Edgar Filing: PSC INC - Form PRE 14A

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant X
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__X___ Preliminary Proxy Statement
______ Definitive Proxy Statement
______ Definitive Additional Materials
______ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
______ Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

PSC Inc.
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(Name of Registrant as Specified in its Charter)

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(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)

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the Form or Schedule and the date of its filing.

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PSC Inc.
4800 S.W. MEADOWS ROAD, SUITE 300
PORTLAND, OREGON 97035

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
July 11, 2001

TO THE SHAREHOLDERS OF PSC INC.:

The annual meeting of shareholders of PSC Inc. (the "Company") will be held
on July 11, 2001 at 9:00 a.m. at The Heathman Hotel, 1001 S.W. Broadway at
Salmon, Portland, Oregon 97205 (the "Annual Meeting") for the following
purposes:

1. To elect four (4) directors (three (3) to be elected by the holders
of all classes of voting securities and one (1) to be elected by the
holders of the Series A Preferred Shares), each to serve a three-year term.

2. To consider and act upon a proposal to amend the Company's
Certificate of Incorporation to increase the number of authorized Common
Shares from 40,000,000 shares to 100,000,000 shares.

3. To consider and act upon a proposal to amend the Company's 1994 Stock
Option Plan to increase the number of Common Shares reserved for issuance
thereunder from 2,750,000 shares to 3,750,000 shares.

4. To consider and act upon a proposal to amend the Company's 2000
Employee Stock Purchase Plan to increase the number of Common Shares
reserved for issuance thereunder from 600,000 shares to 1,000,000 shares.

5. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on June 18, 2001 as
the record date for the determination of shareholders entitled to vote at the
Annual Meeting and to receive notice thereof. The transfer books of the
Company will not be closed.

SHAREHOLDERS ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND TO MAIL
IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.

By Order of the Board of Directors

ELIZABETH J. McDONALD
Secretary

Dated: June 21, 2001
Portland, Oregon

PSC Inc.
4800 S.W. MEADOWS ROAD, SUITE 300
PORTLAND, OREGON 97035

PROXY STATEMENT
FOR
2001 ANNUAL MEETING OF SHAREHOLDERS

This Proxy Statement is furnished to shareholders of PSC Inc. (the
"Company") by the Board of Directors (the "Board") of the Company in
connection with the solicitation of the enclosed proxy for use at the annual
meeting of shareholders to be held on July 11, 2001 at The Heathman Hotel,
1001 S.W. Broadway at Salmon, Portland, Oregon 97205, at 9:00 a.m., Pacific
Daylight Time, and at any adjournment or postponement thereof (the "Annual
Meeting").

The principal executive offices of the Company are located at 4800 S.W.
Meadows Road, Suite 300, Portland, Oregon 97035, and the Company's telephone
number is 503-534-3550. The approximate date on which this Proxy Statement and
the enclosed proxy are first being sent to shareholders is June 21, 2001.

GENERAL INFORMATION

Voting at the Annual Meeting; Record Date

Only shareholders of record at the close of business on June 18, 2001 (the
"Record Date") are entitled to notice of, and to vote at, the Annual Meeting.
At the close of business on the Record Date, there were issued and outstanding
and entitled to vote at the Annual Meeting 12,458,071 common shares of the
Company, par value $.01 per share (the "Common Shares"), and 110,000 shares of
the Company's Series A Convertible Preferred Shares, par value $.01 per share
(the "Series A Preferred Shares"). (The Common Shares and the Series A
Preferred Shares are sometimes collectively referred to below as "Voting
Shares"). Each holder of Common Shares is entitled to cast one vote for each
share held of record at the close of business on the Record Date on each
matter submitted to a vote at the Annual Meeting. The holders of the Series A
Preferred Shares have the right to one vote for each Common Share into which
such Series A Preferred Shares can be converted and are entitled to vote,
together with holders of Common Shares, with respect to any matter upon which
holders of Common Shares have the right to vote. As of the Record Date, the
outstanding Series A Preferred Shares were convertible into 1,375,000 Common
Shares. Accordingly, the Voting Shares outstanding on the Record Date
represent an aggregate of 13,833,071 votes; the holders of Common Shares
having 90.1% of the votes entitled to be cast and the holders of Series A
Preferred Shares having 9.9% of the votes entitled to be cast.

Solicitation and Revocation

Proxies in the form enclosed are solicited by and on behalf of the Board.
The persons named in the proxy have been designated as proxies by the Board.
Any proxy given pursuant to such solicitation and received in time for the
Annual Meeting will be voted as specified in such proxy.

Unless contrary instructions are indicated on the proxy, all Common Shares
represented by valid proxies received pursuant to this solicitation (and not
revoked before they are voted) will be voted FOR the election of the nominees
listed below under Proxy Item 1, FOR the proposal to amend the Certificate of
Incorporation (Proxy Item 2), FOR the proposal to amend the Company's Stock
Option Plan (Proxy Item 3), FOR the proposal to amend the Company's 2000
Employee Stock Purchase Plan and, in the discretion of the proxies named on
the proxy card, with respect to any other matters properly brought before the
meeting and any adjournments thereof. The Board knows of no other matters to
be presented at the Annual Meeting. If any other matters are presented at the
Annual Meeting upon which a vote properly may be taken, the persons named in
the proxy will vote the proxies in accordance with their best judgment.

Any shareholder may revoke a proxy at any time prior to its exercise by
filing a later-dated proxy or a written notice of revocation with the
Secretary of the Company, 4800 S.W. Meadows Road, Suite 300, Portland,

Oregon 97035, or by voting in person at the Annual Meeting. If a shareholder
is not attending the Annual Meeting, any proxy or notice should be returned in
time for receipt no later than the close of business on the day preceding the
Annual Meeting. Attendance by a shareholder at the Annual Meeting does not
alone serve to revoke his or her proxy.

Quorum; Required Vote; Abstentions and Non-Votes

The presence, in person or by proxy, of the holders of a majority of the
shares entitled to be voted at the Annual Meeting is necessary to constitute a
quorum at the Annual Meeting. Shares that are voted "FOR," "AGAINST" or
"ABSTAIN" from a matter are treated as being present at the meeting for
purposes of establishing a quorum and are also treated as being entitled to
vote on the subject matter (the "Votes Cast") with respect to such matter.
While abstentions and broker non-votes will be counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, with respect to Proxy Items 3 and 4 set forth in this Proxy
Statement, they will not be considered as Votes Cast and, accordingly, will
not affect the determination as to whether the requisite majority of Votes
Cast has been obtained with respect to a particular matter. With respect to
Proxy Item 2 (the amendment of the Certificate of Incorporation), since such
proposal requires the affirmative vote of a majority of all outstanding
shares, an abstention is counted in the tabulation of Votes Cast and will have
the same legal effect as a vote against the proposal.

A broker "non-vote" occurs when a nominee holding shares for a beneficial
owner does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received
instructions from the beneficial owner.

Expenses of Solicitation

The entire cost of the solicitation of proxies will be paid by the Company.
In addition to the solicitation of proxies by mail, some of the officers and
regular employees of the Company, without extra remuneration, may solicit
proxies, personally or by telephone, telegram, letter, facsimile or other
means of communication. The Company may also request brokers, banks, nominees,
custodians, fiduciaries and others to forward soliciting material to the
beneficial owners of the Company's Common Shares and will reimburse such
persons for reasonable expenses incurred in forwarding such materials. In
addition, the Company has retained Mellon Investor Services LLC to assist in
distribution of proxy solicitation materials and collection of proxies for an
estimated fee of approximately $7,500 plus out-of-pocket expenses.

Procedure for Submitting Shareholder Proposals

At the Annual Meeting each year, the Board of Directors submits to
shareholders its nominees for election as directors. In addition, the Board of
Directors may submit other matters to the shareholders for action at the
Annual Meeting. It is anticipated that the 2002 Annual Meeting of Shareholders
will be held on May 21, 2002.

Shareholders of the Company also may submit proper proposals for inclusion
in the proxy material. These proposals must meet the shareholder eligibility
and other requirements of the Securities and Exchange Commission. In order to
be included in the Company's 2002 proxy material, a shareholder's proposal
must be received not later than January 21, 2002 by the Secretary of the
Company at the principal office of the Company, 4800 S.W. Meadows Road, Suite
300, Portland, Oregon 97035.

In addition, the Company's Bylaws provide that in order for business to be
brought before an annual meeting of shareholders, a shareholder must deliver
written notice to the Secretary of the Company not less than 90 days prior to
the date of the meeting. The notice must set forth the shareholder's name,
address and number of shares of Company stock held, a representation that the
shareholder intends to appear in person or by proxy at the meeting to make the
proposal, a description of the business to be brought before the meeting, the
reasons for conducting such business at the annual meeting, any material
interest of the shareholder in the proposal and such other information
regarding the proposal as would be required to be included in a proxy
statement. No such

notice has been received by the Company for the 2001 Annual Meeting. For the
2002 Annual Meeting of Shareholders, written notice must be delivered to the
Secretary of the Company at the principal office of the Company, 4800 S.W.
Meadows Road, Suite 300, Portland, Oregon 97035, not later than February 20,
2002.

The Bylaws also provide that if a shareholder intends to nominate a
candidate for election as a director, the shareholder must deliver written
notice of his or her intention to the Secretary of the Company. The notice
must be delivered not less than 90 days before the date of a meeting of
shareholders. The notice must set forth the name and address and number of
shares of Company stock owned by the shareholder, the name and address of the
person to be nominated, a representation that the shareholder intends to
appear in person or by proxy at the meeting to nominate the person specified
in the notice, a description of all arrangements or understandings between
such shareholder and each nominee and any other person (naming such person)
pursuant to which the nomination is to be made by such shareholder, the
business address and experience during the past five years of the nominee, any
other directorships held by the nominee, the nominee's involvement in certain
legal proceedings during the past five years and such other information
concerning the nominee as would be required to be included in a proxy
statement soliciting proxies for the election of the nominee. In addition, the
notice must include the consent of the nominee to serve as a director of the
Company, if elected. No such notice has been received by the Company for the
2001 Annual Meeting. For the 2002 Annual Meeting of Shareholders, written
notice must be delivered to the Secretary of the Company at the principal
office of the Company, 4800 S.W. Meadows Road, Suite 300, Portland, Oregon
97035 no later than February 20, 2002.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

Set forth below is information regarding beneficial ownership of any class
of the Company's Voting Shares as of June 18, 2001 (except as otherwise noted
below) by (i) each entity or person known by the Company to be the beneficial
owner of more than five percent (5%) of any class of the Company's voting
shares, (ii) each of the Company's current directors and nominees to the Board
of Directors, (iii) each of the Company's executive officers named in the
Summary Compensation Table, and (iv) all current directors, director nominees
and executive officers of the Company as a group. The information as to each
person and entity has been furnished by such person and entity, and, except as
noted, each person and entity named in the table has sole voting and
investment power with respect to all shares shown as beneficially owned by
such person or entity.

Certain Beneficial Owners

Name and Address Shares of Class Percentage of Class
of Beneficial Owner Title of Class Beneficially Owned Beneficially Owned
------------------- ------------------ ------------------ -------------------

Dr. Romano Volta (1) Series A Preferred 110,000 100%
Hydra S.p.A. Shares
Via Massino D'Azeglio
57
40123 Bologna, Italy Common Shares 1,991,251 14.20%

Whelan & Gratny Capital Common Shares 1,047,887 8.53%
Management (2)
611 Santa Cruz Avenue,
Suite C
Menlo Park, CA 94025

Stadium Capital Common Shares 723,300 5.89%
Management, LLC
and related parties
(3)
430 Cowper Street,
Suite 200
Palo Alto, CA 94301

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(1) Hydra Investissements S.A. ("Hydra Investissements"), a Luxembourg
corporation, is the record owner of 110,000 Series A Preferred Shares and
a warrant ("Warrant") to purchase 180,000 Common Shares. The Series A
Preferred Shares are convertible into Common Shares at the rate of one
Series A Preferred Share for 12.5 Common Shares (subject to adjustment in
certain circumstances). As adjusted to reflect the conversion, Hydra
Investissements owns beneficially 1,375,000 Common Shares. The Warrant is
currently exercisable and accordingly Hydra Investissements owns
beneficially 180,000 Common Shares. On its Schedule 13D dated September
22, 1997, filed with the Securities and Exchange Commission, Hydra
Investissements reported that it has shared voting and dispositive power
with respect to all of the 1,555,000 Common Shares beneficially owned by
it. Dr. Volta directly owns 426,501 Common Shares with sole voting and
dispositive power and may be deemed to be beneficial owner, with shared
voting and dispositive power, of the 1,555,000 Common Shares beneficially
owned by Hydra Investissements by reason of the ownership by Hydra S.p.A.
("Hydra") of 100% of the capital stock of Hydra Investissements and the
ownership by Dr. Volta of 50% of the capital stock of Hydra. Dr. Volta
also beneficially owns 9,750 Common Shares which are subject to options
currently exercisable.
(2) Based on Schedule 13F filed with the Securities and Exchange Commission on
February 12, 2001, Whelan & Gratny Capital Management reported that it had
sole voting power and sole investment power with respect to 831,887 shares
and shared voting power and shared investment power with respect to
216,000 shares. Whelan & Gratny Capital Management is an institutional
investment manager.
(3) Based on Schedule 13G filed on April 20, 2000, the Company has been
advised that Stadium Capital Management, LLC, a Delaware limited liability
company ("SCM"), has shared voting power and shared dispositive power with
respect to 723,300 shares; Stadium Capital Partners, L.P., a California
limited partnership ("SCP"), has shared voting power and shared
dispositive power with respect to 723,300 shares;

Alexander M. Seaver ("Seaver") has shared voting power and shared
dispositive power with respect to 723,300 shares and Bradley R. Kent
("Kent") has shared voting power and shared dispositive power with respect
to 723,300 shares. SCM is an investment advisor whose clients have the
right to receive or the power to direct the receipt of dividends from, or
the proceeds from the sale of, the shares. SCP is a client of SCM. Seaver
and Kent are the managers of SCM.

Security Ownership of Directors and Executive Officers

Common Shares Percent
Name of Beneficial Owner Beneficially Owned Beneficially Owned
------------------------ ------------------ ------------------

Jay M. Eastman*......................... 115,725(1)(2) +
Robert S. Ehrlich*...................... 410,645(1)(3) 3.30%
Thomas J. Morgan*....................... 29,380(1) +
James C. O'Shea*........................ 30,174(1) +
Terry R. Peets*......................... -- +
Jack E. Rosenfeld*...................... 58,152(1)(4) +
Serge Thill**...........................
Roberto Tunioli*........................ 1,208 +
Bert W. Wasserman*...................... 106,500(1) +
Edward J. Borey*........................ -- +
Robert C. Strandberg.................... 470,581(1) 3.70%
Cecil F. Bowes.......................... 69,245(1) +
Nigel P. Davis.......................... 34,461(1) +
G. Lloyd West........................... 100,000(1) +
George A. Plesko........................ 6,519(1) +
All current directors, director nominees
and executive officers as a group
including those named above (24
persons)............................... 1,625,489(5) 12.09%

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* Current member of the Board of Directors of the Company
** Nominee to the Board of Directors
+ Less than 1%
(1) Includes the following Common Shares subject to acquisition by the
exercise of stock options which are, or within 60 days after June 18, 2001
will be, exercisable and are therefore deemed under Securities and
Exchange Commission regulations to be beneficially owned: Messrs. Morgan
and Rosenfeld, 22,750 shares each; Mr. O'Shea, 16,250 shares; Mr. Ehrlich,
179,145 shares; Dr. Eastman, 102,203 shares; Mr. Wasserman, 56,500 shares;
Mr. Bowes, 61,250 shares; Mr. Davis, 31,250 shares; Mr. Plesko, 5,000
shares; Mr. Strandberg, 423,846 shares; Mr. West, 100,000 shares.

(2) Includes 3,121 shares held by Dr. Eastman's wife, and 7,232 shares held by
his son.

(3) Includes 15,000 shares held by Ehrlich & Co., 80,000 shares held in the R.
S. Ehrlich & Co. Pension Plan Trust (the pension plan for Ehrlich & Co.)
and 50,000 shares held by Red Lion Enterprises, Inc. Mr. Ehrlich is the
senior partner in Ehrlich & Co. and may be deemed to be in control of that
partnership. Red Lion Enterprises, Inc. is a corporation wholly-owned by
Mr. Ehrlich and his wife. Accordingly, Mr. Ehrlich may be deemed to
beneficially own the shares owned by Ehrlich & Co., by the R. S. Ehrlich &
Co. Pension Plan Trust, and by Red Lion Enterprises, Inc.

(4) Includes 10,000 shares held by Solana Inc. (Pension Plan), a corporation
wholly-owned by Mr. Rosenfeld and his wife. Accordingly, Mr. Rosenfeld may
be deemed to beneficially own the shares owned by Solana Inc.
(5) Includes 1,157,819 shares subject to acquisition by the exercise of stock
options which are, or within 60 days after June 18, 2001 will be,
exercisable.

ELECTION OF DIRECTORS
(Proxy Item 1)

The Company's Restated Certificate of Incorporation provides that the
number of directors on the Board shall be fixed from time to time by the Board
but shall not be less than nine nor more than 20 persons and further provides
for a Board of Directors to serve in three classes having staggered terms of
three years each. The number of members constituting the Board is currently
fixed at ten. At present, however, there are nine directors, seven of whom
have been elected by the holders of the Common Shares, one of whom has been
elected by the holders of the Series A Convertible Preferred Shares, and one
of whom has been appointed by the Board of Directors.

Under the Company's Restated Certificate of Incorporation, as amended, so
long as Hydra Investissements S.A. holds at least 27,500 Series A Convertible
Preferred Shares, the holders of Series A Convertible Preferred Shares have
the exclusive right, voting separately as a class, to elect one director (the
"Series A Director") and are entitled to vote together with the holders of the
Common Shares as a single class in the election of the other directors. On
June 5, 2000, the holders of the Series A Preferred Shares elected Roberto
Tunioli as the Series A Director to fill the vacancy caused by the resignation
of Dr. Romano Volta, who had been the Series A Director since September 1997.
Mr. Tunioli has resigned as the Series A Director effective July 11, 2001.

Four directors have terms of office expiring at the 2001 Annual Meeting of
Shareholders (one of whom is the Series A Director and one of whom is Edward
J. Borey, the Company's President and Chief Executive Officer, who was
appointed a director by the Board in December 2000); three directors have
terms of office expiring at the 2002 Annual Meeting; and two directors have
terms of office expiring at the 2003 Annual Meeting.

Nominations of persons for election to the Board of Directors may be made
at a meeting of shareholders only (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Company entitled to vote for the
election of directors at the meeting who complies with the notice procedures
set forth in the Company's Bylaws. See "GENERAL INFORMATION--Procedure for
Submitting Shareholder Proposals."

At this Annual Meeting, four persons will be nominated to serve until the
Annual Meeting in 2004 and until their successors are elected and shall have
qualified. The four nominees are Edward J. Borey, Robert S. Ehrlich, Jack E.
Rosenfeld and Serge Thill, the nominee for Series A Director, who will replace
Mr. Tunioli, the current Series A Director.

Only the holders of the Series A Preferred Shares will be able to vote with
respect to the election of Mr. Thill. The holders of Common Shares and Series
A Preferred Shares, voting together as a class, are entitled to vote with
respect to the election of the other three nominees standing for election.
Unless otherwise specified by the shareholders, it is intended that the shares
represented by proxies will be voted for the three nominees. Proxies for the
Annual Meeting may not be voted for more than the three nominees named.

All nominees have consented to serve if elected, but if any of the nominees
becomes unable or unwilling to serve at the time of the Annual Meeting, the
shares represented by proxy will be voted for the remaining nominee(s) and for
any substitute nominee(s) designated by the Board of Directors. The Board of
Directors does not anticipate that any nominee will be unavailable or unable
to serve.

Following the Annual Meeting, there will remain one vacancy on the Board.
The Board is currently considering potential candidates to fill the vacancy on
the Board and, accordingly, the Board has not taken any action to reduce the
size of the Board.

For the election of directors, only proxies and ballots marked "FOR all
nominees", "WITHHELD for all nominees" or specifying that votes be withheld
for one or more designated nominees are counted to determine the total number
of votes cast; votes that are withheld are excluded entirely from the vote and
will have no effect.

Abstentions will have no effect on the vote for the election of directors.
Directors are elected by a plurality of the votes cast. That means the three
nominees will be elected if they receive more affirmative votes than any other
nominees.

The Board of Directors recommends that shareholders vote FOR the nominees
named in this Proxy Statement.

Information Concerning Nominees for Directors and other Incumbent Members of
the Board of Directors

Certain biographical and other information about the nominees for election
as directors and the directors continuing in office is presented as follows.
The ages of the directors are as of June 18, 2001.

Nominees for directors to be elected by holders of Voting Shares for a three-
year term expiring in 2004:

Edward J. Borey, age 50, has served as President, Chief Executive Officer
and a director since December 2000. Prior to joining the Company, Mr. Borey
was President and CEO of TranSenda (May 2000 to December 2000). Previously,
Mr. Borey held senior positions in the automated data collection industry. At
Intermec Technologies Corporation (1995-1999), he was Executive Vice President
and Chief Operating Officer and also Senior Vice President/General Manager of
the Intermec Media subsidiary. Prior to that, Mr. Borey also held Vice
President/General Manager positions at Paxar (1992-1995) and at Monarch
Marketing Systems (1989-1992). Mr. Borey also held senior marketing positions
at companies in the retail automation industry, including Seimans Nixdorf, ICL
and National Semiconductor Datachecker. Currently, Mr. Borey serves as a Board
member at Centura Software, recently renamed MBrane, and he is on the Advisory
Board of TranSenda Software and NextRx. Mr. Borey holds a B.S. degree in
Economics from the State University of New York, College of Oswego; an M.A.
degree in Public Administration from the University of Oklahoma and an M.B.A.
degree in Finance from Santa Clara University.

Robert S. Ehrlich, age 63, has served as a director of the Company since
1983, has been Chairman of the Board of Directors since April 1997 and was
interim Co-Chief Executive Officer from August 25, 2000 until December 4,
2000. He was Vice Chairman of the Board of Directors from February 1997 until
April 1997. He was also Chairman of the Board of Directors from December 1987
until July 1992. From January 1995 until December 1996, Mr. Ehrlich was
engaged to provide consulting services to the Company. From August 1991 until
December 1994, Mr. Ehrlich was employed by the Company as a senior management
executive. Mr. Ehrlich has been Chairman of the Board of Electric Fuel Company
("EFC") since January 1993 and Chief Financial Officer of EFC since May 1991.
EFC is an Israel-based company engaged in the research, development and
commercialization of advanced zinc air battery products.

Jack E. Rosenfeld, age 62, has served as a director of the Company since
1989. He has been President and Chief Executive Officer of Potpourri
Collection, Inc., a consumer catalog company in Medfield, Massachusetts, since
1998. Prior thereto, he was President and Chief Executive Officer of Hanover
Direct, Inc. (formerly Horn & Hardart Co.) from September 1990 until January
1996 and President and Chief Executive Officer of its direct marketing
subsidiary from May 1988 until January 1996. He is also a director of EFC and
Thane International, an electronic retailer.

Nominee for director to be elected by holders of Series A Preferred Shares for
a three-year term expiring in 2004:

Serge Thill, age , is being elected to the Board for the first time by
the holders of the Series A Preferred Shares.

Directors whose terms expire in 2002:

Dr. Jay M. Eastman, age 52, has served as a director of the Company since
April 1996. He also served as Senior Vice President, Strategic Planning from
December 1995 until October 1997 and as Executive Vice President of the
Company from December 1987 until December 1995. Dr. Eastman is President,
Chief Executive Officer and major shareholder of Lucid, Inc., Rochester, New
York, a corporation he founded in November 1991. Lucid designs and
manufactures custom electro-optical instrumentation for application in fields
such as desktop publishing and medical diagnosis. Dr. Eastman holds Ph.D. and
Bachelor degrees in Optics from the University of Rochester and is an inventor
on 18 United States patents owned by the Company. Dr. Eastman is also a
director of EFC and Centennial Technologies, Inc., Wilmington, Massachusetts,
a manufacturer of PC card-based solutions to original equipment manufacturers.

Thomas J. Morgan, age 65, has served as a director of the Company since
April 1996. Mr. Morgan was the President and Chief Executive Officer from
October 1984 until January 1993 and Chairman of the Board from January 1993
until January 1995 of Verax Systems, Inc., Rochester, New York, a manufacturer
of data collection and specialized software for statistical process control.
Mr. Morgan is also a director of Tru II Form, Inc., Seal Beach, California, a
woman's fitness studio.

Bert W. Wasserman, age 68, has served as a director of the Company since
May 1999. He was interim Co-Chief Executive Officer from August 25, 2000 until
December 4, 2000. Mr. Wasserman served as Executive Vice President and Chief
Financial Officer of Time Warner, Inc. from 1990 until his retirement in 1995
and served on the Board of Directors of Time Warner, Inc. and its predecessor
company, Warner Communications, Inc., from 1981 to 1995. He joined Warner
Communications, Inc. in 1966 and had been an officer of that company since
1970. Mr. Wasserman is a director of several investment companies in the
Dreyfus Family of Funds. He is a director of Malibu Entertainment
International, Inc., Winstar Communications, Inc. and Lillian Vernon
Corporation.

Directors whose terms expire in 2003:

James C. O'Shea, age 55, has served as a director of the Company since
1989. He has been Chairman of the Board and Chief Executive Officer of Bioject
Medical Technologies, Inc., a medical device manufacturer of needle-free
injection systems in Portland, Oregon, since April 1995. Prior thereto, he was
President of Biopure Corporation, a biotechnology company in Cambridge,
Massachusetts, from January 1989 until April 1995.

Terry R. Peets, age 56, has served as a director of the Company since
December 2000. Mr. Peets has been Chairman of the Board of Bruno's
Supermarkets, Inc. since 1999. He served as President, Chief Executive Officer
and director of PIA Merchandising Company, Inc., a provider of nationwide
retail merchandising services, from 1997 until 1999, and as Executive Vice
President of The Vons Companies, Inc., a supermarket chain in Southern
California, from 1995 until 1997. From 1977 until 1995, Mr. Peets served in
various sales, marketing and operation roles for Ralphs Grocery Co., the most
recent of which was as Executive Vice President (1993-1995). Mr. Peets is also
a director of Diamond Brands Inc., a consumer products company, and Super
Markets Online, a division of Catalina Marketing Corporation, a provider of
in-store electronic marketing services.

Information Regarding the Board and its Committees

The Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing the overall performance of the Company
and its subsidiaries and appoints the corporate officers of the Company who
are responsible for conducting business on a day-to-day basis. In 2000, the
Board of Directors held eight meetings.

To assist in the discharge of its responsibilities, the Board of Directors
has established four standing committees: an Audit Committee, a Compensation
Committee, an Executive Committee, and a Strategic Planning/Intellectual
Property Committee. There is currently no standing Nominating Committee.

The Audit Committee has the responsibility for recommending the appointment
of the Company's outside auditors, reviewing the scope and results of audits,
and reviewing internal accounting controls and systems. These reviews include
meetings with the independent auditors and representatives of management, as
well as separate and private meetings with the independent auditors to ensure
that the scope of their activities had not been restricted and that adequate
responses to their recommendations had been received. In addition, the Audit
Committee reviews the estimated fees and types of non-audit services to be
rendered to the Company by the independent accountants for the coming year.
The Audit Committee monitors compliance with the Company's Code of Conduct,
its conflict of interest policy and its policy concerning trading in the
Company's securities and it reviews senior level accounting, auditing and
financial personnel performance and succession planning. The minutes of the
Audit Committee meetings as well as all of the recommendations of the Audit
Committee are submitted to the full Board of Directors. The Audit Committee,
currently consisting of Messrs. Wasserman (Chairman), Morgan and Peets, held
two meetings in 2000.

The Executive Committee is authorized to exercise the powers of the Board
of Directors in the interval between regular meetings of the Board and serves
as the investment committee of the Board. The Executive Committee, currently
consisting of Messrs. Ehrlich (Chairman), Borey, Eastman, O'Shea and
Rosenfeld, held six meetings in 2000.

The Compensation Committee reviews and approves the Company's compensation
philosophy covering executive officers and other key management employees,
reviews the competitiveness of the Company's total compensation practices,
reviews and approves the terms and conditions of proposed incentive plans
applicable to executive officers and other key employees, approves and
administers the Company's 1994 Stock Option Plan and any other stock option
plan of the Company, approves and administers the Company's Employee Stock
Purchase Plans, reviews and makes recommendations with respect to management
compensation, including salaries and bonus awards, examines the impact and
effect of various benefits and incentive plans and reviews and recommends
changes or amendments to such programs to the Board, and reviews and approves
special hiring and severance arrangements with executive officers. The
Compensation Committee, currently consisting of Messrs. O'Shea (Chairman),
Morgan, Rosenfeld and Tunioli, held two meetings during 2000.

The Strategic Planning/Intellectual Property Committee has the
responsibility for monitoring and providing oversight with respect to the
Company's strategic planning process and for working with management in the
development of strategic priorities. The Strategic Planning/Intellectual
Property Committee, formed in December 2000 and currently consisting of
Messrs. Morgan (Chairman), Borey, Eastman, Peets and Tunioli, did not meet in
2000.

In 2000, each director attended 75% or more of the meetings held by the
Board of Directors and the committees on which the director served.

Compensation of Directors

In 2000, each non-employee director was paid $500 for each Board and
Committee meeting attended by him, except that no more than $500 was paid if
more than one meeting occurred on the same day. Also, each non-employee
director received a retainer at the annual rate of $12,500 (the "Director
Retainer"), and each Chairman of a Board Committee (except Mr. Erhlich)
received an additional annual retainer of $2,500 (the "Chairman Retainer").
Both the Director Retainer and the Chairman Retainer were paid in four equal
installments on the last day of each calendar quarter. For 2000, an aggregate
of $147,417 in meeting fees and retainers was paid in cash or in stock to the
non-employee directors. Each non-employee director is also reimbursed the
reasonable expenses incurred in attending the meeting. As noted below, Mr.
Wasserman received no fees as a non-employee director between September 1,
2000 and December 31, 2000.

Pursuant to the PSC Inc. Compensation Plan for Non-Employee Directors, non-
employee directors have the opportunity to receive payment of their
compensation either in cash or in Common Shares. The directors may also elect
to receive their compensation either currently or on a deferred basis. During
2000, no director chose to

defer his compensation. If the amount to be deferred would have been payable
in cash, the Company will credit a Deferral Account maintained for the
director with an amount that would otherwise have been payable to the director
in cash. If the amount to be deferred would have been payable in stock, the
Company will credit units ("Stock Units") to a Unit Account maintained for the
director. Directors make separate elections with respect to the manner of the
payment of the compensation and the time of the payment of the compensation.
The number of Common Shares issued or the number of Stock Units credited to a
director's account will equal the cash amount of the compensation divided by
the fair market value of one share of stock on the date on which such cash
amount would otherwise have been paid. Stock Units and amounts in a Deferral
Account are fully vested at all times. Payment of Stock Units (in full Common
Shares) and the amounts in a Deferral Account must be deferred at least one
year. The director chooses the date of the payment, which may be upon
termination of service as a director. The maximum number of Common Shares that
may be issued under the Plan is 50,000 shares. At December 31, 2000, all such
shares had been issued.

The Company's 1994 Stock Option Plan (the "1994 Plan") provides that each
member of the Board of Directors who is not also an employee or consultant of
the Company will automatically receive on the date of the Annual Meeting of
Shareholders a stock option for 6,500 Common Shares. On the date of the 2000
Annual Meeting of Shareholders, non-employee director stock options ("NEDSOs")
to purchase 6,500 shares were granted to each non-employee director, at a
purchase price of $1.625 per share, the fair market value on the date of the
grant. Said NEDSOs are exercisable in their entirety on December 5, 2001 and
terminate on December 5, 2005. No NEDSOs were granted to Messrs. Ehrlich,
Strandberg or Borey in 2000.

In May 1998, the Board approved a compensation agreement with Mr. Ehrlich,
Chairman of the Board, which was amended in December 1998 and July 1999 (the
agreement, as amended, is referred to as the "1998 Ehrlich Agreement") and
which expired on December 31, 2000. Pursuant to the 1998 Ehrlich Agreement,
for all services rendered to the Company as Chairman of the Board and as a
consultant in such areas as strategic planning, corporate development, mergers
and acquisitions and development of overseas markets, Mr. Ehrlich received
compensation at the annual rate of $85,000. In 2000, Mr. Ehrlich received an
aggregate of $56,667 pursuant to the 1998 Ehrlich Agreement and was also
reimbursed for expenses incurred in the performance of his duties. As noted
below, Mr. Ehrlich received no compensation under the 1998 Ehrlich Agreement
between September 1, 2000 and December 31, 2000. The 1998 Ehrlich Agreement
includes confidentiality and non-compete provisions and provides for a
severance payment upon the termination of his position as Chairman of the
Board as the result of a change-in-control in an amount equal to 2.9 times his
annual rate of compensation to be paid over a period of three years. Pursuant
to the 1998 Ehrlich Agreement, effective as of March 25, 2000, Mr. Ehrlich
received an option for 17,500 Common Shares, at an exercise price of $6.00 per
share (the Fair Market Value of the Company's Common Shares on the date of
grant). This option represented a 50% reduction in the size of the option
grant to which he otherwise would have been entitled. Of the 17,500 stock
options granted, options for 8,750 shares will vest as follows: 2,188 on March
25, 2001; 2,187 on March 25, 2002; 2,188 on March 25, 2003; and 2,187 on March
25, 2004. The remaining 8,750 shares will not vest unless and until certain
performance levels for the Company's Common Shares are attained--with respect
to 2,916 shares, at such time as the Fair Market Value of the Company's Common
Shares equals or exceeds $7.98 per share for seven consecutive days; with
respect to 2,917 shares, at such as the Fair Market Value of the Company's
Common Shares equals or exceeds $9.41 per share for seven consecutive days and
with respect to 2,917 shares, at such time as the Fair Market Value of the
Company's Common Shares equals or exceeds $10.92 per share for seven
consecutive days. If the specified performance goals are not reached, the
options will nevertheless become fully exercisable after December 1, 2004 in
order to maintain favorable accounting treatment. The options will expire on
March 25, 2005. In the event of a change-in-control and if Mr. Ehrlich becomes
entitled to receive the severance payment set forth above, all of his options
will immediately vest.

Effective October 23, 2000, all options held by directors were repriced to
$2.50 per share. See "EXECUTIVE OFFICER COMPENSATION--Option Repricing and
Ten-Year Option Repricing Table."

Other Remuneration Arrangements

With respect to Messrs. Ehrlich and Wasserman, also see "EXECUTIVE OFFICER
COMPENSATION--Overview, Summary Compensation Table, and Other Remuneration
Arrangements."

Directors' and Officers' Liability Insurance Policy

The Company has an insurance policy for $15,000,000 effective until January
20, 2002, which protects its officers and directors against losses which
certain persons may incur because of their acts or omissions as officers or
directors. The policy is underwritten by Great American Insurance Company at
an aggregate premium of $218,750 for a two-year period.

EXECUTIVE OFFICER COMPENSATION

Overview

On August 22, 2000, Robert C. Strandberg resigned as President and Chief
Executive Officer and as a director of the Company, and Messrs. Robert S.
Ehrlich, Chairman of the Board, and Bert W. Wasserman, a director, were
appointed interim Co-Chief Executive Officers and served as such until
December 4, 2000 when Edward J. Borey was appointed President and Chief
Executive Officer. The following data incorporates compensation data resulting
from Mr. Strandberg's resignation and the appointment of Messrs. Ehrlich and
Wasserman as interim Co-Chief Executive Officers. For information regarding
remuneration to Messrs. Ehrlich and Wasserman as directors, see "ELECTION OF
DIRECTORS--Compensation of Directors."

Summary Compensation Table

Set forth below is information concerning the cash and non-cash
compensation for services in all capacities to the Company for the fiscal
years 2000, 1999 and 1998 received by (i) all persons who served as the Chief
Executive Officer in 2000 and (ii) the four other most highly paid executive
officers in the employ of the Company at December 31, 2000 (the individuals in
(i) and (ii), collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

Long-term
Annual Compensation Compensation Awards
--------------------------------- -------------------------
Other Annual Restricted Securities All Other
Name & Principal Salary Bonus Compensation Stock Underlying Compensation
Position Year ($) ($)(1) ($)(2) Awards ($)(3) Options (#) ($)(4)
---------------- ---- -------- -------- ------------ ------------- ----------- ------------

Edward J. Borey(5)...... 2000 $ 13,846 -- $ 2,724 -- 500,000 --
President and Chief
Executive Officer
and Director

Robert C. Strandberg(6). 2000 $215,815 -- $ 47,453 -- 37,500 $125,435
President and Chief 1999 319,800 $152,208 50,442 -- 37,500 5,000
Executive Officer 1998 165,000(7) 133,380 132,170 $403,125 -- 4,500

Cecil F. Bowes.......... 2000 $261,646 -- -- -- -- $ 3,182
Vice President, Sales-- 1999 243,995 -- -- -- 5,000 3,007
The Americans, Asia 1998 196,316 $ 75,005 -- -- 3,012
Pacific Rim --

G. Lloyd West(8)........ 2000 $228,027 -- $ 34,696 -- -- $ 43,650
Senior Vice President-- 1999 42,986 -- 83,515 -- 100,000 --
Global Sales Operations

Nigel P. Davis.......... 2000 $215,390 -- $ 29,691 -- -- --
Vice President, Sales-- 1999 227,326 -- 30,366 -- 5,000 --
Europe, Middle East, 1998 234,705 $ 90,789 -- -- --
Africa --

George A. Plesko(9)..... 2000 $200,000 -- $ 20,238 -- 20,000 $ 2,308
Senior Vice President 1999 -- -- -- -- -- --

Robert S. Ehrlich(10)... 2000 $ 72,000 -- -- -- 25,000 --
Interim Co-Chief
Executive Officer and
Director

Bert W. Wasserman(10)... 2000 $ 72,000 -- -- -- 50,000 --
Interim Co-Chief
Executive Officer and
Director

--------
(1) For 1999, the amounts in this column reflect annual incentive awards under
the Company's Management Incentive Plan ("MIP"). For 1998, the amounts in
this column reflect bonus payments made in lieu of stock options.

(2) Except as noted, none of the Named Executive Officers received personal
benefits in excess of the lesser of $50,000 or 10% of such individual's
reported salary and bonus for 2000, 1999 or 1998. The amounts in this
column for 2000 include the following: Mr. Borey--$2,724 for automobile
expenses and premiums on enhanced life and disability policies; Mr.
Strandberg--$47,453 for automobile expenses, club membership dues and fees
and premiums on enhanced life and disability insurance policies; Mr.
West--$34,696 for automobile expenses, club membership dues and fees and
premiums on enhanced life and disability insurance policies; Mr. Davis--
$29,691 for automobile expenses and premiums on enhanced life and
disability insurance policies; Mr. Plesko--$20,238 for automobile expenses
and premiums on enhanced life and disability insurance policies.
The amounts in this column for 1999 include the following: Mr. Strandberg--
$50,442 for automobile expenses, club membership dues and fees and premiums
on enhanced life and disability policies; Mr. West--$70,000 for sign-on
bonus and other amounts for automobile expenses and premiums on enhanced
life and disability policies; Mr. Davis--$30,366 for automobile expenses
and premiums on enhanced life and disability policies.
The amounts in this column for 1998 include the following: Mr. Strandberg--
$97,412 for relocation expenses and other amounts for automobile expenses,
club membership dues and fees, and premiums on enhanced life and disability
insurance policies, and a related tax gross-up.
(3) Restricted stock awards are valued in the table above at their fair market
value based on the closing price for the Company's Common Shares as
reported by The Nasdaq Stock Market(R) on the date of award. On March 25,
1998, Mr. Strandberg was awarded 37,500 restricted shares. The closing
price of the Company's Common Shares on that date was $10.75. At the end
of the 1998 fiscal year, the fair market value of Mr. Strandberg's
restricted stock holdings was $356,250, based upon the closing price of
the Company's Common Shares on December 31, 1998 of $9.50. As set forth in
the original award, the restrictions on 50% of such shares would lapse in
four equal annual installments on March 25, 1999, March 25, 2000, March
25, 2001 and March 25, 2002 so long as Mr. Strandberg was an officer on
such dates. The restrictions on the other 50% of the shares would not
lapse unless and until certain performance levels for the Company's shares
were attained--with respect to 6,250 shares, at such time as the trading
price of the Company's Common Shares equals or exceeds $14.30 per share
for seven consecutive days at any time prior to March 25, 2002; with
respect to 6,250 shares, at such time as the trading price of the
Company's Common Shares equals or exceeds $16.87 per share for seven
consecutive days at any time prior to March 25, 2002; and with respect to
6,250 shares, at such time as the trading price of the Company's Common
Shares equals or exceeds $19.57 per share for seven consecutive days at
any time prior to March 25, 2002. If the trading price of the shares did
not reach the specified performance levels by March 25, 2002, all shares
still subject to the restrictions would be returned to or cancelled by the
Company. In connection with Mr. Strandberg's resignation, the Board, as of
August 22, 2000, waived all restrictions still remaining on the shares and
all of the restrictions were deemed to have lapsed. See "EXECUTIVE
COMPENSATION--Employment Contracts and Severance and Change-in-Control
Agreements--Robert C. Strandberg."
(4) The amounts in this column for 2000 consist of the following:
(a) The Company's matching contributions to its 401(k) Plan as follows: Mr.
Strandberg--$5,250; Mr. Bowes--$3,182; Mr. West--$1,641; Mr. Plesko--
$2,308.
(b) The amounts paid pursuant to severance agreements: Mr. Strandberg--
$120,185; Mr. West--$42,009.
The amounts in this column for 1999 consist of the following:
The Company's matching contributions to its 401(k) Plan as follows: Mr.
Strandberg--$5,000; Mr. Bowes--$3,007.
The amounts in this column for 1998 consist of the following:
The Company's matching contributions to its 401(k) Plan as follows: Mr.
Strandberg--$4,500; Mr. Bowes--$3,012.
(5) Mr. Borey joined the Company as President and Chief Executive Officer on
December 4, 2000. See "EXECUTIVE COMPENSATION--Employment Contracts and
Severance and Change-in-Control Agreements--Edward J. Borey."

(6) Mr. Strandberg resigned as President and Chief Executive Officer on August
22, 2000. See "EXECUTIVE COMPENSATION--Employment Contracts and Severance
and Change-in-Control Agreements--Robert C. Strandberg."
(7) The amount set forth as salary for 1998 represents the cash payment to Mr.
Strandberg for the period June 1, 1998 through December 31, 1998. Pursuant
to his Employment Agreement, Mr. Strandberg elected to receive all of his
base salary ($240,000) for the period between June 1, 1997 and May 31,
1998 in the form of stock options. Accordingly, on June 2, 1997, Mr.
Strandberg received a stock option to purchase 73,846 shares at an
exercise price of $6.50 per share (the fair market value of the Company's
Common Shares on the date of grant). Said option vested in four equal
quarterly installments on August 31, 1997, November 30, 1997, February 28,
1998 and May 31, 1998 and, as amended, expired on December 31, 2000.
(8) Mr. West terminated employment on October 17, 2000. See "EXECUTIVE
COMPENSATION--Employment Contracts and Severance and Change-in-Control
Agreements--Severance/Change-in-Control Agreements."
(9) Mr. Plesko joined the Company on December 21, 1999 in connection with the
acquisition of GAP Technologies, Inc. and GEO Labs, Inc.
(10) Messrs. Wasserman and Ehrlich were interim Co-Chief Executive Officers
from August 25, 2000 to December 4, 2000, at which time Edward J. Borey
joined the Company as President and Chief Executive Officer.

Options and Stock Appreciation Rights

The following tables summarize option grants to, and exercises by, the
Named Executive Officers in fiscal 2000, and the value of the options held by
such persons at the end of fiscal 2000. No stock appreciation rights have ever
been granted by the Company.

OPTION GRANTS IN 2000

Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term(1)
----------------------------------------------------------- -----------------
Percent of
Number of Total
Securities Options Granted Exercise or
Underlying to Employees in Base Price Expiration
Name Options Granted (#) Fiscal 2000(2) ($/Share)(3) Date(4) 5% ($) 10% ($)
---- ------------------- --------------- ------------ ---------- -------- --------

Edward J. Borey(5)...... 500,000 48.8% $1.750 12/4/05 $241,746 $534,196

Robert C. Strandberg(6). 37,500 3.7% $6.000 3/25/05 $ 62,163 $137,365

George A. Plesko(7)..... 20,000 2.0% $2.500 1/3/05 $ 13,814 $ 30,526

Robert S. Ehrlich(8).... 25,000 2.4% $3.594 8/25/05 $ 24,824 $ 54,854

Bert W. Wasserman(8).... 50,000 4.9% $3.594 8/25/05 $ 49,648 $109,709

--------
(1) The potential realizable value portion of the table illustrates the value
that might be realized upon exercise of the options immediately prior to
the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Shares over the term of the options.
This hypothetical value is based entirely on assumed annual growth rates
of 5% and 10% in the Company's stock price over the term of the options
granted in 2000. The assumed rates of growth were selected by the
Securities and Exchange Commission for illustration purposes only, and are
not intended to predict future performance and prospects. These numbers do
not take into account provisions of certain options providing for
termination of the option following termination of employment,
nontransferability or vesting over various periods.
(2) Percentages indicated are based on a total of 1,025,000 options granted to
21 individuals (13 employees and 8 directors) during 2000.

(3) The exercise price per share is 100% of fair market value of the Company's
Common Shares on the date of grant.
(4) All stock options expire five years from the date of grant.
(5) See "EXECUTIVE COMPENSATION--Employment Contracts and Severance and
Change-in-Control Arrangements--Edward J. Borey."
(6) See "EXECUTIVE COMPENSATION--Employment Contracts and Severance and
Change-in-Control Arrangements--Robert C. Strandberg."
(7) See "EXECUTIVE COMPENSATION--Employment Contracts and Severance and
Change-in-Control Arrangements--George A. Plesko."
(8) See "EXECUTIVE COMPENSATION--Other Remuneration Arrangements."

AGGREGATE OPTION EXERCISES IN 2000
AND 2000 YEAR-END OPTION VALUES

Number of Value of Unexercised
Securities Underlying In-the-Money Options
Unexercised Options at December 31, 2000
at December 31, 2000 (#) ($)(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------

Edward J. Borey......... -- 500,000 -- --
Robert C. Strandberg.... -- -- 423,846 -- -- --
Cecil F. Bowes.......... -- -- 61,250 3,750 -- --
G. Lloyd West........... -- -- 100,000 -- -- --
Nigel P. Davis.......... -- -- 23,750 11,250 -- --
George A. Plesko........ -- -- -- 20,000 -- --
Robert S. Ehrlich....... -- -- 149,770 78,230 -- --
Bert W. Wasserman....... -- -- 3,250 59,750 -- --

--------
(1) The closing price for the Company's Common Shares as reported by The
Nadsaq Stock Market(R) on December 31, 2000 was $0.75. Value is calculated
on the basis of the difference between the option price and $0.75
multiplied by the number of Common Shares underlying the option. An option
is in-the-money if the market value of the Common Shares subject to the
option exceeds the option price.

Option Repricing and Ten-Year Option Repricing Table

On October 23, 2000, the Board of Directors approved the repricing of all
stock options held by employees, including executive officers, on that date.
Options for approximately 1,159,000 shares, held by approximately 154 persons,
were repriced to $2.50 per share, the closing price of the Company's Common
Shares on The Nasdaq Stock Market(R) on October 23, 2000. All other terms and
conditions contained in the original stock options remained in effect. In
addition, effective on October 23, 2000, all stock options held by the
directors were repriced to $2.50 per share. Also, in November 2000, the Board
of Directors approved the repricing of stock options held by L. Michael Hone,
the Company's former Chief Executive Officer. See "Interests of Directors and
Management in Certain Transactions."

The following table sets forth, for all executive officers and directors of
the Company, all option repricings during the period January 1, 1991 through
December 31, 2000.

TEN-YEAR OPTION/SAR REPRICINGS

Length of
Number of Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Remaining At
Options Time of Time of New Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name and Title Date Amended Amendment Amendment Price Amendment
-------------- -------- ----------- ------------ ------------ -------- -------------

Charles Biss............ 10/23/00 2,000 $2.50 $ 7.88 $2.50 1/4 year
Vice President, 10/23/00 5,000 $2.50 $ 6.88 $2.50 1 year
Verification Products 10/23/00 10,000 $2.50 $ 6.75 $2.50 1 5/6 years
10/23/00 3,000 $2.50 $ 6.75 $2.50 4 years

Cecil F. Bowes.......... 10/23/00 10,000 $2.50 $ 6.88 $2.50 2 years
Vice President, 10/23/00 50,000 $2.50 $ 6.75 $2.50 6 5/6 years
Sales--The Americas, 10/23/00 5,000 $2.50 $ 6.75 $2.50 4 years
Asia Pacific Rim

Nigel P. Davis.......... 10/23/00 30,000 $2.50 $ 6.75 $2.50 6 1/2 years
Vice President, 10/23/00 5,000 $2.50 $ 6.75 $2.50 4 years
Sales--Europe, Middle
East, Africa

Phillip Eckerdt......... 10/23/00 4,000 $2.50 $ 6.88 $2.50 2 years
Vice President, 10/23/00 7,500 $2.50 $ 6.75 $2.50 6 5/6 years
Operations 10/23/00 4,000 $2.50 $ 7.75 $2.50 3 years
10/23/00 5,000 $2.50 $ 6.75 $2.50 4 years

G. William Hartman...... 10/23/00 35,000 $2.50 $ 6.88 $2.50 6 3/4 years
Vice President, 10/23/00 4,000 $2.50 $ 6.75 $2.50 4 years
Automation

David L. Latimer........ 10/23/00 15,000 $2.50 $11.88 $2.50 7 1/2 years
Vice President, 10/23/00 5,000 $2.50 $ 6.75 $2.50 4 years
Product Marketing 10/23/00 20,000 $2.50 $ 6.13 $2.50 4 1/3 years

Elizabeth J. McDonald... 10/23/00 15,000 $2.50 $ 6.63 $2.50 2 7/12 years
Vice President, 10/23/00 4,000 $2.50 $ 6.75 $2.50 6 5/6 years
Corporate Counsel and 10/23/00 4,000 $2.50 $ 7.75 $2.50 2 11/12 years
Secretary 10/23/00 2,000 $2.50 $ 6.75 $2.50 4 years

Linda J. Miller......... 10/23/00 7,500 $2.50 $ 6.75 $2.50 4 years
Senior Vice President 10/23/00 26,250 $2.50 $ 7.09 $2.50 4 1/12 years
and General Manager

George A. Plesko........ 10/23/00 20,000 $2.50 $ 7.63 $2.50 4 1/6 years
Senior Vice President

Matt D. Schler.......... 10/23/00 7,500 $2.50 $ 6.75 $2.50 4 years
Vice President, 10/23/00 37,500 $2.50 $ 7.09 $2.50 4 1/12 years
Engineering and Product
Development

Michael Stachura........ 10/23/00 15,000 $2.50 $ 7.75 $2.50 8 years
Vice President,
Treasurer 10/23/00 10,000 $2.50 $ 7.75 $2.50 3 years
and Chief Financial 10/23/00 5,000 $2.50 $ 6.75 $2.50 4 years
Officer

John B. West............ 10/23/00 7,500 $2.50 $ 8.00 $2.50 4 1/4 years
Vice President,
Mobile and Wireless

William Woodard......... 10/23/00 13,125 $2.50 $ 7.88 $2.50 1 1/4 years
Vice President,
Treasurer 15,000 $2.50 $ 6.88 $2.50 2 years
and Chief Financial 42,230 $2.50 $ 8.88 $2.50 4 years
Officer 30,000 $2.50 $ 6.75 $2.50 1 5/6 years
6,500 $2.50 $ 6.75 $2.50 4 years

Linda J. Miller (1)..... 12/6/99 26,250 $7.09 $10.88 $7.09 8 1/3 years
Senior Vice President
and General Manager

Matt D. Schler (1)...... 12/6/99 37,500 $7.09 $10.38 $7.09 7 11/12 years
Vice President,
Engineering and Product
Development

Jay Eastman (2)......... 10/23/00 10,000 $2.50 $11.00 $2.50 1 1/4 years
10/23/00 20,000 $2.50 $ 6.25 $2.50 2 years
10/23/00 16,000 $2.50 $ 5.75 $2.50 2 1/2 years
10/23/00 46,453 $2.50 $ 8.88 $2.50 4 years
10/23/00 6,500 $2.50 $11.88 $2.50 2 years
10/23/00 3,250 $2.50 $10.38 $2.50 3 years

Robert S. Ehrlich (2)... 10/23/00 83,000 $2.50 $10.00 $2.50 8/12 years
10/23/00 50,000 $2.50 $ 6.50 $2.50 2 years
10/23/00 35,000 $2.50 $ 6.50 $2.50 6 years
10/23/00 17,500 $2.50 $ 8.63 $2.50 2 3/4 years
10/23/00 17,500 $2.50 $ 6.00 $2.50 3 3/4 years
10/23/00 25,000 $2.50 $ 3.59 $2.50 4 1/4 years

Thomas S. Morgan (2).... 10/23/00 3,333 $2.50 $ 6.75 $2.50 1 year
10/23/00 3,167 $2.50 $ 6.75 $2.50 1 year
10/23/00 6,500 $2.50 $11.88 $2.50 2 years
10/23/00 3,250 $2.50 $10.38 $2.50 3 years

James C. O'Shea (2)..... 10/23/00 3,333 $2.50 $ 6.75 $2.50 1 year
10/23/00 3,167 $2.50 $ 6.75 $2.50 1 year
10/23/00 6,500 $2.50 $11.88 $2.50 2 years
10/23/00 3,250 $2.50 $10.38 $2.50 3 years

Jack E. Rosenfeld (2)... 10/23/00 3,333 $2.50 $ 6.75 $2.50 1 year
10/23/00 3,167 $2.50 $ 6.75 $2.50 1 year
10/23/00 6,500 $2.50 $11.88 $2.50 1 year
10/23/00 3,250 $2.50 $10.38 $2.50 3 years

Length of
Original
Number of Option Term
Securities Market Price Exercise Remaining
Underlying of Stock at Price at At Date of
Options Time of Time of New Repricing
Repriced or Repricing or Repricing or Exercise or
Name and Title Date Amended Amendment Amendment Price Amendment
-------------- -------- ----------- ------------ ------------ -------- -----------

Bert W. Wasserman (2)... 10/23/00 6,500 $2.50 $10.38 $2.50 3 years
10/23/00 50,000 $2.50 $ 3.59 $2.50 4 1/4 years

Justin L. Vigdor (2).... 10/23/00 3,333 $2.50 $ 6.75 $2.50 1 year
10/23/00 3,167 $2.50 $ 6.75 $2.50 1 year
10/23/00 6,500 $2.50 $11.88 $2.50 2 years
10/23/00 3,250 $2.50 $10.38 $2.50 3 years

--------
(1) In 1999, the Company offered Mr. Miller and Mr. Schler the opportunity to
exchange options for new options for 26,250 shares and 37,500 shares,
respectively. The new options reduced the number of shares underlying the
original grants by 25%. In addition, the new options for 26,250 shares and
37,500 shares, respectively, lowered the exercise price, reduced the
option term from ten years to five years and established a new
performance-based vesting and exercise schedule. Each option will expire
on December 6, 2004.
(2) Board of Directors

Employment Contracts and Severance and Change-in-Control Arrangements

Edward J. Borey

On December 4, 2000, the Company and Edward J. Borey entered into an
Employment Agreement (the "Borey Agreement") pursuant to which Mr. Borey was
employed as President and Chief Executive Officer. The "Initial Term" under
the Borey Agreement will expire on December 31, 2003. However, unless written
notice is given to the contrary by either the Company or Mr. Borey at least
four months prior to the expiration date, the employment period will
automatically be extended for an additional one-year term (each an "Additional
Term"). Under the Borey Agreement, Mr. Borey will receive a base salary at the
annual rate of $360,000. In addition, under the Borey Agreement, for 2001 Mr.
Borey will receive a performance bonus in an amount not less than $360,000,
and for calendar years thereafter, if certain performance goals and targets
determined by the Company's Board of Directors for the Company's Management
Incentive Plan ("MIP") are met, he will be entitled to receive a performance
bonus ranging from 30% to 150% of his base salary with no performance bonus if
the performance goal is not achieved. Mr. Borey is eligible to participate in
employee benefit plans generally made available by the Company to its
executive officers and to receive reimbursement for reasonable relocation
expenses.

Pursuant to his Agreement, on December 4, 2000, Mr. Borey received a stock
option for 500,000 Common Shares at an exercise price of $1.75, the Fair
Market Value of the Company's Common Shares on the Date of Grant. In January
2001, the options were repriced to $1.1875. The options vest in three equal
annual installments commencing one year from the Date of Grant, but no options
may be exercised unless and until the trading price of the Company's Common
Shares equals or exceeds $3.00 per share for twenty consecutive days. If the
trading price does not reach the specified goal, the options may nevertheless
be fully exercisable after June 4, 2005. The options expire on December 4,
2005. If Mr. Borey is then an officer of the Company on each of January 2,
2002 and January 2, 2003, the Company will grant him a stock option for not
less than 75,000 shares.

In the event the Company is adjudicated insolvent, Mr. Borey will be
entitled to additional compensation to offset the decrease in the likelihood
that there will be any value to his equity potential and bonus potential;
accordingly, he will be entitled to a twofold increase in base salary and
payment of 2% of the total gross sales of the Company assets in lieu of the
bonus payments. Also, in the event the Company is adjudicated insolvent, Mr.
Borey will be entitled, at his discretion, to terminate his employment
relationship with the Company upon sixty

(60) days written notice. If such termination option is exercised and occurs
prior to December 4, 2001, he will be entitled to a severance payment equal to
his base salary for one year and his bonus for one year at 100% of target. If
such termination option is exercised and occurs after December 4, 2001, he
will be entitled to a severance payment equal to the greater of (a) his base
salary and bonuses for the unexpired portion of the term or (b) his base
salary for one year and his bonus for one year at 100% of target.

The Borey Agreement contains provisions relating to confidentiality, non-
competition and Change-in-Control (as defined below).

In the event of the termination of Mr. Borey's services by the Company for
any reason other than Cause (as defined below) or a Change-in-Control (as
defined below) or upon the resignation of Mr. Borey for Good Reason (as
defined below), the Company will pay Mr. Borey an amount equal to the greater
of (a) Mr. Borey's base salary and bonuses at 100% of target for the unexpired
portion of the term or (b) Mr. Borey's base salary for one year and his bonus
for one year at 100% of target, and all benefits will continue for a period
equal to the greater of the periods set forth in (a) or (b) above. Under
certain circumstances, the severance payments to Mr. Borey may be offset if he
receives compensation from a third party.

In the event Mr. Borey terminates his employment for any reason within
ninety days after the occurrence of a Change-in-Control or in the event of the
termination of Mr. Borey's services within the two-year period following a
Change-in-Control of the Company and such termination is (a) by the Company or
its successor for any reason other than Cause or (b) by Mr. Borey for Good
Reason (as defined below) following a Change-in-Control, the Company will pay
Mr. Borey an amount equal to the product of the sum of (x) his base salary and
(y) the highest annual bonus paid to him in the three full fiscal years
preceding termination multiplied by 2.9. Said amount will be payable in the
manner elected by Mr. Borey (in a lump sum cash payment, in three equal annual
installments or in equal bi-weekly installments over a three-year period). All
benefits will also continue for a period of three years after such
termination.

If any of the payments to Mr. Borey are considered "excess parachute
payments" as defined in Section 280G of the Internal Revenue Code, the
payments will be reduced to avoid such a characterization.

Robert C. Strandberg

Employment Agreement

Effective June 2, 1998, the Company entered into an Employment Agreement
with Mr. Strandberg, which was amended in December 1998 and July 1999 (the
Employment Agreement, as amended, is referred to as the "Strandberg
Agreement"), and which would have expired on December 31, 2000. However, Mr.
Strandberg resigned as President and Chief Executive Officer on August 22,
2000. Under the Strandberg Agreement, Mr. Strandberg received an annual base
salary of $336,000. In addition, under the Strandberg Agreement, if certain
performance goals and targets determined annually by the Company's Board of
Directors for the Company's Management Incentive Plan ("MIP") were met, Mr.
Strandberg was entitled to receive a performance bonus for that year ranging
from 40% to 170% of his base salary with no performance bonus if the
performance goal was not achieved in a particular year. Mr. Strandberg was
also eligible to participate in employee benefit plans generally made
available by the Company to its executive officers.

The Strandberg Agreement contained provisions relating to confidentiality,
non-competition and Change-in-Control (as defined below).

Pursuant to the Strandberg Agreement, in March 1998 Mr. Strandberg received
an award of 37,500 restricted shares which could not be sold, transferred or
otherwise disposed of until the restrictions lapse. See Footnote (3) to the
Summary Compensation Table for further details with respect to the restricted
shares. Pursuant to the Strandberg Agreement, on March 25, 1999, Mr.
Strandberg received an option for 37,500 Common Shares at an exercise price of
$8.625 per share (the Fair Market Value of the Company's Common Shares on the
date of grant). This option replaced the award of 37,500 restricted shares
which would have been

awarded on March 25, 1999 and represented a 50% reduction in the size of the
option grant to which he otherwise would have been entitled. Of the 37,500
stock options granted, options for 18,750 shares vested as follows: 4,688 on
March 25, 2000; 4,687 on March 25, 2001; 4,688 on March 25, 2002; and 4,687 on
March 25, 2003. The options for the remaining 18,750 shares did not vest
unless and until certain performance levels for the Company's Common Shares
were attained. The options expire on March 25, 2004.

Pursuant to the Strandberg Agreement, effective as of March 25, 2000, Mr.
Strandberg received an option for 37,500 Common Shares, at an exercise price
of $6.00 per share (the Fair Market Value of the Company's Common Shares on
the date of grant). This option represented a 50% reduction in the size of the
option grant to which he otherwise would have been entitled pursuant to his
Agreement. Of the 37,500 stock options granted, options for 18,750 shares
vested as follows: 4,688 on March 25, 2001; 4,687 on March 25, 2002; 4,688 on
March 25, 2003; and 4,687 on March 25, 2004. The remaining 18,750 shares did
not vest unless and until certain performance levels for the Company's Common
Shares were attained--with respect to 6,250 shares, at such time as the Fair
Market Value of the Company's Common Shares equals or exceeds $7.98 per share
for seven consecutive days; with respect to 6,250 shares, at such time as the
Fair Market Value of the Company's Common Shares equals or exceeds $9.41 per
share for seven consecutive days; and with respect to 6,250 shares, at such
time as the Fair Market Value of the Company's Common Shares equals or exceeds
$10.92 per share for seven consecutive days. If the specified performance
goals were not reached, the options would nevertheless become fully
exercisable after December 1, 2004 in order to maintain favorable accounting
treatment. The options expire on March 25, 2005.

Severance Arrangements

On August 22, 2000, Mr. Strandberg resigned all his positions and offices,
including those of President, Chief Executive Officer and member of the Board
of Directors. Pursuant to resolutions adopted by the Board, the Company will
continue to pay Mr. Strandberg, for a period of one year, his base salary of
$336,000 and all current health, dental, life and accidental death and
dismemberment insurance benefits and certain incidental benefits. In addition,
all options held by Mr. Strandberg were deemed fully vested as of August 22,
2000 and may be exercised until the earlier of (i) the date on which the
option expires by its terms or (ii) August 22, 2003. Also, all restrictions on
the restricted shares owned by Mr. Strandberg were waived by the Board and
were deemed to have lapsed as of August 22, 2000. Certain obligations in Mr.
Strandberg's prior Employment Agreement relating to confidentiality and non-
competition remain in effect in accordance with their terms.

George A. Plesko

Following the acquisition of GAP Technologies, Inc. and GEO Labs, Inc., the
Company on December 21, 1999 entered into an Employment Agreement and a Non-
Competition and Confidentiality Agreement (the "Plesko Agreements") with
George A. Plesko, pursuant to which Mr. Plesko was employed as a Senior Vice
President. The "Initial Term" under the Plesko Agreements will expire on
December 20, 2002. Under the Plesko Agreements, Mr. Plesko will receive a base
salary at the annual rate of $200,000. In addition, if certain performance
goals and targets determined annually by the Company's Board of Directors are
met, Mr. Plesko will be entitled to receive a performance bonus of up to 35%
of base salary. Pursuant to the Plesko Agreements, on January 3, 2000 Mr.
Plesko received a stock option for 20,000 Common Shares at an exercise price
of $7.625, the Fair Market Value of the Company's Common Shares on the Date of
Grant. On October 23, 2000, the options were repriced to $2.50 per share. The
options vest and are exercisable in four equal annual installments commencing
one year from the Date of Grant. Mr. Plesko is also eligible to participate in
employee benefit plans generally made available by the Company to its
executive officers.

The Plesko Agreements contain provisions relating to confidentiality, non-
competition and Change-in-Control (as defined below).

In the event of termination of employment or a Change-in-Control, Mr.
Plesko's severance payments will be as described in "Severance/Change-in-
Control Agreements" below, except that if Mr. Plesko is terminated

by the Company prior to the expiration of the initial three-year term, he will
be entitled to severance payments for a period equal to the then remaining
portion of the three-year term.

Severance/Change-in-Control Agreements

Severance/Change-in-Control Agreements have been entered into with all
senior executive officers in order to assure the Company of the continued
services of those executives to the Company in an effective manner without
distraction by reason of the possibility of a termination of employment by the
Company or a change in control of the Company. In general, all provide that in
the event of the termination of the executive's employment by the Company, for
any reason other than Termination for Cause (as defined below), death,
disability or a Change-in-Control (as defined below), the Company will
continue to pay the executive for a period of one year (two years in the case
of William L. Parnell, Executive Vice President and Chief Operating Officer)
following such termination an amount equal to the executive's salary at the
annual rate then in effect. In addition, the Company will provide the
executive with the executive's then current health, dental, life and
accidental death and dismemberment insurance benefits for a period of one year
following such termination. Each agreement also contains a covenant not-to-
compete during the one-year period (two-year period in the case of Mr.
Parnell) in which severance benefits are being paid. In the event of the
termination of the executive's employment within the two-year period following
a Change-in-Control (as defined below) of the Company, and such termination is
(i) by the Company for any reason other than Termination for Cause (as defined
below) or (ii) by the executive if the executive terminates such employment
for Good Reason (as defined below), or, in the case of Mr. Parnell, in
addition, if he terminates his employment for any reason within 90 days after
the occurrence of a Change-in-Control, the Company will pay the executive
either over a period of three years or in a lump sum payment an amount equal
to the sum of (x) the executive's salary at the annual rate then in effect and
(y) the highest annual bonus paid to the 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. In addition, the executive will be
immediately vested in any retirement, incentive or option plans then in effect
and the Company will continue to provide the executive with his or her then
current health, dental, life and accidental death and dismemberment insurance
benefits for a period of three years.

If any of the payments to the executive are considered "excess parachute
payments" as defined in Section 280G of the Internal Revenue Code, the
payments will be reduced to avoid such a characterization.

Certain Definitions. As used in the Borey Agreement, the Plesko Agreement,
the 1998 Ehrlich Agreement, and the Severance/Change-in-Control Agreements:

(a) Change-in-Control generally means the acquisition of 30% of the
Company's voting securities, or a change of one-third of the incumbent Board
of Directors without the prior approval of the members of the incumbent Board
of Directors, or the merger or consolidation of the Company with another
corporation where the shareholders of the Company would not, immediately after
the merger or consolidation, own at least 50% of the voting securities of the
corporation issuing the cash or securities in the merger or consolidation, or
the sale of substantially all of the assets of the Company.

(b) Termination for Cause generally means the termination of the employment
of an officer because the officer has failed or refused to perform such
services as may reasonably be delegated to the officer consistent with the
officer's position, or has been grossly negligent in connection with the
performance of his or her duties, or has committed acts involving dishonesty,
willful misconduct, breach of fiduciary duty, fraud, or any similar offense
which materially affects the officer's ability to perform his or her duties
for the Company or may materially adversely affect the Company, or has been
convicted of a felony.

(c) Good Reason generally means an officer's annual rate of salary is
reduced from the annual rate then currently in effect or the officer's other
employee benefits are in the aggregate materially reduced from those then
currently in effect, (unless such reduction of employee benefits applies
generally to employees of the

Company), or the officer's place of employment is moved from its then current
location, or the officer is assigned duties that are demeaning or are
otherwise materially inconsistent with the duties then currently performed by
the officer.

(d) Termination without Cause generally means the termination of the
employment of an officer for reasons other than death, disability, termination
for cause or termination upon Change-in-Control.

Other Remuneration Arrangements

On August 22, 2000, Messrs. Ehrlich and Wasserman were appointed interim
Co-Chief Executive Officers to serve until the appointment of a new President
and Chief Executive Officer, which occurred on December 4, 2000. During such
interim period, Mr. Wasserman received no fees as an outside director and Mr.
Ehrlich received no fees under the Ehrlich Agreement (as defined below), but
each received fees at the rate of $18,000 per month for so long as they served
as interim Co-Chief Executive Officers.

In addition, Mr. Ehrlich received an option for 25,000 Common Shares and
Mr. Wasserman received an option for 50,000 Common Shares. Each option was
granted at an exercise price of $3.594 per share and each option vested in
five equal monthly installments commencing on September 1, 2000. However,
neither option may be exercised until such time as the fair market value of
the Company's Common Shares equals or exceeds $5.391 per share for seven
consecutive days. If the $5.391 price per share is not reached, the options
will nevertheless become fully exercisable after April 1, 2005 in order to
maintain favorable accounting treatment. Each option expires on August 25,
2005. Effective October 23, 2000, each option was repriced to $2.50 per share.
See "EXECUTIVE OFFICER COMPENSATION--Option Repricing and Ten-Year Option
Repricing Table."

Interests of Directors and Management in Certain Transactions

In fiscal 2000, the Company, pursuant to a Severance Agreement dated April
30, 1997, paid L. Michael Hone, the Company's former Chairman of the Board and
Chief Executive Officer, $85,100 and forgave $35,136 of indebtedness. In
connection with the forgiveness of the loan, Mr. Hone received a related tax
gross-up of $16,452. No further payments are owing to Mr. Hone under his
Severance Agreement and there is no further indebtedness owing by Mr. Hone to
the Company. In addition, on November 30, 2000, in consideration of the
surrender of options for 470,833 shares, the Company repriced Mr. Hone's
remaining options for 175,000 shares, resulting in a new exercise price of
$1.90 per share. Of the 175,000 shares, 50,000 shares had an original exercise
price of $10.00 and 125,000 shares had an original exercise price of $8.88.

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934 that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following Performance
Graph and the Report of the Compensation Committee of the Board of Directors
on Executive Compensation shall not be incorporated by reference into any such
filings.

CORPORATE PERFORMANCE GRAPH

The following graph reflects a comparison of the cumulative total return of
the Company's Common Shares from December 31, 1995 through December 31, 2000,
with the Standard and Poor's 500 Index and the Standard and Poor's Technology
Sector Index. Comparisons of this sort are required by the Securities and
Exchange Commission and, therefore, are not intended to forecast or be
indicative of possible future performance of the Company's Common Shares. The
graph assumes that $100 was invested on December 31, 1995 in each of the
Company's Common Shares, the Standard and Poor's 500 Index and the Standard
and Poor's Technology Sector Index and that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PSC INC., THE S&P 500 INDEX
AND THE S&P TECHNOLOGY SECTOR INDEX
----------------------------------------------------
12/95 12/96 12/97 12/98 12/99 12/00
PSC INC. $100.O0 $ 77.03 $142.57 $102.70 $ 79.73 $ 8.11
S&P 500 100.00 122.96 163.98 210.84 255.22 231.98
S&P TECHNOLOGY SECTOR 100.00 141.87 178.89 309.44 541.93 325.43
*100 INVESTED ON 12/31/95 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors (the "Committee"),
consisting entirely of non-employee directors (Messrs. O'Shea (Chairman),
Morgan, Rosenfeld and Tunioli, approves all of the policies under which
compensation is paid or awarded to the Company's executive officers.

The Company's executive compensation policy is intended (i) to support the
attainment of the Company's long and short-term strategic and financial
objectives; (ii) to provide a competitive total compensation program that
enables the Company to attract, motivate and retain the key executives needed
to accomplish the Company's goals; (iii) to provide variable compensation
opportunities that are directly related to the performance of the Company;
(iv) to align executive compensation with growth in shareholder value; and (v)
to recognize and reward executives for their contributions and commitment to
the growth and profitability of the Company. The Compensation Committee
believes this policy is generally best accomplished by providing a competitive
total compensation package, a significant portion of which is variable and at
risk and related to established performance goals.

To maintain a competitive level of compensation, the Company and the
Committee periodically utilize the services of independent compensation
consultants to analyze compensation data for high technology companies with
revenues of $250 million and to recommend plan designs and guidelines and
compensation strategies.

The Company's compensation program for executive officers consists of the
following key elements: base salary, annual cash incentives and equity-based
incentives. Salary and annual incentive payments are mainly designed to reward
current and past performances. Equity-based incentives are primarily designed
to provide strong incentives for long-term future performance. The components
of the compensation program for executives are described below.

Base Salary: Base salaries and increases for executive officers, other than
Mr. Borey, are determined by the Chief Executive Officer within the guidelines
established by the Committee and are based upon the officer's current
performance, experience, the scope and complexity of his or her position
within the Company and the external competitive marketplace for comparable
positions at peer companies. Base salaries are designed to be competitive,
generally at the median or 50th percentile, as compared to salary levels for
equivalent executive positions in comparable companies and are normally
reviewed annually.

Annual Incentive: A substantial portion of each executive officer's
compensation is variable and tied to Company performance.

The Company's Management Incentive Plan (the "MIP"), which is applicable to
all of the Company's key executives and department managers, provides cash
incentive awards based upon overall performance by the Company as determined
by specific measurement targets which are established each year by the
Committee. In 2000, the measurement targets were based on return on capital
employed ("ROCE") and sales growth. ROCE is defined as operating income
divided by net average capital as reported in the Company's financial
statements. Sales growth is defined as the percentage increase of current
fiscal year revenue over the preceding fiscal year revenue. If the target is
achieved, awards varying from 10% to 60% of base salary will be paid. Below a
threshold level of performance, no awards will be granted. If the target is
surpassed, awards increase, depending on the percentage of target achieved.
The incentive percentage for an employee is based upon position in the Company
and is based upon market comparisons. Since the Company did not meet its
performance targets for 2000, no MIP bonuses were paid to any individual in
2000. In 2001, the performance targets will be based on Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA").

Equity-Based Incentives: Stock options are granted to aid in the retention
of key employees and to align the interests of key employees with those of the
shareholders. Stock option grants are discretionary and reflect the current
performance and continuing contribution of the individual to the success of
the Company. The

Committee is responsible for determining the individuals to whom grants should
be made, the time of the grants and the number of shares subject to each
option. Stock options are granted with an exercise price equal to the fair
market value of the Company's Common Shares on the date of grant. Any value
received by the executive from an option grant depends completely upon
increases in the price of the Company's Common Shares. Consequently, the full
value of an executive's compensation package cannot be realized unless an
appreciation in the price of the Company's Common Shares occurs over a period
of years.

In 2000, stock options were granted only to new officers and to certain key
individuals who became employees of the Company as the result of the Company's
acquisition of Percon.

Option Repricing

Recognizing that executive officers and directors, as well as all
employees, held stock options with option prices significantly higher than the
current market value of the Company's Common Shares, thereby negating the
incentive and retention power associated with such options, the Committee
decided on October 23, 2000 to reprice all outstanding options held by all
individuals who were officers, directors and employees on that date.
Accordingly, the exercise price for all options, which had exercise prices
ranging from $13.06 to $3.59, was reduced to $2.50 per share, the fair market
value of the Company's Common Shares on October 23, 2000. The Compensation
Committee believes that stock options are a significant factor in the
Company's ability to attract, retain and motivate employees who are critical
to the Company's long-term success. The disparity between the original
exercise prices of the Company's outstanding options and the market price for
the Common Shares did not provide, in the judgment of the Compensation
Committee, a meaningful incentive or retention device to the employees holding
those stock options, and, therefore, the Compensation Committee determined
that repricing the stock options was in the best interests of the Company and
its shareholders. See "EXECUTIVE OFFICER COMPENSATION--Option Repricing and
Ten-Year Option Repricing Table."

CEO Compensation

On August 22, 2000, Robert C. Strandberg resigned as President and Chief
Executive Officer and as a director of the Company, and Robert S. Ehrlich,
Chairman of the Board, and Bert W. Wasserman, a director, were appointed
interim Co-Chief Executive Officers and served as such until December 4, 2000,
when Edward J. Borey was appointed President and Chief Executive Officer.

Pursuant to his Employment Agreement, as amended on July 13, 1999, Mr.
Strandberg's base salary for 2000 was $336,000. He received no bonus for 2000,
since the performance targets set forth in the MIP were not met. As provided
for in his Employment Agreement, in March 2000 Mr. Strandberg received a stock
option for 37,500 shares at an exercise price of $6.00, the fair market value
of the Company's Common Shares on the date of grant. Mr. Strandberg's
Employment Agreement and severance arrangements are described in detail in
"EXECUTIVE OFFICER COMPENSATION--Employment Contracts and Severance and
Change-in-Control Agreements--Robert C. Strandberg."

During the period Messrs. Ehrlich and Wasserman served as interim Co-Chief
Executive Officers, each received a fee at the rate of $18,000 per month. The
remuneration of Messrs. Ehrlich and Wasserman in 2000 is described in detail
in "ELECTION OF DIRECTORS--Compensation of Directors" and "EXECUTIVE OFFICER
COMPENSATION--Other Remuneration Arrangements."

When Mr. Borey was elected President and Chief Executive Officer as of
December 4, 2000, the Committee established his base salary and other
compensation arrangements by assessing comparative compensation information
and survey sources that capture high technology compensation data for
companies that approximate PSC's size Mr. Borey's base salary, which is at the
rate of $360,000 per annum, approximates the median of relevant general
industry market data. Mr. Borey's Employment Agreement is described in detail
in "EXECUTIVE OFFICER COMPENSATION--Employment Contracts and Severance and
Change-in-Control Agreements--Edward J. Borey."

Tax Considerations

Section 162(m) of the Internal Revenue Code generally limits the corporate
tax deduction for compensation paid to the Named Executive Officers to
$1,000,000 each. However, compensation is exempt from this limit if it
qualifies as "performance-based compensation." The Compensation Committee has
carefully considered the impact of this tax code provision and its normal
practice is to take such action as is necessary to preserve the Company's tax
deduction. The Committee believes that all of the Company's 2000 compensation
expense will be deductible for federal income tax purposes.

Although the Compensation Committee will continue to consider deductibility
under Section 162(m) with respect to future compensation arrangements with
executive officers, deductibility will not be the sole factor used in
determining appropriate levels or methods of compensation. Since Company
objectives may not always be consistent with the requirements for full
deductibility, the Company may enter into compensation arrangements under
which payments are not deductible under Section 162(m). It is not expected
that the compensation of any executive officer will exceed $1,000,000 in
fiscal 2001.

Compensation Committee

James C. O'Shea, Chairman
Thomas J. Morgan
Jack E. Rosenfeld
Roberto Tunioli

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee consist of Messrs. O'Shea
(Chairman), Morgan, Rosenfeld and Tunioli. Each member is a non-employee
director and does not have any direct or indirect material interest in or
relationship with the Company outside of his position as director.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the
Securities and Exchange Commission ("SEC") reports of ownership and changes in
ownership of common stock and other equity securities of the Company.
Officers, directors and greater-than-10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.

Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during the 2000 fiscal year, all filing requirements
applicable to its officers, directors and greater-than-10% beneficial owners
were complied with.

AUDIT COMMITTEE REPORT

Membership and Role of Audit Committee

The Audit Committee of the Board is responsible for providing independent,
objective oversight and review of the Company's accounting functions, internal
controls and financial reporting process. The Audit Committee is comprised of
three independent directors, and is governed by an amended written charter
adopted and approved by the Board. A copy of the Audit Committee Charter is
attached to this Proxy Statement as Appendix A.

Each of the members of the Audit Committee is independent as defined by the
Company policy and the National Association of Securities Dealers, Inc.
("NASD") listing standards, except that Mr. Wasserman serves

on the Audit Committee despite having served as interim Co-Chief Executive
Officer of the Company for the brief period from August to December 2000. In
connection with the departure of the Company's then Chief Executive Officer on
August 22, 2000, Mr. Wasserman agreed to the request of the Board of Directors
that he, together with Mr. Ehrlich, serve on an interim basis as Co-Chief
Executive Officer. Mr. Wasserman stepped down as interim Co-Chief Executive
Officer on December 4, 2000 when Mr. Borey was appointed the Company's new
Chief Executive Officer. Mr. Wasserman had been a long-term, valued member of
the Audit Committee prior to the time that the Company's Board of Directors,
due to unusual circumstances, asked him to serve as interim Co-Chief Executive
Officer. After his service as interim Co-Chief Executive Officer ended, the
Company's Board of Directors determined that Mr. Wasserman's unique situation
presented exceptional and limited circumstances pursuant to which his
continued service on the Audit Committee was required in the best interests of
the Company and its shareholders.

Management has the primary responsibility for the financial statements and
the reporting process, including the Company's system of internal controls.
The independent accountants are responsible for performing an independent
audit of the Company's consolidated financial statements in accordance with
generally accepted auditing standards and to issue a report thereon. The Audit
Committee's responsibility is to monitor and oversee these processes. The
Audit Committee also recommends to the Board the selection of the Company's
independent auditors.

Review of the Company's Audited Financial Statements

The Audit Committee is responsible for recommending to the Board that the
Company's financial statements be included in the Company's Annual Report on
Form 10-K. In order to fulfill its responsibilities, the Audit Committee (a)
discussed with Arthur Andersen LLP ("AA"), the Company's independent auditors
for the year ended December 31, 2000, the overall scope and plans for its
audit, (b) reviewed and discussed with management and AA the Company's audited
consolidated financial statements for the year ended December 31, 2000, (c)
discussed with AA its judgment as to the quality and acceptability of the
Company's accounting principles as applied in its financial reporting and such
other matters as are required to be discussed by Statement on Auditing
Standards No. 61 (Communication with Audit Committees), and (d) received and
reviewed the written disclosures and the letter from AA required by
Independence Standard No. 1 (Independence Discussions with Audit Committees)
and have discussed with AA its independence.

Based upon the discussions with AA concerning the audit, the independence
discussions, and the financial statement review, and additional matters deemed
relevant and appropriate by the Audit Committee, the Audit Committee
recommended to the Board that the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 include these financial statements.

Arthur Andersen LLP Information

Fees for all services rendered by AA for fiscal year 2000 are as follows:

Audit Fees....................................................... $168,533
Financial Information Systems Design and Implementation Fees..... --
All Other........................................................ $132,375
--------
Total.......................................................... $300,908

The Audit Committee has advised the Company that, in its opinion, the non-
audit services rendered by AA during the Company's most recent fiscal year are
compatible with maintaining the independence of such auditors.

Audit Committee:
Bert W. Wasserman, Chairman
Thomas J. Morgan
Terry R. Peets

PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED COMMON SHARES
(Proxy Item 2)

The Company's Certificate of Incorporation currently authorizes a total of
40,000,000 Common Shares, par value $.01 per share, and 10,000,000 Preferred
Shares, par value $.01 per share. The Board of Directors has approved, and
recommends to the shareholders for their approval and adoption, an amendment
(the "Amendment") to the Company's Certificate of Incorporation (the
"Certificate") to increase the number of authorized Common Shares of the
Company from 40,000,000 shares to 100,000,000 shares. The number of authorized
Preferred Shares will remain at 10,000,000 shares.

As of May 30, 2001, there were 12,458,071 Common Shares issued and
outstanding. Additionally, approximately 3,364,408 Common Shares are reserved
for issuance under the Company's stock option plans and employee stock
purchase plans and approximately 2,130,000 Common Shares are reserved for
conversion of outstanding convertible securities. Thus, an aggregate of
5,494,408 Common Shares are issued and outstanding or reserved for issuance,
representing approximately 44.1% of the Company's authorized Common Shares.

The additional Common Shares for which authorization is sought would become
part of the existing class of Common Shares. The new Common Shares, when
issued, would have the same rights and privileges as the Common Shares
presently outstanding. No shareholder of the Company has any preemptive right
to subscribe for or purchase any of the Common Shares, and, once authorized,
such Common Shares would be available for issuance at such time and on such
terms as the Board of Directors may consider appropriate.

Holders of Common Shares are entitled to such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. The Company has not paid any cash dividends on the Common Shares
since 1979.

Holders of the Common Shares have no redemption, conversion or sinking fund
rights. Holders of Common Shares are entitled to one vote per share on all
matters submitted to a vote of holders of Common Shares and do not have any
cumulative voting rights. In the event of a liquidation, dissolution or
winding-up of the Company, the holders of Common Shares are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all debts and liabilities of the Company and the liquidation
preference, if any, of any outstanding Preferred Shares.

In the opinion of the Board of Directors of the Company, the additional
authorized Common Shares will benefit the Company by providing flexibility to
the Board of Directors, without requiring further action or authorization by
the Company's shareholders (except as may be required by law or the rules of
any stock exchange on which the Company's securities may then be listed), to
issue additional Common Shares from time to time in responding to business
needs and opportunities as they arise, or for other proper corporate purposes.
These opportunities, needs and purposes may include, for example, the
obtaining of capital funds through public and private offerings of Common
Shares or of securities convertible into Common Shares and the use of Common
Shares in connection with structuring possible acquisitions of businesses and
assets. Additionally, the Board, in its discretion, could in the future
declare stock splits or stock dividends or, subject to shareholder approval,
increase, establish or extend stock option and other stock awards plans.
Although the Company regularly reviews and evaluates potential business
opportunities and acquisitions, it does not have any agreements or commitments
at this time to issue any shares for such purposes nor does it have any
present plans with respect to financings, stock splits, dividends or other
actions requiring the issuance of Common Shares, except for the issuance of
Common Shares in connection with existing stock option and employee stock
purchase plans and convertible securities.

If approved by the shareholders, the additional authorized Common Shares
will allow the Company to take prompt action with respect to corporate
opportunities that develop without the delay and expense incident to the
holding of a special meeting of shareholders to consider any specific
issuance. It is not the present intention of

the Board of Directors to seek shareholder approval prior to any issuance of
additional Common Shares unless required by law or by the rules of any stock
exchange on which the Company's shares may then be listed. The Company's
Common Shares currently trade on The Nasdaq SmallCap Market tier of The Nasdaq
Stock Market ("Nasdaq"). Nasdaq currently requires shareholder approval in
several instances, including acquisition transactions where the present or
potential issuance of shares could result in an increase in the number of
Common Shares outstanding by 20% or more.

Although the Board of Directors would only authorize the issuance of
additional Common Shares based on its judgment as to the best interests of the
Company and its shareholders, the issuance of additional authorized shares
could have the effect of diluting the voting power and book value per share of
the outstanding Common Shares. The Board of Directors (if consistent with its
fiduciary responsibilities) could also attempt to deter future takeover
attempts by issuing additional Common Shares (alone or with the Company's
Shareholder Rights Plan as described below) or to dilute the ownership of
persons seeking to gain control of the Company and to impede any unsolicited
bid for control of the Company which the Board believed was not in the best
interests of the Company and its shareholders. For example, the Company might
seek to frustrate a takeover attempt by making a private sale of a large block
of shares to a third party who was opposed to such an attempt. The Company,
however, is aware of no such takeover attempt and has no plans or arrangements
with respect to the same. The issuance of any additional shares will be on
terms deemed to be in the best interests of the Company and its shareholders.

The Company also has in effect a Shareholder Rights Plan (the "Rights
Plan") that gives each holder of the Company's Common Shares one Preferred
Share Purchase Right (a "Right"). The Right entitles the recipient, upon
exercise, to purchase one one-thousandth of a share (a "Unit") of Series B
Preferred Stock, subject to adjustment, at a price of $45.00 per Unit. The
terms of the Rights are triggered upon the acquisition of or an offer by a
person or group to acquire 20% or more of the Company's Common Shares. The
Rights also entitle the holders (other than the person or group holding the
triggering percentage) to certain favorable dividend, liquidation and voting
rights. The Rights are designed to protect the interests of the Company and
its shareholders against coercive takeover tactics by encouraging potential
acquirors to negotiate with the Board of Directors acting on behalf of all
shareholders. The Rights Plan may have the effect of deterring potential
acquirors. The additional shares authorized by the Amendment, when considered
with the Rights Plan, also may deter takeover proposals. A potential acquiror
might ultimately decide not to pursue an acquisition of the Company if the
acquiror's ownership of Common Shares could be diluted by the issuance of
additional Common Shares authorized by the Amendment and shares of Series B
Preferred Stock under the Rights.

The Company's Board of Directors has not proposed the Amendment to the
Certificate as an anti-takeover measure, nor does the Board presently intend
for the foreseeable future to propose anti-takeover measures in any future
proxy solicitations. Any actions taken by the Company to discourage an attempt
to acquire control of the Company may result in shareholders not being able to
participate in any possible premiums which may arise in the absence of anti-
takeover provisions, and could be used to entrench management's position even
if such change in control may be beneficial to shareholders.

The approval of the Amendment to the Certificate will not of itself cause
any change in the capital stock or surplus of the Company. However, any future
issuance of Common Shares may have a dilutive effect on the present equity
holdings of shareholders of the Company.

Certain other provisions of the Company's Certificate and By-Laws may be
deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in such
shareholder's best interest, including those attempts that might result in a
premium over the market price for the shares held by the shareholders. The
Certificate provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
In addition, the Certificate provides that shareholders may remove a director
only for cause and only by the vote of the holders of two-thirds of the Common
Shares of the Company. This provision, when coupled with the provision of the
Certificate authorizing only the Board of Directors to fill

vacant directorships, will preclude shareholders from removing incumbent
directors without cause and simultaneously gaining control over the Board of
Directors by filling the vacancies created by such removal with their own
nominees, and will make more difficult, and therefore may discourage, a proxy
contest to change control of the Company. The Certificate also provides that
special meetings of shareholders of the Company may be called only by the
Board of Directors. These provisions of the Certificate may be changed only by
the affirmative vote of the holders of two-thirds of the Common Shares of the
Company entitled to vote on such matters at a meeting duly called for such
purpose.

The By-Laws provide that shareholders seeking to bring business before an
annual meeting of shareholders, or to nominate candidates for election as
directors at annual or special meeting of shareholders, must provide prior
written notice thereof, as set forth in the By-Laws. See "GENERAL
INFORMATION--Procedure for Submitting Shareholder Proposals."

If approved by the shareholders at the Annual Meeting, the increase in the
number of Common Shares would become effective upon the filing of the
Certificate of Amendment to the Certificate of Incorporation with the New York
Secretary of State, which filing would take place shortly after the Annual
Meeting.

If the Amendment is approved, the text of Paragraph 4(a) of the Certificate
of Incorporation, as amended, would be as follows:

"4(a). Statement of Authorized Stock. The aggregate number of shares
which the Corporation shall have the authority to issue is One Hundred Ten
Million (110,000,000) shares of capital stock of the following classes in
the following amounts:

(i) One Hundred Million (100,000,000) shares shall be Common Shares,
having a par value of $.01 per share ("Common Shares");

(ii) One Hundred Ten Thousand (110,000) shares shall be Series A
Convertible Preferred Shares, having a par value of $.01 per share
("Series A Convertible Preferred Shares");

(iii) One Hundred Seventy-Five Thousand (175,000) shares shall be
Series B Preferred Shares, having a par value of $.01 per share
("Series B Preferred Shares"); and

(iv) Nine Million Seven Hundred Fifteen Thousand (9,715,000) shares
shall be Preferred Shares, having a par value of $.01 per share (the
"Undesignated Preferred Stock"), which shares of Undesignated Preferred
Stock may be issued from time to time in one or more series, each of
which shall have such distinctive designation or title as shall be
fixed by the Board of Directors prior to the issuance of any shares
thereof. Each such series of Undesignated Preferred Stock shall have
such voting powers, full or limited, or no voting power, and have such
preferences and relative participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as
shall be stated in such resolution or resolutions providing for the
issue of such class or series of Undesignated Preferred Stock as may be
adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority expressed
vested in it, all in accordance with the laws of the State of New
York."

Vote Required

Approval of the Amendment to the Certificate of Incorporation requires the
affirmative vote of the holders of a majority of the outstanding Voting Shares
entitled to vote at the Annual Meeting. Abstentions and broker non-votes will
have the same effect as a vote against the Amendment.

Unless authority to so vote is withheld, the persons named in the proxy
card intend to vote shares as to which proxies are received in favor of the
Amendment.

The Board of Directors recommends that shareholders vote FOR the approval
of the proposed Amendment to the Company's Certificate of Incorporation.

PROPOSAL TO AMEND
THE 1994 STOCK OPTION PLAN
(Proxy Item 3)

In May 1995, the shareholders approved the 1994 Stock Option Plan (the
"1994 Plan") and reserved 1,750,000 Common Shares for issuance thereunder. In
May 1999, the shareholders authorized an increase in the number of Common
Shares reserved for issuance by 1,000,000 shares to a total of 2,750,000
shares. The Board has amended the 1994 Plan, subject to shareholder approval,
to increase the number of Common Shares reserved for issuance thereunder by an
additional 1,000,000 to a total of 3,750,000 shares.

The Board of Directors believes that the increase in the number of shares
available for issuance under the 1994 Plan will strengthen the Company's
ability to attract, retain and compensate key employees and future employees
of the Company and motivate such employees to attain individual performance
and overall corporate goals. The Board believes that it is critical that the
Company's new management team have the ability to attract the appropriate
caliber of executive leaders and technical talent to the Company and to
fulfill certain contractual commitments. In an environment which has become
increasingly competitive in the search for employees, especially in high
technology companies, the Board believes it is essential that the Company have
the ability to respond to that competition. This can be done either by
substantially increasing the cash compensation paid to the Company's officers
and key employees or by continuing to grant them stock options in a form and
quantity consistent with other comparable companies in the industry.
Alternative compensation arrangements which would be required if the Company
did not have a sufficient stock option pool would be less attractive to
employees and more expensive to the Company. In addition, unlike the immediate
dilutive effect on earnings per share ("EPS") caused by increases in cash
compensation, grants of stock options have no effect on EPS until the
Company's stock increases in value beyond the option exercise price. The
closing price of the Common Shares on The Nasdaq Stock Market(R) on May 25,
2001 was $1.09. As of that date, the exercise price of all of the Company's
outstanding stock options exceeded the market value of the Company's Common
Shares.

The Company is seeking shareholder approval of the amendment of the 1994
Plan in order to comply with the requirements of Sections 162(m) and 422 of
the Internal Revenue Code of 1986 (the "Code") and the requirements of NASDAQ.

The principal features of the 1994 Plan are summarized below. The summary
is qualified in its entirety by reference to the complete text of the 1994
Plan, as proposed to be amended, which is attached as Appendix B.

Purpose

The primary purposes of the 1994 Plan are to advance the Company's
interests by helping to attract and retain highly qualified individuals to
serve as officers, employees and non-employee directors, to enable them to
acquire a larger personal financial interest in the Company through the
acquisition and ownership of Common Shares, and to encourage them to identify
with shareholders through stock ownership.

Administration of the 1994 Plan

The 1994 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). No director may be appointed to the Committee who
is not a "disinterested person" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934 (the "Exchange Act"). In addition, no director
may be appointed to the Committee who is not an "outside director" for
purposes of Section 162(m) of the Code. Except as described below, the
Committee has full authority to determine the specific individuals to whom
awards may be made under the 1994 Plan, to determine the provisions of such
awards, to interpret the terms of the 1994 Plan and awards made under the 1994
Plan and to adopt, amend and rescind rules and guidelines for the
administration of the 1994 Plan. To the extent permitted by applicable law,
the Committee may delegate to one or more executive officers who are also
directors, the power to grant options to participants who are not subject to
the reporting requirements of Section 16(a) of the Exchange Act, provided,
however, that the Committee must fix the maximum amount of options for such
participants as a group.

Types of Awards

The 1994 Plan provides the Committee with authority to grant incentive
stock options (within the meaning of Section 422 of the Code), nonstatutory
stock options and shares of restricted stock. In addition, the 1994 Plan

also provides for automatic grants of stock options to directors who are not
employees of the Company. The terms and conditions of the awards are set out
from time to time in agreements between the Company and the individuals
receiving such awards ("Stock Option Agreements").

Incentive Stock Options and Nonstatutory Stock Options

Any officer or key employee of the Company or any subsidiary of the Company
is eligible to receive an incentive stock option ("ISO") or nonstatutory stock
option ("NSO") under the 1994 Plan. In addition, any consultant to the
Company, who, in the opinion of the Committee, is in a position to have a
significant effect upon the Company's business, is eligible to receive a NSO
under the 1994 Plan. The Committee, in its sole discretion, selects the
participants from among those eligible to receive options and determines the
form, amount, vesting and timing of the options, except, however, that no
individual may be granted options for more than 525,000 shares in any fiscal
year of the Company. Under the 1994 Plan, the exercise price for the purchase
of shares subject to an ISO or NSO may not be less than one hundred percent
(100%) of the fair market value of the Common Shares at the time the ISO or
NSO is granted, except that the exercise price of ISOs granted to holders of
more than ten percent (10%) of the Common Shares must be at least one hundred
ten percent (110%) of the fair market value of the Common Shares on the date
of grant.

The term of an ISO or NSO may not exceed ten (10) years and, in the case of
an ISO granted to a holder of more than ten percent (10%) of the Common
Shares, the term cannot exceed five (5) years. An ISO or NSO is exercisable in
such installments, and upon such other terms (e.g., the attainment of specific
predetermined stock price goals or other performance goals) as determined by
the Committee and as set forth in the Stock Option Agreement.

ISOs and NSOs may not be assigned or transferred other than by will or by
the laws of descent and distribution. Any optionee who ceases to be employed
by the Company for any reason other than death, disability, or termination for
cause may exercise such ISOs or NSOs, to the extent exercisable, within three
(3) months after such termination. In the event of an optionee's death or
disability, ISOs and NSOs generally will be exercisable for one (1) year after
such death or disability. The Committee may vary these provisions at or after
the time of grant, but in no event may an ISO or NSO be exercised after the
expiration of the option exercise period established at the time of grant.

Non-Employee Director Stock Options

The 1994 Plan provides for automatic grants of stock options to each member
of the Board of Directors who is not also an employee of the Company. All
current directors, except Messrs. Ehrlich and Borey, are non-employee
directors.

A Non-Employee Director Stock Option ("NEDSO") for 6,500 shares is granted
to each non-employee director automatically every year on the date of the
Annual Meeting of Shareholders. Non-employee directors elected by the Board to
fill vacancies and newly created directorships in the interim between grant
dates will receive a prorated NEDSO based upon the number of full months such
non-employee director will serve between his election and the next grant date.
The exercise price of each NEDSO is the fair market value of such shares on
the date the NEDSO is granted.

Each NEDSO is exercisable in its entirety one (1) year from the date of
grant and terminates upon the expiration of five (5) years from the date of
grant. A NEDSO is not transferable other than by will or by the laws of
descent and distribution.

Unless otherwise provided, in the event a non-employee director voluntarily
terminates service on the Board other than by reason of death or disability,
such person's NEDSO (to the extent exercisable upon such termination) will
expire three (3) months from the date of termination of service, provided that
in no event may a NEDSO be exercised beyond its original expiration date.
Pursuant to a resolution adopted by the Board in July

1999, upon the termination of services of a director by reason of such
person's death, disability, resignation, retirement or completion of current
term, all options held by such director will become immediately vested and may
be exercised until the earlier of (i) the date on which the option expires by
its terms or (ii) the date three (3) years after the date of termination of
such director's service as a member of the Board.

Restricted Stock Awards

The 1994 Plan also permits the Committee to make awards of shares of
restricted stock to officers or key employees of the Company and its
subsidiaries. The award will set forth a restriction period during which the
grantee must remain in the employ of the Company and cannot sell, transfer,
assign or pledge the shares. If the grantee's employment terminates during the
period, all such shares still subject to restrictions will be forfeited by the
employee and reacquired by the Company.

The Committee may provide for the lapse of restrictions in installments
where deemed appropriate and it may also require the achievement of
predetermined performance objectives in order for such shares to vest. The
recipient, as owner of the awarded shares, shall have all other rights of a
shareholder, including the right to vote the shares and receive dividends and
other distributions during the restriction period. The restrictions may be
waived, in the discretion of the Committee, in the event of the employee's
retirement, permanent total disability, death or in cases of special
circumstances.

Payment of Exercise Price

Payment for shares purchased on the exercise of a stock option must be made
in full at the time the stock option is exercised. Payment may be made in
cash, with Common Shares of the Company owned by an optionee (provided the
optionee has held such shares for at least six (6) months) or by the delivery
to the Company of irrevocable instructions to deliver the stock certificates
representing the shares for which the option is being exercised directly to a
broker, and instructions to the broker to sell such shares and deliver
promptly to the Company the total exercise price in cash.

Tax Withholding

Whenever a NSO is exercised, a participant must also provide for the
payment of any federal, state or local taxes required by law to be withheld.
Such payment is usually in cash. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of the Company,
including shares retained from the option creating the tax obligation, valued
at their fair market value on the date of delivery. The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of
any kind otherwise due to the participant.

Option Adjustments

In the event of a recapitalization, stock split, stock dividend, merger,
reorganization, tender offer, sale of substantially all of the Company's
assets, dissolution or liquidation of the Company, change-in-control (as
defined in the 1994 Plan), or similar transaction affecting the Company's
Common Shares, the Committee, in its sole discretion, may, as to any
outstanding options, make such substitution or adjustment in the aggregate
number of shares reserved for issuance under the 1994 Plan and in the number
and purchase price of shares subject to such options as it may determine, make
outstanding options fully exercisable, or amend or terminate such options upon
such terms and conditions as it shall provide (which, in the case of the
termination of the vested portion of any option, shall require payment or
other consideration which the Committee deems equitable in the circumstances).

Financing

The 1994 Plan permits the Company, in the discretion of the Committee, to
make a loan to any person holding an ISO, NSO or NEDSO (a "Participant") or to
guarantee the payment of a loan from a bank or others

in an amount sufficient to enable a Participant to exercise a stock option and
to pay the income taxes incurred upon the exercise of an option. No such loans
are currently outstanding.

Each loan or guaranty may extend for a period of not more than five (5)
years, will be evidenced by a promissory note given by the Participant and for
which the Participant will have full personal liability, will bear interest at
such rate per annum as determined by the Committee, which interest will not be
less than the rate in effect for the Company's senior indebtedness to a
financial institution and will be payable at such times as determined by the
Committee but at least no less frequently than annually, will be secured by a
pledge of the shares purchased with the proceeds of the loan which shall be
deposited with the Company, and may contain such further terms and conditions
consistent with the 1994 Plan, including provisions of additional collateral
security, as may be determined by the Committee from time to time.

Shares Subject to 1994 Plan

As noted above, the 1994 Plan has been amended, subject to shareholder
approval, to increase the maximum number of Common Shares available for
issuance thereunder by 1,000,000 shares to a total of 3,750,000 shares
(subject to appropriate adjustments in the event of stock splits, stock
dividends and similar dilutive events). Such shares may be authorized but
previously unissued shares or shares reacquired by the Company, including
shares purchased in the open market.

Amendment and Termination

The Board may amend or terminate the 1994 Plan at any time, except that it
may not amend the 1994 Plan without shareholder approval where the absence of
such approval would cause the 1994 Plan to fail to comply with Rule 16b-3
under the Exchange Act, the performance-based compensation requirements under
Section 162(m) of the Code, Section 422 of the Code, the requirements of any
securities exchange on which the Common Shares of the Company are then listed,
or any other requirement of applicable law or regulation. The Board may not
amend the section of the 1994 Plan relating to NEDSOs more than once every six
(6) months other than to conform with changes in the Code or the rules and
regulations thereunder. The Committee may make non-material amendments to the
1994 Plan.

Term

Options and awards of restricted shares may be granted under the 1994 Plan
until November 7, 2004.

Federal Income Tax Consequences

The following is a summary of the principal federal income tax consequences
associated with options granted under the 1994 Plan. It does not describe all
federal tax consequences.

The following is a summary of the principal federal income tax consequences
associated with options granted under the 1994 Plan. It does not describe all
federal tax consequences under the 1994 Plan nor does it describe foreign,
state or local tax consequences.

(a) ISOs: The ISOs granted under the 1994 Plan are intended to meet the
requirements of Section 422 of the Code. Under the provisions of Section 422
and the related regulations, an optionee will not be required to recognize any
income for federal income tax purposes at the time of grant of an ISO, nor is
the Company entitled to any deduction. The exercise of an ISO is also not a
taxable event, although the difference between the option price and the fair
market value on the date of exercise is an item of tax preference for purposes
of the alternative minimum tax. The taxation of gain or loss upon the sale of
stock acquired upon exercise of an ISO depends in part on whether the stock is
held for at least two (2) years from the date the option was granted and at
least one (1) year from the date the stock was transferred to the optionee
(the "ISO Holding Period").

If the ISO Holding Period is met, then, upon the sale of such shares, any
amount realized in excess of the exercise price will be taxed to such optionee
as a long-term or qualified five-year capital gain and any loss sustained will
be a long-term or qualified five-year capital loss, depending on how long the
optionee has held the shares, and no deduction will be allowed to the Company.

If the ISO Holding Period is not met, then, upon disposition of such shares
(a "disqualifying disposition"), the optionee will realize compensation,
taxable as ordinary income, in an amount equal to the excess of the fair
market value of the shares at the time of exercise over the option price,
limited, however, to the gain on sale and the Company generally will be
entitled to a tax deduction in the same amount. Any additional gain will be
taxable as short-term, long-term or qualified five-year capital gain (or loss)
depending on how long the optionee has held the shares and no deduction will
be allowed to the Company (see below). If the optionee disposes of the shares
in a disqualifying disposition at a price that is below the fair market value
of the shares at the time the ISO was exercised and such disposition is a sale
or exchange to an unrelated party, the amount includible as compensation
income to the optionee will be limited to the excess of the amount received on
the sale or exchange over the exercise price.

If the ISO is exercised by delivery of previously owned common shares in
partial or full payment of the option price, no gain or loss will ordinarily
be recognized by the optionee on the transfer of such previously owned shares.
However, if the previously owned transferred shares were acquired through the
exercise of an ISO, the optionee may realize ordinary income with respect to
the shares used to exercise an ISO if such transferred shares have not been
held for the ISO Holding Period. If the optionee recognizes ordinary income
upon a disqualifying disposition, the Company generally will be entitled to a
tax deduction in the same amount. If an ISO is exercised through the payment
of the exercise price by the delivery of common shares, to the extent that the
number of shares received exceeds the number of shares surrendered, such
excess shares will be considered ISO stock with a zero basis.

(b) NSOs and NEDSOs: In the case of NSOs and NEDSOs granted under the 1994
Plan, no tax consequences result to the Company or the optionee upon granting
of the option. Rather, the optionee realizes compensation income only when the
option is exercised. The amount of income realized is equal to the excess of
the fair market value of the shares at the time the shares are transferred
over the exercise price paid by the optionee for the option. The income
realized by the optionee will be subject to income tax withholding in the case
of an employee.

If a NSO or NEDSO is exercised through payment of the exercise price by the
delivery of common shares, to the extent that the number of shares received by
the optionee exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value.

Generally, the optionee's basis in the shares will be the exercise price
plus the compensation income realized at the time of exercise. Upon the
subsequent disposition of the shares, any additional gain will be short-term,
long-term or qualified by five-year capital gain depending upon whether one
holding period subsequent to the date of exercise is one year or less, more
than one year but five years or less, or more than five years.

In general, capital gain from the disposition of capital stock acquired
after December 31, 2000, and held more than five years is currently taxed at a
maximum federal income tax rate of 18%; capital gain from the disposition of
stock held more than one year but five years or less is currently taxed at a
maximum federal income tax rate of 20%; and capital gain from the disposition
of stock held one year or less is currently taxed at a maximum federal income
tax rate of 39.6%.

The Company is generally entitled to a deductible compensation expense in
an amount equivalent to the amount included as compensation income to the
optionee. This deduction is allowed in the Company's taxable year in which the
income is included as compensation to the optionee.

(c) Restricted Stock: An awardee of restricted stock will generally realize
compensation income (subject to withholding) when and to the extent that the
restrictions on the shares lapse, as measured by the value of the shares at
the time of lapse. The awardee's holding period for the shares will not
commence until the date of lapse, and dividends paid during the restriction
period will constitute an addition to the awardee's tax basis in the shares.

In lieu of deferred recognition of income, the awardee may formally elect,
within thirty (30) days of the award, to realize compensation income at the
time of award, as measured by the fair market value of the shares on the date
of award determined without regard to the restrictions. The income realized
will constitute an addition to the tax basis of the shares. In the case of
such election, any appreciation (or depreciation) on the shares during the
restriction period will give rise to capital gain (or capital loss). In the
event that the awardee terminates employment during the restriction period and
forfeits his or her shares, no deduction may be claimed and the taxes paid on
award of the shares shall be forfeited.

The Company will be entitled to a federal tax deduction at the same time
and to the same extent that the awardee realizes compensation income.

The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement, which are subject to change, and
upon an interpretation of the relevant sections of the Code, their legislative
histories and the income tax regulations which interpret similar provisions of
the Code. Furthermore, the foregoing is only a general discussion of the
federal income tax aspects of the 1994 Plan and does not purport to be a
complete description of all federal income tax aspects of the 1994 Plan.
Optionees may also be subject to state and local taxes in connection with the
grant or exercise of options or the award of restricted shares granted under
the 1994 Plan and the sale or other disposition of shares acquired upon the
exercise of the options. Each person receiving a grant of options or an award
of restricted shares should consult with his or her personal tax advisor
regarding the federal, state and local tax consequences of participating in
the 1994 Plan.

Plan Benefits

Because the grant of options and restricted stock awards under the 1994
Plan is entirely within the discretion of the Committee, it is not possible to
determine the options and restricted stock awards that will be made to the
Named Executive Officers in the future. Information regarding options and
restricted stock awards made to the Named Executive Officers in 2000 is
provided in the Summary Compensation Table and the Stock Option Grants in 2000
Table contained herein. In addition, information regarding options to non-
employee directors in 2000 is provided in the section entitled "ELECTION OF
DIRECTORS--Compensation of Directors".

Vote Required

Approval of the Amendment requires the affirmative vote of a majority of
the Votes Cast at the Annual Meeting. Abstentions and broker non-votes are not
considered as Votes Cast.

Unless authority to so vote is withheld, the persons named in the proxy
card intend to vote shares as to which proxies are received in favor of the
Amendment.

The Board of Directors recommends that the shareholders vote FOR the
approval of the Amendment.

PROPOSAL TO AMEND
THE 2000 EMPLOYEE STOCK PURCHASE PLAN
(Proxy Item 4)

The Board of Directors has adopted, subject to shareholder approval, an
amendment (the "Amendment") to the Company's 2000 Employee Stock Purchase Plan
(the "2000 ESPP") to increase from 600,000 to 1,000,000 the number of Common
Shares available for issuance under the 2000 ESPP in order to enable the
Company's employees to continue to benefit under the 2000 ESPP. The 2000 ESPP,
which was approved by the shareholders at the Annual Meeting on December 6,
2000, became effective January 1, 2001.

The 2000 ESPP is intended to strengthen the Company's ability to attract,
retain and motivate employees by providing them with an opportunity to acquire
an interest in the economic progress of the Company and to encourage them to
increase their efforts to make the Company's business more successful by
providing them with equity-based incentives.

Material Features of the 2000 ESPP

The following is a brief summary of the material provisions of the 2000
ESPP:

In general, all regularly employed employees of the Company and its
subsidiaries are eligible to participate in the 2000 ESPP. In addition, in
general terms, employees who own 5% or more of the Company's Common Shares are
not eligible to participate. As of the Record Date, there were approximately
employees eligible to participate in the 2000 ESPP.

The 2000 ESPP is administered by the Compensation Committee (the
"Committee") of the Board of Directors. The Committee may make such rules and
regulations and establish such procedures for the administration of the 2000
ESPP as it deems appropriate. The Committee has authority to interpret the
2000 ESPP, with such interpretations to be conclusive and binding on all
persons and otherwise accorded the maximum deference permitted by law. The
Committee may take any other actions and make any other determinations or
decisions that it deems necessary or appropriate in connection with the 2000
ESPP or the administration or interpretation thereof.

Employees enroll in the 2000 ESPP by completing a payroll deduction form.
The maximum payroll deduction allowed is generally 10% of an employee's pay.
Pay is an employee's base cash pay (including commissions and overtime, but
not including bonuses, profit-sharing contributions, value of fringe benefits,
reimbursement for expenses, and incentive compensation). No employee may buy
more than $25,000 of Common Shares in any year, based on the Fair Market Value
(as hereinafter defined) at the beginning of the Purchase Period (as
hereinafter defined) in which the shares are purchased. An employee may
discontinue participation in the 2000 ESPP at any time.

The 2000 ESPP is implemented by establishing two six-month purchase periods
("Purchase Periods") each year over a five-year period. The initial Purchase
Period began on January 1, 2001 and will end on June 30, 2001.

Employees who choose to participate in the 2000 ESPP receive an option to
acquire Common Shares at a discount. Under the option, the purchase price
("Purchase Price") of Common Shares is the lower of (i) 85% of the Fair Market
Value of the Common Shares on the first day of a Purchase Period, or (ii) 85%
of the Fair Market Value on the last day of the Purchase Period. The Fair
Market Value is the closing price on The Nasdaq Stock Market(R) on the
relevant date.

At the end of a Purchase Period, a participant's option is exercised
automatically to purchase the number of Common Shares that the employee's
accumulated payroll deductions can buy at the Purchase Price. No fractional
shares may be purchased.

On the exercise of an option on the last day of the Purchase Period (the
"Offering Termination Date"), the Company will deliver as soon as practicable
thereafter to the participant a stock certificate for the Common Shares
purchased or, at the participant's request, deposit such shares directly with
a broker designated by the participant.

Options under the 2000 ESPP cannot be voluntarily or involuntarily
assigned. The Common Shares acquired under the 2000 ESPP are freely
transferable, except as otherwise determined by the Committee.

The Board of Directors has the authority to amend or terminate the 2000
ESPP, except that no amendment may, without the approval of shareholders: (i)
increase the number of shares authorized under the 2000 ESPP, (ii) materially
modify the eligibility requirements for participation in the 2000 ESPP, or
(iii) extend the term of the 2000 ESPP beyond December 31, 2005.

Federal Income Tax Consequences

The 2000 ESPP is intended to qualify for favorable income tax treatment
under Sections 421 and 423 of the Internal Revenue Code. Payroll deductions
are made on an after-tax basis. Thus, participants have to pay income tax on
the dollars withheld from their paychecks under the 2000 ESPP.

No income is recognized when payroll deductions are used to buy Common
Shares at a discount. The discount at the time of purchase is not be taken
into account for income tax purposes until the Common Shares are sold. The
income tax consequences associated with the sale of Common Shares purchased
under the 2000 ESPP depend upon when the sale occurs and the length of the
participant's holding period for his or her Common Shares.

When the shares are disposed of by a participant two years or more after
the beginning of a Purchase Period in which the shares were purchased (or if
the participant dies while owning the shares), he or she will recognize
ordinary income equal to the lesser of (i) the excess of the Fair Market Value
of the shares at the beginning of the Purchase Period over 85% of the Fair
Market Value of the shares at that time or (ii) the excess of the Fair Market
Value of the shares at disposition over the Purchase Price. When shares are
disposed of after less than two years (in what is known as a "disqualifying
disposition"), the participant must recognize the difference between the Fair
Market Value of the shares on the Offering Termination Date and the Purchase
Price as ordinary income, even if the disposition is a gift or is at a loss.
In the event of a participant's death while owning shares acquired under the
2000 ESPP, ordinary income must be recognized in the year of death as though
the shares had been sold.

In the cases discussed above (other than death), the amount of ordinary
income recognized by a participant is added to the Purchase Price paid by the
participant, and this amount becomes the tax basis for determining the amount
of the capital gain or loss from the disposition of the shares. Additional
gain, if any, will be short-term, long-term or qualified capital gain
depending on whether the holding period is one year or less, more than one
year but five years or less, or more than five years.

In general, capital gain from the disposition of capital stock acquired
after December 31, 2000 and held more than five years is currently taxed at a
maximum federal income tax rate of 18%; capital gain from the disposition of
stock held more than one year but five years or less is currently taxed at a
maximum federal income tax rate of 20%; and capital gain from the disposition
of stock held one year or less is currently taxed at a maximum federal income
tax rate of 39.6%.

The Company is entitled to tax deductions for shares issued under the 2000
ESPP only in the event of disqualifying dispositions. For disqualifying
dispositions, the Company is allowed a deduction to the extent of the amount
of ordinary income includable in gross income by such participant for the
taxable year as a result of the premature disposition of the shares.

The foregoing tax discussion is a general description of certain expected
federal income tax results under current law. No attempt has been made to
address any state and local, foreign or estate and gift tax consequences that
may arise in connection with participation in the 2000 ESPP. All affected
individuals should consult their own advisers if they wish any further details
or have special questions.

Vote Required

Approval of the Amendment requires the affirmative vote of a majority of
the Votes Cast at the Annual Meeting. Abstentions and broker non-votes are not
considered as Votes Cast.

Unless authority to so vote is withheld, the persons named in the proxy
card intend to vote shares as to which proxies are received in favor of the
Amendment.

The Board of Directors recommends that the shareholders vote FOR the
approval of the Amendment.

INDEPENDENT PUBLIC ACCOUNTANTS

Arthur Andersen LLP have been the Company's independent public accountants
since June 1985, and have been retained by the Board of Directors for the
current year.

OTHER MATTERS

The Board of Directors knows of no other matters to be presented at the
Annual Meeting, but if other matters properly come before the meeting, the
persons named as Proxies in the enclosed Proxy will vote according to their
best judgment. Shareholders are requested to date and sign the enclosed Proxy
and to mail it promptly in the enclosed postage-paid envelope. If you attend
the Annual Meeting, you may revoke your Proxy at that time and vote in person,
if you wish. Otherwise, your Proxy will be voted for you.

THE COMPANY WILL MAKE AVAILABLE AT NO COST, UPON THE WRITTEN REQUEST OF A
SHAREHOLDER, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2000 (WITHOUT EXHIBITS) AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. COPIES OF EXHIBITS TO THE COMPANY'S FORM 10-K WILL BE
MADE AVAILABLE, UPON WRITTEN REQUEST OF A SHAREHOLDER AND THE PAYMENT TO THE
COMPANY OF THE REASONABLE COSTS OF REPRODUCTION AND MAILING.

By Order of the Board of Directors

ELIZABETH J. McDONALD
Secretary

Dated: June 21, 2001
Portland, Oregon

APPENDIX A

PSC INC.
AUDIT COMMITTEE CHARTER

I. Purpose.

The purpose of the Audit Committee of PSC Inc. ("PSC" or the "Company") is
to assist the Board of Directors ("Board") in fulfilling its oversight
responsibilities with respect to the Company's financial accounting and
reporting process, its system of internal accounting and financial controls,
the internal audit process and the annual independent audit process of the
Company's annual financial statements.

II. Authority.

The Audit Committee is empowered by the Board to take the appropriate
action within the scope of its responsibilities as set forth in this Charter.
The Audit Committee shall be given the resources and assistance necessary to
discharge its responsibilities, including unrestricted access to Company
personnel and documents and the Company's outside auditors. The Audit
Committee shall also have authority to engage outside advisors, as it deems
necessary.

III. Membership.

. The Audit Committee shall consist of at least three directors, all of
whom shall be independent and have no relationship to the Company that
may interfere with the exercise of their independence from management and
the Company. Notwithstanding the foregoing sentence, one director who is
not independent as defined under the rules of the National Association of
Securities Dealers ("NASD") and is not a current employee or an immediate
family member of such employee may be appointed to the Audit Committee,
if the Board, under exceptional and limited circumstances, determines
that membership on the Audit Committee by the individual is required by
the best interests of the Company and its shareholders, and the Board
discloses in the next annual proxy statement subsequent to such
determination the nature of the relationship and the reasons for that
determination.

. The Board shall make determinations of independence with respect to
possible appointees and shall appoint the members of the Audit Committee
and its Chairman. The Board shall apply the rules and restrictions of the
NASD relating to independence and consider employment, officer, business,
family and other relationships in making such determinations and
appointments.

. Each member of the Audit Committee shall be financially literate, as such
qualification is interpreted by the Board in its business judgment, or
must become financially literate within a reasonable period of time after
his or her appointment to the Audit Committee.

. At least one member of the Audit Committee must have accounting or
related financial management expertise, as the Board interprets such
qualification in its business judgment.

IV. Meetings and Reports.

. The Audit Committee shall hold at least four regular meetings annually,
and shall meet more frequently as deemed necessary to fulfill the
responsibilities prescribed in this Charter or by the Board. A special
meeting of the Audit Committee may be called by the Chairman of the Audit
Committee at any time he or she believes is necessary or appropriate.

. To the extent practicable, the meeting agenda, draft minutes from the
prior meeting and supporting materials shall be provided to Audit
Committee members prior to each meeting to allow time for review.

. At least a majority of the members of the Audit Committee are to be
present at all meetings. As necessary or desirable, the Chairman may
request that members of management and/or representatives of the outside
auditors be present at meetings.

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. The Audit Committee shall periodically report on its meetings and other
activities to the Board, shall keep accurate minutes of its meetings and
shall present such minutes to the Board for approval.

V. Responsibilities.

The Company's executive management bears primary responsibility for the
Company's financial and other reporting, for establishing the system of
internal controls and for ensuring compliance with laws, regulations and
Company policies. The Audit Committee's responsibilities and related key
processes are described below. From time to time, the Audit Committee may take
on additional responsibilities, at the request of the Board.

A. Financial Reporting. The Audit Committee shall monitor the
preparation by management of the Company's quarterly and annual external
financial reports. In carrying out this responsibility, the Audit Committee
shall:

. Review with management the significant judgments and estimates used
in developing the financial reports and the major issues addressed;

. Review the accounting and reporting treatment of significant
transactions outside the Company's ordinary operations;

. Review with management and the Company's outside auditors significant
changes to the Company's accounting principles or their application
as reflected in the financial reports;

. Meet with the Company's outside auditors (in private, as appropriate)
to:

(a) review their reasoning in accepting or questioning significant
decisions made by management in preparing the financial reports;

(b) review any outstanding disagreements with management that would
cause them to issue a non-standard report on the Company's
financial statements;

(c) examine the appropriateness of the Company's accounting
principles (including the quality, not just the acceptability,
of accounting principles) and the clarity of disclosure
practices used or proposed;

(d) determine if any restrictions have been placed by management on
the scope of their audit;

(e) review and consider the matters required to be discussed by
Statement of Auditing Standards ("SAS") No. 61, if necessary;
and

(f) discuss any other matters the Audit Committee deems appropriate;

. Review the draft annual financial statements and discuss their
appropriateness with management and the Company's outside auditors;

. Review with management and the outside directors the financial
statements to be included in the Company's Annual Report on Form 10-K
and annually report to the Board whether the Audit Committee
recommends the inclusion of the financial statements in the Company's
Annual Report on Form 10-K; and

. Review the Company's quarterly financial results with management and
the Company's outside auditors, with a particular emphasis on
understanding any new or unusual transactions. For purposes of this
review, the Committee Chairperson may represent the Audit Committee.

B. Relationship with Outside Auditors. The outside auditors are
accountable and responsible primarily to the Board and the Audit Committee,
which have the ultimate authority to select, evaluate and replace the
outside auditors, if necessary. In carrying out this responsibility, the
Audit Committee shall:

. Recommend to the Board the appointment or removal of the outside
auditors;

. Review and approve the scope and extent of audit services to be
provided and related fees;

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. Review and approve the overall audit plan, including the risk factors
considered in determining the audit scope;

. Review the outside auditors' annual written statement pursuant to
Independence Standards Board Standard No. 1, as such Standard may be
modified or supplemented from time to time, outlining all
relationships that may impact its objectivity and independence;

. Review with outside auditors, and approve, the extent of non-audit
services provided and related fees;

. Determine whether the Audit Committee believes the outside auditors
are independent and recommend to the Board any appropriate action in
response to the outside auditor's report regarding independence; and

. Review the responsiveness of the outside auditors to the Company's
needs.

C. Internal Control. The Audit Committee shall have responsibility for
overseeing that management has implemented an effective system of internal
control that helps promote the reliability of financial and operating
information and compliance with applicable laws, regulations and Company
policies, including those related to ethics and conflicts of interest. In
carrying out this responsibility, the Committee shall:

. Inquire of management and the Company's outside auditors concerning
any deficiencies in the Company's policies and procedures that could
adversely affect the adequacy of internal controls and the financial
reporting process and review the timeliness and reasonableness of
proposed corrective actions;

. Review management's responses to the outside auditors' management
letter recommendations for improving internal controls;

. Review the Company's policies and practices related to compliance
with laws, ethical conduct and conflicts of interest;

. Review significant cases of conflicts of interest, misconduct or
fraud;

. Review significant issues between the Company and regulatory
agencies; and

. Review, as appropriate, material litigation involving the Company.

D. Other Committee Activities and Reporting. The Audit Committee shall:

. Annually review the Audit Committee's discharge of its
responsibilities under this Charter;

. Review this Charter annually and propose any recommended changes for
the Board's approval; and

. Prepare the Audit Committee's annual report for inclusion in the
Company's proxy statement.

While the Audit Committee has the responsibilities and powers set forth in
this Charter, its function is one of oversight and review. It is not the duty
of the Audit Committee to plan or conduct audits or to determine that the
financial statements are complete and accurate and are in accordance with
generally accepted accounting principles. This is the responsibility of
management and the outside auditors. The Audit Committee recognizes that the
Company's management, as well as the outside auditors, have more time,
knowledge and information concerning the Company than do the Audit Committee
members. Consequently, in carrying out its oversight responsibilities, the
Audit Committee is not providing any special assurance as to the Company's
financial statements or any professional certification as to the outside
auditor's work.

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APPENDIX B

PSC INC.
1994 STOCK OPTION PLAN

1. Title and Purpose. The plan described herein shall be known as the "PSC
Inc. 1994 Stock Option Plan" (the "Plan"). The purpose of the Plan is to
advance the interests of PSC Inc. (the "Company") and its shareholders by
strengthening the Company's ability to attract and retain individuals of
training, experience, and ability as officers, key employees, directors and
consultants and to furnish additional incentive to such key individuals to
promote the Company's financial success by providing them with an equity
ownership in the Company commensurate with Company performance, as reflected
in increased shareholder value. It is the intent of the Company that such
individuals be encouraged to obtain and retain an equity interest in the
Company and each Participant will be specifically apprised of said intent.

2. Definitions. As used herein, the following words or terms have the
meaning set forth below.

2.1 "Award" means an award granted to any key employee, officer,
consultant, or Non-Employee Director in accordance with the provisions of
the Plan in the form of Options or Restricted Stock.

2.2 "Award Agreement" means the written agreement evidencing each Award
of Restricted Stock granted under the Plan.

2.3 "Board" means the Board of Directors of the Company, except that,
whenever action is to be taken under the Plan with respect to a Reporting
Person, "Board" shall mean only such directors who are disinterested
persons within the meaning of Rule 16b-3 under the Exchange Act or any
successor rule.

2.4 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute.

2.5 "Committee" means the Compensation Committee of the Board or such
other committee as may be designated by the Board to administer the Plan.
To the extent that the Committee delegates its power to grant Options as
permitted by Section 4.2, all references in the Plan to the Committee's
authority to grant Options and determinations with respect thereto shall be
deemed to include the Committee's delegate or delegates.

2.6 "Common Stock" or "Stock" means the Company's $.01 par value Common
Shares.

2.7 "Company" means PSC Inc., a corporation established under the laws
of the State of New York, and its subsidiaries.

2.8 "Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Committee, to receive amounts
due or to exercise rights of the Participant in the event of the
Participant's death. In the absence of an effective designation by a
Participant, Designated Beneficiary shall mean the Participant's estate.

2.9 "Disability" means a physical or mental condition of such a nature
that it would qualify a Participant for benefits under the Company's long-
term disability insurance plan.

2.10 "Disinterested Person" shall have the same meaning as defined in
Rule 16b-3(c)(2) promulgated by the Securities and Exchange Commission
pursuant to its authority under the Exchange Act.

2.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute.

2.12 "Fair Market Value" in the case of a share of Common Stock on a
particular day, means the closing price per share of the Common Stock on
the Nasdaq National Market for that day, 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

B-1

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.

2.13 "Incentive Stock Option" ("ISO") means an Option which is intended
to satisfy the requirements of Section 422 of the Code or any successor
provision.

2.14 "Non-Employee Director" means a member of the Board who is not an
employee of the Company or a management consultant to the Company.

2.15 "Non-Employee Director Stock Option" ("NEDSO") means a Nonstatutory
Stock Option granted to a Non-Employee Director of the Company.

2.16 "Nonstatutory Stock Option" ("NSO") means an Option which is not
intended to qualify as an Incentive Stock Option.

2.17 "Option" means any Option granted under the Plan and includes an
Incentive Stock Option, a Nonstatutory Stock Option and a Non-Employee
Director Stock Option.

2.18 "Option Agreement" means the written agreement evidencing each
Option granted under the Plan.

2.19 "Option Price" means the purchase price per share of Common Stock
upon the exercise of an Option.

2.20 "Outside Director" shall have the same meaning as defined or
interpreted for purposes of Section 162(m) of the Code.

2.21 "Participant" means an individual who has been granted an Award
under the Plan.

2.22 "Reporting Person" means a person required to file reports under
Section 16(a) of the Exchange Act or any successor statute.

2.23 "Restricted Stock" means Stock awarded under Section 9 of the Plan
which is subject to certain forfeiture provisions or restrictions on
transfer.

2.24 "Retirement" means termination of employment with the Company if
such termination of employment constitutes normal retirement, early
retirement, disability retirement or other retirement as provided for at
the time of such termination of employment under the applicable retirement
program then maintained by the Company, provided that the Participant does
not continue in the employment of the Company.

3. Shares Subject to the Plan. Subject to adjustment as provided in Section
12 below, an aggregate of 3,750,000 shares of Common Stock shall be available
for Awards under the Plan. Such shares may be authorized but previously
unissued shares or shares reacquired by the Company, including shares purchased
in the open market. In the event that any outstanding Option granted under the
Plan for any reason expires or is terminated without having been exercised in
full, or any shares of Restricted Stock are forfeited, the shares allocable to
the unexercised portion of such Option or the forfeited portion of such
Restricted Stock shall (unless the Plan shall have been terminated) become
available for subsequent Awards under the Plan; provided that in no event may
the number of shares issued hereunder exceed the total number of shares
reserved for issuance.

4. Administration of the Plan.

4.1 The Plan shall be administered by the Committee. No individual may be
appointed to the Committee who is not both a Disinterested Person and an
Outside Director. Grants of NEDSOs and the amounts and nature of such Options
shall be automatic as described in Section 8. Subject to the preceding sentence
and the provisions set forth herein, the Committee shall have full authority to
determine the time or times at which, and the officers and key employees of the
Company to whom, Awards shall be granted under the Plan, to determine the

B-2

provisions of Awards, to interpret the terms of the Plan and of Awards made
under the Plan, to adopt, amend and rescind rules and guidelines for the
administration of the Plan and for its own acts and proceedings and to decide
all questions and settle all controversies and disputes which may arise in
connection with the Plan. The Committee shall report any action taken by it to
the meeting of the Board next following such action.

4.2 To the extent permitted by applicable law, the Committee may delegate
to one or more executive officers who are also directors of the Company the
power to grant Options to Participants who are not Reporting Persons at the
time of such Options and all determinations under the Plan with respect
thereto, provided that the Committee shall fix the maximum amount of Options
for such Participants as a group. Such delegate or delegates shall report any
action taken by it or them to the meeting of the Committee next following such
action.

4.3 The decision of the Committee on any matter as to which the Committee
is given authority shall be final and binding on all persons concerned. No
member of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Option granted under it.

5. Indemnification of the Committee. In addition to such other rights of
indemnification as they may have as directors of the Company or as members of
the Committee or otherwise, the members of the Committee shall be indemnified
by the Company as and to the fullest extent permitted by law, including
without limitation, indemnification against the reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Awards
granted hereunder, 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 or proceeding that such Committee member is
liable for negligence, bad faith or misconduct in the performance of his
duties; provided that within 60 days after institution of 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.

6. Types of Awards Under the Plan. Awards under the Plan may be in the form
of any one or more of the following:

Incentive Stock Options (ISOs)

Nonstatutory Stock Options (NSOs)

Non-Employee Director Stock Options (NEDSOs)

Restricted Stock

All Awards shall be subject to the terms and conditions set forth herein and
to such other terms and conditions as may be established by the Committee.
Determinations by the Committee under the Plan including without limitation,
determinations of the Participants, the form, amount and timing of Awards, the
terms and provisions of Awards, and the agreements evidencing Awards, need not
be uniform and may be made selectively among Participants who receive, or are
eligible to receive, Awards hereunder, whether or not such Participants are
similarly situated. Except as otherwise provided by the Plan or a particular
Award, any determination with respect to an Award may be made by the Committee
at the time of grant of the Award or any time thereafter.

7. Incentive Stock Options and Nonstatutory Stock Options.

7.1 Eligibility. Any officer or key employee of the Company shall be
eligible to receive an ISO or NSO under the Plan. In addition, any consultant
to the Company, who, in the opinion of the Committee, is in a position to have
a significant effect upon the Company's business, shall be eligible to receive
a NSO under the Plan. No ISO or NSO may be granted to an individual under this
Plan at a time when such individual is serving as a member of the Committee.
An employee owning stock possessing more than 10% of the total combined voting

B-3

power or value of all classes of stock of the Company or any parent or
subsidiary corporation ("Ten Percent Stockholder") is not eligible to receive
an ISO unless the option price is at least 110% of the Fair Market Value of the
Common Stock at the time the ISO is granted and the ISO option by its terms is
not exercisable more than five years from the date it is granted. Restricted
Stock and Common Stock which a grantee may purchase under outstanding Options
shall be treated as stock owned by such grantee for purposes of this
calculation. The Committee also may authorize the granting of ISOs and NSOs to
prospective employees. In the case of a prospective employee, the grant of an
ISO or NSO shall be on the condition of employment by the Company in a key
position, and the date of the grant of the ISO or NSO shall be the date such
employment begins or such later date as the Committee may have specified when
authorizing the grant.

7.2 Grant of ISOs and NSOs

7.2.1 From time to time while the Plan is in effect, the Committee may, in
its absolute discretion, select from among persons eligible to receive ISOs and
NSOs (including persons to whom ISOs and NSOs were previously granted) those
persons to whom ISOs and NSOs are to be granted.

7.2.2 The Committee shall, in its absolute discretion, determine the number
of shares of Common Stock to be subject to each ISO and NSO made by it under
the Plan, provided, however, that the maximum number of shares of Common Stock
with respect to which ISOs and NSOs may be granted to any individual in any one
taxable year of the Company shall not exceed 525,000 shares (the "Maximum
Annual Grant").

7.2.3 The Committee shall determine at the time of each grant hereunder
whether the option is an ISO or NSO. The terms and conditions of ISOs shall be
subject to and comply with Section 422 of the Code or any successor provision,
and any regulations thereunder.

7.3 Option Price. The option price per share of Common Stock with respect to
each ISO and NSO, shall not be less than 100% of the Fair Market Value per
share at the time the ISO or NSO is granted.

7.4 Period of Options. An ISO and NSO shall be exercisable during such
period of time as the Committee may specify, subject, in the case of ISOs, to
any limitation required by the Code. No ISO or NSO shall be exercisable after
the expiration of 10 years from the date the ISO or NSO is granted.

7.5 Vesting of Options. Each ISO and NSO shall be made exercisable at such
time or times as the Committee shall determine. In the case of an ISO or NSO
made exercisable in installments, the Committee may later determine to
accelerate the time at which one or more of such installments may be exercised.
The Committee may impose such conditions with respect to the exercise of ISOs
and NSOs, including conditions relating to the attainment of specific pre-
determined stock price goals or other performance criteria or conditions
relating to applicable federal or state tax or securities laws, as it considers
necessary or advisable and such conditions may differ with respect to each
Participant.

7.6 Limitation on Grant of ISOs. The aggregate Fair Market Value (determined
as of the time the ISO is granted) of the shares with respect to which ISOs are
exercisable for the first time by a grantee during any calendar year (under all
such plans of the Company) shall not exceed $100,000.

7.7 Options Non-Transferable. No ISO or NSO granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution. No
interest of a Participant under an ISO or NSO or the Plan shall be subject to
the attachment, execution, garnishment, sequestration, the laws of bankruptcy
or any other legal equitable process. During the lifetime of the Participant,
ISOs and NSOs shall be exercisable only by the Participant who received them.

7.8 Termination of Employment.

7.8.1 Death During or After Employment. If a Participant dies during
employment or within three (3) months after terminating employment, and at a
time when the Participant is entitled to exercise an ISO or NSO,

B-4

then at any time or times within one year after death (or such greater or
lesser period after death as may be specified in the documentation evidencing
the ISO or NSO) such ISO or NSO may be exercised, but only as to any or all of
those shares which the Participant was entitled to purchase immediately prior
to the Participant's death (unless the Committee within thirty (30) days after
the Participant's death shall have accelerated the vesting of the ISO or NSO).
ISOs or NSOs exercisable after death may be exercised by the Participant's
Designated Beneficiary, and except as so exercised, shall expire at the end of
the specified post-death exercise period. In no event, however, may any ISO or
NSO granted under the Plan be exercised after the expiration of the ISO or NSO
exercise period established at the time of grant.

7.8.2 Retirement or Disability. In the event of a Participant's Retirement
or Disability at a time when the Participant is entitled to exercise an ISO or
NSO, then within three months after Retirement or one year after Disability (or
such greater or lesser period after Retirement or Disability as may be
specified in the documentation evidencing the ISO or NSO) the Participant may
exercise such ISO or NSO only as to those shares which the Participant was
entitled to purchase immediately prior to such Retirement or Disability (unless
the Committee within thirty (30) days after the Participant's Retirement or
Disability shall have accelerated the vesting of the ISO or NSO). If the
Participant dies within the specified post-Retirement or post-Disability
exercise period, the Participant's ISO or NSO may be exercised by the
Participant's Designated Beneficiary, to the same extent as if the deceased
Participant had survived, during the greater of one year from the date of his
death or, if a post-Retirement or post-Disability exercise period greater than
three months or one year was specified in the ISO or NSO documentation, the
remainder of such longer period.

Except as exercised within the applicable period described above, each ISO
or NSO shall expire at the end of such period. In no event, however, may any
ISO or NSO granted under the Plan be exercised after the expiration of the ISO
or NSO exercise period established at the time of grant.

7.8.3 Other Terminations of Employment. If the employment of a Participant
is terminated for cause, the Participant's option rights, both accrued and
future, under any then outstanding ISO or NSO shall be forfeited and terminated
immediately and may not thereafter be exercised to any extent.

If the employment of a Participant is terminated for any reason other than
cause, death, Retirement or Disability at a time when the Participant is
entitled to exercise an ISO or NSO, then within three months after such
termination of employment (or such greater or lesser period after termination
of employment as may be specified in the documentation evidencing the ISO or
NSO), the Participant may exercise such ISO or NSO only as to those shares
which the Participant was entitled to purchase immediately prior to such
termination of employment (unless the Committee within thirty (30) days after
the Participant's termination of employment shall have accelerated the vesting
of the ISO or NSO). If the Participant dies within the specified post-
termination of employment exercise period, the Participant's ISO or NSO may be
exercised by the Participant's Designated Beneficiary, to the same extent as if
the deceased Participant had survived, during a period equal to the greater of
one year from the date of the Participant's death or the remainder of such
specified post-termination of employment exercise period.

If the Committee so decides, an ISO or NSO may provide that a leave of
absence granted by the Company is not a termination of employment for the
purpose of this subsection 7.8.3 and, in the absence of such a provision, the
Committee may, in any particular case, determine that such a leave of absence
is not a termination of employment for such purpose.

7.8.4 Notwithstanding the terms and provisions of Sections 7.8.1, 7.8.2, and
7.8.3, the Committee, at any time, may establish such other terms and
provisions with respect to the exercise of an ISO or NSO by a Participant upon
the death, Disability, or other termination of employment of such person as it,
in its sole discretion, deems advisable.

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8. Non-Employee Director Stock Options.

8.1 Eligibility. Each Non-Employee Director of the Board shall receive a
NEDSO as determined hereunder without further action by the Board or Committee.

8.2 Option Grant Dates. Subject to the approval of the Plan by the
shareholders at the 1995 Annual Meeting, a NEDSO shall be granted to each Non-
Employee Director automatically every year on the date of the Annual Meeting of
Shareholders, commencing on the date of the 1995 Annual Meeting of
Shareholders. Non-Employee Directors elected by the Board to fill vacancies and
newly created directorships in the interim between grant dates will receive a
pro rated NEDSO based upon the number of full months such Non-Employee Director
will serve between his election and the next grant date.

8.3 Option Formula. Each Non-Employee Director shall receive a NEDSO to
purchase 3,167 shares of Stock on each grant date, without further action by
the Board or Committee. Notwithstanding the foregoing sentence and without
further action by the Board or Committee, each Non-Employee Director shall
receive a NEDSO to purchase 6,500 shares of Stock on each grant date commencing
on the first grant date on which a Non-Employee Director does not receive a
stock option under the Company's 1987 Stock Option Plan.

8.4 Period of Options. Except as otherwise provided herein, each NEDSO will
be exercisable in full one year from the date of grant. All NEDSOs shall
terminate upon the expiration of five years from the date upon which such
NEDSOs were granted (subject to prior termination as hereinafter provided).

8.5 Option Price. The price per share of Stock at which a NEDSO may be
exercised shall be equal to 100% of the Fair Market Value of the price per
share of Stock on the date the NEDSO is granted.

8.6 Options Non-Transferable. No NEDSO granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution. No
interest of a Non-Employee Director under a NEDSO or the Plan shall be subject
to attachment, execution, garnishment, sequestration, the laws of bankruptcy or
any other legal or equitable process. During the lifetime of the Non-Employee
Director, NEDSOs shall be exercisable only by the Non-Employee Director who
received them.

8.7 Death or Disability of Non-Employee Director. If a Non-Employee Director
shall terminate performance of services for the Company because of death or
Disability, or shall die after termination of performance of services for the
Company but while the Non-Employee Director could have exercised a NEDSO, that
NEDSO may be exercised, to the extent that the Non-Employee Director was
entitled to do so at the date of termination of performance of services, at any
time, or from time to time, within one year after the date of death or
termination of performance of services because of Disability, but in no event
later than the expiration date specified pursuant to Section 8.4. In the case
of death, exercise may be made by the Non-Employee Director's Designated
Beneficiary. Notwithstanding the foregoing, the Committee may establish such
other provisions with respect to the exercise of a NEDSO upon the death or
Disability of a Non-Employee Director as it, in its sole discretion, deems
advisable.

8.8 Termination of Services as Non-Employee Director. If a Non-Employee
Director's performance of services for the Company shall terminate for any
reason other than death or Disability, the Non-Employee Director must exercise
such NEDSO, to the extent the Non-Employee Director was entitled to do so at
the date of termination of performance of services, at any time, or from time
to time, within three months after the date of termination of performance of
services, but in no event later than the expiration date specified pursuant to
Section 8.4; provided, however, in the case of termination of performance of
services for cause, the NEDSO shall cease to be exercisable on the date of such
termination. Notwithstanding the foregoing sentence, the Committee may
establish such other provisions with respect to the exercise of a NEDSO by a
Non-Employee Director upon the termination of such person's services by reason
of resignation, retirement, completion of term or otherwise, as it, in its sole
discretion, deems advisable. The Committee shall have the sole power to
determine the date of any circumstances which shall constitute termination of
services as a Non-Employee Director and to determine whether such termination
is the result of death, Disability, cause or any other reason.

B-6

9. General Provisions Applicable to All Options.

9.1 Exercise of Options; Payment of Option Price. Options may be exercised
(in full or in part) only by written notice of exercise delivered to the
Company at its principal executive office, accompanied by payment equal to the
full Option Price for the shares of Stock which are exercised. The Option Price
of each share of Common Stock purchased upon exercise of an Option shall be
paid in full in cash at the time of exercise, with shares of Common Stock owned
by the Participant, by delivering to the Company (i) irrevocable instructions
to deliver the stock certificates representing the shares of Stock for which
the Option is being exercised, directly to a broker, and (ii) instructions to
the broker to sell such shares of Stock and promptly deliver to the Company the
portion of the proceeds equal to the total Option Price, or in any combination
thereof. For purposes of making payment in shares of Common Stock, such shares
shall be valued at their Fair Market Value on the date of exercise of the
Option and shall have been held by the Participant for a period of at least six
(6) months.

9.2 Documentation of Options. Neither anything contained in the Plan nor in
any resolutions adopted or to be adopted by the Board or the Shareholders nor
any action taken by the Committee shall constitute the granting of any Option.
The granting of an Option shall take place only when a written Option Agreement
shall have been duly executed and delivered by the Company and the Participant.
Each Option Agreement shall specify the terms and conditions of the Option and
contain such other terms and conditions not inconsistent with the provisions of
the Plan as the Committee considers necessary or advisable to achieve the
purposes of the Plan or comply with applicable tax and regulatory laws and
accounting principles. The Option Agreement with respect to ISOs shall provide,
among other things, that the Participant shall advise the Company immediately
upon any sale or transfer of shares of Common Stock received upon exercise of
the Option to the extent such sale or transfer takes place prior to the later
of two (2) years from the date of grant or one (1) year from the date of
exercise.

9.3 Tax Withholding. The Committee shall require, on such terms as it deems
necessary, that the Participant pay to the Company or make other satisfactory
provision for payment of, any federal, state or local taxes required by law to
be withheld in respect to Options under the Plan. In the Committee's
discretion, such tax obligations may be paid in whole or in part in shares of
Common Stock, including shares retained from the Option creating the tax
obligation, valued at their Fair Market Value on the date of delivery. The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to the Participant.

9.4 Amendment of Options. The Committee may modify or amend any outstanding
Option if it determines, in its sole discretion, that amendment is necessary or
advisable in the light of any addition to or change in the Code or in the
regulations issued thereunder, or any federal or state securities laws or other
law or regulation, which change occurs after the date of grant of the Option
and by its terms applies to the Option. In addition, subject to the terms and
conditions and within the limitations of the Plan, the Committee may modify,
amend, extend or renew outstanding Options granted under the Plan, or accept
the surrender of outstanding Options under the Plan or under any other stock
option plan of the Company (to the extent not theretofore exercised) and
authorize the granting of new Options under the Plan in substitution therefor
(to the extent not theretofore exercised). No amendment of an outstanding
Option, however, may, without the consent of the Participant, make any changes
which would adversely affect the rights of such Participant.

10. Financing. In the discretion of the Committee, the Company may guarantee
bank loans or make loans to a Participant to finance the Option Price of the
shares purchased upon the exercise of an Option and also to finance payment by
the Participant of income taxes incurred with such exercise upon the following
terms and conditions:

10.1 Term of Loan. Each loan or guaranty will extend for a period of not
more than five (5) years.

10.2 Promissory Note. Each loan will be evidenced by a promissory note given
by the Participant and for which the Participant shall have full personal
liability. Each such note shall bear interest at such rate per annum

B-7

as determined by the Committee which interest shall be not less than the rate
in effect for the Company's senior indebtedness to a financial institution and
shall be payable at such times as determined by the Committee but at least no
less frequently than annually. Payments of principal, or installments thereof,
need not be required by the terms of the notes, but may be required thereby if
so determined by the Committee. Principal and interest may be prepaid in whole
or in part, from time to time, without penalty. Each such note shall in all
events become due and payable without demand on the fifth anniversary of the
date of the note, or upon the Participant's failure to pay any installment of
principal and interest when due or within 30 days thereafter, or immediately
upon the insolvency or bankruptcy of the Participant, or within 30 days from
the date of termination of the Participant's employment or directorship or
office for whatever cause, excepting only death, Disability and Retirement. In
the event of the death of a Participant, such note shall become due and
payable without demand nine months from the date of such death. In the event
of the Disability or Retirement of a Participant his note shall become due and
payable without demand three months from the date of such permanent disability
or approved retirement.

10.3 Pledge of Shares. Each note or guaranty will be secured by a pledge of
the shares purchased with the proceeds of the loan which shall be deposited
with the Company. Dividends paid on shares subject to the pledge shall be
first applied against interest charges due upon the bank loan, or the note
secured, with any balance applied to reduce the principal thereof. Regardless
of any other provision of this Plan, shares pledged to secure the guaranty or
note may not be withdrawn from the pledge unless the proportionate amount of
the guaranteed bank loan or the note secured thereby shall be immediately
repaid.

10.4 Other Terms and Conditions. All such notes, guaranty and pledges may
contain such further terms and conditions consistent with this Plan, including
provisions for additional collateral security, as may be determined by the
Committee from time to time.

10.5 Approval by Shareholders. Approval and adoption of this Plan by the
shareholders of the Company shall constitute full and complete authorization
for any guaranty, loan, or interest reimbursement made to or on behalf of
Participant hereunder.

10.6 Loans to Non-Employee Directors and Consultants. Notwithstanding
anything contained herein to the contrary, each note or guaranty representing
a loan or guaranty to a Non-Employee Director or Consultant shall be secured
by a pledge of shares equal to twice their maximum loan value as defined in
Federal Reserve Regulation G (12 CFR Part 207) or by such other or additional
collateral security as the Committee deems appropriate and in the best
interests of the Company.

11. Restricted Stock.

11.1 The Committee may, in its discretion, make Awards of Restricted Stock
to such officers and key employees as may be selected in the manner provided
in Section 6 of this Plan. Such Awards shall be evidenced by an Award
Agreement in such form, and containing such terms and conditions as are not
inconsistent with this Plan, as the Committee, shall, from time to time,
determine. Restricted Stock awarded hereunder shall be subject to such
restrictions as may be determined by the Committee and set out in the Award
Agreement.

11.2 Restricted Stock shall be subject to a restriction period (after which
restrictions will lapse) which shall mean a period commencing on the date the
Award is granted and ending on such date as the Committee shall determine (the
"Restriction Period"). The Committee may provide for the lapse of restrictions
in installments where deemed appropriate.

11.3 Except when the Committee determines otherwise pursuant to Section
11.5, if a Participant terminates employment with the Company for any reason
before the expiration of the Restriction Period, all shares of Restricted
Stock still subject to the restriction shall be forfeited by the Participant
and shall be reacquired by the Company.

B-8

11.4 Except as otherwise provided in this Section 11, no shares of
Restricted Stock received by a Participant shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period.

11.5 In cases of death, Disability or Retirement or in cases of special
circumstances, the Committee may, in its sole discretion when it finds that a
waiver would be in the best interests of the Company, elect to waive any or all
remaining restrictions with respect to such Participant's Restricted Stock.

11.6 The Committee may require, under such terms and conditions as it deems
appropriate or desirable, that the certificates of Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any Award of Restricted Stock that the Participant shall have delivered a stock
power endorsed in blank relating to the Restricted Stock.

11.7 Subject to Section 11.6, each Participant entitled to receive
Restricted Stock under the Plan shall be issued a certificate for the shares of
Stock. Such certificate shall be registered in the name of the Participant and
shall bear an appropriate legend reciting the terms, conditions and
restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.

11.8 The restrictions imposed under this Section 11 shall apply as well to
all shares or other securities issued in respect of the Restricted Stock in
connection with any stock split, stock dividend, recapitalization,
reclassification, merger, consolidation or reorganization, but such
restrictions shall expire or terminate at such time or times as may be
specified therefor in the Award Agreement.

12. Adjustment Upon Changes in Capitalization; Changes in Control.

12.1 If the outstanding shares of Stock of the Company as a whole are
increased, decreased, changed into, or exchanged for, a different number or
kind of shares or securities of the Company, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure, or amendment to the certificate of incorporation of the
Company or otherwise, an appropriate and proportionate adjustment, as
determined by the Committee shall be made to the number and kind of shares
subject to this Plan, and to the number, kind, and per share Option Price of
shares subject to unexercised Options granted prior to any such change. Any
such adjustment shall be made without a change in the aggregate purchase price
of the shares of Stock subject to the unexercised portion of any Option.

12.2 In the event of any tender offer or exchange offer (other than an offer
by the Company) for the Company's Stock, or a dissolution or liquidation of the
Company, or a merger or consolidation or similar transaction in which the
Company is not the surviving corporation, or a sale, exchange or other
disposition of all or substantially all of the Company assets, or a "change in
control" of the Company (as such term is defined in Section 12.3 hereinafter),
the Committee, in its sole discretion, may, as to any outstanding Options, make
such substitution or adjustment in the aggregate number of shares reserved for
issuance under the Plan and in the number and per share Option Price (if any)
of shares subject to such Options as it may determine, make outstanding Options
fully exercisable, or amend or terminate such Options upon such terms and
conditions as it shall provide (which, in the case of the termination of the
vested portion of any Option, shall require payment or other consideration
which the Committee deems equitable in the circumstances).

12.3 For the purposes of this Plan, a "change in control" of the Company
shall be deemed to have occurred if (i) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the "beneficial
owner" (as that term is defined by the Securities and Exchange Commission for
purposes of Section 13(d) of the Exchange Act), directly or indirectly, of more
than 20% of the outstanding voting securities of the Company or its successors;
or (ii) during any period of two consecutive years a majority of the Board of
Directors no longer consists of individuals who were members of the Board of
Directors at the beginning of

B-9

such period, unless the election of each director who was not a director at the
beginning of the period was approved by a vote of at least two-thirds of the
directors still in office who were directors at the beginning of the period.

12.4 The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 11 shall lapse upon the occurrence of an event specified in
Section 12.2 and the Company shall issue stock certificates without a
restrictive legend.

13. Miscellaneous.

13.1 No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to continued employment. The Company expressly reserves
the right at any time to terminate the employment of a Participant free from
any liability or claim under the Plan except as may be expressly provided in
the applicable Award.

13.2 No Right to Continue as a Director. The granting of a NEDSO shall not
constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain a Non-Employee Director for any period of
time.

13.3 No Rights as Shareholder. Subject to the provisions of the applicable
Option, no Participant or Designated Beneficiary shall have any rights as a
shareholder with respect to any shares of Common Stock to be distributed under
the Plan until such person becomes the holder thereof.

13.4 No Fractional Shares. No fractional shares of Common Stock shall be
issued under the Plan, and cash shall be paid in lieu of any fractional shares
in settlement of Options granted under the Plan.

13.5 Unfunded Plan. The Plan shall be unfunded, shall not create (or be
construed to create) a trust or a separate fund or funds, and shall not
establish any fiduciary relationship between the Company and any Participant or
other person.

13.6 Successors and Assigns. The Plan shall be binding on all successors and
assigns of the Participant, including without limitation the Participant's
Designated Beneficiary or any receiver or trustee in bankruptcy or
representative of the Participant's creditors.

13.7 Compliance With Other Laws and Regulations. The Plan, the grant and
exercise of Awards under the Plan, and the obligation of the Company to
transfer shares under such Awards shall be subject to all applicable federal
and state laws, rules and regulations, including those related to disclosure of
financial and other information to Participants, and to any approvals by any
government or regulatory agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of Stock prior to (a)
the listing of such shares on any stock exchange on which the Stock may then be
listed, where such listing is required under the rules or regulations of such
exchange, and (b) the compliance with applicable federal and state securities
laws and regulations relating to the issuance and delivery of such
certificates; provided, however, that the Company shall make all reasonable
efforts to so list such shares and to comply with such laws and regulations.

13.8 Compliance with Rule 16b-3. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.

13.9 Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, except that it may not amend the Plan
without shareholder approval where the absence of such approval would cause the
Plan to fail to comply with Rule 16b-3 under the Exchange Act, the performance-
based compensation requirements under Section 162(m) of the Code, Section 422
of the Code, the requirements of any

B-10

securities exchange on which the shares of Common Stock are then listed, or any
other requirement of applicable law or regulation. The Board may not amend
Section 8 more than once every six months, other than to conform with changes
in the Code or the rules and regulations thereunder. The Committee may make
non-material amendments to the Plan. No amendment shall apply to adversely
affect any Participant with respect to whom an Award shall heretofore have been
granted.

13.10 Governing Law. To the extent not superseded by federal law, the
provisions of the Plan shall be governed by and interpreted in accordance with
the laws of the State of New York.

14. Effective Date of Plan; Term of Plan. The Plan shall become effective as
of the date on which the Board adopts the Plan, subject, however, to the
approval by the shareholders at the 1995 Annual Meeting of Shareholders. The
Plan shall terminate on November 7, 2004 and no Awards shall be granted under
the Plan after that date, provided, however, that the Plan and all Awards
granted under the Plan prior to such date shall remain in effect until such
Awards have been satisfied or terminated in accordance with the Plan and the
terms of such Awards.

Date Plan adopted by Board of Directors: November 8, 1994
Date Plan approved by Shareholders: May 3, 1995
Date Amendment adopted by Board of Directors: February 2, 1999
Date Amendment approved by Shareholders: May 12, 1999
Date Amendment adopted by Board of Directors: July 13, 1999

B-11

PROXY
PROXY PSC INC. PROXY
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, JULY 11, 2001

The undersigned, revoking all prior proxies, hereby appoints Robert S. Ehrlich
and Edward J. Borey and either one of them with full power of substitution, as
proxy or proxies to vote for the undersigned, in the name of the undersigned,
all of the Common Shares of PSC Inc. (the "Company") of the undersigned, as if
the undersigned were personally present and voting at the Company's Annual
Meeting of Shareholders to be held at The Heathman Hotel, 1001 S.W. Broadway at
Salmon, Portland, Oregon on July 11, 2001 at 9:00 a.m. (Pacific Daylight Time)
(the "Annual Meeting"), and at any and all adjournments thereof, upon the
following matters:

(Continued and to be signed on reverse side)

________________________________________________________________________________

Please mark your votes as
as indicated in this example [X]

1. Election of three (3) directors, each to serve a three-year term.

FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary) to vote for all nominees listed below

[_] [_]

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)

Edward J. Borey Robert S. Ehrlich Jack E. Rosenfeld

2. Proposal to amend the Certificate of Incorporation to increase the number
of authorized Common Shares.

FOR AGAINST ABSTAIN
[_] [_] [_]

3. Proposal to amend the 1994 Stock Option Plan.

FOR AGAINST ABSTAIN
[_] [_] [_]

4. Proposal to amend the 2000 Employee Stock Purchase Plan.

FOR AGAINST ABSTAIN
[_] [_] [_]

5. Transaction of such other business as may properly come before the meeting
or any adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR ELECTION OF THE NOMINEES FOR DIRECTORS SPECIFIED IN THE PROXY STATEMENT AND
FOR PROPOSALS 2, 3 AND 4.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

Dated: _________________________, 2001

______________________________________
Signature

IMPORTANT: Sign the Proxy exactly as your name or names appear on your Common
Share certificate; in the case of Common Shares held in joint tenancy, each
joint tenant must sign. Fiduciaries should indicate their full titles and the
capacity in which they sign. Please complete, sign, date and return this Proxy
promptly in the enclosed envelope.