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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 April 2, 1999

|_| 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 May 12, 1999, there were 11,968,325 shares of common stock outstanding.
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PSC Inc. AND SUBSIDIARIES

INDEX

PAGE NUMBER
PART I: FINANCIAL INFORMATION

Item 1 -Financial Statements

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

Consolidated Statements of Operations and
Retained Earnings for the three months ended:
April 2, 1999 (Unaudited) and
April 3, 1998 (Unaudited) ....................................................5

Consolidated Statements of Cash Flows for the three months ended:
April 2, 1999 (Unaudited) and
April 3, 1998 (Unaudited) ....................................................6

Notes to Consolidated Financial
Statements (Unaudited) ....................................................7-10

Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................................11-13

PART II: OTHER INFORMATION

Item 1 -Legal Proceedings .................................................14

Item 2 -Changes in Securities ............................................14

Item 3 -Defaults upon Senior Securities ...................................14

Item 4 -Submission of Matters to a Vote of Security Holders ..............14

Item 5 -Other Information ...............................................14

Item 6 -Exhibits and Reports on Form 8-K .................................14

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

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

April 2, 1999 December 31, 1998
------------- -----------------
(Unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents ....................... $ 5,090 $ 6,180
Accounts receivable, net of allowance
for doubtful accounts of $1,575
and $1,492, respectively ..................... 35,809 37,121
Inventories ..................................... 21,042 17,250
Prepaid expenses and other ...................... 3,125 2,946
----------- ----------

TOTAL CURRENT ASSETS ............................. 65,066 63,497

PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $20,092
and $18,639, respectively ....................... 34,949 35,397

DEFERRED TAX ASSETS ..................................... 21,401 21,244

INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $22,261 and $20,419, respectively ..... 51,001 51,125
---------- ----------

TOTAL ASSETS ............................................ $172,417 $171,263
========= =========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

April 2, 1999 December 31, 1998
------------- -----------------
(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt .................... $ 14,871 $ 14,402
Accounts payable .................................... 19,415 18,190
Accrued expenses .................................... 10,321 8,035
Accrued payroll and related employee benefits ....... 5,624 5,628
Accrued acquisition related restructuring costs ..... 157 415
--------- -------

TOTAL CURRENT LIABILITIES ......................... 50,388 46,670

LONG-TERM DEBT, less current maturities .................... 74,743 78,806

OTHER LONG-TERM LIABILITIES ................................ 1,561 1,588

SHAREHOLDERS' EQUITY:
Series A convertible preferred shares, par value $.01; 1 1
110 shares authorized, issued and outstanding
($11,000 aggregate liquidation value)
Series B preferred shares, par value $.01; 175
authorized, 0 shares issued and outstanding ......... -- --
Undesignated preferred shares, par value $.01;
9,715 authorized, 0 shares issued and outstanding ... -- --
Common shares, par value $.01;
40,000 authorized 11,942 and 11,869
shares issued and outstanding .................... 119 119
Additional paid-in capital .......................... 70,668 70,068
Retained earnings/(Accumulated deficit) ............. (23,936) (26,027)
Accumulated other comprehensive income/(loss) ....... (890) 275
Less treasury stock, 39 shares
repurchased, at cost ............................... (237) (237)
----------- ----------

TOTAL SHAREHOLDERS' EQUITY ........................ 45,725 44,199
--------- --------

TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................ $172,417 $171,263
======== ========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

Three Months Ended
------------------------
April 2, April 3,
1999 1998
---- ----

NET SALES ....................................................... $59,145 $53,628

COST OF SALES ................................................... 33,540 31,943
--------- ---------
Gross profit ........................................... 25,605 21,685

OPERATING EXPENSES:
Engineering, research and development .................. 4,128 3,884
Selling, general and administrative .................... 12,360 9,738
Severance and other costs .............................. 2,103 --
Amortization of intangibles resulting
from business acquisitions ........................ 1,699 1,707
----- -----
Income from operations ................................. 5,315 6,356

INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ....................................... (2,174) (2,876)
Interest income ........................................ 91 65
Other income/(expense) ................................. (15) (5)
----------- --------
(2,098) (2,816)
--------- -------
Income before income tax provision ..................... 3,217 3,540
Income tax provision ................................... 1,126 1,310
-------- ------
Net income ............................................. $2,091 $2,230
====== ======

NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic .................................................. $0.18 $0.19
Diluted ................................................ $0.15 $0.16

WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic .................................................. 11,895 11,478
Diluted ................................................ 13,677 13,799

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period .................................. ($26,027) ($36,543)
Net income ............................................. 2,091 2,230
----------- -----
Retained earnings/(Accumulated deficit),
end of period ........................................ ($23,936) ($34,313)
========= ========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

Three Months Ended
------------------
April 2, April 3,
1999 1998
---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $2,091 $2,230
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 3,340 3,157
Deferred tax assets ...................................... (157) 909
(Increase) decrease in assets:
Accounts receivable .................................. 1,291 (211)
Inventories .......................................... (3,792) (1,406)
Prepaid expenses and other ........................... (179) (151)
Increase (decrease) in liabilities:
Accounts payable ..................................... 1,225 (1,197)
Accrued expenses ..................................... 2,286 1,247
Accrued payroll and related employee benefits ........ (67) (1,717)
Accrued acquisition related restructuring costs ...... (258) (218)
------ ------

Net cash provided by operating activities ......... 5,780 2,643
---------- -----

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ..................................... (1,005) (1,186)
Additions to intangible and other assets ...................... (2,037) (698)
Repayment of notes for stock option activity .................. -- 325
-------- ---------
Net cash used in investing activities ....... (3,042) (1,559)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Addition to long-term debt .................................... 2,000 4,000
Payment of long-term debt .................................... (5,594) (4,585)
Addition to (payment of) other long-term liabilities, net ..... 63 (40)
Exercise of options and issuance of common shares ............. 555 1,524
----- -----
Net cash (used in) provided by financing activities .......... (2,976) 899
-------- ---

FOREIGN CURRENCY TRANSLATION ...................................... (852) (204)

NET (DECREASE)/INCREASE IN CASH AND CASH -------- -----
EQUIVALENTS .............................................. (1,090) 1,779

CASH AND CASH EQUIVALENTS:
Beginning of period ...................................... 6,180 2,271
------- -------
End of period ............................................ $5,090 $4,050
====== ======

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

INVENTORIES

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

April 2, 1999 December 31, 1998
---------------- ---------------------
Raw materials ........... $13,660 $11,231
Work-in-process ......... 3,228 2,888
Finished goods .......... 4,154 3,131
========== ==========
$21,042 $17,250
========== ==========

(2) LONG-TERM DEBT

Long-term debt consists of the following:

April 2, 1999 December 31, 1998
---------------- ---------------------
Senior term loan A ......... $34,000 $37,000
Senior term loan B ......... 22,750 23,000
Subordinated term loan ..... 29,562 29,547
Subordinated promissory note 3,125 3,438
Other ...................... 177 223
---------- -----------
89,614 93,208
Less: current maturities .. 14,871 14,402
---------- -----------
$74,743 $78,806
========== ===========

(3) SEVERANCE AND OTHER COSTS

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

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

(4) SHAREHOLDERS' EQUITY

During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires
comprehensive income and its components to be presented in the financial
statements. Comprehensive income, which includes net income, foreign
currency translation adjustments and unrealized loss on securities, was
$926 and $2,026 for the three months ended April 2, 1999 and April 3,
1998, respectively.

During the three month period ended April 2, 1999, employees purchased
approximately 62 shares at $7.76 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:

January 1, 1999 Weighted January 1, 1998 Weighted
to Average to Average
April 2, 1999 Price December 31, 1998 Price
------------------ ------------ --------------------- ------------

Options outstanding at
beginning of period ............. 3,027 $7.98 3,046 $7.76
Options granted .................... -- -- 391 8.92
Options exercised .................. (11) 7.54 (310) 6.42
Options forfeited/canceled ......... (6) 7.21 (100) 7.28
======= ======== ======== ========
Options outstanding at
end of period ................... 3,010 $7.99 3,027 $7.98
======= ======== ======== ========

Number of options at end
of period:
Exercisable ..................... 1,829 1,820
Available for grant ............. 6 4

During the three month period ended April 2, 1999, 4 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.

(5) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

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

The following options were not included in the computation of diluted EPS
since the exercise prices were greater than the average market price of
Common Shares. Options to purchase 1,171 and 469 common shares at an
average price of $9.65 and $9.23 per share were outstanding for the three
months ended April 2, 1999 and April 3, 1998, respectively.

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

Three Months Ended
---------------------------------------------------------------------------------
April 2, 1999 April 3, 1998
---------------------------------------- --------------------------------------
Per Per
Income Shares Share Income Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
Basic EPS:

Income available to common
shareholders ....................... $2,091 11,895 $0.18 $2,230 11,478 $0.19
===== =====
Effect of dilutive securities:
Options ............................ -- 324 -- 649
Warrants ........................... -- 83 -- 297
Preferred Shares ................... -- 1,375 -- 1,375
------------ -------------- ------------- --------------
Diluted EPS:
Income available to common
shareholders and assumed
conversions ........................ $2,091 13,677 $0.15 $2,230 13,799 $0.16
====== ====== ===== ====== ====== =====

(6) 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 all fiscal quarters of 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. Cash flows
from interest rate swap agreements and foreign currency forward exchange
contracts are classified in the same category as the item being hedged.

Interest Rate Risk:

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

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

Foreign Currency Exchange Rate Risk:

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

(7) SUBSEQUENT EVENT

On May 12, 1999, the Company sold its facilities and property located in Eugene,
Oregon and simultaneously entered into a lease agreement for the facilities for
a fifteen year period. The lease is being accounted for as an operating lease,
and the resulting gain of $0.5 million is being amortized over the life of the
lease. The annual rental expense will be $0.8 million, which will be paid in
quarterly installments. The net proceeds from the sale totaled $8.3 million, of
which, $8.0 million will be utilized to reduce the senior credit facilities.

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

General

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

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

Net Sales. Consolidated net sales during the three months ended April 2, 1999
increased $5.5 million or 10% compared with the same period in 1998.
International net sales increased 16% and represented approximately 55% of net
sales in the first quarter of 1999 versus 52% of net sales in the first quarter
of 1998. The overall increase in consolidated net sales is attributed primarily
to increased sales in the fixed position retail product lines and U-Scan(R)
Express Self-Checkout Systems. The increase in international sales is primarily
due to the evolution of new products and the continued growth in the Company's
European and Asian Pacific customer sales.

Gross Profit. Consolidated gross profit during the three months ended April 2,
1999 increased $3.9 million or 18% compared with the same period in 1998. As a
percentage of sales, gross profit increased from 40.4% to 43.3%. The increase in
gross profit percentage is primarily due to improved product mix, higher
manufacturing volume and lower product unit costs.

Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.2 million or 6%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.0% in the first quarter of 1999
versus 7.2% of net sales in the first quarter of 1998. The dollar increase is
due to additional investments in developing new products.

Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $2.6 million or 27%, as compared to the same period in 1998.
As a percentage of sales, SG&A was 20.9% in 1999 versus 18.2% in 1998. The
dollar increase is primarily due to a significant increase in the international
sales infrastructure and additional investments in the Company's marketing
organization and marketing programs.

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

Interest Expense. Interest expense decreased $0.7 million versus the comparable
period in 1998. The decrease is due to lower principal balances outstanding and
a reduction in the Company's interest rates on its senior term loans as the
Company achieved key milestones under certain financial covenants contained in
the bank credit agreements.

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

Liquidity and Capital Resources:

Current assets increased $1.6 million from December 31, 1998 primarily due to an
increase in inventory resulting from newly introduced products offset in part by
a reduction in accounts receivable. Current liabilities increased $3.7 million
primarily due to an increase in accounts payable and accrued expenses. As a
result, working capital decreased $2.1 million from December 31, 1998.

Property, plant and equipment expenditures totaled $1.0 million for the three
months ended April 2, 1999 compared with $1.2 million for the three months ended
April 3, 1998. The 1999 expenditures primarily related to new product tooling,
manufacturing equipment and computer hardware.

The long-term debt to capital percentage was 62.0% at April 2, 1999 versus 64.1%
at December 31, 1998 primarily due to a reduction in long-term debt by $4.1
million and an increase in retained earnings resultant from net income of $2.1
million in the first quarter of 1999. At April 2, 1999, liquidity immediately
available to the Company consisted of cash and cash equivalents of $5.1 million.
The Company has credit facilities totaling $89.6 million and a revolving line of
credit of $20.0 million, of which, there is no outstanding balance. The Company
believes that its cash resources and available credit facilities, in addition to
its operating cash flows, are sufficient to meet its requirements for the next
12 months.

Year 2000

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

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

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

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

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

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

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

(3) Implementation of a remediation plan. This phase includes testing
some modifications/upgrades in a Year 2000 simulated environment
and vendor interface testing, if necessary. The Company has
commenced implementation, both domestically and internationally,
and expects this phase to be completed by the end of 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.

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

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

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

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

Euro Conversion

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

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.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings:

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

On April 28, 1999, the Court denied Symbol's motions for
reconsideration and for immediate appeal of the Court's October 1998
Order granting the Company partial summary judgment against Symbol for
patent misuse. The Court also clarified its prior Order by deleting
reference to the 1995 licensing agreement.

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

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:

10.1 Lease Agreement between the Company and Scan LLC dated May 12, 1999.....16

(b) Reports on Form 8-K: None

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: May 14, 1999 By: /s/ Robert C. Strandberg
--------------------
Robert C. Strandberg
President and Chief Executive Officer

DATE: May 14, 1999 By: /s/ William J. Woodard
-------------------
William J. Woodard
Vice President and
Chief Financial Officer

DATE: May 14, 1999 By: /s/ Michael J. Stachura
-------------------
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)