UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  ------------
                                    FORM 10-Q
                                  ------------

(Mark One)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

               For the quarterly period ended: September 30, 1999

                                       or

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                                  ------------
                         Commission File Number: 0-26462
                                  ------------


                               PERCON INCORPORATED
             (Exact name of registrant as specified in its charter)


               Washington                                  91-1486560
      (State or other jurisdiction                       (IRS Employer
    of incorporation or organization)                  Identification No.)


     1800 Millrace Drive Eugene, OR                          97403
(Address of principal executive offices)                   (Zip code)


                                  541-344-1189
              (Registrant's telephone number, including area code)


                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

                                  ------------

             The number of shares of common stock outstanding as of
                          November 10, 1999: 3,809,111
<PAGE>
                      PERCON INCORPORATED and SUBSIDIARIES


                                    FORM 10-Q

                               September 30, 1999

                                      INDEX

                                                                         Page
PART I - FINANCIAL INFORMATION                                         Reference
--------------------------------------------------------------------------------

Item 1 - Financial Statements

         Condensed Consolidated Balance Sheets as of
         September 30, 1999 and December 31, 1998 (unaudited).             3

         Condensed Consolidated Statements of Income for the
         three months ended September 30, 1999 and 1998, and  the
         nine months ended September 30, 1999 and 1998 (unaudited).        4

         Condensed Consolidated Statements of Cash Flows for the
         three months ended September 30, 1999 and 1998 (unaudited).       5

         Notes to Condensed Consolidated Financial Statements            6 - 9

Item 2 - Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                      10 - 15


PART II - OTHER INFORMATION
---------------------------

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

Signatures                                                                16


                                                                               2
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
Percon Incorporated
Condensed Consolidated Balance Sheets
(in thousands, except share data)                                      September 30,       December 31,
                                                                               1999               1998
                                                                       ------------       ------------
ASSETS                                                                  (Unaudited)                 (1)
<S>                                                                    <C>                <C>
Current assets:
     Cash and cash equivalents                                         $      7,085       $      4,534
     Accounts receivable, net                                                 6,246              6,793
     Inventories, net                                                         3,398              3,742
     Prepaid expenses and other                                                 507                860
     Deferred income tax asset                                                  289                276
                                                                       ------------       ------------
       Total current assets                                                  17,525             16,205

Property and equipment, net                                                   2,733              2,758
Goodwill and intangibles, net                                                 1,061              1,439
                                                                       ------------       ------------

       Total assets                                                    $     21,319       $     20,402
                                                                       ============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                                 $        101       $        104
     Accounts payable                                                         1,620              1,644
     Accrued expenses                                                         1,399              1,124
     Deferred revenue                                                           174                116
     Income taxes payable                                                        41                231
                                                                       ------------       ------------
       Total current liabilities                                              3,335              3,219

Deferred income taxes                                                           387                468
Long-term debt, less current portion                                            554                703
Other                                                                            21                 20
                                                                       ------------       ------------

       Total liabilities                                               $      4,297       $      4,410
                                                                       ------------       ------------
Commitments and Contingencies

Shareholder's Equity:
   Preferred stock, 5,000,000 shares authorized,
      None issued                                                                 -                  -
   Common stock, no par value, 20,000,000 shares authorized,
      3,918,781 and 3,807,711 shares issued and
      Outstanding, respectively                                               9,353              9,319
   Treasury stock, at cost, 210,000 at September 30, 1999                    (1,517)              (597)
   Retained earnings                                                          9,753              7,471
   Accumulated other comprehensive income / (loss)                             (567)              (201)
                                                                       ------------       ------------
       Total shareholders' equity                                            17,022             15,992
                                                                       ------------       ------------

       Total liabilities and shareholders' equity                      $     21,319       $     20,402
                                                                       ============       ============


(1)  The consolidated balance sheet as of December 31, 1998 has been taken from
     the audited financial statements at that date and condensed.

See accompanying notes.
</TABLE>

                                                                               3
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Condensed Consolidated Statements of Income, (Unaudited)
(in thousands, except per share data)
                                                           Three Months Ended         Nine Months Ended
                                                              September 30,             September 30,
                                                             1999          1998         1999           1998
------------------------------------------------------   ----------------------    ------------------------
<S>                                                      <C>           <C>         <C>            <C>
Net sales                                                $  9,267      $  7,818    $  25,710      $  21,969

Cost of goods sold                                          4,655         4,117       12,766         11,521
------------------------------------------------------   ----------------------    ------------------------

     Gross profit                                           4,612         3,701       12,944         10,448

Operating Expenses:

   Selling, marketing and customer service                  1,716         1,486        4,910          4,129

   General and administrative                                 938           824        2,670          2,263

   Research and product development                           541           403        1,578          1,263

   Charges related to terminated  acquisition                   -             -          161              -
------------------------------------------------------   ----------------------    ------------------------

     Operating income                                       1,417           988        3,625          2,793


Interest and other income (expense), net                       62            32           82             54
------------------------------------------------------   ----------------------    ------------------------

     Income before taxes                                    1,479         1,020        3,707          2,847


Provision for income taxes                                    567           392        1,425          1,083
------------------------------------------------------   ----------------------    ------------------------
     Net income                                          $    912      $    628    $   2,282      $   1,764
------------------------------------------------------   ----------------------    ------------------------
     Net income per share:
                                   Basic                 $   0.24      $   0.16    $    0.59      $    0.44
------------------------------------------------------   ----------------------    ------------------------
                                 Diluted                 $   0.24      $   0.16    $    0.59      $    0.43
------------------------------------------------------   ----------------------    ------------------------

Weighted average shares outstanding:

    Basic                                                   3,804         4,013        3,854          4,006
    Effect of dilutive securities:

        Warrants                                               11             -            1             39

        Options                                                22             3           13             22
------------------------------------------------------   ----------------------    ------------------------

    Diluted                                                 3,837         4,016        3,868          4,067
------------------------------------------------------   ----------------------    ------------------------

See accompanying notes.
</TABLE>

                                                                               4
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Condensed Consolidated Statements of Cash Flows, (Unaudited)
(in thousands)
                                                                                      Nine Months Ended
                                                                                        September 30,
                                                                                    1999               1998
-----------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
   Net Income                                                                   $  2,282           $  1,764
   Adjustments to reconcile net income to net
      cash provided by (used in) operating activities:
       Depreciation and amortization                                                 884                911
       Deferred income taxes                                                         (94)               (94)
       Change in operating assets and liabilities:
        Accounts receivable                                                          547               (776)
        Inventories                                                                  344                435
        Prepaid expenses and other                                                   354               (137)
        Accounts payable and accrued expenses                                        202                928
-----------------------------------------------------------------------------------------------------------
          Net cash provided by operating activities                                4,519              3,031
-----------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
    Capital expenditures                                                            (568)              (995)
-----------------------------------------------------------------------------------------------------------
        Net cash used in investing activities                                       (568)              (995)
-----------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
   Principal paid on long-term debt                                                 (148)               (12)
   Proceeds from stock issued                                                         30                260
   Tax benefit from exercise or
     early disposition of certain stock options                                        3                 77
   Cash used for purchase of treasury stock                                         (920)                 -
-----------------------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities                         (1,035)               325
-----------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                             (365)               128
-----------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                               2,551              2,489
Cash and cash equivalents at beginning of period                                   4,534              1,884
-----------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                      $  7,085           $  4,373
-----------------------------------------------------------------------------------------------------------

Supplemental disclosure:
   Interest paid                                                                $     50           $     59
   Taxes paid                                                                   $  1,730           $  1,121

See accompanying notes.
</TABLE>

                                                                               5
<PAGE>
Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial
Statements, (Unaudited)


1.   Summary Of Significant Accounting Policies

Principles Of Consolidation

The condensed consolidated financial statements include the accounts of Percon
Incorporated ("Percon" or the "Company") and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.


Basis Of Reporting

The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and in the opinion of management contain all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of the interim periods presented. It should be
understood that accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end. The results of operations for
the nine months ended September 30, 1999, are not necessarily indicative of the
results to be expected for the full year.

The accompanying interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998.

Basic earnings per share are based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share are based
on the weighted average number of shares of common stock and potentially
dilutive securities outstanding during the period, computed in accordance with
the treasury stock method.


2.   Inventories

Inventories are stated at the lower of cost (methods which approximate the
first-in, first-out method) or market. Inventory costs include materials, labor,
and overhead and consist of the following:

<TABLE>
<CAPTION>
(In thousands)                  September 30, 1999             December 31, 1998
                                ------------------             -----------------
<S>                                       <C>                           <C>
Finished goods                            $  2,173                      $  2,258
Materials                                    1,918                         2,053
Reserve for obsolescence                      (693)                         (569)
                                          --------                      --------
                                          $  3,398                      $  3,742
                                          ========                      ========
</TABLE>


3.   Stock Options

During the first nine months of 1999, the Company granted options to purchase an
aggregate of 55,000 shares of common stock at an average price of $8.48 per
share. The exercise prices are greater than or equal to the Company's market
price on the date of grant.


                                                                               6
<PAGE>
Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial
Statements, Continued, (Unaudited)


4.   Commitments and Contingencies

In December 1997, the Company signed a ten year non-cancelable lease for a new
headquarters facility, which contains a five year lease extension option. The
lease contains provisions for the Company to pay certain ongoing costs, such as
property taxes, insurance and support costs, which are not reflected in the
minimum lease payments totaling approximately $5.5 million. The Company expects
to sublease certain portions of the new facility as permitted under the lease
agreement.

On October 8, 1998 the Company announced that its Board of Directors had
authorized the repurchase of up to 250,000 shares of its common stock. The
shares may be repurchased from time to time through open market transactions,
and funded from existing cash balances or from borrowings under bank credit
arrangements. The number of shares held as treasury stock was 210,000 and 94,400
as of September 30, 1999 and December 31, 1998, respectively.


5.   Income Taxes

The provision for income taxes has been recorded based on the Company's current
estimate of the Company's annual effective tax rate. This rate differs from the
combined federal and state statutory rate of approximately 38.5% primarily due
to the benefit of the Company's foreign sales corporation and research and
experimentation tax credits.


6.   Comprehensive Income

The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1,
1998. This statement establishes standards for reporting comprehensive income
and its components in the condensed consolidated financial statements. The
objective of SFAS 130 is to report changes in equity that result from
transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity.

<TABLE>
<CAPTION>
                                                            Three Months Ended         Nine Months Ended
                                                               September 30,             September 30,
       (in thousands)                                         1999         1998          1999         1998
                                                           -------      -------       -------      -------
       <S>                                                 <C>          <C>           <C>          <C>
       Net income                                          $   912      $   628       $ 2,281      $ 1,764
       Other comprehensive income net of tax                     -            -             -            -
       Foreign currency translation adjustment                  68          280          (365)         251
                                                           -------      -------       -------      -------
       Comprehensive income                                $   980      $   908       $ 1,916      $ 2,015
                                                           =======      =======       =======      =======
</TABLE>


7.   Significant Customer Discussion

Sales to a single customer accounted for 14.7% and 11.7% of net sales for the
three and nine months ended September 30, 1999, respectively. Accounts
receivable at September 30, 1999 were $624,000 related to this one customer. No
other account represented more than 10% of the Company's sales for the periods
mentioned.


                                                                               7
<PAGE>
Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial
Statements, Continued, (Unaudited)


8.   Business Segment Information

The Company operates in a single industry with two geographic operating segments
- North America and Europe. While the Company's chief operating decision maker
monitors the revenue streams of the various products and geographic locations,
operations are managed and financial performance is evaluated based upon the
geographic locations because each operating segment represents a strategic
business unit that serves different markets.

The accounting policies of the operating segments are the same as those
described in the summary of significant policies. The Company evaluates
performance based on stand-alone operating segment net income and generally
accounts for intersegment sales and transfers based upon internal transfer
prices set by the Company. Revenues are attributed to geographic areas based on
the location of the assets producing the revenues.

Identifiable assets are those tangible and intangible assets used in operations
in each geographic area. Eliminated assets primarily represent the investment in
the European subsidiary and the net result of operations since that time.

Summarized data of the Company's operations, by geographic area, for the three
and nine months ended September 30, 1999 and 1998 are presented below (in
thousands).

<TABLE>
<CAPTION>
Three Months Ended
                                                                  Percon
September 30, 1999                                Percon US       Europe        Elimination      Consolidated
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>                <C>               <C>
Sales to unaffiliated customers                    $  6,633     $  2,634           $      -          $  9,267
Intra-company transfers                                 739            -               (739)                -
Gross profit                                          3,621        1,004                (13)            4,612
Income from operations                                1,204          246                (33)            1,417
Interest & other income (expense), net                   70           (8)                 -                62
Pretax income                                         1,274          238                (33)            1,479

Total assets                                       $ 20,639     $  5,810           $ (5,130)         $ 21,319
</TABLE>

<TABLE>
<CAPTION>
Three Months Ended
                                                                  Percon
September 30, 1998                                Percon US       Europe        Elimination      Consolidated
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>                <C>               <C>
Sales to unaffiliated customers                    $  5,192     $  2,626           $      -          $  7,818
Intra-company transfers                                 469            -               (469)                -
Gross profit                                          2,596        1,099                  6             3,701
Income from operations                                  831          173                (16)              988
Interest & other income (expense), net                   51          (19)                 -                32
Pretax income                                           882          154                (16)            1,020

Total assets                                       $ 18,646     $  6,931           $ (5,120)         $ 20,457
</TABLE>


                                                                               8
<PAGE>
Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial
Statements, Continued, (Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
                                                                  Percon
September 30, 1999                                Percon US       Europe        Elimination      Consolidated
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>                <C>               <C>
Sales to unaffiliated customers                    $ 18,019     $  7,691           $      -          $ 25,710
Intra-company transfers                               2,123            -             (2,123)                -
Gross profit                                          9,996        3,006                (58)           12,944
Income from operations                                3,134          611               (120)            3,625
Interest & other income (expense), net                  177          (95)                                  82
                                                                                          -
Pretax income                                         3,310          516               (119)            3,707
</TABLE>


<TABLE>
<CAPTION>
Nine Months Ended
                                                                  Percon
September 30, 1998                                Percon US       Europe        Elimination      Consolidated
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>                <C>               <C>
Sales to unaffiliated customers                    $ 14,016     $  7,953           $      -          $ 21,969
Intra-company transfers                               1,307            -             (1,307)                -
Gross profit                                          7,116        3,360                (28)           10,448
Income from operations                                2,172          711                (89)            2,793
Interest & other income (expense), net                  118          (64)                 -                54
Pretax income                                         2,290          646                (89)            2,847
</TABLE>


9.   Subsequent Events

On November 9, 1999 the Company entered into an Agreement and Plan of Merger
with PSC Inc. ("PSC") that provides for the merger of a wholly owned subsidiary
of PSC into the Company, with the Company surviving as a wholly owned subsidiary
of PSC. In the merger shareholders of Percon would receive $15.00 in cash per
share of Percon common stock. The merger, which was approved by the board of
directors of each company, is subject to Percon shareholder and regulatory
approvals.


                                                                               9
<PAGE>
Item 2 - Management's Discussion And Analysis
         Of Financial Condition And Results Of Operations


Overview

Percon Incorporated ("Percon" or the "Company") develops, assembles, and markets
a complete line of data collection hardware and data management software
products. The Company's product offering includes radio frequency ("RF") and
batch portable data collection terminals ("PDCT"), fixed station and integrated
decoders, hand-held laser scanners, data management application software, and
terminal emulation software. The Company also markets bar code input devices
manufactured by others for use with the Company's fixed station decoders and
PDCTs. The Company's products provide a rapid, accurate, and efficient means to
collect, process, transmit, record, and manage data. The Company's products are
used principally in point-of-sale, point-of-service, and inventory management
applications in a wide variety of industries, including manufacturing,
warehousing and distribution, package delivery, retail, education, and
healthcare.

Percon markets its products through a network of ADC distributors, value-added
resellers ("VARs"), and systems integrators, which allows the Company's products
to reach small and mid-size end users cost effectively. In addition, Percon
markets its products to mid-size and large end users through its strategic
relationships as an original equipment manufacturer ("OEM") with other sales
organizations. The Company also distributes its products internationally
primarily through VARs in Europe, Latin America, and Asia.

On November 9, 1999 the Company entered into an Agreement and Plan of Merger
with PSC Inc. ("PSC") that provides for the merger of a wholly owned subsidiary
of PSC into the Company, with the Company surviving as a wholly owned subsidiary
of PSC. In the merger shareholders of Percon would receive $15.00 in cash per
share of Percon common stock. The merger, which was approved by the board of
directors of each company, is subject to Percon shareholder and regulatory
approvals.

The statements in this report concerning the Year 2000 issue and working capital
requirements constitute forward-looking statements that are subject to risks and
uncertainties. Factors that could materially affect the Year 2000 issue include,
but are not limited to, unanticipated costs associated with any required
modifications to the Company's information systems, its ancillary systems and
associated software. Factors that could materially affect future working capital
requirements include, but are not limited to, competitive market pressures
(including increased competition, new product offerings by competitors and price
pressures) and the availability of appropriate resources, unfavorable business
conditions in the ADC industry and general economy.


                                                                              10
<PAGE>
Results of Operations

The following table sets forth for the periods indicated selected statements of
operations data, expressed as a percentage of sales, and the percentage change
in dollar amounts of each of the items on the condensed consolidated statements
of income.

<TABLE>
<CAPTION>
                                                         Three Months Ended                Nine Months Ended
                                                            September 30,                    September 30,
                                                      1999      1998     % change      1999      1998     % change
                                                  -------------------------------- -------------------------------
<S>                                                  <C>       <C>          <C>       <C>       <C>          <C>
Net sales                                            100.0%    100.0%       18.5%     100.0%    100.0%       17.0%
Cost of goods sold                                    50.2%     52.7%       13.1%      49.7%     52.4%       10.8%
---------------------------------------------------------------------              -------------------
     Gross profit                                     49.8%     47.3%       24.6%      50.3%     47.6%       23.9%

Operating Expenses:
   Selling, marketing and customer service            18.5%     19.0%       15.5%      19.1%     18.8%       18.9%
   General and administrative                         10.1%     10.5%       13.8%      10.4%     10.3%       18.0%
   Research and product development                    5.8%      5.1%       34.2%       6.1%      5.7%       24.9%
   Charges related to terminated  acquisition          0.0%      0.0%        0.0%       0.6%      0.0%        0.0%
---------------------------------------------------------------------              -------------------
     Operating income                                 15.3%      9.3%       43.4%      13.5%     12.7%       29.8%

Interest and other income (expense), net               0.7%      0.4%       93.8%       0.3%      0.2%       51.9%
---------------------------------------------------------------------              -------------------
     Income before taxes                              16.0%      9.6%       45.0%      13.6%     13.0%       30.2%

Provision for income taxes                             6.1%      5.0%       44.6%       5.5%      4.9%       31.6%
---------------------------------------------------------------------              -------------------
     Net income                                        9.8%      8.0%       45.2%       8.1%      8.0%       29.4%
---------------------------------------------------------------------              -------------------
</TABLE>


Comparison of the three and nine months ended September 30, 1999 and 1998.


Net Sales

Net sales of $9.3 million and $25.7 million for the three and nine months ended
September 30, 1999 increased 18.5% and 17.0%, respectively, over the comparable
prior year periods. The increases for the three and nine months ended September
30, 1999 were due in large part to a $1.8 million and $3.4 million increase,
respectively, in the sales of PDCT products over comparable prior year periods.
Foreign exchange fluctuations unfavorably impacted net sales by approximately
3.3% and 2.8%, respectively, for the three and nine months ended September 30,
1999 from the effective exchange rate at December 31, 1998. Foreign exchange
fluctuations did not have a material effect on net sales for the three and nine
months ended September 30, 1998.

Net sales attributed to Percon's U.S. operations increased 27.8% and 28.6% to
$6.6 million and $18.0 million, respectively, for the three and nine months
ended September 30, 1999 over the comparable prior year periods. The increase
for the three month period was due to increased PDCT sales of $1.5 million. The
increase for the nine month period was attributable to increased PDCT sales of
$2.2 million and increased decoder sales of $1.4 million.

Net sales attributed to Percon Europe were unchanged for the three months ended
September 30, 1999 over the comparable prior year period. Net sales decreased
3.3% to $7.7 million for the nine months ended September 30, 1999 over the
comparable prior year period. The decrease for the nine month period was
attributable to decreased sales of decoder, software, and input devices of $1.5
million offset by increased sales of PDCT products of $1.2 million.


                                                                              11
<PAGE>
Gross Profit

Gross profit of $4.6 million and $12.9 million increased 24.6% and 23.9%,
respectively, for the three and nine months ended September 30, 1999 over the
comparable prior year periods. As a percent of net sales, gross profit increased
for the three month period to 49.8% from 47.3% for 1998, and increased for the
nine month period to 50.3% from 47.6% for 1998. The increase for the three and
nine months ended September 30, 1999 resulted primarily from increased sales of
PDCTs and increased service revenue, each of which carry higher gross margins

Gross profit for Percon U.S. operations of $3.6 million and $10.0 million
increased 27.9% and 40.5%, respectively, for the three and nine months ended
September 30, 1999 from the comparable periods for 1998. As a percent of net
sales, gross profit for U.S. operations increased for the three month period to
54.6% from 50.0% for 1998, and increased for the nine month period to 55.5% from
50.8% for 1998. The increase in gross profit for the three months ended
September 30, 1999 is primarily due to increased sales PDCTs products, which
have higher gross margins. The increase in gross profit for the nine months
ended September 30, 1999 is a result of increased sales of decoder and PDCT
products and service revenue, each of which have higher margins.

Gross profit attributed to Percon Europe of $1.0 million and $3.0 million
decreased 8.7% and 10.5%, respectively, for the three and nine months ended
September 30, 1999 from the same periods for 1998. As a percent of net sales,
gross profit for Percon Europe decreased for the three month period to 38.1%
from 41.9% for 1998, and decreased for the nine month period to 39.1% from 42.3%
for 1998. The decrease in gross profit for the three months ended September 30,
1999 is attributed to decreased sales of decoder and input devices. The decrease
in gross profit for the nine months ended September 30, 1999 is attributed to
decreased sales of decoder, software, and input devices.


Selling, Marketing and Customer Service Expenses

Selling, marketing and customer service expenses of $1.7 million and $4.9
million increased from $1.5 million and $4.1 million, respectively, for the
three and nine months ended September 30, 1999 over comparable prior year
periods. In absolute dollars, selling, marketing and customer service expenses
increased 15.5% and 18.9%, respectively, for the three and nine months ended
September 30, 1999, from the prior year periods. As a percentage of net sales,
these expenses decreased to 18.5% from 19.0% for the three month period, and
increased to 19.1% from 18.8% for the nine month period ended September 30, 1999
from the comparable prior year periods. The increases are a result of additional
wages and marketing efforts to support new advertising efforts, new product
introductions, and increased sales. The percentage decrease for the three months
ended September 30, 1999 is due to operating efficiencies achieved by spreading
these expenses over an increased net sales base. The percentage increase for the
nine months ended September 30, 1999 is due to additional wages and marketing
efforts to support new advertising efforts, new product introductions, and
increased sales.


General and Administrative Expenses

General and administrative expenses are comprised of the costs associated with
finance and executive activities, and the management of information technologies
and general facilities. Direct facility and information technology costs are
allocated to other departments. General and administrative expenses of $0.9
million and $2.7 million increased from $0.8 million and $2.3 million,
respectively, for the three and nine months ended September 30, 1999 over the
comparable periods for 1998. In absolute dollars, general and administrative
expenses increased 13.8% and 18.0%, respectively, for the three and nine months
ended September 30, 1999, from the prior year periods. As a percentage of net
sales, these expenses decreased to 10.1% from 10.5% for the three month period,
and increased to 10.4% from 10.3% for the nine month period ended September 30,
1999 from the comparable prior year periods. The increases are a result of
additional wages, rent expense, and professional fees. The percentage decrease
for the three months ended September 30, 1999 is due to operating efficiencies
achieved by


                                                                              12
<PAGE>
spreading these expenses over an increased net sales base. The percentage
decrease for the nine months ended September 30, 1999 is due to increased wages,
rent expense, and professional fees.

Research and Product Development Expenses

Research and product development expenses of $0.5 million and $1.6 million
increased from $0.4 million and $1.3 million, respectively, for the three and
nine months ended September 30, 1999 over the comparable periods for 1998. In
absolute dollars, research and product development expenses increased 34.2% and
24.9%, respectively, for the three and nine months ended September 30, 1999,
from the prior year periods. As a percentage of net sales, these expenses
increased to 5.8% from 5.1% for the three month period, and increased to 6.1%
from 5.7% for the nine month period ended September 30, 1999 from the comparable
prior year periods. These increases resulted from additional efforts to support
new product development.


Charges Related to Terminated Acquisition

The Company incurred charges related to a terminated acquisition of $0.2 million
for the nine months ended September 30, 1999, representing 0.6% of net sales,
with no comparable charge for the nine months ended September 30, 1998. This
charge is related to acquisitions which were pursued but were terminated during
the first quarter of 1999.


Interest and Other Income

Interest and other income for the three months ended September 30 ,1999
increased to $62,000 from $32,000 for the prior year period, due to increased
interest earned on larger cash balances during the period. Interest and other
income for the nine months ended September 30 ,1999 increased to $82,000 from
$54,000 for the prior year period due to increased interest earned on larger
cash balances during the period.


Provision for Income Taxes

The provision for income taxes for the three months ended September 30, 1999 was
$0.6 million, which represents an effective tax rate of 38.3%. The provision for
income taxes for the nine months ended September 30, 1999 was $1.4 million,
which represents an effective tax rate of 38.4%. Items which cause these rates
to differ from the U.S. federal statutory rate of 34% include state and
international taxes and benefits from domestic and foreign research credits and
the Company's foreign sales corporation. The provision for income taxes for the
three months ended September 30, 1998 was $0.4 million, which represents an
effective tax rate of 38.4%. The provision for income taxes for the nine months
ended September 30, 1998 was $1.1 million, which represents an effective tax
rate of 38.0%. The increase in the effective tax rate is primarily related to
increased foreign taxes.


Net Income

Net income of $0.9 million and $2.3 million for the three and nine months ended
September 30, 1999 increased 45.2% and 29.4%, respectively, over the comparable
prior year periods. The increase was due to increased sales of the Company's
products and operational efficiencies.


                                                                              13
<PAGE>
Year 2000 Computer System Impact

The Year 2000 issue relates to the inability of some computers and computer
software programs to accurately recognize dates after 1999 expressed as a
two-digit number. The inability to recognize date information accurately could
affect computer operations and calculations or cause computer systems and
computer-dependent mechanical systems not to operate properly.

The Company's assessment of the potential impact of the Year 2000 problem
consisted of two phases. The detection phase identified and catalogued all
mechanical and operational systems owned or operated by the Company that rely on
date related information to function properly. The Company completed this phase
for its domestic operations in May 1999. A similar assessment of its European
operations was completed April 1999. The remediation phase repaired, replaced,
or retired any non-compliant systems. This phase began early in 1999 and was
completed July 30, 1999.

The detection phase for domestic operations revealed that only minor upgrades
and replacements are required to achieve full Year 2000 compliance.
Specifically, software upgrades were required to bring the Company's general
ledger, payroll, and fixed asset systems into compliance. The Company discovered
that the remainder of the domestic non-compliant systems required only
incremental software upgrades or were non-critical in nature.

Based upon the Company's current estimates, total incremental out-of-pocket
costs of its Year 2000 program are expected to be approximately $25,000. These
costs are primarily related to remediation of computer software. These costs do
not include internal management time and the deferral of other projects, the
effects of which are not expected to be material to the Company's results of
operations or financial condition.

The Company believes that modification to its product offering will not be
required in order for its products to function properly with respect to dates in
the Year 2000. The Company has undertaken measures to inform customers of Year
2000 related issues via its web site. However, it is not possible to anticipate
all end user situations and/or Year 2000 related issues, particularly those
involving third party products.

At this stage of the process, the Company believes it is difficult to
specifically identify the cause of the most reasonable worst case Year 2000
scenario. A reasonable worst case scenario would be the failure of the Company's
products to operate properly through the interaction with third party products
causing customers' systems and/or operations that are dependent upon such
products to fail or be disrupted. In case of such failures, customers may
commence legal action against the Company or otherwise seek compensation for
their losses associated with such failures. An additional worst case Year 2000
scenario would be the failure of key vendors and/or suppliers to have corrected
their own Year 2000 issues which could cause disruption of the Company's
operations and have a material adverse effect on the Company's financial
condition. In a survey of major suppliers, no immediate problems in the delivery
of materials required for the Company to sustain operations were discovered.
Discussions with these key business partners will continue and contingency plans
developed as needed based on assessments of their exposure and remediation
plans. If major suppliers, customers, or economic conditions are negatively
affected by the Year 2000, there may be a negative impact on the Company's
performance and operational results.


Disclosure Regarding Euro Conversion

On January 1, 1999, eleven member countries of the European Community began a
process to convert their existing sovereign currencies to a single common
denomination, the euro. The process of conversion is gradual over the next three
years, culminating in the eventual removal from circulation of all existing
domestic currency of the participating countries.


                                                                              14
<PAGE>
The Company's French subsidiary, Percon Europe, is located in a member country,
France, and transacts business in all European countries. Before the January 1,
1999 conversion, new accounting and sales systems that allow for euro
denominated transactions were successfully installed. To date the Company has
experienced no difficulty in adopting the new currency, nor are any future
problems anticipated. The full impact of this currency transition on Company
profitability, competitive position, and future prospects is still under
investigation.


Liquidity and Capital Resources

The Company's line of credit with a domestic bank permits it to borrow up to 80%
of eligible accounts receivable and 25% of eligible inventory (as defined by the
bank agreement) to a maximum of $1.0 million. Outstanding principal amounts
thereunder bear interest at the bank's prime rate, which was 7.75% at September
30, 1999. The Company also has a line of credit and short-term borrowing
arrangements with two foreign banks that allow it to borrow up to an aggregate
of 2,000,000 French francs (approximately $312,000), collateralized by accounts
receivable. Borrowings under these facilities bear interest at the banks'
current interest rates, which was 8.09% at September 30, 1999. No amounts were
outstanding under any of these arrangements at September 30,1999.

Assets and liabilities are translated at the rate of exchange in effect as of
the balance sheet date. The gains and losses that result from this process are
shown as accumulated other comprehensive income in the shareholders' equity
section of the balance sheet. Operating transactions are translated at weighted
average rates during the period. Transaction gains and losses are reflected in
net income.

Net cash provided by operations was $4.5 million for the nine months ended
September 30, 1999 compared to cash provided by operations of $3.0 million for
the nine months ended September 30, 1998. Significant changes for the nine
months ended September 30, 1999 relate to decreases in inventories, accounts
receivable, and prepaid expenses. For the nine months ended September 30, 1999,
net cash used in investing activities for capital expenditures totaled $0.6
million compared to $1.0 million for the nine months ended September 30, 1998.

During the nine months ended September 30, 1999, net cash used in financing
activities totaled $1.0 million. Cash used in financing activities was related
to the repayment of foreign long-term bank debt and the repurchase of the
Company's common stock in open market transactions. During the nine months ended
September 30, 1998, net cash provided by financing activities totaled $0.3
million. Cash generated by financing activities was primarily related to the
sale of the Company's common stock.

The Company's current cash balances, together with the borrowings available
under its line of credit agreements and cash generated from operations, are
expected to be sufficient to meet the Company's liquidity requirements for at
least the next 12 months. There is no assurance that additional financing will
be available if required or on terms deemed favorable by the Company.


                                                                              15
<PAGE>
PART II - OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K

          (a)   Exhibits

                (27)   Financial Data Schedule

          (b)   Reports on Form 8-K

                None.


SIGNATURES


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


PERCON INCORPORATED


by: /s/ JASON DAVIS
    ------------------------------------------------
        Jason Davis
        Chief Financial Officer
        (Principal Financial and Accounting Officer)

        Dated:  November 12, 1999


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