PSC INC, 10-Q, 1998-08-10

PSC INC
10-Q, 1998-08-10
COMPUTER PERIPHERAL EQUIPMENT, NEC

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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 July 3, 1998

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-9919

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months preceding (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

As of August 6, 1998, there were 11,856,664 shares of common stock outstanding.

================================================================================

<PAGE>

PSC Inc. AND SUBSIDIARIES

INDEX

PAGE NUMBER
PART I: FINANCIAL INFORMATION

Item 1 -Financial Statements

Consolidated Balance Sheets as of
July 3, 1998 (Unaudited) and
December 31, 1997.................................................3-4

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

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

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

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

PART II: OTHER INFORMATION

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

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

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

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

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

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

<PAGE>
PART I - FINANCIAL INFORMATION

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

CURRENT ASSETS:

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

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

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

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

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

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

</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ............................... ($36,543) ($39,432)
Net income/(loss) ................................... 4,925 (2,461)
--------------- ----------
Retained earnings/(Accumulated deficit),
end of period ..................................... ($31,618) ($41,893)
========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>

PSC INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------
July 3, July 4,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ............................................. $4,925 ($2,461)
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization ............................ 6,505 7,112
Loss on disposition of assets ............................ - 109
Loss on disposition of discontinued operations ........... - 265
Deferred tax assets ...................................... 603 211
Decrease (increase) in assets:
Accounts receivable .................................. (1,841) 1,290
Inventories .......................................... (1,292) (539)
Prepaid expenses and other ........................... (228) (357)
Increase (decrease) in liabilities:
Accounts payable ..................................... (4,578) 1,564
Accrued expenses ..................................... 1,901 (4,112)
Accrued payroll and related employee benefits ........ (254) (1,230)
Accrued acquisition related restructuring costs ...... (412) (2,605)
------ --------

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

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

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

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

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

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

PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 3, 1998 and July 4, 1997
(All amounts in thousands, except per share data)
(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements have been prepared by
the Company without audit. In the opinion of management, these financial
statements include all adjustments necessary to present fairly the
Company's financial position as of July 3, 1998, the results of operations
for the three and six months ended July 3, 1998 and July 4, 1997 and its
cash flows for the six months ended July 3, 1998 and July 4, 1997. The
results of operations for the three and six months ended July 3, 1998 are
not necessarily indicative of the results to be expected for the full
year.

Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1997 annual report on
Form 10-K.

INVENTORIES

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

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

(2) LONG-TERM DEBT

Long-term debt consists of the following:

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

(3) SHAREHOLDERS' EQUITY

In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires comprehensive
income and its components to be presented in the financial statements.
Comprehensive income, which includes net income/(loss), foreign currency
translation adjustments and unrealized gains on securities, was $4,929 and
($3,383) for the six months ended July 3, 1998 and July 4, 1997,
respectively.

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

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

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

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

(4) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding during the year.
Diluted EPS for the three and six months ended July 3, 1998 and July 4,
1997 was determined on the following assumptions:

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

The following options and warrants were not included in the computation of
diluted EPS since the exercise prices were greater than the average market
price of Common Shares. Options to purchase 147 and 2,947 common shares at
an average price of $12.11 and $9.05 per share were outstanding for the
three months ended July 3, 1998 and July 4, 1997, respectively. Options to
purchase 182 and 2,545 common shares at an average price of $11.87 and
$9.39 per share were outstanding for the six months ended July 3, 1998 and
July 4, 1997, respectively. Warrants to purchase 975 common shares at
$8.00 per share were outstanding for the three and six months ended July
4, 1997.
<PAGE>

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

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

Diluted EPS
Income Available to
Common shareholders
And assumed conversions ....... $4,925 13,940 $0.35 ($2,461) 11,139 ($0.22)
====== ====== ===== ======= ====== ======
</TABLE>
<PAGE>

(4) DERIVATIVES

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

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

Interest Rate Risk:

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

Foreign Currency Exchange Rate Risk:

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

<PAGE>

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

General

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
of the Company's December 31, 1997 annual report on Form 10-K.

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

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

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

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

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

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

Acquisition Related Restructuring and Other Matters. During the third quarter of
1996, the Company recorded a one-time, pretax charge of $10.0 million for the
cost of restructuring its existing operations with those of Spectra which was
acquired in July 1996. The restructuring program in part, provided for employee
severance and benefit costs for the elimination of certain positions. As of July
3, 1998, all positions targeted in the restructuring program have been
eliminated. Restructuring actions are expected to be completed by the end of
1998. The amount of the restructuring accrual at July 3, 1998 was approximately
$0.8 million, which relates to current contractual obligations. There have been
no reallocations or reestimates to date. During the second quarter of 1998, the
Company sold its 10% ownership interest in an industrial partner for
approximately $2.0 million and incurred a charge for the release from a
manufacturing rights and software licensing agreement for $1.9 million.

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources:

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

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

The long-term debt to capital percentage was 71.1% at July 3, 1998 versus 76.6%
at December 31, 1997. At July 3, 1998, liquidity immediately available to the
Company consisted of cash and cash equivalents of $3.7 million. In 1996, the
Company obtained credit facilities totaling $130.0 million, of which, $14.0
million is available on these facilities. The Company believes that its cash
resources and available credit facilities, in addition to its operating cash
flows, are sufficient to meet its requirements for the next twelve months.

<PAGE>
PART II: OTHER INFORMATION

Item 1: Legal Proceedings:

The descriptions of the Company's legal proceedings with Symbol
Technologies, Inc. ("Symbol"), set forth in Item 3 of the Company's
Annual Report on Form 10-K for the fiscal period ended December 31,
1997 (the "Litigation") are incorporated herein by reference.

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

Item 2: Changes in Securities: None

Item 3: Defaults upon Senior Securities: None

Item 4: Submission of Matters of Shareholders to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 7, 1998.

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

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

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

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

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

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

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

Item 5: Other Information: None

Item 6: Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

10.3 Director Compensation Plan dated as of May 7, 1998

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

(b) Reports on Form 8-K: None

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PSC Inc.

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

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

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

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of June 2, 1998 by and between PSC Inc., a New
York corporation ("PSC" or the "Company") and ROBERT C. STRANDBERG
("Executive").
RECITALS

PSC and Executive entered into an Employment Agreement as of June 2, 1997,
which currently will expire on June 1, 1998.
Executive has developed and implemented a comprehensive restructuring
program and a new operating plan and PSC desires to retain his unique
experience, background, ability and services.
Accordingly, the parties desire to amend in certain respects and restate in
its entirety said Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained in this Agreement, the parties agree as follows:

1. Employment. PSC hereby employs the Executive as President and Chief
Executive Officer. Executive hereby accepts such employment and agrees to remain
in the employ of PSC for the Term to perform any and all reasonable and lawful
duties prescribed by PSC's Board of Directors and to abide by the terms and
conditions of this Agreement. During the Term, in good faith, Executive shall
exert all reasonable efforts to promote the interests of the Company and shall
devote substantially all of his entire working time, attention and energies to
the business of the Company.
2. Term of Employment. The term of employment under this Agreement shall
commence as of the date of this Agreement and shall terminate on December 31,
2000 (the "Initial Term"); provided, however that the term of this Agreement
shall be automatically extended for additional one year terms (each an
"Additional Term") upon the end of the Initial Term, or any successor Additional
Term unless either the Executive or the Company shall have given written notice
to the other at least seventy-five (75) days prior thereto that the term of this
Agreement shall not be so extended.
<PAGE>

3. Compensation.

A. Base Salary. For all services to be rendered to the Company by Executive
in any capacity, including, without limitation, services as an officer, director
or member of any committee of the Board of Directors and the performance of any
duties assigned to him by the Board of Directors, PSC shall pay to Executive a
salary at the annual rate of not less than $300,000 ("Base Salary"). Base Salary
shall be payable in accordance with the customary payroll practices of PSC,
subject to such deductions and withholdings as may be required by law or agreed
to by Executive.

B. Performance Bonus. Pursuant to PSC's current Management Incentive Plan
or any successor plan, for any calendar year during the Initial Term or the
Additional Term, if any, if and to the extent PSC achieves its pre-established
performance goals for such calendar year, Executive shall be entitled to a
performance bonus for such year in an amount equal to the percentage of his then
existing Base Salary for such year set forth opposite the performance goal
percentage below:
% of Performance Goal Achieved % of Base Salary
------------------------------ ----------------
Threshold 40%
Target 60%
133% of Target 90%
150% of Target 130%
170% of Target 170%

4. Benefits. In addition to his Base Salary, Executive shall also be
entitled throughout the Term and the Additional Term, if any, to all benefits of
full time employees or officers as to which he meets the eligibility
requirements universally applicable to all employees and such other benefits as
may be accorded to other senior executives by written notification from the
Company given from time to time. The Company also agrees to pay the initiation
fee and the monthly dues associated with Executive's membership in a country
club of Executive's choice.
5. Restricted Stock. Pursuant to the Company's 1994 Stock Option Plan, on
March 25, 1998 PSC awarded Executive 37,500 restricted Common Shares of the
Company, upon the terms and conditions and subject to the restrictions set forth
in the Restricted Stock Award Agreement attached hereto as Exhibit A. If
Executive is then an officer of the Company, on each of March 25, 1999 and March
25, 2000, PSC will award Executive 37,500 restricted Common Shares pursuant to a
Restricted Stock Award Agreement similar in form to Exhibit A, as modified to
reflect changes in dates and stock prices.

<PAGE>

6. Confidential Information. Executive agrees that during the Initial Term
and the Additional Term, if any, and for five years thereafter, he will not,
except as required by the performance of his duties under this Agreement,
disclose or authorize anyone else to disclose or use or make known for his or
another's benefit, any confidential information or knowledge or data of the
Company, whether or not patentable or copyrightable, in any way acquired by
Executive from the inception of his employment with the Company through the
expiration of the Term (hereinafter "Confidential Information"). Confidential
Information for the purposes of this Agreement, shall include, but not be
limited to, matters not readily available to the public which are:

A. of a technical nature, such as, but not limited to, methods, know-how,
formulae, ompositions, drawings, blueprints, compounds, processes, discoveries,
machines, prototypes, inventions, computer programs;
B. of a business nature, such, as, but not limited to, information about
sales or lists of customers, prices, costs, purchasing, profits, markets,
strengths and weaknesses of products, business processes, business and marketing
plans and activities and employee personnel records;
C. pertaining to future developments, such as, but not limited to, research
and development, future marketing or merchandising plans or ideas.
Immediately upon termination of Executive's services, Executive shall
deliver to the Company all originals and copies of everything in his possession
or under his control which embodies or contains any Confidential Information,
including, without limitation, all documents, correspondence, specifications,
blueprints, notebooks, reports, sketches, formulae, computer programs, computer
discs, prototypes, price lists, customer lists or information, samples and all
other materials.
Confidential Information shall not include information which (i) is
published or otherwise becomes generally available to the public other than by a
breach of confidentiality, or (ii) Employee can show by documentation was
properly in his possession prior to his employment with the Company, or (iii)
becomes available to Employee from an independent source without breach of this
Agreement or violation of law, or (iv) is independently developed by Employee
without the use of the Company's Confidential Information.

<PAGE>

7. Covenant Not to Compete
A. In light of the special and unique services that have been and will be
furnished to the Company by Executive and the Confidential Information that has
been and will be disclosed to him during his employment, Executive agrees that
during the Initial Term and the Additional Term, if any, and for a period of
twenty-four (24) months thereafter (the "Non-Competition Period"), he will not,
without the written consent of the Company, directly or indirectly, whether as
principal, agent, officer, director, consultant, employee, partner, stockholder
or owner of or in any capacity with any corporation, partnership, business,
firm, individual company or any entity located any where in the world engage in,
or assist another to engage in, any work or activity in any way competitive with
the Business of the Company (as hereinafter defined). However, nothing herein
shall prevent Executive from owning not more than five percent (5%) of the
outstanding publicly traded shares of common stock of a corporation, as to which
corporation Executive has no relationship other than as a shareholder. In
addition, during the Non-Competition Period, Executive will not, directly or
indirectly, (a) induce or attempt to induce any officer or employee of the
Company to leave the employ of the Company, or in any way interfere with the
relationship between the Company and any officer, employee, director or
shareholder thereof, (b) hire directly or through another entity any person who
is an employee of the Company on the date of termination of employment of
Executive, or (c) induce or attempt to induce any customer, dealer, supplier or
licensee to cease doing business with the Company, or in any way interfere with
the relationship between any such customer, dealer, supplier or licensee and the
Company.
Executive specifically agrees that because of his special expertise and the
special and unique services that he will be furnishing the Company, and because
of the Confidential Information that has been acquired by him or that will be
disclosed to him during his employment with the Company, the above stated
geographic areas and time period, in and during which he will not compete with
the Company, are reasonable in scope and duration and are necessary to afford
the Company just and adequate protection against the irreparable damage which
would result to the Company from any activities prohibited by this Section.

<PAGE>

B. If Executive in any way breaches the obligations specified in this
Section, the Company shall have the right, in addition to any other remedies
available to it, to terminate the further payment of any amounts due or the
further provisions of any benefits under Sections 3 and 4 hereof.

C. If any provision hereof is found to be unreasonably broad, it shall
nevertheless be enforceable to the extent reasonably necessary for the
protection of the Company and to carry out to the fullest extent the parties'
mutual intent in entering into this Agreement, which intent is that the
provisions of this Section will be strictly enforced as agreed to.

D. For purposes of this Agreement, the "Business of the Company" is the
development, manufacturing and marketing of technologies, products and services
for the automatic identification and keyless data entry industry, and includes,
but is not limited to, products, services, applications, systems and
technologies relating to bar coded data, magnetic stripe encoded data, radio
frequency communications of bar coded or related data, optical character
recognition, machine vision as applied to the recognition of bar coded data and
electronic interchange of bar coded or related data. The Business of the Company
shall also include any business in which the Company is actually engaged or as
to which it is doing research and development during Executive's employment with
the Company. Notwithstanding anything to the contrary in the preceding two
sentences, Business of the Company shall not include the manufacturing, design,
engineering, distributing, marketing, selling or reselling of thermal or thermal
transfer bar code printers, bar code verifiers or labeling media and ribbons
used in connection with thermal bar code printers.

8. Injunctive Relief. Executive agrees that in the event of a breach or
threatened breach by the Employee of any of the provisions of Sections 6 or 7
hereof, the Company shall be entitled to an injunction restraining the Executive
from such breach or threatened breach without posting any bond or other
security. Nothing herein, however, shall be construed as prohibiting the Company
from pursuing, in conjunction with an injunction or otherwise, any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from the Executive.

9. Severance Payment.
A. Termination of Employment - In General. In the event of the termination
of employment of Executive by the Company prior to the expiration of the Term
for any reason other than Termination for Cause (as hereinafter defined), death,
disability, or a Change in Control (as hereinafter defined), the Company will
continue to pay the Executive for a period of one year following such
termination or expiration of the Initial Term or any Additional Term an amount
equal to the Executive's Base Salary at the annual rate then in effect. Such
amount shall be payable bi-weekly. In addition, the Company will provide
Executive with Executive's then current health, dental, life and accidental
death and dismemberment insurance benefits for a period of one year following
such termination. In the event of Executive's death while receiving severance
payments hereunder, all remaining severance installment payments otherwise
payable to Executive hereunder will be paid in the same amounts and in the same
manner to Executive's heirs and legal representatives. All payments made to
Executive hereunder will be subject to all applicable employment and withholding
taxes.

<PAGE>

B. Termination of Employment - Change in Control. In the event Executive
terminates his employment for any reason within 90 days after the occurrence of
a Change in Control (as hereinafter defined) of the Company or in the event of
the termination of employment of Executive within the two year period following
a Change in Control (as hereinafter defined) of the Company, and such
termination is (i) by the Company for any reason other than Termination for
Cause (as hereinafter defined), death or disability, or (ii) by the Executive
for "Good Reason" (as hereinafter defined), the Company will pay the Executive
over a period of three years following such termination an amount equal to the
product of the sum of (x) Executive's Base Salary at the annual rate then in
effect and (y) the highest annual bonus paid to Executive under the Company's
current Management Incentive Plan or any successor plan in the three full fiscal
years preceding termination multiplied by 2.9. Such amount shall be payable
bi-weekly. In addition, Executive will be immediately vested in any retirement,
incentive, restricted stock, or option plans or agreements then in effect and
the Company will continue to provide Executive with Executive's then current
health, dental, life and accidental death and dismemberment insurance benefits
for a period of three years. All payments made to Executive hereunder will be
subject to all applicable employment and withholding taxes.
C. Limitations. Notwithstanding anything in this Section to the contrary,
the maximum amount of cash and other benefits payable (whether on a current or
deferred basis and whether or not includible in income for income tax purposes)
under this Section (the "Severance Benefits") shall be limited to the extent
necessary to avoid causing any portion of such Severance Benefits, or any other
payment in the nature of compensation to the Executive, to be treated as a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended. Any adjustment required to satisfy the
limitation described in the preceding sentence shall be accomplished first by
reducing any cash payments that would otherwise be made to the Executive and
then, if further reductions are necessary, by adjusting other benefits as
determined by the Company.

<PAGE>

D. Certain Definitions.
Change in Control. A "Change in Control" shall be deemed to have occurred
(i) on the date that any person or group deemed a person under Sections 3(a)(9)
and 13(d)(3) of the Securities Exchange Act of 1934, other than the Company, in
a transaction or series of transactions, has become the beneficial owner,
directly or indirectly (with beneficial ownership as determined as provided in
Rule 13d-3, or any successor rule under such Act), of 20% or more of the
outstanding voting securities of the Company; or (ii) on the date on which one
third or more of the members of the Board of Directors shall consist of persons
other than Current Directors (for these purposes, a "Current Director" shall
mean any member of the Board of Directors elected at or continuing in office
after, the 1998 Annual Meeting of Shareholders, any successor of a Current
Director who has been approved by a majority of the Current Directors then on
the Board, and any other person who has been approved by a majority of the
Current Directors then on the Board); or (iii) on the date of approval of (x)
the merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
would not beneficially own, immediately after the merger or consolidation,
shares entitling such shareholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect directors by a
separate class vote) to which all shareholders of the corporation would be
entitled in the election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or consolidation,
would not immediately after the merger or consolidation, constitute a majority
of the Board of Directors of the corporation issuing cash or securities in the
merger or consolidation or (y) on the date of approval of the sale or other
disposition of all or substantially all the assets of the Company.

Termination for Cause. The Company shall have the right to terminate the
services of Executive at any time without further liability or obligations to
Executive if: (i) Executive has failed or refused to perform such services as
may reasonably be delegated or assigned to Executive, consistent with the
Executive's position, by the Board of Directors, (ii) Executive has been grossly
negligent in connection with the performance of Executive's duties, (iii)
Executive has committed acts involving dishonesty, willful misconduct, breach of
fiduciary duty, fraud, or any similar offense which materially affects
Executive's ability to perform Executive's duties for the Company or may
materially adversely affect the Company, or (iv) Executive has been convicted of
a felony.

<PAGE>

Termination of the services of Executive for Cause shall not be effective
unless and until acted upon by the Board of Directors and unless and until
written notice shall have been given to Executive which notice shall include
identification with specificity of each and every factual basis or incident upon
which the termination is based. Notwithstanding the preceding sentence, in
connection with the termination of the services of Executive for Cause under
section (i) above, the Board of Directors shall take no action until the
Executive has been provided written notice of the services Executive has failed
or refused to perform and such failure or refusal remains unremedied for 30 days
after Executive has received such notice.
Good Reason. Good Reason shall mean the occurrence or existence of any of
the following with respect to Executive: (i) Executive's annual rate of salary
is reduced from the annual rate then currently in effect or Executive's other
employee benefits are in the aggregate materially reduced from those then
currently in effect (unless such reduction of employee benefits applies to
employees of the Company generally), or (ii) Executive's place of employment is
moved more than 25 miles from its then current location, or (iii) Executive's
title is changed or he is assigned duties that are demeaning or are otherwise
materially inconsistent with the duties then currently performed by Executive.
Before Executive may terminate his employment for Good Reason, Executive
must notify the Company in writing of his intention to terminate and the Company
shall have 15 days after receiving such written notice to remedy the situation,
if possible.

10. Notices. All notices given in connection with this Agreement shall be
in writing and shall be delivered either by personal delivery, by telegram,
telex, telecopy or similar facsimile means, by certified or registered mail,
return receipt requested, or by express courier or delivery services, addressed
to the parties hereto at the following addresses:

To Strandberg: To PSC:

Robert C. Strandberg PSC Inc.
3977 East Avenue 675 Basket Road
Rochester, NY 14618 Webster, NY 14580
FAX: (716) 265-6409

or at such other address and number as either party shall have previously
designated by written notice given to the other party in the manner hereinabove
set forth. Notice shall be deemed given when received, if sent by telegram,
telex, telecopy or similar facsimile means (confirmation of such receipt by
confirmed facsimile transmission being deemed receipt of communications sent by
telex, telecopy or other facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery services, or sent by
certified or registered mail, return receipt requested.

<PAGE>

11. Waiver. Any waiver of a breach of any of the terms of this Agreement
shall not operate as a waiver of any other breach of such terms or of any other
terms, nor shall failure to enforce any term hereof operate as a waiver of any
such term or of any other term.
12. Severability. If any term of this Agreement or the application thereof
is held invalid or unenforceable, the validity or unenforceability shall not
effect any other term of this Agreement which can be given effect without the
invalid or unenforceable term.
13. Governing Law; Venue. This Agreement shall be construed and enforced in
accordance with and governed by the internal laws of the State of New York,
without reference to conflict of law principles of any jurisdiction (including
without limitation New York) which would result in the application of the
domestic substantive laws of any other jurisdiction. The parties consent to the
exclusive jurisdiction of the Supreme Court of New York, Monroe County or of the
United States District Court for the Western District of New York for any legal
action instituted by any party against any other with respect to the subject
matter hereof.
14. Prior Agreements. This Agreement supersedes all previous agreements
related to the subject matter herein.
15. Termination of Obligations. Executive agrees that in the event his
employment with the Company is terminated for any reason, that he will meet with
a representative of the Company and discuss, among other matters, the provisions
of this Agreement and the Executive's obligations hereunder.
16. Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof. This Agreement may not be
amended or changed except by a writing signed by both parties.
IN WITNESS WHEREOF, Executive has executed this Agreement and the Company
has caused this Agreement to be executed as of the date set forth above.

PSC INC.

By: /s/ Robert S. Ehrlich
Robert S. Ehrlich
Its: Chairman of the Board

/s/ Robert C. Strandberg
Robert C. Strandberg

AGREEMENT

THIS AGREEMENT dated as of June 2, 1998 by and between PSC Inc., a New
York corporation ("PSC" or the "Company") and ROBERT S. EHRLICH ("Ehrlich").
WHEREAS, Ehrlich was elected Chairman of the Board of Directors of PSC
on April 30, 1997, and WHEREAS, the Company and Ehrlich entered into an
Agreement dated as of June 2, 1997 (the "1997
Agreement"), and
WHEREAS, the parties desire to amend the 1997 Agreement in certain
respects and to restate in its entirety said 1997 Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:

1. Services. Ehrlich shall perform such duties and exercise such powers
as are customarily associated with the position of Chairman of a Board of
Directors, including but not limited to, presiding at all meetings of the Board
of Directors, selecting and chartering Board committees, establishing Board
agendas, and monitoring and reviewing the performance of the President and Chief
Executive Officer. In addition, he shall perform such other duties as the Board
may from time to time direct, including but not limited to, services in such
areas as strategic planning, corporate development, mergers and acquisitions,
and development of overseas markets. During the Term, in good faith, Ehrlich
shall exert all reasonable efforts to promote the interests of the Company and
shall devote such time, attention and energies to the performance of his
responsibilities and duties hereunder and at such locations as may reasonably be
deemed necessary or appropriate by the parties. During the Term, Ehrlich may
have other business investments and participate in other unrelated and
non-competitive business ventures, but these shall not interfere or be
inconsistent with his duties hereunder. Ehrlich may perform his services at such
times, at such locations and by such means (i.e., in person, by phone, by fax or
other electronic devices) as shall be reasonably appropriate and mutually
agreeable.

<PAGE>

2. Term. The term of service under this Agreement shall commence as of
the date of this Agreement and shall terminate on December 31, 2000 or on such
earlier date as Ehrlich may no longer be a member of the Board of Directors (the
"Term").
3. Compensation. For all services to be rendered to the Company by
Ehrlich in any capacity, PSC shall pay to Ehrlich a fee at the annual rate of
$85,000. The fee shall be payable biweekly.
4. Restricted Stock. Pursuant to the Company's 1994 Stock Option Plan,
on March 25, 1998 PSC awarded Ehrlich 17,500 restricted Common Shares of the
Company, upon the terms and conditions and subject to the restrictions set forth
in the Restricted Stock Award Agreement attached hereto as Exhibit A. If Ehrlich
is then Chairman of the Board of Directors of the Company, on each of March 25,
1999 and March 25, 2000, PSC will award Ehrlich 17,500 restricted Common Shares
pursuant to a Restricted Stock Award Agreement similar in form to Exhibit A, as
modified to reflect changes in dates and stock prices.
5. Confidential Information. Ehrlich agrees that during the Term and
for five years thereafter, he will not, except as required by the performance of
his duties under this Agreement, disclose or authorize anyone else to disclose
or use or make known for his or another's benefit, any confidential information,
knowledge or data of the Company, whether or not patentable or copyrightable, in
any way acquired by him from the inception of his original relationship with the
Company in any capacity through the expiration of the Term (herein "Confidential
Information"). Confidential Information, for purposes of this Agreement, shall
include, but not be limited to, matters not readily available to the public
which are:

a. of a technical nature, such as, but not limited to, methods, know-how,
formulae, compositions, drawings, blueprints, compounds, processes,
discoveries, machines, inventions, computer programs and similar items:

b. of a business nature, such as, but not limited to, information about sales
or lists of customers, prices, costs, purchasing, profits, markets,
strengths and weaknesses of products, business processes, business and
marketing plans and activities and employee personnel records;

c. pertaining to future developments, such as, but not limited to, research
and development, future marketing or merchandising plans or ideas.
<PAGE>

Immediately upon termination of Ehrlich's services, Ehrlich shall
deliver to the Company all originals and copies of everything in his possession
or under his control which embodies or contains Confidential Information,
including, without limitation, all documents, correspondence, specifications,
blueprints, notebooks, reports, sketches, formulae, computer programs, computer
discs, sales and other materials, price lists, customer lists or information,
samples, and all other materials.

Confidential Information shall not include information which (i) is
published or otherwise becomes generally available to the public other than by a
breach of confidentiality, or (ii) Ehrlich can show by documentation was
properly in his possession prior to the commencement of his original
relationship with the Company, or (iii) becomes available to Ehrlich from an
independent source without breach of his Agreement or violation of law, or (iv)
is independently developed by Ehrlich without the use of the Company's
Confidential Information.

6. Covenant Not to Compete.

a. In light of the special and unique services that have been and will be
furnished to the Company by Ehrlich and the Confidential Information that
has been and will be disclosed to him during his relationship with the
Company, Ehrlich agrees that during the Term, and for a period of eighteen
(18) months thereafter, he will not, without the written consent of the
Company, directly or indirectly, whether as principal, agent, officer,
director, consultant, employee, partner, stockholder or owner of or in any
capacity with any corporation, partnership, business, firm, individual
company or any entity located any where in the world engage in, or assist
another to engage in, any work or activity in any way competitive with the
Business of the Company (as hereinafter defined). However, nothing herein
shall prevent Ehrlich from owning not more than five percent (5%) of the
outstanding publicly traded shares of common stock of a corporation, as to
which corporation Ehrlich has no relationship other than as a shareholder.

Ehrlich specifically agrees that because of his special expertise and the
special and unique services that he will be furnishing the Company, and
because of the Confidential Information that has been acquired by him or
that will be disclosed to him during the Term, the above stated geographic
areas and time period, in and during which he will not compete with the
Company, are reasonable in scope and duration and are necessary to afford
the Company just and adequate protection against the irreparable damage
which would result to the Company from any activities prohibited by this
Section.
<PAGE>

b. If Ehrlich in any way breaches the obligations specified in this Section,
the Company shall have the right, in addition to any other remedies
available to it, to terminate the further payment of any amounts due under
Section 3 hereof.

c. If any provision hereof is found to be unreasonably broad, it shall
nevertheless be enforceable to the extent reasonably necessary for the
protection of the Company and to carry out to the fullest extent the
parties' mutual intent in entering into this Agreement, which intent is
that the provisions of this Section will be strictly enforced as agreed to.

d. For purposes of this Agreement, the "Business of the Company" is the
development, manufacturing and marketing of technologies, products and
services for the automatic identification and keyless data entry industry,
and includes, but is not limited to, products, services, applications,
systems and technologies relating to bar coded data, magnetic stripe
encoded data, radio frequency communications of bar coded or related data,
optical character recognition, machine vision as applied to the recognition
of bar coded data, electronic interchange of bar coded or related data, and
custom reed-relay switching systems. The Business of the Company shall also
include any business in which the Company is actually engaged or as to
which it is doing research and development during Ehrlich's services with
the Company.

7. Injunctive Relief. Ehrlich agrees that in the event of a breach or
threatened breach by Ehrlich of any of the provisions of Sections 5 or 6 hereof,
the Company shall be entitled to an injunction restraining Ehrlich from such
breach or threatened breach without posting any bond or other security. Nothing
herein, however, shall be construed as prohibiting the Company from pursuing, in
conjunction with an injunction or otherwise, any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from Ehrlich.
<PAGE>

8. Notices. All notice given in connection with this Agreement shall be
in writing and shall be delivered either by personal delivery, by telegram,
telex, telecopy or similar facsimile means, by certified or registered mail,
return receipt requested, or by express courier to the parties hereto at the
following addresses:

To Ehrlich: To PSC:
Robert S. Ehrlich PSC Inc.
P.O. Box 1334 675 Basket Road
Efrat 90962 Webster, NY 14580
Israel Attn: Chief Executive Officer
Fax: 011-972-293-2189 Fax: 716-265-6406

or at such other address and number as either party shall have previously
designated by written notice given to the other party in the manner hereinabove
set forth. Notice shall be deemed given when received, if sent by telegram,
telex, telecopy or similar facsimile means (confirmation of such receipt by
confirmed facsimile transmission being deemed receipt of communications sent by
telex, telecopy or other facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail, return receipt requested.

9. Waiver. Any waiver of a breach of any of the terms of this Agreement
shall not operate as a waiver of any other breach of such terms or of any other
terms, nor shall failure to enforce any term hereof operate as a waiver of any
such term or of any other term.

10. Severability. If any term of this Agreement or the application
thereof is held invalid or unenforceable, the validity or unenforceability shall
not affect any other terms of this Agreement which can be given effect without
the invalid or unenforceable term.

11. Governing Law: Venue. This Agreement shall be construed and
enforced in accordance with and governed by the internal laws of the State of
New York, without reference to conflict of law principles or the domicile or
residence of any individual party if other than New York. The parties hereby
submit and consent to the exclusive personal jurisdiction of the Supreme Court
of New York, Monroe County or of the United States District Court for the
Western District of New York for any legal action instituted by any party
against any other with respect to the subject matter hereof and process in such
action shall be effectively served if served in accordance with Section 8
hereof.
12. Prior Agreement. This Agreement supersedes all previous agreements
and understandings relating to the subject matter herein.

13. Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof. This Agreement
may not be amended or changed except by a writing signed by both parties.

<PAGE>

IN WITNESS WHEREOF, Ehrlich has executed this Agreement and the Company
has caused this Agreement to be executed as of the date set forth above.

PSC INC.

By: /s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer

Robert S. Ehrlich

PSC Inc.

Director Compensation Plan

Article I Purpose of the Plan

1.1 Purpose of Plan. PSC Inc. (the "Company") adopts the PSC Inc. Compensation
Plan for Non-Employee Directors (the "Plan") to provide for payment either in
cash or in shares of the Company's Common Stock, $.01 par value ("Stock"), of
the compensation paid for the services of members of the Board of directors of
the Company who are not employees of the Company or any of its affiliates or
subsidiaries ("Non-Employee Directors"). The Plan also allows the Non-Employee
Directors to defer all or a portion of the compensation for their services as
directors. The Plan is intended to provide Non-Employee Directors with a larger
equity interest in the Company, to enhance the identity of interests between
Non-Employee Directors and the shareholders of the Company, and to assist the
Company in attracting and retaining well-qualified individuals to serve as
Non-Employee Directors.

Article II Eligibility and Participation

2.1 Eligibility and Participation. Only Non-Employee Directors shall be eligible
to participate in the Plan. An eligible Plan participant may be referred to
herein as "Participant".

Article III Director Compensation Elections

3.1 Compensation Payable in Cash or Stock. Each Non-Employee Director may elect
to have (a) his or her director retainer fee that is paid in quarterly
installments, or in any other manner (determined without regard to the Plan)
(the "Retainer"), (b) his or her fees for attendance at meetings of the
Company's Board of Directors and/or committees thereof (determined without
regard to the Plan) ("Meeting Fees"), and (c) any other compensation paid to him
or her for services as a director (determined without regard to the Plan)
("Other Compensation") payable in cash or in Stock.

3.2 Deferral of Compensation. Each Non-Employee Director may elect to defer
receipt of all or a specified portion of the Retainer, the Meeting Fees or the
Other Compensation otherwise payable to him or her. If the amount to be deferred
would have been payable in cash pursuant to Section 3.1, the Company will credit
a Deferral Account maintained for the Non-Employee Director as provided in this
Plan with an amount that would otherwise have been payable to the Non-Employee
Director in cash. If the amount to be deferred would have been payable in Stock
pursuant to Section 3.1, the Company will credit units ("Stock Units") to a Unit
Account maintained for the Non-Employee Director as provided in this Plan.

<PAGE>

For purposes of the Plan, Deferral Account means an account maintained in a
ledger for a Non-Employee Director to which cash equivalent amounts allocable to
the Non-Employee Director under this Plan are credited and a Unit Account means
the account maintained in a ledger for a Non-Employee Director to which Stock
Units allocable to the Non-Employee Director under this Plan are credited. A
Stock Unit means a credit in a Non-Employee Director Unit Account representing
one share of Stock.

3.3 Elections. An election under Sections 3.1 and 3.2 must be made in writing
and delivered to the Company prior to the start of the calendar year in which
the Retainer, the Meeting Fees or the Other Compensation would otherwise be paid
(but for the deferral election) and such election will be irrevocable for the
affected calendar year (the "Affected Year"). To participate in the Plan during
the calendar year in which the Plan becomes effective, the Non-Employee Director
must make an election under Sections 3.1 and 3.2 for services to be performed
subsequent to the election within 30 days after the Effective Date (as defined
in Section 9.1) and such election will be irrevocable for the remainder of the
Affected Year. To participate in the Plan during the first calendar year in
which a Non-Employee Director becomes eligible to participate in the Plan, the
new Non-Employee Director must make an election under Sections 3.1 and 3.2 for
services to be performed subsequent to the election within 30 days after the
date he or she becomes eligible and such election will be irrevocable for the
remainder of the Affected Year. Each election shall remain in effect until
revoked in writing, and any such revocation shall become effective no earlier
than the first day of the first calendar year commencing after such revocation
is received by the Company. If a Non-Employee Director does not file an election
form by the specified date, he or she will be deemed to have elected to receive
all of the Retainer, the Meeting Fees and the Other Compensation in cash.

3.4 Payment in Stock. If a Non-Employee Director elects to receive Stock in
payment of all or part of his or her Retainer, Meeting Fees and Other
Compensation, the number of shares of Stock to be issued on the date that
payment would otherwise have been made in cash shall equal the cash amount that
would have been paid divided by the Fair Market Value of one share of Stock on
the date on which such cash amount would have been paid.

For purposes of the Plan, the Fair Market Value of Stock on any business day
means (a) if the primary market for the Stock is a national securities exchange,
the Nasdaq National Market, or other market quotation system in which last sale
transactions are reported on a contemporaneous basis, the last reported sale
price of the Stock on such exchange or in such quotation system for that day or,
if there shall not have been a sale on such exchange or reported through such
system on such trading day, the closing or last bid quotation therefor on such
exchange or quotation system on such trading day; (b) if the primary market for
the Stock is not such an exchange or quotation market in which transactions are
contemporaneously reported, the closing or last bid quotation in the
over-the-counter market on such trading day as reported by the National
Association of Securities Dealers through NASDAQ, its automated system for
reporting quotations, or its successor, or such other generally accepted source
of publicly reported bid quotations as the Company may reasonably designate. To
the extent that the application of any formula described in this Section 3.4
does not result in a whole number of shares of Stock, the result shall be
rounded upwards to the next whole number such that no fractional shares of Stock
shall be issued under the Plan.
<PAGE>

3.5 Crediting Cash to a Deferral Account. If a Non-Employee Director defers
receipt of any portion of the Retainer, the Meeting Fees or the Other
Compensation by having an amount credited to a Deferral Account, then on each
date that payment would have been made in cash, the Company will credit to the
Non-Employee Director's Deferral Account an amount equal to the dollar amount of
the Retainer, the Meeting Fees or the Other Compensation deferred. On the last
day of each calendar year the Company will also credit the Deferral Account with
interest, calculated at the Interest Rate, on the aggregate amount credited to
the Deferral Account.

For purposes of the Plan "Interest Rate" means the annual rate at which interest
is deemed to accrue on the amounts credited in a Deferral Account for a
Non-Employee Director. The annual rate shall be the average interest rate paid
by the Company during the year to its senior lender.

3.6 Deferral Account Fully Vested. All sums credited to a Deferral Account
shall at all times be fully vested.

3.7 Crediting Stock Units to Unit Accounts. If a Non-Employee Director defers
receipt of any portion of the Retainer, the Meeting Fees or the Other
Compensation by having Stock Units credited to a Unit Account, then on each date
that payment would have been made in cash, the Company will credit to the
Non-Employee Director's Unit Account a certain number of Stock Units. The number
of Stock Units credited to a Unit Account with respect to any Non-Employee
Director shall equal the amount deferred divided by the Fair Market Value of one
share of Stock on the date on which such cash amount would have been paid but
for the deferral election pursuant to Section 3.3.

3.8 Fully Vested Stock Units. All Stock Units credited to a Participant's Unit
Account pursuant to this Article III shall be at all times fully vested and
nonforfeitable.

3.9 Distribution of the Amounts in a Deferral Account. After the Distribution
Date, as hereinafter defined, for a Non-Employee Director, the Company will pay
the Non-Employee Director cash equal to the amount with which the Non-Employee
Director's Deferral Account is credited. The Non-Employee Director may elect to
receive all of the cash at one time or in any number of installments up to 10
annual installments as described below. If the Non-Employee Director has elected
to receive all of the cash at one time, the Company will pay the cash to the
Non-Employee Director as soon as practicable after the Distribution Date.
<PAGE>

If the Non-Employee Director has elected to be paid the cash in installments, a
pro rata portion of the amount credited to the Deferral Account on the
Distribution Date will be paid in each installment, along with the additional
amount credited to the Deferral Account as interest since the last installment
was paid. The Company will pay to the Non-Employee Director the cash to be paid
in the first installment as soon as practicable after the Distribution Date. The
remaining installments of cash shall be paid on or about each anniversary of the
Director's Distribution Date.

For purposes of this Plan, the "Distribution Date" means any date subsequent to
the Affected Year specified by a Non-Employee Director on an election form filed
pursuant to Section 3.3 and, in any case, the date on which a Non-Employee
Director (i) ceases to be a director of the Company or (ii) becomes employed by
the Company or an affiliate, or (iii) dies.

3.10 Distribution of the Amounts in a Unit Account. After the Distribution Date
for a Non-Employee Director, the Company will issue to the Non-Employee Director
a certificate for that number of shares equal to the number of Units with which
the Non-Employee Director's Unit Account is credited. The Non-Employee Director
may elect to receive all of the shares of Stock at one time or in up to 10
annual installments as described below. If the Non-Employee Director has elected
to receive all of the shares of Stock at one time, the Company will issue the
shares of Stock as soon as practicable after the Distribution Date.

If the Non-Employee Director has elected to receive the shares of Stock in
installments, a pro rata number of shares of Stock will be issued for each
installment plus additional shares of Stock equal to the Units credited to the
Unit Account respecting dividends paid on the Stock since the last installment
was made. The Company will issue the first installment of shares of Stock as
soon as practicable after the Non-Employee Director's Distribution Date. The
remaining installments of shares of Stock will be issued on or about each
anniversary of the Non-Employee Director's Distribution Date.

3.11 Conversion of Accounts. At any time prior to the Distribution Date, a
Non-Employee Director who has a Deferral Account may convert all or any portion
of the Deferral Account into Units credited to a Unit Account. The number of
Units to be credited to the Non-Employee Director's Unit Account upon the
conversion shall equal (1) the amount credited to the Non-Employee Director's
Deferral Account so converted divided by (2) the Fair Market Value on the date
of the Non-Employee Director's election to convert.
<PAGE>

At any time prior to the Distribution Date, a Non-Employee Director who has a
Unit Account may convert all or any portion of the Unit Account into a Deferral
Account. The cash amount to be credited to the Non-Employee Director's Deferral
Account upon the conversion shall equal (1) the number of Units credited to his
or her Unit Account so converted multiplied by (2) the Fair Market Value on the
date of the Non-Employee Director's election to convert.

Any election to convert must be made on a form prescribed by the Company and
filed with its Secretary. The conversion of a Unit Account or a Deferral Account
shall be deemed to occur on the date of the Director's election.

Article IV - Stock

4.1 Authorized Stock. The aggregate number of shares of Stock that may be issued
under the Plan shall not exceed 50,000 shares, unless such number of shares is
adjusted as provided in Article V of the Plan. Such shares of Stock may be
authorized but unissued shares, treasury shares or shares acquired in the open
market for the account of the Participant.

4.2 Fractional Shares. No fractional shares of Stock shall be issued under the
Plan under any circumstances.

Article V - Adjustment upon Changes in Capitalization

5.1 Adjustment upon Changes in Capitalization. In the event of a stock dividend,
stock split or combination, reclassification, recapitalization or other capital
adjustment of shares of Stock, the number of shares of Stock that may be issued
pursuant to Stock Units and the number of Stock Units credited to Unit Accounts
shall be appropriately adjusted by the Board of Directors of the Company, whose
determination shall be final, binding on the Company and the Participants and
conclusive.

5.2 No Effect on Rights of Company. The grant of Stock Units pursuant to the
Plan shall not affect in any way the right or power of the Company to issue
additional Stock or other securities, make adjustments, reclassifications,
reorganizations or other changes in its corporate, capital or business
structure, to participate in a merger, consolidation or share exchange or to
transfer its assets or dissolve or liquidate.

Article VI - Termination or Amendment of the Plan

6.1 In General. The Board of Directors of the Company may at any time terminate,
suspend or amend the Plan. An amendment or the termination of this Plan shall
not adversely affect the right of a Non-Employee Director or Beneficiary to
receive shares of Stock issuable or cash payable at the effective date of the
amendment or termination or any rights that a Non-Employee Director, former
Non-Employee Director, or a Beneficiary has in any Deferral Account or Unit
Account at the effective date of the amendment or termination. If the Plan is
terminated, however, the Company may, at its option, accelerate the payment of
all deferred and other benefits payable under this Plan.
<PAGE>

Article VI - Government Regulations

6.1 Government Regulations.

(a) The obligations of the Company to issue any Stock pursuant to the
Plan shall be subject to all applicable laws, rules and regulations and the
obtaining of all such approvals by governmental agencies as may be deemed
necessary or appropriate by the Board of Directors of the Company.

(b) The Board of Directors of the Company may make such changes to the
Plan as may be necessary or appropriate to comply with the rules and regulations
of any governmental authority.

Article VII - Administration

7.1 In General. The Plan shall be administered by the Compensation Committee of
the Board of Directors (the "Committee"), which shall have full power and
authority, subject to the provisions of the Plan, to supervise administration of
the Plan and to interpret the provisions of the Plan and of any award, issuance
or payment of Stock or Stock Units hereunder. Any decision by the Committee
shall be final and binding on all parties. No member of the Committee shall be
liable for any determination made, or any decision or action taken with respect
to the Plan or any award, issuance or payment of Stock or Stock Units under the
Plan. The Committee may delegate any of its responsibilities to one or more
agents, including employees of the Company or one or more of its affiliates and
subsidiaries, and may retain advisors to provide advice to the Committee. No
Participant shall participate in the making of any decision with respect to any
question relating to any Stock or Stock Unit issued under the Plan exclusively
to that Participant.

7.2 Rules and Interpretation. The Committee shall be vested with full authority
to make such rules and regulations as it deems necessary to administer the Plan
and to interpret and administer the provisions of the Plan in a uniform manner.
Any determination, decision or action of the Committee in connection with the
construction, interpretation, administration or application of the Plan shall be
final, conclusive and binding on all parties.

7.3 Expenses. The cost of issuing and paying Stock and Stock Units pursuant to
the Plan and the expenses of administering the Plan shall be borne by the
Company.

Article VIII - Miscellaneous

8.1 Unfunded Plan. The Plan shall be unfunded with respect to the Company's
obligation to pay any amounts in the Deferral Accounts and any Stock Units in
the Unit Accounts and a Participant's rights to receive any payment of any
amounts in the Deferral Accounts and any Stock Units in the Unit Accounts shall
not be greater than the rights of an unsecured general creditor of the Company.
<PAGE>

8.2 Assignment; Non-Alienation. The rights, benefits or interests a Non-Employee
Director may have under this Plan, any Deferral Account or any Unit Account are
not assignable or transferable and shall not be subject in any manner to
alienation, sale or any encumbrances, liens, levies, attachments, pledges or
charges of the Participant or his or her creditors. Any action attempting to
effect any transaction of that type shall be void and of no force and effect.

8.3 Death Benefit; Designation of Beneficiaries. Upon the death of a
Participant, the Stock Units remaining in his or her Unit Account as of the date
of death and the amounts of cash remaining in his or her Deferral Account as of
the date of death shall be paid to the beneficiary or beneficiaries of the
Participant, or to his or her estate, as described in this Section 8.3, in
shares of Stock and in cash, as the case may be, in a single distribution. A
Participant may designate a beneficiary or beneficiaries to receive any payments
under the Plan upon his or her death. A beneficiary designation shall be in
writing on a form acceptable to the Company and shall be effective only upon
delivery to the Company. A beneficiary designation may be revoked by a
Participant at any time by delivering to the Company either written notice of
revocation or a new written beneficiary designation. The written beneficiary
designation last delivered to the Company prior to the death of the Participant
shall control. If no beneficiary has been designated, amounts due hereunder
shall be paid to the Participant's estate.

8.4 No Guarantee of Directorship. Neither the adoption and maintenance of the
Plan nor any election made hereunder by a Participant shall be deemed to be a
contract between the Company and the Participant to retain his or her position
as a director of the Company.

8.5 Applicable Law. The validity, interpretation and administration of the Plan
and any rules, regulations, determinations or decisions hereunder, and the
rights of any and all persons having or claiming to have any interest herein or
hereunder, shall be determined exclusively in accordance with the laws of the
State of New York (without regard to the choice of laws provisions thereof),
except to the extent such laws are preempted by the laws of the United States of
America.

8.6 Notices. All notices, elections or other communications made or given
pursuant to the Plan shall be in writing and shall be sufficiently made or given
if hand-delivered or mailed by certified mail, addressed (if from the Company to
the Participant) to any Participant at the address contained in the records of
the Company for such Participant, or addressed (if from the Participant to the
Company) to the Secretary of the Company at its principal office.

8.7 Headings. The headings in the Plan are for reference purposes only and shall
not affect the meaning or interpretation of the Plan.

Article IX - Effective Date of the Plan

9.1 Effective Date. The Plan shall be effective immediately upon the date of its
approval by the shareholders of the Company (the "Effective Date").

PSC Inc.
1995 Employee Stock Purchase Plan
(includes all amendments through February 11, 1998)

Section 1. Purpose.

The PSC Inc. 1995 Employee Stock Purchase Plan (the "Plan") is designed
to provide an opportunity for the employees of PSC Inc. and its subsidiaries
(hereinafter referred to, unless the context otherwise requires, as the
"Company") to purchase Common Shares (the "Stock") of the Company through
voluntary systematic payroll deductions. It is the purpose and policy of the
Plan to provide employees with an opportunity to acquire a proprietary interest
in the economic progress of the Company and a further incentive to promote its
best interests. It is the intention of the Company to have the Plan qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly,
be construed so as to extend and limit participation in a manner consistent with
the requirements of that Section of the Code.

Section 2. Definitions.

(a) "Compensation" means the base salary or wage paid to an Employee,
including commissions and overtime payments. "Compensation" shall not include
bonuses, profit sharing contributions, Company contributions to Social Security,
contributions to the Company's 401-k Profit Sharing Plan or any other retirement
plan or program, or the value of any other fringe benefits provided at the
expense of the Company.

(b) "Employee" means any person, including an officer, who is employed
by (i) the Company or (ii) any subsidiary company, 50% or more of whose voting
shares are owned directly or indirectly by the Company. A director of the
Company who is not also a full time officer is not deemed to be an employee.

(c) "Fair Market Value". For purposes of this Plan, the "fair market
value" of the Stock on a given date shall be the closing price of the Stock on
the Nasdaq National Market on such date, provided at least one sale of said
Stock took place on such exchange on such date, and, if not, then on the basis
of the closing price on the last preceding date on which at least one sale on
such exchange did occur. If the Stock of the Company is not admitted to trading
on any of the aforesaid dates for which closing prices of the Stock are to be
determined, then reference shall be made to the fair market value of the Stock
on that date, as determined on such basis as shall be established or specified
for the purpose by the Committee.

Section 3. Eligibility.

(a) Initial Eligibility. Any person who shall be employed by the
Company shall be immediately eligible to participate in the Plan and shall be
eligible to participate in Offerings which commence on or after the first day of
employment.
<PAGE>

(b) Restrictions on Participation. Any provision of the Plan to the
contrary notwithstanding, no Employee shall be granted an option to purchase
Stock in the Plan:

(i) if, immediately after the grant, such Employee would own
shares, and/or hold outstanding options to purchase stock, possessing 5% or more
of the total combined voting power or value of all classes of stock of the
Company (for purposes of this paragraph, the rules of Section 424(d) of the Code
shall apply in determining stock ownership of any Employee); or

(ii) if it would permit such Employee's rights to purchase
shares under all employee stock purchase plans of the Company to accrue at a
rate which exceeds $25,000 in fair market value of the Stock (determined at the
time such rights are granted) for each calendar year in which rights to purchase
such Stock are outstanding.

Section 4. Offerings under the Plan.

The Plan will be implemented by ten semi-annual offerings of the
Company's Stock (the "Offerings") beginning on January 1 and July 1 in each of
the years 1996, 1997, 1998, 1999 and 2000 and terminating on June 30 and
December 31 in each of such years, respectively. As used in the Plan, "Offering
Commencement Date" means the January 1 or July 1, as the case may be, on which
the particular Offering begins and "Offering Termination Date" means the June 30
or December 31, as the case may be, on which the particular Offering terminates.

Participation in any Offering under the Plan shall neither limit, nor
require, participation in any other Offering except that no Employee may have
more than one authorization for payroll deduction in effect simultaneously.
Except as provided in Section 3 of the Plan, all Employees participating in an
Offering shall have the same rights and privileges to purchase Stock in the
Plan.

Section 5. Participation and Payroll Deductions.

(a) Payment for Stock. Shares of Stock purchased under the Plan will be
paid for by payroll deductions during the period beginning on the Offering
Commencement Date and ending on the Offering Termination Date ("Purchase
Period").

(b) Participation.

(i) An eligible Employee becomes a participant ("Participant")
in the Plan by completing an authorization for a payroll deduction on the form
provided by the Company ("Employee Authorization Card") and filing it with the
Human Resources Department of the Company during the enrollment period
("Enrollment Period") prior to an Offering. Upon becoming a Participant, said
Employee shall be bound by the terms of this Plan, including any amendments
hereto.
<PAGE>

(ii) The Enrollment Period for each of the Offerings is the
thirty days prior to each Offering Commencement Date.

(iii) An Employee Authorization Card shall become effective on
the Commencement Date of the first applicable Offering and shall remain in
effect for all subsequent Offerings so long as the Employee remains eligible
under the Plan and has not withdrawn from the Plan as set forth in Section 10.

(i) At the time an Employee files an Employee Authorization
Card, the Employee shall elect to have deductions made from his pay on each
payday during the time the Employee is a Participant in an Offering at the rate
of 2, 3, 4, 5, 6, 7, 8, 9 or 10% of the Compensation which the Employee is
entitled to receive on such payday ("Payroll Deduction Rate").

(ii) Payroll deductions for a Participant shall begin as of
the first pay period after an Employee Authorization Card has become effective.

(iii) All payroll deductions made for a Participant shall be
credited to the Participant's account under the Plan. Amounts credited to such
accounts may be used by the Company for any corporate purpose.
A Participant may not make any separate cash payment into such account.

(d) Change in Payroll Deduction Rate; Discontinuance of Payroll
Deductions.

(i) A Participant's Payroll Deduction Rate, once established,
shall remain in effect for each Offering. A Participant may change the Payroll
Deduction Rate, at any time during the Enrollment Period prior to the beginning
of the next Offering, effective for the next Offering following the receipt of
written notice by the Company on such forms as provided by the Company.

(ii) At any time during an Offering, a Participant may notify
the Company that the Participant wishes to discontinue the Participant's payroll
deductions. This notice shall be in writing and on such forms as provided by the
Company and shall become effective as of a date not more than thirty (30) days
following its receipt by the Company.

(e) No Interest.

No interest shall accrue on any amounts withheld under this
Plan.
<PAGE>

Section 6. Granting of Option.

(a) Number of Option Shares. On the Commencement Date of each Offering,
a participating Employee shall be deemed to have been granted an option to
purchase a maximum number of shares of the Stock of the Company equal to an
amount determined as follows: an amount equal to (i) that percentage of the
Employee's Compensation which the Employee has elected to have withheld (but not
in any case in excess of 10%) multiplied by (ii) the Employee's Compensation
during the period of the Offering (iii) divided by 85% of the Fair Market Value
of the Stock of the Company on the applicable Offering Commencement Date. The
Fair Market Value of the Company's Stock shall be determined as provided in
Section 2(c) above.

(b) Option Price. The option price of Stock purchased with payroll
deductions made during such Offering for a Participant therein shall be the
lower of:

(i) 85% of the Fair Market Value of the Stock on the Offering
Commencement Date; or

(ii) 85% of the Fair Market Value of the Stock on the Offering
Termination Date.

Section 7. Exercise of Option.

(a) Automatic Exercise. Unless a Participant gives written notice to
the Company as hereinafter provided, the Participant's option for the purchase
of Stock with payroll deductions made during any Offering will be deemed to have
been exercised automatically on the Offering Termination Date applicable to such
Offering, for the purchase of the number of full shares of Stock which the
accumulated payroll deductions in the Participant's account at that time will
purchase at the applicable option price (but not in excess of the number of
shares for which options have been granted to the Employee pursuant to Section
6(a), and any excess in the Participant's account at that time will be returned
to the Participant.

(b) Withdrawal of Account. By written notice to the Company, at any
time prior to the Offering Termination Date applicable to any Offering, a
Participant may elect to withdraw all the accumulated payroll deductions in the
Participant's account at such time.

(c) Fractional Shares. Fractional shares will not be issued under the
Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be returned to any Employee promptly following
the termination of an Offering, without interest.

(d) Transferability of Option. During a Participant's lifetime, options
held by such Participant shall be exercisable only by that Participant.

(e) Delivery of Stock. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each Participant,
as appropriate, the Stock purchased upon exercise of the Participant's option.
<PAGE>

Section 8. Withdrawal.

(a) In General. As indicated in Section 7(b), a Participant may
withdraw payroll deductions credited to the Participant's account under the Plan
at any time by giving written notice to the Company. All of the Participant's
payroll deductions credited to the Participant's account will be paid to the
Participant promptly after receipt of the notice of withdrawal, and no further
payroll deductions will be made from the Participant's pay during such Offering.

(b) Effect on Subsequent Participation. A Participant's withdrawal from
any Offering will not have any effect upon the Participant's eligibility to
participate in any succeeding Offering or in any similar plan which may
hereafter be adopted by the Company.

(c) Termination of Employment. Upon termination of the Participant's
employment for any reason, including retirement (but excluding death while in
the employ of the Company), the payroll deductions credited to the Participant's
account will be returned to the Participant or, in the case of the Participant's
death subsequent to the termination of the Participant's employment, to the
person or persons entitled thereunder under Section 11(a).

(d) Termination of Employment Due to Death. Upon termination of the
Participant's employment because of the Participant's death, the Participant's
beneficiary (as defined in Section 11) shall have the right to elect, by written
notice given to the Company prior to the earlier of the Offering Termination
Date or the expiration of a period of sixty (60) days commencing with the date
of the death of the Participant, either:

(i) to withdraw all of the payroll deductions credited to the
Participant's account under the Plan, or

(ii) to exercise the Participant's option for the purchase of
Stock on the Offering Termination Date next following the date of the
Participant's death for the purchase of the number of full shares of Stock which
the accumulated payroll deductions in the Participant's account at the date of
the Participant's death will purchase at the applicable option price, and any
excess in such account will be returned to said beneficiary, without interest.

In the event that no such written notice of election shall be duly
received by the Company, the beneficiary shall automatically be deemed to have
elected, pursuant to paragraph (ii), to exercise the Participant's option.

<PAGE>

Section 9. Stock.

(a) Maximum Shares. The maximum number of shares which shall be issued
under the Plan, subject to adjustment upon changes in capitalization of the
Company as provided in Section 11(d) shall be 600,000 shares. If the total
number of shares for which options are exercised on any Offering Termination
Date in accordance with Section 6 exceeds the number of shares then available
under the Plan, the Company shall make a pro rata allocation of the shares
available for delivery and distribution in as nearly a uniform manner as shall
be practicable and as it shall determine to be equitable, and the balance of
payroll deductions credited to the account of each Participant under the Plan
shall be returned to the Participant as promptly as possible.

(b) Participant's Interest in Option Stock. The Participant will have
no interest in Stock covered by the Participant's option until such option has
been exercised.

(c) Registration of Stock. Stock to be delivered to a Participant under
the Plan will be registered in the name of the Participant, or, if the
Participant so directs by written notice to the Company prior to the Offering
Termination Date applicable thereto, in the names of the Participant and one
such other person as may be designated by the Participant, as joint tenants with
rights of survivorship or as tenants by the entireties, to the extent permitted
by applicable law.

(d) Restrictions on Exercise. The Committee may, in its discretion,
require as conditions to the exercise of any option that the shares of Stock
reserved for issuance upon the exercise of the option shall have been duly
listed, upon official notice of issuance, upon a stock exchange, and that
either:

(i) A Registration Statement under the Securities Act of 1933,
as amended, with respect to said shares shall be effective, or

(ii) the Participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company, that it is the
Participant's intention to purchase the shares for investment and not for resale
or distribution.

Section 10. Administration.

(a) Committee. The Compensation Committee (the "Committee") of the
Board of Directors shall administer the Plan, The Committee shall consist of no
fewer than three members of the Board of Directors. No member of the Committee
shall be eligible to purchase Stock under the Plan.

(b) Authority of Committee. Subject to the express provisions of the
Plan, the Committee shall have plenary authority in its discretion to interpret
and construe any and all provisions of the Plan, to adopt rules and regulations
for administering the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan. The Committee's determination
on the foregoing matters shall be conclusive.
<PAGE>

(c) Rules Governing the Administration of the Committee. The Board of
Directors may from time to time appoint members of the Committee in substitution
for or in addition to members previously appointed and may fill vacancies,
however caused, in the Committee. The Committee may select one of its members as
its Chairman and shall hold its meetings at such times and places as it shall
deem advisable and may hold telephonic meetings. A majority of its members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. The Committee may correct any defect or omission or
reconcile any inconsistency in the Plan, in the manner and to the extent it
shall deem desirable. Any decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.

(d) Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
under the Company's Certificate of Incorporation, By-laws, or pursuant to law or
contract, the members of the Committee shall be indemnified by the Company
against reasonable expenses, including attorneys' fees actually and necessarily
incurred in connection with any action or appeal therein, to which they or any
of them may be party by reason of any action taken or failure to act under or in
connection with the Plan or any stock option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding except in
relation to matters as to which it shall be adjudged in such action, suit,
proceeding that such Committee member is liable for misconduct in the
performance of his duties; provided that within 60 days after institution of any
such action, suit or proceeding a Committee member shall in writing offer the
Company the opportunity, at its own expense, to handle and defend the same.

Section 11. Miscellaneous.

(a) Designation of Beneficiary. A Participant may file a written
designation of a beneficiary who is to receive any shares and cash to the
Participant's credit under the Plan in the event of such Participant's death
prior to delivery to the Participant of such shares and cash. Such designation
of beneficiary may be changed by the Participant at any time by written notice
to the Company. Upon the death of a Participant and upon receipt by the Company
of proof of the identity and existence at the Participant's death of a
beneficiary validly designated by the Participant under the Plan, the Company
shall deliver such shares and cash to such beneficiary. In the event of the
death of a Participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participant's death, the
company shall deliver such shares and cash to the executor or administrator of
the estate of the Participant, or if no such executor or administrator has been
appointed (to the knowledge of the company) the Company, in its discretion, may
deliver such shares and cash to the spouse or to any one or more dependents or
relatives of the Participant or if no spouse, dependent, or relative is known to
the Company then to such other person as the Company may designate. No
designated beneficiary shall prior to the death of the Participant by whom the
beneficiary has been designated, acquire any interest in the shares or cash
credited to the Participant under the Plan.
<PAGE>

(b) Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the Participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Section 7(b).

(c) Use of Funds. All payroll deductions received or held by the
Company under this Plan may be used by the Company for any corporate purpose and
the Company shall not be obligated to segregate such payroll deductions.

(d) Adjustment Upon Changes in Capitalization.

(i) If, while any options are outstanding, the outstanding
shares of Stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization, reclassification, stock split,
reverse stock split or similar transaction, appropriate and proportionate
adjustments may be made by the Committee in the number and/or kind of shares
which are subject to purchase under outstanding options and on the option
exercise price or prices applicable to such outstanding options. In addition, in
any such event, the number and/or kind of shares which may be offered in the
Offerings described in Section 4 hereof shall also be proportionately adjusted.

(ii) Upon the dissolution or liquidation of the Company, or
upon a reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the holder of each option then outstanding under the Plan
will thereafter be entitled to receive at the next Offering Termination Date
upon the exercise of such option for each share as to which such option shall be
exercised, as nearly as reasonably may be determined, the cash, securities
and/or property which a holder of one share of the Stock was entitled to receive
upon and at the time of such transaction. The Board of Directors shall take such
steps in connection with such transactions as the Board shall deem necessary to
assure that the provisions of this Section 11(d) shall thereafter be applicable,
as nearly as reasonably may be determined, in relation to the said cash,
securities and/or property as to which such holder of such option might
thereafter be entitled to receive.

(e) Amendment and Termination. The Board of Directors shall have
complete power and authority to terminate or amend the Plan; provided, however,
that the Board of Directors shall not, without the approval of the shareholders
of the Company (i) increase the maximum number of shares which may be issued
under the Plan, (ii) amend the requirements as to the class of employees
eligible to purchase Stock under the Plan or permit the members of the Committee
to purchase stock under the Plan. No termination, modification or amendment of
the Plan may, without the consent of an Employee then having an option under the
Plan to purchase Stock, adversely affect the rights of such Employee under such
option.
<PAGE>

(f) No Rights as a Shareholder. No right as a shareholder shall exist
with respect to any shares of Stock covered by stock options until the date of
the issuance of a stock certificate for such shares. No adjustment shall be made
for dividends or other rights for which the record date is prior to the date
such certificate is issued.

(g) No Employment Rights. The Plan does not, directly or indirectly,
create any right for the benefit of any Employee or class of employees to
purchase any shares under the Plan, or create in any Employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an Employee's employment at any time.

(h) Effective Date. The Plan shall become effective as of January 1,
1996, subject to approval by a majority of the shareholders of the Company
within twelve (12) months after its adoption by the Board of Directors. If the
Plan is not approved, the Plan shall not become effective.

(i) Termination Date. This Plan shall terminate, and no further shares
of Stock shall be sold or issued hereunder, on December 31, 2000, or such
earlier date as may be determined by the Board of Directors or Committee. The
termination of this Plan, however, shall not affect any restrictions previously
imposed on the shares issued pursuant to this Plan or rights of the Company
granted pursuant to this Plan.

(j) Effect of Plan. The provisions of the Plan shall, in accordance
with its terms, be binding upon, and inure to the benefit of, all successors of
each Employee participating in the Plan, including, without limitation, such
Employee's estate and the executors, administrator or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Employee.

(k) Governing Law. The law of the State of New York will govern all
matters relating to this Plan except to the extent it is superseded by the laws
of the United States.

Date Plan adopted by Board of Directors: November 8, 1994 Date Plan approved by
Shareholders: May 3, 1995 Date Plan amendment approved by Board of Directors:
February 11, 1998 Date Plan amendment approved by Shareholders:

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