FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                   (Mark One)

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

     For the fiscal year ended December 31, 1996 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
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Address of principal executive offices                                  zip code

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

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

           Securities registered pursuant to Section 12(g)of the Act:
           ----------------------------------------------------------
                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

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

                                            Yes     X          No ____

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

<PAGE>


As of March 24,  1997 the  aggregate  market  value of the voting  stock held by
non-affiliates  of  the  registrant  was  approximately   $66,828,938   (Assumes
officers, directors and any shareholder holding 5% of the outstanding shares are
affiliates.)

As of March 24, 1997, there were outstanding 11,178,725 shares of Common Stock.

Documents incorporated by reference:
         Portions  of PSC  Inc.'s  Proxy  Statement  for the  Annual  Meeting of
         Shareholders to be held on May 6, 1997 are  incorporated  into Part III
         of this Form 10-K.


<PAGE>
                                TABLE OF CONTENTS

                                     PART I                           PAGE
Item   1:  Business.................................................    4
Item   2:  Properties...............................................   17
Item   3:  Legal Proceedings........................................   18
Item   4:  Submission of Matters to a Vote of Security Holders......   18
              Executive Officers of Registrant......................   19

                                     PART II

Item   5:  Market for Registrant's Common Equity and Related
              Security Holder Matters...............................   22
Item   6:  Selected Financial Data..................................   23
Item   7:  Management's Discussion and Analysis of Financial
              Condition and Results of Operations...................   24
Item   8:  Financial Statements and Supplementary Data..............   28
Item   9:  Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure................   28

                                    PART III

Item  10:  Directors and Executive Officers of the Registrant.......   28
Item  11:  Executive Compensation...................................   28
Item  12:  Security Ownership of Certain Beneficial Owners and
              Management............................................   28
Item  13:  Certain Relationships and Related Transactions...........   28

                                     PART IV

Item  14:  Exhibits, Financial Statement Schedules and Reports
              on Form 8-K...........................................   29



<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  manufactures  the
world's  broadest  line of laser  based  handheld  and fixed  position  bar code
readers,  verifiers and integrated  sortation and  point-of-sale  (POS) scanning
systems for the  worldwide  Automatic  Identification  and Data  Capture  (AIDC)
market.  The  Company's  products  serve as the "front end" of terminals or host
computers  and are used to identify,  capture,  process and transmit  data.  The
Company has  developed  products  for AIDC at every stage of the product  supply
chain  from  raw  material,   manufacturing   and  warehousing,   to  logistics,
transportation,  inventory  management and POS. The Company's  products are used
throughout  the world in food and general  retail,  healthcare,  government  and
other industries.

         The Company has  positioned  itself within the AIDC industry by selling
both  domestically  and  internationally.   International  sales  accounted  for
approximately  38%  of  the  Company's  1996  total  sales.  The  Company  has a
diversified customer base composed of original equipment  manufacturers  (OEMs),
third-party  resellers and end users. The Company's  distribution  relationships
have enabled it to introduce its products  (generally  under non-PSC  labels) to
new  vertical   markets,   and  have  fostered  the   development  of  strategic
relationships with leading AIDC participants and end users. The Company operates
within one industry segment:
automatic identification and data capture.

         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 operations in the
Americas, Europe, Asia and Australia.

RECENT DEVELOPMENT

         On July 12, 1996,  the Company  completed its purchase  agreement  with
Spectra-Physics AB of Sweden to acquire  Spectra-Physics  Scanning Systems Inc.,
TxCOM S.A. and related businesses (Spectra).  Spectra, which is headquartered in
Eugene,  Oregon,  is one of the world's leading  manufacturers of countertop and
in-counter   fixed   position  bar  code   scanners  for  retail   point-of-sale
applications.  The purchase price was approximately  $140 million.  The purchase
was funded by $125  million  cash,  $10  million  in PSC common  shares and a $5
million  subordinated  promissory note. The $125 million cash portion was funded
by a  combination  of the  Company's  cash,  senior  debt  ($92.5  million)  and
subordinated debt ($30 million). The acquisition was accounted for as a purchase
and is included in the 1996 Consolidated  Financial Statements since the date of
acquisition.  The  Company  allocated  $60.1  million of the  purchase  price to
acquired  in-process  research and development as required by generally accepted
accounting principles,  resulting in a one-time charge to the Company's earnings
in the third quarter. In connection with the acquisition, the Company recorded a
pretax  charge of $10.0  million  for the costs of  restructuring  its  existing
operations with those of Spectra.  The  acquisition  related  restructuring  and
other costs reduced 1996 income  before income taxes,  net income and net income
per share by $70.1 million, $44.2 million and $4.21, respectively.


<PAGE>



MARKETS

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

Retail

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

         The Company is currently  active in most retail  applications and sells
its  countertop  and  in-counter  bar code  scanners to customers in most retail
segments.  In  addition,  the Company has begun to target  systems-oriented  and
segment-specific  products.  One such product  currently  being  marketed by the
Company is U-Scan Express(TM),  an automated grocery store self-checkout  system
developed and licensed to the Company by Optimal  Robotics  Corporation.  U-Scan
Express(TM),  which is currently being pilot tested by several major  retailers,
is designed to permit  supermarket  customers to scan, bag and pay for purchases
with little or no assistance from store personnel.

Commercial and Industrial

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

COMPANY PRODUCTS AND SERVICES

         The  Company  offers  a wide  range of laser  based  bar code  scanning
products  such as scan  engines,  handheld,  countertop,  in-counter  and  fixed
position  scanners for use by  business,  industry  and  government  in multiple
application areas. In addition,  the Company markets a full line of accessories,
software and supplies to support its products.  This line includes such items as
cables, stands, printers,  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.

<PAGE>

         The Company's products include:

Fixed Position Scanners:  Retail

360 Degree  Scanner  and  Scanner/Scale  (Magellan(R)).  The  Company  sells the
Magellan(R),  the industry's first 360 degree scanner and  scanner/scale and the
Company's  highest  performing  in-counter  scanner.  Magellan(R)  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.
Magellan(R)  is available  with an  integrated,  30 pound  capacity  scale which
allows  retailers to combine the scanner and scale functions into a single unit.
Both the scanner and  scanner/scale  are designed for easy installation into new
and  existing   checkstands.   An  integrated  electronic  article  surveillance
deactivation antenna is also available for use in deactivating RF-based security
tags.  Magellan(R)  autodiscriminates  UPC/EAN  and up to three  industrial  bar
codes, and is available with advanced  Edge(TM)  decoding  software that enables
the scanner to read torn and disfigured  labels.  Magellan(R) also reads UPC/EAN
and Code 128 supplemental  codes, such as those found on books,  periodicals and
coupons.

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

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

Compact Scanners  (SP*ACE(TM) and PS1500).  SP*ACE(TM) is the Company's smallest
fixed  position  scanner.  Because of its compact size and  multi-position  scan
head, the SP*ACE(TM) scanner adapts easily to a variety of retail and industrial
countertop or wall-mounted applications where space and/or routing opportunities
are  limited.   SP*ACE(TM)   reads  bar  codes  up  to  eight  inches  away  and
autodiscriminates between up to four different bar code types.


The PS1500,  introduced in 1995, is a high  performance,  omni-directional,  bar
code projection  scanner ideal for retail  point-of-sale and small item material
handling  applications.  Its small footprint and well defined field of view make
it ideal for  environments  with limited counter space.  The PS1500 is typically
used for hands free scanning. Items can be swept quickly past the reader without
concern for the  orientation of the bar code label.  To read bar codes on larger
items, the PS1500 can be manually removed from its stand and repositioned.

<PAGE>

Retail Automation Systems

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

Handheld Scanners

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

Ruggedized  Industrial  Scanners (5300 IP). Like the 5300 HP, the Company's high
performance  5300 IP  handheld  scanners  are  based  on its  5301  scan  engine
platform.  The 5300 IP series scanners were designed for extreme  durability and
performance  for  jobs in  demanding  environments.  They are  ideal  for use in
warehouses,  distribution centers, automotive plants, utilities, in cold storage
warehouses and at chemical plants.  They can withstand rugged conditions such as
multiple  six-foot drops to concrete and temperatures as low as -22oF (-30oC) as
are encountered in walk-in  freezers.  The IP products can be  manufactured  and
certified  intrinsically  safe  for  use  under  hazardous  conditions  such  as
explosive environments found in coal mines or in volatile chemical environments.

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

Retail,  POS Service and Commercial  Scanners (Quick Scan and SP400).  The QUICK
SCAN(TM)  is  a  full  feature,   full  function,   full   performance   scanner
incorporating the Company's smaller scan engine platforms. The QUICK SCAN GP(TM)
provides general performance scanning in lower volume POS,  point-of-service and
commercial  applications  with  consistent bar code placement and location.  The
QUICK SCAN HP(TM)  addresses the scanning  requirements for higher volume retail
and commercial applications where handling mixed and inconsistently marked items
requires greater  depth-of-field  and enhanced scanning  performance.  The QUICK
SCAN EP(TM) provides extended performance and longer range scanning applications
up to five feet. In 1996, the QUICK SCAN(TM) 6000 was introduced. This model was
designed   specifically  for  the  retail  POS  and  features  an  unprecedented
combination:  the  superior  performance  and  rugged  design  of a high end POS
scanner,  priced  affordably.  Its advanced  ergonomic design was developed with
operator  comfort in mind -- a critical factor that ensures  prolonged  operator
productivity.  The QUICK SCAN(TM) family is positioned as an affordable scanning
alternative for the retail POS market and other price sensitive  markets such as
those in Europe and Latin America. The size and shape of QUICK SCAN(TM) makes it
comfortable to hold independent of handedness and hand size.
<PAGE>

The SP400 offers  higher  performance  levels by combining a visible laser diode
light source,  patented signal processing  technology,  long  depth-of-field and
wide angle reading. The SP400 family includes a variety of models for retail and
industrial applications.

Specialty Handheld Scanners (538X Series). These specialty scanners offer custom
form factors and optics for unique  applications.  Included in this line are the
5380  Back-of-the-Hand   Scanner,  the  5381  Palm  Top  Scanner  and  the  5387
SCANDLE(TM).

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

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

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

Fixed Position Scanners:  Commercial and Industrial

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

High-End  Line  Scanners.   The  series  8000  and  8000LX  provide  a  line  of
high-powered,  high-speed,  adjustable  rastering  line  scanners for  demanding
applications,  such as airline  baggage  handling,  overnight  package  delivery
sortation and other high-speed sortation.  It can read bar code labels moving at
speeds of up to 400 feet per minute.  Features  include  auto-focusing  and TIME
SLICE  DECODING(TM)  (TSD) which allows the scanner to read only a small portion
of a code on each of several  successive  scans and  reconstruct  the entire bar
code. By  multiplexing  (interconnecting  two or more of these  scanners  having
varying scanning ranges), a system can be configured to simultaneously  read and
track bar codes as they move past the scanners at different distances.

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

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

Carton Dimensioning System. The SureCube(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.

Scan Engines

         The  Company's  scan  engines  are   self-contained  bar  code  reading
components  which  OEMs build into a variety of  products.  The  Company's  scan
engines  incorporate  all of the electronic,  optical and mechanical  components
required for laser scanning in a single package which can be easily  integrated.
The  various  models  manufactured  by the  Company are based on either its 5301
"large"  platform,  the  smaller  5303  version or the  miniaturized  Minuet(TM)
DI-1000(TM) family. Introduced in 1991, the 5301 platform is about the size of a
deck of playing cards and occupies a volume of 10 cubic  inches.  In response to
industry  demands  for  a  smaller  scanning  platform,  in  1993,  the  Company
introduced  the 5303 scan engine  which is about half the  footprint of the 5301
and occupies 3.5 cubic inches.  In 1995, the Company  introduced an even smaller
scan engine, the Minuet(TM) DI-1000(TM) DIRECT ILLUMINATION(TM) bar code engine.
This  miniature  engine  has a volume  of only  1.2  cubic  inches.  In a DIRECT
ILLUMINATION(TM)  bar code engine system,  there are no reflective  optics;  the
laser is mechanically swept to directly  illuminate the bar code. The Minuet(TM)
DI-1000(TM) can significantly  enhance bar code reading performance in a variety
of OEM products such as portable data collection devices;  laptop,  handheld and
palmtop computers; diagnostic and test equipment; and ticket issuing machines.

Quick Check(TM) Verifiers

         The Company's line of Quick Check(TM) verifiers is designed to ensure 
that the customer is producing,  using and  receiving  quality bar code symbols.
Quick  Check(TM)  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) and European Committee
for  Standardisation  (CEN) guidelines such as edge  determination,  reflectance
minimum,  symbol contrast,  modulation,  decodability and edge contrast minimum.
When mounted on-line,  the Quick Check(TM)  verifier  results can  automatically
control the user's system and cause it to pause,  reprint,  shutdown or activate
an alarm.  All Quick Check(TM)  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.

<PAGE>

SALES AND MARKETING

         The Company sells its products domestically and internationally through
a  diversified  customer base  composed of OEMs,  third party  resellers and end
users. International sales increased from approximately $11.2 million, or 19% of
net sales, in 1994 to approximately $55.2 million, or 38% of net sales, in 1996.
Management  believes  that the  international  markets for bar code products are
less  developed  and  intends to broaden  its  international  sales and  provide
additional sales and marketing support to its international operations.

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

         In addition to its sales and marketing  staff in Webster,  New York and
Eugene,  Oregon,  the Company has regional sales  representatives  in the United
States  and sales  offices  throughout  Europe  and the  Asia/Pacific  area 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.

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   Eugene,   Oregon  customer   service  and  support
organization has met ISO 9000 quality  registration levels. In 1995, the Company
was  recognized  for  customer  commitment  by the  New  York  State  Governor's
Excelsior Awards Program.  The Company received an Excelsior Exemplary Practices
Citation for Customer Satisfaction.


<PAGE>


CUSTOMERS

         The Company  sells its products to OEMs,  VARs,  distributors,  systems
integrators  and end users.  During 1996, no individual  customer  accounted for
greater  than  10% of net  sales.  During  1995  and  1994,  Telxon  Corporation
accounted for 17% and 22%,  respectively.  During 1994,  Intermec, a division of
Western  Atlas,  accounted  for  10% of  net  sales.  No  other  customers  were
responsible  for  greater  than  10% of net  sales in  1996,  1995 or 1994.  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 bar code scanning,  retail applications such as retail self-checkout  systems
and new  generations  of portable  data  terminals.  The Company also carries on
significant development programs in electronics design, bar code acquisition and
decoding,  RF  communications,   optical  signal  detection,  software,  network
architectures,   advanced  mechanical  structures  and  automated  manufacturing
methods. Computer-aided design and computer-aided manufacturing tools assist the
Company's research and development  efforts by permitting computer simulation of
proposed  products.  These tools include  electronics  circuit modeling,  optics
analysis and three-dimensional mechanical product modeling.

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

The Company's ER&D expenses were approximately $11.1 million,  $5.0 million, and
$3.8 million in 1996, 1995, and 1994, respectively.  Such amounts do not include
expenditures by the Company for manufacturing engineering activities.

MANUFACTURING AND SUPPLIERS

         The Company designs,  engineers and manufactures  substantially  all of
its  scanning  products at its  Webster,  New York  headquarters  or its Eugene,
Oregon facility. Employees build in groups within modular workstations, and each
employee is trained in the work of the preceding and subsequent  workstations as
well as the  employee's  own  workstation.  The  Company'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(TM)  product is
manufactured  by  an  independent   third  party.   The  Company   believes  its
relationship   with  this  manufacturer  to  be  good,  and  the  loss  of  this
manufacturer would not have a material effect on the Company.
<PAGE>

     The Company does not have long-term supply contracts with its vendors.  The
Company  currently  relies on single  suppliers,  some of whom  manufacture at a
number of  locations,  for some key  components  of its  products.  The  Company
believes that maintaining  ongoing  relationships with single suppliers who have
proven  that they are  capable of meeting the  Company's  standards  of quality,
on-time  delivery and cost  containment  has enabled it to increase the value of
its  product to its  customers.  Although  the  Company  maintains  30 to 60 day
inventories  of key  components  and  alternative  sources of key  materials are
available,  the Company  could incur  set-up  costs and delays in  manufacturing
should it  become  necessary  to  replace  key  vendors  due to work  stoppages,
shipping  delays,  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, 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  competitor in the fixed position scanner market is Accu-Sort Systems,
Inc. (Accu-Sort). 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 is Bar Code Systems and RJS Inc. The  Company's  principal  competitor
for POS self-checkout systems is Productivity Solutions, Inc.

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

INTELLECTUAL PROPERTY

         The Company  believes that certain of its products are  proprietary and
consequently  relies on a combination  of patent,  trade  secret,  copyright and
trademark  law to  establish  and protect its  proprietary  rights.  The Company
currently holds more than 100 United States patents and also has certain foreign
patents pertaining to various technologies  associated with its products.  These
patents expire on various dates between 2001 and 2014. 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

<PAGE>

not believe that it is infringing on the proprietary rights of others. While the
Company  believes that its patents provide it with  competitive  advantages with
respect to the  products  they cover,  the  Company  relies  primarily  upon the
technical know-how, competence, innovative skills and marketing abilities of its
engineers and other employees.

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

EMPLOYEES

         As of March 1, 1997,  the Company  had  approximately  1,200  full-time
employees.  In  addition,  the Company, at various times, makes use of temporary
labor in its  manufacturing  operations.  Approximately  7% of the work force is
located outside the United States,  based in offices  throughout  Europe and the
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 the Canadian  Standard  Association,  the European  Community
Standards (CE) and TUV Rheinland (Europe),  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.

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

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

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 of such risk  factors,  nor can it assess the impact of all of 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.

Spectra Acquisition/Debt  Service. The Company incurred substantial indebtedness
($127.5 million) in connection with the acquisition of Spectra-Physics  Scanning
Systems,  Inc., TxCOM S.A. and related  businesses  (Spectra).  The indebtedness
could have important  consequences,  including the following:  (i) the Company's
ability  to obtain  additional  financing  in the future  for  working  capital,
capital  expenditures,   acquisitions  or  general  corporate  purposes  may  be
impaired;  (ii) a substantial portion of the Company's cash flow from operations
must be  dedicated  to the  payment of  interest  on the  indebtedness,  thereby
reducing  the funds  available  to the  Company  for other  purposes;  (iii) the
agreements  governing  the  Company's  long-term  indebtedness  contain  certain
restrictive  financial and operating covenants;  (iv) certain indebtedness under
the senior  debt will be at  variable  rates of  interest  which would cause the
Company  to be  vulnerable  to  increases  in  interest  rates;  (v)  all of the
indebtedness  outstanding  under the senior debt is secured by substantially all
the assets of the Company; (vi) the Company is substantially more leveraged than
certain of its  competitors  which  might  place the  Company  at a  competitive
disadvantage; (vii) the Company may be hindered in its ability to adjust rapidly
to changing  market  conditions and (viii) the Company's  substantial  degree of
leverage  could make it more  vulnerable  in the event of a downturn  in general
economic conditions or its business.

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

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

Intellectual Property; Pending Litigation. The Company's success is dependent in
part on its ability to obtain patent protection for its products, maintain trade
secret  protection  and operate  without  infringing the  proprietary  rights of
others. The Company currently owns over 100 U.S. patents having expirations from
the year 2001 to the year 2014 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.

         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.

         The Company has also  commenced an action  against Symbol for violation
of the  antitrust  laws  and  unfair  trade  practices  and for  declaration  of
noninfringement  and/or  invalidity  of certain  of  Symbol's  patents.  In that
action,  Symbol has  counterclaimed  alleging patent  infringement  and alleging
breaches of certain  Symbol-PSC  License  Agreements.  The Company has  informed
Symbol that  subsequent to the Spectra  acquisition it has been operating  under
certain  Symbol-Spectra  License  Agreements  rather  than under the  Symbol-PSC
License  Agreements.  Although the Company  maintains that Symbol's  patents are
invalid,  that the Company has not infringed the patents,  or both, and that the
Symbol-Spectra  License Agreements rather than the Symbol-PSC License Agreements
are  controlling,  there can be no assurance that the actions will be decided or
settled in the Company's  favor.  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 effort would be successful. See "Business-Intellectual Property."

Competition.  The AIDC industry is highly  competitive with rapid  technological
change, product improvements, new product introduction and intellectual property
developments  representing key competitive factors. The Company also competes on
the basis of innovative design, high quality manufacturing,  technical expertise
in  scanning,  level of sales and support  services,  price and overall  product
functionality  and  fitness  for use.  Failure  to keep  pace with  product  and
technological   advances  could  negatively  affect  the  Company's  competitive
position and prospects for growth.  Several of the  Company's  competitors  have
substantially  greater  financial  and  other  resources  than the  Company.  In
addition,  other larger corporations could enter the AIDC industry. No assurance
can be given  that the  Company  will be able to  compete  successfully  against
current and future  competitors  or that the  competitive  factors  faced by the
Company will not adversely affect its business,  financial  condition or results
of operations. See "Business--Competition."

<PAGE>



Dependence  on Sales by Third  Parties:  Significant  Customers.  A  significant
portion of the Company's  net sales are  dependent  upon the ability of its OEM,
value-added  reseller  (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 other  marketing  restrictions  that adversely  affect the operations of the
Company's  OEM, VAR,  distributor  and systems  integrator  customers can have a
substantial impact upon the Company's  financial  results.  No assurances can be
given that the Company's OEM, VAR,  distributor and systems integrator customers
will not experience  financial or other difficulties that could adversely affect
their operations and, in turn, the results of operations of the Company.  During
1996, no individual  customer  accounted for more than 10% of net sales.  During
1995 and 1994, Telxon Corporation accounted for 17% and 22%, respectively of the
Company's  net sales.  In 1994,  net sales to  Intermec,  a division  of Western
Atlas, accounted for 10% of net sales.  See "Business--Sales and Marketing"  and
"--Customer Support and Services."

Risks  Associated  with  International   Operations.   The  Company's  sales  to
international  customers  increased from $11.2 million or 19% of total net sales
in 1994 to $55.2  million or 38% of net sales in 1996.  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  changes in  regulatory  requirements,
compliance costs associated with quality control  standards,  special  standards
requirements,  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. The majority of the Company's sales in Europe and the Pacific Rim
are  billed  in  foreign   currencies  and  are  subject  to  currency  exchange
fluctuations.  Since the  Company's  products  are  manufactured  in the  United
States, sales and results of operations could be impacted by fluctuations in the
U.S.  dollar.  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   "Business--Sales  and
Marketing."

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

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

Fluctuations  in Operating  Results.  Historically,  the Company has experienced
variability  in its  quarterly  results.  Large  orders can cause  favorable  or
unfavorable variations in quarterly comparisons. The volume and timing of orders
received during a quarter are difficult to forecast.  Since customers  generally
order  products  for  delivery  within 30 to 45 days,  backlog is not a reliable
predictor  of future  financial  performance  beyond  the  current  quarter.  In
addition,  the Company's results may vary  significantly from quarter to quarter
depending on other factors such as the level of development, sales and marketing
expense  incurred  in  anticipation  of future  revenues,  and the timing of new
product  and  application  announcements  and  releases  by the  Company and its
competitors. Many of these factors are beyond the Company's control. The Company
believes that quarterly  period-to-period  comparisons of its financial  results
are not necessarily meaningful and should not be relied upon as an indication of
future  performance.  See  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations."

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


                               ITEM 2: PROPERTIES

The Company's principal manufacturing,  engineering, and administrative facility
consists  of an  approximately  132,000  square foot  Company-owned  building in
Webster, New York, a suburb of Rochester, New York. This facility,  completed in
1995,  was  custom-designed  to serve the Company's  operations  and to permit a
relatively rapid 45,000 square foot manufacturing  addition. An adjacent 20 acre
parcel of land owned by the Company is also available for expansion. The Company
leases  approximately  28,000  square  feet of  offsite  storage  and shop space
immediately  adjacent to its principal  facility.  This lease expires January 2,
2000.

         The Company  also owns a 32 acre site in Eugene,  Oregon.  Engineering,
marketing  and  administrative  functions  are  contained  in a fifteen year old
54,000 square foot facility.  Manufacturing  and  warehousing are contained in a
separate ten year old 56,000  square foot  building.  In  addition,  the Company
leases 9,000  square feet of offsite  storage and shop space  approximately  two
miles from the manufacturing facility. This lease expires June 30, 1998.

         The Company leases a 35,000 square foot building in an industrial  park
in Sanford,  Florida, a suburb of Orlando,  Florida.  This lease expires May 31,
1999. This facility formerly housed the manufacturing and engineering  functions
of the Company's industrial fixed position product line. Currently,  efforts are
being made to sublease this property.

         Domestically, the Company maintains offices under short-term leases for
individual sales and support personnel in or near Dallas,  Texas;  Dayton, Ohio;
Raleigh, North Carolina; Denver, Colorado; San Jose, California;  Miami, Florida
and  Skaneateles,  New York in order to serve North,  Central and South America.
Internationally,  the  Company  maintains  offices  in or near  Tokyo,  Beijing,
Sydney, Hong Kong, London,  Manchester,  Paris, Milan,  Frankfurt,  Brussels and
Madrid.  These  offices  house from one to 15 people in 300 to 3,000 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.
<PAGE>


                           ITEM 3: LEGAL PROCEEDINGS

         On April 1, 1996,  the  Company  commenced  suit in the  United  States
District  Court for the Western  District of New York located in Rochester,  New
York, against Symbol Technologies,  Inc. (Symbol) for violation of the antitrust
laws,  unfair trade  practices and for  declaration  of  noninfringement  and/or
invalidity  of certain  Symbol  patents.  On or about the same  effective  date,
Symbol sued the Company for patent  infringement  in the United States  District
Court for the Southern District of New York in Manhattan,  alleging infringement
of  certain  Symbol  patents.  Symbol  also  alleged  breaches  of  two  license
agreements  between  Symbol  and the  Company.  In  addition,  Symbol  sued  the
Company's customer, Data General Corporation (Data General), for infringement of
the same patents.  The Company has assumed the  responsibility  of defending the
action on behalf of Data General.

         On June 19, 1996,  the United  States  District  Court for the Southern
District of New York granted the Company's motion and transferred  Symbol's suit
in that  district  to the  Western  District.  Symbol's  action  has since  been
consolidated with the Company's  pending action against Symbol,  with the effect
that the cases will be conducted together through discovery and trial.

         The litigation is in the early stages of discovery. On October 9, 1996,
the  Court  determined  that  there  would be a  non-jury  hearing  as to all of
Symbol's  patents in suit which,  as agreed by the  parties,  are now limited to
nine patents.  This hearing will be solely related to claim  construction of the
patent  claims  alleged by Symbol to be infringed and is expected to be heard in
July 1997.  Thereafter,  it is expected there will be a jury trial on the issues
of  infringement  and validity.  The separate  litigation by Symbol against Data
General  has  been  consolidated  and will be  litigated  in  parallel.  All the
Company's assertions as to antitrust, unfair competition,  breach of contract by
Symbol and related matters have been stayed pending a determination  on the nine
patents of Symbol.

        

           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, 1996.



<PAGE>
                        EXECUTIVE OFFICERS OF REGISTRANT

The Company's executive officers as of December 31, 1996, were as follows.

Name                   Age      Officer/Position

L. Michael Hone        47.......Chairman of the Board and Chief Executive 
                                   Officer

Robert C. Strandberg   39.......Executive Vice President

Dr. Jay M. Eastman     48.......Senior Vice President, Strategic Planning

Charles E. Biss        44 ......Vice President, Verification

Cecil F. Bowes         54 ......Vice President, North American Sales - 
                                   Retail Products

Scott D. Deverell      31.......Controller, Principal Accounting Officer

Dr. Dean Faklis        34.......Vice President, Engineering and Product 
                                   Development

Mary A. Gallahan       49.......Vice President, Human Resources

Stuart M. Itkin        46.......Vice President, Marketing

Joseph F. Murphy       31.......Vice President, Intellectual Property, Corporate
                                    Counsel and Assistant Secretary

John C. Nugent         53 ......Vice President, International Sales

William L. Parnell     41.......Vice President, Operations

Brad R. Reddersen      44.......Vice President, Engineering and Product 
                                    Development

Richard N. Stathes     50.......Vice President, North American Sales - 
                                    Commercial and Industrial Products

Benny R. Tafoya        59 ......Vice President, Industrial Product Development

Roger D. Tedford       43.......Vice President, Chief Information Officer

William J. Woodard     45.......Vice President, Treasurer and Chief Financial
                                    Officer

     L. Michael Hone has served as Chairman of the Board of Directors since July
1992,  as a director of the Company  since  December  1987,  as Chief  Executive
Officer  since April 1989 and as  President  from 1987 until 1996.  Mr. Hone has
held various other sales and  management  positions with the Company since 1981.
Mr. Hone is an inventor on five United States patents owned by the Company.  Mr.
Hone is also a  director  of  Verax  Systems,  Inc.,  and  Rochester  Healthcare
Information Group, Inc., both of Rochester,  New York. In addition,  Mr. Hone is
President of AIM (Automatic  Identification  Manufacturers)  International and a
director and past chairman of AIM, USA.


<PAGE>



Robert C. Strandberg has served as Executive Vice President since November 1996.
Prior to  joining  the  Company,  he was  Chairman  of the  Board of  Directors,
President  and Chief  Executive  Officer  of Datamax  International  Corporation
(1991-1996).  Mr.  Strandberg has an MBA degree from Harvard  Graduate School of
Business  Administration  and a BS degree in Operations  Research and Industrial
Engineering from Cornell University.

     Dr. Jay M.  Eastman  has served as a director  of the  Company  since April
1996. He has served as Senior Vice President,  Strategic  Planning since January
1996 and as Executive  Vice  President of the Company from  December  1987 until
December  1995.  He joined the Company in 1986 when the Company  acquired  Optel
Systems,  Inc., a  corporation  which he  co-founded  and for which he served as
Chairman,  President and Chief Executive Officer from its formation in 1981. Dr.
Eastman is also  President,  Chief  Executive  Officer and major  shareholder of
Lucid Technologies, Inc. (LTI), Rochester, New York, a corporation he founded in
November   1991.   LTI   designs   and   manufactures   custom   electro-optical
instrumentation  for  application  in  fields  such as desk top  publishing  and
medical  diagnosis.  Until  January  1983,  Dr.  Eastman  was  Director  of  the
University of  Rochester's  Laboratory for Laser  Energetics.  Dr. Eastman holds
Ph.D. and  Bachelor's  degrees in Optics from the University of Rochester and is
an inventor on 18 United  States  patents owned by the Company.  Dr.  Eastman is
also a director of Electric Fuel Corporation, an Israel-based company.

     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.  He received his BS Degree in  Photographic  Science and
Engineering from Rochester Institute of Technology.

     Cecil F. Bowes has served as Vice President,  North American Sales - Retail
Products since  December  1996.  Prior  thereto,  he was Group  Director,  North
America for Spectra from November 1990 until December 1996. Mr. Bowes holds a BS
degree in Education from the University of Dayton.

     Scott D. Deverell has served as Controller since May 1990. Mr. Deverell,  a
certified  public  accountant,  received a BS in Accounting from SUNY at Geneseo
and an MBA from Rochester Institute of Technology.

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

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

     Stuart M. Itkin has served as Vice  President,  Marketing since March 1995.
Prior to joining the Company, he was Vice President Marketing,  Stores Automated
Systems (1994-1995) and Senior Director of Marketing, Symbol Technologies,  Inc.
(1989-1994).  Mr. Itkin holds a BA in Mathematics and Computer Science and an MA
degree in Applied  Statistics and  Quantitative  Methods in Psychology  from the
University of Illinois at Urbana-Champaign.
<PAGE>

     Joseph F. Murphy has served as Vice  President,  Intellectual  Property and
Corporate  Counsel since October 1996, as Corporate  Counsel and Patent Attorney
from December 1992 until October 1996 and as Assistant Secretary since May 1995.
Mr. Murphy is admitted to practice as an attorney in New York, Massachusetts and
before the United  States  Patent and  Trademark  Office.  Mr. Murphy holds a BS
degree in Electrical  Engineering from Marquette University and a JD degree from
Franklin Pierce Law Center.

     John C.  Nugent  has served as Vice  President  International  Sales  since
January 1995.  He joined the Company in February 1992 as European  General Sales
Manager.  He was  appointed  as Managing  Director of PSC Bar Code Ltd.,  the UK
based wholly  owned  subsidiary  of PSC Inc. in July 1994.  Prior to joining the
Company he was European Sales Manager of Welch Allyn Inc. of Skaneateles  Falls,
New York.

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

     Brad R.  Reddersen has served as Vice  President,  Engineering  and Product
Development  since December  1996.  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 BS in Physics and an MS in Optical Engineering from the
University of Rochester.

     Richard  N.  Stathes  has  served  as  Vice   President,   North   American
Sales-Commercial  and  Industrial  Products  since  January  1995. He joined the
Company in January 1992 as Vice  President of Sales for Bar Code  Equipment  and
became Vice President,  Sales in January 1994. Prior to joining the Company,  he
was  Director of Sales for  Computer  Products  Inc. of Pompano  Beach,  Florida
(1991). Mr. Stathes holds a BSBA degree from Syracuse University.

     Benny  R.  Tafoya  has  served  as  Vice  President,   Industrial   Product
Development  since  January 1993 when the Company  acquired BRT  Corporation,  a
company in which Mr. Tafoya had been the major  shareholder  and Chief Executive
Officer (1983 - 1993).  Mr.  Tafoya holds a BS degree in Mechanical  Engineering
from Penn State University and a BSAA degree from George Washington University.

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

     William  J.  Woodard  has  served as Vice  President,  Treasurer  and Chief
Financial  Officer  since  October  1996.  Prior  to  that,  he  served  as Vice
President,  Finance and  Treasurer  since August 1994.  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 BBA degree in Accounting.



<PAGE>



                                     PART II

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

     The Company's  Common Shares are traded on the Nasdaq  National Market Tier
of the Nasdaq  Stock  Market under the symbol  PSCX.  The  following  table sets
forth,  for the periods  indicated,  the high and low sale prices for the common
shares.

                                  High                Low
1996
    Fourth Quarter............     $ 9.63             $6.88
    Third Quarter.............     $10.00             $7.00
    Second Quarter............     $13.50             $7.13
    First Quarter.............     $ 9.75             $7.63


1995
    Fourth Quarter............     $13.00            $ 8.63
    Third Quarter.............     $15.75            $11.50
    Second Quarter............     $14.75            $11.00
    First Quarter.............     $15.50            $10.50

     As of December 31, 1996, 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.



<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, 1996 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,
                                        ----------------------------------------------------------
                                          1996         1995        1994        1993        1992
-------------------------------------   ---------    ---------   ---------   ---------   ---------
<S>                                    <C>          <C>         <C>         <C>         <C>      
Statement of Operations Data:
Net sales ..........................   $ 146,051    $  87,516   $  60,447   $  38,894   $  35,912
Cost of sales ......................      83,675       50,634      32,198      20,256      17,734
                                       ----------------------------------------------------------
  Grosss profit ....................      62,376       36,882      28,249      18,638      18,178
Operating expenses:
   Engineering, research and
     development ...................      11,069        4,962       3,810       3,754       2,248
   Selling, general and
     administrative ................      37,855       23,024      16,031      11,826       8,502
   Write-off of intangible assets ..          --           --          --         167         957
   Acquisition related restructuring
     and other costs ...............      70,068(1)      --         6,894 (2)      --          --
   Amortization of intangibles from
      business acquisitions ........       3,564          877         485         220         135
                                       ----------------------------------------------------------
Income/(loss)  from operations .....     (60,180)       8,019       1,029       2,671       6,336
Interest and other income/(expense).      (5,747)         676         110          45         (70)
Income/(loss) from continuing
   operations before income tax
   provision/(benefit) .............     (65,927)(1)    8,695       1,139 (2)   2,716       6,266
Income tax provision/(benefit) .....     (24,393)       3,246         527         865       1,920
                                       ---------------------------------------------------------- 
Income/(loss) from continuing
   operations ......................     (41,534)       5,449         612       1,851       4,346
Loss from discontinued operations ..      (5,446)         --          --          --          --
                                       ----------------------------------------------------------
Net income/(loss) ..................    ($46,980)(1)    5,449        $612 (2)$   1,851   $  4,346
                                       ===========================================================
Net income/(loss) per common and 
common equivalent share:
  Continuing operations.............    ($   3.96)      $0.54     $  0.08       $ 0.25   $   0.59
  Discontinued operations...........        (0.52)         --          --          --          --
                                       ----------------------------------------------------------
Net income/(loss)...................       ($4.48) (1)  $0.54     $  0.08 (2)   $ 0.25   $   0.59
                                       ===========================================================
                                                                                                
Weighted average number of common 
  and common equivalent shares......       10,490      10,013       7,617        7,476      7,350

</TABLE>

(1)      The  acquisition  related  restructuring  and other costs  reduced 1996
         income  before income tax, net income and net income per share by $70.1
         million, $44.2 million and $4.21, respectively.
(2)      The  acquisition  related  restructuring  and other costs  reduced 1994
         income  before  income tax, net income and net income per share by $6.9
         million, $4.5 million and $0.56, respectively.
<PAGE>


<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                             ------------------------------------------------------------
                                            1996            1995             1994       1993       1992
                                            ----            ----             ----       ----       -----
<S>                                         <C>              <C>             <C>        <C>       <C>    
Balance Sheet Data:
Cash and cash equivalents ................  $10,838          $5,538          $2,720     $9,120    $11,535
Working capital ..........................   11,783          20,397           8,014     11,779     14,125
Total assets .............................  183,361          71,237          52,763     32,063     24,992
Long-term debt, including current
  maturities .............................  127,453             623          13,609      1,806      1,931
Total shareholders' equity ...............   15,301          53,327          22,233     21,265     18,532

</TABLE>


<PAGE>

            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,
                                                -----------------------------------------------------------------------
                                                         1996                   1995                     1994
                                                ----------------------- ----------------------   ----------------------
                                                                        (dollars in thousands)

<S>                                               <C>           <C>       <C>          <C>        <C>           <C>   
Net sales ..................................      $146,051      100.0%    $87,516      100.0%     $60,447       100.0%
Cost of sales ..............................        83,675        57.3     50,634        57.9      32,198         53.3
                                                -----------   --------- ----------   ---------   ---------    ---------
  Gross profit .............................        62,376        42.7     36,882        42.1      28,249         46.7
Operating expenses:
  Engineering, research and development ....        11,069         7.6      4,962         5.7       3,810          6.3
  Selling, general and administrative ......        37,855        25.9     23,024        26.3      16,031         26.5
  Acquisition related restructuring 
     and other  costs ......................        70,068 (1)    48.0         --          --       6,894 (2)     11.4
  Amortization of intangibles from business
     acquisitions ..........................         3,564         2.4        877         1.0         485          0.8
                                                -----------   --------- ----------   ---------   ---------    ---------
Income/(loss)  from operations .............       (60,180)      (41.2)      8,019         9.1       1,029          1.7
Interest and other income/(expense) ........       (5,747)       (3.9)        676         0.8         110          0.2
                                                -----------   --------- ----------   ---------   ---------    ---------
Income/(loss) from continuing operations
before income tax provision/(benefit) ......      (65,927) (1)  (45.1)      8,695         9.9       1,139 (2)      1.9
Income tax provision/(benefit) .............      (24,393)      (16.7)      3,246         3.7         527          0.9
                                                -----------   --------- ----------   ---------   ---------    ---------
Income/(loss) from continuing operations ...      (41,534)      (28.4)      5,449         6.2         612          1.0
Loss from discontinued operations ..........       (5,446)       (3.7)         --          --          --           --
                                                ===========   ========= ==========   =========   =========    =========
Net income/(loss) ..........................     ($46,980) (1) (32.1%)     $5,449         6.2        $612 (2)     1.0%
                                                ===========   ========= ==========   =========   =========    =========
</TABLE>

(1)      The  acquisition  related  restructuring  and other costs  reduced 1996
         income  before  income taxes and net income by $70.1  million and $44.2
         million, respectively.
(2)      The  acquisition  related  restructuring  and other costs  reduced 1994
         income  before  income  taxes and net income by $6.9  million  and $4.5
         million, respectively.


<PAGE>

         On July 12, 1996,  the Company  completed its purchase  agreement  with
Spectra-Physics AB of Sweden to acquire  Spectra-Physics  Scanning Systems Inc.,
TxCOM S.A. and related businesses (Spectra).  Spectra, which is headquartered in
Eugene,  Oregon,  is one of the world's leading  manufacturers of countertop and
in-counter   fixed   position  bar  code   scanners  for  retail   point-of-sale
applications.  The purchase price was approximately  $140 million.  The purchase
was funded by $125  million  cash,  $10  million  in PSC common  shares and a $5
million  subordinated  promissory note. The $125 million cash portion was funded
by a  combination  of the  Company's  cash,  senior  debt  ($92.5  million)  and
subordinated debt ($30 million). The acquisition was accounted for as a purchase
and is included in the 1996 Consolidated  Financial Statements since the date of
acquisition.  The  Company  allocated  $60.1  million of the  purchase  price to
acquired  in-process  research and development as required by generally accepted
accounting principles,  resulting in a one-time charge to the Company's earnings
in the third quarter. In connection with the acquisition, the Company recorded a
pretax  charge of $10.0  million  for the costs of  restructuring  its  existing
operations with those of Spectra.  The  acquisition  related  restructuring  and
other costs reduced 1996 income  before income taxes,  net income and net income
per share by $70.1 million, $44.2 million and $4.21, respectively.

                In December  1994,  the Company  acquired,  for $9.25 million in
cash, all of the outstanding stock of LazerData Corporation. The transaction was
accounted  for as a  purchase  and is  included  in the  Consolidated  Financial
Statements  since the date of acquisition.  In connection with the  acquisition,
the  Company  recorded  a  pretax  charge  of  $3.0  million  for the  costs  of
restructuring  its existing fixed position  scanner  product lines with those of
LazerData.  In addition,  in the fourth quarter of 1994,  the Company  allocated
$3.9  million  of  the  purchase  price  to  acquired  in-process  research  and
development as required by generally accepted accounting  principles,  resulting
in a  one-time  charge to the  Company's  earnings  in the fourth  quarter.  The
acquisition  related  restructuring  and other costs  reduced 1994 income before
income taxes, net income and net income per share by $6.9 million,  $4.5 million
and $0.56, respectively.

         Net sales. Net sales increased $58.5 million,  or 67% from 1995 to 1996
and $27.1  million,  or 45% from 1994 to 1995. The sales increase in 1996 is due
to the  inclusion  of Spectra  product  sales  offset,  in part,  by lower sales
volumes of the Company's  scan engine  products.  The sales increase in 1995 was
primarily due to increased sales volume of the Company's handheld products, scan
engine  assemblies  and the  inclusion  of  LazerData's  product  line of  fixed
position scanners  acquired in December 1994.  International net sales increased
185% in 1996 primarily due to the Spectra  acquisition  and  represented  38% of
sales versus 22% in 1995 and 19% in 1994.

         Gross profit.  Gross profit as a percentage of sales was 42.7% in 1996,
42.1% in 1995 and 46.7% in 1994.  The  increase in gross  profit  percentage  is
primarily  due to the  inclusion of Spectra  products.  The decrease in the 1995
gross  profit  margin  versus  1994 was due to a change  in the sales mix of the
Company's handheld products, lower scan engine average selling prices associated
with  competitive  pricing  pressure and the inclusion of the LazerData  product
line.

         Engineering,  research  and  development.   Engineering,  research  and
development  (ER&D)  expenses  increased $6.1 million,  or 123% in 1996 and $1.2
million,  or 30% in 1995. As a percentage of sales, ER&D was 7.6% in 1996 versus
5.7% in 1995 and 6.3% in 1994. The 1996 dollar increase was primarily due to the
inclusion of Spectra. In addition,  there were increased expenses related to the
Company's new product  development of its handheld and industrial fixed position
scanner  products.  The  1995  dollar  increase  was  primarily  related  to the
Company's new product  development of its handheld and industrial fixed position
scanner products.
<PAGE>

         Selling,    general   and   administrative.    Selling,   general   and
administrative  (SG&A) expenses increased $14.8 million, or 64% in 1996 and $7.0
million, or 44% in 1995. As a percentage of sales, SG&A was 25.9% in 1996 versus
26.3% in 1995 and 26.5% in 1994. The 1996 dollar increase was primarily  related
to the inclusion of Spectra,  start-up costs  associated  with the Company's new
subsidiary  responsible  for sales and support in South and Central  America and
increased  patent related  expenses.  The increase in patent related expenses is
due to an  increase  in  litigation  expenses  related to the  Company's  patent
infringement lawsuit with Symbol Technologies, Inc. The 1995 dollar increase was
primarily due to higher patent related  expenses,  higher  royalty  expenses and
increased promotion and advertising expenses.

         Acquisition  related  restructuring  and other costs.  During the third
quarter of 1996, the Company recorded a one-time, 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 and relocating those operations to its
Webster,  New York  facility,  $3.6  million  was  related to the  write-off  of
previously existing intangible and tangible assets and $1.4 million was recorded
for employee severance and benefit costs for the elimination of seven positions.
As of December 31, 1996,  all positions  targeted in the  restructuring  program
have been  eliminated.  Restructuring  actions are expected to be  substantially
completed by the end of 1997. The restructuring  accrual as of December 31, 1996
was  approximately  $4.7  million of which  $0.7  million  related to  long-term
contractual  obligations.  There have been no  reallocations  or  reestimates to
date.

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

         In the fourth quarter of 1994, the Company  provided a pretax charge of
approximately  $3.0 million for the costs of  restructuring  its existing  fixed
position  scanner  product lines with those of LazerData  Corporation  which was
acquired  in December  1994.  Of the total  pretax  charge,  approximately  $1.6
million was to recognize  anticipated costs associated with the consolidation of
manufacturing and office  facilities,  $0.7 million was related to write-offs of
previously existing intangible assets and $0.7 million was provided for employee
severance  and  benefit  costs  for  the   elimination   of   approximately   12
manufacturing and engineering  support  positions.  As of December 31, 1996, all
positions   targeted  in  the   restructuring   program  have  been  eliminated.
Restructuring  actions are substantially  completed as of December 31, 1996. The
restructuring  accrual as of December 31, 1996 was  approximately  $0.4 million.
There have been no reallocations or reestimates to date.

         In addition,  in the fourth quarter of 1994, the Company allocated $3.9
million of the  LazerData  purchase  price to acquired  in-process  research and
development  projects.  The acquisition  related  restructuring  and other costs
reduced 1994 income before income taxes,  net income and net income per share by
$6.9 million, $4.5 million, and $0.56, respectively.
<PAGE>


         Discontinued operations.  During the third quarter of 1996, the Company
adopted a plan to dispose of its TxCOM subsidiary. TxCOM was acquired as part of
the Spectra acquisition.  The net loss of the TxCOM operation from July 12, 1996
to December 31, 1996 was $229. The loss on disposal of  discontinued  operations
of $5,217  includes the write-down of the assets to their net  realizable  value
and the  estimated  costs of disposing of this  subsidiary,  net of expected tax
benefits applicable.

         Income  tax  provision.  The  Company  had a $24.4  million  income tax
benefit  due to  the  restructuring  and  other  charges  discussed  above.  The
Company's effective tax rate was 37.0% in 1996, 37.3% in 1995 and 46.3% in 1994.
The 1994  effective  tax rate  increased  as a result of the non-tax  deductible
goodwill  write-off  included  in the 1994  restructuring  charge.  The  Company
expects to record income tax expense at or about the combined  federal and state
statutory tax rate in 1997.

Liquidity and Capital Resources

         Current assets increased $23.2 million from December 31, 1995 primarily
due to increased  accounts  receivable and inventories due to the acquisition of
Spectra.  Current  liabilities  increased  $31.8  million from December 31, 1995
primarily due to accrued  acquisition costs,  restructuring  costs and increased
accounts  payable to  support  higher  operating  levels.  As a result,  working
capital decreased $8.6 million from December 31, 1995.

         Current  assets  increased  $13.2 million  during 1995 primarily due to
increased  accounts  receivable and inventory levels related to higher operating
volume  levels.  Current  liabilities  increased  $0.8 million during 1995. As a
result, working capital increased $12.4 million in 1995.

         Property, plant and equipment expenditures totaled $4.8 million in 1996
compared with $7.4 million in 1995. The 1996  expenditures  primarily related to
manufacturing  equipment  and new  product  tooling  and the  1995  expenditures
primarily  related  to the  construction  costs of the  Company's  headquarters,
manufacturing and engineering facility.

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

         The long-term debt-to-capital percentage was 88.5% at December 31, 1996
versus 0.9% at December 31, 1995 due to the Spectra acquisition. At December 31,
1996, liquidity  immediately available to the Company consisted of cash and cash
equivalents of approximately $10.8 million. On July 12, 1996, in connection with
the acquisition of Spectra, the Company terminated its existing revolving credit
facility  and  simultaneously  replaced it with new credit  facilities.  The new
facilities  provide  credit  totaling $130 million.  They consist of senior term
loans of $80 million,  a senior  revolving  credit facility of $20 million and a
subordinated  term  loan  of  $30  million.   The  Company  borrowed,   and  has
outstanding,  $122.5 million on these facilities.  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 twelve months.

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


<PAGE>



               ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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


                                    PART III

           ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this item is presented  under the caption
entitled "Election of Directors  Information  Concerning  Nominees for Directors
and  Other  Incumbent  Members  of the  Board  of  Directors"  contained  in the
definitive  proxy  statement  issued in  connection  with the Annual  Meeting of
Shareholders  to be held  May 6,  1997 and is  incorporated  in this  report  by
reference  thereto.   The  information   regarding  Executive  Officers  of  the
Registrant is found in Part I of this report.

                         ITEM 11: EXECUTIVE COMPENSATION

         The  information  required by this item is presented  under the caption
entitled  "Executive  Officer  Compensation"  contained in the definitive  proxy
statement  issued in connection  with the Annual Meeting of  Shareholders  to be
held May 6,  1997 and is  incorporated  in this  report  by  reference  thereto,
except,  however,  the sections entitled  "Performance Graph" and the "Report of
the  Compensation  Committee of the Board of Directors" are not  incorporated in
this report by reference.

     ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this item is presented  under the caption
entitled  "Security  Ownership  of Certain  Beneficial  Owners  and  Management"
contained in the definitive proxy statement issued in connection with the Annual
Meeting  of  Shareholders  to be held May 6,  1997 and is  incorporated  in this
report by reference thereto.

             ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this item is presented  under the caption
"Executive  Officer  Compensation  - Interest of  Directors  and  Management  in
Certain  Transactions"  contained in the definitive  proxy  statement  issued in
connection with the Annual Meeting of Shareholders to be held May 6, 1997 and is
incorporated in this report by reference thereto.


<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.................   34

         Consolidated Financial Statements........................   35

         Notes to Consolidated Financial Statements...............   39

(a) 2    Financial Statement Schedules:

         Included in Part IV of this report:

         Schedule II       Valuation and Qualifying Accounts......  54

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

(a) 3    Exhibits:


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

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

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

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

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

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).
<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).

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

10.2*Consulting  Agreement  between  the  Company  and  Robert S.  Ehrlich as of
     January 2, 1995 (incorporated by reference to Exhibit 10.1 to the Company's
     Quarterly  Report  on  Form 10-Q  for the quarter ended June 30, 1995 (the
     "June 30, 1995 Form 10-Q")).

10.3*Form of  Change-in-Control/Severance  Agreement  between  the  Company  and
     certain of its executive officers .......................................55

10.4*Form of third  party  severance  letter  between  Spectra-Physics  Scanning
     Systems, Inc. and certain executive officers ............................61

10.5*Employment  Agreement  between the Company and John F. O'Brien,  as of July
     12, 1996 ................................................................65

10.6*Consulting  Agreement  between  the  Company  and  John F.  O'Brien,  as of
     January 13, 1997 ........................................................68

10.7*Employment  Agreement  between  the  Company  and  Benny R.  Tafoya,  as of
     January 21,  1993  (incorporated  by  reference  to  Exhibit  10.9  to  the
     Company's Annual Report on Form 10-K for the fiscal year ended December 31,
     1992 (the December 31, 1992 Form 10-K")).

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

10.9*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, (the "December 31, 1991 Form 10-K")).

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

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

10.12*1994 Stock  Option Plan  (incorporated  by reference to Exhibit 4.1 of the
     Company's  Registration  Statement  on Form S-8  dated  June  20,  1995 No.
     33-60389).

10.13* 1995 Employee Stock Purchase Plan  (incorporated  by reference to Exhibit
     4.1 of the Company's Registration Statement on Form S-8 dated June 19, 1995
     No. 33-60343).

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

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

10.16* Restated  PSC Inc.  401(K)  Profit  Sharing  Plan,  as of October 1, 1995
     (incorporated  by  reference  to Exhibit  10.3 to the  Company's  Quarterly
     Report on Form 10-Q for the  quarter  ended  March 31, 1996 (the "March 31,
     1996 Form 10-Q")).

10.17Agreement  between  Symbol  Technologies,  Inc. and  Photographic  Sciences
     Corporation dated March 6, 1991  (incorporated by reference to Exhibit 10.5
     to the  Company's  Annual  Report on Form 10-K for the  fiscal  year  ended
     December 31, 1990).

10.18Standard  Warehouse  Lease  between  Owens  &  Minor,  Inc.  and  LazerData
     Corporation  dated January 22, 1996  (incorporated  by reference to Exhibit
     10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended
     December 31, 1995 (the "December 31, 1995 Form 10-K")).

10.19Credit  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).

10.20First  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 10-Q")).

10.21Securities   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).

10.22Amendment 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).

22.1     Subsidiaries of Registrant..........................................69

24.1     Consent of Independent Public Accountant, dated March 28, 1997......70

(b):     Reports on Form 8-K:

         None.

*        Management contract or compensatory plan or arrangement



<PAGE>



                                   SIGNATURES

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

Dated:   March 28, 1997                 PSC Inc.

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

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

Date:  March 28, 1997                       Principal Executive Officer

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




Date:  March 28, 1997                       Chief Financial Officer

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




Date:  March 28, 1997                       Principal Accounting Officer

                                             /s/ Scott D. Deverell
                                                 Scott D. Deverell
                                                 Controller, Principal 
                                                 Accounting Officer



<PAGE>




Date:  March 28, 1997               /s/ Jay M. Eastman
                                    ------------------
                                             Jay M. Eastman
                                             Director

Date:  March 28, 1997               /s/ Robert S. Ehrlich
                                    ---------------------
                                             Robert S. Ehrlich
                                             Director

Date:  March 28, 1997               /s/ James Henry
                                    ---------------
                                             James Henry
                                             Director

Date: March 28, 1997                /s/ Donald K. Hess
                                    ------------------
                                             Donald K. Hess
                                             Director

Date: March 28, 1997                /s/ Thomas J. Morgan
                                    --------------------
                                             Thomas J. Morgan
                                             Director

Date:  March 28, 1997               /s/ James O'Shea
                                    ----------------
                                             James O'Shea
                                             Director

Date:  March 28, 1997               /s/ Jack Rosenfeld
                                    ------------------
                                             Jack Rosenfeld
                                             Director

Date:  March 28, 1997               /s/ Justin L. Vigdor
                                    --------------------
                                             Justin L. Vigdor
                                             Director



<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, 1996 and 1995, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1996.  These
financial  statements and schedule  referred to below are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

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

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The schedule  listed in Item 14(a)2 is
presented  for  purposes  of  complying   with  the   Securities   and  exchange
Commission's  rules  and is not  part of the  basic  financial  statements.  The
schedule has been subjected to the auditing  procedures  applied in the audit 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

Rochester, New York,
  January 31, 1997



<PAGE>



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

                                     ASSETS
<CAPTION>
                                                                           December 31,
                                                                 ---------------------------------
                                                                      1996               1995
                                                                 ---------------     -------------
<S>                                                               <C>               <C>    
Current Assets:
  Cash and cash equivalents ....................................        $10,838           $ 5,538
  Marketable securities ........................................             --             4,204
  Accounts receivable, net of allowance for doubtful accounts
    of $1,101 in 1996 and $387 in 1995 .........................         29,501            15,897
  Inventories                                                            18,306            10,440
  Prepaid expenses and other ...................................          1,244               623
                                                                 ---------------     -------------
     Total current assets ......................................         59,889            36,702
Property, Plant and Equipment, net                                       35,612            22,157
Deferred Tax Assets ............................................         24,773             1,506
Intangible and Other Assets, net ...............................         63,087            10,872
                                                                 ===============     =============
     Total assets ..............................................       $183,361           $71,237
                                                                 ===============     =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt ............................         $9,459          $    131
  Accounts payable .............................................         15,681             8,397
  Accrued expenses .............................................         11,448             6,202
  Accrued payroll and related employee benefits ................          7,509             1,237
  Accrued acquisition related restructuring costs ..............          4,009               338
                                                                ---------------     -------------
     Total current liabilities .................................         48,106            16,305
Long-Term Debt, less current maturities ........................        117,994               492
Other Long-Term Liabilities ....................................          1,960             1,113

Commitments and Contingencies
Shareholders' Equity:
   Preferred shares, par value $.01; 10,000 shares authorized, 
    none issued ...............................................             --                --
  Common shares, par value $.01; 40,000 shares authorized, 11,161
    and 9,985 shares issued at December 31, 1996
    and 1995, respectively ....................................             112                100
  Additional paid-in capital ..................................          54,891             45,881
  Retained earnings/(Accumulated deficit) .....................         (39,432)             7,548
  Cumulative translation adjustment ...........................             (33)                35
  Less -- 39 treasury shares, repurchased at cost .............            (237)             (237)
                                                                 ---------------     -------------
     Total shareholders' equity ...............................          15,301            53,327
                                                                 ===============     =============
     Total liabilities and shareholders' equity ...............         $183,361           $71,237
                                                                 ===============     =============

See accompanying notes to the Consolidated Financial Statements.
</TABLE>


<PAGE>
<TABLE>


                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (All amounts in thousands, except per share data)
<CAPTION>
                                                                     Year Ended December 31,
                                                           --------------------------------------
                                                              1996         1995         1994
                                                           ---------  ------------  -------------
<S>                                                        <C>          <C>          <C>      
Net Sales ..............................................   $ 146,051    $  87,516    $  60,447
Cost of Sales ..........................................      83,675       50,634       32,198
                                                           ---------    ---------    ---------
     Gross profit ......................................      62,376       36,882       28,249

Operating Expenses:
     Engineering, research and development .............      11,069        4,962        3,810
     Selling, general and administrative ...............      37,855       23,024       16,031
     Amortization of intangibles resulting from business
            acquisitions ...............................       3,564          877          485
     Acquisition related restructuring and other costs .      70,068         --          6,894
                                                           ---------    ---------    ---------
           Income/(loss) from operations ...............     (60,180)       8,019        1,029

Interest and Other Income/(Expense):
     Interest expense ..................................      (5,835)        (306)         (97)
     Interest income ...................................         568          594          394
     Other income/(expense) ............................        (480)         388         (187)
                                                           ---------    ---------    ---------
                                                              (5,747)         676          110
                                                           ---------    ---------    ---------

Income/(Loss) from Continuing Operations Before
     Income Tax Provision/(Benefit) ....................     (65,927)       8,695        1,139
Income Tax Provision/(Benefit) .........................     (24,393)       3,246          527
                                                           ---------    ---------    ---------
Income/(Loss) from Continuing Operations ...............     (41,534)       5,449          612

Discontinued Operations:
      Loss from discontinued operations, net of tax ....        (229)        --           --
      Loss on disposal of discontinued operations,
          net of tax ...................................      (5,217)        --           --
                                                           ---------    ---------    ---------
Total Loss from Discontinued Operations ................      (5,446)        --           --
                                                           ---------    ---------    ---------
Net Income/(Loss) ......................................   ($ 46,980)   $   5,449    $     612
                                                           =========    =========    =========

Net Income/(Loss) Per Common and
     Common Equivalent Share:
     Continuing operations .............................   ($   3.96)   $    0.54    $    0.08
     Discontinued operations ...........................       (0.52)        --           --
                                                           ---------    ---------    ---------
     Net income/(loss) .................................   ($   4.48)   $    0.54    $    0.08
                                                           =========    =========    =========


Weighted Average Number of Common
     and Common Equivalent Shares Outstanding ..........      10,490      10,013        7,617

</TABLE>


See accompanying notes to the Consolidated Financial Statements.


<PAGE>

<TABLE>


                            PSC INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                           (All amounts in thousands)
<CAPTION>
                                                                                                             Retained
                                           Common Stock        Additional    Cumulative                      Earnings/
                                        ---------------------   Paid-In      Translation     Treasury      (Accumulated
                                        Shares     Amount       Capital       Adjustment       Stock          Deficit)
                                        ---------  ----------  ------------- --------------- ------------ -------------------
<S>                                    <C>      <C>            <C>           <C>              <C>          <C>     
Balance, December 31, 1993 .......      7,239    $     73      $ 19,890       $      6        ($   191)     $  1,487

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

Issuance of shares according to
    Employee Stock Purchase Plan .          9          --           87              --             --           --
Exercise of options ..............        194           2        1,269              --             --           --
Tax benefit from exercise or early
    disposition of certain stock
    options ......................         --          --          685              --            --            --
Issuance of stock, net ...........      2,310          23       23,552              --            --            --
Foreign currency translation .....         --          --           --              27            --            --
Net income .......................         --          --           --              --            --         5,449
                                     --------    --------     --------         --------       --------    --------
Balance, December 31, 1995 .......      9,946         100       45,881              35           (237)       7,548

Issuance of shares according to
     Employee Stock Purchase Plan          26          --          201              --            --           --
Exercise of options ..............        173           2        1,079              --            --           --
Issuance of warrants .............         --          --          600              --            --           --
Tax benefit from exercise or early
      disposition of certain stock
      options ....................         --          --          140              --            --           --
Issuance of stock, net ...........        977          10        6,990              --            --           --
Foreign currency translation .....         --          --           --             (68)           --           --
Net loss .........................         --          --           --              --            --       (46,980)
                                     ========    ========     ========         ========      ========      ========
Balance, December 31, 1996 .......     11,122    $    112     $ 54,891        ($    33)     ($   237)     ($39,432)
                                     ========    ========     ========         ========      ========      ========
</TABLE>


See accompanying notes to the Consolidated Financial Statements.




<PAGE>
<TABLE>


                            PSC INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (All amounts in thousands)
<CAPTION>
                                                                           Year Ended December 31,
                                                               -------------------------------------------
                                                                     1996            1995           1994
                                                               --------------   -----------    -----------
<S>                                                              <C>              <C>              <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ...........................................    ($46,980)        $5,449           $612
Adjustments to reconcile net income/(loss) to
    net cash provided by operating activities:
        Depreciation and amortization .......................        9,169         2,784          2,018
        (Gain)/loss on disposition of assets ................        3,860         (161)          1,169
        Acquired research and development write-off .........       60,100            --          3,930
        Loss on disposal of discontinued operations .........        5,217            --             --
        Deferred tax assets .................................     (23,033)           668        (1,950)
        (Increase) decrease in assets:
          Accounts receivable, net ..........................        1,760        (2,669)        (5,051)
          Inventories .......................................       (1,199)       (4,031)            151
          Prepaid expenses and other ........................         (147)           301          (793)
        Increase (decrease) in liabilities:
          Accounts payable ..................................        1,461           699          1,213
          Accrued expenses ..................................       (5,535)        1,297          1,028
          Accrued payroll and related employee benefits .....        6,272         (333)            592
          Accrued acquisition related restructuring costs ...        4,278       (1,107)          1,892
                                                             --------------   -----------    -----------
            Net cash provided by operating activities .......       15,223         2,897          4,811
                                                             --------------   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................      (4,843)       (7,418)       (10,905)
Cash paid for acquisition of business .......................     (10,124)            --        (2,450)
Additions to intangible and other assets ....................      (1,238)       (4,443)           (40)
Issuance of notes for stock option activity .................        (382)         (593)             --
Purchase of marketable securities, net ......................          --            --        (1,335)
Proceeds from sale of marketable securities .................       4,167            --             --
                                                             --------------   -----------    -----------
            Net cash used in investing activities ...........     (12,420)      (12,454)       (14,730)
                                                             --------------   -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt .................................         ---         1,046          6,219
Additions to other long-term liabilities ....................         648           230             17
Principal repayments of long-term debt ......................        (105)      (14,126)          (174)
Payment of other long-term liabilities .......................         --         (420)             --
Exercise of stock options and the issuance of stock and 
  warants ....................................................       1,882        24,933            400
Purchase of treasury shares ..................................          --            --           (46)
Tax benefit from exercise or early disposition of
 certain stock options .......................................         140           685             --
                                                             --------------   -----------    -----------
            Net cash provided by financing activities .......        2,565        12,348          6,416
                                                             --------------   -----------    -----------
Foreign currency translation ................................         (68)            27              2
                                                             --------------   -----------    -----------
Net Increase (Decrease) in Cash and Cash Equivalents ........        5,300         2,818        (3,501)

CASH AND CASH EQUIVALENTS:
                Beginning of year ..........................         5,538         2,720          6,221
                                                              --------------   -----------    -----------
                End of year ................................       $10,838        $5,538         $2,720
                                                              ==============   ===========    ===========
Supplemental disclosures of cash flow information:
  Interest paid ............................................        $3,994       $   306        $   550
  Income taxes paid ........................................        $  833       $ 3,009        $ 2,450
  Capital leases ...........................................        $   35       $   131        $   586
</TABLE>


See accompanying notes to the Consolidated Financial Statements.


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)


1.  DESCRIPTION OF BUSINESS

         PSC (the Company)  manufactures  the world's  broadest line of handheld
and fixed  position bar code  readers,  verifiers and  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 and general retail, healthcare, government and other industries.

         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  world  wide.  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 transactions and
balances 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.

Marketable Securities

         Marketable securities are accounted for in accordance with Statement of
Financial  Accounting  Standards No. 115 "Accounting for Certain  Investments in
Debt and Equity  Securities"  and are stated at current  market value.  Realized
gains and losses are  included in earnings  and are derived  using the  specific
identification method for determining the cost of securities.

Inventories

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

Property, Plant and Equipment

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

Building and improvements .....................  10-45 years
Office furniture and equipment ................    3-7 years
Production equipment ..........................    3-8 years
Leasehold improvements ........................   3-15 years


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


<PAGE>



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)


Intangibles Resulting from Business Acquisitions

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

         During 1996,  the Company  adopted  Statement  of Financial  Accounting
Standards No. 121 (SFAS No. 121),  "Accounting  for the Impairment of Long-lived
Assets and Long-lived  Assets to be Disposed of." The effect of adoption was not
material.  This  statement  requires  the Company to review  long-lived  assets,
including certain  intangibles and goodwill,  for impairment  whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable.  If such events or changes in circumstances are present,  a loss
is recognized to the extent the carrying  value of the asset is in excess of the
sum of the undiscounted  cash flows expected to result from the use of the asset
and its eventual disposition.

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 ten years,  their current
estimated useful lives.

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

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

Foreign Currency Translation

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


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)
Derivatives

         In September  1996,  the Company  entered into four interest rate swaps
with its senior lending banks in accordance  with the terms of the senior loans.
These swaps  commence in January 1997 and expire in September  1998.  They cover
only the  senior  loans  and  convert  the  variable  rate  senior  debt,  on an
amortizing  basis,  into fixed rate  debt,  through  the  expiration  date.  The
differentials to be received or paid under these agreements are recognized as an
adjustment to interest expense.  The fair value of interest rate swap agreements
is estimated  based on quotes from the market  makers of these  instruments  and
represents the estimated amounts that the Company would expect to receive or pay
to  terminate  these  agreements.   The  Company  has  no  other  interest  rate
derivatives  outstanding  and,  as a  matter  of  policy,  does not  enter  into
derivative agreements other than straight interest rate swaps designed to cancel
variable rate exposures.

Fair Value of Financial Instruments

         The estimated fair value of the Company's financial  instruments is the
following at December 31:
<TABLE>
<CAPTION>

                                                      1996             1995
                                           --------------------- -----------------
                                           Carrying     Fair     Carrying    Fair
                                            Amount      Value     Amount     Value
<S>                                        <C>         <C>        <C>       <C>   
Cash and cash equivalents ................ $10,838     $10,838    $5,538    $5,538
Marketable securities ....................    --         --       $4,204    $4,204
Long-term debt, including current portion  $127,453   $127,453     $623      $623
</TABLE>

         The fair values of the Company's financial  instruments were determined
as follows:

         Cash and cash equivalents:  The carrying amount approximates fair value
because of the short maturity of these instruments.

         Marketable securities:  The fair value is based on quoted market prices
for these or similar instruments. Accordingly, the carrying amount of marketable
securities approximates fair value.

         Long-term  debt,  including  current  portion:  The  fair  value of the
long-term debt is estimated based on quoted market prices currently available on
similar debt.  Accordingly,  the carrying amount of long-term debt  approximates
fair value.

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


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)
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
1996 presentation.

3.  ACQUISITIONS AND DISPOSITIONS

         On July 12, 1996,  the Company  completed its purchase  agreement  with
Spectra-Physics AB of Sweden to acquire Spectra-Physics  Scanning Systems, Inc.,
TxCOM S.A. and related businesses (Spectra).  Spectra, which is headquartered in
Eugene,  Oregon,  is one of the world's leading  manufacturers of countertop and
in-counter   fixed   position  bar  code   scanners  for  retail   point-of-sale
applications.  The purchase price was approximately  $140 million.  The purchase
was funded by $125 million in cash,  $10 million in the Company's  common shares
less a $3  million  discount  as the shares  are  unregistered  and a $5 million
subordinated  promissory  note.  The $125  million  cash portion was funded by a
combination of the Company's cash,  senior debt ($92.5 million) and subordinated
debt ($30  million).  The  acquisition  was  accounted  for as a purchase and is
included  in the  1996  Consolidated  Financial  Statements  since  the  date of
acquisition.  The  Company  allocated  $60.1  million of the  purchase  price to
acquired  in-process  research and development as required by generally accepted
accounting principles,  resulting in a one-time charge to the Company's earnings
in the third quarter.  The remaining  excess of the purchase price over the fair
value of net assets acquired is approximately  $58 million and will be amortized
on a straight-line basis over 10 years.

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

                                                           Pro Forma
                                                      Twelve Months Ended
                                                ---------------------------
                                                12/31/96           12/31/95
                                                --------           --------
Net sales ....................................  $210,961           $189,143
Income/(loss) from operations ................  (51,800)             15,444
Income/(loss) from continuing operations .....  (40,148)              1,931
Total loss from discontinued operations ......   (5,446)                 --
Net income/(loss) ............................  (45,594)              1,931
Net income/(loss) per common and common
   equivalent share:
   Continuing operations .....................   ($3.65)              $0.17
   Discontinued operations ...................    (0.49)                 --
                                                  ------             -------    
   Net income/(loss) .........................   ($4.14)              $0.17
                                                 =======              =====

Weighted average shares outstanding ..........    11,008             11,216


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

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

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

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

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

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

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

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

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


4.   MARKETABLE SECURITIES

         At  December  31,  1995,  the  Company's  marketable   securities  were
classified  as available  for sale and these  securities  were  recorded at fair
market value. During 1996, these securities were sold at a net loss of $37.


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)
5.  INVENTORY

Inventory consists of the following at December 31:
                                          1996              1995
                                      --------------     ------------
  Raw materials ....................    $10,688           $6,914
  Work-in-process ..................      3,547            2,090
  Finished goods ...................      4,071            1,436
                                       --------          -------
                                        $18,306          $10,440
                                        =======          =======

6.  PROPERTY, PLANT AND EQUIPMENT

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

                                                1996              1995
                                             ------------      ------------
Land .....................................        $2,304          $    812
Building and improvements ................        17,569            10,516
Office furniture and equipment ...........         8,356             4,333
Production equipment .....................        12,073            10,109
Leasehold improvements ...................         3,535               499
                                             ------------      ------------
                                                  43,837            26,269
  Less:  accumulated depreciation
         and amortization ................         8,225             4,112
                                             ------------      ------------
                                                 $35,612           $22,157
                                             ============      ============

         The Company  capitalized  interest costs of $453 in 1994 related to the
construction  of  its  new  office  and  manufacturing  facility.  There  was no
capitalized interest in 1996 or 1995.

         Depreciation  expense  for 1996,  1995 and 1994  amounted  to $4,947,  
$1,673 and  $1,407,  respectively.  Amortization  of capital lease assets is 
included in depreciation expense.

7.  INTANGIBLE AND OTHER ASSET

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

                                                        1996         1995
                                                   ----------  ----------
Intangibles resulting from business acquisitions .    $65,750      $8,016
Other intangibles ................................      2,234       3,050
Other assets .....................................      1,341       2,182
                                                  -----------  ------------
                                                       69,325      13,248
   Less:  accumulated amortization ...............      6,238       2,376
                                                  ------------ ------------
                                                      $63,087     $10,872
                                                  ============ ============


     Amortization expense for 1996, 1995 and 1994 amounted to $4,222, $1,111 and
$611, respectively.

<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)


8.  ACCRUED EXPENSES

Accrued expenses consist of the following at December 31:

                                             1996             1995
                                          ------------     ------------
        Accrued warranty cost .........        $3,178           $1,550
        Accrued royalty ...............         1,261            1,715
        Accrued technology licenses ...            --            1,620
        Accrued interest ..............         1,687               --
        Accrued relocation ............         1,185               --
        Other expenses ................         4,137            1,317
                                          -----------      -----------
                                              $11,448           $6,202
                                         ============     ============

9.  LONG-TERM DEBT

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

                                            1996             1995
                                        --------------    -----------
Senior term loan A ....................       $55,000         $   --
Senior term loan B ....................        25,000             --
Senior revolving credit ...............        12,500             --
Subordinated term loan ................        29,428             --
Subordinated promissory note ..........         5,000             --
Other .................................           525            623
                                        --------------    -----------
                                              127,453            623
  Less:  current maturities ...........         9,459            131
                                        --------------    -----------
                                             $117,994           $492
                                        ==============    ===========

         During  1996,  the Company  negotiated a series of debt  agreements  in
connection  with the funding of its  acquisition  of  Spectra.  Term loan A is a
senior  loan with five  lenders,  having a final  maturity  in June  2001,  at a
current floating interest rate of 8.6% and a swapped fixed rate of 9.4% starting
in 1997. Term loan B is a senior loan with four lenders, having a final maturity
in December  2002,  at a current  floating  interest  rate of 9.2% and a swapped
fixed  rate of 9.9%  starting  in 1997.  The  swaps  for both  loans  expire  on
September 30, 1998.

         The revolving credit is with the term loan lenders, matures in 2001 and
has a  current  floating  interest  rate of 8.4%.  The  total  revolving  credit
facility is $20.0  million,  of which $12.5 million is used and  outstanding  at
December  31,  1996.  The unused  portion of the  revolving  credit  facility is
subject  to a  commitment  fee of  between  0.375%  and 0.5%.  The  senior  debt
facilities have collateral in all of the assets of the Company.

         The  subordinated  term loan is from five  lenders,  at a fixed rate of
11.25%,  with principal  payments  starting in June 2003 and a final maturity in
June 2006. This debt, which also contains warrants to purchase 975 shares of the
Company's stock at $9.48 a share, has an associated unamortized discount of $572
which has been netted against the total outstanding balance of $30.0 million.

         The subordinated  promissory note matures in 2001 and has a current 
floating  interest rate of 9.25%. The subordinated term loan and promissory note
 are unsecured.

         The other debt is principally composed of capital lease obligations.


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

         The senior debt and subordinated term loan agreements  restrict payment
of dividends,  limit stock  repurchases  and require the  maintenance of certain
financial ratios.  The Company was in compliance with all of these covenants and
ratios as of December 31, 1996.

         During 1995,  the Company  repaid and terminated its term loan facility
from which it partially  financed its  acquisition  of LazerData  Corporation in
December  1994.  During  1995,  the  Company  also  repaid  and  terminated  its
construction  and permanent loan agreement  which was used to partially fund the
construction of the Company's new  headquarters,  manufacturing  and engineering
facility.

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

           1997 ..............       $   9,459
           1998 ..............          12,406
           1999 ..............          14,402
           2000 ..............          16,281
           2001 ..............          34,949
           Thereafter ........          39,956
                               ----------------
                                      $127,453
                               ================

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

10.     INCOME TAXES

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

                                   1996              1995          1994
                               --------------     -----------    ----------
Current:
  Federal ...................       ($1,589)          $1,686        $2,230
  State .....................             65             341           534
  Foreign ...................            164             551           171
Deferred:
  Federal ...................       (21,176)             585       (2,138)
  State .....................        (1,857)              83         (270)
                               ==============     ===========    ==========
      Total .................      ($24,393)          $3,246          $527
                               ==============     ===========    ==========

         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:

                                                  1996        1995        1994
                                                ----------  ---------  ---------
Computed "expected" tax expense ...............   34.0%       34.0%       34.0%
Tax benefit - net operating loss carryforward .    --          --        (35.1%)
Write-off of intangible assets ................    --          --         18.2%
Change in valuation reserve ...................   2.3%       (4.7%)      (10.2%)
State income taxes, net of
  federal income tax benefit ..................   1.8%        3.2%        31.0%
Goodwill amortization .........................   0.2%        1.4%        14.5%
Miscellaneous items, net ......................  (1.3%)       3.4%        (6.1%)
                                                ----------  ---------  ---------
                                                  37.0%       37.3%       46.3%
                                                ==========  =========  =========


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

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

                                                      1996             1995
                                                   ------------     ------------
Receivables ......................................        $327             $145
Inventory ........................................       1,405              386
Warranty reserves ................................       1,175              578
Acquisition related restructuring and other costs        1,828              293
Acquired in-process research and development costs      22,226            1,360
Property, plant & equipment ......................       (688)            (531)
Other, net .......................................         636              130
                                                   ------------     ------------
                                                        26,909            2,361
Less:  valuation allowance .......................     (2,136)            (621)
                                                   ============     ============
Net deferred tax asset ...........................     $24,773           $1,740
                                                   ============     ============

         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  recorded a  valuation  allowance  to
reflect the estimated realizable amount of deferred tax assets.

11.  COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

         Certain  equipment  and  properties  are  rented  under   noncancelable
operating leases that expire at various dates through 2001. Total rental expense
under operating leases was  approximately  $1,214,  $786 and $379, for the years
ended December 31, 1996, 1995 and 1994, respectively.

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

          1997 ..............    $1,480
          1998 ..............     1,124
          1999 ..............       677
          2000 ..............       294
          2001 ..............       214
                              ==========
                                 $3,789
                              ==========

Employment Agreements

         The Company has an  employment  contract  with the  Chairman  and Chief
Executive  Officer  which expires on December 31, 1999 and for which the Company
has a minimum commitment aggregating  approximately $1,444 at December 31, 1996.
The commitment is payable ratably over the term of the contract.


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)


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 1996, 1995 and
1994.

Legal Matters

         The automatic identification and data capture industry is characterized
by  substantial  litigation  regarding  patent and other  intellectual  property
rights.  The Company  aggressively  defends  its  patents and other  proprietary
rights,   and  is  currently  a  plaintiff  in  two  lawsuits   alleging  patent
infringements on the part of others, and these proceedings involve counterclaims
against the Company.  In  addition,  there is  litigation  pending in the United
States  District Court for the Western  District of New York between the Company
and one of its  customers,  on the  one  hand,  and  Symbol  Technologies,  Inc.
(Symbol) on the other,  involving certain of Symbol's  patents.  In that action,
the  Company  has also  alleged  violation  of the  antitrust  laws  and  unfair
practices  by  Symbol  and  Symbol  has  alleged  breaches  of  certain  license
agreements between the Company and Symbol. The litigation is in the early stages
of discovery.  The Company has also assumed the  responsibility of defending the
action  on  behalf  of  its  customer  and  has  provided   certain   rights  of
indemnification  to its customer.  The Company  intends to defend itself and its
customer  vigorously.  Although the Company  maintains that Symbol's patents are
invalid,  that the Company has not infringed the patents,  or both, and that the
Company has not, as was alleged,  breached the Symbol  license,  there can be no
assurance  that this or any other  action  will be  decided  or  settled  in the
Company's  favor.  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.






<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

12.  SHAREHOLDERS' EQUITY

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

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

         In accordance  with the  provisions of the Plans,  the Company may make
loans to  participants  to finance the exercise  price and related  income taxes
upon the exercise of an option.  During 1996,  the Company  granted two loans to
the  Chairman  and  Chief  Executive  Officer,  totaling  $382.  Each  loan is a
five-year  loan at an  interest  rate of  9.50%  and is  secured  by the  shares
purchased with the proceeds of the loan.  During 1995,  the Company  granted two
loans to participants, both of whom are members of the Board of Directors of the
Company,  totaling  $593.  Each loan is a five-year  loan at an interest rate of
7.34% and is secured by the shares purchased with the proceeds of the loan.

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

                                           1996              1995
                                           ----              ----
Net income/(loss) as reported .......... ($46,980)          $5,449
Net income/(loss) pro forma ............ ($48,501)          $5,325

Net income/(loss) per common and common
    equivalent share as reported .......  ($4.48)           $0.54
Net income/(loss) per common and
    common equivalent share pro forma ..  ($4.62)           $0.53

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


<PAGE>



                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

         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 1996 and 1995:

                                        1996              1995
                                        ----              ----
Risk free interest rate .............   5.95%            6.66%
Expected dividend yield .............      0%                0%
Expected lives ......................  4 years          4 years
Expected volatility .................    45%              45%
Fair value of options granted .......   $3.31            $5.45


         The  following  is a summary of the  activity  in the  Company's  stock
option plans for the years ended December 31:
<TABLE>
<CAPTION>
                                                                                           
                                                            Weighted                 Weighted                  Weighted
                                                            Average                  Average                   Average
                                                 1996        Price        1995        Price        1994         Price
                                              -----------    -----       -------     -------      ----------   ------ 
<S>                                            <C>           <C>         <C>          <C>           <C>        <C>  
Options outstanding at beginning of
    period ..................................      2,138     $8.41          2,299     $8.02         1,320      $7.14
Options granted .............................        953      7.78            105     12.54         1,354       8.02
Options exercised ...........................      (173)      6.27          (200)      6.52        (226)       1.77
Options forfeited/canceled ..................      (100)      8.06           (66)      6.84        (149)       7.69
                                              -----------               ----------
                                                                                                 =========
Options outstanding at end of period ........      2,818     $8.33          2,138     $8.41         2,299      $8.02
                                              ===========               ==========               =========
Number of options at end of period:
   Exercisable ..............................      1,630                    1,575                   1,133
   Available for grant ......................        784                    1,637                   1,676

</TABLE>

         The  Company was able to realize an income tax benefit in 1996 and 1995
from the exercise or early  disposition of certain stock options.  For financial
reporting purposes,  this benefit resulted in a decrease in current income taxes
payable and an increase in additional paid-in capital.

Warrants

         The   acquisition   of  Spectra  was  financed,   in  part,  by  senior
subordinated  notes. In connection  with the  subordinated  term loan,  warrants
(Warrants)  evidencing  rights to purchase an aggregate of 975 Common  shares of
  the Company were issued and sold to the purchasers of the subordinated debt.
These  Warrants  have an exercise  price of $9.48 per share and may be exercised
between  July 12,  1997 and July 12,  2006.  The  holders of the  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.

         The fair  value of the  warrants  issued  is  estimated  on the date of
issuance  using  the  Black-Scholes  option  pricing  model  with the  following
weighted average assumptions used for issues in 1996 and 1995:

                                           1996         1995
                                           ----         ----
         Risk free interest rate .......  6.55%          n/a
         Expected dividend yield .......     0%          n/a
         Expected lives ................  4 years        n/a
         Expected volatility ...........     45%         n/a
         Fair value of warrants issued .  $4.22          n/a

<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

Employee Stock Purchase Plan

         The Company has a Stock Purchase Plan (the Plan) under which 250 shares
of its  common  stock can be  issued.  Under  the  terms of the  Plan,  eligible
employees may purchase  shares of the Company's  common stock  semi-annually  on
approximately  January 1 and July 1 through  payroll  deductions.  The  purchase
price is the lower of 85% of the fair market  value of the stock on the first or
last day of each six month offering period. Employees purchased approximately 26
shares at an average  price of $7.82 per share,  9 shares at an average price of
$9.16 per share and 13  shares  at an  average  price of $5.16 per share  during
1996, 1995 and 1994, respectively. The Plan expires on December 31, 2000.

         The fair value of each option  grant 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 1996 and 1995:

                                      1996            1995
                                      ----            ----
Risk free interest rate ..........    5.89%           6.10%
Expected dividend yield ..........       0%            0%
Expected lives ...................   6 mos.          6 mos.
Expected volatility ..............     45%             45%
Fair value of options granted ....    $2.54           $3.78

Other Agreements

         During 1993, the Company's Board of Directors  authorized a plan, which
was terminated in 1995,  under which the Company's  management  could repurchase
its common shares in the open market.  The plan  authorized the repurchase of up
to 500 shares which will be held as treasury shares.  No shares were repurchased
in 1996 or 1995. The Company repurchased eight shares in 1994 at a cost of $46.

13.  401(K) PLANS

         The Company currently has two 401(k) plans. The first plan is available
to U.S. employees meeting certain service and eligibility  requirements,  except
for employees who work for the former Spectra group.  The Company pays a monthly
matching  contribution  equal  to 50% of the  employees'  contributions  up to a
maximum of 5% of their  compensation.  Plan expense was $210,  $193 and $143 for
1996, 1995 and 1994, respectively.

         The second plan is available to U.S.  employees who work for the former
Spectra group and meet 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 compensation. Plan expense was $167
for 1996.

         The Company intends on merging these two plans in 1997.

14.  ACQUISITION RELATED RESTRUCTURING AND OTHER COSTS

         During the third  quarter of 1996,  the  Company  recorded a  one-time,
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 and relocating those
operations to its Webster,  New York  facility,  $3.6 million was related to the
write-off of previously existing intangible and tangible assets and $1.4 million
was recorded for employee  severance  and benefit costs for the  elimination  of
seven  positions.  As of  December  31,  1996,  all  positions  targeted  in the
restructuring  program have been eliminated.  Restructuring actions are expected
to be substantially  completed by the end of 1997. The restructuring  accrual as
of  December  31,  1996 was  approximately  $4.7  million of which $0.7  million
relates to long-term contractual  obligations.  There have been no reallocations
or reestimates to date.


<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)

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

         In the fourth quarter of 1994, the Company  provided a pretax charge of
approximately  $3.0 million for the costs of  restructuring  its existing  fixed
position  scanner  product lines with those of LazerData  Corporation  which was
acquired  in December  1994.  Of the total  pretax  charge,  approximately  $1.6
million was to recognize  anticipated costs associated with the consolidation of
manufacturing  and office  facilities,  $0.7 million  related to  write-offs  of
previously existing intangible assets and $0.7 million was provided for employee
severance  and  benefit  costs  for  the   elimination   of   approximately   12
manufacturing and engineering  support  positions.  As of December 31, 1996, all
positions   targeted  in  the   restructuring   program  have  been  eliminated.
Restructuring  actions are substantially  completed as of December 31, 1996. The
restructuring accrual as of December 31,  1996  was  approximately $0.4 million.
There have been no reallocations or reestimates to date.

         In addition,  in the fourth quarter of 1994, the Company allocated $3.9
million of the  LazerData  purchase  price to acquired  in-process  research and
development  projects,  which  represented  the estimated fair values related to
these  projects  determined  by  an  independent  appraisal.   Proven  valuation
procedures and techniques  were utilized in determining the fair market value of
each intangible asset. The development  technologies were evaluated to determine
that there were no  alternative  future uses. As these projects have not reached
technological  feasibility  and alternative  future uses of these  developmental
technologies do not exist, these costs were expensed as of the acquisition date.
The acquisition related restructuring and other costs reduced 1994 income before
income taxes, net income and net income per share by $6.9 million,  $4.5 million
and $0.56, respectively.

15.  DISCONTINUED OPERATIONS

         During the third quarter of 1996, the Company adopted a plan to dispose
of its TxCOM subsidiary.  TxCOM was acquired as part of the Spectra acquisition.
The net loss of the TxCOM  operation from July 12, 1996 to December 31, 1996 was
$229  and  is  included  in  the  Consolidated  Statement  of  Operations  under
"Discontinued  Operations." Net sales for TxCOM for this period were $1,615. The
loss on  disposal  of  discontinued  operations  reflected  in the  Consolidated
Statement of Operations of $5,217 includes the write-down of the assets to their
net realizable value and the estimated costs of disposing of this division,  net
of expected tax benefits applicable.

16.  SIGNIFICANT CUSTOMER INFORMATION

         The  Company  sells its  products  principally  to  original  equipment
manufacturers,  value-added  resellers,  distributors  and systems  integrators.
During 1996, no individual customer accounted for greater than 10% of net sales.
During 1995 and 1994, net sales to the Company's largest customer  accounted for
approximately  17% and 22%,  respectively.  During 1994,  the  Company's  second
largest  customer  accounted  for  approximately  10% of  net  sales.  No  other
customers  were  responsible  for greater than 10% of net sales in 1995 or 1994.
The Company's arrangements with major customers are generally nonexclusive.



<PAGE>


                            PSC INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                (All amounts in thousands, except per share data)



17.  INTERNATIONAL SALES

         International  sales by  geographic  area are as follows  for the years
ended December 31:

                                        1996          1995        1994
                                    -------------  ---------   ----------
Europe ...........................        $31,985    $11,004       $5,588
Pacific Rim ......................         11,667      5,377        3,484
North America, 
   excluding the United States ...          5,426      2,003        1,295
Other ............................          6,079        954          871
                                    -------------  ---------   ----------
                                          $55,157    $19,338      $11,238
                                    =============  ==========  ===========


18.  SELECTED QUARTERLY FINANCIAL DATA:  (UNAUDITED)
<TABLE>
<CAPTION>

                                        First          Second         Third         Fourth
                                       Quarter         Quarter       Quarter        Quarter
                                      ---------      ----------    -----------   ------------

<S>                                      <C>           <C>            <C>            <C>    
Year Ended December 31, 1996       
-----------------------------
Net sales ...........................    $21,499       $22,052        $46,486        $56,014
Gross profit ........................      9,156         8,564         20,283         24,373
Income (loss) from continuing
    operations ......................        435           211       (43,444)          1,264
Loss from discontinued operations ...         --            --        (5,331)          (115)
Net Income (loss) ...................        435           211       (48,775)          1,149

Net  income (loss) per common 
  and common equivalent share:
Continuing operations ...............      $0.04         $0.02        ($3.99)          $0.11
Discontinued operations .............         --            --         (0.49)         (0.01)
                                          ------        ------         ------         ------
Net Income (loss) ...................      $0.04         $0.02        ($4.48)         $0.10
                                           =====         =====        =======         =====

Year Ended December 31, 1995
-----------------------------------

Net sales ...........................    $22,263       $21,315        $22,483        $21,456
Gross profit ........................     10,502         9,308          8,895          8,177
Net income ..........................      1,881         1,734          1,566            268

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

</TABLE>


<PAGE>

                            PSC INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

                           (All amounts in thousands)


                                         1996        1995        1994
                                         ----        ----        ----
Accounts Receivable Reserve-
BALANCE, at beginning of year .........  $387        $576        $183
  Provision for doubtful accounts .....   168        (134)        230
  Write-offs of doubtful accounts,
     net of recoveries ................  (200)        (55)        (12)
  Other ...............................   746 (1)       -         175  (2)
                                        ------     -------       -----
BALANCE, at end of year ...............$1,101         $387       $576
                                       ======         ====       ====


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

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