===============================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q


(Mark One)

           |X| Quarterly Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                   For the quarterly period ended July 2, 1999

                                       OR

              |_| Transition report pursuant to Section 13 or 15(d)
                     of the Securities exchange Act of 1934


                           Commission File No. 0-9919

                                    PSC INC.
                                    --------
             (Exact name of Registrant as Specified in Its Charter)

              New York                                      16-0969362
              --------                                      ----------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)


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

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

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 12 months  preceding  (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 |_|

As of August 5, 1999, there were 12,045,544 shares of common stock outstanding.

<PAGE>


                            PSC Inc. AND SUBSIDIARIES
                                      INDEX
                                                               PAGE NUMBER
PART I:  FINANCIAL INFORMATION

Item 1    -Financial Statements

Consolidated Balance Sheets as of
July 2, 1999 (Unaudited) and
December 31, 1998.................................................3-4

Consolidated Statements of Income and
Retained Earnings for the three and six months ended:
July 2, 1999 (Unaudited) and
July 3, 1998 (Unaudited) .........................................5-6

Consolidated Statements of Cash Flows for the six months ended:
July 2, 1999 (Unaudited) and
July 3, 1998 (Unaudited) ...........................................7

Notes to Consolidated Financial
Statements (Unaudited) ..........................................8-12

Item 2    -Management's Discussion and Analysis of
               Financial Condition and Results of
               Operations ......................................13-17

PART II:  OTHER INFORMATION

Item 1    -Legal Proceedings ......................................18

Item 2    -Changes in Securities  .................................19

Item 3    -Defaults upon Senior Securities ........................19

Item 4    -Submission of Matters to a Vote of Security Holders.....19

Item 5    -Other Information   ....................................19

Item 6    -Exhibits and Reports on Form 8-K  ......................20

<PAGE>
                         PART I - FINANCIAL INFORMATION

Item 1:  Financial Statements
<TABLE>
                            PSC Inc. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (All amounts in thousands, except per share data)
<CAPTION>
                                                       July 2, 1999    Dec. 31, 1998
                                                       -------------   -------------
                                                       (Unaudited)
<S>                                                     <C>             <C>
ASSETS
CURRENT ASSETS:
        Cash and cash equivalents ..................    $  5,464        $  6,180
        Accounts receivable, net of allowance
           for doubtful accounts of $1,554
           and $1,492, respectively ................      38,308          37,121
        Inventories ................................      21,761          17,250
        Prepaid expenses and other .................       3,097           2,946
                                                     -----------      ----------

       TOTAL CURRENT ASSETS ........................      68,630          63,497

PROPERTY, PLANT AND EQUIPMENT, net
        of accumulated depreciation of $20,605
        and $18,639, respectively ..................      27,101          35,397

DEFERRED TAX ASSETS ................................      20,201          21,244

INTANGIBLE AND OTHER ASSETS, net of accumulated
  amortization of $24,079 and $20,419, respectively       52,541          51,125
                                                      ----------      ----------


TOTAL ASSETS .......................................    $168,473        $171,263
                                                       =========       =========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


<PAGE>
<TABLE>
                            PSC Inc. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (All amounts in thousands, except per share data)
                                  (Continued)
<CAPTION>
                                                              July 2, 1999    December 31, 1998
                                                              ------------    -----------------
                                                               (Unaudited)
<S>                                                            <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
       Current portion of long-term debt ...................   $ 15,340       $   14,402
       Accounts payable ....................................     20,402           18,190
       Accrued expenses ....................................      9,411            8,035
       Accrued payroll and related employee benefits .......      5,754            5,628
       Accrued acquisition related restructuring costs .....        132              415
                                                              ---------          -------

     TOTAL CURRENT LIABILITIES .............................     51,039           46,670

LONG-TERM DEBT, less current maturities ....................     65,686           78,806

OTHER LONG-TERM LIABILITIES ................................      1,915            1,588

SHAREHOLDERS' EQUITY:
     Series A convertible preferred shares, par value $.01;.          1                1
       110 shares authorized, issued and outstanding
       ($11,000 aggregate liquidation value)
     Series B preferred shares, par value $.01; 175
       authorized, 0 shares issued and outstanding .........         --               --
     Undesignated preferred shares, par value $.01;
       9,715 authorized, 0 shares issued and outstanding ...         --               --
     Common shares, par value $.01;
       40,000 authorized 12,047 and 11,869
       shares issued and outstanding .......................        120              119
       Additional paid-in capital ..........................     71,432           70,068
       Retained earnings/(Accumulated deficit) .............    (20,448)         (26,027)
       Accumulated other comprehensive income/(loss) .......       (963)             275
       Less treasury stock repurchased at cost,
       46 and 39 shares ....................................       (309)            (237)
                                                                   -----            -----
       TOTAL SHAREHOLDERS' EQUITY ..........................     49,833           44,199
                                                              ---------         --------

TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY ................................................   $168,473         $171,263
                                                               ========         ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>


                            PSC Inc. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                (All amounts in thousands, except per share data)
                                   (Unaudited)

                                                          Three Months Ended
                                                       ------------------------
                                                       July 2,       July 3,
                                                         1999         1998
                                                          ---          ---
NET SALES ...........................................  $58,001       $51,877

COST OF SALES .......................................   33,979        30,011
                                                     ---------     ---------
         Gross profit ...............................   24,022        21,866

OPERATING EXPENSES:
         Engineering, research and development ......    4,419         3,856
         Selling, general and administrative ........   10,798         9,540
         Amortization of intangibles resulting
              from business acquisitions ............    1,513         1,718
                                                         -----         -----
         Income from operations .....................    7,292         6,752

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ...........................   (1,908)       (2,682)
         Interest income ............................       48            55
         Other income/(expense) .....................      (73)          152
                                                      ---------     --------
                                                        (1,933)       (2,475)
                                                      ---------       -------
         Income before income tax provision .........    5,359         4,277
         Income tax provision .......................    1,871         1,582
                                                      --------        ------
         Net income .................................   $3,488        $2,695
                                                        ======        ======

NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic ......................................    $0.29         $0.23
         Diluted ....................................    $0.25         $0.19

WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic ......................................   11,928        11,735
         Diluted ....................................   13,894        14,069

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period ...................... ($23,936)     ($34,313)
         Net income .................................    3,488         2,695
                                                     -----------       -----
         Retained earnings/(Accumulated deficit),
           end of period ............................ ($20,448)     ($31,618)
                                                      =========      ========



SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>


                            PSC Inc. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                (All amounts in thousands, except per share data)
                                   (Unaudited)

                                                          Six Months Ended
                                                       ----------------------
                                                         July 2,        July 3,
                                                           1999          1998
                                                           ----         ----
NET SALES ............................................   $117,146     $105,505

COST OF SALES ........................................     67,519       61,954
                                                        ---------    ---------
         Gross profit ................................     49,627       43,551

OPERATING EXPENSES:
         Engineering, research and development .......      8,547        7,740
         Selling, general and administrative .........     23,158       19,278
         Severance and other costs ...................      2,103           --
         Amortization of intangibles resulting
              from business acquisitions .............      3,212        3,425
                                                             ----         ----
         Income from operations ......................     12,607       13,108

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ............................     (4,082)      (5,558)
         Interest income .............................        139          120
         Other income/(expense) ......................        (88)         147
                                                       -----------    --------
                                                           (4,031)      (5,291)
                                                         ---------      -------
         Income before income tax provision ..........      8,576        7,817
         Income tax provision ........................      2,997        2,892
                                                         --------       ------
         Net income ..................................     $5,579       $4,925
                                                           ======       ======

NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic .......................................      $0.47        $0.42
         Diluted .....................................      $0.41        $0.35

WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic .......................................     11,912       11,608
         Diluted .....................................     13,774       13,940

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period .......................   ($26,027)    ($36,543)
         Net income ..................................      5,579        4,925
                                                        -----------      -----
         Retained earnings/(Accumulated deficit),
           end of period .............................   ($20,448)    ($31,618)
                                                         =========     ========


SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


<TABLE>

                            PSC Inc. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (All amounts in thousands)
                                   (Unaudited)
<CAPTION>
                                                                           Six Months Ended
                                                                           ----------------
                                                                       July 2,           July 3,
                                                                        1999              1998
                                                                        ----              ----
<S>                                                                    <C>              <C>
    Net income ....................................................    $5,579           $4,925

       Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
         Depreciation and amortization ............................     6,649            6,505
         Deferred tax assets ......................................     1,043              603
         (Increase) decrease in assets:
             Accounts receivable ..................................    (1,196)          (1,841)
             Inventories ..........................................    (4,511)          (1,292)
             Prepaid expenses and other ...........................      (151)            (228)
         Increase (decrease) in liabilities:
             Accounts payable .....................................     2,212           (4,578)
             Accrued expenses .....................................     1,376            1,901
             Accrued payroll and related employee benefits ........        30             (254)
             Accrued acquisition related restructuring costs ......      (283)            (412)
                                                                        ------           ------

                Net cash provided by operating activities .........    10,748            5,329
                                                                       ------             ----

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures, net .....................................    (2,213)          (2,664)
    Additions to intangible and other assets ......................    (5,283)          (1,215)
    Proceeds from sale and leaseback transaction ..................     8,043               --
    Repayment of notes for stock option activity ..................       --               325
                                                                     ----------       ----------
               Net cash provided by (used in) investing activities        547           (3,554)
                                                                     ----------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Addition to long-term debt ....................................     7,000            6,500
     Payment of long-term debt ....................................   (19,182)          (9,672)
    Addition to (payment of) other long-term liabilities, net .....        39             (138)
    Purchase of treasury stock ....................................       (72)              --
    Exercise of options and issuance of common shares .............     1,253            2,678
    Tax benefit from exercise or early disposition of stock options        27              464
                                                                         ----              ---
                       Net cash used in financing activities ......   (10,935)            (168)
                                                                      --------            -----

FOREIGN CURRENCY TRANSLATION ......................................    (1,076)            (189)
                                                                       -------            -----

NET (DECREASE)/INCREASE IN CASH AND CASH
         EQUIVALENTS ..............................................      (716)           1,418

CASH AND CASH EQUIVALENTS:
         Beginning of period ......................................      6,180           2,271
                                                                       -------          -------
         End of period ............................................     $5,464          $3,689
                                                                        ======          ======


SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


<PAGE>


                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
                (All amounts in thousands, except per share data)
                                   (Unaudited)


(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accompanying  consolidated  financial statements have been prepared by
      the Company without audit.  In the opinion of management,  these financial
      statements  include  all  adjustments  necessary  to  present  fairly  the
      Company's financial position as of July 2, 1999, the results of operations
      for the three and six  months  ended July 2, 1999 and July 3, 1998 and its
      cash  flows for the six months  ended  July 2, 1999 and July 3, 1998.  The
      results of operations  for the three and six months ended July 2, 1999 are
      not  necessarily  indicative  of the results to be  expected  for the full
      year.

      Certain  information  and  disclosures   normally  included  in  financial
      statements  prepared in  accordance  with  generally  accepted  accounting
      principles  have been  condensed or omitted.  The  accompanying  financial
      statements should be read in conjunction with the financial statements and
      notes thereto included in the Company's December 31, 1998 annual report on
      Form 10-K.

      INVENTORIES

      Inventories  are stated at the lower of cost or market using the first-in,
      first-out  method.  Inventory  costs  include  material,  direct labor and
      overhead and consist of the following:

                                  July 2, 1999           December 31, 1998
                                 ----------------      -----------------------
     Raw materials ..............       $14,427                 $11,231
     Work-in-process ............         3,688                   2,888
     Finished goods .............         3,646                   3,131
                                     ===========             ===========
                                        $21,761                 $17,250
                                     ===========             ===========

(2)   LONG-TERM DEBT

      Long-term debt consists of the following:

                                  July 2, 1999           December 31, 1998
                                  ----------------      -----------------------
     Senior term loan A .........      $28,004                 $37,000
     Senior term loan B .........       20,496                  23,000
     Subordinated term loan .....       29,577                  29,547
     Subordinated promissory note        2,813                   3,438
     Other ......................          136                     223
                                    -----------             -----------
                                        81,026                  93,208
     Less:  current maturities ..       15,340                  14,402
                                    -----------             -----------
                                       $65,686                 $78,806
                                    ===========             ===========

<PAGE>


                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
                (All amounts in thousands, except per share data)
                                   (Unaudited)


(3)   SEVERANCE AND OTHER COSTS

      During the first quarter of 1999, the Company  recorded a pretax charge of
      $2.1 million for  severance  and other costs.  Of the total  charge,  $1.4
      million was for employee  severance and benefit costs for the  elimination
      of  approximately  140  positions  primarily  at  the  Webster,  New  York
      manufacturing facility resultant from the consolidation of all high volume
      handheld scanner  manufacturing at the Company's Eugene,  Oregon facility.
      The remaining $0.7 is for early  termination of the lease on the Company's
      Webster  offsite  storage  and repair  facility.  As of July 2, 1999,  the
      amount of the severance and other accruals was approximately $1.8 million,
      which relates to current contractual obligations. These costs reduced 1999
      income before income tax provision,  net income, basic EPS and diluted EPS
      by $2.1 million, $1.4 million, $0.11 and $0.10, respectively.

(4)   SALE LEASEBACK

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

(5)   SHAREHOLDERS' EQUITY

      During  1998,  the  Company  adopted  Statement  of  Financial  Accounting
      Standards  No.  130,  "Reporting  Comprehensive  Income",  which  requires
      comprehensive  income and its  components to be presented in the financial
      statements.  Comprehensive  income,  which  includes  net income,  foreign
      currency  translation  adjustments and unrealized gain/loss on securities,
      was $3,414 and $2,903 for the three  months ended July 2, 1999 and July 3,
      1998, respectively, and $4,340 and $4,929 for the six months ended July 2,
      1999 and July 3, 1998, respectively.

      During the six  month  period  ended  July 2, 1999,  employees  purchased
      approximately  129 shares at an average price of $7.49 per share under the
      provisions of the Company's Employee Stock Purchase Plan.



<PAGE>
<TABLE>
                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
                (All amounts in thousands, except per share data)
                                   (Unaudited)

      Changes in the status of options  under the  Company's  stock option plans
are summarized as follows:
<CAPTION>
                                        January 1, 1999        Weighted          January 1, 1998           Weighted
                                               to               Average                 to                 Average
                                          July 2, 1999           Price          December 31, 1998           Price
                                       -------------------    ------------    -----------------------    -------------

<S>                                           <C>                 <C>                   <C>                   <C>
    Options outstanding at
        beginning of period ...........       3,027               $7.98                 3,046                 $7.76
     Options granted ..................          84                9.23                   391                  8.92
     Options exercised ................        (42)                6.85                 (310)                  6.42
     Options forfeited/canceled .......        (45)                8.01                 (100)                  7.28
                                            ========            ========              ========              ========
     Options outstanding at
        end of period .................       3,024               $8.03                 3,027                 $7.98
                                            ========            ========              ========              ========

     Number of options at end
        of period:
        Exercisable ...................       1,884                                     1,820
        Available for grant ...........         948                                         4
</TABLE>

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

      During the six month period ended July 2, 1999, 16 forfeited  options were
      cancelled due to the  expiration of the 1987 Stock Option Plan in December
      1997. These options are not available for future grants.

(6)   NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

      Basic EPS was computed by dividing reported  earnings  available to common
      shareholders  by  weighted  average  shares  outstanding  during the year.
      Diluted EPS for the three  months  ended July 2, 1999 and July 3, 1998 was
      determined on the following assumptions:  (1) Preferred Shares and related
      warrants  issued in connection  with the private  placement of equity were
      converted  upon  issuance  on January 1, 1998 and (2)  warrants  issued in
      connection  with the  acquisition  of Spectra were converted on January 1,
      1998.

      The following  options were not included in the computation of diluted EPS
      since the exercise  prices were  greater than the average  market price of
      Common Shares. Options to purchase 497 and 147 common shares at an average
      price of $10.49 and $10.06 per share were outstanding for the three months
      ended July 2, 1999 and July 3, 1998, respectively. Options to purchase 551
      and 182 common  shares at an  average  price of $10.08 and $7.64 per share
      were  outstanding  for the six months ended July 2, 1999 and July 3, 1998,
      respectively.


<PAGE>
<TABLE>

                           PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
                (All amounts in thousands, except per share data)
                                   (Unaudited)
<CAPTION>
                                                                            Three Months Ended
                                ---------------------------------------------------------------------------------------------
                                                July 2, 1999                                     July 3, 1998
                                ---------------------------------------------    --------------------------------------------
                                                                     Per                                              Per
                                   Income           Shares          Share           Income           Shares          Share
                                 (numerator)     (denominator)      Amount        (numerator)     (denominator)      Amount
                                 -----------     -------------      ------        -----------     -------------      ------
<S>                                  <C>                <C>          <C>              <C>                <C>          <C>
Basic EPS:
Income available to common
   shareholders ................     $3,488             11,928       $0.29            $2,695             11,735       $0.23
                                                                     =====                                            =====
Effect of dilutive securities:
   Options .....................         --                425                            --                651
   Warrants ....................         --                166                            --                308
   Preferred Shares ............         --              1,375                            --              1,375
                                -------------- ------------------                -------------- ------------------
Diluted EPS:
Income available to common
   shareholders and assumed
   conversions .................     $3,488             13,894       $0.25            $2,695             14,069       $0.19
                                     ======             ======       =====            ======             ======       =====

</TABLE>
<TABLE>


                                                                      Six Months Ended
                                ---------------------------------------------------------------------------------------------
                                                July 2, 1999                                     July 3, 1998
                                ---------------------------------------------    --------------------------------------------
<CAPTION>
                                                                     Per                                              Per
                                 Income           Shares          Share           Income           Shares            Share
                               (numerator)     (denominator)      Amount        (numerator)     (denominator)        Amount
                               -----------     -------------      ------        -----------     -------------        ------
<S>                                  <C>                <C>          <C>              <C>                <C>          <C>
Basic EPS:
Income available to common
   shareholders ................     $5,579             11,912       $0.47            $4,925             11,608       $0.42
                                                                     =====                                            =====
Effect of dilutive securities:
   Options .....................         --                361                            --                655
   Warrants ....................         --                126                            --                302
   Preferred Shares ............         --              1,375                            --              1,375
                               ------------- ------------------                -------------- ------------------
Diluted EPS:
Income available to common
   shareholders and assumed
   conversions .................     $5,579             13,774       $0.41            $4,925             13,940       $0.35
                                     ======             ======       =====            ======             ======       =====

</TABLE>
<PAGE>


                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
                (All amounts in thousands, except per share data)
                                   (Unaudited)


(7)      DERIVATIVES

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

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

     Interest Rate Risk:

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

     Foreign Currency Exchange Rate Risk:

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


Item 2:  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

General

The following  discussion and analysis  should be read in  conjunction  with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
of the Company's December 31, 1998 annual report on Form 10-K.

Results of Operations:  Three Months ended July 2, 1999 and July 3, 1998
------------------------------------------------------------------------

Net Sales.  Consolidated  net sales  during the three  months ended July 2, 1999
increased   $6.1  million  or  12%  compared  with  the  same  period  in  1998.
International  net sales increased 35% and represented  approximately 60% of net
sales in the  second  quarter  of 1999  versus  49% of net  sales in the  second
quarter of 1998. The overall  increase in  consolidated  net sales is attributed
primarily to increased  sales in the fixed  position  retail  product  lines and
U-Scan(R) Express Self-Checkout  Systems. The increase in international sales is
primarily due to new products and the continued growth in the European and Asian
Pacific customer sales.

Gross  Profit.  Consolidated  gross profit during the three months ended July 2,
1999  increased  $2.2 million or 10% compared with the same period in 1998. As a
percentage of sales, gross profit decreased from 42.1% to 41.4%. The decrease in
gross profit  percentage  is  primarily  due to product  mix,  negative  foreign
currency impact and costs incurred to transition  manufacturing  activities from
Webster, NY to Eugene, OR.

Engineering,  Research and  Development.  Engineering,  Research and Development
(ER&D) expenses increased $0.6 million or 15%, as compared to the same period in
1998.  As a  percentage  of sales,  ER&D was 7.6% in the second  quarter of 1999
versus 7.4% of net sales in the second quarter of 1998.

Selling, General and Administrative.  Selling, General and Administrative (SG&A)
expenses  increased $1.3 million or 13%, as compared to the same period in 1998.
As a  percentage  of sales,  SG&A was 18.6% in 1999  versus  18.4% in 1998.  The
dollar increase is primarily due to a significant  increase in the international
sales  infrastructure  and  additional  investments  in the Company's  marketing
organization and marketing programs.

Interest Expense.  Interest expense decreased $0.8 million versus the comparable
period in 1998. The decrease is due to lower principal balances  outstanding and
a  reduction  in the  Company's  interest  rates on its senior term loans as the
Company achieved key milestones under certain financial  covenants  contained in
the bank credit agreements.

Provision  for  Income  Taxes.  The Company's effective tax rate was 35% in 1999
versus  37% in 1998 due to  larger  Foreign  Sales Corporation benefits.

Results of Operations:  Six Months ended July 2, 1999 and July 3, 1998
----------------------------------------------------------------------

Net Sales.  Consolidated  net sales  during  the six  months  ended July 2, 1999
increased  $11.6  million  or  11%  compared  with  the  same  period  in  1998.
International  net sales increased 25% and represented  approximately 57% of net
sales in the first  half of 1999  versus  51% of net sales in the first  half of
1998. The overall increase in consolidated net sales is attributed  primarily to
increased sales in the fixed position retail product lines and U-Scan(R) Express
Self-Checkout  Systems.  The increase in international sales is primarily due to
new  products  and the  continued  growth in the  Company's  European  and Asian
Pacific customer sales.
<PAGE>

Gross Profit. Consolidated gross profit during the six months ended July 2, 1999
increased  $6.1  million  or 14%  compared  with the same  period in 1998.  As a
percentage of sales, gross profit increased from 41.3% to 42.4%. The increase in
gross  profit  percentage  is primarily  due to improved  product mix and higher
manufacturing volume.

Engineering,  Research and  Development.  Engineering,  Research and Development
(ER&D) expenses increased $0.8 million or 10%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.3% in the first half of both 1999 and
1998.  The dollar  increase is due to additional  investments  in developing new
products.

Selling, General and Administrative.  Selling, General and Administrative (SG&A)
expenses  increased $3.9 million or 20%, as compared to the same period in 1998.
As a  percentage  of sales,  SG&A was 19.8% in 1999  versus  18.3% in 1998.  The
dollar increase is primarily due to a significant  increase in the international
sales  infrastructure  and  additional  investments  in the Company's  marketing
organization and marketing programs.

Severance  and Other  Costs.  During  the first  quarter  of 1999,  the  Company
recorded a pretax charge of $2.1 million for  severance and other costs.  Of the
total charge,  $1.4 million was for employee severance and benefit costs for the
elimination of approximately  140 positions  primarily at the Webster,  New York
manufacturing  facility  resultant  from the  consolidation  of all high  volume
handheld scanner  manufacturing at the Company's  Eugene,  Oregon facility.  The
remaining $0.7 is for early  termination  of the lease on the Company's  Webster
offsite  storage  and repair  facility.  As of July 2,  1999,  the amount of the
severance and other accruals was  approximately  $1.8 million,  which relates to
current contractual  obligations.  These costs reduced 1999 income before income
tax  provision,  net income,  basic EPS and diluted  EPS by $2.1  million,  $1.4
million, $0.11 and $0.10, respectively.

Interest Expense.  Interest expense decreased $1.5 million versus the comparable
period in 1998. The decrease is due to lower principal balances  outstanding and
a  reduction  in the  Company's  interest  rates on its senior term loans as the
Company achieved key milestones under certain financial  covenants  contained in
the bank credit agreements.

Provision  for  Income  Taxes.  The  Company's  effective  tax rate  was  35% in
1999  versus  37% in 1998 due to  larger  Foreign  Sales
Corporation benefits.

Liquidity and Capital Resources:

Current assets increased $5.1 million from December 31, 1998 primarily due to an
increase in accounts  receivable and inventory  resulting from newly  introduced
products.  Current  liabilities  increased  $4.4  million  primarily  due  to an
increase in accounts payable and accrued expenses. As a result,  working capital
increased $0.7 million from December 31, 1998.

Property,  plant and  equipment  expenditures  totaled  $2.2 million for the six
months  ended July 2, 1999  compared  with $2.7 million for the six months ended
July 3, 1998. The 1999  expenditures  primarily  related to new product tooling,
manufacturing equipment and computer hardware.
<PAGE>


The long-term debt to capital  percentage was 56.9% at July 2, 1999 versus 64.1%
at December 31, 1998  primarily  due to a reduction  in long-term  debt by $13.1
million and an increase in retained  earnings  resultant from net income of $5.6
million  in the  first  half of 1999.  At July 2,  1999,  liquidity  immediately
available to the Company consisted of cash and cash equivalents of $5.5 million.
The Company has a revolving line of credit of $20.0 million,  of which, there is
no  outstanding  balance.  The  Company  believes  that its cash  resources  and
available  credit  facilities,  in addition  to its  operating  cash flows,  are
sufficient to meet its requirements for the next 12 months.

Year 2000

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

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

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

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

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

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

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

         (2)   Assessment  of the software and hardware  identified.  This phase
               includes the  evaluation of the software and hardware  identified
               for Year 2000  compliance,  the  determination of the remediation
               method  and  resources  required,   and  the  development  of  an
               implementation plan. The Company has substantially  completed the
               assessment stage.

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


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

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

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

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

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

Euro Conversion

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

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995

Certain statements contained in this Management's Discussion and Analysis may be
forward-looking  in nature,  or  "forward-looking  statements" as defined in the
Private Securities Litigation Reform Act of 1995. Management cautions that these
statements are estimates of future  performance and are highly  dependent upon a
variety  of  important  factors,  which  could  cause  actual  results to differ
materially  from the estimate.  These factors  include the market  acceptance of
products,  competitive  product offerings,  the disposition of legal issues, the
ability of the Company to identify and address successfully the Year 2000 issues
in a timely manner and at costs that are  reasonably  in line with  projections,
and the ability of the  Company's  vendors to identify and address  successfully
their own Year 2000 issues in a timely manner.  Profits also will be affected by
the Company's ability to control  manufacturing  and operating costs.  Reference
should be made to  filings  with the  Securities  and  Exchange  Commission  for
further discussion of factors that could affect the Company's future results.


<PAGE>

PART II:  OTHER INFORMATION

Item 1:   Legal Proceedings:

         The  descriptions  of  the  Company's  legal  proceedings  with  Symbol
         Technologies,  Inc.  ("Symbol"),  set forth in Item 3 of the  Company's
         Annual  Report on Form 10-K for the fiscal  period  ended  December 31,
         1998 (the "Litigation") are incorporated herein by reference.

         On April 28, 1999,  the  Court denied  Symbol's  motions  for reconsid-
         eration and for  immediate  appeal of  the Court's  October 199   Order
         granting the  Company  partial  summary  judgment  against  Symbol  for
         patent misuse.  The Court also  clarified  its prior  Order by deleting
         reference  to the 1995 licensing agreement.

         The trial for the contract issues has not yet been rescheduled.

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

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

         The Company has been informed that on or about  July 2,  1999, Interna-
         tional Automated Systems ("IAS") filed a complaint in the State of Utah
         against the Company and  Optimal  Robotics Corp. ("Optimal"),  alleging
         patent infringement.  The complaint has not yet been served on the Com-
         pany.  The Company believes that the lawsuit will not have  a  material
         adverse effect  on the  Company's  business or prospects and intends to
         vigorously defend the claim with  Optimal.  The Company's contract with
         Optimal  provides  for  indemnification  obligations  on  the  part  of
         Optimal.
<PAGE>
Item 2:   Changes in Securities:  None

Item 3:   Defaults upon Senior Securities:  None

Item 4:  Submission of Matters of Shareholders to a Vote of Security Holders:

(a)      The Annual Meeting of Shareholders was held on May 12, 1999.

(b)      The names of  the  directors  elected at  the  Annual  Meeting  for  a
         three-year term are as follows:

                  Jay M. Eastman
                  Thomas J. Morgan
                  Bert W. Wasserman

         The name of each other director whose  term  of office continued  after
         the Annual Meeting is as follows:

                  Robert S. Ehrlich
                  Donald K. Hess
                  James C. O'Shea
                  Jack E. Rosenfeld
                  Robert C. Strandberg
                  Justin L. Vigdor
                  Dr. Romano Volta

        (c)(i) At the Annual  Meeting,  the  tabulation of votes with respect to
         each nominee for director was as follows:

                                            Votes               Authority
              Nominee                        FOR                 Withheld
              Jay M. Eastman ...........  8,830,684              741,982
              Thomas J. Morgan .........  8,802,075              770,591
              Bert W. Wasserman ........  8,860,479              712,187

        (c)(ii)At the  Annual  Meeting,  the  shareholders  voted upon one other
               matter.  The  description  of the other matter voted upon and the
               tabulation of votes with respect to such matter are as follows:

                                               Votes       Votes         Votes
                                                FOR       AGAINST     ABSTAINING
              Proposal to approve the        2,641,393   2,291,208      97,022
              amendment to the 1994 Stock
              Option Plan

Item 5:   Other Information:  None
<PAGE>

Item 6:   Exhibits and Reports on Form 8-K

(a)      Exhibits:                                                     Page No.

              10.1 Amendment  Five and Consent  and Waiver  dated as of March 1,
                   1999 to the Credit  Agreement dated as of July 12, 1996 among
                   PSC Scanning Inc., as Borrower,  PSC Inc., as Guarantor,  the
                   financial  institutions  party  thereto  and  Fleet  Bank  as
                   initial Issuing Bank and administrative agent .............22

              10.2 Amendment  No. 4,  Consent and Waiver  dated March 1, 1999 to
                   Securities  Purchase  Agreements and Warrants among PSC Inc.,
                   PSC Scanning Inc., and the Purchasers named in the Securities
                   Purchase Agreements .......................................25

              10.3 Amendment Six dated as of May 1, 1999 to the Credit Agreement
                   dated  as of July  12,  1996  among  PSC  Scanning  Inc.,  as
                   Borrower, PSC Inc., as Guarantor,  the financial institutions
                   party  thereto  and Fleet  Bank as initial  Issuing  Bank and
                   administrative agent ......................................33

              10.4 Consent  and Waiver  dated as of June 30,  1999 to the Credit
                   Agreement  dated as of July 12, 1996 among PSC Scanning Inc.,
                   as  Borrower,   PSC  Inc.,   as   Guarantor,   the  financial
                   institutions  party thereto and Fleet Bank as initial Issuing
                   Bank and administrative agent .............................36

              10.5* Second Amendment to Employment Agreement between the Company
                   and Robert C. Strandberg dated as of July 13, 1999 ........38

              10.6* Second Amendment to Agreement between the Company and Robert
                   S. Ehrlich dated as of July 13, 1999 ......................47


         (b)  Reports on Form 8-K:   None
<PAGE>

SIGNATURES

Pursuant  to the  requirements  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.

                          PSC Inc.



DATE:    August 9, 1999   By:    /s/ Robert C. Strandberg
                                     --------------------
                                    Robert C. Strandberg
                                    President & Chief Executive Officer


DATE:    August 9, 1999   By:   /s/  William J. Woodard
                                     William J. Woodard
                                     Vice President & Chief Financial Officer


DATE:    August 9, 1999   By:   /s/ Michael J. Stachura
                                    -------------------
                                    Michael J. Stachura
                                    Vice President of Finance
                                    (Principal Accounting Officer)