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                                  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 October 2, 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  November  11,  1998,  there  were  11,860,679  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
           October 2, 1998 (Unaudited) and
           December 31, 1997.........................................3-4

           Consolidated Statements of Operations and
           Retained Earnings for the three and nine
           months ended:
           October 2, 1998 (Unaudited) and
           October 3, 1997 (Unaudited) ..............................5-6

           Consolidated Statements of Cash Flows
           for the nine months ended:
           October 2, 1998 (Unaudited) and
           October 3, 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 .........................................12-15

PART II:  OTHER INFORMATION

Item 1    -Legal Proceedings .........................................16

Item 2    -Changes in Securities  ....................................16

Item 3    -Defaults upon Senior Securities ...........................16

Item 4    -Submission of Matters to a Vote of Security Holders  ......16

Item 5    -Other Information   .......................................16

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>
                                                              October 2, 1998           December 31, 1997
                                                              ---------------           -----------------
                                                                (Unaudited)
<S>                                                            <C>                     <C>
ASSETS

CURRENT ASSETS:
        Cash and cash equivalents .........................    $  2,489                $  2,271
        Accounts receivable, net of allowance
            for doubtful accounts of $1,337
           and $1,169, respectively .......................      37,981                  35,094
        Inventories .......................................      21,036                  17,723
        Prepaid expenses and other ........................       2,165                   1,569
                                                            -----------              ----------

       TOTAL CURRENT ASSETS ...............................      63,671                  56,657

PROPERTY, PLANT AND EQUIPMENT, net
        of accumulated depreciation of $17,126
        and $13,024, respectively .........................      35,185                  35,469

DEFERRED TAX ASSETS .......................................      23,048                  23,576

INTANGIBLE AND OTHER ASSETS, net of accumulated
  amortization of $18,554 and $13,006, respectively .......      52,449                  57,096
                                                             ----------              ----------


TOTAL ASSETS ..............................................    $174,353                $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>
                                                               October 2, 1998       December 31, 1997
                                                               ---------------       -----------------
                                                                (Unaudited)
<S>                                                            <C>                   <C>       
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
       Current portion of long-term debt ...................   $ 13,908              $   12,406
       Accounts payable ....................................     17,050                  18,000
       Accrued expenses ....................................      9,087                   7,405
       Accrued payroll and related employee benefits .......      5,538                   5,559
       Accrued acquisition related restructuring costs .....        726                   1,175
                                                              ---------               ---------
         TOTAL CURRENT LIABILITIES .........................     46,309                  44,545

LONG-TERM DEBT, less current maturities ....................     85,387                  96,148

OTHER LONG-TERM LIABILITIES ................................      1,815                   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 ....................        120                     114
       Additional paid-in capital ..........................     69,918                  66,734
       Retained earnings/(Accumulated deficit) .............    (28,891)                (36,543)
       Accumulated other comprehensive income/(loss)........        (69)                   (739)
       Less treasury stock, 39 shares
        repurchased, at cost ...............................       (237)                   (237)
                                                             -----------              ----------

         TOTAL SHAREHOLDERS' EQUITY ........................     40,842                  29,330
                                                              ---------                --------

TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY ................................................   $174,353                $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      
                                                                 ------------------
                                                           October 2,       October  3,
                                                               1998            1997
                                                              ----             ----
<S>                                                         <C>               <C>    
NET SALES ...............................................   $52,807           $53,191

COST OF SALES ...........................................    30,339            31,024
                                                          ---------         ---------
         Gross profit ...................................    22,468            22,167

OPERATING EXPENSES:
         Engineering, research and development ..........     3,877             3,215
         Selling, general and administrative ............    10,180            10,270
         Amortization of intangibles resulting
              from business acquisitions ................     1,683             1,674
                                                              -----             -----
         Income from operations .........................     6,728             7,008

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ...............................    (2,479)           (3,039)
         Interest income ................................        65                91
         Other income/(expense) .........................        14               (25)
                                                          ---------          ---------
                                                             (2,400)           (2,973)
                                                           ---------        ----------
         Income from continuing operations before
              income tax provision ......................     4,328             4,035
         Income tax provision ...........................     1,601             1,493
                                                           --------         ---------
         Net Income......................................    $2,727            $2,542
                                                             ======            ======
NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic ..........................................     $0.23             $0.23
         Diluted ........................................     $0.20             $0.22

WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic ..........................................    11,817            11,207
         Diluted ........................................    13,331            11,793

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period ..........................  ($31,618)         ($41,893)
         Net income .....................................     2,727             2,542
                                                           ---------         ---------
         Retained earnings/(Accumulated deficit),
           end of period ................................  ($28,891)         ($39,351)
                                                           =========          ========
</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>
                                                                         Nine Months Ended      
                                                                         -----------------
                                                                   October 2,          October 3,
                                                                       1998               1997
                                                                       ----               ----
<S>                                                                 <C>               <C>     
NET SALES ...............................................           $158,312          $154,728

COST OF SALES ...........................................             92,293            91,947
                                                                   ---------         ---------
         Gross profit ...................................             66,019            62,781

OPERATING EXPENSES:
         Engineering, research and development ..........             11,617            10,296
         Selling, general and administrative ............             29,458            33,617
         Severance and other costs ......................                  -             4,191
         Amortization of intangibles resulting
              from business acquisitions ................              5,108             5,022
                                                                   ---------          --------
         Income from operations .........................             19,836             9,655

INTEREST AND OTHER INCOME /(EXPENSE):
         Interest expense ...............................             (8,037)           (9,793)
         Interest income ................................                185               342
         Other income ...................................                161                83
                                                                  ----------           -------
                                                                      (7,691)           (9,368)
                                                                    ---------        ----------
         Income from continuing operations before
              income tax provision ......................             12,145               287

         Income tax provision ...........................              4,493               105
                                                                    --------           -------
         Income from continuing operations ..............              7,652               182
         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 .....................................             $7,652              $ 81
                                                                      ======              ====
NET INCOME PER COMMON AND COMMON
        EQUIVALENT SHARE:
         Basic:
           Continuing operations ........................              $0.66               $0.02
           Discontinued operations ......................                  -               (0.01)  
                                                                  ------------           --------
           Net income ...................................               $0.66               $0.01
                                                                     ========               =====

         Diluted:
           Continuing operations ........................              $0.55               $0.02
           Discontinued operations ......................                  -               (0.01)
                                                                   ---------               ----- 
           Net income ...................................              $0.55               $0.01
                                                                   =========               =====
WEIGHTED AVERAGE NUMBER OF
    COMMON AND COMMON EQUIVALENT
    SHARES OUTSTANDING:
         Basic ..........................................             11,677              11,162
         Diluted ........................................             14,026              11,454

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
         Retained earnings/(Accumulated deficit)
           beginning of period ..........................           ($36,543)           ($39,432)
         Net income .....................................              7,652                  81
                                                               ---------------       ------------
         Retained earnings/(Accumulated deficit),
           end of period ................................           ($28,891)           ($39,351)
                                                                    =========            ========
</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>
                                                                        Nine Months Ended
                                                                        -----------------
                                                                    October 2,      October 3,
                                                                        1998           1997
                                                                        ----           ----

<S>                                                                   <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income ...................................................    $7,652               $81
       Adjustments to reconcile net income
       to net cash provided by (used in) operating activities:
         Depreciation and amortization ...........................     9,890            10,466
         Loss on disposition of assets ...........................         9               109
         Loss on disposition of discontinued operations ..........         -               265
         Deferred tax assets .....................................       528             1,077
         Decrease (increase) in assets:
             Accounts receivable .................................    (2,867)           (3,918)
             Inventories .........................................    (3,313)             (366)
             Prepaid expenses and other ..........................      (596)             (218)
         Increase (decrease) in liabilities:
             Accounts payable ....................................      (950)            2,094
             Accrued expenses ....................................     1,682            (2,973)
             Accrued payroll and related employee benefits .......      (731)           (2,983)
             Accrued acquisition related restructuring costs .....      (508)           (3,090)
                                                                       ------          --------

                Net cash provided by operating activities ........    10,796               544
                                                                 -----------               ---

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures, net ....................................    (4,067)           (5,887)
    Additions to intangible and other assets .....................    (1,440)              (63)
    Repayment of notes for stock option activity .................       325                 -
                                                                   ---------        -----------
                      Net cash used in investing activities ......    (5,182)           (5,950)
                                                                    ---------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payment of long-term debt, net ..............................    (9,259)          (12,784)
    (Payment of) additions to other long-term liabilities ........      (110)            1,482
     Issuance of preferred shares and warrants, net ..............         -            10,212
    Exercise of options and issuance of common shares and warrants      2,727              664
    Tax benefit from exercise or early disposition of stock options       464                -  
                                                                         ----       ------------
                       Net cash used in financing activities .....     (6,178)            (426)
                                                                      ----------          -----

FOREIGN CURRENCY TRANSLATION .....................................        782           (1,163)

NET INCREASE/(DECREASE) IN CASH AND CASH                                        
         EQUIVALENTS .............................................       218            (6,995)

CASH AND CASH EQUIVALENTS:
         Beginning of period .....................................     2,271            10,838
                                                                     -------          --------
         End of period ...........................................    $2,489            $3,843
                                                                      ======            ======
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>


                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 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  October  2,  1998,  the  results of
      operations for the three and nine months ended October 2, 1998 and October
      3, 1997 and its cash flows for the nine months  ended  October 2, 1998 and
      October 3, 1997.  The results of operations  for the three and nine months
      ended October 2, 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:

                               October 2, 1998         December 31, 1997
         Raw materials            $12,012                    $10,979
         Work-in-process            4,132                      3,727
         Finished goods             4,892                      3,017
                                ---------                  ---------
                                  $21,036                    $17,723
                                  =======                    =======


(2)   LONG-TERM DEBT

      Long-term debt consists of the following:

                                             October 2, 1998   December 31, 1997
                                             ---------------   -----------------
         Senior Term Loan A                    $39,500                 $47,000
         Senior Term Loan B                     23,250                  24,000
         Senior revolving credit                 3,000                   3,000
         Subordinated term loan                 29,532                  29,488
         Subordinated promissory note            3,750                   4,688
         Other                                     263                     378
                                              --------             -----------
                                                99,295                 108,554
         Less:  current maturities              13,908                  12,406
                                             ---------               ---------
                                               $85,387                 $96,148
                                               =======                 =======
<PAGE>

                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 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,   foreign  currency
      translation  adjustments and unrealized  losses on securities,  was $3,393
      and $2,301 for the three months ended October 2, 1998 and October 3, 1997,
      respectively, and $8,322 and ($1,082) for the nine months ended October 2,
      1998 and October 3, 1997, respectively.

      During the nine month period ended  October 2, 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:
<TABLE>
<CAPTION>

                                      January 1, 1998        Weighted     January 1, 1997     Weighted
                                                to            Average         to               Average
                                      October 2, 1998          Price      Dec. 31, 1997         Price
                                      ---------------          -----      -------------         -----
<S>                                    <C>                   <C>               <C>              <C>  
      Options outstanding
         at beginning of period .....  3,046                 $7.76             2,818            $8.33
      Options granted ...............    461                  9.19             1,094             6.98
      Options exercised .............   (359)                 7.19              (162)            7.51
      Options forfeited/canceled ....   (102)                 7.26              (704)            9.00
                                      -------                                   -----
      Options outstanding at
         end of period ..............  3,046                  7.97             3,046             7.76

      Number of options at end
         of period:
         Exercisable ................  1,727                                   1,884
         Available for grant ........      1                                     394
</TABLE>

      During the  nine  month  period   ended  October  2,  1998,  31  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.


(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 nine  months  ended  October  2, 1998 and
      October 3, 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 September 10, 1997 and January 1, 1998.
<PAGE>

                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
                (All amounts in thousands, except per share data)
                                   (Unaudited)

      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 1,524 and 1,299 common shares
      at an average price of $7.87 and $9.30 per share were  outstanding for the
      three  months  ended  October 2, 1998 and  October 3, 1997,  respectively.
      Options to purchase  469 and 1,314  common  shares at an average  price of
      $9.65 and  $9.27 per share  were  outstanding  for the nine  months  ended
      October 2, 1998 and  October 3, 1997,  respectively.  Warrants to purchase
      1,155  common  shares at $8.00 per share  were  outstanding  for the three
      months  ended  October 2, 1998 and  October 3, 1997.  Warrants to purchase
      1,155 common shares were  outstanding for the nine months ended October 3,
      1997.
<TABLE>
<CAPTION>
                                                                         Three Months Ended                      
                                          ------------------------------------------------------------------------------------------
                                                   October 2, 1998                                       October 3, 1997
                                                   ---------------                                       ---------------
                                             Income      Shares      Per Share                 Income         Shares      Per Share
                                          (numerator) (denominator)    Amount                (numerator)   (denominator)     Amount 
                                          --------------------------------------              --------------------------------------

<S>                                           <C>          <C>             <C>                    <C>             <C>           <C> 
      Income available to
         common shareholders                  $2,727       11,817          $0.23                  $2,542          11,207       $0.23
                                                                           =====                                               =====
      Effect of dilutive securities:
         Options                                  -          139                                       -             238
         Preferred Shares                         -        1,375                                       -             348   
                                          ----------       -----                               -----------        -------
      Diluted EPS
      Income available to
         common shareholders
         and assumed conversions             $2,727        13,331          $0.20                  $2,542          11,793       $0.22
                                             ======        ======          =====                  ======          ======       =====
</TABLE>
<TABLE>
<CAPTION>
                                                                          Nine Months Ended                      
                                          ------------------------------------------------------------------------------------------
                                                   October 2, 1998                                       October 3, 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                  $7,652       11,677         $0.66                 $81        11,162        $0.01
                                                                          =====                                          =====
      Effect of dilutive securities:
         Options                                  -           767                                 -           178
         Warrants                                 -           207                                 -             -
         Preferred Shares                         -         1,375                                 -           114 
                                                ---        ------                               ---         -----
      Diluted EPS
      Income available to
         common shareholders
         and assumed conversions              $7,652        14,026        $0.55                 $81         11,454       $0.01
                                              ======        ======        =====                 ===         ======       =====
</TABLE>
<PAGE>
                            PSC Inc. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
                (All amounts in thousands, except per share data)
                                   (Unaudited)


(5)      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 October 2, 1998 and October 3, 1997
------------------------------------------------------------------------------

Net Sales.  Consolidated net sales during the three months ended October 2, 1998
decreased   $0.4  million  or  1%  compared   with  the  same  period  in  1997.
International  net sales increased 19% and represented  approximately 54% of net
sales in the third  quarter of 1998 versus 45% of net sales in the third quarter
of  1997.  The  increase  in  international   sales  is  primarily  due  to  the
introduction of new products and the continued growth in the Company's  European
customer sales.

Gross Profit. Consolidated gross profit during the three months ended October 2,
1998  increased  $0.3 million or 1% compared  with the same period in 1997. As a
percentage of sales, gross profit increased from 41.7% to 42.5%. 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.

Engineering,  Research and  Development.  Engineering,  Research and Development
(ER&D) expenses increased $0.7 million or 21%, as compared to the same period in
1997.  As a  percentage  of sales,  ER&D was 7.3% in the third  quarter  of 1998
versus 6.0% of net sales in the third  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  $0.1 million or 1%, as compared to the same period in 1997.
As a percentage of sales, SG&A was 19.3% in 1998 and 1997.

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
October 2, 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  October  2,  1998  was
approximately $0.7 million,  which relates to current  contractual  obligations.
There have been no reallocations or reestimates to date.

Interest Expense.  Interest expense decreased $0.6 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.

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.

<PAGE>

Results of Operations:  Nine Months ended October 2, 1998 and October 3, 1997
-----------------------------------------------------------------------------

Net Sales.  Consolidated  net sales during the nine months ended October 2, 1998
increased   $3.6  million  or  2%  compared   with  the  same  period  in  1997.
International  net sales increased 20% and represented  approximately 52% of net
sales in the first nine months of 1998 versus 45% of net sales in the first nine
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 $2.2 million in
1998 versus 1997.

Gross Profit.  Consolidated gross profit during the nine months ended October 2,
1998  increased  $3.2 million or 5% compared  with the same period in 1997. As a
percentage of sales, gross profit increased from 40.6% to 41.7%. 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 $1.3 million or 13%, as compared to the same period in
1997. As a percentage  of sales,  ER&D was 7.3% in the first nine months of 1998
versus  6.7% of net  sales in the first  nine  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 $4.2 million or 12%, as compared to the same period in 1997.
As a  percentage  of sales,  SG&A was 18.6% in 1998 versus  21.7% 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
October 2, 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  October  2,  1998  was
approximately $0.7 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 $1.8 million versus the comparable
period in 1997.  The  decrease  is  primarily  due to lower  principal  balances
outstanding and reduced interest rates,  which resulted from an amendment to the
bank credit agreements in April 1998.

Provision for Income Taxes. The Company recorded a $4.5 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.
<PAGE>
Liquidity and Capital Resources:

Current assets increased $7.0 million from December 31, 1997 primarily due to an
increase in accounts  receivable and inventory.  Current  liabilities  increased
$1.8 million  primarily due to an increase in current  portion of long-term debt
and accrued  expenses  offset in part by a reduction in accounts  payable.  As a
result, working capital increased $5.2 million from December 31, 1997.

Property,  plant and  equipment  expenditures  totaled $4.1 million for the nine
months  ended  October 2, 1998  compared  with $5.9  million for the nine months
ended October 3, 1997. The 1998 expenditures  primarily related to manufacturing
equipment and new product tooling.

The  long-term  debt to capital  percentage  was 67.6% at October 2, 1998 versus
76.6% at December 31, 1997 primarily due to increased equity from the results of
operations  and  quarterly  payments  on the  Company's  senior  term  loans and
subordinated   promissory  note.  At  October  2,  1998,  liquidity  immediately
available to the Company consisted of cash and cash equivalents of $2.5 million.
The Company has credit  facilities  totaling  $116.5  million,  of which,  $17.0
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.

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
could potentially 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  plans to address the  potential  risks it faces as a
result of Year 2000  issues.  These  risks  include,  among  other  things,  the
possible failure or malfunction of the Company's internal  information  systems,
possible  problems  with the  products and services the Company has provided its
customers,  and  possible  problems  arising  from the failure of the  Company's
supplier systems.
<PAGE>

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 and expects this
               phase to be fully completed by the end of December 1998.

         (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.  A  significant  portion of the  assessment
               stage has been  completed.  The Company  expects this phase to be
               fully completed by the end of January 1999.

         (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 August 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.

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.
<PAGE>

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. Any products that are
date dependent will be made Year 2000  complaint.  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 is not Year 2000 compliant.

The  Company  is  developing  its  contingency  plans and  expects  to have them
completed by June 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 flow.

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 timely  address their Year 2000  compliance  issues,  the
effects  of  which  may  be an  adverse  impact  on  the  Company's  results  of
operations.

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

          On September 11, 1998,  the Company made a motion for partial  summary
          judgment  on the issue of  patent  misuse  on the part of  Symbol.  By
          letter,  dated  September 17, 1998, the Court advised the parties that
          the trial date for the  contract  issues,  scheduled  for  October 13,
          1998, was canceled and that the partial summary  judgment motion would
          be heard on  October  7,  1998.  Thereafter,  Symbol  cross  moved for
          partial  summary  judgment  that it had not engaged in patent  misuse.
          Oral argument of the motions took place before the Court on October 7,
          1998.

          On October 22, 1998, the Court granted the Company's motion and denied
          Symbol's  cross  motion.  The Court  stated that  "Because  Symbol has
          engaged in patent  misuse with respect to the '297 and '186 patents by
          attempting to collect double royalties on the same product under those
          patents,  I  hereby  grant  plaintiff's  partial  motion  for  summary
          judgment,  deny defendant's motion for summary judgment, and find that
          the '297 and '186 patents are  unenforceable as against PSC from April
          1, 1996,  the day on which Symbol was notified of  the misuse, through
          the present, and until such misuse is purged. Accordingly,  PSC is not
          obligated to pay royalties to Symbol under those  patents  pursuant to
          either its 1991 or 1996 licensing agreements for products manufactured
          or sold on or after April 1, 1996."

          Symbol has moved for reconsideration of the Court's Decision,  and has
          also moved for  permission  to appeal  immediately,  rather  than wait
          until the end of the case.  These motions are scheduled to be heard on
          December 16, 1998.

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

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:  None

Item 5:   Other Information:  None

Item 6:   Exhibits and Reports on Form 8-K

          (a)  Exhibits:  None

          (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:  November 16, 1998..........By: /s/ Robert C. Strandberg
                                      Robert C. Strandberg
                                      President and Chief Executive Officer

DATE:  November 16, 1998..........By: /s/ William J. Woodard
                                      William J. Woodard
                                      Vice President and Chief Financial Officer

DATE:  November 16, 1998..........By: /s/ Michael J. Stachura
                                      Michael J. Stachura
                                      Vice President of Finance
                                      (Principal Accounting Officer)