marketing  personnel,  in conjunction  with outside  vendors,  conduct  customer
surveys and  coordinate  advertising  and public  relations.  This group creates
advertising, brochures and documentation, manages trade show exhibits and places
articles  highlighting  applications  of PSC  products  in  trade  and  industry
publications.  The marketing  personnel are also responsible for the development
of new market opportunities and liaisons with key customers, vendors, government
regulatory and industry standards committees.

Customer Support and Service

         The Company maintains a highly responsive  customer support and service
organization that bridges the Company's marketing, engineering and manufacturing
functions.  The  Company  employs  service  representatives  who  are  generally
responsible for specific territorial areas and work with the Company's sales and
marketing personnel.  The customer service  representatives  receive training in
virtually all the Company's  products and assist  customers in tracking  orders,
expediting the  manufacturing  and shipment of products and technical support of
products.  The  customer  service  representatives  also issue  return  material
authorizations  for products  under  warranty or that need to be returned to the
Company for  servicing  and  identify  and refer the  customers  to  independent
providers  of spare parts and  services.  The customer  representatives  are, in
turn,  supported by technical  support and  engineering  personnel who assist in
providing consumer-based support and will, if necessary, do so at the customer's
location.  In 1995, PSC was  recognized for customer  commitment by the New York
State  Governor's  Excelsior  Awards Program.  The Company received an Excelsior
Exemplary Practices Citation for Customer Satisfaction.

         Utilizing a similar  support and service  strategy,  LazerData  employs
field service personnel,  located in various  territories  throughout the United
States, reporting to a customer service manager.

Customers

         During 1995, 1994, and 1993, Telxon Corporation accounted for 17%, 22%,
and 16%,  respectively,  of the  Company's  net  sales.  The  1994 net  sales to
Intermec, a division of Western Atlas,  accounted for 10% of net sales. No other
customer accounted for more than 10% of net sales during 1995, 1994 or 1993.

Engineering, Research and Product Development

         The  Company  conducts   engineering   programs  for  the  purposes  of
developing  new  products,   improving  its  existing   products'   reliability,
ergonomics and performance,  and reducing  manufacturing  and support costs. The
Company  extensively  utilizes computer-aided design  manufacturing  ("CAD-CAM")
tools  in  the   simulation   of  scanners  and  in  the  design  of  mechanical
applications,  including optics, digital electronic circuits and printed circuit
boards.  The Company is engaged in development  programs in the areas of optics,
electronics, automated manufacturing methods and mechanics. Substantially all of
the Company's research and development is performed by its own staff.
<PAGE>
                                       14


         The Company spent approximately $4,962,000, $3,810,000, and $3,754,000,
in 1995, 1994 and 1993, respectively, on engineering,  research and development.
Such  amounts  do not  include  expenditures  by the  Company  on  manufacturing
engineering  personnel.   PSC's  engineers  are  experienced  in  the  specialty
disciplines of mechanical,  electronic, software, optical, digital and materials
engineering.

Manufacturing and Suppliers

     The Company designs,  engineers and manufactures  substantially  all of its
handheld  scanning  products  at  its  Webster,  New  York  headquarters.  PSC's
manufacturing   space   tripled   during   1995  after  it   occupied   its  new
custom-designed  plant.  Employees build in groups within modular  workstations,
and each  employee  is  trained  in the  work of the  preceding  and  subsequent
workstations  as well as the employee's  own  workstation  The Company  utilizes
material  resource  planning and  schedules its  production to manage  inventory
levels and meet customer delivery demands.

     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 QuickCheck(TM)
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.

     The Company designs,  engineers and manufactures  substantially  all of its
fixed position  scanning products in Sanford,  Florida.  LazerData also utilizes
contract  manufacturing for the production of circuit boards and  subassemblies.
Contract manufacturing  activities are coordinated by LazerData's  manufacturing
personnel.

     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,  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  Auto  ID  industry  is  highly  competitive.   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"),  Metrologic
Instruments  Inc.  ("Metrologic")  and  Spectra-Physics  Scanning  Systems  Inc.
("Spectra-Physics").  The Company's principal  competitors in the fixed position
scanner market are Accu-Sort Systems,  Inc.  ("Accu-Sort") and Computer Identics
<PAGE>
                                       15


Corporation.  The  ability to compete in the Auto ID  marketplace  is based upon
price, product  functionality,  performance,  support and overall quality. It is
also strongly influenced by accessibility to certain patented technology.

Intellectual Property

         The Company  believes that certain of its products are  proprietary and
consequently  relies on a combination  of patent,  trade  secret,  copyright and
trademark  law to  establish  and protect its  proprietary  rights.  The Company
currently  holds 45 United States patents and also has certain  foreign  patents
pertaining to various technologies  associated with its products.  These patents
expire on various  dates  between  2002 and 2013.  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 has  obtained  rights  under  various  licenses,  including
certain  rights  obtained  by  LazerData  from  Accu-Sort   pertaining  to  data
reconstruction  technologies.  In addition, the Company has obtained rights from
Symbol,  its largest  competitor in the handheld  scanning  market.  In general,
under the agreement with Symbol, both PSC and Symbol have granted to the other a
worldwide,   non-exclusive   license  to  manufacture  and  distribute  products
utilizing  technologies  covered by  certain  patents  held by the other  party,
consistent in each case with the terms of the agreement.  The agreement provides
for the  payment  of  certain  royalties  and  extends  through  the life of the
applicable  patents,  subject  to  earlier  termination  for  a  breach  of  the
agreement.  The agreement limits the Company's annual sales of licensed products
in "Asia," as defined, to no more than 20% of its annual revenues.  In 1995, the
Company's  sales in "Asia"  represented  5% of its  revenues.  In the event of a
"change in control" of PSC, the  agreement  could be  terminated  or the royalty
payable to Symbol could be increased and the sale of licensed  products limited.
"Change in Control" is defined in the  agreement as the  acquisition  by another
party  of 30% or  more of the  voting  power  of the  equity  securities  of the
Company,  the  replacement  of over 50% of the current Board of Directors of the
Company,  other than with the approval of two-thirds of the current  Board,  the
sale of all or substantially all of the assets of the Company or the sale of the
Company's  handheld  scanner  business.  The  early  termination  of the  Symbol
agreement could materially adversely affect the operations of the Company.

         The Company  currently holds seven  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 two foreign  trademarks and
has numerous domestic and foreign trademark registrations pending.

Employees

         As of March 1, 1996, PSC had approximately 500 full-time employees. The
Company  believes that its future  success will depend in part on its ability to
recruit and maintain  highly  qualified  management,  marketing,  technical  and
<PAGE>
                                       16


administrative  personnel.  None of PSC'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 the Canadian  Standard  Association,  the European  Community
Standards (CE) and TUV Rheinland (Europe),  which are corresponding agencies for
certain foreign countries.  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.

                               ITEM 2: PROPERTIES

         PSC'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 has been
custom designed to serve the Company's  operations and was constructed 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 a 35,000 square foot building in an industrial  park
in Sanford,  Florida, a suburb of Orlando,  Florida.  This lease expires May 31,
1999.  The  Company  also  leases  approximately  1,750  square  feet in Denver,
Colorado which serves as a technical  support office.  This lease expires in May
1998. The Company maintains a month-to-month lease on sales offices in San Jose,
California and Skaneateles, New York.

         PSC  established its  European headquarters  in  September  1992,  near
Manchester,  England  where it  leases  1,850  square  feet  which  serves  as a
marketing and sales office and service  center for sales to the United  Kingdom,
the European Continent and Asia. This lease expires September 1998.

         PSC  established its Central and South American office in February 1996
in Miami,  Florida. The Company now leases approximately 1,200 square feet which
serves as a sales and technical  support office for its customers in Central and
South America. The lease expires in March 1999.

         All of the  Company's  locations are in good  condition and  management
believes  that  the  Company  has  sufficient  manufacturing  capacity  for  the
foreseeable future.
<PAGE>
                                       17



                            ITEM 3: LEGAL PROCEEDINGS

         On July 1, 1992,  the Company filed two patent  infringement  lawsuits:
one against  Spectra-Physics  relating to the  manufacture and sale of its SP300
and SP400 models and one against Metrologic relating to the manufacture and sale
of its 900  Series,  in each case in the United  States  District  Court for the
Western District of New York located in Rochester, New York. The Company alleges
that each of  Spectra-Physics  and Metrologic has infringed the Company's patent
for an optical  scanning  device for detecting bar codes,  United States Letters
Patent   4,652,750  (the  "750  Patent"),   and  seeks   injunctions   enjoining
Spectra-Physics  and  Metrologic  from  further   infringement  and  damages  to
compensate it for such acts of infringement. Spectra-Physics and Metrologic have
each filed answers alleging invalidity,  non-infringement,  and unenforceability
of the 750 patent.  These actions are stayed  pending  disposition of the appeal
described below.

         On September 21, 1994, the Company filed a patent infringement  lawsuit
in the  United  States  District  Court for the  Western  District  of New York,
alleging that certain  products of Accu-Sort  infringe the 750 Patent.  The suit
seeks an injunction to prevent  further  infringement  and also seeks damages to
compensate  for  past  infringement.   Accu-Sort  has  answered  the  complaint,
asserting defenses of  non-infringement  and invalidity and filed a counterclaim
seeking  a  declaratory  judgment  that the 750  Patent  is  inter  alia and not
infringed. The Company moved for summary judgment of infringement. Accu-Sort has
not alleged that the Company is infringing any Accu-Sort patent.

         On October 13, 1995 the Court  granted  Accu-Sort's  motion for summary
judgment of  non-infringement,  denied the Company's motion for summary judgment
of infringement, and dismissed the action.  The Company has appealed all rulings
adverse  to the  Company in an appeal  filed  with the Court of Appeals  for the
Federal Circuit. The appeal is still pending.

           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, 1995.

<PAGE>
                                       18



<TABLE>
                        EXECUTIVE OFFICERS OF REGISTRANT

The Company's executive officers as of December 31, 1995, were as follows.
<CAPTION>
                                                                         Initial
Name                       Age   Officer(s)                             Election
<S>                        <C>   <C>                                        <C>   
L. Michael Hone .........  46    Chairman of the Board,                     1984
                                 President and Chief Executive Officer

Dr. Jay M. Eastman ......  47    Executive Vice President                   1987

Stanley D. Seitz ........  46    Senior Vice President, Operations          1994

William J. Woodard ......  44    Vice President, Finance and Treasurer      1994

Dr. Dean Faklis .........  33    Vice President Engineering and
                                 Product Development                        1995

Stuart M. Itkin .........  45    Vice President, Worldwide Marketing        1995

Mary A. Gallahan ........  48    Vice President, Human Resources            1994

Richard N. Stathes.......  49    Vice President North American Sales        1994

Benny R. Tafoya..........  58    Vice President, Product Development        1994

Scott D. Deverell .......  30    Controller, Principal Accounting Officer   1994

Joseph F. Murphy ........  30    Corporate Counsel and Patent Attorney      1995

John D. Cochran..........  64    Vice President Sales FPP                   1995

Michael G. Reid..........  49    Vice President Hardware Engineering FPP    1995

James R. Waldron.........  37    Vice President Software Development        1995
</TABLE>

         L. Michael Hone has served as Chairman of the Board of Directors  since
July 1992 and as President and as a director of the Company since  December 1987
and as Chief Executive Officer since April 1989. His previous positions with the
Company were  President/General  Manager Webster  Operations  (1986-1987),  Vice
President/General  Manager  Operations  (1985-1986),  Vice  President  Sales and
Marketing (1984-1985),  National Sales Manager (1984) and Regional Sales Manager
(1981-1984).  Prior to joining  the  Company,  Mr.  Hone was  employed at the 3M
Company  and at  Citicorp.  Mr. Hone  attended  Ohio State  University  where he
majored  in  Business  Administration.  Mr.  Hone is also a  director  of  Verax
Systems,  Inc., Rochester,  New York and Rochester Healthcare Information Group,
Inc., Rochester, New York.

         Dr.  Jay M.  Eastman  has  served as  Executive  Vice  President  since
December  1987.  He joined the Company in 1986 when the Company  acquired  Optel
Systems,  Inc., a  corporation  which he  co-founded  and for which he served as
Chairman,  President  and Chief  Executive  Officer from its  formation in 1981.
Until January 1983,  Dr.  Eastman was Director of the  University of Rochester's
Laboratory for Laser Energetics.  Dr. Eastman holds Ph.D. and Bachelor's degrees
in Optics from the  University of Rochester and is a named inventor in seventeen
United  States  patents,  fourteen of which relate to bar code scanning and have
been assigned to the Company and one of which  relates to nuclear  fusion and is
owned by the United States Department of Energy and two of which relate to laser
interferometry and are owned by the University of Rochester. Dr. Eastman is also
a director of Electric Fuel Corporation, an Insrael-based company.


<PAGE>
                                       19


         Stanley D. Seitz has served as Senior Vice President, Operations  since
January  1994.  Prior  to  joining  the  Company,  he  was  Senior  Director  of
Operations,  Compudyne,  Division of CompUSA (1992 - 1993); President, PC Brand,
Inc.  (1989  -  1992);  and  Vice  President  of  Manufacturing,  Dell  Computer
Corporation  (1986 - 1989). Mr. Seitz holds a BS degree with  concentrations  in
physics and mathematics  from the University of Arizona and a Master of Business
Administration  degree from the  University  of Chicago with  concentrations  in
productions  and  operations  management  plus  industrial  relations  and human
resources management.

     William J.  Woodard has served as Vice  President,  Finance  and  Treasurer
since  August  1994.  Previously,  he was Vice  President  and  Chief  Financial
Officer,  Champion  Products  (1987 - 1994),  and  Director  of  Accounting  and
Financial Reporting, Gleason Corporation (1985 - 1987). Mr. Woodard, a certified
public accountant,  attended St. Bonaventure  University where he received a BBA
degree in Accounting.

         Dr. Dean Faklis has served as Vice  President,  Engineering and Product
Development  since  August  1995.  Prior to  joining  the  Company,  he was Vice
President and a founder of Rochester  Photonics  Corporation (August 1989-August
1995) and on the faculty of The  Institute  of Optics,  University  of Rochester
(June  1990-May  1995).  Dr.  Faklis  holds a BS degree in physics  from  Loyola
University  of Chicago and Ph.D.  and MS degrees in Optics from The Institute of
Optics, University of Rochester.

         Stuart M. Itkin has served as Vice President, Worldwide Marketing since
March  1995.  Prior to joining the  Company,  he was Vice  President  Marketing,
Stores  Automated  Systems  (1994-1995),  Senior  Director of Marketing,  Symbol
Technologies,   Inc.  (1989-1994),  Vice  President,   International  and  Major
Accounting Marketing,  Computer Entry Systems ("CES") (October 1986-April 1989).
Mr.  Itkin holds BA and MA degrees  from the  University  of Illinois at Urbana-
Champaign.

         Mary A. Gallahan has served as Vice  President,  Human  Resources since
May 1993.  She joined the Company in July 1992 as  Director of Human  Resources.
Prior to joining the Company, she was Manager of Employment and Benefits,  Nalge
(Sybron)  Company  (1990  -  1992)  and  Director  of  Human  Resources,   Ultra
Technologies  (Eastman  Kodak  Company)  (1984 - 1990).  Mrs.  Gallahan holds an
Associates degree in Business Administration from SUNY at Cobbleskill.

     Richard N. Stathes has served as Vice President,  Sales since January 1994.
He joined the Company in January  1992 as Vice  President  of Sales for Bar Code
Equipment.  Prior to joining the Company,  he was Director of Sales for Computer
Products  Inc. of Pompano  Beach,  Florida from April 1991 to December  1991 and
North East Area Marketing  Manager for the Hewlett Packard Company of Palo Alto,
California  where he also held several sales  management  positions from 1981 to
April 1991. Mr. Stathes holds a BSBA degree from Syracuse University.
<PAGE>
                                       20



          Benny R. Tafoya has served as Vice President,Product Development since
January 1993 when the Company acquired BRT  Corporation,  a company in which Mr.
Tafoya had been the major  shareholder and Chief Executive  Officer from 1983 to
1993.  Prior thereto,  he was Executive  Vice  President and General  Manager of
Accu-Sort  Systems Inc. Mr. Tafoya holds a BS degrees in Mechanical  Engineering
from Penn State University and a BSAA degree from George Washington University.

         Scott D.  Deverell has served as  Controller  since May 1990. He joined
the Company in March 1989 as an accountant. Prior to joining the Company, he was
an  auditor  with  Arthur  Andersen  & Co.  Mr.  Deverell,  a  certified  public
accountant, attended SUNY at Geneseo where he received a BS in Accounting.

         Joseph   M.  Murphy  has   served  as  Corporate  Counsel  and  Patent
Attorney since December 1992 and as Assistant Secretary since May 1995. Prior to
joining  the  Company,  he  was  employed  as a  Technology  Specialist  at  the
intellectual  property law firm Wolf,  Greenfield and Sacks,  P.D.  (1988-1989),
studied  law at  Franklin  Pierce Law Center  (1989-1992),  and  assisted in the
practice of Civil law at  LawServe(TM)  (1991-1992).  Mr.  Murphy is admitted to
practice as an attorney in New York,  Massachusetts and before the United States
Patent and  Trademark  Office.  Mr.  Murphy  holds a B.S.  degree in  Electrical
Engineering from Marquette University and a J.D. degree from Franklin Pierce Law
Center.

         John E. Cochran has  served as Vice President of Sales and Marketing of
the PSC LazerData  Products Group since its acquisition in December 1994. He has
served in that capacity since 1986.

         Michael G. Reid has  served  as Vice  President, Hardware  Development,
Fixed  Position  Product  since  August  1995.  He joined the  Company  with the
Company's 1994 acquisition of LazerData  Corporation,  which Mr. Reid co-founded
in  1988.  Prior  to  1988,  he was Vice  President,  Operations  for  InstaRead
Corporation  (1984-1988).  Mr.  Reid holds a BSEE from  Rochester  Institute  of
Technology.

         James R. Waldron has  served as Vice  President,  Software  Development
since August of 1995. He was the Director of Software Engineering for Lazer Data
Corporation for the four years preceding PSC's acquisition of LazerData in 1994,
and worked for Intermec  Corporation for the five years prior to that. Jim has a
Bachelor of Science degree from Clarion  University of  Pennsylvania,  and is an
inventor on multiple patents related to barcode scanning.
<PAGE>
                                       21



                                     PART II

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

     The Company's  Common Shares are traded on the Nasdaq National Market Tier
of the NASDAQ  Stock  Market under the symbol  PSCX.  The  following  table sets
forth,  for the periods  indicated,  the high and low sale prices for the Common
Shares.
<TABLE>
<CAPTION>
                                            High           Low
                                          -------         ------
<S>    <C>                                <C>             <C>   
1995   4th Quarter ...................    $13.00          $ 8.63
       3rd Quarter ...................    $15.75          $11.50
       2nd Quarter ...................    $14.75          $11.00
       1st Quarter ...................    $15.50          $10.50

1994
       4th Quarter ...................    $13.75          $ 8.25
       3rd Quarter ...................    $10.00          $ 8.13
       2nd Quarter ...................    $10.00          $ 7.00
       1st Quarter ...................    $ 8.00          $ 5.50
1993
       4th Quarter ...................    $ 8.50          $ 5.25
       3rd Quarter ...................    $ 8.50          $ 5.13
       2nd Quarter ...................    $ 9.25          $ 6.00
       1st Quarter ...................    $12.50          $ 7.25
</TABLE>


     As of December 31, 1995, there were  approximately  1,200 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.

<PAGE>
                                       22


 

                         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, 1995 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,
                                             ----------------------------------------------------------------------------------
<S>                                              <C>            <C>                 <C>            <C>            <C>    
                                                 1995           1994                 1993            1992           1991
                                                 ----           ----                 ----            ----           ----
Statement of Operations Data:
     Net  sales ................................ $87,516        $60,447             $38,894        $35,912        $20,170
     Cost of sales .............................  50,634         32,198              20,256         17,734         11,271
                                                 -------------------------------------------------------------------------------
        Gross profit ...........................  36,882         28,249              18,638         18,178          8,899
    
     Operating expenses:
        Engineering, research and development ..   4,962          3,810               3,754          2,248          1,262
        Selling, general and administrative ....  23,901         16,516              12,046          8,637          5,444
        Write-off of intangible assets .........      --             --                 167            957             --
       Acquisition related restructuring &       
          Other costs ..........................      --          6,894 (1)              --             --             --
                                                  -------------------------------------------------------------------------------
                                                         
     Income from operations ....................   8,019          1,029               2,671          6,336          2,193
     Interest and other (expense) income .......     676            110                  45           (70)          (458)
                                                 -------------------------------------------------------------------------------
     Income before income tax ..................   8,695          1,139 (1)           2,716          6,266          1,735
     Income tax provision ......................   3,246            527                 865          1,920            104
                                                 ===============================================================================
     Net income ................................ $ 5,449           $612 (1)         $1,851         $4,346         $1,631
                                                 ===============================================================================

      Net income per common and
         common equivalent share ...............    $.54           $.08 (1)            $.25           $.59           $.26

      Weighted average number of common
         and common equivalent shares
         outstanding ...........................  10,013          7,617               7,476          7,350          6,232

(1)      The  acquisition  related  restructuring  and other costs  reduced 1994
         income  before  income tax, net income and net income per share by $6.9
         million, $4.5 million and $0.56 respectively.

         See Note 11 of Notes to Consolidated Financial Statements and
         "Management's Discussion and Analysis of Financial Condition and 
         Results of Operations."
</TABLE>
<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                 ------------------------------------------------------------------------------
                                                 1995           1994              1993             1992           1991
                                                 ----           ----              ----             ----           ----
 <S>                                              <C>             <C>                 <C>           <C>             <C>   
Balance Sheet Data:
     Cash and short-term investments ........... $ 5,538         $2,720              $9,120        $11,535         $4,974
     Working capital ...........................  20,397          8,014              11,779         14,125          7,591
     Total assets ..............................  71,237         52,763              32,063         24,992         17,706
     Long-term debt, including 
     current  maturities .......................     623         13,609               1,806          1,931          1,886
     Total shareholders' equity ................  53,327         22,233              21,265         18,532         12,317
    
</TABLE>

<PAGE>
                                       23




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

         The following  discussion  should be read in conjunction with "Selected
Consolidated  Financial Data" and 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,
                                                -----------------------------------------------------------------------
                                                       1995                    1994                      1993
                                                -------------------    ----------------------   -----------------------
                                                                     (dollars in thousands)
<S>                                              <C>        <C>          <C>          <C>         <C>           <C>
Net sales ...................................    $87,516    100.0%       $60,447      100.0%      $38,894       100.0%
Cost of  sales ..............................     50,634     57.9%        32,198       53.3%       20,256        52.1%
                                                 --------   --------     ---------    ---------   ----------    ----------
  Gross profit ..............................     36,882     42.1%        28,249       46.7%       18,638        47.9%

Operating expenses:
  Engineering, research and development .....      4,962      5.7%         3,810        6.3%        3,754         9.7%
  Selling, general and administrative .......     23,901     27.3%        16,516       27.3%       12,046        31.0%
  Write-off of intangible assets ............         --        --            --          --          167         0.4%
  Acquisition related restructuring 
    and other costs .........................         --        --         6,894 (1)   11.4%           --           --
                                                 --------   --------      ----------  ---------   ----------    ----------
Income from operations ......................      8,019      9.1%         1,029        1.7%        2,671         6.9%
Interest and other income, net ..............        676      0.8%           110        0.2%           45         0.1%
                                                 --------   --------      ----------  ---------   ----------    ----------
Income before income taxes ..................      8,695      9.9%         1,139 (1)    1.9%        2,716         7.0%
Income tax provision ........................      3,246      3.7%           527        0.9%          865         2.2%
                                                 --------   --------      ----------  ---------   ----------    ----------
Net income ..................................     $5,449      6.2%          $612 (1)    1.0%       $1,851         4.8%
                                                 =========  ========      ==========  =========   ==========    ==========
</TABLE>

(1)     The  acquisition  related  restructuring  and other costs  reduced 1994
        income  before  income  taxes and net income by $6.9  million  and $4.5
        million. See Note 11 of Notes to Consolidated Financial Statements.

        Although the Company  operates in one business  segment,  net sales for
        1995, 1994 and 1993 are divided into the following three product groups:
<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                               ---------------------------------------------------------------
Product Group                          1995                    1994                  1993
-----------------------------  ----------------------  ----------------------   --------------
                                                        (dollars in millions)
<S>                            <C>            <C>       <C>         <C>         <C>      <C>

Bar Code Equipment ..........  $87.1          100.0%    $59.1        97.8%      $36.5     93.8%
Image Products ..............    0.4             --       1.3         2.2%        1.6      4.1%
Switching Systems ...........     --             --        --          --         0.8      2.1%
                               ------         ------    -----       ------      -----    ------
                               $87.5          100.0%    $60.4       100.0%      $38.9    100.0%
                               ======         ======    =====       ======      =====    ======
</TABLE>

                In December  1994,  the Company  acquired,  for $9.25 million in
cash, all of the outstanding stock of LazerData Corporation. The transaction was
accounted  for as a  purchase  and is  included  in the  consolidated  financial
statements  since the date of acquisition.  Accordingly,  financial data for all
<PAGE>
                                       24



periods prior to the acquisition do not reflect the operations of LazerData.  In
connection with the  acquisition,  the Company recorded a pre-tax charge of $3.0
million for the costs of  restructuring  its  existing  fixed  position  scanner
product lines with those of  LazerData.  In addition,  in the fourth  quarter of
1994, the Company  allocated $3.9 million of the LazerData  acquisition costs to
acquired in-process research and development projects.  Accordingly, these costs
were expensed as of the acquisition date. The acquisition related  restructuring
and other costs reduced 1994 income  before  income taxes,  net income and fully
diluted  net  income  per  share  by  $6.9  million,  $4.5  million  and  $0.56,
respectively.

         In April 1995,  the Company  completed  the sale of its Image  Products
product group. In December 1993, the Company completed the sale of substantially
all the assets and liabilities related to its Switching Systems product group.

         Net Sales. Net sales increased $27.1 million,  or 45% from 1994 to 1995
and $21.5  million  or 55% from 1993 to 1994.  The  sales  increase  in 1995 was
primarily due to increased sales volume of the Company's handheld products, scan
engine  assemblies  and the  inclusion  of  LazerData's  product  line of  fixed
position  scanners  acquired in December  1994.  The sales  increase in 1994 was
primarily due to increased sales volume of the Company's  handheld  scanners and
scan engine assemblies.

         International  sales  increased  72%  in  1995  to  $19.3  million  and
represented 22% of net sales versus 19% in 1994 and 18% in 1993. During 1995 and
1994,  the Company  experienced  significant  sales  growth in Europe and in the
Pacific Rim area as a result of increased sales and marketing efforts overseas.

         Gross Profit. Gross profit as a percent of net sales was 42.1% in 1995,
46.7% in 1994 and 47.9% in 1993.  The decrease in the 1995 gross  profit  margin
versus  1994 was due to a change  in the  sales  mix of the  Company's  handheld
products,  lower scan engine average selling prices  associated with competitive
pricing  pressure and the inclusion of the LazerData  product line.  LazerData's
operating  results  reflect  lower gross profit  margins than  historical  gross
profit  margins of the Company.  The  decrease in the 1994 gross  profit  margin
versus  1993 is  primarily  due to a change in the  Company's  product  mix.  In
addition, decreased sales volume resulted in a lower gross profit margin for the
Company's Image Products business.

         Engineering,  research  and  development.   Engineering,  research  and
development  expenses increased $1.2 million,  or 30% from 1994 to 1995 and $0.1
million,  or 1.5%  from  1993 to 1994.  Engineering,  research  and  development
expenses  were  5.7%,  6.3% and  9.7% of net  sales  for  1995,  1994 and  1993,
respectively.  The 1995 dollar  increase was primarily  related to the Company's
new  product  development  for  its  handheld  laser  scanner  products  and its
LazerData product line's fixed position  scanners.  The 1994 dollar increase was
primarily  related to the  Company's  new product  development  for its handheld
laser scanner products.

         Selling,    general   and   administrative.    Selling,   general   and
administrative  expenses  increased  $7.4  million,  or 45%,  in 1995  and  $4.5
million,  or 37%, in 1994.  Selling,  general and  administrative  expenses were
27.3%,  27.3% and 31.0% of net sales in 1995, 1994 and 1993,  respectively.  The
1995 and 1994 increased dollar amount was primarily due to higher patent related
expenses,  higher  royalty  expenses  related  to sales  volume,  and  increased
promotion and advertising expenses.  The increase in patent related expenses was
due to the increased number of patent  applications  being filed and an increase
in litigation expenses related to patent infringement lawsuits.

         Acquisition  related  restructuring  and  other  costs.  In the  fourth
quarter of 1994,  the Company  provided a pre-tax charge of  approximately  $3.0
million for the costs of  restructuring  its  existing  fixed  position  scanner
product lines with those of LazerData Corporation which was acquired in December
<PAGE>
                                       25



1994. Of the total pre-tax charge,  approximately  $1.6 million was to recognize
anticipated  costs associated with the consolidation of manufacturing and office
facilities, $0.7 million related to write-offs of previously existing intangible
assets,  and $0.7 million was provided for employee  severance and benefit costs
for the elimination of approximately 12  manufacturing  and engineering  support
positions.  As of December 31, 1995, all positions targeted in the restructuring
program have been eliminated.  Restructuring actions are substantially completed
as of December 31, 1995. The  restructuring  accrual as of December 31, 1995 was
approximately $0.8 million. There have been no re-allocations or re-estimates to
date.

         In addition in the fourth quarter of 1994,  the Company  allocated $3.9
million of the LazerData  acquisition costs 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. As these projects have not reached
technological  feasibility  and alternative  future uses of these  developmental
technologies do not exist, these costs were expensed as of the acquisition date.
The acquisition related restructuring and other costs reduced 1994 income before
income taxes, net income and fully diluted net income per share by $6.9 million,
$4.5  million,  and $0.56,  respectively.  See Note 11 of Notes to  Consolidated
Financial Statements.

         Income tax  provision.  The provision for income taxes was $3.2 million
in 1995,  $0.5 million in 1994 and $0.9 million in 1993.  The effective tax rate
was 37.3% in 1995,  46.3% in 1994 and 31.8% in 1993.  The tax provision for 1994
and 1993 reflects  utilization  of net operating loss  carryforwards  which were
completely utilized by the end of 1994. The 1994 effective tax rate increased as
a  result  of  the  non-tax  deductible   goodwill  write-off  included  in  the
restructuring  charge.  The Company  expects to record  income tax expense at or
about the combined federal and state statutory tax rate in 1996.

Liquidity and Capital Resources

The Company utilizes a number of measures of liquidity including the following:
<TABLE>
<CAPTION>
                                 Year Ended December 31,
                                 -----------------------
                                1995      1994       1993
                                -------------------------
                                 (dollars in thousands)
<S>                             <C>        <C>        <C>  
Cash provided by operations ... $ 2,897    $ 4,811    $ 2,651
Working capital ............... $20,397    $ 8,014    $11,779
Long-term debt to capital
  (Long-term debt to long-term 
  debt plus equity) ...........    0.9%      37.4%       6.6%
</TABLE>

         Cash provided by operations  decreased $1.9 million in 1995 versus 1994
primarily  due to the  increased  receivables  and  inventory  related to higher
operating volume levels. The 1994 increase in cash provided by operations versus
1993 was a result of the Company's  increased  inventory turnover by maintaining
handheld scanner inventory levels at approximately  1993 year-end levels,  which
was offset, in part, by sales related  receivables growth. At December 31, 1995,
the Company had cash and  short-term  investments of $5.5 million as compared to
$2.7 million at December  31, 1994 and $9.1  million at December  31,  1993.  In
addition,  the Company had $4.2 million of marketable securities at December 31,
1995. The increase in cash and short-term investments is primarily the result of
the Company's secondary stock offering completed during 1995.

         Working  capital  increased  $12.4  million at December 31, 1995 versus
December 31, 1994. Current assets increased $13.2 million from December 31, 1994
principally from an increase in receivables ($2.7 million) as a result of higher
sales  volume,  an increase in  inventory  ($4.0  million) as a result of higher
operating levels, an increase in cash and short-term  investments ($2.8 million)
<PAGE>
                                       26



as discussed above,  and marketable  securities ($4.2 million) due to the change
in  classification  of investments  from held to maturity to available for sale.
Current  liabilities  at December 31, 1995  increased $0.9 million from December
31,  1994 due to  higher  year-end  payables  and  accruals  for  royalties  and
technology  licenses  offset  by a  reduction  in  accrued  acquisition  related
restructuring and other costs.

         Property, plant and equipment expenditures totaled $7.4 million for the
year ended  December  31, 1995  compared  with $10.9  million for the year ended
December  31,  1994.  The 1995 and 1994  expenditures  primarily  related to the
construction  costs  of  the  Company's  new  headquarters,   manufacturing  and
engineering   facility.   The  1995   expenditures   also   include   additional
manufacturing  equipment to increase capacity and upgrades to the Company's data
processing systems.

         During 1995, the Company also spent $4.2 million for intangible assets.
The expenditures were primarily related to purchased  technology  licenses.  The
Company  acquired a license to  manufacture  and sell two  dimensional  bar code
products to expand its handheld and scan engine  product  category.  The Company
also acquired a license to manufacture and sell a high-speed carton dimensioning
system.  This dimensioning  system will be integrated with the Company's line of
high-speed, fixed position scanning products.

         During the year ended  December 31,  1995,  the Company  completed  its
secondary stock offering.  The Company sold 2.3 million common shares at a price
of $11.00 per share.  The net  proceeds to the Company  from the  offering  were
approximately $23.6 million.  The Company used approximately $7.2 million of the
net  proceeds  from the offering to repay in full the  outstanding  indebtedness
under the  Company's  construction  loan used to finance  its new  headquarters,
manufacturing and engineering facility. The Company also used approximately $6.8
million of the net proceeds  from the offering to repay in full the  outstanding
indebtedness  under  the  Company's  term  loan  that  was used to  finance  the
acquisition of LazerData in December 1994.

         The  long-term  debt to  capital  percentage  decreased  from  37.4% at
December  31,  1994 to 0.9% at December  31,  1995.  The  decrease is due to the
repayment in full of the Company's construction loan and term loan, as discussed
above.

         At December 31, 1995,  liquidity  immediately  available to the Company
consisted of cash and short-term  investments of approximately $5.5 million. The
Company  also had  $4.2  million  in  marketable  securities.  In  addition,  in
September  1995  the  Company  secured  a  new  revolving  loan  agreement  with
Manufacturers and Traders Trust Company pursuant to which the bank has agreed to
provide a line of credit  totaling  $20.0  million.  It replaced  the  Company's
previous  line of credit  facility  that totaled  $5.0  million.  The  agreement
expires  in  September  2000.  As of  December  31,  1995,  the  Company  had no
outstanding  borrowings  under this agreement.  The Company believes that it has
adequate  liquidity  for  the  next  twelve  months  to  meet  its  current  and
anticipated operating needs from the results of its operations,  existing credit
facilities and working capital.  As part of its overall business  strategy,  the
Company may from time to time  evaluate  other  acquisition  opportunities.  The
funding for these future transactions, if any, may require the Company to obtain
additional sources of financing.

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

<PAGE>
                                       27



               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 April 30,  1996 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 April 30, 1996 and is  incorporated  in this report by  reference  thereto,
except,  however,  the sections entitled  "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 April 30, 1996 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 April 30, 1996 and
is incorporated in this report by reference thereto.

<PAGE>
                                       28




                                     PART IV

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

(a) 1    Financial Statements                                  PAGE

         Report of Independent Public Accountants............   33

         Consolidated Financial Statements...................   34

         Notes to Consolidated Financial Statements..........   38

(a) 2    Financial Statement Schedules:

         Included in Part IV of this report:

         Schedule II       Valuation and Qualifying Accounts..  50

         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      Asset  Purchase  Agreement  among BRT  Corporation,  Benny R.  Tafoya,
         Susann C. Tafoya, A. D. Data Systems Corp. and PSC Inc., dated January
         21, 1993  (incorporated  by reference to Exhibit 2.1 to the  Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1992
         (the "December 31, 1992 Form 10-K")).

2.2      Stock Purchase  Agreement among BTR Dunlop Inc.,  Electro  Corporation
         and LazerData Holdings,  Inc. dated December 21, 1994 (incorporated by
         reference to Exhibit 2.1 to the Company's  Current  Report on Form 8-K
         dated December 21, 1994 ("the 1994 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, 1995 (the "June 30, 1995 Form 10-Q")).

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

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

10.1*    Amended and Restated  Employment  Agreement  between the Company and L.
         Michael  Hone,  as of August  1, 1991  (incorporated  by  reference  to
         Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1991 (the "December 31, 1991 Form 10-K")).

10.2*    Amendment  No.  1 to the  Amended  and  Restated  Employment  Agreement
         between the  Company  and L.  Michael  Hone,  as of  December  20, 1993
         (incorporated  by  reference to Exhibit  10.2 to the  Company's  Annual
         Report on Form 10-K for the fiscal  year ended  December  31, 1993 (the
         "December 31, 1993 Form 10-K")).

10.3*    Amended and Restated Employment Agreement between the Company and L.
         Michael Hone, as of September 14, 1995 (incorporated by reference to 
         Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the 
         quarter ended September 30, 1995 (the "September 30, 1995 Form 10-Q")).
<PAGE>
                                       29



10.4*    Amended  and  Restated  Employment  Agreement  between  the  Company  
         and Jay M.  Eastman,  as of  August  1, 1991 (incorporated by reference
         to Exhibit 10.7 to the December 31, 1991 Form 10-K).

10.5*    Amendment  No. 1 to the  Employment  Agreement  between  the  Company 
         and Jay M.  Eastman,  as of January 1, 1994 (incorporated  by reference
         to  Exhibit  10.4 to the  Company's  Annual  Report on Form 10-K for 
         the year  ended December 31, 1994 (the "December 31, 1994 Form 10-K")).

10.6*    Extension  of  the  Employment  Agreement  between  the  Company  and 
         Jay  M.  Eastman,  dated  January  3,  1995 (incorporated by reference
         to Exhibit 10.4 to the December 31, 1994 Form 10-K).

10.7*    Employment  Agreement between the Company and Robert S. Ehrlich,  as of
         August 1, 1991 (incorporated by reference to Exhibit 10.5 to the 
         December 31, 1991 Form 10-K).

10.8*    Amendment  No. 1 to the  Employment  Agreement  between  the Company  
         and Robert S.  Ehrlich,  as of June 12, 1992 (incorporated by reference
         to Exhibit 10.7 to the December 31, 1992 Form 10-K).

10.9*    Consulting  Agreement  between the Company and Robert S.  Ehrlich as of
         January 2, 1995  (incorporated by reference to Exhibit 10.1 to the June
         30, 1995 Form 10-Q).

10.10*   Employment Agreement between the Company and Benny R. Tafoya, as of 
         January  21,  1993  (incorporated by reference to Exhibit 10.9 to the 
         December 31,1992 Form 10-K).

10.11*   Non-competition  Agreement  among the Company,  A.D. Data Systems Corp.
         and Benny R. Tafoya dated January 21, 1993 (incorporated by reference 
         to Exhibit 10.19 to the December 31, 1992 Form 10-K).

10.12*   Form of Indemnification Agreement between the Company and its Directors
         and  Officers  (incorporated  by  reference  to  Exhibit  10.10  to the
         December 31, 1991 Form 10-K).

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

10.14*   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 (the "June 30, 1994 Form 10-Q")).

10.15*   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).

10.16*   1990 Employee Stock Purchase Plan (incorporated by reference to Exhibit
         10.14 to the December 31, 1992 Form 10-K).

10.17*   1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit
         4.1 of the Company's Registration Statement on Form S-8 dated June 19, 
         1995 No. 33-60343).

10.18*   Management Incentive Plan (incorporated by reference to exhibit 10.15 
         to the December 31, 1992 Form 10-K).
<PAGE>
                                       30



10.19*   Employee Profit Sharing Plan (incorporated by reference to Exhibit
         10.16 to the December 31, 1992 Form 10-K).

10.20*   Restated  PSC Inc.  401(K)  Profit  Sharing  Plan and Trust,  as of
         April 1, 1993  (incorporated  by  reference to Exhibit 10.18 to the 
         December 31, 1993 Form 10-K).

10.21    Agreement between Symbol Technologies,  Inc. and Photographic  Sciences
         Corporation  dated March 6, 1991  (incorporated by reference to Exhibit
         10.5 to the  Company's  Annual  Report on Form 10-K for the fiscal year
         ended December 31, 1990.

10.22    Under Lease and License dated  September 1992 between  Scomagg  Limited
         the English  Industrial Estates  Corporation,  and PSC Bar Code Limited
         (incorporated  by reference to Exhibit 10.3 to the Company's  Quarterly
         Report on Form  10-Q for the  quarter  ended  September  30,  1992.

10.23    Agreement  for Land  Purchase  dated  July 6, 1993  between  William G.
         Boulter and the Company  (incorporated  by reference to Exhibit 10.2 to
         the  Company's  Quarterly  Report  on Form 10-Q for the  quarter  ended
         September 30, 1993 (the "September 30, 1993 Form 10-Q")).

10.24    Agreement for land purchase dated November 11, 1994 between  William G.
         Boulter and the Company (incorporated  by reference to Exhibit 10.28 to
         the December 31, 1994 Form 10-K).

10.25    Lease Agreement  between the Company and Hewlett  Packard for Computer
         hardware and software dated August 4, 1994 (incorporated by reference 
         to Exhibit 10.2 to September 30, 1994 Form 10-Q).

10.26    Standard  Warehouse  Lease between Owens and Minor Inc.  (Landlord) and
         LazerData  Corporation  (tenant)  dated  May 6, 1991  (incorporated  by
         reference to Exhibit 10.30 to the December 31, 1994 Form 10-K).

10.27    Credit   Facility   Agreement   dated   September   28,  1995   between
         Manufacturers  and Traders Trust Company and the Company  (incorporated
         by reference to Exhibit 10.1 to the Company's  Quarterly Report on Form
         10-Q for the quarter ended  September 30, 1995.

10.28    Standard Warehouse Lease between Owens & Minor, Inc. (Landlord) and
         LazerData Corporation (Tenant) dated January 22, 1996.............  51

10.29    Lease Agreement between Omaha Woodmen Life Insurance Society (Landlord)
         and LazerData Corporation (Tenant) dated April 11, 1995...........  71

22.1     Subsidiaries of Registrant........................................  84

24.1     Consent of Independent Public Accountant, dated 
         March 22, 1996, 1996..............................................  85

(b):     Reports on Form 8-K:

         None.

*        Management contract or compensatory plan or arrangement

<PAGE>
                                       31


                                   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 22, 1996                        PSC Inc.

                                               /s/ L. Michael Hone
                                               --------------------   
                                               Chairman,
                                               Chief Executive Officer,
                                               President, and Director

         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 22, 1996                           Principal Executive Officer

                                               /s/ L. Michael Hone
                                               ----------------------
                                               L. Michael Hone
                                               Chairman,
                                               Chief Executive Officer,
                                               President, and Director


Date: March 22, 1996                           Chief Financial Officer

                                               /s/ William J. Woodard
                                               -----------------------
                                               William J. Woodard
                                               Vice President, Finance
                                               and Treasurer


Date: March 22, 1996                           Principal Accounting Officer

                                               /s/ Scott D. Deverell
                                               -----------------------
                                               Scott D. Deverell
                                               Controller
<PAGE>
                                       32



Date:  March 22, 1996                          /s/ Milton P. Axelrod
                                               -----------------------
                                               Milton P. Axelrod
                                               Director

Date: March 22, 1996                           /s/ Robert S. Ehrlich
                                               ------------------------
                                               Robert S. Ehrlich
                                               Director

Date: March 22, 1996                           /s/ James Henry
                                               -----------------------
                                               James Henry
                                               Director

Date: March 22, 1996                           /s/ Donald K. Hess
                                               ----------------------
                                               Donald K. Hess
                                               Director

Date: March 22, 1996                           /s/ James O'Shea
                                               ----------------------
                                               James O'Shea
                                               Director

Date: March 22, 1996                           /s/ Jack Rosenfeld
                                               -----------------------
                                               Jack Rosenfeld
                                               Director

Date: March 22, 1996                           /s/ Abby R. Solomon
                                               -----------------------
                                               Abby R. Solomon
                                               Director

Date: March 22, 1996                           /s/ Justin L. Vigdor
                                               -----------------------
                                               Justin L. Vigdor
                                               Director

<PAGE>
                                       33




                    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, 1995 and 1994, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1995.  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, 1995 and 1994,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1995,  in
conformity with generally accepted accounting principles.


/s/ Arthur Andersen

ARTHUR ANDERSEN LLP
Rochester, New York
January 30, 1996


<PAGE>
                                       34


<TABLE>

                            PSC INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           (All amounts in thousands)

                                     ASSETS
<CAPTION>
            
                                                                              December 31,
                                                                       ---------------------------------
                                                                            1995               1994
                                                                       ---------------     -------------
<S>                                                                    <C>                 <C>   
Current Assets:
  Cash and short-term investments ...................................         $ 5,538          $  2,720
  Marketable securities .............................................           4,204                --
  Accounts receivable, net of allowance for doubtful accounts
    of $387 in 1995 and $576 in 1994 ................................          15,897            13,139
  Inventories .......................................................          10,440             6,446
  Prepaid expenses and other ........................................             623             1,148
                                                                       ---------------     -------------
     Total current assets ...........................................          36,702            23,453
Investments .........................................................              --             4,234
Property, Plant and Equipment, net ..................................          22,157            16,459
Deferred Tax Assets .................................................           1,506             1,950
Intangible and Other Assets, net ....................................          10,872             6,667
                                                                       ===============     =============
     Total assets ...................................................         $71,237           $52,763
                                                                       ===============     =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Current portion of long-term debt .................................        $    131          $    300
  Accounts payable ..................................................           8,397             7,698
  Accrued expenses ..................................................           6,202             4,738
  Accrued payroll and commissions ...................................           1,237             1,570
  Accrued acquisition related restructuring costs ...................             338             1,133
                                                                       ---------------     -------------
     Total current liabilities ......................................          16,305            15,439
Long-Term Debt, less current maturities .............................             492            13,309
Other Long-Term Liabilities .........................................           1,113             1,782
Shareholders' Equity:
  Common  shares,  par value $.01; 25,000 shares authorized,  
    9,985 and 7,472 shares issued at December 31, 1995
    and 1994, respectively ..........................................             100                75
  Additional paid-in capital ........................................          45,881            20,288
  Retained earnings .................................................           7,548             2,099
  Cumulative translation adjustment .................................              35                 8
  Less -- 39 treasury shares, repurchased at cost ...................           (237)             (237)
                                                                       ---------------     -------------
     Total shareholders' equity .....................................          53,327            22,233
                                                                       ===============     =============
     Total liabilities and shareholders' equity .....................         $71,237           $52,763
                                                                       ===============     =============
</TABLE>

See accompanying notes to the consolidated financial statements.


<PAGE>
                                       35


<TABLE>
                                        PSC INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF OPERATIONS
                           (All amounts in thousands, except per share data)
<CAPTION>
                                                                         Year Ended December 31,
                                                                -------------------------------------------
                                                                   1995           1994           1993
                                                                ------------   ------------  --------------
<S>                                                             <C>            <C>           <C> 

Net Sales .................................................         $87,516        $60,447         $38,894
Cost of Sales .............................................          50,634         32,198          20,256
                                                                ------------   ------------  --------------
     Gross profit .........................................          36,882         28,249          18,638

Operating Expenses:
     Engineering, research and development ................           4,962          3,810           3,754
     Selling, general and administrative ..................          23,901         16,516          12,046
     Write-off of intangible assets .......................              --             --             167
     Acquisition related restructuring and other costs ....              --          6,894              --
                                                                ------------   ------------  --------------
           Income from operations .........................           8,019          1,029           2,671

Interest and other income, net ............................             676            110              45
                                                                ------------   ------------  --------------
           Income before provision for income taxes .......           8,695          1,139           2,716

Income Tax Provision ......................................           3,246            527             865
                                                                ------------   ------------  --------------

Net Income ................................................         $ 5,449        $   612         $ 1,851
                                                                ============   ============  ==============

Net Income Per Common and Common Equivalent Share .........        $    .54        $   .08        $    .25

Weighted Average Number of Common and Common Equivalent 
     Shares Outstanding ...................................          10,013          7,617           7,476

</TABLE>
See accompanying notes to the consolidated financial statements.


<PAGE>
                                       36





<TABLE>


                            PSC INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                           (All amounts in thousands)
<CAPTION>
                                                                     Additional   Cumulative                    Retained
                                              Common Stock            Paid-In     Translation      Treasury     (Deficit)
                                            Shares       Amount       Capital      Adjustment       Stock       Earnings
                                          ---------    ----------  ------------- --------------- ------------ ------------
<S>                                       <C>          <C>         <C>           <C>             <C>          <C>

Balance, December 31, 1992 .............     7,086         $71        $18,825             $--          $--       ($364)

Issuance of shares according to
    Employee Stock Purchase Plan .......         8          --             66              --           --           --
Exercise of options ....................       115           1            278              --           --           --
Acquisition of BRT Corporation .........        61           1            627              --           --           --
Tax benefit from exercise or early
    disposition of certain stock options        --          --             94              --           --           --
Purchase of treasury shares ............      (31)          --             --              --        (191)           --
Foreign currency translation ...........        --          --             --               6           --           --
Net income .............................        --          --             --              --           --        1,851
                                          ---------    ----------  ------------- --------------- ------------ ------------
Balance, December 31, 1993 .............     7,239          73         19,890               6        (191)        1,487

Issuance of shares according to
    Employee Stock Purchase Plan .......        13          --             66              --           --           --
Exercise of options ....................       189           2            332              --           --           --
Purchase of treasury shares ............        (8)         --             --              --         (46)           --
Foreign currency translation ...........        --          --             --               2           --           --
Net income .............................        --          --             --              --           --          612
                                          ---------    ----------  ------------- --------------- ------------ ------------
Balance, December 31, 1994 .............     7,433          75         20,288               8        (237)        2,099

Issuance of shares according to
    Employee Stock Purchase Plan .......         9          --             87              --           --           --
Exercise of options ....................       194           2          1,269              --           --           --
Tax benefit from exercise or early
    disposition of certain stock options        --          --            685              --           --           --
Issuance of stock, net .................     2,310          23         23,552              --           --           --
Foreign currency translation ...........        --          --             --              27           --           --
Net income .............................        --          --             --              --           --        5,449
                                          ---------    ----------  ------------- --------------- ------------ ------------
Balance, December 31, 1995 .............     9,946        $100        $45,881             $35       ($237)       $7,548
                                          =========    ==========  ============= =============== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
                                       37



<TABLE>
<CAPTION>
                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (All amounts in thousands)
                                                                         Year Ended December 31,
                                                                -------------------------------------------
                                                                    1995            1994           1993
                                                                --------------   -----------    -----------
<S>                                                             <C>              <C>            <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................        $5,449          $612         $1,851
Adjustments to reconcile net income to                     
    net cash provided by operating activities:
        Depreciation and amortization .........................         2,784         2,018          1,344
        Write-off of intangible assets ........................            --            --            167
        (Gain)/loss on disposition of assets ..................         (161)         1,169            101
        Acquired research and development write-off ...........            --         3,930             --
        (Increase) decrease in assets:
          Accounts receivable .................................       (2,669)       (5,051)        (1,551)
          Inventories .........................................       (4,031)           151        (3,032)
          Prepaid expenses and other ..........................           301         (793)             12
          Deferred tax assets .................................           668       (1,950)             --
        Increase (decrease) in liabilities:
          Accounts payable ....................................           699         1,213          3,965
          Accrued expenses ....................................         1,297         1,028           (94)
          Accrued payroll and commissions .....................         (333)           592          (112)
          Accrued acquisition related restructuring costs .....       (1,107)         1,892             --
                                                                --------------   -----------    -----------
            Net cash provided by operating activities .........         2,897         4,811          2,651
                                                                --------------   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..........................................       (7,418)      (10,905)        (5,036)
Cash paid for acquisition of business .........................            --       (2,450)             --
Additions to intangible and other assets ......................       (4,443)          (40)          (328)
Issuance of notes for stock option activity ...................         (593)            --             --
Purchase of investments, net ..................................            --       (1,335)             --
                                                                --------------   -----------    -----------
            Net cash used in investing activities .............      (12,454)      (14,730)        (5,364)
                                                                --------------   -----------    -----------

 CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt ...................................         1,046         6,219             --
Additions to other long-term liabilities ......................           230            17             --
Principal repayments of long-term debt ........................      (14,126)         (174)          (170)
Payment of other long-term liabilities ........................         (420)            --             --
Exercise of stock options and the issuance of stock ...........        24,933           400            344
Purchase of treasury shares ...................................            --          (46)          (191)
Tax benefit from exercise or early disposition 
    of certain stock options ..................................           685            --             94
                                                                --------------   -----------    -----------
            Net cash provided by financing activities .........        12,348         6,416             77
                                                                --------------   -----------    -----------
Foreign currency translation ..................................            27             2              6

Net Increase (Decrease) in Cash and Short-Term Investments ....         2,818       (3,501)        (2,630)

CASH AND SHORT-TERM INVESTMENTS:
                Beginning of year .............................         2,720         6,221         11,750
                                                                --------------   -----------    -----------
                End of year ...................................        $5,538        $2,720         $9,120
                                                                ==============   ===========    ===========
Supplemental disclosures of cash flow information:
  Interest paid ...............................................       $   306       $   550         $  298
  Income taxes paid ...........................................       $ 3,009       $ 2,450         $  486
  Capital leases ..............................................       $   131       $   586         $   45
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
                                       38





                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

1.  DESCRIPTION OF BUSINESS

         PSC Inc. (the Company)  designs,  manufactures and markets handheld and
fixed position  laser-based  bar code scanners,  scan engines and other scanning
products for the worldwide automatic  identification and data collection market.
By  identifying,  collecting,  processing and  transmitting  data, the Company's
scanning  products  serve as the "front end" of terminals or host computers used
by  industry,   business  and  government  to  manage  and  control  production,
warehousing, distribution, sales and service. Headquartered in upstate New York,
with additional operations in Florida and the United Kingdom, the Company serves
original  equipment  manufacturers  ("OEMs"),  value-added  resellers  ("VARs"),
distributors and system integrators throughout the world.

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 transactions and
balances have been eliminated in consolidation.

Cash and Short-term Investments

         Cash and  short-term  investments  are highly liquid  investments  with
remaining  maturities  of three  months  or  less.  Short-term  investments  are
recorded at cost, which approximates market value.

Marketable Securities

         Marketable securities are stated at current market value.

Inventories

         Inventories  are  stated  at the  lower  of cost  (first-in,  first-out
method) or market.  Elements of cost include  materials,  labor and overhead and
consist of the following at December 31:

<TABLE>
<S>                                       <C>                <C> 
                                                 1995             1994
                                          --------------     ------------
Raw materials .........................         $6,914           $4,337
Work-in-process .......................          2,090            1,605
Finished goods ........................          1,436              504
                                          --------------     ------------
                                               $10,440           $6,446
                                          ==============     ============
</TABLE>
<PAGE>
                                       39





                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

Property, Plant and Equipment

         Property,  plant and equipment is carried 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 .................... 30 - 39 years
       Office furniture and equipment ...............     3-7 years
       Production equipment .........................     5-7 years
       Leasehold improvements .......................    3-15 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.  Renewals and  betterments  are  capitalized,  and
repairs and maintenance are expensed as incurred.


Intangibles Resulting from Business Acquisitions

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

         In March 1995,  Statement of  Financial  Accounting  Standards  No. 121
(SFAS  No.  121),  "Accounting  for the  Impairment  of  Long-lived  Assets  and
Long-lived  Assets to be Disposed  of",  was  issued.  This  statement  requires
companies  to  review  long-lived  assets,  including  certain  intangibles  and
goodwill,  for impairment  whenever events or changes in circumstances  indicate
that the carrying amount of an asset may not be recoverable. The Company will be
required to adopt SFAS No. 121 in 1996. The Company  believes that the effect of
adoption will not be material.

Other Intangibles

         Other  intangibles,  which consists primarily of technology and license
agreements,  are stated at cost less accumulated  amortization.  Amortization is
calculated on a straight-line  basis over periods ranging from two to ten years,
their current estimated useful lives.

Income Taxes

     Effective  January 1, 1993,  the Company  adopted  Statement  of  Financial
Accounting  Standards  No. 109 (SFAS No. 109).  The adoption of SFAS No. 109 did
not have a material effect upon the Company's  financial  position or net income
for the year ended December 31, 1993.

         In accordance with SFAS No. 109,  deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the basis of
assets and liabilities for income tax and for financial reporting  purposes.  In
addition,  the amount of any  future tax  benefits  are  reduced by a  valuation
allowance until it is more likely than not that such benefits will be realized.
<PAGE>
                                       40





                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

Net Income per Common and Common Equivalent Share

         Primary and  fully-diluted  net income per common and common equivalent
share are based on the  weighted  average  number of shares of common  stock and
common stock equivalents  (options)  outstanding during the period,  computed in
accordance  with the treasury  stock method.  The effect of  considering  common
stock  equivalents for fully-diluted net income per share was not significant in
1995, 1994 and 1993.

Foreign Currency Translation

         The financial statements of foreign operations are translated into U.S.
dollars in accordance  with Financial  Accounting  Standards Board Statement No.
52. Accordingly,  all assets and liabilities are translated at year-end exchange
rates.  The gains and losses  that  result  from this  process  are shown in the
cumulative translation adjustment account in the shareholders' equity section of
the balance sheet.  Operating  transactions  are translated at weighted  average
rates during the year.  Transaction gains and losses are reflected in net income
and were not material.

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.

Use of Estimates

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

Reclassification

         Certain amounts in prior years have been reclassified to conform to the
1995 presentation.


3.   INVESTMENTS

         The Company adopted Statement of Financial Accounting Standards No. 115
(SFAS  No.  115)  "Accounting  for  Certain   Investments  in  Debt  and  Equity
Securities" in the first quarter of 1994, and the cumulative  effect of adoption
did not have a material  effect on the  financial  statements.  At December  31,
1994, the Company's  investment  securities were classified as held to maturity,
which are recorded at amortized  cost.  During the fourth  quarter of 1995,  the
Company  transferred its investments from held to maturity to available for sale
to improve its overall  liquidity  position.  At the date of transfer,  the fair
market value of the  investment  securities  approximated  cost. At December 31,
1995, these investment securities are recorded at fair market value.


<PAGE>
                                       41



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

4.  PROPERTY, PLANT AND EQUIPMENT

         Property,  plant and  equipment,  at cost,  consist of the following at
December 31:
<TABLE>
<CAPTION>
                                                           1995              1994
                                                        ------------      ------------
<S>                                                     <C>               <C>     
Land ...............................................       $    812          $    812
Building ...........................................         10,516                --
Office furniture and equipment .....................          4,333             2,328
Production equipment ...............................         10,109             4,376
Leasehold improvements .............................            499                24
Construction in progress ...........................             --            12,246
                                                        ------------      ------------
                                                             26,269            19,786
  Less:  accumulated depreciation and amortization .          4,112             3,327
                                                        ------------      ------------
                                                            $22,157           $16,459
                                                        ============      ============
</TABLE>

         The Company  capitalized  interest costs of $453 in 1994 related to the
construction  of  its  new  office  and  manufacturing  facility.  There  was no
capitalized interest in 1995 or 1993.

         Depreciation  expense  for 1995,  1994,  and 1993  amounted  to $1,673,
$1,407,  and  $1,039,  respectively.  Amortization  of capital  lease  assets is
included in depreciation expense.

5.  INTANGIBLE AND OTHER ASSETS

         Intangible and other assets consist of the following at December 31:
<TABLE>
<CAPTION>

                                                                        1995             1994
                                                                    -----------    ----------- 
        <S>                                                         <C>            <C>   
        Intangibles resulting from business acquisitions .........      $8,016          $7,499
        Intangibles resulting from technology acquisitions .......       3,050              --
        Other assets .............................................       2,182             433
                                                                    ------------    -----------
                                                                        13,248           7,932
            Less:  accumulated amortization ......................       2,376           1,265
                                                                    ------------    -----------
                                                                       $10,872          $6,667
                                                                    ============    ===========
</TABLE>

         During 1995, the Company acquired a license to manufacture and sell two
     dimensional  bar code  products  and a license  to  manufacture  and sell a
     high-speed, carton dimensioning system.

         Amortization expense for 1995, 1994, and 1993 amounted to $1,111, $611,
and $305, respectively.
<PAGE>
                                       42




                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

6.  ACCRUED EXPENSES

         Accrued expenses consist of the following at December 31:

<TABLE>
<CAPTION>
                                        1995             1994
                                     -----------     -------------
<S>                                  <C>             <C>   
Accrued warranty cost ............     $1,550            $1,250
Accrued royalty ..................      1,715             1,332
Accrued income taxes .............        396               765
Accrued technology licenses ......      1,620                --
Other expenses ...................        921             1,391
                                     ===========     =============
                                       $6,202            $4,738
                                     ===========     =============

</TABLE>

7.  LONG-TERM DEBT

         Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
                                      1995               1994
                                 ---------------      ------------
<S>                              <C>                  <C>   
Term loan .....................            $ --            $6,800
Construction loan .............              --             6,219
Capital lease obligations .....             553               590
Other .........................              70                --
                                 ---------------      ------------
                                            623            13,609
  Less:  current maturities ...             131               300
                                 ---------------      ------------
                                           $492           $13,309
                                 ===============      ============
</TABLE>

         During 1995,  the Company  repaid and terminated its term loan facility
from which it partially  financed its  acquisition  of LazerData  Corporation in
December  1994.  During  1995,  the  Company  also  repaid  and  terminated  its
construction  and permanent loan agreement  which was used to partially fund the
construction of the Company's new office and manufacturing facility. The Company
has capitalized  lease  agreements for equipment which are payable through March
2001 at an interest rate of approximately 8%.

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

                                   1996 ......   $131
                                   1997 ......    140
                                   1998 ......    150
                                   1999 ......    145
                                   2000 ......     21
                                   Thereafter      36
                                                ------
                                                 $623
                                                ======

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

<PAGE>
                                       43




                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

8.  COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

         Certain  equipment  and  properties  are  rented  under   noncancelable
operating leases that expire at various dates through 2000. Total rental expense
under operating  leases was  approximately  $786,  $379, and $305, for the years
ended December 31, 1995, 1994, and 1993, respectively.

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

                                   1996 ....      $757
                                   1997 ....       747
                                   1998 ....       746
                                   1999 ....       513
                                   2000 ....        85
                                             ----------
                                                $2,848
                                             ==========
Employment Agreements

         The Company has  executed  employment  contracts  with  certain  senior
executives  that vary in length for which the Company  has a minimum  commitment
aggregating approximately $1,625 at December 31, 1995.

Royalty Agreements

         The Company and its subsidiary, LazerData, currently have cross-license
agreements with certain industry competitors. Under these agreements,  royalties
are paid by the  Company  on a  sliding  scale  up to 15% of  sales  of  certain
licensed  products.  Under one of these agreements,  no royalty is payable until
sales  volume  reaches a  specified  level and no  royalties  are payable to the
Company for the  competitors'  sales of licensed  products.  In  addition,  this
agreement limits the type of customers to whom the Company can sell the licensed
products as well as  restricts  the  geographic  areas in which  these  licensed
products can be sold.  Accordingly,  royalty expense under these  agreements was
included in selling, general and administrative expense in 1995, 1994, and 1993.

Legal Matters

         The  automatic   identification   and  data   collection   industry  is
characterized by substantial  litigation regarding patent and other intellectual
property  rights.  The  Company  aggressively  defends  its  patents  and  other
proprietary  rights and is  currently a  plaintiff  in three  lawsuits  alleging
patent  infringements  on the part of  others,  and  these  proceedings  involve
counterclaims  against the Company.  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  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 effort would be successful.


<PAGE>
                                       44



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

Credit Facility

         The  Company  has a  revolving  loan  agreement  with a  domestic  bank
pursuant to which the bank has agreed to provide a line of credit totaling $20.0
million.  As of December 31,  1995,  the Company had no  outstanding  borrowings
under this agreement.  Such  borrowings  would bear interest at the bank's prime
rate or 0.95%  above the defined  LIBOR  rate.  The Company is required to pay a
commitment  fee of 0.125  percent of unused credit  availability.  The revolving
loan agreement expires in September 2000.

9.  SHAREHOLDERS' EQUITY

         In March 1995, the Company  completed a secondary stock  offering.  The
Company sold  approximately  2.3 million  shares at a price of $11.00 per share.
The net  proceeds to the Company  from the  offering  were  approximately  $23.6
million.  The Company used  approximately  $7.2 million of the net proceeds from
the offering to repay in full the outstanding  indebtedness  under the Company's
construction loan used to finance its new office and manufacturing facility. The
Company  also used  approximately  $6.8  million  of the net  proceeds  from the
offering to repay in full the outstanding  indebtedness under the Company's term
loan  that was  used to  finance  a  portion  of its  acquisition  of  LazerData
Corporation in December 1994.

         In 1987,  the Company  adopted  the 1987 Stock  Option Plan (1987 SOP).
Options under the 1987 SOP may be granted to employees, consultants,  directors,
and officers.  686 shares remain  available for grant under the 1987 SOP.  Under
the 1987 SOP,  all  options  vest over a period of years  following  the date of
grant.  In 1994,  the  Company  adopted  the 1994 Stock  Option Plan (1994 SOP).
Options  outstanding under prior stock option plans continue in effect according
to their original terms. Under the 1994 SOP, the Company may grant stock options
to employees,  consultants,  directors, and officers. The 1994 SOP provides that
options may vest over time or based upon the performance of the Company's stock,
or both, at the  discretion of the Board of Directors.  The Company has reserved
1,750 shares for issuance  under the 1994 SOP.  Options under both plans must be
issued at an exercise  price not less than fair  market  value on date of grant.
Options  issued  under both plans expire 5 to 10 years from date of grant unless
employment is terminated or death occurs earlier.

         In accordance  with the  provisions of the Plans,  the Company may make
loans to a participant  to finance the exercise  price and related  income taxes
upon the exercise of an option.  During 1995,  the Company  granted two loans to
participants,  both of  which  are  members  of the  Board of  Directors  of the
Company,  totaling  $593.  Each loan is a five-year  loan at an interest rate of
7.34% and is secured by the shares purchased with the proceeds of the loan.

         The Company  accounts  for its Stock Option Plans under APB Opinion No.
25, "Accounting for Stock Issued to Employees", under which no compensation cost
has  been  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).  Companies which continue
to measure  compensation  cost using the intrinsic value method as prescribed by
APB Opinion  No. 25 will be  required  to disclose  pro forma net income and, if
presented,  earnings  per  share  as if the fair  value  based  method  had been
applied.  The Company  will be  required to adopt SFAS No. 123 on a  prospective
basis  beginning in 1996.  The Company is unable to determine  the impact of the
pro forma  disclosure  requirement.  Such impact will be  dependent  upon future
stock option activity.

<PAGE>
                                       45



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

         The  following  is a summary of the  activity  in the  Company's  stock
option plans for the years ended December 31:
<TABLE>
<CAPTION>
                                                              1995             1994             1993
                                                          --------------    ------------    -------------
<S>                                                       <C>                <C>            <C>  
Options outstanding at beginning of period ...........            2,299           1,320            1,100
Options granted ......................................              105           1,354              402
Options exercised ....................................            (200)           (226)            (117)
Options forfeited/canceled ...........................             (66)           (149)             (65)
                                                          --------------    ------------    -------------
Options outstanding at end of period .................            2,138           2,299            1,320
                                                          ==============    ============    =============
Number of options at end of period:
   Exercisable .......................................            1,575           1,133              810
   Available for grant ...............................            1,637           1,676              381

Average price of options :
   Outstanding at end of period ......................            $8.41           $8.02            $7.14
   Exercised .........................................            $6.52           $1.77            $2.43
</TABLE>

         The  Company was able to realize an income tax benefit in 1995 and 1993
from the exercise or early  disposition of certain 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.

Other Agreements

         During 1993,  the  Company's  Board of  Directors  authorized a plan in
which the Company's  management  could  repurchase its common shares in the open
market,  which was terminated in 1995. The plan  authorized the repurchase of up
to 500 shares which will be held as treasury shares.  No shares were repurchased
in 1995. The Company repurchased 8 shares in 1994 at a cost of $46 and 31 shares
in 1993 at a cost of $191.

Employee Stock Purchase Plan

         The  Company  has a Stock  Purchase  Plan under which 250 shares of its
common stock can be issued.  Under the terms of the plan, eligible employees may
purchase shares of the Company's  common stock  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  stock on the first or last day of each
six month offering  period.  Employees  purchased  approximately  9 shares at an
average price of $9.16, 13 shares at an average price of $5.16 per share,  and 8
shares  at an  average  price of $7.82  per share  during  1995,  1994 and 1993,
respectively. The current plan expires on December 31, 2000.

10.  INTERNATIONAL SALES

         International  sales by  geographic  area are as follows  for the years
ended December 31:
<TABLE>
<CAPTION>
                                                              1995             1994              1993
                                                           -------------    -------------   --------------
<S>                                                        <C>              <C>             <C>   
North America, excluding the United States .............         $2,003          $1,295             $1,102
Europe .................................................         11,004           5,588              3,665
Pacific Rim ............................................          4,193           2,824              1,057
Other ..................................................          2,138           1,531                992
                                                           -------------    ------------    --------------       
                                                                $19,338         $11,238             $6,816
                                                           =============    ============    ===============
</TABLE>
<PAGE>
                                       46




                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

11.  ACQUISITION RELATED RESTRUCTURING AND OTHER COSTS

         In the fourth quarter of 1994, the Company provided a pre-tax charge of
approximately  $3.0 million for the costs of  restructuring  its existing  fixed
position  scanner  product lines with those of LazerData  Corporation  which was
acquired in December  1994.  Of the total  pre-tax  charge,  approximately  $1.6
million was to recognize  anticipated costs associated with the consolidation of
manufacturing  and office  facilities,  $0.7 million  related to  write-offs  of
previously  existing  intangible  assets,  and $0.7  million  was  provided  for
employee  severance and benefit costs for the  elimination of  approximately  12
manufacturing and engineering  support  positions.  As of December 31, 1995, all
positions   targeted  in  the   restructuring   program  have  been  eliminated.
Restructuring  actions are substantially  completed as of December 31, 1995. The
restructuring  accrual as of December 31, 1995 was  approximately  $0.8 million.
There have been no re-allocations or re-estimates to date.

         In addition in the fourth quarter of 1994,  the Company  allocated $3.9
million of the LazerData  acquisition costs to acquired  in-process research and
development  projects,  which  represented  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. As these projects have not reached
technological  feasibility  and alternative  future uses of these  developmental
technologies do not exist, these costs were expensed as of the acquisition date.
The acquisition related restructuring and other costs reduced 1994 income before
income taxes, net income and fully diluted net income per share by $6.9 million,
$4.5 million, and $0.56, respectively.

12.  INCOME TAXES

         The provision for income taxes consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
                                   1995              1994         1993
                               --------------     -----------   ----------
<S>                            <C>                <C>           <C>   
Current:
  Federal .................    $1,686             $2,230          $635
  State ...................       341                534           230
  Foreign .................       551                171            --
Deferred:
Federal ...................       585             (2,138)            --
State .....................        83               (270)            --
                               ==============     ===========   ==========
   Total ..................    $3,246               $527          $865
                               ==============     ===========   ==========
</TABLE>
<PAGE>
                                       47




                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

         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:
<TABLE>
<CAPTION>

                                                      1995             1994              1993
                                                  -------------    --------------    --------------
<S>                                               <C>              <C>               <C>  
Computed "expected" tax expense ...............      34.0%             34.0%             34.0%
Tax benefit - net operating loss
  carryforward ................................        --             (35.1%)           (18.8%)
Write-off of intangible assets ................        --              18.2%              2.1%
Change in valuation reserve ...................      (4.7%)           (10.2%)            11.5%
State income taxes, net of
  federal income tax benefit ..................       3.2%             31.0%              5.6%
Goodwill amortization .........................       1.4%             14.5%              2.7%
Tax exempt interest income ....................      (0.7%)            (7.0%)             --
Miscellaneous items, net ......................       4.1%              0.9%            (5.3%)
                                                  -------------    --------------    --------------
                                                     37.3%             46.3%             31.8%
                                                  =============    ==============    ==============
</TABLE>
         The deferred tax assets/(liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
                                                                1995             1994
                                                            -----------      -----------
 <S>                                                        <C>              <C>   
 Receivables ............................................         $145           $  149
 Inventory ..............................................          386              412
 Warranty reserves ......................................          578              354
 Acquisition related restructuring and other costs ......          293              875
 Acquired in-process research and  development costs ....        1,360            1,533
 Property, plant & equipment ............................        (531)            (114)
 Other, net .............................................          130              226
                                                            -----------      -----------
                                                                 2,361            3,435
 Less:  Valuation allowance .............................        (621)          (1,027)
                                                            -----------      -----------
 Net deferred tax asset .................................       $1,740          $ 2,408
                                                            ===========      ===========
</TABLE>

13.  401(K) PLAN

         The Company has a defined  contribution plan available to all employees
of  the  Company  meeting  certain  eligibility   requirements.   The  Plan  was
established in 1985.  Each  participant  may elect to contribute a percentage of
their  compensation.  A matching  contribution equal to 50% of the amount of the
employee  contribution,  limited to 5% of the employee's total compensation,  is
made by the Company. The Company contributed  approximately $193, $143, and $216
in 1995, 1994 and 1993, respectively.

14.  SIGNIFICANT CUSTOMER INFORMATION

The Company sells its products principally to original equipment  manufacturers,
value-added  resellers,  distributors and systems integrators.  Net sales to the
Company's largest customer  represented  approximately  17%, 22%, and 16% of the
Company's  net sales for the fiscal  years  1995,  1994 and 1993,  respectively.
During 1994, the Company's second largest customer  accounted for  approximately
10% of net sales.  No other  customers were  responsible for greater than 10% of
net sales in 1995, 1994 and 1993. Sales to the Company's  largest  customers are
expected  to  continue  to  represent  a  significant  portion of the  Company's
revenues.   The  Company's  arrangements  with  major  customers  are  generally
nonexclusive.
<PAGE>
                                       48



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)

15.  ACQUISITIONS AND DISPOSITIONS

         In April 1995, the Company  completed the sale of substantially  all of
the assets  related to its Image Products  business.  This resulted in a gain of
approximately $161 which was included in other income in 1995.

         On December 21, 1994,  the Company  acquired for $9.25  million in cash
all of the outstanding  stock of LazerData  Corporation.  LazerData is a leading
manufacturer of fixed position,  high speed line,  rastering and omnidirectional
bar code scanners.  A portion of the purchase price ($3.9 million) was allocated
to acquired  in-process research and development and accordingly was written-off
as of the purchase  date.  The remaining  excess of the purchase  price over the
fair value of the net assets acquired of approximately $5.1 million is amortized
on a straight-line  basis over 10 years.  The transaction was accounted for as a
purchase and is included in the consolidated financial statements since the date
of acquisition.

         The following  unaudited pro forma  condensed  consolidated  results of
operations  assume the  operations  of the Company were  combined  with those of
LazerData  Corporation  at the beginning of 1994.  The pro forma  information is
presented  after  giving  effect  to  certain   adjustments  for   depreciation,
amortization, interest expense and related income tax effects. The unaudited pro
forma results do not purport to be indicative of the results that actually would
have been  achieved  during  the period  indicated  and are not  intended  to be
indicative of future results.

                                                         Pro forma 
                                                      Twelve months ended
                                                      -------------------
                                                          12/31/94
                                                          --------
Net sales ............................................    $70,789
Acquisition related restructuring and other costs ....      6,894
Loss from operations .................................       (181)
Net Loss..............................................       (822)
Net Loss per common and common equivalent share.......      ($.11)

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

                                                       1994
                                                     -------
                  Fair value assets acquired .....   $12,436
                  Liabilities assumed ............     3,186
                    Cash paid ....................     9,250
                  Less amounts borrowed ..........     6,800
                                                     --------
                    Net cash paid for acquisition      2,450
                                                     ========

<PAGE>
                                       49


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1995
                (All amounts in thousands, except per share data)


16.  SELECTED QUARTERLY FINANCIAL DATA:  (UNAUDITED)
<TABLE>
<CAPTION>
                                                              First         Second          Third          Fourth
                                                             Quarter        Quarter        Quarter         Quarter
                                                            ----------     ----------     -----------    ------------
Year Ended December 31, 1995
-----------------------------------------
<S>                                                          <C>           <C>            <C>            <C>    
Net sales .............................................      $22,263       $21,315        $22,483        $21,456
Gross profit ..........................................       10,502         9,308          8,895          8,177
Net income ............................................        1,881         1,734          1,566            268

Net income per common
    and common equivalent share .......................         $.22          $.16           $.15           $.03

Year Ended December 31, 1994
-----------------------------------------

Net sales .............................................      $16,739       $13,119        $13,220        $17,369
Gross profit ..........................................        8,201         6,122          5,980          7,946
Net income (loss) .....................................        2,016           941            910        (3,255)

Net income (loss) per common
    and common equivalent share .......................         $.27          $.12           $.12         ($.42)


Year Ended December 31, 1993
-----------------------------------------

Net sales .............................................       $8,542        $8,991         $9,696        $11,665
Gross profit ..........................................        4,216         4,286          4,512          5,624
Net income ............................................          590           322            329            610

Net income per common
   and common equivalent share ........................         $.08          $.04           $.04           $.08

</TABLE>
<PAGE>
                                       50




                                   SCHEDULE II
<TABLE>
                            PSC INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

                           (All amounts in thousands)

<CAPTION>
                                                 1995       1994          1993   
                                                -------    ------        ------
<S>                                             <C>        <C>           <C>    
Accounts Receivable Reserve-
BALANCE, at beginning of year ...............    $576      $183          $219
  Provision for doubtful accounts ...........    (134)      230             9
  Write-offs of doubtful accounts,
     net of recoveries                            (55)      (12)          (45)
  Other (1) .................................      --       175            --
                                                ------     -------       ------
BALANCE, at end of year ....................    $387       $576          $183
                                                ======     =======       ======
</TABLE>

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