<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
                                  June 30, 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 August 10, 1999, there were 13,403,982 outstanding shares of Common Stock.


<PAGE>

                           DESTRON FEARING CORPORATION


                                    FORM 10-Q

                       FOR THE QUARTER ENDED JUNE 30, 1999


                                      INDEX
                                      -----

<TABLE>
<CAPTION>

                                                                            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>

                                      - 2 -

<PAGE>

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES


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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------

         ASSETS                                    June 30,    September 30,
                                                       1999            1998
                                                -----------     ------------
<S>                                                <C>             <C>
CURRENT ASSETS:
    Cash and cash equivalents                      $    460        $    104
    Accounts receivable, net                          2,555           2,212
    Inventories, net                                  3,604           4,753
    Vendor deposits                                     615             475
    Prepaid expenses and other current assets           137              33
                                                   --------        --------
       Total current assets                           7,371           7,577

PROPERTY AND EQUIPMENT, net                           1,888           1,922
GOODWILL, net                                         1,854           1,917
OTHER ASSETS, net                                       131             147
                                                   --------        --------
                                                   $ 11,244        $ 11,563
                                                   --------        --------
                                                   --------        --------

       LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Line of credit                                 $    --         $  1,278
    Accounts payable                                    761             988
    Customer deposits                                   322             865
    Accrued liabilities                                 545             495
    Current portion of long-term obligations            663           2,544
                                                   --------        --------
       Total current liabilities                      2,291           6,170

LONG-TERM OBLIGATIONS,
   net of current portion                               972             677
                                                   --------        --------

   Total liabilities                                  3,263           6,847
                                                   --------        --------

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value;
      20,000,000 shares authorized;
      13,404,000 shares issued and outstanding          134             134
   Common stock warrants                                100             --
   Additional paid-in capital                        19,889          19,846
   Accumulated deficit                              (12,142)        (15,264)
                                                   --------        --------
   Total shareholders' equity                         7,981           4,716
                                                   --------        --------
                                                   $ 11,244        $ 11,563
                                                   --------        --------
                                                   --------        --------
</TABLE>


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


                                      - 3 -

<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                    Quarter  Ended June 30,            Nine Months Ended June 30,
                                                   ------------------------            --------------------------
                                                   1999                1998             1999               1998
                                              -------------      -------------       ---------          ---------
<S>                                            <C>               <C>                 <C>                <C>
NET REVENUE                                     $  5,271           $  3,123           $ 14,782           $ 10,103

COSTS AND EXPENSES:
   Cost of sales                                   2,961              2,171              8,691              6,946
   Selling, general and administrative               712                982              2,435              2,857
   Research and development                          192                253                594                813
   Interest expense and other                         77                127                342                379
                                                --------           --------           --------           --------

   Total costs and expenses                        3,942              3,533             12,062             10,995

INCOME (LOSS) BEFORE INCOME TAXES                  1,329               (410)             2,720               (892)

PROVISION FOR INCOME TAXES                            27               --                   70               --
                                                --------           --------           --------           --------

NET INCOME (LOSS) BEFORE
    EXTRAORDINARY GAIN                             1,302               (410)             2,650               (892)

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

NET INCOME (LOSS)                               $  1,302           $   (410)          $  3,122           $   (892)
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------

 BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON SHARE:
      Income before extraordinary item          $   0.10           $  (0.03)          $   0.20           $  (0.07)
       Extraordinary item                           --                 --                 0.03               --
                                                --------           --------           --------           --------

                                                $   0.10           ($  0.03)          $   0.23           $  (0.07)
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------
WEIGHTED AVERAGE
   COMMON AND COMMON EQUIVALENT
   SHARES OUTSTANDING:
       Basic                                      13,390             13,315             13,366             13,302
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------

        Diluted                                   13,463             13,315             13,397             13,302
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------
</TABLE>

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


                                      - 4 -

<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(in thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                 Nine Months Ended June 30,
                                                              -------------------------------
                                                                  1999                1998
                                                              ------------       ------------
<S>                                                           <C>                <C>
OPERATING ACTIVITIES:
   Net income (loss)                                            $  3,122            $ ( 892)
   Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
    Extraordinary gain on debt restructuring                        (472)              --
    Depreciation and amortization                                    358                360
    Changes in operating items:
       Accounts receivable                                          (343)               636
       Inventories                                                 1,149                280
       Vendor deposits                                              (140)               (16)
       Prepaid expenses and other current assets                    (104)               (14)
       Accounts payable and accrued liabilities                     (177)                28
       Customer deposits                                            (543)              --
                                                              ------------       ------------
       Net cash provided by operating activities                   2,850                382
                                                              ------------       ------------

INVESTING ACTIVITIES:
   Purchases of fixed assets                                        (245)              (191)
                                                              ------------       ------------

FINANCING ACTIVITIES:
   Issuance of common stock                                           43                 58
   Repayments of long-term obligations                            (1,014)            (1,152)
   Net borrowings (repayments) on bank line of credit             (1,278)               343
                                                              ------------       ------------

       Net cash used in by financing activities                   (2,249)              (751)
                                                              ------------       ------------

NET CHANGE IN CASH                                                   356               (560)

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

CASH AND CASH EQUIVALENTS end of period                         $    460            $   515
                                                              ------------       ------------
                                                              ------------       ------------

SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid                                                $    330            $   386
                                                              ------------       ------------
                                                              ------------       ------------

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.


                                      - 5 -

<PAGE>

DESTRON FEARING CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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>
<CAPTION>
                                                        June  30, 1999            September 30, 1998
                                                       ---------------            ------------------
<S>                                                    <C>                        <C>
Raw materials                                                  $1,444                      $2,481
Finished goods                                                  2,160                       2,272
                                                              -------                     -------
       Total inventories                                       $3,604                      $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.


                                      - 6 -

<PAGE>

A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
quarter and nine months ended June 30 (in thousands, except per share amounts).


<TABLE>
<CAPTION>
                                                   Quarter Ended June 30               Nine Months Ended June 30
                                                  -----------------------             --------------------------
                                                  1999               1998               1999              1998
                                                  ----               ----               ----              ----
<S>                                             <C>                <C>                <C>                <C>
Net income (loss)                               $  1,302           ($  410)           $ 3,122            ($   892)
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------
Weighted average number of
common shares outstanding                         13,390             13,315             13,366             13,302

Dilutive effect of stock options
and warrants after application
of the treasury stock method                          73               --                   31               --
                                                --------           --------           --------           --------

                                                  13,463             13,315             13,397             13,302
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------
Basic and diluted earnings
(loss) per common share                         $   0.10           ($  0.03)          $   0.23           ($  0.07)
                                                --------           --------           --------           --------
                                                --------           --------           --------           --------
</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 2002. 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. The
warrants were recorded at their estimated fair value as of the date of issuance.

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.

In May 1999, the Company made an additional $600,000 cash payment against the
principal of the note. Giving effect to this additional payment, the note is
currently scheduled to be retired in November 2000.


                                      - 7 -

<PAGE>

6.     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, which was issued in May, 1993 and expires in May, 2010.) 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
was not appealed and is now final.

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


                                      - 8 -

<PAGE>

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 15, 1999, the Company filed a notice of appeal to the United States
Court of Appeals for the Federal Circuit regarding the District Court's failure
to find contempt from defendants' offers for sale and sales of the ID-100 Zip
Quill. This issue is undergoing briefing by the parties, after which the Court
of Appeals will select a date for oral argument.

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 not resolve this damage issue until after the Court of Appeals rules on
the merits of the pending appeal.

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


                                      - 9 -

<PAGE>

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 agreed to dismiss the
complaint with prejudice and without any further cost to the Company. Based on
this agreement, on July 29, 1999, Judge Rosenbaum dismissed the plaintiffs'
complaint with prejudice and without costs to either party. Thus, this matter
has been concluded.


                                     - 10 -

<PAGE>

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

RESULTS OF OPERATIONS

Net income for the third quarter of fiscal year 1999 was $1,302,000 compared to
a net loss of $410,000 in the prior year's third quarter. Year-to-date net
income before the extraordinary gain was $2,650,000 compared to a net loss of
$892,000 in the comparable year earlier period. The extraordinary gain of
$472,000 posted in the second quarter of fiscal 1999 was the result of a debt
restructuring. (See "Liquidity and Capital Resources"). Net income for the
nine-month period in fiscal 1999 was $3,122,000. The increase in net income for
the quarter and nine months was the result of strong sales growth, improved
margins and continued lower operating expenses.

Net revenue for the quarter ended June 30, 1999 of $5,271,000 was 69% higher
than the $3,123,000 reported for the comparable quarter of fiscal 1998. For
the nine-month period, revenue was $14,782,000, representing a 46% increase
from the fiscal 1998 period. In the third quarter, electronic product sales
grew 151% compared to the same quarter last year. Visual identification
product revenue decreased 13% from the comparable quarter of fiscal 1998 due
to a shift of expected sales to the first two quarters of this fiscal year.
Visual identification sales for the nine-month period increased 5% over the
nine months of fiscal 1998.

Cost of sales of $2,961,000 for the third quarter and $8,691,000 for the
nine-month period were higher than the comparable fiscal 1998 periods by 36% and
25%, respectively. The higher costs were attributable to higher revenues during
the quarter. Gross profit margins improved to 44% and 41% of revenue in the
third quarter and nine-month period of fiscal 1999, respectively, compared to
30% and 31% for each of those periods in fiscal 1998. Gross margins continue to
improve significantly, as in prior quarters this fiscal year, due to higher
sales levels and a resulting improvement in overhead absorption, improved cost
efficiencies and a favorable product mix.

Selling, general and administrative expenses for the third quarter of fiscal
1999 were $712,000, or 27% lower than for the same period last year. For the
nine-month period ended June 30, 1999, these expenses were $2,435,000, which was
a 15% decrease over last year's comparable period. Selling expenses decreased
38% for the quarter and 25% for the nine-month period due to a decrease in
personnel. General and administrative expenses are down $64,000 and $37,000,
respectively, for the third quarter and nine months compared with comparable
periods in fiscal 1998, due principally to lower legal and investor relations
expenses.

Research and development expense of $192,000 in the third quarter of 1999 is
down 24% over last year's third quarter and down 27% over comparable nine-month
periods. Lower research and development expense is due to less emphasis on
outside consultants.

Interest and other of $77,000 in the third quarter of fiscal 1999 is $50,000
lower than the third quarter of fiscal 1998 due to significantly lower debt
levels. Debt was restructured in the second quarter of fiscal 1999 causing a
favorable variance of $37,000 for the nine months ended June 30, 1999.

In 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 $2,352,000
at 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

                                     - 11 -

<PAGE>

which will be recognized in the form of lower interest expense over the life
of 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 June 30, 1999 and funds available under its existing credit
agreement combined with funds expected to be 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, at
that time, the Company's line of credit agreement had not yet been renewed
beyond June 30, 1999. As a result of conditions at September 30, 1998, and as of
the date of filing of the most recent 10-K, the auditors' report on the
Company's financial statements as of and for the year ended September 30, 1998
contained a qualification which indicated substantial doubt about the Company's
ability to continue as a going concern. (See additional discussion below
regarding fiscal 1999 financing activities.)

The Company's current operating activities provided $2,850,000 during the
nine-month period ended June 30, 1999 primarily related to net income of
$3,122,000 and a net $1,149,000 decrease in inventories, partially offset by the
non-cash gain in debt restructuring and changes in customer deposits and other
operating items.

The Company's investing activities used $245,000 during the nine-month period
ended June 30, 1999 for the purchase of fixed assets. Its financing activities
used net cash of $2,249,000 during the same period for repayments of long-term
obligations and line of credit borrowings.

As of June 30, 1999, the Company had net working capital of $5,080,000 with a
current ratio of 3.22 to 1.0, which represents a $3,673,000 increase in working
capital from September 30, 1998. The debt restructuring reduced overall debt
levels and 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 has been renewed through June 30, 2001, with provisions for extensions
of the maturity date. Interest on the credit facility is paid monthly at a rate
equal to the greater of eight percent (8%) or prime plus one and three-quarters
percent (1 3/4%). At June 30, 1999, the Company had no outstanding borrowings
under the facility and had a maximum availability under the borrowing formula of
$3,000,000.


                                     - 12 -

<PAGE>

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. In May 1999, a one-time payment of
$600,000 was made to further accelerate payment of this note. The Company plans
to continue making monthly payments of $50,000 until the restructured note is
paid in full in November 2000. 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.


                                     - 12 -

<PAGE>

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.

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
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.


                                     - 13 -

<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, which was
              issued in May, 1993, and expires in May, 2010.) 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 was not appealed and is
              now final.

              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


                                     - 14 -

<PAGE>

              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 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 15, 1999, the Company filed a notice of appeal in the
              United States Court of Appeals for the Federal Circuit regarding
              the District Court's failure to find contempt from defendants'
              offers for sale and sales of the ID-100 Zip Quill. The issue is
              undergoing briefing by the parties, after which the Court of
              Appeals will select a date for oral argument.

              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 not resolve this damage issue until
              after the Court of Appeals rules on the merits of the pending
              appeal.

              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


                                     - 15 -

<PAGE>

              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
              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 agreed to dismiss the complaint with
              prejudice and without any further cost to the Company. Based on
              this agreement, on July 29, 1999, Judge Rosenbaum dismissed the
              plaintiffs' complaint with prejudice and without costs to either
              party. Thus, this matter has been concluded.



                                     - 16 -

<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
the 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.

                           11.1   Not filed

                  b.    Reports on Form 8-K

                           No reports on Form 8-K were filed in the quarter
ended June 30, 1999.


                                     - 17 -

<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:    August 10, 1999                  ------------------------------
                                           By:  Randolph K. Geissler
                                           President
                                           Chief Executive Officer


                                     - 18 -