================================================================================
                                  
                                 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 3, 1998

                                       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 6, 1998, there were 11,856,664 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 3, 1998 (Unaudited) and
           December 31, 1997.................................................3-4

           Consolidated Statements of Operations and
           Retained Earnings for the three and six
           months ended:
           July 3, 1998 (Unaudited) and
           July 4, 1997 (Unaudited) .........................................5-6

           Consolidated Statements of Cash Flows
           for the six months ended:
           July 3, 1998 (Unaudited) and
           July 4, 1997 (Unaudited) .......................................... 7

           Notes to Consolidated Financial
           Statements (Unaudited) ..........................................8-11

Item 2    -Management's Discussion and Analysis of
               Financial Condition and Results of
               Operations .................................................12-14

PART II:  OTHER INFORMATION

Item 1    -Legal Proceedings .................................................15

Item 2    -Changes in Securities  ............................................15

Item 3    -Defaults upon Senior Securities ...................................15

Item 4    -Submission of Matters to a Vote of Security Holders  ............. 15

Item 5    -Other Information..................................................15

Item 6    -Exhibits and Reports on Form 8-K  .................................16


<PAGE>
                         PART I - FINANCIAL INFORMATION

Item 1:  Financial Statements
<TABLE>
                            PSC Inc. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           (All amounts in thousands)
<CAPTION>
                                                              July 3, 1998       December 31, 1997
                                                              ------------      -----------------
                                                              (Unaudited)
<S>                                                            <C>                     <C>     
ASSETS

CURRENT ASSETS:

        Cash and cash equivalents .........................    $  3,689                $  2,271
        Accounts receivable, net of allowance
            for doubtful accounts of $1,217
           and $1,169, respectively .......................      36,935                  35,094
        Inventories .......................................      19,015                  17,723
        Prepaid expenses and other ........................       1,797                   1,569
                                                            -----------              ----------

       TOTAL CURRENT ASSETS ...............................      61,436                  56,657

PROPERTY, PLANT AND EQUIPMENT, net
        of accumulated depreciation of $15,828
        and $13,024, respectively .........................      35,329                  35,469

DEFERRED TAX ASSETS .......................................      22,973                  23,576

INTANGIBLE AND OTHER ASSETS, net of accumulated
  amortization of $16,707 and $13,006, respectively .......      54,424                  57,096
                                                             ----------              ----------


TOTAL ASSETS ..............................................    $174,162                $172,798
                                                              =========               =========

</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>
<TABLE>

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

<CAPTION>
                                                              July 3, 1998           December 31, 1997
                                                              ------------           -----------------
                                                              (Unaudited)
<S>                                                            <C>                   <C>       
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
       Current portion of long-term debt ...................   $ 13,412              $   12,406
       Accounts payable ....................................     13,422                  18,000
       Accrued expenses ....................................      9,306                   7,405
       Accrued payroll and related employee benefits .......      5,548                   5,559
       Accrued acquisition related restructuring costs .....        822                   1,175
                                                              ---------               ---------

         TOTAL CURRENT LIABILITIES .........................     42,510                  44,545


LONG-TERM DEBT, less current maturities ....................     91,970                  96,148

OTHER LONG-TERM LIABILITIES ................................      2,281                   2,775

SHAREHOLDERS' EQUITY:
       Preferred shares, par value $.01;
      10,000 authorized, 110 shares issued
          and outstanding. 
          ($11,000 aggregate liquidation value) ............          1                       1
       Common shares, par value $.01;
         40,000 authorized, 11,855 and 11,390
          shares issued and outstanding ....................        119                     114
       Additional paid-in capital ..........................     69,871                  66,734
       Retained earnings/(Accumulated deficit) .............    (31,618)                (36,543)
       Accumulated other comprehensive income ..............       (735)                   (739)
       Less treasury stock, 39 shares
        repurchased, at cost ...............................       (237)                   (237)
                                                             -----------              ----------

         TOTAL SHAREHOLDERS' EQUITY ........................     37,401                  29,330
                                                              ---------                --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................   $174,162                $172,798
                                                               ========                ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
                            PSC Inc. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                (All amounts in thousands, except per share data)
                                   (Unaudited)
<CAPTION>
                                                                    Three Months Ended
                                                                    ------------------
                                                                     July 3,          July  4,
                                                                      1998               1997
                                                                      ----               ----
<S>                                                                  <C>               <C>    
NET SALES ......................................................     $51,877           $47,301

COST OF SALES ..................................................      30,011            29,388
                                                                   ---------         ---------
         Gross profit ..........................................      21,866            17,913

OPERATING EXPENSES:
         Engineering, research and development .................       3,856             3,547
         Selling, general and administrative ...................       9,540            10,364
         Severance and other costs .............................           -             4,191
         Amortization of intangibles resulting
              from business acquisitions .......................       1,718             1,672
                                                                       -----             -----
         Income/(loss) from operations .........................       6,752            (1,861)

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ......................................      (2,682)           (3,384)
         Interest income .......................................          55               100
         Other income/(expense) ................................         152                (8)
                                                                  ----------           --------
                                                                      (2,475)           (3,292)
                                                                    ---------        ----------
         Income/(loss) from continuing operations before
              income tax provision/(benefit) ...................       4,277            (5,153)

         Income tax provision/(benefit) ........................       1,582            (1,907)
                                                                    --------        -----------
         Income/(loss) from continuing operations ..............       2,695            (3,246)
         Discontinued operations:
         Gain from discontinued operations, net of tax .........           -               180
         Loss on sale of discontinued operation, net of tax ....           -              (265)
                                                                 -----------              -----
         Total loss from discontinued operations ...............           -               (85)
                                                                 -----------          ---------
         Net income/(loss) .....................................      $2,695           ($3,331)
                                                                      ======           ========
NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic:
           Continuing operations ...............................       $0.23            ($0.29)
           Discontinued operations .............................           -             (0.01)
           Net income/(loss) ...................................       $0.23            ($0.30)
                                                                     ========            ======

         Diluted:
           Continuing operations ...............................       $0.19            ($0.29)
           Discontinued operations .............................          -              (0.01)
                                                                    ------------         ------
           Net income/(loss) ...................................       $0.19            ($0.30)
                                                                      =========         ======

WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic .................................................      11,735            11,142
         Diluted ...............................................      14,069            11,142

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period .................................    ($34,313)         ($38,562)
         Net income/(loss) .....................................       2,695            (3,331)
                                                                --------------       ----------
         Retained earnings/(Accumulated deficit),
           end of period .......................................    ($31,618)         ($41,893)
                                                                    =========          ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>

<TABLE>
                            PSC Inc. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                (All amounts in thousands, except per share data)
                                   (Unaudited)
<CAPTION>
                                                                          Six Months Ended
                                                                          ----------------
                                                                    July 3,           July 4,
                                                                     1998               1997
                                                                     ----               ----
<S>                                                                 <C>               <C>     
NET SALES ....................................................      $105,505          $101,537

COST OF SALES ................................................        61,954            60,923
                                                                   ---------         ---------
         Gross profit ........................................        43,551            40,614

OPERATING EXPENSES:
         Engineering, research and development ...............         7,740             7,081
         Selling, general and administrative .................        19,278            23,347
         Severance and other costs ...........................             -             4,191
         Amortization of intangibles resulting
              from business acquisitions .....................         3,425             3,348
                                                                       -----          --------
         Income/(loss) from operations .......................        13,108             2,647

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ....................................        (5,558)           (6,754)
         Interest income .....................................           120               251
         Other income/(expense) ..............................           147               108
                                                                    ---------          --------
                                                                      (5,291)           (6,395)
                                                                    ---------        ----------
         Income/(loss) from continuing operations before
              income tax provision/(benefit) .................         7,817            (3,748)

         Income tax provision/(benefit) ......................         2,892            (1,388)
                                                                    --------        -----------
         Income/(loss) from continuing operations ............         4,925            (2,360)
         Discontinued operations:
         Gain from discontinued operations, net of tax .......             -               164
         Loss on sale of discontinued operations, net of tax .             -              (265)
                                                                     -------           --------
         Total loss from discontinued operations, net of tax .             -              (101)
         Net income/(loss) ...................................        $4,925          ($ 2,461)
                                                                      ======           ========

NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic:
           Continuing operations .............................         $0.42            ($0.21)
           Discontinued operations ...........................             -             (0.01)
           Net income/(loss) .................................         $0.42            ($0.22)
                                                                       ======            ======

         Diluted:
           Continuing operations .............................         $0.35            ($0.21)
           Discontinued operations ...........................             -             (0.01)
                                                                      ---------          ------
           Net income/(loss) .................................         $0.35            ($0.22)
                                                                      =========          ======
WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic ...............................................        11,608            11,139
         Diluted .............................................        13,940            11,139

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period ...............................      ($36,543)         ($39,432)
         Net income/(loss) ...................................         4,925            (2,461)
                                                               ---------------       ----------
         Retained earnings/(Accumulated deficit),
           end of period .....................................      ($31,618)         ($41,893)
                                                                    =========          ========
</TABLE>
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 3,          July 4,
                                                                       1998            1997
                                                                       ----            ----
<S>                                                                   <C>              <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income/(loss) .............................................   $4,925           ($2,461)
       Adjustments to reconcile net income
       to net cash provided by (used in) operating activities:
         Depreciation and amortization ............................    6,505             7,112
         Loss on disposition of assets ............................        -               109
         Loss on disposition of discontinued operations ...........        -               265
         Deferred tax assets ......................................      603               211
         Decrease (increase) in assets:
             Accounts receivable ..................................   (1,841)            1,290
             Inventories ..........................................   (1,292)             (539)
             Prepaid expenses and other ...........................     (228)             (357)
         Increase (decrease) in liabilities:
             Accounts payable .....................................   (4,578)            1,564
             Accrued expenses .....................................    1,901            (4,112)
             Accrued payroll and related employee benefits ........     (254)           (1,230)
             Accrued acquisition related restructuring costs ......     (412)           (2,605)
                                                                       ------          --------

                Net cash provided by (used in) operating activities     5,329             (753)
                                                                      --------             ----

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures, net .....................................   (2,664)           (4,693)
    Additions to intangible and other assets ......................   (1,215)             (104)
    Repayment of stock option loan ................................      325                 -
                                                                   ---------          ---------
                      Net cash used in investing activities .......   (3,554)           (4,797)
                                                                    ---------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payment of long-term debt, net ................................   (3,172)           (2,604)
    Payment of other long-term liabilities ........................     (138)             (296)
    Exercise of stock options and sale of common stock ............     2,678              431
    Tax benefit from exercise or early disposition of stock options      464                 -
                                                                         ----           --------
                       Net cash used in financing activities ......     (168)            (2,469)
                                                                      --------           -------

FOREIGN CURRENCY TRANSLATION ......................................    (189)             (922)

NET INCREASE/(DECREASE) IN CASH AND CASH                              --------         --------   
         EQUIVALENTS ..............................................   1,418            (8,941)

CASH AND CASH EQUIVALENTS:
         Beginning of period ......................................    2,271            10,838
                                                                     -------          --------
         End of period ............................................   $3,689            $1,897
                                                                      ======            ======
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>

                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 3, 1998 and July 4, 1997
                (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 3, 1998, the results of operations
      for the three and six  months  ended July 3, 1998 and July 4, 1997 and its
      cash  flows for the six months  ended  July 3, 1998 and July 4, 1997.  The
      results of operations  for the three and six months ended July 3, 1998 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, 1997 annual report on
      Form 10-K.

      INVENTORIES

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

                                      July 3, 1998            December 31, 1997
                                      ------------            -----------------
         Raw materials ............   $12,038                    $10,979
         Work-in-process ..........     3,920                      3,727
         Finished goods ...........     3,057                      3,017
                                    ---------                  ---------
                                      $19,015                    $17,723
                                      =======                    =======


(2)   LONG-TERM DEBT

      Long-term debt consists of the following:

                                               July 3, 1998    December 31, 1997
                                               ------------    -----------------
         Senior Term Loan A ................   $42,000                $47,000
         Senior Term Loan B ................    23,500                 24,000
         Senior revolving credit ...........     6,000                  3,000
         Subordinated term loan ............    29,518                 29,488
         Subordinated promissory note ......     4,062                  4,688
         Other .............................       302                    378
                                              --------            -----------
                                               105,382                108,554
         Less:  current maturities .........    13,412                 12,406
                                             ---------              ---------
                                               $91,970                $96,148
                                               =======                =======
<PAGE>
                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 3, 1998 and July 4, 1997
                (All amounts in thousands, except per share data)
                                   (Unaudited)

(3)   SHAREHOLDERS' EQUITY

      In 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/(loss),  foreign currency
      translation adjustments and unrealized gains on securities, was $4,929 and
      ($3,383)  for  the six  months  ended  July  3,  1998  and  July 4,  1997,
      respectively.

      During  the six month  period  ended  July 3,  1998,  employees  purchased
      approximately  107 shares at an average price of $6.92 per share under the
      provisions of the Company's Employee Stock Purchase Plan.

      Changes in the status of options  under the  Company's  stock option plans
      are summarized as follows:

                             Jan. 1, 1998    Weighted   Jan. 1, 1997    Weighted
                                 to           Average        to         Average
                              July 3, 1998     Price    Dec. 31, 1997    Price
                              ------------     -----   -------------     -----
 Options outstanding
    at beginning of period ..  3,046           $7.76        2,818        $8.33
 Options granted ............    195           11.24        1,094         6.98
 Options exercised ..........   (359)           7.19         (162)        7.51
 Options forfeited/canceled .    (98)           7.27         (704)        9.00
                               ------                        -----
 Options outstanding at
    end of period ...........  2,784            7.99        3,046         7.76

 Number of options at end
    of period:
    Exercisable .............  1,651                        1,884
    Available for grant .....    297                          394

(4)    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 and six  months  ended July 3, 1998 and July 4,
      1997 was determined on the following assumptions:

      1)   Warrants  issued in connection  with the private  placement of equity
           were converted upon issuance on January 1, 1998,
      2)   Warrants issued in connection with  the acquisition  of  Spectra were
           converted on January 1, 1998 and
      3)   Preferred Shares were converted on January 1, 1998.

      The following options and warrants 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 147 and 2,947 common shares at
      an average  price of $12.11 and $9.05 per share were  outstanding  for the
      three months ended July 3, 1998 and July 4, 1997, respectively. Options to
      purchase  182 and 2,545  common  shares at an average  price of $11.87 and
      $9.39 per share were outstanding for the six months ended July 3, 1998 and
      July 4, 1997,  respectively.  Warrants  to purchase  975 common  shares at
      $8.00 per share were  outstanding  for the three and six months ended July
      4, 1997.
<PAGE>

<TABLE>
                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE THREE MONTHS ENDED July 3, 1998 and July 4, 1997
                (All amounts in thousands, except per share data)
                                   (Unaudited)
<CAPTION>
                                                                  Three Months Ended
                                           --------------------------------------------------------------------
                                                      July 3, 1998                       July 4, 1997
                                           ----------------------------------    -------------------------------
                                           Income      Shares      Per Share    Income    Shares      Per Share
                                          (numerator) (denominator)  Amount   (numerator)(denominator)   Amount
<S>                                        <C>          <C>           <C>      <C>          <C>          <C>    
      Basic EPS
      Income Available to
         Common shareholders ...........   $2,695       11,735        $0.23    ($3,331)     11,142       ($0.30)
                                                                      =====                               ======
      Effect of Dilutive securities
         Options .......................        -          651                       -          -
         Warrants ......................        -          308                       -          -
         Preferred Shares ..............        -        1,375                       -          -
                                          --------     -------                 -------      -------
      Diluted EPS
      Income Available to
         Common shareholders
         And assumed conversions .......  $2,695        14,069        $0.19    ($3,331)     11,142       ($0.30)


                                                                   Six Months Ended
                                           --------------------------------------------------------------------
                                                      July 3, 1998                       July 4, 1997
                                           ----------------------------------    -------------------------------
                                           Income      Shares      Per Share     Income    Shares      Per Share
                                          (numerator) (denominator)  Amount      (numerator)(denominator)   Amount
<S>                                        <C>          <C>           <C>         <C>          <C>          <C>  
      Basic EPS
      Income Available to
         Common shareholders ...........   $4,925      11,608          $0.42     ($2,461)      11,139       ($0.22)
                                                                       =====                                 ======
      Effect of Dilutive securities
         Options .......................       -          655                          -            -
         Warrants ......................       -          302                          -            -
         Preferred Shares ..............       -        1,375                          -            -
  
      Diluted EPS
      Income Available to
         Common shareholders
         And assumed conversions .......   $4,925      13,940          $0.35          ($2,461)  11,139      ($0.22)
                                           ======      ======          =====          =======   ======      ====== 
</TABLE>
<PAGE>

(4)   DERIVATIVES

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

The Company monitors its exposure to interest rate and foreign currency exchange
risk. The Company has limited involvement with derivative financial  instruments
and  does not use  them  for  trading  purposes.  The  Company  uses  derivative
instruments solely to reduce the financial impact of these risks.

Interest Rate Risk:

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

Foreign Currency Exchange Rate Risk:

The Company's exposure to foreign currency exchange changes relates primarily to
its international subsidiaries.  The Company may occasionally enter into forward
foreign exchange contracts as a hedge against currency  fluctuations relating to
these foreign  transactions and commitments  denominated in foreign  currencies.
The foreign  exchange  contracts  generally have maturities of  approximately 30
days and require the Company to exchange foreign  currencies for U.S. dollars at
maturity, at rates agreed to at the inception of the contracts. Gains and losses
on forward contracts are offset against the foreign exchange gains and losses on
the underlying  hedged items and are recorded in the Consolidated  Statements of
Operations.

<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, 1997 annual report on Form 10-K.

Results of Operations:  Three Months ended July 3, 1998 and July 4, 1997
------------------------------------------------------------------------

Net Sales.  Consolidated  net sales  during the three  months ended July 3, 1998
increased   $4.6  million  or  10%  compared  with  the  same  period  in  1997.
International  net sales increased 22% and represented  approximately 49% of net
sales in the  second  quarter  of 1998  versus  44% of net  sales in the  second
quarter of 1997.  The increases are  primarily  due to the  introduction  of new
fixed position retail products and a continued growth in the Company's  European
customer  sales  offset  by  the  effects  of  the  stronger  U.S.  dollar.  The
translation of sales denominated in foreign  currencies was negatively  impacted
by $0.7 million in 1998 versus 1997.

Gross  Profit.  Consolidated  gross profit during the three months ended July 3,
1998  increased  $4.0 million or 22% compared with the same period in 1997. As a
percentage of sales, gross profit increased from 37.9% to 42.1%. The increase in
gross profit  percentage  is  primarily  due to the change in product mix of the
Company's handheld and fixed position product lines and a $1.0 million inventory
write-off  which  was  recorded  in 1997  for  the  discontinuation  of  certain
products.

Engineering,  Research and  Development.  Engineering,  Research and Development
(ER&D) expenses  increased $0.3 million or 9%, as compared to the same period in
1997.  As a  percentage  of sales,  ER&D was 7.4% in the second  quarter of 1998
versus 7.5% of net sales in the second quarter of 1997.  The dollar  increase is
due to additional  investments in developing new products and enhancing existing
products.

Selling, General and Administrative.  Selling, General and Administrative (SG&A)
expenses  decreased  $0.8 million or 8%, as compared to the same period in 1997.
As a  percentage  of sales,  SG&A was 18.4% in 1998 versus  21.9% in 1997.  As a
result of efficiencies  developed due to the integration of Spectra, the Company
has continued to reduce its general and administrative  expenses as a percentage
of sales.

Severance  and Other  Costs.  During the second  quarter  of 1997,  the  Company
recorded a one-time pretax charge of $4.2 million for severance and other costs.
Of the  total  charge,  approximately  $2.3  million  was  associated  with  the
Severance Agreement with the former CEO, $1.2 million was for employee severance
and benefit costs for the elimination of  approximately  30 positions  including
several senior  executives and $0.7 million for the  centralization  of research
and development  efforts and the relocation of  manufacturing of certain product
lines between its two manufacturing facilities.

Acquisition Related Restructuring and Other Matters. 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. The restructuring  program in part, provided for employee
severance and benefit costs for the elimination of certain positions. As of July
3,  1998,  all  positions  targeted  in  the  restructuring  program  have  been
eliminated.  Restructuring  actions are  expected to be  completed by the end of
1998. The amount of the restructuring  accrual at July 3, 1998 was approximately
$0.8 million, which relates to current contractual obligations.  There have been
no reallocations or reestimates to date.  During the second quarter of 1998, the
Company  sold  its  10%  ownership   interest  in  an  industrial   partner  for
approximately  $2.0  million  and  incurred  a  charge  for the  release  from a
manufacturing rights and software licensing agreement for $1.9 million.

Interest Expense.  Interest expense decreased $0.7 million versus the comparable
period in 1997. The decrease is due to lower principal balances  outstanding and
a  reduction  in the  Company's  interest  rates on its  senior  term  loans and
revolving  line of credit,  which  resulted from an amendment to the bank credit
agreements in April 1998.
<PAGE>

Provision for Income Taxes. The Company recorded a $1.6 million tax provision in
1998 primarily due to an increase in pretax income. The Company's  effective tax
rate was 37% in both 1998 and 1997.  The  Company  expects to record  income tax
expense at or about the combined federal and state statutory tax rate in 1998.

Discontinued  Operations.  During  the  second  quarter  of  1997,  the  Company
completed  the  sale of  TxCOM,  which  was  acquired  as  part  of the  Spectra
acquisition,  for  approximately  $1.0  million.  A loss of  approximately  $0.3
million, net of tax, was recorded.


Results of Operations:  Six Months ended July 3, 1998 and July 4, 1997
----------------------------------------------------------------------

Net Sales.  Consolidated  net sales  during  the six  months  ended July 3, 1998
increased   $4.0  million  or  4%  compared   with  the  same  period  in  1997.
International  net sales increased 19% and represented  approximately 51% of net
sales in the first six  months of 1998  versus 44% of net sales in the first six
months of 1997.  The  increases are  primarily  due to the  introduction  of new
products and the  continued  growth in the  Company's  European  customer  sales
offset by the effects of the stronger  U.S.  dollar.  The  translation  of sales
denominated in foreign  currencies  was  negatively  impacted by $2.1 million in
1998 versus 1997.

Gross Profit. Consolidated gross profit during the six months ended July 3, 1998
increased  $2.9  million  or 7%  compared  with the same  period  in 1997.  As a
percentage of sales, gross profit increased from 40.0% to 41.3%. The increase in
gross profit  percentage  is  primarily  due to the change in product mix of the
Company's handheld and fixed position product lines and a $1.0 million inventory
write-off  which  was  recorded  in 1997  for  the  discontinuation  of  certain
products.

Engineering,  Research and  Development.  Engineering,  Research and Development
(ER&D) expenses  increased $0.7 million or 9%, as compared to the same period in
1997.  As a percentage  of sales,  ER&D was 7.3% in the first six months of 1998
versus  7.0% of net sales in the  first  six  months  of 1997.  The  dollar  and
percentage of sales  increases are due to additional  investments  in developing
new products and enhancing existing products.

Selling, General and Administrative.  Selling, General and Administrative (SG&A)
expenses  decreased $4.1 million or 17%, as compared to the same period in 1997.
As a  percentage  of sales,  SG&A was 18.3% in 1998 versus  23.0% in 1997.  As a
result of efficiencies  developed due to the integration of Spectra, the Company
has continued to reduce its general and administrative  expenses as a percentage
of sales.

Severance  and Other  Costs.  During the second  quarter  of 1997,  the  Company
recorded a one-time pretax charge of $4.2 million for severance and other costs.
Of the  total  charge,  approximately  $2.3  million  was  associated  with  the
Severance Agreement with the former CEO, $1.2 million was for employee severance
and benefit costs for the elimination of  approximately  30 positions  including
several senior  executives and $0.7 million for the  centralization  of research
and development  efforts and the relocation of  manufacturing of certain product
lines between its two manufacturing facilities.

Acquisition Related Restructuring and Other Matters. 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. The restructuring  program in part, provided for employee
severance and benefit costs for the elimination of certain positions. As of July
3,  1998,  all  positions  targeted  in  the  restructuring  program  have  been
eliminated.  Restructuring  actions are  expected to be  completed by the end of
1998. The amount of the restructuring  accrual at July 3, 1998 was approximately
$0.8 million, which relates to current contractual obligations.  There have been
no reallocations or reestimates to date.  During the second quarter of 1998, the
Company  sold  its  10%  ownership   interest  in  an  industrial   partner  for
approximately  $2.0  million  and  incurred  a  charge  for the  release  from a
manufacturing rights and software licensing agreement for $1.9 million.

Interest Expense.  Interest expense decreased $1.2 million versus the comparable
period in 1997.  The  decrease  is  primarily  due to lower  principal  balances
outstanding and reduced interest rates, which went into effect in April 1998.
<PAGE>

Provision for Income Taxes. The Company recorded a $2.9 million tax provision in
1998 primarily due to an increase in pretax income. The Company's  effective tax
rate was 37% in both 1998 and 1997.  The  Company  expects to record  income tax
expense at or about the combined federal and state statutory tax rate in 1998.

Discontinued  Operations.  During  the  second  quarter  of  1997,  the  Company
completed  the  sale of  TxCOM,  which  was  acquired  as  part  of the  Spectra
acquisition,  for  approximately  $1.0  million.  A loss of  approximately  $0.3
million, net of tax, was recorded.

Liquidity and Capital Resources:

Current assets increased $4.8 million from December 31, 1997 primarily due to an
increase  in  cash,  accounts  receivable  and  inventory.  Current  liabilities
decreased $2.0 million  primarily due to a reduction in accounts  payable offset
in part by an  increase  in  current  portion  of  long-term  debt  and  accrued
expenses. As a result,  working capital increased $6.8 million from December 31,
1997.

Property,  plant and  equipment  expenditures  totaled  $2.7 million for the six
months  ended July 3, 1998  compared  with $4.7 million for the six months ended
July 4, 1997. The 1998 expenditures primarily related to manufacturing equipment
and new product tooling.

The long-term debt to capital  percentage was 71.1% at July 3, 1998 versus 76.6%
at December 31, 1997. At July 3, 1998,  liquidity  immediately  available to the
Company  consisted of cash and cash  equivalents  of $3.7 million.  In 1996, the
Company  obtained credit  facilities  totaling $130.0 million,  of which,  $14.0
million is available 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.

<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,
         1997 (the "Litigation") are incorporated herein by reference.

         A trial on the  contract  issues is  tentatively  scheduled to begin on
         October 13, 1998.

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 7, 1998.


         (b) The names of the  directors  elected  at the Annual  Meeting  for a
             three-year term are as follows:
                           Robert S. Ehrlich
                           Jack E. Rosenfeld
                           Robert C. Strandberg

                  In  addition,  Dr.  Romano  Volta was elected a director for a
                  three-year  term by the  holders  of the  Series  A  Preferred
                  Shares.  He received all 110,000  votes cast by the holders of
                  the Series A Preferred Shares.


                  The name of each other director whose term of office continued
                  after the Annual Meeting is as follows:
                           Jay M. Eastman
                           James W. Henry
                           Donald K. Hess
                           Thomas J. Morgan
                           James C. O'Shea
                           Justin L. Vigdor


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

                  Nominee                   Votes FOR        Authority Withheld
                  -------------------------------------------------------------
                  Robert S. Ehrlich         10,954,734                 410,516
                  Jack E. Rosenfeld         10,959,258                 405,995
                  Robert C. Strandberg      10,999,677                 365,641

            (ii)  At the Annual Meeting,  the shareholders  voted upon two other
                  matters.  The  description of each other matter voted upon and
                  the  tabulation  of votes with respect to each such matter are
                  as follows:
                                                     Votes     Votes     Votes
                                                      FOR     AGAINST ABSTAINING
                                                   -----------------------------
                  (a)  Proposal to approve the     9,630,138  328,769  1,406,413
                       amendment to the 1995
                       Employee Stock Purchase 
                       Plan

                  (b)  Proposal to approve the     9,471,494 417,719   1,446,300
                       Director Compensation Plan       
<PAGE>

Item 5:   Other Information:  None

Item 6:   Exhibits and Reports on Form 8-K

          (a)  Exhibits:

             10.1      Employment Agreement between the Company and 
                       Robert C. Strandberg as of June 2, 1998

             10.2      Agreement between the Company and
                       Robert S. Ehrlich as of June 2, 1998

             10.3      Director  Compensation Plan dated as of May 7, 1998

             10.4      Amended 1995 Employee Stock Purchase Plan 
                       as of May 7, 1998

         (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 10, 1998        By:   /s/Robert C. Strandberg
                                          --------------------
                                         Robert C. Strandberg
                                         President & Chief Executive Officer

DATE:    August 10, 1998.        By:  /s/William J. Woodard
                                        William J. Woodard
                                        Vice President & Chief Financial Officer

DATE:    August 10, 1998.        By:  /s/ Michael J. Stachura
                                         Michael J. Stachura
                                         Vice President of Finance
                                        (Principal Accounting Officer)