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

                                    FORM 10-K

(Mark One)

[X]  Annual report pursuant to section 13 or 15(d) of the
     Securities Exchange Act of 1934

     For the fiscal year ended December 31, 1999 or

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

     For the transition period from       to____

Commission file number:  0-9919

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

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



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

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

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

                                      None
                                      ----

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

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.

                                            Yes     X          No ____

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

                                      -1-

<PAGE>


As of March 27,  2000,  the  aggregate  market value of the voting stock held by
non-affiliates  of  the  registrant  was  approximately   $65,539,284   (Assumes
officers, directors and any shareholder holding 5% of the outstanding shares are
affiliates.)

As of March 27, 2000, there were outstanding 12,208,801 shares of Common Stock.

Documents incorporated by reference:

Part III  incorporates  information  from  certain  portions of PSC Inc.'s Proxy
Statement  for the 2000  Annual  Meeting  of  Shareholders  to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal
year.


                                      -2-

<PAGE>


                                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..............   19
                Executive Officers of Registrant...........................   20

                                     PART II

Item  5:  Market for Registrant's Common Equity and Related
              Security Holder Matters......................................   23
Item  6:  Selected Financial Data..........................................   24
Item  7:  Management's Discussion and Analysis of Financial
              Condition and Results of Operations..........................   25
Item  8:  Financial Statements and Supplementary Data......................   30
Item  9:  Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure.......................   30

                                    PART III

Item  10:  Directors and Executive Officers of the Registrant..............   30
Item  11:  Executive Compensation..........................................   30
Item  12:  Security Ownership of Certain Beneficial Owners and
              Management...................................................   30
Item  13:  Certain Relationships and Related Transactions..................   30

                                     PART IV

Item  14:  Exhibits, Financial Statement Schedules and Reports
              on Form 8-K..................................................   31


















U-SCAN and U-SCAN  EXPRESS are trademarks of Optimal  Robotics Corp.  used under
license.  ADVANTAG is a trademark of Eldat Communication Ltd.

                                      -3-
<PAGE>


PART I

                                ITEM 1: BUSINESS

Company Overview

     PSC Inc., together with its subsidiaries, (the Company) was incorporated in
the State of New York in 1969. The Company  designs,  manufactures and markets a
broad line of laser and  non-laser  based  handheld and fixed  position bar code
scanners,  two-dimensional  image  readers,  wireless  portable data  terminals,
warehouse  management software,  bar code scan engines,  verifiers and automated
carton dimensioning systems for the worldwide Automatic  Identification and Data
Collection (AIDC) market. The Company's products are used to identify,  capture,
process and transmit data. The Company has developed  products for AIDC at every
stage  of  the  product  supply  chain  from  raw  material,  manufacturing  and
warehousing,  to logistics,  transportation,  inventory  management and POS. The
Company's  products are used  throughout the world in automated data  collection
solutions in the food, general retail, health care, manufacturing,  warehousing,
logistics, package handling and other industries.

     The Company has positioned  itself within the AIDC industry by selling both
domestically   and   internationally.    International   sales   accounted   for
approximately  58%  of  the  Company's  1999  total  sales.  The  Company  has a
diversified customer base comprised of original equipment  manufacturers (OEMs),
value-added resellers (VARs),  distributors,  systems integrators and end users.
The  Company's  distribution  relationships  have  enabled it to  introduce  its
products to new vertical markets, and have fostered the development of strategic
relationships with leading AIDC participants and end users. The Company operates
within one industry segment: automatic identification and data collection.

     On January 19, 2000, the Company acquired all of the outstanding  shares of
Percon Incorporated (Percon), a manufacturer of wireless and batch portable data
terminals  (PDTs),  decoders,  input devices and data management  software,  for
approximately $57.1 million. The acquisition of Percon  significantly  increased
the scope of the  Company's  product line,  enhancing  the Company's  ability to
provide  systems  type  solutions  and to expand  the  Company  into the PDT and
software/services  categories of the AIDC market, which are growing rapidly. The
transaction will be accounted for under the purchase method of accounting in the
first quarter of 2000.

     On December 21, 1999, the Company acquired  substantially all of the assets
of GAP  Technologies,  Inc.  and GEO Labs,  Inc.  (GAP) for  approximately  $4.8
million.  GAP is a technology and research  group that designs and  manufactures
miniature  laser scan engines and  pen-based  scanners.  In February  2000,  the
Company introduced an innovative consumer home shopping appliance, incorporating
the miniature scan engine technology  developed by GAP. The home shopping system
enables  consumers to create a shopping  list by scanning  product bar codes and
then transmitting the list online to the retailer.

     In May 1999,  the  Company  made a  minority  interest  investment  of $3.0
million in Eldat  Communication  Ltd.,  which  develops and  manufactures  fully
integrated  electronic price display systems for retail applications,  including
electronic  shelf labels.  The system  interfaces  with a store's main computer,
point-of-sale  and back-office  system  enabling  immediate,  coordinated  price
changes to thousands of products.

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

     In 1996, the Company acquired Spectra-Physics Scanning Systems, Inc., TxCOM
S.A. and related  businesses  (Spectra).  Spectra was one of the world's leading
manufacturers  of countertop and in-counter fixed position bar code scanners for
retail POS applications. The purchase price was approximately $140.0 million and
was accounted for under the purchase method of accounting.

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

                                      -4-
<PAGE>
Markets

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

Retail

     The  retail  market  consists  of many  applications  of bar code  scanning
devices  used to track the flow of goods,  equipment,  employees  and  customers
throughout  the  retail  environment.  The  most  traditional  and  identifiable
application  of bar code scanners and scanning  systems is in front end checkout
applications,  such as in grocery stores, in which an employee uses a stationary
or  handheld  scanner to read  product  identifiers  encoded in a bar code.  The
retail market has,  however,  expanded  beyond this base with regard to both the
types of retail stores employing scanners and scanning systems,  and the uses to
which these  stores put the  scanners  and  scanning  systems.  Discount,  drug,
do-it-yourself,  convenience,  department  and  specialty  retail stores now use
scanners in such diverse ways as price verification,  shelf stocking,  inventory
tracking     and      replenishment,      receiving,      coupon     redemption,
promotion/merchandising and frequent shopper programs.

     The Company is currently  active in most retail  applications and sells its
countertop,  in-counter  and  handheld  bar code  scanners to  customers in most
retail markets.  In addition,  the Company has begun to target  systems-oriented
and market segment-specific  products. One such product currently being marketed
by the Company in a stategic  alliance  with Optimal  Robotics  Corporation,  is
U-Scan(R) Express Self-Checkout System, an automated grocery store self-checkout
system. The U-Scan(R) Express  Self-Checkout System, which has been installed in
several  major  supermarket  chains  and is  currently  being  tested by several
national mass merchandise chains, is designed to permit supermarket customers to
scan,  bag and  pay for  purchases  with  little  or no  assistance  from  store
personnel. To meet the increasing demand for up-to-date, accurate pricing at the
merchandise  shelf,  the Company offers  Electronic  Shelf Labels (ESLs).  These
allow a retailer to electronically  change pricing  instantaneously at the shelf
and at the checkout.

Commercial and Industrial

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

Company Products and Services

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

The Company's products include:

Fixed Position Scanners:  Retail

360-Degree Scanner and Scanner/Scale  (Magellan(R) SL(TM) Scanner). The Magellan
SL was designed to accommodate  installation in the narrower check-stands common
in Europe,  Asia and large  cities  throughout  the world.  The  Magellan  SL is
capable of simultaneously reading the bottom and all four sides of grocery store
items,  a full  360  degrees,  thereby  increasing  productivity  and  improving
ergonomics  by reducing the need for  checkers to twist,  turn or lift items for
scanning.  The  Magellan  SL is also  available  with an  integrated,  30  pound
capacity scale with an L-shaped,  All-Weighs(TM)  Platter which allows retailers
to  combine  the  scanner  and  scale  functions  into a single  unit.  With the
All-Weighs  Platter,  the  scanner/scale's  vertical  window  and  frame  are an
integral part of the scale weighing platter, allowing checkers to lean oversized
items against the vertical window, intentionally or unintentionally,  and get an
accurate  weight.  The unit may also be ordered  with an  integrated  electronic
article surveillance antenna for use in deactivating RF-based security tags.

                                      -5-
<PAGE>

High Performance  Horizontal  Scanner  (HS1250).  The HS1250 is a compact,  high
performance  horizontal scanner for grocery, drug, discount and home improvement
store  applications.  The HS1250  reads  UPC/EAN  and  industrial  bar codes and
features  advanced  Edge  decoding  software.  It  is  also  available  with  an
integrated  electronic  article  surveillance  antenna  for use in  deactivating
RF-based security tags.

High Performance  Vertical  Scanners (VS1000 and VS1200).  The VS1000 and VS1200
compact vertical scanners include scan geometry  optimized for vertical scanning
applications in limited space areas such as pharmacies,  variety and convenience
stores.  These  products  permit  bar codes to be read  whether  the  handler is
presenting  the bar code to the  scanner  or  sweeping  the bar code  across the
scanner in a continuous movement.  Both the VS1000 and VS1200 are available with
an  optional  integrated  electronic  article  surveillance  antenna  for use in
deactivating RF-based security tags.

Compact Scanners  (Duet(TM) and VS800(TM)).  The Duet Scanner is a compact "dual
action" scanner that combines features of both countertop and handheld scanners.
Standard  bar  coded  items  are  presented  or swept by the  scanner's  19 line
omni-directional  scan  window.  Pick lists and large,  bulky  goods are scanned
using  Duet's  Targeted  Handheld  Mode by simply  picking  up the  scanner  and
pointing it at a bar code. The VS800 is perfect for situations where space is at
a  premium.  Fully  adjustable  and  able to be  mounted  in a wide  variety  of
orientations,  the  VS800  provides  aggressive,  highly  affordable  hands-free
scanning  performance in a very small  package.  The VS800 is ideally suited for
convenience stores, pharmacies, specialty retailers and small grocers.

Retail Automation Systems

The Company is currently  manufacturing  and  marketing  the  U-Scan(R)  Express
Self-Checkout  System to major supermarkets and mass merchandisers in a stategic
alliance with Optimal  Robotics  Corporation.  The system is targeted for retail
store express lanes and  incorporates  the PSC Magellan SL scanner,  interactive
video,  security  system  and  money  tendering  (cash,  credit or  debit).  The
U-Scan(R) Express is designed to permit customers to scan, bag and pay for their
own  purchases  with  little or no  assistance  from  store  personnel,  thereby
speeding checkout and improving store productivity.

The Company also markets the AdvanTAG(TM)  Electronic Shelf Label system to meet
the growing demand for pricing accuracy in the retail  marketplace.  This system
is an  in-store  network  that  delivers  shelf  edge  data for use in  pricing,
merchandising,  and managing the retail environment. It consists of a high speed
wireless  infra-red (IR) network for  communicating  throughout  the store,  and
shelf edge labels to display data for customers, employees and store management.

Handheld Scanners

Rugged Industrial Scanners  (PowerScan(TM),  5300 IP). Designed "from the ground
up" for rugged industrial applications, the PowerScan handheld scanner is one of
the toughest tools in the industry. It is ideally suited for harsh conditions as
found in  industrial  warehouses  and trucking and for  demanding  applications,
including   inventory  control,   parcel  sorting  and  tracking,   and  product
manufacturing (from electronics goods to large industrial equipment). It is also
used for  outdoor  applications  (e.g.  rental  car  returns  or home and garden
stores) and for freezer or cold storage applications.

The 5300 IP series is the predecessor to the new PowerScan  family of industrial
bar code scanners.  Like the PowerScan,  the 5300 IP series is built for extreme
durability and performance for jobs in demanding  environments.  It is ideal for
use in warehouses,  distribution  centers,  automotive plants,  utilities,  cold
storage  warehouses and at chemical plants. The 5300 series of scanners has many
different  options  available,  such as LED display and optional  memory,  which
allows the bar code scanner to be customized.

                                      -6-
<PAGE>
Light  Industrial/Commercial  Scanners  (5300 HP,  SP400).  The  Company's  high
performance 5300 HP handheld scanners are based on the same scanning  technology
used  for the  5300 IP  scanners  but use a less  robust  enclosure.  They  were
designed for light industrial,  commercial and special retail environments where
high performance scanning is critical.

The  SP400  family of  handheld  scanners  sets the  standard  for  performance,
ergonomics and durability. It is perfect for point-of-sale, back-room inventory,
warehouse and manufacturing applications.

Retail, POS and Commercial Scanners  (QuickScan(R) Series). The QuickScan series
of bar code scanners is a full feature, full function,  full performance scanner
series incorporating the Company's smaller scan engine platforms.  The QuickScan
series consists of the QS6000 Plus, QS1000, QS200, and QS Pen bar code scanners.

The  QuickScan(R)  6000 Plus was  designed  specifically  for the retail POS and
features an  unprecedented  combination:  the  superior  performance  and rugged
design of a high-end POS scanner - priced  affordably.  Its  advanced  ergonomic
design  was  developed  with  operator  comfort in mind,  which  helps to ensure
prolonged operator productivity.  The size and shape of the QS6000 Plus makes it
comfortable to hold independent of handedness and hand size.

The QuickScan(R) 1000 Scanner provides the same superior scan performance of the
QuickScan 6000 Plus in a sleek  triggerless  design. It is ideal for use in both
hands-free (with optional  countertop  stand) and handheld  applications such as
clothing or convenience store point-of-sale.

The QuickScan(R) 200 Scanner is a lightweight,  ergonomic,  handheld CCD (charge
coupled  device)  scanner  for retail  and light  commercial  applications.  The
QuickScan 200 offers the ability to read and  autodiscriminate  all major retail
and industrial bar code symbologies in a small, inexpensive package.

The newest addition to the QuickScan family is the QuickScan Pen(TM).  It is the
first laser bar code reader to utilize high performance laser scanning optics in
a small,  ergonomic pen design.  Its small shape and lightweight  design make it
ideal  for  mating  with  portable  data  terminals  (PDTs)  and  personal  data
assistants   (PDAs).   The  QuickScan   Pen  is  ideal  for  route   accounting,
point-of-sale  checkouts  with  limited  space,  electronics  manufacturing  and
medical applications.

Two-Dimensional  (2D) Label Readers (Imager 8000(TM)).  Meeting the demand for a
reader to read 2D labels and capture images, PSC recently  introduced the rugged
Imager 8000.  This is a high  performance,  rugged handheld  reader,  capable of
omni-directional  decoding of traditional  linear bar codes and 2D  symbologies,
including  DataMatrix,   MaxiCode,  QR  Code  and  PDF417.  Images  of  objects,
signatures,  labels, etc. also can be easily captured. This reader is especially
suited for warehousing and logistics applications.

Fixed Position Scanners: Commercial and Industrial

Miniature  Scanners.  The  LazerData(R)  9000,  11000,  12000 and LM520  offer a
complete line of compact, versatile, industrial miniature line scanners aimed at
the high-speed automated sorting or identification applications in the demanding
environments of the manufacturing and material handling markets. The LD11000 and
LD12000 are supplied with LDHost,  a Windows-based  software  package that makes
configuring  the scanners for a customer's  application  a breeze.  For the most
demanding  applications,  the  LD9000E  offers the  performance  of many  larger
high-performance line scanners.  The LM520 is PSC's most cost-effective  compact
scanning solution for indexed or continuous flow material  tracking.  Its simple
plug-and-play  design is  incorporated  easily  into any  scanning  application,
particularly OEM environments where space is limited.

High-End Line Scanners. With the LD16000 and the LD8000 family of line scanners,
the Company now offers the most  complete line of high-end  line  scanners.  The
LD16000 is exceptional  for reading bar codes on the side of packages,  whereas,
the LD8000 is perfect for reading bar codes on the front and back.  In addition,
the LD8000 is an integral  component of  sophisticated  tunnel scanning  systems
that scan bar codes on high-speed conveyors from all angles.

Mid  Range   Omni-directional   Scanning.   The  LD8000LX   offers  a  low  cost
omni-directional  scanning  solution by  creating an "X" pattern  using a single
laser. To achieve greater  depths-of-field,  increased scan coverage, or to scan
more than one face of the carton at a time, the LD8000LX can be chained together
providing a single output to the customer.  With  TimeSlice(TM)  decoding  (TSD)
software and tracking  built into the scanner,  more than one bar code can be in
the scan zone at one time  maximizing  the system  throughput.

                                      -7-
<PAGE>


Omni-directional   Scanners.   The   SureScan(R)   is  a   high-speed   modular,
omni-directional  scanner for use in  high-volume  retail  distribution,  parcel
sortation centers and e-commerce distribution applications. It can be configured
with up to four  multiplexed  scanners and is a key component of tunnel scanning
systems. For scanning bar codes positioned on the bottom of packages, PSC offers
the  SureScan  HS  Linear  Omni  Scanner.   Using  both  image-based  and  laser
technology,  the HS Linear Omni scans bar codes in any orientation through a gap
between two conveyor belts. It is ideal for parcel identification and sorting in
high-volume distribution centers.

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

Scanning Tunnel Systems. By mounting multiple scanners in a fixed array around a
conveyor  belt,  PSC  offers a unique  solution  to solve  high-speed  sortation
problems  where  cartons  may have a bar code label on any  surface of a carton,
even the bottom, or multiple labels on multiple sides of the carton.  With PSC's
ScanManager  Data Management  System,  this system can track up to 16 cartons at
one time at conveyor speeds up to 500 feet per minute.

Scan Engines

         The  Company's  scan  engines  are   self-contained  bar  code  reading
components  which  OEMs build into a variety of  products.  The  Company's  scan
engines  incorporate  all of the  electronic,  optical,  mechanical and bar code
decoding components required for laser scanning in a single package which can be
easily  integrated  into fixed position and portable  applications.  The various
models  manufactured  by the Company are based on its successful  LM500 Plus(TM)
laser scanning  engine used in many of its own products,  adapted for custom OEM
needs. Ideally suited for portable applications,  the LM500 Plus is the lightest
scan  engine in its class and  features  RapidStart  circuitry  for the  fastest
start-of-scan  in the  industry  with  very  low  power  consumption,  which  is
essential for battery powered applications.

Portable Data Collection Terminals

         Portable  data  collection  terminals  (PDTs)  are  handheld,   battery
powered,  durable computers that typically employ application specific software.
Data  can be  entered  either  manually  through  an  input  device  such  as an
integrated keypad or automatically  through a wand, CCD, magnetic stripe reader,
integrated laser scanning module or a handheld laser scanner.

Falcon(TM) 320 and  Falcon(TM)  325. The Falcon 320 and 325 are 16-line DOS PDTs
which include a 486 processor, 57 key splash resistant alphanumeric keypad, user
accessible PC Card slot and eight megabytes of RAM memory. The Falcon 320 is the
batch version and the Falcon 325 is the RF version, incorporating 2.4 GHz spread
spectrum radio technology. The PC Card slot can be utilized for memory expansion
cards or modems.

Falcon(TM)310.  The  Falcon 310 is an  eight-line  DOS PDT batch unit with a 386
processor and a user accessible PC Card slot for ATA flash cards or modem.

Falcon(TM)315.  The  Falcon  315 is an  eight-line  DOS PDT RF  unit  with a 386
processor and 2.4 GHz spread spectrum radio.

PT2000. The PT2000 is a 12 ounce PDT with 34 splash resistant alphanumeric keys,
up to one  megabyte of data  storage and a separate  bank of erasable  flash ROM
memory.

TopGun(R).  The TopGun is a PT 2000 with an  integrated  laser which  allows for
one-handed scanning.

                                      -8-
<PAGE>


Fixed Station and Integrated Decoders

     Fixed  station  decoders  (decoders)  are bar code  readers  designed to be
connected  in series with the  keyboard (a keyboard  wedge) of either a personal
computer  (PC),  a computer  terminal  or  attached  to a serial  port on a host
computer. Bar codes scanned by the decoders are translated into data used by the
PC or terminal as if the data  originated  from the  keyboard.  Decoders  permit
computers  to read  bar  codes  without  requiring  special  programming  of the
application  software.  Products  offered  in this  category  include  the  Mini
PowerWedge(TM), PowerWedge 10, PowerWedge 20, Master B+ and Master BB+.

     Integrated decoders are products  incorporating the base decoder technology
in other form  factors  thereby  creating  integrated  decoder  products.  These
products  include the  SnapShot,  a handheld  laser  scanner  available  with an
integrated  decoder,  and the Decoder  Communications  Card, which is an ISA Bus
card  incorporating  the decoder  technology with four high-speed  serial ports.
Symphony  is a decoder  product  that  incorporates  narrow  band RF support and
includes the Maestro base station and Player radio unit with belt clip.

Application Software

     Application  software consists of PC-based  computer programs  available in
both stand alone and networked versions that permit the storage,  management and
reporting of data.  Data can be uploaded or downloaded  into these programs with
the Company's PDTs.  Products  offered in this category include the full line of
IntelliTrack(R)  software,  including applications for fixed assets,  inventory,
shipping,  receiving, tool room management,  check-in and checkout applications,
and stock  room  management.  IntelliTrack  RF is a  reliable,  affordable,  and
easy-to-use  real-time  inventory  control software  application  which operates
under  Microsoft  Windows  95, 98 or NT.  When  combined  with the Falcon 315 or
Falcon 325 RF PDT, it becomes a complete RF-based inventory solution.

Quick Check(R) Verifiers

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

Sales and Marketing

     The Company sells its products  domestically and internationally  through a
diversified  customer  base  comprised of OEMs,  third party  resellers  and end
users. International sales increased from approximately $95.2 million, or 46% of
net sales,  in 1997 to  approximately  $133.0  million,  or 58% of net sales, in
1999.   Management  believes  that  the  international   markets  for  Automatic
Identification  and Data  Collection  products are less developed and intends to
broaden its  international  sales and  provide  additional  sales and  marketing
support to its international operations.

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

                                      -9-
<PAGE>

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

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

     The Company's  marketing  operations  include  product  management,  market
management,  new business  development and marketing  communications.  Marketing
personnel identify new business opportunities,  develop business plans, identify
new product and market requirements, manage product positioning/introduction and
provide tactical sales support activities. They interact regularly with external
parties such as OEMs,  VARs,  distributors,  systems  integrators and end users,
technical partners and standards  committees.  The marketing  personnel also, in
conjunction  with  outside  vendors,  conduct  customer  surveys and  coordinate
advertising and public relations. This group creates advertising,  brochures and
documentation,  manages  trade show  exhibits and places  articles  highlighting
applications of the Company's products in trade and industry publications. These
marketing  efforts are augmented by the Company's  cooperative  advertising  and
sales  incentives  programs  which promote  greater  visibility of the Company's
products.

Customer Support and Service

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

Customers

     The  Company  sells  its  products  to OEMs,  VARs,  distributors,  systems
integrators and end users.  During 1999,  1998 and 1997, no individual  customer
accounted  for greater than 10% of net sales.  The Company's  arrangements  with
major customers are generally nonexclusive.

Engineering, Research and Product Development

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

     While the majority of the Company's  research and  development is performed
by its own staff,  advanced  research  in  targeted  technologies  is  supported
through relationships with several well known universities. The Company believes
its  technical   strengths  are  in  the   specialty   disciplines   of  lasers,
electro-optics,   miniature  mechanical   mechanisms,   video  imaging,   signal
processing, decoding and software development.

     The Company's ER&D expenses were approximately $18.1 million, $15.7 million
and $13.4 million in 1999,  1998,  and 1997,  respectively.  Such amounts do not
include expenditures by the Company for manufacturing engineering activities.

                                      -10-
<PAGE>

Manufacturing and Suppliers

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

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

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

Competition

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

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

                                      -11-
<PAGE>

Intellectual Property

     The Company  believes  that  certain of its products  are  proprietary  and
consequently relies on a combination of United States and foreign patent,  trade
secret,  copyright and  trademark  law to establish and protect its  proprietary
rights. The Company currently holds more than 250 United States patents and also
has certain foreign patents pertaining to various  technologies  associated with
its products.  These patents  expire on various dates between 2003 and 2017. 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.  The
Company,  however, is currently involved in several patent lawsuits.  See "Legal
Proceedings."  While the  Company  believes  that its  patents  provide  it with
competitive  advantages  with  respect to the products  they cover,  the Company
relies primarily upon the technical know-how, competence,  innovative skills and
marketing abilities of its engineers and other employees.

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

Employees

     As of  March  1,  2000,  the  Company  had  approximately  1,250  full-time
employees.  In  addition,  the Company at various  times makes use of  temporary
labor in its  manufacturing  operations.  Approximately 10% of the work force is
located outside the United States,  based in offices  throughout  Europe,  Latin
America  and the Asia  Pacific  regions.  The Company  believes  that its future
success  will  depend in part on its  ability to  recruit  and  maintain  highly
qualified management, marketing, technical and administrative personnel. None of
the Company's  employees is  represented by a labor union.  Management  believes
that its relationship with employees is good.

Government Regulation

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

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

                                      -12-
<PAGE>

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

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

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

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

RISK FACTORS

     Debt Service. The Company incurred  substantial  indebtedness in connection
with the acquisition of Spectra,  of which,  $73.9 million was outstanding as of
December 31, 1999.  Subsequent to year-end,  the Company  borrowed an additional
$58.0 million under its amended senior term loan and revolving  credit  facility
to  finance  the  acquisition  of  Percon  resulting  in total  indebtedness  of
approximately   $133.6   million.   The   indebtedness   could  have   important
consequences,  including  the  following:  (i) the  Company's  ability to obtain
additional  financing in the future for working capital,  capital  expenditures,
acquisitions or general corporate  purposes may be impaired;  (ii) a substantial
portion of the  Company's  cash flow from  operations  must be  dedicated to the
payment of interest on the indebtedness, thereby reducing the funds available to
the Company for other  purposes;  (iii) the  agreements  governing the Company's
long-term  indebtedness  contain  certain  restrictive  financial  and operating
covenants;  (iv) certain  indebtedness under the senior debt will be at variable
rates of interest which would cause the Company to be vulnerable to increases in
interest rates; (v) all of the indebtedness outstanding under the senior debt is
secured by  substantially  all the assets of the  Company;  (vi) the  Company is
substantially  more leveraged than certain of its competitors  which might place
the Company at a competitive disadvantage;  (vii) the Company may be hindered in
its  ability to adjust  rapidly to  changing  market  conditions  and (viii) the
Company's  substantial  degree of leverage could make it more  vulnerable in the
event of a downturn in general economic conditions or its business.

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

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

                                      -13-
<PAGE>

Dependence on Intellectual  Property Rights.  The Company's success is dependent
in part on its ability to obtain patent  protection  for its products,  maintain
trade secret protection and operate without infringing on the proprietary rights
of others.  The Company  currently  owns over 250 United States  patents  having
various  expiration  dates between 2003 and 2017,  and also has certain  foreign
patents. The Company has filed, and intends to file, applications for additional
patents  covering  its  products.  There can be no  assurance  that any of these
patent applications will be granted, or that the Company will develop additional
products that are patentable and do not infringe upon the patents of others,  or
that the patents  issued to or licensed by the Company  will provide the Company
with a  competitive  advantage  or  adequate  protection  for its  products.  In
addition,  there can be no assurance  that the  Company's  competitors  will not
develop  technology  or  know-how,  to  obtain  patents,  that  could  limit the
Company's ability to compete in the future or that patents issued to or licensed
by the Company will not be challenged, invalidated or circumvented by others.

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

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

Product  Transitions.  The Company is dependent upon the introduction of new and
improved  products.  The Company's  financial  performance is dependent upon the
successful introduction of these products. The success will be dependent,  among
other things, upon the ability of the Company to complete development of certain
products,  customer acceptance of and demand for these products, and the ability
of the Company to  efficiently  manufacture  these products and to meet delivery
schedules. The introduction of new and enhanced products requires the Company to
manage the  transition  from older  products in order to minimize  disruption in
customer ordering  patterns,  avoid excess levels of older material  inventories
and ensure  that  adequate  supplies of new  product  can be  delivered  to meet
customer demand.

The Company and Optimal  Robotics Corp.  (Optimal)  entered into an agreement in
April 1998, which provides the Company exclusive rights to manufacture U-Scan(R)
Express  Self-Checkout  Systems until  December 31, 2000.  During 1999,  Optimal
announced  that they  would  commence  manufacturing  of the  U-Scan(R)  Express
Self-Checkout  Systems upon  termination of the agreement  with the Company.  In
anticipation that the relationship with Optimal would eventually terminate,  the
Company reserved the right under the agreement to design and manufacture its own
self-checkout product, however, the Company agreed not to actually sell, promote
or market a competing product.  The Company intends on remaining a market leader
in all aspects of retail  scanning and is committed to retaining  that  position
for the long term. There can be no assurance that the Company will  successfully
manage the transition to selling new products. The failure to do so could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

                                      -14-
<PAGE>

Dependence  on Sales by Third  Parties:  Significant  Customers.  A  significant
portion of the  Company's  net sales is  dependent  upon the ability of its OEM,
VAR,  distributor and systems integrator  customers to develop and sell products
that incorporate the Company's  scanning products.  Factors,  including economic
conditions,  patent  positions,  inventory  positions,  the  ability to sell the
Company's  products  to  end  users,   regulatory   requirements  and  marketing
restrictions  that  adversely  affect the  operations of the Company's OEM, VAR,
distributor and systems integrator  customers can have a substantial impact upon
the Company's  financial results.  No assurances can be given that the Company's
OEM, VAR,  distributor  and systems  integrator  customers  will not  experience
financial or other  difficulties  that could adversely  affect their  operations
and, in turn,  the results of operations of the Company.  During 1999,  1998 and
1997,  no  individual  customer  accounted  for more than 10% of net sales.  See
"Business--Sales and Marketing" and "--Customer Support and Service."

Risks  Associated  with  International   Operations.   The  Company's  sales  to
international  customers  increased from $95.2 million or 46% of total net sales
in 1997 to $133.0  million or 58% of net sales in 1999.  The Company  intends to
continue  to expand its  operations  outside  of the United  States and to enter
additional  international  markets  which will  require  significant  management
attention and financial resources and which will result in a significant portion
of the  Company's net sales being  subject to the normal risks  associated  with
international  sales.  Such  risks  include  unexpected  changes  in  regulatory
requirements,  compliance  costs  associated  with  quality  control  standards,
special  standards  requirements,  longer  accounts  receivable  collections  in
certain geographic regions, tariffs and other barriers, difficulties in staffing
and  managing  international  subsidiary  operations,  potentially  adverse  tax
consequences, country-specific product requirements and political and regulatory
uncertainties.  There can be no  assurance  that these  factors will not have an
adverse   impact  on  the   Company's   ability  to  increase  or  maintain  its
international sales or results of operations.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations" and  "Business--Sales
and Marketing."

Exposure to Currency  Fluctuations.  Historically,  the  Company's  revenue from
international  operations  primarily  has  been  denominated  in  United  States
dollars.  During  1999,  approximately  55% of its  revenue  from  international
operations and approximately 75% of its consolidated revenue were denominated in
United  States  dollars.  The Company  expects that a growing  percentage of its
business will be conducted in currencies other than the United States dollar. As
a  result,  fluctuations  in the  value  of  certain  foreign  currencies  could
materially  affect  the  Company's  business  operating  results  and  financial
condition.  Also, an increase in the value of the United States dollar  relative
to foreign  currencies  could make the Company's  products more  expensive  and,
therefore,  less competitive in certain markets.  Due to the constantly changing
currency  exposures and the volatility of currency exchange rates,  there can be
no assurance that the Company will not experience currency losses in the future,
nor can the Company predict the effect of exchange rate fluctuations upon future
operating results. The Company enters into forward foreign exchange contracts as
a hedge against currency  fluctuations  relating to foreign sales denominated in
foreign   currencies.   The  forward  contracts  generally  have  maturities  of
approximately 30 days and require the Company to exchange foreign currencies for
United  States  dollars at maturity,  at rates agreed to at the inception of the
contracts.  Gains and losses on forward contracts are offset against the foreign
exchange gains and losses on the underlying hedged items and are recorded in the
Consolidated Statements of Income.

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

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

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

                                      -15-
<PAGE>

Risks  Associated  with  Significant  Suppliers  in the Year 2000.  The  Company
believes that the area of greatest  potential risk associated with the Year 2000
relates to significant suppliers' failing to remediate their Year 2000 issues in
a timely  manner.  If a  number  of  significant  suppliers  are not  Year  2000
compliant, this could have a material adverse effect on the Company's results of
operations,  financial position or cash flow. At this point, the Company has not
been  advised  of any Year 2000  issues  experienced  by any of its  significant
suppliers.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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

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

The  Company  anticipates  that in 2000 it will sell more  products  with  lower
margins and lower margin  products will represent a greater  percentage of total
sales than in prior years.  If the Company does not increase  sales and/or lower
operating  expenses to  compensate  for overall  lower  margins,  the  Company's
operating results could be materially, adversely affected.

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

                               ITEM 2: PROPERTIES

     The  Company's   headquarters   are  located  in  a  132,000   square  foot
Company-owned  facility in Webster,  New York, a suburb of  Rochester,  New York
which is utilized primarily for manufacturing,  engineering,  and administrative
functions.  This facility,  completed in 1995, was  custom-designed to serve the
Company's operations.

     During 1999, the Company sold its two facilities and 32 acre parcel located
in Eugene,  Oregon and  simultaneously  entered into a lease  agreement  for the
facilities, which expires in May 2014. Engineering, marketing and administrative
functions are contained in one of the  facilities,  which is eighteen  years old
and consists of 54,000 square feet. The second facility, which is thirteen years
old and consists of 56,000 square feet,  contains  manufacturing and warehousing
functions.  The Company also leases  20,000  square feet for  manufacturing  and
warehousing  activities and 9,000 square feet of offsite  storage and shop space
which are both located within a two miles radius from the main facilities. These
leases   expire  on  March  31,  2001  and  on  June  30,  2000,   respectively.
Additionally,  the Company  leases a separate  37,250  square  foot  facility in
Eugene,  Oregon for  manufacturing and research and development  activities,  of
which,  approximately  9,000 square feet are subleased to another  tenant.  This
lease expires on December 31, 2007.

                                      -16-
<PAGE>

     The  Company  leases  approximately  6,250  square  feet  in  Sharon  Hill,
Pennsylvania for  manufacturing and engineering  operations  associated with the
recent acquisition of GAP. This lease expires on October 31, 2000.

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

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

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

                            ITEM 3: LEGAL PROCEEDINGS

Symbol Technologies, Inc.

     On or about  April 1, 1996,  the  Company  filed suit in the United  States
District  Court for the Western  District of New York located in Rochester,  New
York against Symbol Technologies,  Inc.  (Symbol)(97-CV-06152)  for violation of
the  antitrust  laws  and  unfair  trade   practices  and  for   declaration  of
non-infringement  and/or invalidity of certain of Symbol's  patents.  Symbol has
counterclaimed,  alleging patent  infringement and alleging  breaches of certain
Symbol-PSC  License  Agreements.  The Company informed Symbol that subsequent to
the acquisition of  Spectra-Physics  Scanning  Systems,  Inc., now PSC Scanning,
Inc. (Scanning),  it has been operating under certain  Symbol-Scanning  licenses
rather than under the Symbol-PSC licenses.  Proceedings were stayed with respect
to all  issues  other than the  contract  issues  involved  in the status of the
various licenses.

     On  September  11,  1998,  the Company  made a motion for  partial  summary
judgment on the issue of patent misuse on the part of Symbol. Thereafter, Symbol
cross-moved  for  partial  summary  judgment  that it had not  engaged in patent
misuse.  On October 22, 1998, the Court granted the Company's motion for partial
summary  judgment on the issue of patent misuse on the part of Symbol and denied
Symbol's  cross-motion.  Accordingly,  the  Company  was  not  obligated  to pay
royalties to Symbol  under the `297 and `186  patents  pursuant to either of its
licensing agreements for products manufactured or sold on or after April 1, 1996
unless and until the misuse was purged.  Symbol moved for reconsideration of the
Court's Decision, and also moved for permission to file an interlocutory appeal,
rather than wait for the final  adjudication of the case. On April 28, 1999, the
Court denied Symbol's motions for reconsideration  and for interlocutory  appeal
of the Court's October 1998 Order granting the Company partial summary  judgment
against Symbol for patent misuse.

     Pursuant to a scheduling  order dated October 6, 1999, the contract  issues
in the litigation  were submitted as  cross-motions  for summary  judgment filed
with the Court in November 1999.

     On February 8, 2000,  an order was  entered by the United  States  District
Court for the  Western  District  of New York  based  upon a  decision  of Judge
Michael A. Telesca (the Decision and Order),  which held (1) that the Company is
obligated to pay Symbol a royalty under the  Symbol-PSC  License  Agreements for
any product  manufactured  by the Company that  practices  the  licensed  Symbol
patent  rights  described in those  Agreements  rather than a royalty under more
favorable Symbol-Scanning License Agreements to which the Company succeeded when
it acquired Scanning and (2) that Symbol purged its misuse on October 23, 1998.

         Thereafter, several motions were made by the parties:

         a.    On  February   23,   2000,   the  Company   filed  a  motion  for
               reconsideration  and clarification of the Decision and Order and,
               in the alternative,  for certification of an interlocutory appeal
               thereof under 28 U.S.C.  ss. 1292(b).  These motions were opposed
               by Symbol.

                                      -17-
<PAGE>

         b.    On March 10, 2000, Symbol filed a motion for an order holding the
               Company in contempt of the Decision and Order and imposing a fine
               on the  Company  for each day of  non-compliance  therewith.  The
               Company opposed the motion.

         c.    On March 21, 2000, the Company filed a cross-motion for a stay of
               any money  payments due under the  Decision and Order,  pending a
               final  adjudication  in the  action.  This  motion was opposed by
               Symbol.

     All  the  foregoing  motions  are  currently  scheduled  to  be  considered
submitted without oral argument,  unless the Court otherwise  directs,  on April
19, 2000.

     On March 14,  2000,  Symbol  commenced  an  unrelated  action (the  Eastern
District Action) against the Company in the United States District Court for the
Eastern  District  of New York for the  alleged  infringement  by the  Company's
Momentum bar code scanner  module of Symbol's  patents Nos.  5468952 and 6036098
(CV-001432).  On April 6, 2000,  the Company filed an answer to the complaint in
that action in which it denies  infringement,  pleads four affirmative  defenses
and asserts two counterclaims.

     On March 27, 2000, Symbol filed a motion for an injunction pendente lite in
the Eastern  District  Action.  On March 28,  2000,  this  motion was  summarily
dismissed  without  prejudice,  because  Symbol  filed a brief in  excess of the
applicable page  limitation.  Symbol intends to refile that motion and is asking
permission  to file an oversized  brief.  This motion is returnable on April 26,
2000.  When  Symbol  refiles its motion for an  injunction  pendente  lite,  the
Company will oppose it. The action is in its  preliminary  stage.  However,  the
Company believes it to be without merit and will vigorously defend the claims.

Lemelson

     On July  21,  1999,  the  Company  and six  other  leading  members  of the
Automatic  Identification and Data Capture industry jointly initiated litigation
(the Auto ID  Action)  in the United  States  District  Court of Nevada in Reno,
Nevada against the Lemelson Medical, Educational & Research Foundation,  Limited
Partnership (the Lemelson Partnership).  In the Auto ID Action, entitled "Symbol
Technologies,   Inc.  et  al.  v.  Lemelson  Medical,   Educational  &  Research
Foundation,  Limited  Partnership",  the Auto ID  companies  seek,  among  other
remedies,  a declaration that certain  patents,  which have been asserted by the
Lemelson  Partnership  against  end users of bar code  equipment,  are  invalid,
unenforceable  and not  infringed.  The  other  plaintiffs  in the  lawsuit  are
Accu-Sort  Systems,  Inc.,  Intermec  Technologies  Corporation,  a wholly-owned
subsidiary of UNOVA, Inc.,  Metrologic  Instruments,  Inc., Symbol Technologies,
Inc.,  Teklogix   Corporation,   a  wholly-owned  U.S.  subsidiary  of  Teklogix
International,  Inc. and Zebra  Technologies  Corporation.  Symbol has agreed to
bear  approximately  half of the legal and related expenses  associated with the
litigation,  with the  remaining  portion being borne equally by the Company and
the other five Auto ID companies.

     Although  no  claim  is now  being  asserted  by the  Lemelson  Partnership
directly against the Company, the Lemelson Partnership has contacted many of the
Company's and other Auto ID companies'  customers  demanding a one-time  license
fee for  certain  so-called  "bar  code"  patents  transferred  to the  Lemelson
Partnership  by the late Jerome H.  Lemelson.  The Company and the other Auto ID
companies  have received many  requests  from their  customers  asking that they
undertake the defense of these claims using their knowledge of the technology at
issue.  Certain of these  customers have requested  indemnification  against the
Lemelson  Partnership's claims from the Company and the other Auto ID companies,
individually and/or collectively with other equipment suppliers. The Company and
the other Auto ID companies  believe that  generally  they have no obligation to
indemnify  their  customers  against  these  claims and that the  patents  being
asserted by the Lemelson Partnership against their customers with respect to bar
code  equipment  are invalid,  unenforceable  and not  infringed.  However,  the
Company and the other Auto ID  companies  believe  that the  Lemelson  claims do
concern the Auto ID industry at large and that it is appropriate for them to act
jointly to protect  their  customers  against  what they  believe to be baseless
claims being  asserted by the  Lemelson  Partnership.  The Lemelson  Partnership
moved to dismiss, transfer and/or stay the Auto ID Action.

     On March 21, 2000,  the U.S.  District  Court in Nevada denied the Lemelson
Partnerhip's  motion to dismiss,  transfer  or stay the Auto ID Action.  It also
struck one of the five counts in the Action and ordered the Action  consolidated
with an action against the Lemelson  Partnership  brought by Cognex  Corporation
pending in the same Court.
                                      -18-
<PAGE>

     On  March  31,  2000,  the  Lemelson  Partnership  moved  (1) to have a new
Magistrate  appointed  and (2) to  transfer  the case from  Reno,  Nevada to the
unofficial  southern  division of Nevada in Las Vegas.  The motion was denied by
the Court on April 10, 2000.  A  scheduling  hearing was held on April 13, 2000.
This litigation is in its early stages.

International Automated Systems

     On or about July 2, 1999,  International  Automated  Systems  (IAS) filed a
complaint  in the State of Utah  against the Company and Optimal  Robotics  Corp
(Optimal) alleging patent infringement.  The complaint was served on the Company
on or about August 23, 1999. An answer and counterclaim on behalf of the Company
and  Optimal  was served on IAS on or about  October  22,  1999.  A reply to the
counterclaim was filed on November 12, 1999. The Kroger Company and Smith's Food
and Drug have been added to the case as defendants. Optimal has retained counsel
to represent Optimal,  the Company and the other companies.  This case is in the
discovery   phase.   The   Company's   contract   with   Optimal   provides  for
indemnification  obligations on the part of Optimal.  The Company  believes that
the lawsuit will not have a material adverse effect on the Company's business or
prospects  and,  with Optimal and the other  defendants,  intends to  vigorously
defend the claim.

Metrologic Instruments, Inc.

     On or about October 13, 1999, Metrologic  Instruments,  Inc. commenced suit
against the Company in the United States  District Court for the District of New
Jersey alleging patent  infringement and seeking damages and injunctive  relief.
The Company filed an answer and  counterclaim  on December 22, 1999.  The action
involves  seven  patents.  The Company  believes that the claims  against it are
without merit and intends to vigorously defend the action.

     Following a status  conference  on January 26,  2000,  the  District  Court
referred this action to a mediator in accordance with its non-binding  mediation
program.  On April 4, 2000,  the parties met with the  mediator.  An  additional
session  has been  scheduled  for May 4,  2000.  A stay of  discovery  and other
proceedings  has been  ordered to May 15, 2000 to permit the parties to focus on
the mediation process.

           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, 1999.

                                      -19-
<PAGE>


                        EXECUTIVE OFFICERS OF REGISTRANT


The Company's executive officers as of December 31, 1999, were as follows.

Name                       Age              Officer/Position
----                       ---              ----------------

Robert C. Strandberg       42.....President and Chief Executive Officer

Charles E. Biss            47.....Vice President, Verification Products

Cecil F. Bowes             56.....Vice President, Sales - The Americas,
                                  Asia Pacific Rim

Nigel P. Davis             49.....Vice President, Sales - Europe,
                                  Middle East, Africa

Phillip A. Eckerdt         52.....Vice President, Operations

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

Dennis T. Hopwood          50.....Vice President, Human Resources

David L. Latimer           48.....Vice President, Product Marketing

Elizabeth J. McDonald      46.....Vice President, Corporate Counsel and
                                  Assistant Secretary

Linda J. Miller            39.....Senior Vice President and General Manager

William L. Parnell, Jr.    43.....Chief Operating Officer and
                                  Senior Vice President

George A. Plesko           53.....Senior Vice President

Brad R. Reddersen          47.....Vice President, Chief Technology Officer

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

Michael J. Stachura        44.....Vice President, Finance

Roger D. Tedford           46.....Vice President, Chief Information Officer

G. Lloyd West              54.....Senior Vice President, Global Sales Operations

William J. Woodard         48.....Vice President, Chief Financial Officer and
                                  Treasurer

                                      -20-
<PAGE>


     Robert C. Strandberg has served as a director since May 1998. He has served
as the President and Chief Executive Officer of the Company since April 1997 and
as Executive Vice  President  from November 1996 until April 1997.  Between 1991
and 1996, Mr.  Strandberg was Chairman of the Board of Directors,  President and
Chief  Executive  Officer  of  Datamax  International  Corporation  ("Datamax"),
Orlando,  Florida.  Datamax designs and manufactures  thermal bar code printers.
Mr. Strandberg is a director of Sawtech, Inc., Orlando,  Florida, a manufacturer
of surface  acoustical  filters for  cellular  phones.  He is also a director of
Merix  Corporation,  Forest Grove,  Oregon,  a manufacturer of advanced  printed
circuit boards for use in sophisticated  electronic  equipment.  Mr.  Strandberg
holds a B.S. degree in Industrial  Engineering  Operations Research from Cornell
University and an M.B.A. degree from Harvard University.

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

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

     Nigel P. Davis has served as Vice President,  Sales - Europe,  Middle East,
Africa (EMEA) since July 1996.  Prior thereto,  he was Group Director,  EMEA for
Spectra  from  March  1993 to May  1996.  Before  joining  Spectra,  he held the
position of Vice President, EMEA for Prime Computer, Inc.

     Phillip A. Eckerdt has served as Vice President,  Operations since May 1999
and Director of Materials from July 1996 until May 1999.  Prior thereto,  he was
Director  of  Materials  for Spectra  from  November  1990 until July 1996.  Mr.
Eckerdt holds a B.S. degree in Psychology from Washington  State  University and
an M.S. degree in International Management from the University of Oregon.

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

     Dennis T. Hopwood  served as Vice  President,  Human  Resources  since July
1997. As of January 11, 2000,  Mr. Hopwood left the Company.  Prior thereto,  he
was Vice  President,  Human Resources for Spectra from May 1985 to January 1997.
Mr. Hopwood holds a B.S. degree in Sociology from the University of Idaho and an
M.S. degree in Higher Education Administration from the University of Wisconsin.

     David L. Latimer has served as Vice President,  Product Marketing since May
1998. Prior thereto,  he was Vice President of Product Marketing at Percon Inc.,
Eugene, Oregon, a manufacturer of bar code reading products,  from February 1997
to May 1998 and  Director of Product  Marketing at Spectra  from  December  1987
until  February  1997.  He received B.S. and M.S.  degrees from  Michigan  State
University and University of Wisconsin - Milwaukee,  respectively,  and holds an
M.B.A. degree from Harvard Business School.

     Elizabeth J. McDonald has served as Vice President,  Corporate  Counsel and
Assistant  Secretary  since  July  1999,  as  Corporate  Counsel  and  Assistant
Secretary from September 1997 until July 1999 and as Assistant Corporate Counsel
from December 1996 until September 1997.  Prior thereto,  Ms. McDonald was a New
York State  Assistant  Attorney  General.  Ms. McDonald holds a B.A. degree from
Elmira College and a J.D. degree from Albany Law School of Union University.

     Linda J. Miller has served as Senior  Vice  President  and General  Manager
since May 1999 and as Vice President,  Marketing from April 1998 until May 1999.
Prior to joining the Company, Ms. Miller was Vice President of Business Planning
and  Development  for  Champion  Products,  which she joined in January  1992 as
Director  of Sales  Planning.  Ms.  Miller  holds a B.S.  degree  in  Industrial
Administration  from  General  Motors  Institute  and an M.B.A.  degree from the
University of Michigan.

                                      -21-
<PAGE>


     William L. Parnell,  Jr. served as Chief Operating  Officer and Senior Vice
since May 1999 and as Vice  President,  Operations  from  October 1996 until May
1999. On January 11, 2000, Mr. Parnell left the Company.  Prior thereto,  he was
Vice  President - Operations  of Spectra from  November 1990 until October 1996.
Mr. Parnell  received a B.S. degree in Physics from Utah State University and an
M.B.A. degree from the University of Washington.

     George A. Plesko has served as Senior Vice  President  since December 1999.
Prior to joining the  Company,  Mr.  Plesko was  President,  CEO,  Chairman  and
majority  stockholder of GAP Technologies,  Inc. (GAP) which he founded in 1989.
GAP  was  engaged  in the  design,  development  and  manufacture  of  miniature
electro-optical scanning devices. Prior to founding GAP, he served as a director
at Mars Electronics International,  Inc. Mr. Plesko is the inventor of 31 United
States  patents,  29 of which are now owned by the Company.  These include broad
patents on the world's only non-contact  laser scanning pen. Mr. Plesko received
a B.S.  degree  in  Physics  and an M.S.  degree  in  Nuclear  Physics  from the
Pennsylvania State University.

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

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

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

     Roger D. Tedford served as Vice President,  Chief Information Officer since
November 1996. On March 31, 2000,  Mr. Tedford left the Company.  Prior thereto,
he was Vice  President,  Treasurer  and  Secretary of Spectra from November 1990
until November 1996. Mr. Tedford  received a B.A.  degree in  Accounting/Finance
and an M.B.A. degree from California University at Fullerton.

     G. Lloyd West has served as Senior Vice President,  Global Sales Operations
since October 1999.  Prior to joining the Company,  Mr. West was Vice President,
International Business Development at Tektronix,  Inc. He also held positions as
Vice  President and General  Manager,  Europe and Vice President - U.S. Sales at
Tektronix.  Mr. West received a B.S. degree in Business/Mathematics  from Oregon
State University and an M.B.A. degree from the University of Oregon.

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

                                      -22-
<PAGE>

                                     PART II

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

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

                                                         High               Low
                                                         ----               ---
              1999
                  Fourth Quarter...................     $ 9.00             $6.25
                  Third Quarter....................     $10.25             $6.88
                  Second Quarter...................     $10.75             $7.63
                  First Quarter....................     $ 9.63             $7.38

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



     As of December 31, 1999, there were  approximately  1,400 holders of record
of common shares.

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

                                      -23-
<PAGE>


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

     The selected  consolidated  financial data presented  below for each of the
five years in the period  ended  December  31, 1999 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,
                                                -------------------------------------------------------------------------
                                                     1999              1998        1997            1996          1995
                                                     ----              ----        ----            ----          ----
Statement of Operations Data:
<S>                                                 <C>               <C>         <C>            <C>            <C>
     Net sales.................................     $231,324          $217,223    $207,840       $146,051       $87,516
     Cost of sales.............................      134,049           126,350     122,995 (2)     83,675        50,634
                                                -------------------------------------------------------------------------
        Gross profit...........................       97,275            90,873      84,845         62,376        36,882
     Operating expenses:
        Engineering, research and development..       18,075            15,665      13,429         11,069         4,962
        Selling, general and administrative....       45,185            42,069      43,743         37,855        23,024

        Acquisition related restructuring and
          other costs..........................         --                --          --           70,068 (3)      --
        Severance and other costs..............        8,323 (1)          --         4,191 (2)       --            --
        Amortization of intangibles from
          business acquisitions................        6,419             6,822       6,715          3,564           877
                                                -------------------------------------------------------------------------
     Income/(loss)from operations..............       19,273            26,317      16,767        (60,180)        8,019
     Interest and other income/(expense).......       (7,024)           (9,833)    (12,016)        (5,747)          676
                                                -------------------------------------------------------------------------
     Income/(loss) from continuing operations
          before income tax provision/(benefit)       12,249 (1)        16,484       4,751 (2)    (65,927) (3)    8,695
     Income tax provision/(benefit)............        4,287             5,968       1,761        (24,393)        3,246
                                                -------------------------------------------------------------------------
     Income/(loss) from continuing operations..        7,962            10,516       2,990        (41,534)        5,449
     Loss from discontinued operations.........         --                --          (101)        (5,446)         --
                                                -------------------------------------------------------------------------
     Net income/(loss).........................      $ 7,962 (1)       $10,516     $ 2,889 (2)   $(46,980) (3)   $5,449
                                                =========================================================================
      Net income/(loss) per common and
          common equivalent share:
      Basic:
         Continuing operations.................        $0.67             $0.90       $0.27         $(3.96)        $0.58
         Discontinued operations...............         --                --         (0.01)         (0.52)         --
                                                =========================================================================
      Net income/(loss)........................        $0.67 (1)         $0.90       $0.26 (2)     $(4.48) (3)    $0.58
                                                =========================================================================
      Diluted:
         Continuing operations.................        $0.58             $0.75       $0.25         $(3.96)        $0.54
         Discontinued operations...............         --                --         (0.01)         (0.52)         --
                                                =========================================================================
      Net income/(loss)........................        $0.58 (1)         $0.75       $0.24 (2)     $(4.48) (3)    $0.54
                                                =========================================================================
      Weighted average number of common and
         common equivalent shares:
         Basic.................................       11,942            11,713      11,197         10,490         9,329
         Diluted ..............................       13,751            13,993      11,843         10,490        10,013
</TABLE>

     (1)  Severance and other costs reduced 1999 income before income taxes, net
          income, basic EPS and diluted EPS by $8.3 million, $5.4 million, $0.45
          and $0.39, respectively.

     (2)  Severance and other costs reduced 1997 income before income taxes, net
          income, basic EPS and diluted EPS by $5.2 million, $3.3 million, $0.29
          and $0.28, respectively.

     (3)  The  acquisition  related  restructuring  and other costs reduced 1996
          income before income taxes,  net income,  basic EPS and diluted EPS by
          $70.1 million, $44.2 million, $4.21 and $4.21, respectively.

                                      -24-
<PAGE>


<TABLE>
<CAPTION>

                                                 Year Ended December 31,
                                    ----------------------------------------------------
                                      1999       1998        1997       1996       1995
                                      ----       ----        ----       ----       ----
Balance Sheet Data:
<S>                                 <C>        <C>        <C>        <C>        <C>
Cash and cash equivalents........   $  1,402   $  6,180   $  2,271   $ 10,838   $  5,538
Working capital..................     16,845     16,827     12,112     13,320     20,397
Total assets.....................    166,741    171,263    172,798    183,361     71,237
Long-term debt, including current
maturities.......................     73,866     93,208    108,554    127,453        623
Total shareholders' equity.......     51,333     44,199     29,330     15,301     53,327
</TABLE>

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

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

Results of Operations

     The  following  table  sets  forth,  for  the  years   indicated,   certain
consolidated financial data expressed as a percentage of net sales.

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                ----------------------------------------------------------------------
                                                        1999                   1998                     1997
                                                ---------------------  ----------------------  -----------------------
                                                                       (dollars in thousands)
<S>                                               <C>          <C>       <C>          <C>       <C>           <C>
Net sales....................................     $231,324     100.0%    $217,223     100.0%    $207,840      100.0%
Cost of sales................................      134,049      58.0      126,350      58.2      122,995 (2)   59.2
                                                 ----------  --------  -----------  ---------  ----------    --------
  Gross profit...............................       97,275      42.0       90,873       41.8      84,845       40.8
Operating expenses:
  Engineering, research and development......       18,075       7.8       15,665        7.2      13,429        6.5
  Selling, general and administrative........       45,185      19.5       42,069       19.4      43,743       21.0
  Severance and other costs..................        8,323 (1)   3.6         --          --        4,191 (2)    2.0
  Amortization of intangibles from business
     acquisitions............................        6,419       2.8        6,822        3.1       6,715        3.2
                                                 ----------  --------  -----------  ---------  -----------   --------
Income from operations.......................       19,273       8.3       26,317       12.1      16,767        8.1
Interest and other income/(expense)..........       (7,024)     (3.0)      (9,833)      (4.5)    (12,016)      (5.8)
                                                 ----------  --------  -----------  ---------  -----------   --------
Income from continuing operations before
   income tax provision......................       12,249 (1)   5.3       16,484        7.6       4,751 (2)    2.3
Income tax provision.........................        4,287       1.9        5,968        2.7       1,761        0.9
                                                 ----------  --------  -----------  ---------  -----------   --------
Income from continuing operations...........         7,962       3.4       10,516        4.9       2,990        1.4
Loss from discontinued operations...........          --         --          --          --         (101)       --
                                                 ----------  --------  -----------  ---------  -----------   --------
Net income..................................       $ 7,962 (1)   3.4%     $10,516        4.9%    $ 2,889 (2)    1.4%
                                                 ==========  ========  ===========  =========  ===========   ========
</TABLE>

     (1)  Severance  and other costs reduced 1999 income before income taxes and
          net income by $8.3 million and $5.4 million, respectively.

     (2)  Severance  and other costs reduced 1997 income before income taxes and
          net income by $5.2 million and $3.3 million, respectively.

                                      -25-
<PAGE>


Overview

PSC Inc. (the Company) achieved record annual sales in 1999 while also investing
in new products and companies  that extend its reach into higher growth  markets
and  emerging   technologies  within  the  Automatic   Identification  and  Data
Collection  (AIDC)  industry.   During  the  year,  the  Company  announced  two
acquisitions and a minority investment,  streamlined  manufacturing  operations,
strengthened  its financial  position by reducing debt and interest  expense and
increased  investments  in  product  development  and  marketing  to  accelerate
profitable revenue growth.

Some of the key results of the Company's 1999 efforts include the following:

o Sales reached a record high of $231.3 million
o Earnings per diluted share, excluding one-time charges, improved by 29% to a
  record $0.97
o Earnings  per diluted  share,  excluding  goodwill  amortization  and one-time
  charges, increased by 18% to a record $1.22
o Four quarters of EBITDA, excluding one-time  charges,  reached  $41.3  million
o Long-term  debt  declined by $21.2 million or 27%
o Two  acquisitions  and a minority  investment  were  announced, expanding the
  Company's product lines and systems solutions capabilities

The Company's solid financial position,  established earnings record, market and
technological  leadership,  and new  product  introductions  provided  a  strong
foundation  from which to increase  future  sales  growth and improve  financial
results. The Company expects growth from several investments announced in 1999.

On January 19,  2000,  the Company  acquired  all of the  outstanding  shares of
Percon Incorporated (Percon), a manufacturer of wireless and batch portable data
terminals  (PDTs),  decoders,  input devices and data management  software,  for
approximately $57.1 million. The acquisition of Percon  significantly  increased
the scope of the  Company's  product line,  enhancing  the Company's  ability to
provide  systems  type  solutions  and to expand  the  Company  into the PDT and
software/services categories of the AIDC market, which are growing rapidly.

On December 21, 1999, the Company  acquired  substantially  all of the assets of
GAP Technologies,  Inc. and GEO Labs, Inc. (GAP) for approximately $4.8 million.
GAP is a technology and research group that designs and  manufactures  miniature
laser scan engines and pen-based  scanners.  The Company recently  introduced an
innovative  consumer home shopping  appliance,  incorporating the miniature scan
engine  technology  developed by GAP. The home shopping system enables consumers
to create a shopping  list by scanning  product bar codes and then  transmitting
the list online to the retailer.

In May 1999, the Company made a minority interest  investment of $3.0 million in
Eldat  Communication  Ltd.,  which develops and  manufactures  fully  integrated
electronic price display systems for retail  applications,  including electronic
shelf labels. The system interfaces with a store's main computer,  point-of-sale
and  back-office  system  enabling  immediate,   coordinated  price  changes  to
thousands of products.

Also during 1999, the Company continued to develop its commercial and industrial
and retail  scanner  product  lines for the future.  One of the fastest  growing
product  categories  for  PSC in  1999  was  self-checkout,  with  sales  of the
U-Scan(R) Express  Self-Checkout  System up significantly  over 1998.  U-Scan(R)
Express  Self-Checkout  Systems are  manufactured  exclusively by the Company in
accordance with an agreement  entered into by the Company with Optimal  Robotics
Corp.  (Optimal)  which extends until  December 31, 2000.  During 1999,  Optimal
announced  that they would  commence  manufacturing  at the  termination  of the
agreement.  In anticipation  that the relationship with Optimal would eventually
terminate,  the Company  reserved  the right under the  agreement  to design and
manufacture its own self-checkout  product,  however,  the Company agreed not to
actually  sell,  promote  or market a  competing  product  until  the  agreement
terminates.  The Company  intends on remaining a market leader in all aspects of
retail scanning and is committed to retaining that position for the long-term.

For the Year ended December 31, 1999

Net sales of $231.3  million for the year ended  December 31, 1999  increased 7%
over 1998.  The increase in net sales is primarily  due to higher sales of fixed
position retail,  handheld retail and U-Scan(R)  Express  Self-Checkout  Systems
products  offset  by  lower  industrial  automation,   handheld  commercial  and
industrial  scanner and engine product sales.  International net sales increased
19% over the prior year  primarily due to the  introduction  of new products and
the continued  growth in the Company's  European and Asian customer  sales,  and
represented 58% of net sales in 1999 versus 52% in 1998.

                                      -26-
<PAGE>

Gross profit of $97.3 million for the year ended  December 31, 1999 increased 7%
over 1998. As a percentage of sales,  gross profit was 42.1% in 1999 compared to
41.8% in 1998.  Gross profit dollars and percentage  increased  primarily due to
the change in product mix, as higher margin fixed position products  represented
a greater percentage of total sales.

In 1999,  the Company  continued its  commitment  to new products.  Engineering,
research and  development  (ER&D)  expenses of $18.1  million for the year ended
December 31, 1999 increased $2.4 million or 15%. As a percentage of sales,  ER&D
increased to 7.8% from 7.2% in 1998.  The 1999 dollar and  percentage  increases
were primarily due to additional investments to develop new products and enhance
existing products.

Selling,  general and  administrative  (SG&A)  expenses of $45.2 million for the
year ended  December 31, 1999  increased  $3.1 million or 7%. As a percentage of
sales,  SG&A  increased  slightly to 19.5% in 1999 from 19.4% in 1998.  The 1999
dollar and percentage  increases are primarily  attributed to an increase in the
international   sales   infrastructure  to  support  higher  sales  volumes  and
additional  investments in the Company's  marketing  organization  and marketing
programs.

During the first quarter of 1999,  the Company  recorded a pretax charge of $2.1
million for severance and other costs. Of the total charge, $1.4 million was for
employee  severance and benefit costs for the elimination of  approximately  140
positions  primarily at the Webster,  New York manufacturing  facility resultant
from the consolidation of all high volume handheld scanner  manufacturing at the
Company's  Eugene,  Oregon  facility.  The remaining  $0.7 million was for early
termination  of the lease on the Company's  Webster  offsite  storage and repair
facility.  Excluding $0.2 million reversed in 1999, the Company recorded charges
against  the  accrual of $1.8  million in 1999.  As of December  31,  1999,  the
severance and other accruals were approximately  $0.1 million,  which relates to
current contractual  obligations.  These costs reduced 1999 income before income
tax  provision,  net income,  basic EPS and diluted  EPS by $1.9  million,  $1.3
million, $0.10 and $0.09, respectively.

During the fourth quarter of 1999, the Company  recorded a pretax charge of $6.4
million  for  potential  back  royalty  charges  in  connection  with the Symbol
litigation.  These costs reduced 1999 income before  income tax  provision,  net
income,  basic EPS and  diluted EPS by $6.4  million,  $4.2  million,  $0.35 and
$0.30, respectively.

The  Company's  effective  tax  rate  was  35.0%  in 1999  versus  36.2% in 1998
primarily  due to  utilization  of federal tax credits and larger  Foreign Sales
Corporation  benefits  realized  during the current year.  In 1999,  the Company
recorded  a $4.3  million  income tax  provision  due to an  increase  in pretax
income.

For the Year ended December 31, 1998

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

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

In 1998, engineering,  research and development (ER&D) expenses of $15.7 million
increased $2.2 million or 17%. As a percentage of sales,  ER&D increased to 7.2%
from 6.5% in 1997. The 1998 dollar and  percentage  increases were primarily due
to additional investments to develop new products and enhance existing products.

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

                                      -27-
<PAGE>

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

During the second quarter of 1997, the Company  recorded a pretax charge of $4.2
million for severance and other costs. Of the total charge,  approximately  $2.3
million was  associated  with the Severance  Agreement with the former CEO, $1.2
million was for employee  severance  and benefit  costs for the  elimination  of
approximately 30 positions  including several senior executives and $0.7 million
was  for  the  centralization  of  research  and  development  efforts  and  the
relocation of  manufacturing  of certain product lines between the Company's two
manufacturing  facilities.  The accrual for these  activities as of December 31,
1999 was  approximately  $0.1  million,  which  relates to  current  contractual
obligations.  These costs and the inventory write-off reduced 1997 income before
income  taxes,  net  income,  basic EPS and diluted  EPS by $5.2  million,  $3.3
million, $0.29 and $0.28, respectively.

Discontinued Operations

In June 1997, the Company disposed of its TxCOM  subsidiary,  which was acquired
as a part of the Spectra acquisition. In 1997, the Company recognized a net gain
on operations of $0.2 million and a loss of $0.3 million in connection  with the
disposal of TxCOM.  This loss includes the write-down of the assets to their net
realizable value and the costs of disposing of the subsidiary, net of applicable
tax benefits.

Liquidity and Capital Resources

Current assets increased $3.1 million from December 31, 1998 primarily due to an
increase  in accounts  receivable  and  inventory  levels.  Current  liabilities
increased  $3.1 million from  December 31, 1998  primarily due to an increase in
the current portion of long-tem debt and accounts  payable offset by a reduction
in accrued  expenses.  As a result,  working  capital was consistent  with prior
year.

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

Property, plant and equipment expenditures totaled $4.8 million in 1999 and $5.8
million  in 1998.  The 1999  expenditures  primarily  related  to  manufacturing
equipment,  new product  tooling and computer  hardware.  The 1998  expenditures
primarily related to manufacturing equipment and new product tooling.

During May 1999, the Company sold its facilities and property located in Eugene,
Oregon and simultaneously  entered into a lease agreement for the facilities for
a 15 year period.  The net proceeds  from the sale totaled $8.0  million,  which
were utilized to reduce the senior credit facilities.

The long-term  debt-to-capital  percentage was 50.9% at December 31, 1999 versus
64.1% at December 31, 1998.  The decrease in  percentage  was primarily due to a
reduction  in  long-term  debt of $21.2  million  and an  increase  in  retained
earnings of $12.1 million  resultant  from 1999 net income  offset,  in part, by
$1.1 million of common  shares  repurchased  during 1999.  At December 31, 1999,
liquidity  immediately  available  to the  Company  consisted  of cash  and cash
equivalents of approximately  $1.4 million.  The Company has outstanding  credit
facilities  totaling $73.9 million and a revolving line of credit totaling $20.0
million, of which, there were no outstanding borrowings as of December 31, 1999.

In January  2000,  the  Company's  credit  agreement  with the senior  term loan
lenders was amended in connection with the Percon acquisition. Consequently, the
Company borrowed an additional $58.0 million resulting in total  indebtedness of
approximately  $133.6  million.  Additionally,  the Company's  revolving line of
credit was increased to $50.0 million,  of which, $23.0 million was available to
the Company  subsequent to the  acquisition.  The Company believes that its cash
resources and available  credit  facilities,  in addition to its operating  cash
flows, are sufficient to meet its requirements for the next 12 months.

                                      -28-
<PAGE>

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

Market Risk

At December 31, 1999,  the Company had  outstanding  foreign  currency  exchange
contracts to sell $7.5 million of various currencies. The difference between the
fair  value  of  these  outstanding  contracts  and  the  contract  amounts  was
immaterial.   A  hypothetical  10%  fluctuation  in  exchange  rates  for  these
currencies would change the fair value by approximately  $0.7 million.  However,
since these  contracts  hedge foreign  currency  denominated  transactions,  any
change in the fair  value of the  contracts  would be offset by  changes  in the
underlying value of the transactions being hedged.

The net assets of the  Company's  foreign  subsidiaries  at  December  31,  1999
totaled  $8.5  million.  The  potential  loss  in net  assets  resulting  from a
hypothetical  10%  adverse  change in quoted  foreign  currency  exchange  rates
amounts to $0.8 million.

At December 31, 1999, the Company had interest rate swap agreements  aggregating
a notional principal amount of $42.0 million. These swaps effectively change the
Company's  payment of interest on $42.0  million of variable  rate debt to fixed
rate debt.  Based on the fair value of these  interest  rate swap  agreements at
December 31, 1999, the Company would have received $0.2 million to terminate the
agreements.  A  hypothetical  1%  decrease  in the  replacement  swap rate would
decrease the fair value by approximately $0.3 million.

The fair value of long-term fixed interest rate debt is subject to interest rate
risk.  Generally,  the fair value of fixed  interest  rate debt will increase as
interest  rates fall and decrease as interest  rates rise.  The  estimated  fair
value of the Company's total long-term debt was $73.5 million, including current
maturities,  at December 31, 1999. A  hypothetical  1% increase from  prevailing
interest  rates at December 31, 1999 would result in a decrease in fair value of
long-term debt by approximately $1.1 million.

Year 2000

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

To mitigate the effects of the  Company's or  significant  suppliers'  potential
failure to remediate  the Year 2000 issue in a timely  manner,  the Company will
execute its contingency plan and make  arrangements for alternate  suppliers and
utilize  manual  intervention  to ensure the  continuation  of operations  where
necessary.  If it becomes  necessary  for the  Company to take these  corrective
actions,  the Company  does not believe  that this would  result in  significant
delays in business operations or have a material adverse effect on the Company's
results of operations, financial position or cash flows.

The Company  incurred  approximately  $0.6 million of incremental  out-of-pocket
costs for its Year 2000  program to  remediate  existing  computer  software and
hardware. These costs do not include internal management time, which the Company
does not separately  track,  nor the deferral of other projects,  the effects of
which were not  material to the  Company's  results of  operations  or financial
condition. As of this time, the Company has not been made aware of any Year 2000
issues nor has the Year 2000 issue had a material  adverse  impact on results of
operations, financial position or cash flows.

Euro Conversion

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

                                      -29-
<PAGE>

               ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     This item is submitted as a separate  section of this report.  See Exhibits
in Part IV.

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

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

                                    PART III

           ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required  by this item is  presented  under the  captions
entitled "Election of Directors - Information  Concerning Nominees for Directors
and Other  Incumbent  Members  of the Board of  Directors"  and  "Section  16(a)
Beneficial  Ownership  Reporting  Compliance"  contained in the Company's  proxy
statement  for the 2000  Annual  Meeting  of  Shareholders  to be filed with the
Securities and Exchange  Commission not later than 120 days after the end of the
fiscal year covered by this report, or in an amendment to this Form 10-K, 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  Company's  proxy
statement  for the 2000  Annual  Meeting  of  Shareholders  to be filed with the
Securities and Exchange  Commission not later than 120 days after the end of the
fiscal year covered by this report, or in an amendment to this Form 10-K, and is
incorporated in this report by reference thereto,  except, however, the sections
entitled  "Corporate  Performance  Graph" and the  "Report  of the  Compensation
Committee  of the Board of  Directors"  are not  incorporated  in this report by
reference.

     ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required  by this item is  presented  under  the  caption
entitled  "Security  Ownership  of Certain  Beneficial  Owners  and  Management"
contained  in the  Company's  proxy  statement  for the 2000  Annual  Meeting of
Shareholders  to be filed with the Securities and Exchange  Commission not later
than 120 days after the end of the fiscal year covered by this report,  or in an
amendment  to this Form 10-K,  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 Company's  proxy statement for the 2000
Annual  Meeting of  Shareholders  to be filed with the  Securities  and Exchange
Commission  not later than 120 days after the end of the fiscal year  covered by
this report,  or in an amendment to this Form 10-K, and is  incorporated in this
report by reference thereto.

                                      -30-
<PAGE>


PART IV

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

(a) 1    Financial Statements                                           Page
                                                                        ----

         Report of Independent Public Accountants........................38

         Consolidated Financial Statements...............................39

         Notes to Consolidated Financial Statements......................43

(a) 2    Financial Statement Schedules:

         Included in Part IV of this report:

         Schedule II       Valuation and Qualifying Accounts.............62

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

2.2  Agreement  and Plan of Merger,  dated as of November 9, 1999,  by and among
     PSC Inc., West Acquisition Corp. and Percon  Incorporated  (incorporated by
     reference to Exhibit 2.1 of the Company's  Current Report on Form 8-K as of
     January 19, 2000 ("the January 19, 2000 Form 8-K")).

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

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

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

3.4  Bylaws of the Company as currently in effect.............................63

3.5  Articles of Merger of West Acquisition Corp. into Percon Incorporated filed
     with  the  Secretary  of the  State  of  Washington  on  January  19,  2000
     (incorporated  by  reference  to Exhibit  3.1 of the  January 19, 2000 Form
     8-K).

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

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

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

                                      -31-
<PAGE>

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

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

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

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

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

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

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

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

10.3*First  Amendment to Agreement  between the Company and Robert S. Ehrlich as
     of December  11, 1998  (incorporated  by  reference  to Exhibit 10.4 of the
     Company's Annual Form 10-K for the fiscal year ended December 31, 1998 (the
     "December 31, 1998 Form 10-K")).

10.4*Second Amendment to Agreement  between the Company and Robert S. Ehrlich as
     of  July  13,  1999  (incorporated  by  reference  to  Exhibit  10.6 of the
     Company's  Quarterly Report on Form 10-Q for the quarter ended July 2, 1999
     (the "July 2, 1999 Form 10-Q")).

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

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

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

10.8*First Amendment to Employment  Agreement  between the Company and Robert C.
     Strandberg,  as of December 11, 1998  (incorporated by reference to Exhibit
     10.9 of the December 31, 1998 Form 10-K).

10.9*Second Amendment to Employment  Agreement between the Company and Robert C.
     Strandberg,  as of July 13, 1999 (incorporated by reference to Exhibit 10.5
     of the July 2, 1999 Form 10-Q).

10.10*Employment  Agreement  between the Company and Nigel P. Davis dated 1998
     (incorporated  by reference to Exhibit  10.11 of the December 31, 1998 Form
     10-K).

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

                                      -32-
<PAGE>

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

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

10.14* Amended PSC Inc.  1994 Stock  Option Plan  (incorporated  by reference to
     Exhibit  4.1 of the  Company's  Registration  Statement  on Form S-8  dated
     August 5, 1999 No. 333-84539).

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

10.16* 1997  Management  Incentive  Plan  (incorporated  by reference to Exhibit
     10.12 of the Company's December 31, 1997 Form 10-K).

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

10.18Credit  Agreement  dated July 12,  1996  among PSC  Acquisition,  Inc.,  as
     Borrower,  PSC Inc. and  Guarantor,  the Initial  Lenders named therein and
     Fleet Bank as Initial Issuing Bank and Administrative  Agent, together with
     Form of Term A Note,  Form of Term B Note and Form of Working  Capital Note
     (incorporated by reference to Exhibit 10.2 of the 1996 8-K).

10.19First  Amendment  dated as of  September  27, 1996 to the Credit  Agreement
     dated as of July 12, 1996 among PSC Scanning  Inc., as Borrower,  PSC Inc.,
     as Guarantor,  the financial  institutions  party thereto and Fleet Bank as
     initial Issuing Bank and administrative agent (incorporated by reference to
     Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter
     ended September 27, 1996 (the "September 27, 1996 Form 10-Q")).

10.20Second  Amendment dated as of July 4, 1997 to the Credit Agreement dated as
     of July 12,  1996  among PSC  Scanning  Inc.,  as  Borrower,  PSC Inc.,  as
     Guarantor,  the  financial  institutions  party  thereto  and Fleet Bank as
     initial Issuing Bank and administrative agent (incorporated by reference to
     Exhibit 10.3 of the July 4, 1997 Form 10-Q).

10.21Amendment  Three dated as of August 13, 1997 to the Credit  Agreement dated
     as of July 12, 1996 among PSC  Scanning  Inc.,  as Borrower,  PSC Inc.,  as
     Guarantor,  the  financial  institutions  party  thereto  and Fleet Bank as
     initial Issuing Bank and administrative agent (incorporated by reference to
     Exhibit  10.5 of the  Company's  Quarterly  Report on Form  10-Q/A  for the
     quarter ended July 4, 1997 (the "July 4, 1997 Form 10-Q/A")).

10.22Consent  dated as of December 8, 1997 to the Credit  Agreement  dated as of
     July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as Guarantor,
     the financial  institutions party thereto and Fleet Bank as initial Issuing
     Bank and administrative  agent  (incorporated by reference to Exhibit 10.18
     of the Company's December 31, 1997 Form 10-K).

10.23Fourth  Amendment  dated as of April 8, 1998 to the Credit  Agreement dated
     as of July 12, 1996 among PSC  Scanning  Inc.,  as Borrower,  PSC Inc.,  as
     Guarantor,  the  financial  institutions  party  thereto  and Fleet Bank as
     initial Issuing Bank and administrative agent (incorporated by reference to
     Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter
     ended April 3, 1998).

                                      -33-
<PAGE>


10.24AmendmentFive  and  Consent  and  Waiver  dated as of March 1,  1999 to the
     Credit  Agreement  dated as of July 12, 1996 among PSC  Scanning  Inc.,  as
     Borrower, PSC Inc., as Guarantor,  the financial institutions party thereto
     and  Fleet  Bank  as  initial   Issuing  Bank  and   administrative   agent
     (incorporated by reference to Exhibit 10.1 of the July 2, 1999 Form 10-Q).

10.25Amendment Six dated as of May 1, 1999 to the Credit  Agreement  dated as of
     July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as Guarantor,
     the financial  institutions party thereto and Fleet Bank as initial Issuing
     Bank and administrative agent (incorporated by reference to Exhibit 10.3 of
     the July 2, 1999 Form 10-Q).

10.26Consent and Waiver dated as of June 30, 1999 to the Credit  Agreement dated
     as of July 12, 1996 among PSC  Scanning  Inc.,  as Borrower,  PSC Inc.,  as
     Guarantor,  the  financial  institutions  party  thereto  and Fleet Bank as
     initial Issuing Bank and administrative agent (incorporated by reference to
     Exhibit 10.4 of the July 2, 1999 Form 10-Q).

10.27Amendment  Seven and Consent and Waiver dated as of October 13, 1999 to the
     Credit  Agreement  dated as of July 12, 1996 among PSC  Scanning  Inc.,  as
     Borrower, PSC Inc., as Guarantor,  the financial institutions party thereto
     and   Fleet   Bank   as   initial    Issuing   Bank   and    administrative
     agent....................................................................76

10.28Variance dated as of October 28, 1999 to the Credit  Agreement  dated as of
     July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as Guarantor,
     the financial  institutions party thereto and Fleet Bank as initial Issuing
     Bank and administrative agent............................................81

10.29Amendment  Eight and Consent and Waiver dated as of January 19, 2000 to the
     Credit  Agreement  dated as of July 12, 1996 among PSC  Scanning  Inc.,  as
     Borrower, PSC Inc., as Guarantor,  the financial institutions party thereto
     and  Fleet  Bank  as  initial   Issuing  Bank  and   administrative   agent
     (incorporated  by  reference  to Exhibit  10.1 of the January 19, 2000 Form
     8-K).

10.30Securities   Purchase  Agreement  dated  July  12,  1996  among  PSC  Inc.,
     SpectraScan, Inc. and Equitable Life Assurance Society of the United States
     (separate but identical  Securities  Purchase  Agreements were addressed to
     each  of  the  Other   Purchasers   of  the  Senior   Subordinated   Notes)
     (incorporated by reference to Exhibit 10.1 of the 1996 8-K).

10.31Amendment No. 1 dated October 10, 1996 to  Securities  Purchase  Agreements
     among PSC Inc., PSC Scanning Inc., and Equitable Life Assurance  Society of
     the United States (separate but identical amendments were addressed to each
     of the other purchasers of the Senior Subordinated Notes)  (incorporated by
     reference to Exhibit 10.2 of the September 27, 1996 10-Q).

10.32Amendment No. 2 dated July 4, 1997 to Securities  Purchase Agreements among
     PSC Inc., PSC Scanning  Inc.,  and Equitable Life Assurance  Society of the
     United States (separate but identical  amendments were addressed to each of
     the other  purchasers of the Senior  Subordinated  Notes)  (incorporated by
     reference to Exhibit 10.4 of the July 4, 1997 Form 10-Q).

10.33Amendment  No. 3 dated August 18, 1997 to  Securities  Purchase  Agreements
     and Warrants among PSC Inc., PSC Scanning Inc., and the Purchasers named in
     the Securities  Purchase  Agreements  (incorporated by reference to Exhibit
     10.6 of the July 4, 1997 Form 10-Q/A).

10.34Consent  dated as of December 29, 1997 to  Securities  Purchase  Agreements
     and Warrants among PSC Inc., PSC Scanning Inc., and the Purchasers named in
     the Securities  Purchase  agreements  (incorporated by reference to Exhibit
     10.23 of the Company's December 31, 1997 Form 10-K).

10.35Amendment  No. 4,  Consent  and Waiver  dated  March 1, 1999 to  Securities
     Purchase Agreements and Warrants among PSC Inc., PSC Scanning Inc., and the
     Purchasers  named in the Securities  Purchase  Agreements  (incorporated by
     reference to Exhibit 10.2 of the July 2, 1999 Form 10-Q).

10.36Amendment No. 5, and Consent dated December 20, 1999 to Securities Purchase
     Agreements  and  Warrants  among  PSC  Inc.,  PSC  Scanning  Inc.,  and the
     Purchasers        named       in       the       Securities        Purchase
     Agreements...............................................................84

10.37Stock  and  Warrant  Purchase  Agreement  dated  September  4,  1997 by and
     between PSC Inc. and Hydra Investissements S.A.  (incorporated by reference
     to Exhibit 10.1 of the 1997 Form 8-K).

10.38Registration  and Investor Rights Agreement dated September 10, 1997 by and
     between PSC Inc. and Hydra Investissements S.A.  (incorporated by reference
     to Exhibit 10.2 of the 1997 Form 8-K).

10.39Lease  Agreement  between  the  Company  and Scan LLC  dated  May 12,  1999
     (incorporated  by  reference  to Exhibit  10.1 of the  Company's  Quarterly
     Report on Form 10-Q for the quarter ended April 2, 1999).

22.1 Subsidiaries of Registrant...............................................94

24.1 Consent of Independent Public Accountant, dated April 14, 2000...........95

                                      -34-
<PAGE>

(b): Reports on Form 8-K:

     Report on Form 8-K dated November 10, 1999

     Report on Form 8-K dated December 22, 1999

     Report on Form 8-K dated February 2, 2000

     Report on Form 8-K/A dated April 3, 2000


*    Management contract or compensatory plan or arrangement


                                      -35-
<PAGE>



                                   SIGNATURES

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

Dated:   April 14, 2000            PSC Inc.

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


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

Date:  April 14, 2000             Principal Executive Officer

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





Date:  April 14, 2000             Chief Financial Officer

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




Date:  April 14, 2000            Principal Accounting Officer

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


                                      -36-
<PAGE>



Date:  April 14, 2000           /s/ Jay M. Eastman
                                -----------------------------------
                                        Jay M. Eastman
                                        Director

Date:  April 14, 2000           /s/ Robert S. Ehrlich
                                -----------------------------------
                                        Robert S. Ehrlich
                                        Director, Chairman of the Board

Date:  April 14, 2000           /s/ Donald K. Hess
                                -----------------------------------
                                        Donald K. Hess
                                        Director

Date:  April 14, 2000           /s/ Thomas J. Morgan
                                -----------------------------------
                                        Thomas J. Morgan
                                        Director

Date:  April 14, 2000           /s/ James C. O'Shea
                                -----------------------------------
                                        James C. O'Shea
                                        Director

Date:  April 14, 2000           /s/ Jack E. Rosenfeld
                                -----------------------------------
                                        Jack E. Rosenfeld
                                        Director

Date:  April 14, 2000           /s/ Justin L. Vigdor
                                -----------------------------------
                                        Justin L. Vigdor
                                        Director

Date:  April 14, 2000           /s/ Romano Volta
                                -----------------------------------
                                        Romano Volta
                                        Director

Date:  April 14, 2000          /s/ Bert W. Wasserman
                               ------------------------------------
                                        Bert W. Wasserman
                                        Director


                                      -37-
<PAGE>








                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PSC Inc.:

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

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1999,  in
conformity with accounting principles generally accepted in the United States.

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


                                       /s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Rochester, New York
April 14, 2000

                                      -38-
<PAGE>

<TABLE>
<CAPTION>

                            PSC INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (All amounts in thousands, except per share data)


                                                                                        December 31,
                                                                              ------------------------------
                                                                                   1999            1998
                                                                              -------------    -------------
                                     ASSETS
<S>                                                                                <C>          <C>
Current Assets:
  Cash and cash equivalents                                                        $   1,402    $   6,180
  Accounts receivable, net of allowance for doubtful accounts
    of $685 and $1,492, respectively                                                  38,396       37,121
  Inventories, net                                                                    23,343       17,250
  Prepaid expenses and other                                                           3,514        2,946
                                                                                   ---------    ---------
     Total current assets                                                             66,655       63,497
Property, Plant and Equipment, net                                                    25,994       35,397
Deferred Tax Assets                                                                   20,762       21,244
Intangible and Other Assets, net                                                      53,330       51,125
                                                                                   ---------    ---------
     Total assets                                                                  $ 166,741    $ 171,263
                                                                                   =========    =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt                                                $  16,281    $  14,402
  Accounts payable                                                                    20,685       18,190
  Accrued expenses                                                                     7,086        8,450
  Accrued payroll and related employee benefits                                        5,758        5,628
                                                                                   ---------    ---------
     Total current liabilities                                                        49,810       46,670
Long-Term Debt, less current maturities                                               57,585       78,806
Accrued Provision for Disputed Royalties                                               6,400         --
Other Long-Term Liabilities                                                            1,613        1,588
Commitments and Contingencies

Shareholders' Equity:
   Series A convertible preferred shares, par value $.01; 110 shares authorized,
     issued and outstanding ($11,000 aggregate liquidation value)                          1            1
   Series B preferred shares, par value $.01; 175 authorized, no shares
     issued and outstanding                                                             --           --
   Undesignated preferred shares, par value $.01; 9,715 authorized, no shares
     issued and outstanding                                                             --           --
   Common shares, par value $.01; 40,000 authorized, 12,080
     and 11,869 issued, respectively                                                     121          119
   Additional paid-in capital                                                         71,843       70,068
   Retained earnings/(Accumulated deficit)                                           (18,065)     (26,027)
   Accumulated other comprehensive income/(loss)                                      (1,210)         275
   Less treasury shares repurchased at cost, 180 and 39 shares, respectively          (1,357)        (237)
                                                                                   ---------    ---------
     Total shareholders' equity                                                       51,333       44,199
                                                                                   ---------    ---------
     Total liabilities and shareholders' equity                                    $ 166,741    $ 171,263
                                                                                   =========    =========

</TABLE>


        See accompanying notes to the Consolidated Financial Statements.

                                      -39-
<PAGE>

<TABLE>
<CAPTION>

                            PSC INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                (All amounts in thousands, except per share data)


                                                                   Year Ended December 31,
                                                          --------------------------------------
                                                              1999          1998        1997
                                                          ------------  ------------ -----------
<S>                                                         <C>          <C>          <C>
Net Sales                                                   $ 231,324    $ 217,223    $ 207,840
Cost of Sales                                                 134,049      126,350      122,995
                                                            ---------    ---------    ---------
      Gross profit                                             97,275       90,873       84,845

Operating Expenses:
      Engineering, research and development                    18,075       15,665       13,429
      Selling, general and administrative                      45,185       42,069       43,743
      Amortization of intangibles resulting from business
             acquisitions                                       6,419        6,822        6,715
      Severance and other costs                                 8,323         --          4,191
                                                            ---------    ---------    ---------
           Income from operations                              19,273       26,317       16,767

Interest and Other Income:
     Interest expense                                          (7,686)     (10,246)     (12,563)
     Interest income                                              278          238          440
     Other income                                                 384          175          107
                                                            ---------    ---------    ---------
                                                               (7,024)      (9,833)     (12,016)
                                                            ---------    ---------    ---------

Income from Continuing Operations Before
     Income Tax Provision                                      12,249       16,484        4,751
Income Tax Provision                                            4,287        5,968        1,761
                                                            ---------    ---------    ---------
Income from Continuing Operations                               7,962       10,516        2,990

Discontinued Operations:
     Gain from discontinued operations, net of tax               --           --            164
     Loss on disposal of discontinued operations                 --           --           (265)
                                                            ---------    ---------    ---------
Total Loss from Discontinued Operations                          --           --           (101)
                                                            ---------    ---------    ---------
Net Income                                                  $   7,962    $  10,516    $   2,889
                                                            =========    =========    =========

Net Income Per Common and Common
      Equivalent Share:
Basic:
     Continuing operations                                  $    0.67    $    0.90    $    0.27
      Discontinued operations                                    --           --          (0.01)
                                                            ---------    ---------    ---------
      Net income                                            $    0.67    $    0.90    $    0.26
                                                            =========    =========    =========
Diluted:
     Continuing operations                                  $    0.58    $    0.75    $    0.25
      Discontinued operations                                    --           --          (0.01)
                                                            ---------    ---------    ---------
      Net income                                            $    0.58    $    0.75    $    0.24
                                                            =========    =========    =========
Weighted Average Number of Common
      and Common Equivalent Shares Outstanding:
      Basic                                                    11,942       11,713       11,197
      Diluted                                                  13,751       13,993       11,843
</TABLE>

        See accompanying notes to the Consolidated Financial Statements.

                                      -40-
<PAGE>

<TABLE>
<CAPTION>

                            PSC INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                           (All amounts in thousands)


                                                                 Year Ended December 31,
                                               ---------------------------------------------------------
                                                     1999                1998                1997
                                               -----------------    ---------------    -----------------
                                               Shares    Amount     Shares   Amount     Shares    Amount
                                               ------   --------    ------   ------     ------    ------
<S>                                              <C>     <C>           <C>   <C>          <C>    <C>
Series A Convertible Preferred Shares:
   Balance, beginning of year                     110    $     1       110   $     1      --     $  --
   Issuance of preferred shares                  --         --        --        --         110         1
                                              -------    -------   -------   -------   -------   -------
   Balance, end of year                           110    $     1       110   $     1       110   $     1
                                              =======    =======   =======   =======   =======   =======

Common Shares:
   Balance, beginning of year                  11,830    $   119    11,351   $   114    11,122   $   112
   Issuance of shares pursuant to
      Employee Stock Purchase Plan                129          1       107         1        67         1
   Issuance of restricted stock awards, net      --         --          62         1         7      --
   Shares repurchased                            (141)      --        --        --        --        --
   Exercise of options                             82          1       310         3       155         1
                                              -------    -------   -------   -------   -------   -------
   Balance, end of year                        11,900    $   121    11,830   $   119    11,351   $   114
                                              =======    =======   =======   =======   =======   =======

Additional Paid-In Capital:
   Balance, beginning of year                            $70,068             $66,734             $54,891
   Issuance of shares pursuant to
      Employee Stock Purchase Plan                           964                 737                 390
   Exercise of options                                       594               1,983               1,150
   Issuance of restricted stock awards, net                 --                   590                  70
   Deferred compensation for restricted
      stock awards, net of amortization                      175                (459)                (70)
   Issuance of preferred shares, net                        --                  --                 9,595
   Issuance of warrants                                     --                  --                   617
   Tax benefit from exercise or early
      disposition of stock options                            42                 483                  91
                                                         -------             -------             -------
   Balance, end of year                                  $71,843             $70,068             $66,734
                                                         =======             =======             =======

Retained Earnings/(Accumulated Deficit):
   Balance, beginning of year                           $(26,027)           $(36,543)           $(39,432)
   Net income                                              7,962              10,516               2,889
                                                        ---------           ---------           ---------
   Balance, end of year                                 $(18,065)           $(26,027)           $(36,543)
                                                        =========           =========           =========

Accumulated Other Comprehensive
   Income/(Loss):
   Balance, beginning of year                           $    275            $   (739)           $    (33)
   Foreign currency translation adjustment                (1,173)                702                (706)
   Unrealized (loss)/gain on securities                     (312)                312                --
                                                        ---------           ---------           ---------
   Balance, end of year                                 $ (1,210)           $    275            $   (739)
                                                        =========           =========           =========

Treasury Shares:
   Balance, beginning of year                           $   (237)           $   (237)           $   (237)
   Shares repurchased                                     (1,120)               --                  --
                                                        ---------           ---------           ---------
   Balance, end of year                                 $ (1,357)           $   (237)           $   (237)
                                                        =========           =========           =========
Comprehensive Income:
   Net Income                                           $  7,962            $ 10,516            $  2,889
   Other comprehensive income/(loss), net of tax:
      Foreign currency translation adjustment             (1,173)                702                (706)
      Unrealized (loss)/gain on securities                  (312)                312                --
                                                        ---------           ---------           ---------
   Comprehensive Income                                 $  6,477            $ 11,530            $  2,183
                                                        =========           =========           =========

</TABLE>

        See accompanying notes to the Consolidated Financial Statements.

                                      -41-
<PAGE>

<TABLE>
<CAPTION>

                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (All amounts in thousands)

                                                                       Year Ended December 31,
                                                                  --------------------------------
                                                                    1999        1998         1997
                                                                  --------    --------    --------
<S>                                                               <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                        $  7,962    $ 10,516    $  2,889
Adjustments to reconcile net income to
    net cash provided by operating activities:
        Depreciation and amortization                               13,300      13,399      13,735
        Loss on disposition of assets                                 --             9         109
        Loss on disposal of discontinued operations                   --          --           265
        Deferred tax assets                                            482       2,332       1,197
        (Increase) decrease in assets:
           Accounts receivable, net                                 (1,284)     (2,029)     (6,705)
           Inventories                                              (6,093)        473         581
           Prepaid expenses and other                                 (568)     (1,377)         80
        Increase (decrease) in liabilities:
           Accounts payable                                          2,495         190       2,467
           Accrued expenses                                           (982)        630      (3,190)
           Accrued payroll and related employee benefits                88        (477)     (1,855)
           Accrued provision for disputed royalties                  6,400        --          --
           Accrued acquisition related restructuring costs            (414)       (819)     (3,830)
                                                                   --------    --------    --------
             Net cash provided by operating activities              21,386      22,847       5,743
                                                                   --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                (4,752)     (5,792)     (6,557)
Additions to intangible and other assets                            (9,736)     (1,559)       (343)
Proceeds from sale/leaseback and land sale                           8,620        --          --
Repayment of notes for stock option activity                          --           325         278
                                                                   --------    --------    --------
             Net cash used in investing activities                  (5,868)     (7,026)     (6,622)
                                                                   --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt                                         11,750      11,500       5,000
Payments of long-term debt                                         (31,092)    (26,846)    (23,899)
Additions to other long-term liabilities                              --          --         1,398
Payments of other long-term liabilities                               (263)       (476)       (655)
Exercise of options and the issuance of common shares                1,559       2,725       1,542
Purchase of treasury stock                                          (1,120)       --          --
Issuance of preferred shares and warrants, net                        --          --        10,213
Tax benefit from exercise or early disposition of stock options         43         483          91
                                                                   --------    --------    --------
             Net cash used in financing activities                 (19,123)    (12,614)     (6,310)
                                                                   --------    --------    --------

Effect of exchange rate changes on cash and cash equivalents        (1,173)        702      (1,378)
                                                                   --------    --------    --------

Net (Decrease) Increase in Cash and Cash Equivalents                (4,778)      3,909      (8,567)

CASH AND CASH EQUIVALENTS:
                Beginning of year                                    6,180       2,271      10,838
                                                                   --------    --------    --------
                End of year                                        $ 1,402     $ 6,180     $ 2,271
                                                                   ========    ========    ========
Supplemental disclosures of cash flow information:
  Interest paid                                                    $ 7,607     $10,059     $13,804
  Income taxes paid                                                $ 3,739     $ 2,455     $   438
</TABLE>

        See accompanying notes to the Consolidated Financial Statements.

                                      -42-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


1.  DESCRIPTION OF BUSINESS

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

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Cash and Cash Equivalents

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

Inventories

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

Property, Plant and Equipment

     Property,  plant  and  equipment  are  recorded  at cost  less  accumulated
depreciation.   Expenditures   for   maintenance   and  repairs  are   expensed;
expenditures for renewals and improvements are generally capitalized.  Upon sale
or retirement of an asset,  the related costs and accumulated  depreciation  are
removed from the accounts and any gain or loss is recognized in the consolidated
statements of operations.  Depreciation  and amortization are computed using the
straight-line method over the following estimated useful lives:

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

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

                                      -43-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


Intangibles Resulting from Business Acquisitions

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

Other Intangibles

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

     The Company reviews its long-lived  assets,  including certain  intangibles
and goodwill, in accordance with Statement of Financial Accounting Standards No.
121,  "Accounting for the Impairment of Long-lived  Assets and Long-lived Assets
to be Disposed of," for impairment  whenever events or changes in  circumstances
indicate that the carrying  amount of an asset may not be  recoverable.  If such
events or changes in  circumstances  are present,  a loss is  recognized  if the
carrying  value of the asset is in excess  of the sum of the  undiscounted  cash
flows expected to result from the use of the asset and its eventual disposition.
An impairment loss is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. No impairments were recorded in 1999,
1998 or 1997.

Income Taxes

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

Net Income per Common and Common Equivalent Share

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

Comprehensive Income

     Statement  of  Financial  Accounting  Standards  No.  130 (SFAS  No.  130),
"Reporting   Comprehensive   Income,"  requires  comprehensive  income  and  its
components to be presented in the  financial  statements.  Comprehensive  income
consists of net income, foreign currency translation  adjustments and unrealized
gains/(losses)  on securities,  net of tax, and is presented in the consolidated
statements of shareholders' equity.


                                      -44-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


Foreign Currency Translation

     The financial  statements of foreign  operations are  translated  into U.S.
dollars in accordance with Statement of Financial  Accounting  Standards No. 52,
"Foreign  Currency  Translation."  Accordingly,  all assets and  liabilities are
translated at year-end  exchange  rates.  Gains and losses  resulting  from this
process are recorded in accumulated  other  comprehensive  income/(loss)  in the
consolidated balance sheets.  Operating  transactions are translated at weighted
average  exchange  rates  prevailing  during the year and are  reflected  in net
income. Translation gains and losses were not material in 1999, 1998 or 1997.

Derivatives

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  133  (SFAS  No.  133),   "Accounting  for
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  133  establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance  sheet as either an asset or  liability  measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized in earnings  unless  specific hedge  accounting  criteria are met. As
amended by Statement of Financial  Accounting Standards No. 137, "Accounting for
Derivative  Instruments and Hedging  Activities - Deferral of the Effective Date
of FASB Statement No. 133", SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 and cannot be applied  retroactively.
The Company has not yet  quantified  the impacts of adopting SFAS No. 133 on the
financial  statements and has not determined the timing of or method of adopting
SFAS No. 133.

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

Interest Rate Risk:

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

Foreign Currency Exchange Rate Risk:

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

                                      -45-
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents, trade receivables, other
current assets,  accounts payable,  and amounts included in accruals meeting the
definition  of  a  financial  instrument  approximate  fair  value  due  to  the
short-term maturity of these instruments.  The notional amounts, carrying values
and  related  estimated  fair  values  for  the  Company's  remaining  financial
instruments are as follows:

<TABLE>
<CAPTION>
                                                   1999                                            1998
                                --------------------------------------         -----------------------------------------
                                 Notional      Carrying        Fair              Notional      Carrying         Fair
                                  Amount        Amount        Value               Amount        Amount         Value
                                -----------  ------------  -----------         ------------  ------------  -------------
<S>                              <C>            <C>          <C>                <C>            <C>              <C>
Long-term debt,
  including current
  portion                        $  --          $73,866      $73,534            $  --          $93,208          $94,145
Interest rate swap
  agreements                     $42,000        $  --        $  (156)           $60,000        $  --            $   522
Foreign currency
  exchange contracts             $ 7,460        $  --        $   (35)           $ 2,241        $  --            $    (7)
</TABLE>

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

Product Warranty

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

Research and Development Costs

     All research and development costs are expensed as incurred.

Revenue Recognition

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

Use of Estimates

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

Reclassification

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

                                      -46-
<PAGE>

                           PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999
               (All amounts in thousands, except per share data)


3.  INVENTORY

     Inventory consists of the following at December 31:

                                              1999              1998
                                          ------------      ------------
     Raw materials                          $14,358           $11,231
     Work-in-process                          5,238             2,888
     Finished goods                           3,747             3,131
                                          ------------      ------------
                                            $23,343           $17,250
                                          ============      ============

4.  PROPERTY, PLANT AND EQUIPMENT

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

                                                         1999          1998
                                                      --------      --------
     Land                                              $   234       $ 2,312
     Building and improvements                          11,041        18,114
     Office furniture and equipment                     15,028        13,347
     Production equipment                               22,027        19,702
     Leasehold improvements                              1,278           561
                                                      --------      --------
                                                        49,608        54,036
     Less:  accumulated depreciation and amortization   23,614        18,639
                                                      --------      --------
                                                       $25,994       $35,397
                                                      ========      ========

     Depreciation expense for 1999, 1998 and 1997 amounted to $6,005, $5,855 and
$6,478,  respectively.  Amortization  of capital  lease  assets is  included  in
depreciation expense.

     During May 1999, the Company sold its  facilities  and property  located in
Eugene,  Oregon  and  simultaneously  entered  into a  lease  agreement  for the
facilities  for a 15  year  period.  The  lease  is  being  accounted  for as an
operating  lease, and the resulting gain of $0.5 million is being amortized over
the life of the lease.  The annual rental  expense will be $0.8  million,  which
will be paid in quarterly  installments.  The net proceeds from the sale totaled
$8.0 million which were utilized to reduce the senior credit facilities.

5.  INTANGIBLE AND OTHER ASSETS

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

                                                          1999         1998
                                                        --------      -------
     Intangibles resulting from business acquisitions    $71,103      $66,749
     Other intangibles                                     4,695        3,522
     Other assets                                          5,008        1,273
                                                        --------      -------
                                                          80,806       71,544
     Less:  accumulated amortization                      27,476       20,419
                                                        --------      -------
                                                         $53,330      $51,125
                                                        ========      =======

     Amortization expense for 1999, 1998 and 1997 amounted to $7,120, $7,413 and
$7,257, respectively.


                                      -47-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     On December 21, 1999, the Company acquired  substantially all of the assets
from GAP  Technologies,  Inc. and GEO Labs,  Inc. (GAP) for  approximately  $4.8
million,  which  included  the  assumption  of  certain  liabilities.  GAP  is a
technology and research group that designs and  manufactures  laser scan engines
and  pen-based  scanners.  The  acquisition  was accounted for as a purchase and
accordingly,   the  results  of  GAP's  operations  are  included  in  the  1999
consolidated statements of operations since the date of acquisition.  The excess
purchase price over the fair value of net assets acquired was approximately $5.0
million and is being amortized on a straight-line basis over 10 years.

     In May 1999,  the  Company  made a  minority  interest  investment  of $3.0
million in a company which develops and manufactures fully integrated electronic
price display systems, including electronic shelf labels.

6.  ACCRUED EXPENSES

     Accrued expenses consist of the following at December 31:

                                                 1999              1998
                                               --------          --------
     Accrued warranty                           $1,740             $1,738
     Accrued royalty                               815              1,412
     Accrued taxes                               1,248              1,098
     Deferred revenue                              665                629
     Other expenses                              2,618              3,573
                                              --------           --------
                                                $7,086             $8,450
                                              ========           ========

7.  LONG-TERM DEBT

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

                                             1999               1998
                                           --------           --------
     Senior term loan A                     $22,004            $37,000
     Senior term loan B                      19,996             23,000
     Subordinated term loan                  29,607             29,547
     Subordinated promissory note             2,188              3,438
     Other                                       71                223
                                           --------           --------
                                             73,866             93,208
        Less:  current maturities            16,281             14,402
                                           --------           --------
                                            $57,585            $78,806
                                           ========           ========

     Term loan A is a senior loan with five lenders,  having a final maturity in
June 2001, at a current  floating  interest rate of 7.4%, paid quarterly,  and a
swapped  fixed  rate of 6.9%.  Term loan B is a senior  loan with four  lenders,
having a final maturity in December 2002, at a current floating interest rate of
7.9%, paid quarterly, and a swapped fixed rate of 7.4%. The interest rate swaps,
which were entered into on September 30, 1998,  expire on or about September 30,
2000 for both loans.

     The Company has  revolving  credit  facilities  with the term loan lenders,
which mature in 2001,  totaling  $20.0  million.  As of December  31, 1999,  the
Company had no borrowings outstanding under these facilities. The unused portion
of the revolving  credit facility is subject to a commitment fee of 0.375%.  The
senior debt facilities have collateral in all of the assets of the Company.

     The subordinated term loan is from five lenders, at a fixed rate of 11.25%,
paid  quarterly,  with  principal  payments  starting  in June  2003 and a final
maturity in June 2006. This debt has an associated unamortized discount of $393,
which has been netted against the total outstanding balance of $30.0 million.

                                      -48-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     The subordinated promissory note matures in 2001 and has a current floating
interest rate of 9.5%, paid quarterly. The subordinated term loan and promissory
note are unsecured.

     The other debt is principally composed of capital lease obligations.

     The senior debt and subordinated  term loan agreements  restrict payment of
dividends,  limit  stock  repurchases  and require  the  maintenance  of certain
financial  ratios.  The Company was in compliance with all of these covenants as
of December  31, 1999 as a result of obtaining  amendments  and waivers from the
senior and subordinated debt holders.

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

                                 2000                          $16,281
                                 2001                           19,453
                                 2002                            8,503
                                 2003                            7,507
                                 2004                            7,508
                                 Thereafter                     14,614
                                                              ---------
                                                               $73,866
                                                              =========

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

8.  INCOME TAXES

     The  provision  for income taxes  consisted of the  following for the years
ended December 31:

                        1999            1998           1997
                     ----------      ----------     ----------
     Current:
       Federal         $1,700          $1,943         $  244
       State              709             110             59
       Foreign          1,394           1,583            261
     Deferred:
       Federal            450           2,299          1,658
       State               34              33           (461)
                     ----------     -----------     ----------
                       $4,287          $5,968         $1,761
                     ==========     ===========     ==========

     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:

                                                     1999      1998      1997
                                                    ------    ------    ------
     Statutory U.S. federal rate                     35.0%     35.0%     34.0%
     State income taxes, net of
       federal income tax benefit                     3.8%      0.4%      4.2%
     Goodwill amortization                            --        0.8%      2.7%
     FSC benefit                                     (6.2%)    (4.7%)    (3.7%)
     Foreign income taxes in excess of U.S. rate      1.3%      3.7%      0.2%
     Meals and entertainment                          1.1%      0.6%      2.1%
     Miscellaneous items, net                         --        0.4%     (2.4%)
                                                    ------    ------    ------
                                                     35.0%     36.2%     37.1%
                                                    ======    ======    ======

                                      -49-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


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

                                                           1999        1998
                                                        ---------   ---------
     Intangibles resulting from business acquisitions   $ 16,567    $ 17,229
     Accrued provision for disputed royalties              2,240        --
     Tax credit carryforwards                              2,016       1,914
     Net operating loss carryforwards                       --         1,211
     Inventory reserve                                     1,155       1,103
     Warranty reserve                                        995       1,091
     Plant and equipment                                    (836)       (663)
     Allowance for doubtful accounts                         208         509
     Other, net                                              (17)        416
                                                         --------    --------
                                                          22,328      22,810
     Less:  valuation allowance                           (1,566)     (1,566)
                                                         --------    --------
     Net deferred tax asset                              $ 20,762    $ 21,244
                                                         ========    ========

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

     At December  31,  1999 and 1998,  the Company has tax credits of $2,016 and
$1,914, respectively,  which primarily represent state investment tax credit and
federal general business credit carryforwards that expire between 2010 and 2019.

9.  COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

     Certain equipment and properties are rented under  noncancelable  operating
leases that expire at various  dates through  2014.  Total rental  expense under
operating leases was approximately  $3,284,  $2,581,  and $2,214,  for the years
ended December 31, 1999, 1998 and 1997, respectively.

     During May 1999, the Company sold its  facilities  and property  located in
Eugene,  Oregon  and  simultaneously  entered  into a  lease  agreement  for the
facilities  for a 15  year  period.  The  lease  is  being  accounted  for as an
operating  lease, and the resulting gain of $0.5 million is being amortized over
the life of the lease.  The annual rental  expense will be $0.8  million,  which
will be paid in quarterly  installments.  The net proceeds from the sale totaled
$8.0 million which were utilized to reduce the senior credit facilities.

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

                        2000                    $ 3,214
                        2001                      2,464
                        2002                      1,803
                        2003                        998
                        2004                        847
                        Thereafter                7,722
                                                -------
                                                $17,048
                                                =======

                                      -50-
<PAGE>

                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


Employment and Consulting Agreements

     The  Company  has an  employment  agreement  with the  President  and Chief
Executive  Officer and a consulting  agreement with the Chairman of the Board of
Directors  which  terminate on December 31, 2000 and for which the Company has a
minimum commitment aggregating  approximately $421 plus benefits at December 31,
1999. The commitment is payable ratably over the term of the contracts.

Royalty Agreements

     The Company  currently has  cross-license  agreements with certain industry
competitors. Under these agreements,  royalties are paid by the Company on sales
of certain  licensed  products.  Royalty  expense  under  these  agreements  was
included in selling, general and administrative expense in 1999, 1998 and 1997.

Legal Matters

     The automatic  identification and data capture industry is characterized by
substantial  litigation regarding patent and other intellectual property rights.
On or about April 1, 1996, the Company filed suit in the United States  District
Court for the  Western  District  of New York  located  in  Rochester,  New York
against Symbol  Technologies,  Inc.  (Symbol)(97-CV-06152)  for violation of the
antitrust   laws  and   unfair   trade   practices   and  for   declaration   of
non-infringement  and/or invalidity of certain of Symbol's  patents.  Symbol has
counterclaimed,  alleging patent  infringement and alleging  breaches of certain
Symbol-PSC  License  Agreements.  The Company informed Symbol that subsequent to
the acquisition of  Spectra-Physics  Scanning  Systems,  Inc., now PSC Scanning,
Inc. (Scanning),  it has been operating under certain  Symbol-Scanning  licenses
rather than under the Symbol-PSC licenses.  Proceedings were stayed with respect
to all  issues  other than the  contract  issues  involved  in the status of the
various licenses.

     Pursuant to a scheduling  order dated October 6, 1999, the contract  issues
in the litigation  were submitted as  cross-motions  for summary  judgment filed
with the Court in November  1999.  On February 8, 2000,  an order was entered by
the United States District Court for the Western District of New York based upon
a decision of Judge Michael A. Telesca (the Decision and Order),  which held (1)
that the  Company  is  obligated  to pay Symbol a royalty  under the  Symbol-PSC
License  Agreements for any product  manufactured  by the Company that practices
the licensed Symbol patent rights  described in those  Agreements  rather than a
royalty under more  favorable  Symbol-Scanning  License  Agreements to which the
Company  succeeded  when it acquired  Scanning  and (2) that  Symbol  purged its
misuse on October 23, 1998.

     Thereafter,  several  motions were made by the  parties:(a) On February 23,
2000, the Company filed a motion for  reconsideration  and  clarification of the
Decision  and  Order  and,  in  the   alternative,   for   certification  of  an
interlocutory  appeal  thereof under 28 U.S.C.  ss. 1292 (b). These motions were
opposed by Symbol.  (b) On March 10,  2000,  Symbol  filed a motion for an order
holding the Company in contempt of the Decision and Order and imposing a fine on
the Company for each day of  non-compliance  therewith.  The Company opposed the
motion.  (c) On March 21, 2000, the Company filed a  cross-motion  for a stay of
any  money  payments  due  under  the  Decision  and  Order,   pending  a  final
adjudication in the action. This motion was opposed by Symbol. These motions are
pending.

     On March 14,  2000,  Symbol  commenced  an  unrelated  action (the  Eastern
District Action) against the Company in the United States District Court for the
Eastern  District  of New York for the  alleged  infringement  by the  Company's
Momentum bar code scanner  module of Symbol's  patents Nos.  5468952 and 6036098
(CV-001432).  On April 6, 2000,  the Company filed an answer to the complaint in
that action in which it denies  infringement,  pleads four affirmative  defenses
and asserts two counterclaims.

                                      -51-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     On July  21,  1999,  the  Company  and six  other  leading  members  of the
Automatic  Identification and Data Capture industry jointly initiated litigation
(the Auto ID  Action)  in the United  States  District  Court of Nevada in Reno,
Nevada against the Lemelson Medical, Educational & Research Foundation,  Limited
Partnership (the Lemelson Partnership).  In the Auto ID Action, entitled "Symbol
Technologies,   Inc.  et  al.  v.  Lemelson  Medical,   Educational  &  Research
Foundation,  Limited  Partnership",  the Auto ID  companies  seek,  among  other
remedies,  a declaration that certain  patents,  which have been asserted by the
Lemelson  Partnership  against  end users of bar code  equipment,  are  invalid,
unenforceable  and not  infringed.  The  other  plaintiffs  in the  lawsuit  are
Accu-Sort  Systems,  Inc.,  Intermec  Technologies  Corporation,  a wholly-owned
subsidiary of UNOVA, Inc.,  Metrologic  Instruments,  Inc., Symbol Technologies,
Inc.,  Teklogix   Corporation,   a  wholly-owned  U.S.  subsidiary  of  Teklogix
International,  Inc. and Zebra  Technologies  Corporation.  Symbol has agreed to
bear  approximately  half of the legal and related expenses  associated with the
litigation,  with the  remaining  portion being borne equally by the Company and
the other five Auto ID companies.

     Although  no  claim  is now  being  asserted  by the  Lemelson  Partnership
directly against the Company, the Lemelson Partnership has contacted many of the
Company's and other Auto ID companies'  customers  demanding a one-time  license
fee for  certain  so-called  "bar  code"  patents  transferred  to the  Lemelson
Partnership  by the late Jerome H.  Lemelson.  The Company and the other Auto ID
companies  have received many  requests  from their  customers  asking that they
undertake the defense of these claims using their knowledge of the technology at
issue.  Certain of these  customers have requested  indemnification  against the
Lemelson  Partnership's claims from the Company and the other Auto ID companies,
individually and/or collectively with other equipment suppliers. The Company and
the other Auto ID companies  believe that  generally  they have no obligation to
indemnify  their  customers  against  these  claims and that the  patents  being
asserted by the Lemelson Partnership against their customers with respect to bar
code  equipment  are invalid,  unenforceable  and not  infringed.  However,  the
Company and the other Auto ID  companies  believe  that the  Lemelson  claims do
concern the Auto ID industry at large and that it is appropriate for them to act
jointly to protect  their  customers  against  what they  believe to be baseless
claims being  asserted by the  Lemelson  Partnership.  The Lemelson  Partnership
moved to dismiss,  transfer  and/or stay the Auto ID Action.  On March 21, 2000,
the U.S.  District Court in Nevada denied the Lemelson  Partnership's  motion to
dismiss, transfer or stay the Auto ID Action.

     On or about July 2, 1999,  International  Automated  Systems  (IAS) filed a
complaint  in the State of Utah against the Company and Optimal  Robotics  Corp.
(Optimal) alleging patent infringement.  The complaint was served on the Company
on or about August 23, 1999. An answer and counterclaim on behalf of the Company
and  Optimal  was served on IAS on or about  October  22,  1999.  A reply to the
counterclaim was filed on November 12, 1999. The Kroger Company and Smith's Food
and Drug have been added to the case as defendants. Optimal has retained counsel
to represent Optimal, the Company, and the other companies.  This case is in the
discovery   phase.   The   Company's   contract   with   Optimal   provides  for
indemnification  obligations on the part of Optimal.  The Company  believes that
the lawsuit will not have a material adverse effect on the Company's business or
prospects  and,  with Optimal and the other  defendants,  intends to  vigorously
defend the claim.

     On or about October 13, 1999, Metrologic  Instruments,  Inc. commenced suit
against the Company in the United States  District Court for the District of New
Jersey alleging patent  infringement and seeking damages and injunctive  relief.
The Company filed an answer and  counterclaim  on December 22, 1999.  The action
involves  seven  patents.  The Company  believes that the claims  against it are
without  merit and intends to vigorously  defend the action.  Following a status
conference  on January 26, 2000,  the District  Court  referred this action to a
mediator  in  accordance  with  its  non-binding  mediation  program.  A stay of
discovery and other  proceedings  has been ordered to May 15, 2000 to permit the
parties to focus on the mediation process.

                                      -52-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


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

10.  SHAREHOLDERS' EQUITY

Preferred Shares

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

Common Stock Repurchase Program

     In May 1999,  the Board of Directors  approved a plan to  repurchase  up to
$3.0 million of the Company's  common shares.  In 1999, the Company  repurchased
141 shares at a cost of approximately  $1.1 million.  The repurchased shares are
held in treasury.

Shareholder Rights Plan

     In December  1997, the Company  adopted a Shareholder  Rights Plan in which
one Preferred Share Purchase Right (the Right) was granted for each  outstanding
Common Share.  The Rights are exercisable  only if a person or group acquires or
tenders an offer that would result in the beneficial ownership of 20% or more of
the then  outstanding  Common  Shares of the  Company.  Each Right  entitles the
holder to  purchase  one  one-thousandth  of a share of the  Company's  Series B
Preferred  Shares at a purchase price of $45. Under certain  circumstances,  the
Rights  are  redeemable  at a price of $0.01  per  Right  and,  unless  redeemed
earlier,  will  expire in  December  2007.  There were no issued or  outstanding
Series B Preferred Shares at December 31, 1999 or 1998.

Stock Option Plan

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

                                      -53-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     In accordance with the provisions of the SOP, the Company may make loans to
participants  to finance the  exercise  price and related  income taxes upon the
exercise of an option.  During 1998, the Company  received loan  repayments from
participants totaling $325.

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

                                             1999          1998            1997
                                             ----          ----            ----
   Net income as reported                   $7,962        $10,516         $2,889
   Net income pro forma                     $6,835        $ 9,483         $2,175
   Net income per common and common
       equivalent share as reported:
       Basic                                 $0.67          $0.90          $0.26
       Diluted                               $0.58          $0.75          $0.24
   Net income per common and common
       equivalent share pro forma:
       Basic                                 $0.57          $0.81          $0.19
       Diluted                               $0.50          $0.68          $0.18

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used for grants in 1999, 1998 and 1997:

                                           1999          1998            1997
                                           ----          ----            ----
     Risk free interest rate               5.86%         4.53%           6.19%
     Expected dividend yield                --            --              --
     Expected lives                        4 years       4 years         4 years
     Expected volatility                     49%           51%             45%
     Fair value of options granted        $3.21          $3.99           $2.89

     The  following is a summary of stock option  activity and weighted  average
exercise prices under the Company's SOP for the years ended December 31:

<TABLE>
<CAPTION>
                                                       1999                          1998                          1997
                                             --------------------------    --------------------------    -------------------------
                                                            Weighted                      Weighted                      Weighted
                                                            Average                        Average                       Average
                                              Shares         Price           Shares         Price          Shares         Price
                                             ---------    -------------    ----------    ------------    ----------    -----------
<S>                                             <C>          <C>               <C>           <C>            <C>          <C>
Options outstanding at beginning of period      3,027        $7.98             3,046         $7.76          2,818        $8.33
Options granted                                   432         7.28               391          8.92          1,087         6.98
Options exercised                                 (82)        7.24              (310)         6.42           (155)        7.51
Options forfeited/canceled                       (156)        9.24              (100)         7.28           (704)        9.00
                                             ---------                       --------                    ---------
Options outstanding at end of period            3,221         7.84             3,027          7.98          3,046         7.76
                                             =========                       ========                    =========
Number of options at end of period:
   Exercisable                                  2,058        $8.13             1,820         $8.18         1,884         $8.06
   Available for grant                            693                              4                         394

</TABLE>

                                      -54-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     The following is a summary of stock options outstanding and exercisable for
the year ended December 31, 1999:
<TABLE>
<CAPTION>

                                            Options Outstanding                          Options Exercisable
                          -------------------------------------------------------  -------------------------------
                                            Weighted              Weighted                           Weighted
  Range of Exercise                         Average           Average Remaining                       Average
        Prices                           Exercise Price       Contractual Life                    Exercise Price
      per Share             Shares         per Share             (in years)          Shares          per Share
  -------------------     -----------    ---------------    ---------------------  ----------    ----------------
<S>                          <C>             <C>                     <C>                <C>            <C>
   $5.75 - $7.19             1,631           $ 6.70                  4.6                808            $ 6.65
   $7.19 - $8.99             1,124           $ 8.37                  3.9                882            $ 8.48
   $8.99 - $11.24              330           $ 9.93                  3.0                275            $ 9.88
   $11.24 - $13.06             136           $12.20                  3.2                 93            $12.36
</TABLE>

     On May 12,  1999,  the  shareholders  approved an increase in the number of
common shares  available for the issuance of stock options and restricted  stock
awards under the 1994 Stock Option Plan by 1,000 shares.

     During the twelve month period ended  December 31, 1999 and 1998, 35 and 33
forfeited  options were cancelled due to the expiration of the 1987 Stock Option
Plan in December 1997. These options are not available for future grants.

     The  Company  was able to realize an income tax  benefit in 1999,  1998 and
1997 from the exercise or early  disposition  of stock  options.  For  financial
reporting purposes,  this benefit resulted in a decrease in current income taxes
payable and an increase in additional paid-in capital.

Restricted Stock Awards

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

Warrants

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

     In connection with the subordinated term loan,  warrants  evidencing rights
to purchase an  aggregate  of 975 Common  Shares of the Company  were issued and
sold to the  purchasers of the  subordinated  term loan.  These warrants have an
exercise  price of $8.00 per  share and may be  exercised  at  anytime  prior to
September 15, 2006.

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

                                      -55-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


Employee Stock Purchase Plan

     The Company has an Employee  Stock Purchase Plan (the Plan) under which 600
Common Shares are authorized to be issued to its  employees.  Under the terms of
the  Plan,   eligible   employees  may  purchase  the  Company's  Common  Shares
semi-annually on approximately  January 1 and July 1 through payroll deductions.
The purchase price is the lower of 85% of the fair market value of the shares on
the first or last day of each six month  offering  period.  Employees  purchased
approximately  129 shares at an average price of $7.49 per share,  107 shares at
an average  price of $6.92 per share and 67 shares at an average  price of $5.81
per share during 1999, 1998 and 1997, respectively. The Plan expires on December
31, 2000.

     The fair value of the purchase  rights is estimated on the first day of the
offering period using the Black-Scholes  option pricing model with the following
weighted average assumptions for grants in 1999, 1998 and 1997:

                                            1999            1998          1997
                                            ----            ----          ----
     Risk free interest rate                4.76%           5.19%         5.12%
     Expected dividend yield                 --              --            --
     Expected lives                         6 mos.          6 mos.        6 mos.
     Expected volatility                    49%             51%           45%
     Fair value of purchase rights          $2.84           $3.35         $2.06

11.  ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

     Accumulated other comprehensive  income/(loss) consists of the following at
December 31:

<TABLE>
<CAPTION>
                                                                        1999
                                         ----------------------------------------------------------
                                            Foreign                                  Accumulated
                                            Currency            Unrealized               Other
                                           Translation        Gain/(Loss) on         Comprehensive
                                            Adjustment          Securities           Income/(Loss)
                                          ---------------    ----------------     ------------------
<S>                                          <C>                   <C>                  <C>
     Balance, beginning of year              $  (37)               $312                 $   275
     Current period change                   (1,173)               (312)                 (1,485)
                                          ---------------    ----------------     ------------------
     Balance, end of year                    $(1,210)              $ --                 $(1,210)
                                          ===============    ================     ==================

</TABLE>
<TABLE>
<CAPTION>
                                                                        1998
                                          ----------------------------------------------------------
                                            Foreign                                   Accumulated
                                            Currency           Unrealized                Other
                                           Translation           Gain on             Comprehensive
                                            Adjustment         Securities            Income/(Loss)
                                          ---------------   ----------------      ------------------
<S>                                          <C>                    <C>                 <C>
     Balance, beginning of year              $(739)                 $ --                $ (739)
     Current period change                     702                   312                 1,014
                                          ---------------   ----------------      ------------------
     Balance, end of year                    $ (37)                 $312                $  275
                                          ===============   ================      ==================
</TABLE>

                                      -56-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


12.  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

                                            Year Ended December 31, 1999
                                   ---------------------------------------------
                                      Income         Shares          Per-Share
                                    (Numerator)   (Denominator)        Amount
                                   ------------- ---------------   -------------
Basic EPS:
Income available to
  common shareholders                  $7,962         11,942            $0.67
                                                                       =======
Effect of dilutive securities:
Options                                 --               333
Warrants                                --               101
Preferred shares                        --             1,375
                                       ------         ------
Diluted EPS:
Income available to common
  shareholders and assumed conversions $7,962         13,751            $0.58
                                       ======         ======           =======

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


                                         Year Ended December 31, 1997
                                    --------------------------------------------
                                         Income           Shares      Per-Share
                                       (Numerator)     (Denominator)    Amount
                                    ---------------   --------------- ----------
Basic EPS:
Income available to
  common shareholders                     $2,889           11,197        $0.26
                                                                       =========
Effect of dilutive securities:
Options                                     --                195
Warrants                                    --                 29
Preferred shares                            --                422
                                         ---------       ---------
Diluted EPS:
Income available to common
  shareholders and assumed conversions    $2,889           11,843        $0.24
                                         =========       =========     =========

                                      -57-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


     Basic EPS were computed by dividing reported  earnings  available to common
shareholders by weighted average shares outstanding during the year. Diluted EPS
for the years 1999, 1998 and 1997 were determined on the following  assumptions:
1) Preferred  Shares and related  warrants issued in connection with the private
placement of equity were  converted  upon the later of issuance or the beginning
of fiscal year on September 10, 1997, January 1, 1998 and January 1, 1999 and 2)
warrants issued in connection with the acquisition of  Spectra-Physics  Scanning
Systems,  Inc.,  TxCOM S.A.  and related  businesses  (Spectra)  were  converted
January 1, 1997, January 1, 1998 and January 1, 1999.

     The following  options were not included in the  computation of diluted EPS
since the exercise  prices were greater than the average  market price of Common
Shares.  Options to purchase  1,076,  469 and 1,148 shares of common stock at an
average price of $9.62, $9.93 and $9.52 per share were outstanding for the years
ending December 31, 1999, 1998, and 1997, respectively.

13.  401(k) PLAN

     The Company's  401(k) plan is available to U.S.  employees  meeting certain
service  and  eligibility  requirements.  The  Company  pays a monthly  matching
contribution equal to 50% of the employees'  contributions up to a maximum of 6%
of their eligible  compensation.  Plan expense was $797, $761 and $717 for 1999,
1998 and 1997, respectively.

14.  SEVERANCE AND OTHER COSTS

     During the first quarter of 1999,  the Company  recorded a pretax charge of
$2.1 million for  severance and other costs.  Of the total charge,  $1.4 million
was  for  employee   severance  and  benefit  costs  for  the   elimination   of
approximately  140 positions  primarily at the Webster,  New York  manufacturing
facility  resultant from the  consolidation  of all high volume handheld scanner
manufacturing at the Company's  Eugene,  Oregon facility.  The remaining $0.7 is
for early  termination of the lease on the Company's Webster offsite storage and
repair  facility.  Excluding $0.2 million reversed in 1999, the Company recorded
charges of $1.8  million in 1999.  As of December 31, 1999,  the  severance  and
other  accruals  were  approximately  $0.1  million,  which  relates  to current
contractual  obligations.  Including $0.2 million  reversed in 1999, these costs
reduced  1999 income  before  income tax  provision,  net income,  basic EPS and
diluted EPS by $1.9 million, $1.3 million, $0.10 and $0.09, respectively.

     During the fourth quarter of 1999, the Company  recorded a pretax charge of
$6.4 million for potential  back  royalties  owed in connection  with the Symbol
litigation (see Note 9 "Commitments and  Contingencies:  Legal Matters").  These
costs reduced 1999 income before income tax provision, net income, basic EPS and
diluted EPS by $6.4 million, $4.2 million, $0.35 and $0.30, respectively.

     During the second quarter of 1997, the Company  recorded a pretax charge of
$5.2 million for severance and other costs.  Of the total charge,  approximately
$2.3 million was  associated  with the Severance  Agreement with the former CEO,
$1.2 million was for employee severance and benefit costs for the elimination of
approximately 30 positions  including several senior executives,  a $1.0 million
inventory  write-off  for the  discontinuation  of  certain  products,  and $0.7
million for the  centralization  of  research  and  development  efforts and the
relocation of  manufacturing  of certain product lines between the Company's two
manufacturing  facilities.  Of the $4.2 million  originally accrued in 1997, the
Company recorded  charges against the accrual of $0.6 million,  $2.2 million and
$1.3 million in 1999,  1998 and 1997,  respectively.  The accrual as of December
31, 1999 was approximately  $0.1 million,  which relates to current  contractual
obligations.

                                      -58-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


15.  ACQUISITION RELATED RESTRUCTURING AND OTHER COSTS

     During the third quarter of 1996,  the Company  recorded a pretax charge of
$10.0 million for the cost of restructuring  its existing  operations with those
of Spectra which was acquired in July 1996. Of the total  restructuring  charge,
approximately  $5.0  million was  associated  with the closing of the  Company's
Sanford,  Florida  manufacturing  facility,  $3.6  million  was  related  to the
write-off of previously existing intangible and tangible assets and $1.4 million
was recorded for employee  severance  and benefit costs for the  elimination  of
seven  positions.  Excluding  $0.1  million  reversed  in 1999 and $0.2  million
reversed  in 1998,  the  Company  recorded  charges  against the accrual of $0.3
million, $0.5 million and $3.7 million in 1999, 1998 and 1997, respectively.

16.  DISCONTINUED OPERATIONS

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

17.  SIGNIFICANT CUSTOMER INFORMATION

     The  Company  sells  its  products   principally   to  original   equipment
manufacturers,  value-added  resellers,  distributors  and systems  integrators.
During 1999,  1998 and 1997, no individual  customer  accounted for greater than
10% of net sales. The Company's  arrangements with major customers are generally
nonexclusive.

18.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                                         First    Second    Third     Fourth
                                        Quarter   Quarter   Quarter   Quarter
                                       --------- --------- --------- ---------
Year Ended December 31, 1999
-------------------------------
Net sales                               $59,145   $58,001   $59,031   $55,147
Gross profit                             25,605    24,022    24,901    22,747
Net income/(loss)                         2,091     3,488     3,842    (1,459)

Net  income/(loss) per common and
  common equivalent share (1):
  Basic                                   $0.18     $0.29     $0.32    $(0.12)
  Diluted                                 $0.15     $0.25     $0.27    $(0.12)

                                      -59-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)


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

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

(1)  Earnings  per share are  computed  independently  for each of the  quarters
     presented  whereby the sum of the quarterly  earnings per share in 1999 and
     1998 does not equal the total computed for the respective years.

19.  OPERATIONS BY GEOGRAPHIC AREA

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

     Sales are  allocated  to  geographic  areas based on customer  location and
long-lived  assets  represent   tangible  assets  used  in  operations  in  each
geographic area.

Year Ended December 31, 1999
----------------------------
                         North
                        America     Europe       ROW    Eliminations   Total
                       ---------   --------     -----  -------------- -------
Sales to unaffiliated
   customers            $127,344   $ 74,564   $ 29,416   $   --      $231,324
Transfers between
   geographic areas       57,013       --         --      (57,013)       --
                        --------   --------   --------   --------    --------
Total net sales          184,357     74,564     29,416    (57,013)    231,324
                        ========   ========   ========   ========    ========
Long-lived assets       $ 24,945   $    849   $    200   $   --      $ 25,994
                        ========   ========   ========   ========    ========

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


                                      -60-
<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999
                (All amounts in thousands, except per share data)

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

         Sales are summarized by product as follows:

                                   1999              1998             1997
                              --------------    -------------    --------------
Scanners                         $214,231         $197,096          $190,723
Service                            17,093           20,127            17,117
                              --------------    -------------    --------------
                                 $231,324         $217,223          $207,840
                              ==============    =============    ==============

20.  SUBSEQUENT EVENTS

Acquisition

     On January 19, 2000, the Company acquired all of the outstanding  shares of
Percon  Incorporated,  a  manufacturer  of  wireless  and  batch  portable  data
terminals,   decoders,   input  devices  and  data  management   software,   for
approximately  $57.1 million.  The Company  borrowed an additional $58.0 million
under its amended senior term loan and revolving  credit facility to finance the
acquisition.  The amended revolving credit facilities  provide for borrowings up
to  $50.0  million,  of  which,  $27.0  million  was  utilized  to  finance  the
acquisition.   The  total   indebtedness   subsequent  to  the  acquisition  was
approximately  $133.6 million.  The acquisition  will be accounted for under the
purchase method of accounting.

Litigation

         On February 8, 2000, an order was entered by the United States District
Court for the  Western  District  of New York  based  upon a  decision  of Judge
Michael A. Telesca (the Decision and Order),  which held (1) that the Company is
obligated to pay Symbol a royalty under the  Symbol-PSC  License  Agreements for
any product  manufactured  by the Company that  practices  the  licensed  Symbol
patent  rights  described in those  Agreements  rather than a royalty under more
favorable Symbol-Scanning License Agreements to which the Company succeeded when
it acquired  Scanning and (2) that Symbol purged its misuse on October 23, 1998.
On  February  23,  2000,  the  Company  filed a motion for  reconsideration  and
clarification  of  the  Decision  and  Order  and,  in  the   alternative,   for
certification  of  an   interlocutory   appeal  (see  Note  9  "Commitments  and
Contingencies:  Legal  Matters").  As a result of the  Decision  and Order,  the
Company recorded a $6.4 million pre-tax charge in the fourth quarter of 1999 for
potential  back  royalties  owed.  Commencing in the first quarter of 2000,  the
Company will record  royalty  expense at the higher  royalty  rate,  pending the
outcome of the court proceedings.

                                      -61-
<PAGE>


                                   SCHEDULE II

                            PSC INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                           (All amounts in thousands)


                                           1999           1998            1997
                                          ------         ------          ------

Accounts Receivable Reserve-
BALANCE, at beginning of year             $1,492         $1,169          $1,101
  Provision for doubtful accounts            169            469             346
  Write-offs of doubtful accounts,
     net of recoveries                      (976)          (146)           (278)
                                          -------        -------         -------
BALANCE, at end of year                   $  685         $1,492          $1,169
                                          =======        =======         =======


Restructuring Reserves-
BALANCE, at beginning of year             $  415         $1,234          $5,064
  Addition to restructuring reserves        --             --              --
  Usage of restructuring reserves           (290)          (619)         (3,830)
  Reversal of excess restructuring reserves (124)          (200)           --
                                          -------        -------         -------
BALANCE, at end of year                   $    1         $  415          $1,234
                                          =======        =======         =======

                                      -62-
<PAGE>