<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

     [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
          ACT OF 1934

                         For the Quarterly Period Ended
                                 March 31, 1999

     [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                         For the Transition Period From
                          ____________ to ____________

                         Commission file number 0-19688

                           DESTRON FEARING CORPORATION

             (Exact name of Registrant as specified in its charter)

                Delaware                             84-1079037
   (State or other jurisdiction of      (I.R.S. Employer Identification No.)
   incorporation or organization)

                               490 Villaume Avenue
                            South St. Paul, MN 55075
                                 (651) 455-1621
                    (Address of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the 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

As of May 12, 1999, there were 13,353,982 outstanding shares of Common Stock.

<PAGE>

                           DESTRON FEARING CORPORATION

                                    FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 1999

                                      INDEX

<TABLE>

                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
PART I -- FINANCIAL INFORMATION

               Item 1 --      Financial Statements                                                      3


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

PART II -- OTHER INFORMATION

               Item 1 --      Legal Proceedings                                                        14


               Item 6 --      Exhibits and Reports on Form 8-K                                         17

               Signatures                                                                              18

</TABLE>

<PAGE>

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 1999 AND SEPTEMBER 30, 1998
(in thousands, except share and per share amounts)

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

<TABLE>

                  ASSETS                           March 31,   September 30,
                                                     1999          1998
                                                   --------    -------------
<S>                                                <C>         <C>
CURRENT ASSETS:
    Cash and cash equivalents                      $    536      $    104
    Accounts receivable, net                          3,743         2,212
    Inventories, net                                  4,577         4,753
    Vendor deposits                                     545           475
    Prepaid expenses and other current assets            74            33
                                                   --------      --------

       Total current assets                           9,475         7,577

PROPERTY AND EQUIPMENT, net                           1,978         1,922
GOODWILL, net                                         1,875         1,917
OTHER ASSETS, net                                       137           147
                                                   --------      --------

                                                   $ 13,465      $ 11,563
                                                   --------      --------
                                                   --------      --------

       LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Line of credit                                 $  1,828      $  1,278
    Accounts payable                                  1,170           988
    Customer deposits                                   853           865
    Accrued liabilities                                 572           495
    Current portion of long-term obligations            662         2,544
                                                   --------      --------

       Total current liabilities                      5,085         6,170

LONG-TERM OBLIGATIONS,
   net of current portion                             1,744           677
                                                   --------      --------

   Total liabilities                                  6,829         6,847
                                                   --------      --------

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value;
      20,000,000 shares authorized;
      13,354,000 shares issued and outstanding          134           134
   Common stock warrants                                100          --
   Additional paid-in capital                        19,846        19,846

<PAGE>


   Accumulated deficit                              (13,444)      (15,264)
                                                   --------      --------

   Total shareholders' equity                         6,636         4,716
                                                   --------      --------

                                                   $ 13,465      $ 11,563
                                                   --------      --------
                                                   --------      --------

</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.
<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands, except per share amounts)

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

<TABLE>

                                          Three Months Ended March 31, Six Months Ended March 31,
                                          ---------------------------- --------------------------
                                             1999          1998          1999          1998
                                           --------      --------      --------      --------
<S>                                       <C>            <C>           <C>           <C>
NET REVENUE                                $  5,449      $  4,350      $  9,511      $  6,980

COSTS AND EXPENSES:
   Cost of sales                              3,099         2,892         5,730         4,775
   Selling, general and administrative          856         1,095         1,723         1,875
   Research and development                     219           292           402           560
   Interest expense and other                   123           141           265           252
                                           --------      --------      --------      --------

   Total costs and expenses                   4,297         4,420         8,120         7,462

INCOME (LOSS) BEFORE INCOME TAXES             1,152           (70)        1,391          (482)

PROVISION FOR INCOME TAXES                       43          --              43          --   
                                           --------      --------      --------      --------

NET INCOME (LOSS) BEFORE
    EXTRAORDINARY GAIN                        1,109           (70)        1,348          (482)

EXTRAORDINARY GAIN ON
    DEBT RESTRUCTURING                          472          --             472          --   
                                           --------      --------      --------      --------

NET INCOME (LOSS)                          $  1,581      $    (70)      $1 ,820      $   (482)
                                           --------      --------      --------      --------
                                           --------      --------      --------      --------

 BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON SHARE:
      Income before extraordinary item     $   0.08      $  (0.01)     $   0.10      $  (0.04)
       Extraordinary item                      0.04          --            0.04          --   
                                           --------      --------      --------      --------

                                           $   0.12      $  (0.01)     $   0.14      $  (0.04)
                                           --------      --------      --------      --------
                                           --------      --------      --------      --------
WEIGHTED AVERAGE
   COMMON AND COMMON EQUIVALENT
   SHARES OUTSTANDING:

       Basic                                 13,354        13,299        13,354        13,296
                                           --------      --------      --------      --------
                                           --------      --------      --------      --------
       Diluted                               13,370        13,299        13,362        13,296
                                           --------      --------      --------      --------
                                           --------      --------      --------      --------

</TABLE>

                     The accompanying notes are an integral
                part of these consolidated financial statements.

<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands)

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

<TABLE>

                                                             Six Months Ended March 31,
                                                             --------------------------
                                                                 1999         1998 
                                                               -------      -------
<S>                                                          <C>            <C>
OPERATING ACTIVITIES:
   Net income (loss)                                           $ 1,820      ( $ 482)
   Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
    Extraordinary gain on debt restructuring                      (472)          --
    Depreciation and amortization                                  237          247
    Changes in operating items:
       Accounts receivable                                      (1,531)        (736)
       Inventories                                                 176          379
       Vendor deposits                                             (70)        (234)
       Prepaid expenses and other current assets                   (41)          19
       Accounts payable and accrued liabilities                    259          309
       Customer deposits                                           (12)          -- 
                                                               -------      -------

       Net cash provided by (used in) operating activities         366         (498)
                                                               -------      -------

INVESTING ACTIVITIES:
   Purchases of fixed assets                                      (241)        (131)
                                                               -------      -------

FINANCING ACTIVITIES:
   Issuance of common stock                                         --            2
   Repayments of long-term obligations                            (243)        (759)
   Net borrowings on bank line of credit                           550          504
                                                               -------      -------

       Net cash provided (used in) by financing activities         307         (253)
                                                               -------      -------

NET CHANGE IN CASH                                                 432         (882)

CASH, beginning of period                                          104        1,075
                                                               -------      -------

CASH, end of period                                            $   536      $   193
                                                               -------      -------
                                                               -------      -------

SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid                                               $   259      $   257
                                                               -------      -------
                                                               -------      -------

SUPPLEMENTAL DISCLOSURE OF NON CASH
   ACTIVITIES:
   Issuance of common stock warrants in
      connection with debt restructuring                       $   100      $    -- 
                                                               -------      -------
                                                               -------      -------

</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 and 1998
(unaudited)

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

1.   GENERAL

The information included in the accompanying consolidated interim financial
statements is unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the most recent
Annual Report on Form 10-K filed for Destron Fearing Corporation and its
subsidiaries (collectively, the "Company"). In the opinion of management, all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of the financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the entire fiscal year.

2.   INVENTORIES

Inventories are valued at the lower of first in, first out, cost or market, and
consist of the following (in thousands):

<TABLE>

                                                                       March 31, 1999   September 30, 1998
                                                                       --------------   ------------------
<S>                                                                    <C>              <C>
Raw materials                                                              $2,586            $2,481
Finished goods                                                              1,991             2,272
                                                                           ------            ------

       Total inventories                                                   $4,577            $4,753
                                                                           ------            ------
                                                                           ------            ------
</TABLE>

3.   NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common and common equivalent share is based on the
weighted average number of common and common equivalent shares outstanding for
the period. Common equivalent shares consist primarily of stock options granted
to employees, directors and others, and outstanding warrants. In fiscal 1998,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." SFAS No. 128 established new accounting standards for
computing and presenting earnings (loss) per share data (EPS). Basic EPS is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the period, excluding potentially dilutive
securities. Diluted EPS is calculated using the treasury stock method and
reflects the dilutive effect of outstanding options, warrants and other
securities.

<PAGE>

A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
quarter and six months ended March 31 (in thousands, except per share amounts):

<TABLE>

                                     Quarter Ended March 31    Six Months Ended March 31
                                     ----------------------    -------------------------
                                       1999         1998          1999         1998
                                     --------     --------      --------     --------
<S>                                  <C>          <C>          <C>           <C>
Net income (loss)                    $  1,581     $    (70)     $  1,820     $   (482)
                                     --------     --------      --------     --------
                                     --------     --------      --------     --------

Weighted average number of
common shares outstanding              13,354       13,299        13,354       13,296


Dilutive effect of stock options
and warrants after application
of the treasury stock method               16           --             8           --
                                     --------     --------      --------     --------
                                       13,370       13,299        13,362       13,296
                                     --------     --------      --------     --------
                                     --------     --------      --------     --------
Basic and diluted earnings
(loss) per common share              $   0.12     ($  0.01)     $   0.14     ($  0.04)
                                     --------     --------      --------     --------
                                     --------     --------      --------     --------

</TABLE>

4.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No.131, which is effective for fiscal years beginning after December 15, 1997,
requires that public business enterprises report information about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is
currently evaluating the impact of SFAS No. 131 and will adopt the disclosure
requirements in its annual report for fiscal year 1999, when required.

5.   DEBT RESTRUCTURING

In March 1999, the Company completed a restructuring of its outstanding vendor
note payable (balance of $2,352,000 prior to restructuring), whereby the vendor
assigned the note to a third party. Effective March 1, 1999, the new noteholder
agreed to a reduction of the principal to $1,529,000 to reflect a 35% discount,
with interest at 9.25% and monthly payments of $50,000 through January 2001. In
connection with this restructuring, the Company granted warrants to the new
noteholder to purchase 275,000 shares of the Company's common stock at $1.00 per
share. The warrants are exercisable at any time through March 15, 2004.

In accordance with the requirements of SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," the Company recorded a net gain on
restructuring of $472,000 in the second quarter of fiscal 1999.

6.   LEGAL PROCEEDINGS

Colorado Patent Actions

<PAGE>

On January 8, 1996, the Company commenced a patent infringement trial against 
four competitors in the United States District Court of Colorado. (The patent 
involved is No. 5,211,129, which relates to the Company's injectable 
transponder technology.) On January 29, 1996, the jury in the trial returned 
a verdict in favor of the Company and found that the defendants had willfully 
infringed on the Company's patent and awarded damages of $444,000, including 
prejudgment interest. The defendants appealed the judgment against them, and 
the Company cross-appealed the failure of the court to increase the Company's 
damages. On July 24, 1997, the Court of Appeals for the Federal Circuit 
handed down its decision in the appeal. The decision of the Court of Appeals 
affirmed the trial court's judgment, holding the Company's patent is valid 
and was willfully infringed by the competitors. However, the Court of Appeals 
remanded to the trial court for further proceedings the issue of whether the 
Company engaged in inequitable conduct in prosecuting the patent application 
before the United States Patent Office.

On November 7, 1997, the U.S. District Court of Colorado, on remand on the issue
of inequitable conduct, found no intent on the part of the Company to deceive
the Patent Office, and therefore that no inequitable conduct occurred and the
Company's '129 patent was enforceable. On February 9, 1998, the District Court
Judge issued an Order containing findings and conclusions and entered a Third
Amended Judgment confirming the Court's finding of no inequitable conduct. The
defendants appealed this decision, and oral argument to the U.S. Court of 
Appeals for the Federal Circuit was held on December 8, 1998.

On January 26, 1999, the Court of Appeals entered an order affirming the U.S.
District Court's decision that the Company had not engaged in inequitable
conduct in obtaining the '129 patent and thus the patent was enforceable. The
order of the Court of Appeals has the effect of continuing the permanent
injunction entered by the United States District Court in Colorado which
prohibits the defendants from manufacturing, using, selling, or offering to sell
the transponders that violate the Company's '129 patent. Because the defendants
did not pursue a timely appeal to the United States Supreme Court, the January
26, 1999 decision of the Court of Appeals is now final and not appealable.

Further, during the pendency of the first appeal, the Company pursued a contempt
action against certain defendants for willful violations of the District Court's
permanent injunction. On November 7, 1997, a Magistrate Judge of the District
Court recommended that the defendants be found in willful contempt of the
permanent injunction and that the Company should be awarded double damages,
amounting to $33,000, as well as attorneys' fees and costs. On February 9, 1998,
the District Court Judge issued an Order adopting the Magistrate's
recommendation that the defendants were in contempt. This finding of contempt
has also been appealed and upheld.

On January 23, 1998, the Company filed a second Motion for Contempt against
certain defendants. Following a March 27, 1998 hearing, on April 23, 1998 the
Magistrate Judge entered a recommendation that the defendants be held in
contempt a second time, based upon their attempts to solicit purchase orders
from the Denver Metro Microchip Committee and their manufacture, use and sale of
the ID-100 Zip Quill transponder product. The Company has requested treble
damages, attorneys' fees, costs and sanctions against the defendants for their
contempt of the District Court permanent injunction. The defendants have
objected to the recommendations of the Magistrate Judge.

On March 18, 1999, the District Court entered an order of contempt against the
defendants arising from their efforts to solicit purchase orders from the Denver
Metro Microchip Committee, but found that it could not determine if the ID-100
Zip Quill transponder product was made for the purpose of evading the injunction
without essential change in the nature of the device and, therefore, determined

<PAGE>


a new infringement trial was necessary. As part of the same March 18, 1999
Order, the District Court instructed the parties to submit briefs on the issue
of damages flowing from the contempt and further held that the Company may
register its willful infringement judgment against the defendants with the
District Court for the District of Minnesota and for the District of Columbia
for purposes of enforcing the judgment and collecting the previously awarded
damages from the defendants.

On April 26, 1999, the parties simultaneously submitted briefs on the issue 
of damages resulting from the defendants' contempt of court in soliciting 
purchase orders from the Denver Metro Microchip Committee. The Company seeks 
an award of several thousand dollars for the contempt. The defendants urged 
the District Court to award no damages. The Company believes that the 
District Court will likely resolve this issue without oral argument.

Minnesota Patent Actions

On December 17, 1996, the same three competitors found to be willful infringers
in the Colorado Patent Actions filed a lawsuit against the Company and its
United States distributor, Schering-Plough, in the United States District Court
for the District of Minnesota. The plaintiffs alleged that the defendants
participated in unfair competition, breached an oral contract and infringed on
three of the plaintiffs' United States patents. On January 24, 1997, the
plaintiffs withdrew this lawsuit in its entirety.

On April 21, 1997, four plaintiffs (including the three competitors identified
in the foregoing paragraph) filed a lawsuit against the Company and
Schering-Plough and another of the Company's competitors in the United States
District Court for the District of Minnesota. The plaintiffs allege that the
defendants participated in unfair competition, breached an oral agreement and
infringed on three of the plaintiffs' United States patents and requested that
the Court award compensatory and treble damages of an unspecified amount.

On May 16, 1997, the plaintiffs amended the lawsuit and, in their complaint as
amended, allege patent infringement, false advertising, unfair competition and
attempted monopolization on the part of the Company, among other matters,
stemming from the ISO standards. This lawsuit has been stayed by agreement of
all parties pending the outcome of the appeal of the Colorado Patent Action.

Since the Company was successful in obtaining an affirmance of the judgment of
enforceability in the Colorado Patent Action, the Company's exposure, if any, in
the Minnesota litigation may be reduced. As a result of the favorable ruling in
the Colorado Patent Action on February 9, 1998, and as indicated in the above
paragraph, the Minnesota litigation has been stayed pending the Federal Circuit
Court decision in the Colorado Patent Action. The Company is now assessing its
alternatives in the Minnesota Patent Actions in light of the January 26, 1999
decision of the Court of Appeals in the Colorado Patent Action.

Minnesota Class Action

On January 28, 1999, a class action lawsuit was commenced against the Company in
the United States District Court for the District of Minnesota on behalf of
persons who were shareholders of record of the Company's common stock on
December 29, 1998 and received the Company's Proxy Statement dated December 29,
1998 ("Proxy Statement") for the Company's annual meeting of stockholders to be
held on January 29, 1999 ("Annual Meeting"). The complaint principally alleged
violations of federal securities laws based on disclosures in the Proxy
Statement. The plaintiffs alleged that the Proxy Statement failed to inform the
stockholders of their ability to exercise dissenters' rights in connection with
the proposed reverse stock split described in the Proxy Statement. The 

<PAGE>

Company believes the plaintiffs' case had no merit because the Proxy 
Statement is believed to contain a complete and accurate description of the 
reverse stock split, including the absence of dissenters' rights.

In connection with the above-described class action lawsuit, on January 28,
1999, the plaintiffs filed a motion requesting an order that would prevent the
Company from holding the Annual Meeting or, in the alternative, that would
prevent it from holding the vote on the proposed reverse stock split. A hearing
on the motion was held on January 29, 1999 in the United States District Court
for the District of Minnesota. In a strongly worded order from the bench, Judge
James M. Rosenbaum ruled in favor of the Company and denied plaintiffs' motion,
which allowed the Company to hold the Annual Meeting as planned.

At the January 29, 1999 Annual Meeting of the Company's shareholders, the 
shareholders authorized the Company's Board of Directors to carry out the 
reverse stock split at any time before April 1, 1999. Due to increases in the 
price of the Company's common stock as quoted on The Nasdaq SmallCap Market, 
the Board determined to forgo the reverse stock split and allowed its 
authority to execute the stock split to expire unexercised on April 1, 1999. 
In view of that development, the plaintiffs in the class action lawsuit have 
agreed to dismiss the complaint with prejudice and without any further cost 
to the Company.

<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Net income before an extraordinary gain for the second quarter of fiscal year
1999 was $1,109,000 compared to a net loss of $70,000 in the prior year's second
quarter. Year-to-date net income before the extraordinary gain was $1,348,000
compared to a net loss of $482,000 in the comparable year earlier period. After
an extraordinary gain of $472,000 resulting from a debt restructuring, net
income for the second quarter and six-month period was $1,581,000 and
$1,820,000, respectively. The increase in net income for the quarter and six
months was the result of significant sales growth, higher gross margin
percentages and lower operating expenses.

Net revenue for the quarter ended March 31, 1999 of $5,449,000 was 25% higher
than the $4,350,000 reported for the comparable quarter of fiscal 1998. For the
six-month period, revenue was $9,511,000, representing a 36% increase from the
fiscal 1998 period. Revenue for the second quarter and six-month period from
Radio Frequency Identification (RFID) products was up by 45% and 55%,
respectively, from last year with higher sales occurring in the United States
fisheries market and in the European companion animal market. Visual
identification product revenue increased 3% in the second quarter and 14% for
the six-month period when compared to the fiscal 1998 amounts because of
increased unit sales of visual products.

Cost of sales of $3,099,000 for the second quarter and $5,730,000 for the
six-month period was higher than the comparable fiscal 1998 periods by 8% and
20%, respectively. The higher costs were attributable to higher revenues during
the quarter. Gross profit margins improved to 43% and 40% of revenue in the
second quarter and six-month period of fiscal 1999, respectively, compared to
34% and 32% for each of those periods in fiscal 1998. Gross margins improved
significantly for quarter and year-to-date results due to ongoing cost cutting
and expense reduction programs in tandem with increased revenues and a favorable
product mix for both the electronic and visual divisions, including higher
margin sales in the fisheries market.

Selling, general and administrative expenses for the second quarter of fiscal
1999 were $856,000 or 22% lower than for the same period last year. For the
six-month period ended March 31, 1999, these expenses were $1,723,000, which was
an 8% decrease over last year's comparable period. Selling expenses decreased
20% for the quarter and 18% for the six-month period due to a decrease in
personnel and related expenses in sales and marketing areas. While general and
administrative expenses are down $127,000 from the comparable quarter for 1998,
these amounts remain higher for the six-month period than last year by $27,000
due primarily to continuing legal expenses.

Research and development expenses of $219,000 in the second quarter of fiscal
1999 decreased 25% over last year and, for the six-month period, were down 28%
from fiscal 1998 to $402,000. The lower research and development expense was due
to an increased emphasis on in-house development and lower usage of outside
engineering consultants.

Interest and other of $123,000 in the second quarter of fiscal 1999 were 13%
lower than the $141,000 reported for the comparable 1998 period principally
because the second quarter debt restructuring caused a lower principal balance
and interest rate on the long-term note payable. For the six-month period of
fiscal 1999, interest and other increased 5% to $265,000.

During the second quarter of fiscal 1999, the Company recorded an extraordinary
gain of $472,000 resulting from a restructuring of a vendor note. In a
transaction involving the sale of the note to a third party, the debt was
reduced as of March 1, 1999 to $1,529,000 at 9 1/4% interest from $2,552,000 at

<PAGE>

11 1/4% interest and the Company issued five-year warrants to the note holder to
purchase 275,000 shares of common stock at $1.00 per share. Net of costs
directly associated with the restructuring, the total gain on the transaction
was $693,000, $221,000 of which will be deferred to offset future interest
charges on the note. (See Exhibits 10.1, 10.2 and 10.3 hereto).

The Company derives a significant portion of its revenue from export sales. 
The gross profit and cash requirements of these sales do not vary materially 
from the requirements of its domestic sales.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has utilized financing sources such as public and
private equity offerings and borrowings from financial institutions and
individual investors to fund its operating activities. The Company believes that
its cash on hand at March 31, 1999 and funds available under its existing credit
agreement combined with funds generated by operations will provide the Company
with adequate liquidity and capital resources for working capital and other cash
requirements through at least fiscal 1999.

As reflected in the financial statements included in the Company's most recent
Annual Report on Form 10-K, the Company incurred a net loss of $1,980,000 for
the year ended September 30, 1998, and also experienced negative cash flow from
operations. Prior to the successful restructuring of its vendor note payable in
March 1999, the Company had also been in default on this note. Additionally, the
Company's current line of credit agreement is effective through June 30,1999,
and although management expects to be able to renew the agreement, there can be
no assurance that a renewal agreement with acceptable terms will be reached.
Fiscal 1999 cash flow projections are dependent on the availability of an
operating line of credit with sufficient borrowing base and achievable financial
covenants from the present lender or another financing source. As a result of
conditions at September 30, 1998, and as of the date of filing of the most
recent Form 10-K, the auditors' report on the Company's financial statements as
of and for the year ended September 30, 1998 contains a modification which
indicates substantial doubt about the Company's ability to continue as a going
concern.

The Company's operating activities provided $366,000 during the six-month period
ended March 31, 1999 because of net income, as offset by increases in accounts
receivable and other operating items, including the non-cash gain on debt
restructuring.

The Company's investing activities used $241,000 during the six-month period
ended March 31, 1999 for the purchase of fixed assets. Its financing activities
provided net cash of $307,000 during the same period for repayments of long-term
obligations of $243,000, offset by increases in its net borrowings on its bank
line of credit.

As of March 31, 1999, the Company had net working capital of $4,390,000 with a
current ratio of 1.86 to 1.0, which represents a $2,983,000 increase in working
capital from September 30, 1998. The debt restructuring allowed a significant
reclassification of debt from short-term to long-term, thereby significantly
improving the Company's working capital position.

The Company has a $3,000,000 revolving credit facility with Coast Business
Credit, a division of Southern Pacific Thrift and Loan Association of Los
Angeles, California. The credit facility is secured by all of the Company's
receivables, inventories, investment property, equipment and general
intangibles, as defined in the agreement. Borrowings under the facility are
payable on demand and are limited to a portion of eligible accounts receivable
and inventories, as defined in a borrowing formula in the agreement. The
agreement is effective through June 30, 1999, with provisions for extensions of
the maturity date. Interest on the credit facility is paid monthly at a rate
equal to the 

<PAGE>

greater of eight percent (8%) or prime plus one and three-quarters percent (1 
3/4%). At March 31, 1999, the Company had outstanding borrowings of 
$1,828,000 under the facility and had a maximum availability under the 
borrowing formula of $3,000,000.

In June 1997, the Company completed an agreement with a vendor whereby
$4,290,000 of a trade payable was converted into a promissory note. In August
1998, the Company advised the vendor it could not comply with the original
payment schedule of the promissory note. Beginning in September 1998, the
Company unilaterally reduced the monthly payment to $50,000. In March 1999, the
note was restructured as described above. The Company will continue to make
monthly payments of $50,000 until the restructured note is paid in full in
January 2002. While management believes that this restructuring will improve the
Company's ability to meet its ongoing cash flow requirements in the foreseeable
future, there can be no assurance in this regard.

In November 1998, the Company received notice from The Nasdaq Stock Market that
the Company's common stock would be delisted from The Nasdaq Small Cap Market if
the closing bid price did not trade at or above $1.00 for ten consecutive
trading days prior to February 17, 1999. The Company's common stock was able to
meet this requirement. Management is no longer considering a reverse stock split
at this time.

YEAR 2000

During fiscal 1997 and 1998, the Company undertook a comprehensive review of its
computer systems and related software to ensure that all systems would properly
recognize Year 2000 and continue to process data. The review encompassed
information technology systems, significant third party relationships and
manufactured product lines.

Based upon this internal assessment, the Company upgraded major portions of its
information systems during the first quarter of fiscal 1998 to ensure Year 2000
compliance. The cost of evaluating and replacing certain business systems did
not have a significant impact on the Company's results of operations. The cost
of approximately $100,000 was funded through operating cash flows. These costs
were attributable primarily to the purchase of new software and equipment and
were expensed or capitalized on a basis consistent with the Company's accounting
policies for capital assets.

The Company is currently in the process of evaluating the Year 2000 preparedness
of its customers, suppliers and service providers by soliciting representations
and assurances from such third parties. If these representations prove to be
inadequate, the Company's business, financial condition and results of
operations could be adversely affected. With regard to its manufactured
electronic products, the Company believes that its embedded technologies are
Year 2000 compliant.

As of the date of this report, the Company also is in the process of preparing
contingency plans to address any remaining exposures to Year 2000 matters, after
consideration of the above plans. There can be no assurance that these plans
will successfully mitigate all Year 2000 risks.

FORWARD-LOOKING INFORMATION

The information set forth in the preceding paragraphs and certain areas
elsewhere in this Form 10-Q contains forward-looking information. Therefore, if,
for any reason (including, without limitation, those described below), the
Company's operations require more capital than anticipated, revenues do not
reach anticipated levels, or cash flow needs are greater than planned, the
Company may need additional financing in order to maintain its operations. There
can be no assurance that the Company would be able to obtain any required
additional financing when needed or that such financing, if obtained, would be
on terms favorable or acceptable to the Company. If the Company was unable to

<PAGE>

obtain additional financing when needed and under acceptable conditions, it
would be required to significantly scale back plans for growth and perhaps
reduce the scope of its operations. Factors that may affect the Company's
revenues, use of capital, expenses and/or cash flow, and that would cause actual
results to differ materially from those anticipated include, but are not limited
to, the introduction of competing products with performance equivalent to or
exceeding that of the Company's products, a claim (whether or not successfully
made) that the Company's products infringe a patent held by another company or
individual, any performance problems involving the Company's products, changes
in technology that could cause the Company's products to become obsolete, the
departure of key members of management and/or key employees, regulatory
requirements that would make the Company's products difficult or uneconomical to
produce, and general economic conditions.

<PAGE>

                           PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

          Colorado Patent Actions

          On January 8, 1996, the Company commenced a patent infringement trial
          against four competitors in the United States District Court of
          Colorado. (The patent involved is No. 5,211,129, which relates to the
          Company's injectable transponder technology.) On January 29, 1996, the
          jury in the trial returned a verdict in favor of the Company and found
          that the defendants had willfully infringed on the Company's patent
          and awarded damages of $444,000, including prejudgment interest. The
          defendants appealed the judgment against them, and the Company
          cross-appealed the failure of the court to increase the Company's
          damages. On July 24, 1997, the Court of Appeals for the Federal
          Circuit handed down its decision in the appeal. The decision of the
          Court of Appeals affirmed the trial court's judgment, holding that the
          Company's patent is valid and was willfully infringed by the
          competitors. However, the Court of Appeals remanded to the trial court
          for further proceedings the issue of whether the Company engaged in
          inequitable conduct in prosecuting the patent application before the
          United States Patent Office.

          On November 7, 1997, the U.S. District Court of Colorado, on remand on
          the issue of inequitable conduct, found no intent on the part of the
          Company to deceive the Patent Office, and therefore that no
          inequitable conduct occurred and the Company's '129 patent was
          enforceable. On February 9, 1998, the District Court Judge issued an
          Order containing findings and conclusions and entered a Third Amended
          Judgment confirming the Court's finding of no inequitable conduct. The
          defendants appealed this decision, and oral argument to the U.S. Court
          of Appeals for the Federal Circuit was held on December 8, 1998.

          On January 26, 1999, the Court of Appeals entered an order affirming
          the U.S. District Court's decision that the Company had not engaged in
          inequitable conduct in obtaining the '129 patent and thus the patent
          was enforceable. The order of the Court of Appeals has the effect of
          continuing the permanent injunction entered by the United States
          District Court in Colorado which prohibits the defendants from
          manufacturing, using, selling, or offering to sell the transponders
          that violate the Company's '129 patent. Because the defendants did not
          pursue a timely appeal to the United States Supreme Court, the January
          26, 1999 decision of the Court of Appeals is now final and not
          appealable.

          Further, during the pendency of the first appeal, the Company pursued
          a contempt action against certain defendants for willful violations of
          the District Court's permanent injunction. On November 7, 1997, a
          Magistrate Judge of the District Court recommended that the defendants
          be found in willful contempt of the permanent injunction and that the
          Company should be awarded double damages, amounting to $33,000, as
          well as attorneys' fees and costs. On February 9, 1998, the District
          Court Judge issued an Order adopting the Magistrate's recommendation
          that the defendants were in contempt. This finding of contempt has
          also been appealed and upheld.

          On January 23, 1998, the Company filed a second Motion for Contempt
          against certain defendants. Following a March 27, 1998 hearing, on
          April 23, 1998 the Magistrate Judge entered a recommendation that the
          defendants be held in contempt a second time, based 

<PAGE>



          upon their attempts to solicit purchase orders from the Denver 
          Metro Microchip Committee and their manufacture, use and sale of 
          the ID-100 Zip Quill transponder product. The Company has requested 
          treble damages, attorneys' fees, costs and sanctions against the 
          defendants for their contempt of the District Court permanent 
          injunction. The defendants have objected to the recommendations of 
          the Magistrate Judge.

          On March 18, 1999, the District Court entered an order of contempt
          against the defendants arising from their efforts to solicit purchase
          orders from the Denver Metro Microchip Committee, but found that it
          could not determine if the ID-100 Zip Quill transponder product was
          made for the purpose of evading the injunction without essential
          change in the nature of the device and, therefore, determined a new
          infringement trial was necessary. As part of the same March 18, 1999
          Order, the District Court instructed the parties to submit briefs on
          the issue of damages flowing from the contempt and further held that
          the Company may register its willful infringement judgment against the
          defendants with the District Court for the District of Minnesota and
          for the District of Columbia for purposes of enforcing the judgment
          and collecting the previously awarded damages from the defendants.

          On April 26, 1999, the parties simultaneously submitted briefs on the
          issue of damages resulting from the defendants' contempt of court in
          soliciting purchase orders from the Denver Metro Microchip Committee.
          The Company seeks an award of several thousand dollars for the
          contempt. The defendants urged the District Court to award no damages.
          The Company believes that the District Court will likely resolve this
          issue without oral argument.

          Minnesota Patent Actions

          On December 17, 1996, the same three competitors found to be willful
          infringers in the Colorado Patent Actions filed a lawsuit against the
          Company and its United States distributor, Schering- Plough, in the
          United States District Court for the District of Minnesota. The
          plaintiffs alleged that the defendants participated in unfair
          competition, breached an oral contract and infringed on three of the
          plaintiffs' United States patents. On January 24, 1997, the plaintiffs
          withdrew this lawsuit in its entirety.

          On April 21, 1997, four plaintiffs (including the three competitors
          identified in the foregoing paragraph) filed a lawsuit against the
          Company and Schering-Plough and another of the Company's competitors
          in the United States District Court for the District of Minnesota. The
          plaintiffs allege that the defendants participated in unfair
          competition, breached an oral agreement and infringed on three of the
          plaintiffs' United States patents and requested that the Court award
          compensatory and treble damages of an unspecified amount.

          On May 16, 1997, the plaintiffs amended the lawsuit and, in their
          complaint as amended, allege patent infringement, false advertising,
          unfair competition and attempted monopolization on the part of the
          Company, among other matters, stemming from the ISO standards. This
          lawsuit has been stayed by agreement of all parties pending the
          outcome of the appeal of the Colorado Patent Action.

          Since the Company was successful in obtaining an affirmance of the
          judgment of enforceability in the Colorado Patent Action, the
          Company's exposure, if any, in the 

<PAGE>

          Minnesota litigation may be reduced. As a result of the favorable 
          ruling in the Colorado Patent Action on February 9, 1998, and as 
          indicated in the above paragraph, the Minnesota litigation has been 
          stayed pending the Federal Circuit Court decision in the Colorado 
          Patent Action. The Company is now assessing its alternatives in the 
          Minnesota Patent Actions in light of the January 26, 1999 decision 
          of the Court of Appeals in the Colorado Patent Action.

          Minnesota Class Action

          On January 28, 1999, a class action lawsuit was commenced against 
          the Company in the United States District Court for the District of 
          Minnesota on behalf of persons who were shareholders of record of 
          the Company's common stock on December 29, 1998 and received the 
          Company's Proxy Statement dated December 29, 1998 ("Proxy 
          Statement") for the Company's annual meeting of stockholders to be 
          held on January 29, 1999 ("Annual Meeting"). The complaint 
          principally alleged violations of federal securities laws based on 
          disclosures in the Proxy Statement. The plaintiffs alleged that the 
          Proxy Statement failed to inform the stockholders of their ability 
          to exercise dissenters' rights in connection with the proposed 
          reverse stock split described in the Proxy Statement. The Company 
          believes the plaintiffs' case had no merit because the Proxy 
          Statement is believed to contain a complete and accurate 
          description of the reverse stock split, including the absence of 
          dissenters' rights.

          In connection with the above-described class action lawsuit, on
          January 28, 1999, the plaintiffs filed a motion requesting an order
          that would prevent the Company from holding the Annual Meeting or, in
          the alternative, that would prevent it from holding the vote on the
          proposed reverse stock split. A hearing on the motion was held on
          January 29, 1999 in the United States District Court for the District
          of Minnesota. In a strongly worded order from the bench, Judge James
          M. Rosenbaum ruled in favor of the Company and denied plaintiffs'
          motion, which allowed the Company to hold the Annual Meeting as
          planned.

          At the January 29, 1999 Annual Meeting of the Company's shareholders,
          the shareholders authorized the Company's Board of Directors to carry
          out the reverse stock split at any time before April 1, 1999. Due to
          increases in the price of the Company's common stock as quoted on The
          Nasdaq SmallCap Market, the Board determined to forgo the reverse
          stock split and allowed its authority to execute the stock split to
          expire unexercised on April 1, 1999. In view of that development, the
          plaintiffs in the class action lawsuit have agreed to dismiss the
          complaint with prejudice and without any further cost to the Company.

<PAGE>

Item 6.   Exhibits and Reports on Form 8-K

          a.   Exhibits:

                    The following exhibit is hereby incorporated by reference to
                    Exhibit 10.32 to the Company's Annual Report on Form 10-K
                    for the year ended September 30, 1997:

                    10.1 Promissory Note dated June 1, 1997 issued by the
                         Company to Hughes Microelectronics Europa Espana S.A.

                    The following exhibits are hereby filed as part of this
                    Quarterly Report on Form 10-Q:

                    10.2 Amendment No. 1 to Promissory Note dated as of March
                         15, 1999 by and between the Company and Data Sales Co.,
                         Inc.

                    10.3 Warrant Agreement dated as of March 15, 1999 by and
                         between the Company and Data Sales Co., Inc.

                    27   Financial Data Schedule

          b.   Reports on Form 8-K

                    A report on Form 8-K was filed on February 19, 1999 relating
                    to the Nasdaq minimum bid requirements. No other reports on
                    Form 8-K were filed in the quarter ended March 31, 1999.

<PAGE>

                                   SIGNATURES

In accordance with 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.

                                        DESTRON FEARING CORPORATION
                                        (Registrant)

Dated:    May 12, 1999                  /s/ Randolph K. Geissler
                                        ---------------------------------
                                        By:  Randolph K. Geissler
                                        President
                                        Chief Executive Officer