UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                   Form 10-Q


Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                  Act of 1934

For the Quarter ended   September 30, 1998 

Commission File Number  0-19943


                             PROTOCOL SYSTEMS, INC.
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            (Exact name of registrant as specified in its charter)


            Oregon                                        93-0913130
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   (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                        Identification No.)


      8500 SW Creekside Place, Beaverton, OR                     97008        
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      (Address of principal executive offices)                   (Zip Code)

                                 (503) 526-8500
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             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the 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.

                                                        [X] Yes    [  ] No

              Number of shares of common stock outstanding as of
                               October 30, 1998:
                  8,335,799 shares, $.01 par value per share
                  ------------------------------------------









<PAGE>2

                             PROTOCOL SYSTEMS, INC.

                              Index to Form 10-Q


PART I  FINANCIAL INFORMATION                                         Page No.
-----------------------------                                         --------

Item 1. Financial Statements
      
        Condensed Consolidated Statements of
        Operations for the three and nine months
        ended September 30, 1998 and 1997                                3

        Condensed Consolidated Balance Sheets
        as of September 30, 1998 and December 31, 1997                   4

        Consolidated Statements of Cash Flows for
        the nine months ended September 30, 1998 and 1997                5

        Notes to Condensed Consolidated Financial
        Statements                                                      6-9

Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations                  10-16


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

Item 2. Changes in Securities                                            17

Item 4. Submission of Matters to a Vote of Security Holders              17

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


SIGNATURES                                                               18
----------
















<PAGE>3
<TABLE>
                                    PROTOCOL SYSTEMS, INC.
                        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                            (in thousands except per share amounts)
                                          (unaudited)



                        Three months ended September 30,   Nine months ended September 30,
                                  1998       1997                 1998        1997     
                                 ------     ------               ------      ------
<S>                              <C>        <C>                  <C>         <C>
Sales                            $17,530    $17,158              $49,410     $46,460              
Cost of sales                      8,052      8,095               24,052      22,824           
                                 -------    -------              -------     -------        
    Gross profit                   9,478      9,063               25,358      23,636             

Operating expenses:
  Research and development 
   expenses                        2,514      2,244                6,425       6,408            
  Selling, general and 
   Administrative expenses         5,759      5,292               16,967      15,158 
  Relocation costs                 2,246         -                 2,246          -
                                  -------    -------             -------     -------         
    Total operating expenses      10,519      7,536               25,638      21,566            
                                  -------    -------             -------     -------    
    Income (loss) from 
     operations                   (1,041)     1,527                 (280)      2,070

Other income                         225        291                  718         803               
                                  -------    -------             -------     -------       
    Income (loss) before 
     income taxes                   (816)     1,818                  438       2,873

Provision (benefit) for income
 taxes                              (259)       441                   92         747             
                                  -------    -------             -------     -------          
    Net income (loss)            $  (557)   $ 1,377              $   346     $ 2,126           
                                  =======    =======             =======     =======
 
    Comprehensive income (loss)  $  (372)   $ 1,448              $   520     $ 2,038         
                                  =======    =======             =======     =======

    Basic earnings (loss) 
      per share                  $ (0.07)   $  0.15              $  0.04     $  0.24      
                                  =======    =======             =======     =======
    Diluted earnings (loss)
      per share                  $ (0.07)   $  0.15              $  0.04     $  0.23     
                                  =======    =======             =======     =======

Weighted average number of shares
used in the computation of:  
    Basic earnings per share       8,389      8,887                8,562       8,838
    Diluted earnings per share     8,389      9,337                8,886       9,210           




       See accompanying notes to condensed consolidated financial statements

</TABLE>
<PAGE>4
<TABLE>
                                    PROTOCOL SYSTEMS, INC.
                             CONDENSED CONSOLIDATED BALANCE SHEETS
                                        (in thousands)
                                         (unaudited)


                                                              September 30,  December 31,
                                                                  1998          1997
                                                                 ------        ------
<S>                                                              <C>           <C> 
ASSETS
Current assets:
  Cash and cash equivalents                                      $ 6,458      $12,257
  Short-term investments                                           9,304        6,524
  Accounts receivable - net                                       16,555       16,106
  Inventories                                                     13,160       13,507
  Deferred taxes                                                   1,443        1,474
  Prepaid expenses and other                                         410          276
                                                                 -------      -------
    Total current assets                                          47,330       50,144

Long-term investments                                              4,711        6,789
Property and equipment - net                                       3,968        4,575
Other assets                                                       2,125        2,247
                                                                 -------      -------
                                                                 $58,134      $63,755
                                                                 =======      =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                               $ 3,293      $ 2,806
  Accrued salaries, wages and related liabilities                  2,581        2,375
  Other accrued liabilities                                        1,209          606
  Income taxes payable                                              (384)         676
  Reserve for warranties                                           1,136        1,084
  Deferred revenue and customer deposits                             117          122
                                                                 -------      -------
    Total current liabilities                                      7,952        7,669

Deferred taxes                                                       413          408
Shareholders' equity:
  Common stock, $.01 par value.  Authorized 30,000 shares;
    issued and outstanding 8,313 at 1998 and 8,935 at 1997            83           89
  Additional paid-in capital                                      29,088       35,414
  Unearned compensation                                              (96)           -
  Accumulated other comprehensive income:
    Unrealized holding gain on investments                            71           33
    Foreign currency translation adjustment                          200           65
  Retained earnings                                               20,423       20,077
                                                                 -------      -------
    Total shareholders' equity                                    49,769       55,678
                                                                 -------      -------
                                                                 $58,134      $63,755
                                                                 =======      =======


       See accompanying notes to condensed consolidated financial statements




</TABLE>
<PAGE>5
<TABLE>     
                                    PROTOCOL SYSTEMS, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       (in thousands)
                                        (unaudited)
                                                        Nine months ended September 30,
                                                              1998         1997
                                                             ------       ------
<S>                                                         <C>          <C>
Cash flows from operating activities:
 Net income                                                 $   346      $ 2,126

 Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization                              1,743        1,813
   Write-off of assets                                          719           -
   Amortization of bond premium                                  77          267
   Provision for deferred taxes                                  23           (9)
   Other non-cash items                                          96           -
   Increase (decrease) in cash resulting from
    changes in:
     Accounts receivable                                       (409)        (129)
     Inventories                                                391         (879)
     Prepaid expenses and other assets                         (113)         (11)
     Accounts payable and accrued liabilities                 1,084          (22)
     Income taxes payable                                    (1,038)         358
     Reserve for warranties                                      52            3
     Deferred revenue and customer deposits                      (5)         (37)
                                                            -------      -------
        Net cash provided by operating activities             2,966        3,480

Cash flows from investing activities:
  Purchase of investments                                    (8,855)     (12,024)
  Proceeds from maturity of investments                       8,115       14,715
  Acquisition of property and equipment                      (1,410)      (1,722)
  Capitalization of software development costs                 (191)          -
  Acquisition of intangible assets                              (74)         (10)
                                                             -------      -------
        Net cash provided by (used in) investing activities  (2,415)         959

Cash flows from financing activities:
  Proceeds from exercise of stock options
   and stock purchase plan                                      974          888
  Repurchase of common stock                                 (7,498)          - 
                                                            -------      -------
        Net cash provided by (used in) financing activities  (6,524)         888
                                                            -------      -------
Effect of exchange rates on cash and cash equivalents           174          (24)
                                                            -------      -------
        Net increase (decrease) in cash and cash equivalents (5,799)       5,303

Cash and cash equivalents at beginning of period             12,257        6,903
                                                            -------      -------
Cash and cash equivalents at end of period                  $ 6,458      $12,206
                                                            =======      =======
Supplemental disclosure of cash flow information:
 Cash paid for income taxes                                 $ 1,024      $   295

Supplemental schedule of noncash transactions:
  Increase in investment in Protocol Medical Systems Ltd.
   due to release of compensatory shares of common 
   stock from escrow                                        $    91      $    91

       See accompanying notes to condensed consolidated financial statements

</TABLE>
<PAGE>6

                            PROTOCOL SYSTEMS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been 
prepared by the Company without audit and in conformity with generally 
accepted accounting principles for interim financial information.  
Accordingly, certain financial information and footnotes have been omitted or 
condensed.  In the opinion of management, the condensed consolidated financial 
statements include all necessary adjustments (which are of a normal and 
recurring nature) for the fair presentation of the results of the interim 
periods presented.  These financial statements should be read in conjunction 
with the Company's audited consolidated financial statements for the year 
ended December 31, 1997.  The results of operations for the interim period 
shown in this report are not necessarily indicative of results for any future 
interim period or the entire fiscal year.


INVENTORIES

Inventories are valued at the lower of cost or market with cost determined on 
the first-in, first-out basis (FIFO). The components of inventories are as 
follows:

                                             September 30,   December 31,
(in thousands)                                   1998            1997
-------------------------------------------------------------------------
Raw materials                                  $ 4,949         $ 5,521
Work in process                                  2,575           2,460
Finished goods                                   3,306           3,569
Demonstration instruments                        2,330           1,957
                                               -------          ------
   Total inventories                           $13,160         $13,507
                                               =======          ======


PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and includes the following: 

                                             September 30,   December 31,
(in thousands)                                   1998            1997
-------------------------------------------------------------------------
Equipment                                      $11,920         $11,732
Furniture and fixtures                           1,886           1,757
Leasehold improvements                             252             683
                                                ------          ------
                                                14,058          14,172
Less accumulated depreciation and amortization  10,090           9,597
                                                ------          ------
   Property and equipment - net                $ 3,968         $ 4,575
                                                ======          ======



<PAGE>7

INCOME TAXES

The provision for income taxes has been recorded based on the current estimate 
of the Company's annual effective tax rate.  This rate differs from the 
Federal statutory rate primarily because of the provision for state income 
taxes, the benefit of the Company's research and experimentation tax credits 
and tax-exempt interest income earned on investments.  See Management's 
Discussion and Analysis of Financial Condition and Results of Operations for 
further discussion of income taxes.


BASIC AND DILUTED EARNINGS PER SHARE

In accordance with the requirements of Statement of Financial Accounting 
Standards (SFAS) No. 128, "Earnings per Share" both basic earnings per share 
and diluted earnings per share are presented.  Basic earnings per share is 
computed using the weighted average number of common shares outstanding and 
diluted earnings per share is computed using the weighted average number of 
common shares outstanding and dilutive potential common shares assumed to be 
outstanding during the period using the treasury stock method.  Dilutive 
potential common shares consist of options to purchase common stock. 

COMPREHENSIVE INCOME

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" which 
establishes standards for the reporting and display of comprehensive income 
and its components.  The following is a reconciliation of net income to 
comprehensive income:

<TABLE>
                       Three months ended September 30,    Nine months ended September 30,
(in thousands)                  1998       1997                    1998       1997
------------------------------------------------------------------------------------------
<S>                            <C>         <C>                   <C>          <C>              
Net income (loss)              $ (557)     $ 1,377               $   346      $ 2,126

 Other comprehensive 
  income, net of tax
    Foreign currency 
     translation adjustments      147           55                   136          (88)
    Unrealized holding 
     gain arising during
      the period                   38           16                    38           -
                               -------      -------               -------      -------
 Other comprehensive 
  income (loss)                   185           71                   174          (88)
                               -------      -------               -------      -------

Comprehensive income (loss)    $ (372)     $ 1,448               $   520      $ 2,038
                               =======      =======               =======      =======
</TABLE>

<PAGE>8
RELOCATION OF SUBSIDIARY

During the third quarter of 1998 the Company relocated its wholly-owned 
subsidiary, Pryon Corporation, from Menomonee Falls, Wisconsin to the 
Company's Beaverton, Oregon facility in order to improve operating 
efficiencies.  This relocation included moving all Pryon operations including 
key management personnel and was complete by the end of the third quarter of 
1998.  The relocation resulted in a reduction of 56 employees from 
manufacturing, engineering and administrative functions.

The Company incurred $2.2 million ($1.8 million after tax) in relocation costs 
in the third quarter of 1998. These costs include employee severance benefits, 
lease and other contract terminations, key employee, inventory and equipment 
relocation costs as well as a write-off of $482,000 of fixed assets and 
capitalized software development costs related to assets that will not be 
utilized by the Company's Beaverton facility.  At the end of the third quarter 
of 1998, relocation costs of $779,000 were not disbursed. The Company 
anticipates that these remaining balances will be expended by the end of 1998, 
except for amounts related to longer term lease and other contract 
terminations.
 

PENDING LITIGATION

In 1990, the Company entered into a development and supply agreement with 
Gensia, Inc. to develop and supply a closed-loop drug delivery and monitoring 
device ("GenESA device"). This agreement was amended in December 1997.  Gensia 
began shipments of the GenESA device to Europe in 1995 and received FDA 
clearance to market the product in the United States in the third quarter of 
1997.  In April 1998, the Company was informed that Gensia plans no additional 
purchases of the GenESA device under the supply agreement with the Company 
which provided for the purchase of devices through the year 2002.  In July 
1998, the Company commenced litigation against Gensia Sicor, Inc. and Gensia 
Automedics alleging that they have breached the supply agreement and is 
seeking damages of approximately $10 million.


NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, 
"Disclosures about Segments of an Enterprise and Related Information".  The 
Statement changes the way public companies report segment information in 
annual financial statements and also requires those companies to report 
selected segment information in interim financial reports to shareholders.  
The Company plans to adopt the statement for the quarter ending December 31, 
1998.

In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software 
Revenue Recognition", which supercedes SOP 91-1. The Company adopted SOP 97-2 
for software transactions entered into beginning January 1, 1998. SOP 97-2 
generally requires revenue earned on software arrangements involving multiple 
elements to be allocated to each element based on the relative fair values of 
the elements. The revenue allocated to software products generally is 
recognized upon delivery of the products. The revenue allocated to post-
contract customer support generally is recognized ratably over the term of the 
support and revenue allocated to service elements generally is recognized as 
the services are performed. The impact on the Company's Consolidated Financial 
Statements is not material.

<PAGE>9

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect SFAS No. 133 to have a material
impact on its Consolidated Financial Statements.



<PAGE>10

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Third Quarter 1998 vs. Third Quarter 1997
-------------------------------------------

Sales.  Sales for the third quarter of 1998 increased 2.2% to $17.5 million 
from $17.2 million for the third quarter of 1997. 

U.S. military revenues increased 360.9% to $2.8 million (16.0% of total sales) 
in the third quarter of 1998 from $609,000(3.5% of total sales) in the third 
quarter of 1997.  Several large military orders were shipped during the third 
quarter of 1998.   

Domestic sales, excluding military revenues and Original Equipment 
Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, decreased 
11.4% to $9.8 million (56.1% of total sales) in the third quarter of 1998 from 
$11.1 million (64.6% of total sales) in the third quarter of 1997.  The 
decrease in domestic sales in the third quarter of 1998 was primarily due to a 
reduction in the average sales price of monitors caused by fewer highly 
configured monitors.  This reduction was partially offset by an increase in 
the unit sales of Flexible Monitoring systems including the Acuity central 
workstation. 

International sales, excluding international OEM sales of Pryon OEM products 
and GenESA devices, decreased 6.6% to $3.2 million (18.3% of total sales) in 
the third quarter of 1998 from $3.4 million (20.0% of total sales) in the 
third quarter of 1997.  This decrease in international sales was principally 
due to the continuing strength of the U.S. dollar against foreign currencies 
and soft economic conditions particularly in Europe and Asia.

OEM sales decreased 16.7% to $1.7 million (9.7% of total sales) in the third 
quarter of 1998 from $2.0 million (11.8% of total sales) in the third quarter 
of 1997 primarily due to a $317,000 decrease in sales to certain of its OEM 
customers. 

Gross profit.  As a percentage of sales, gross profit increased to 54.1% in 
the third quarter of 1998 from 52.8% in the third quarter of 1997.  The 
increase in gross margin was primarily due to improved manufacturing 
efficiencies in the third quarter of 1998.

Research and development.  Research and development expenses increased 12.0% 
to $2.5 million in the third quarter of 1998 from $2.2 million in the third 
quarter of 1997.  The increase in research and development expenses resulted 
primarily from the write-off of an engineering software license and related 
fixed assets as the Company no longer intends use these assets in future 
product development.  As a percentage of sales, research and development 
expenses increased to 14.3% in the third quarter of 1998 from 13.1% in the 
third quarter of 1997.

<PAGE>11

Selling, general and administrative.  Selling, general and administrative 
expenses increased 8.8% to $5.8 million in the third quarter of 1998 from $5.3 
million in the third quarter of 1997.  This increase resulted primarily from 
the establishment of direct sales organizations in Germany and France in 1998 
and an increase in the number of direct sales representatives and clinical 
application specialists employed by the Company to expand the field sales and 
service operations. As a percentage of sales, selling, general and 
administrative expenses increased to 32.9% in the third quarter of 1998 from 
30.8% in the third quarter of 1997.

Relocation costs.  In the third quarter of 1998, the Company incurred $2.2 
million ($1.8 million after tax) of relocation costs related to the relocation 
of the operations of its Pryon subsidiary from Wisconsin to Oregon.  These 
costs include employee severance, write-off of assets that will not be 
utilized in Oregon, lease and other contract terminations, and costs to 
relocate key employees as well as inventory and equipment. The relocation 
resulted in a reduction of 56 employees from manufacturing, engineering and 
administrative functions. 

Other income.  Other income decreased 22.8% to $225,000 in the third quarter 
of 1998 from $291,000 in the third quarter of 1997 primarily due to a decrease 
in interest income.  Cash and investments decreased as the Company repurchased 
common stock during 1998 under a previously announced buy-back program.

Provision for (benefit from) income taxes.  The benefit from income taxes was 
$259,000 in the third quarter of 1998 compared to a provision for income taxes 
of $441,000 in the third quarter of 1997.  The annual effective tax rates used 
in 1998 and 1997 were 21% and 26%, respectively, the decrease being primarily 
due to greater expected percentage benefits from tax-exempt interest and 
research and experimentation credits.  Tax rates in the third quarters were 
also beneficially impacted by the effects of a reduction of the tax rates used 
in the first six months of each year, resulting in effective tax rates of 
31.7% and 24.3% in the third quarter of 1998 and 1997, respectively. 

Net income (loss).  The net loss in the third quarter of 1998 was $557,000 or 
$0.07 per diluted share compared to net income of $1.4 million or $0.15 per 
diluted share in the third quarter of 1997.  Excluding costs associated with 
the relocation of Pryon, net income for the third quarter of 1998 would have 
been $1.2 million or $0.15 per diluted share.

The Company expects net income in 1998, excluding costs associated with the 
relocation of Pryon, to remain relatively flat compared to 1997 as a result of 
increases in its marketing and sales efforts in 1998, including increases in 
the number of direct sales representatives, clinical application specialists, 
field service engineers, and the establishment of direct sales organizations 
in France and Germany during 1998.

Net income exclusive of relocation costs is a non-GAAP measure and investors 
should not rely on it as a substitute for GAAP measures.  Because the 
relocation of the Pryon subsidiary was unusual in nature, management believes 
that a measure of net income excluding the relocation is meaningful and useful 
to investors as it provides an alternative basis with which management and 
investors can assess the profitability of the Company's core operations. 


<PAGE>12

Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
-----------------------------------------------------------------------------

Sales.  Sales for the first nine months of 1998 increased 6.3% to $49.4 
million from $46.5 million for the first nine months of 1997. 

U.S. military revenues increased 221.3% to $6.5 million (13.2% of total sales) 
in the first nine months of 1998 from $2.0 million (4.4% of total sales) in 
the first nine months of 1997 due to several large military orders shipped 
during the first nine months of 1998.   

Domestic sales, excluding military revenues and Original Equipment 
Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, increased 
5.5% to $26.7 million (54.1% of total sales) in the first nine months of 1998 
from $25.3 million (54.5% of total sales) in the first nine months of 1997.  
The growth in domestic sales was primarily due to an increase in the unit 
sales of Flexible Monitoring systems including the Acuity central stations. 

International sales, excluding international OEM sales of Pryon OEM products 
and GenESA devices, decreased 17.8% to $10.7 million (21.8% of total sales) in 
the first nine months of 1998 from $13.1 million (28.1% of total sales) in the 
first nine months of 1997. This decrease in international sales was 
principally due to the continuing strength of the U.S. dollar against foreign 
currencies and soft economic conditions particularly in Europe and Asia.

OEM sales of Pryon OEM products and GenESA devices decreased 10.5% to $5.4 
million (10.9% of total sales) in the first nine months of 1998 from $6.0 
million (12.9% of total sales) in the first nine months of 1997.  Pryon OEM 
sales decreased by $1.1 million primarily as a result of a decrease in sales 
to certain of its OEM customers.  This decrease was partially offset by an 
increase of $437,000 in sales of the GenESA device to Gensia Automedics, Inc. 
Gensia received clearance from the Food and Drug Administration (FDA) to 
market the GenESA device in the United States in 1997.  In April 1998, the 
Company was informed that Gensia plans no additional purchases of the GenESA 
device under a supply agreement with the Company which provided for the 
purchase of devices through the year 2002.  In July 1998, the Company 
commenced litigation against Gensia Sicor, Inc. and Gensia Automedics alleging 
that they have breached the supply agreement and seeking damages of 
approximately $10 million.

Gross profit.  As a percentage of sales, gross profit increased slightly to 
51.3% in the first nine months of 1998 from 50.9% in the first nine months of 
1997 primarily due to an improvement in gross margins of Pryon OEM products. 

Research and development.  Research and development expenses remained level at 
$6.4 million in the first nine months of 1998 compared to the first nine 
months of 1997.  As a percentage of sales, research and development expenses 
decreased to 13.0% in the first nine months of 1998 from 13.8% in the first 
nine months of 1997.

Selling, general and administrative.  Selling, general and administrative 
expenses increased 11.9% to $17.0 million in the first nine months of 1998 
compared to $15.2 million in the first nine months of 1997. This increase 
resulted primarily from the establishment of direct sales organizations in 
Germany and France in 1998 and an increase in the number of direct sales 
representatives and clinical application specialists employed by the Company 
to expand the field sales and service operations.  As a percentage of sales, 
selling, general and administrative expenses increased to 34.3% in the first 
nine months of 1998 from 32.6% in the first nine months of 1997.

<PAGE>13

Relocation costs.  In the third quarter of 1998, the Company incurred $2.2 
million ($1.8 million after tax) of relocation costs related to the relocation 
of the operations of its Pryon subsidiary from Wisconsin to Oregon.  These 
costs include employee severance, write-off of assets that will not be 
utilized in Oregon, lease and other contract terminations, and costs to 
relocate key employees as well as inventory and equipment. The relocation 
resulted in a reduction of 56 employees from manufacturing, engineering and 
administrative functions. 

Other income.  Other income decreased 10.6% to $718,000 in the first nine 
months of 1998 from $803,000 in the first nine months of 1997 as interest 
income decreased due to a reduction in the cash and investments balance as the 
Company repurchased shares of common stock in 1998.  This decrease was 
partially offset by a higher rate of return on investments in 1998.

Provision for income taxes.  The provision for income taxes decreased to 
$92,000 in the first nine months of 1998 from $747,000 in the first nine 
months of 1997, representing effective tax rates of 21.0% and 26.0%, 
respectively. The effective tax rate, which reflects the estimate of the 
Company's annual effective tax rate, decreased primarily due to a reduction in 
the estimate of net taxable income for 1998 and the corresponding greater 
percentage benefits from tax-exempt interest and research and experimentation 
credits.

Net income.  Net income decreased 83.7% to $346,000 or $0.04 per diluted share 
in first nine months of 1998 from $2.1 million or $0.23 per diluted share in 
the first nine months of 1997 primarily due to costs associated with the 
relocation of the Pryon subsidiary.  Excluding the costs associated with the 
relocation of the Pryon subsidiary, net income for the first nine months of 
1998 would have been $2.1 million or $0.24 per diluted share.

The Company expects net income in 1998, excluding costs associated with the 
relocation of Pryon, to remain relatively flat compared to 1997 as a result of 
increases in its marketing and sales efforts in 1998, including increases in 
the number of direct sales representatives, clinical application specialists, 
field service engineers, and the establishment of direct sales organizations 
in France and Germany during 1998.

Net income exclusive of relocation costs is a non-GAAP measure and investors 
should not rely on it as a substitute for GAAP measures.  Because the 
relocation of the Pryon subsidiary was unusual in nature, management believes 
that a measure of net income excluding the relocation is meaningful and useful 
to investors as it provides an alternative basis with which management and 
investors can assess the profitability of the Company's core operations. 

<PAGE>14

LIQUIDITY AND CAPITAL RESOURCES

The Company maintained its strong financial position as of September 30, 1998 
with working capital balances of $39.4 million and a current ratio of 6.0:1 as 
compared to working capital of $42.5 million and a current ratio of 6.5:1 at 
December 31, 1997.  Cash flow from operating activities for the first nine 
months of 1998 was $3.0 million as compared to cash flow from operating 
activities of $3.5 million for the first nine months of 1997.  In January 1998 
the Company's Board of Directors adopted a resolution authorizing the 
repurchase of up to 1,000,000 outstanding shares of the Company's common stock 
over a 12 month period. During the first nine months of 1998, the Company 
repurchased 822,000 shares.  Management believes that current cash and 
investment balances and future cash flows from operations will be sufficient 
to meet the Company's liquidity and capital needs for the foreseeable future. 

YEAR 2000 ISSUES

The Company is in the process of assessing its computer software programs and 
operating systems used in its internal operations, including applications used 
in its financial, manufacturing equipment, and engineering design tools to 
determine its readiness for the Year 2000.  The inability of computer software 
programs and operating systems to accurately recognize, interpret and process 
date codes designating the year 2000 and beyond could result in a system 
failure or miscalculations which could have a material impact on the Company's 
ability to conduct its business. The Company estimates that its internal 
assessment of its computer software programs and operating systems is 
approximately 50% complete and will be completed in the first quarter of 1999.  
Costs incurred by the Company to date in its assessment of internal systems 
have not been material, and future costs to complete this assessment are not 
anticipated to be material.

The Company has completed its assessment of Year 2000 compliance of each of 
its product lines.  All configurations of instruments (instruments include 
Propaq and Propaq Encore monitors and all options) and their component parts 
have been tested and are Year 2000 compliant.  Acuity software versions 
3.15.05 and all Networked Acuity software versions have been tested and are 
Year 2000 compliant.  Acuity software versions prior to 3.15.05 have a minor 
connectivity issue related to the Year 2000 between the Acuity central station 
and the monitors that can be fixed through an upgrade to the Acuity system 
provided by the Company.  The operation of the Acuity system and the monitor 
in the year 2000 and beyond should not be adversely affected by this 
connectivity issue.

The Company has also contacted most critical suppliers of products and 
services to determine that the suppliers' operations and the products and 
services they provide are Year 2000 compliant.  The Company has received 
responses from approximately 70% of the suppliers contacted, all of which have 
indicated that their products and operations either are, or expect to be, Year 
2000 compliant.   The Company will continue to follow up with suppliers who 
have not yet responded to determine if there are any critical suppliers who 
may not be Year 2000 compliant.


<PAGE>15

Based on its assessments to date, the Company believes it will not experience 
any material disruption as a result of Year 2000 issues in its computer 
software programs and other systems used in its operations.  However, there 
can be no assurances that unanticipated Year 2000 issues will not have a 
material adverse effect on the Company's business, financial condition or 
results of operations.  Furthermore, there can be no assurance that Year 2000 
issues of certain critical third party suppliers, including those supplying 
electricity, water or telephone service will not experience difficulties 
resulting in the disruption of service or delivery of supplies to the Company, 
which could adversely affect the Company's business, financial condition or 
results of operations.  The Company has not developed contingency plans for 
dealing with the most reasonably likely worst case scenario that would occur 
in the event that the Company and critical third parties fail to complete 
efforts to achieve Year 2000 compliance on a timely basis, and such a scenario 
has not been clearly identified.  The Company intends to determine whether to 
develop a contingency plan by the end of the first quarter of 1999. 

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains statements, including statements regarding the 
Company's expectations as to net income for 1998, the anticipated operating 
efficiencies associated with the relocation of Pryon Corporation, and the 
anticipated effects of the Year 2000 issue, that are forward-looking 
statements within the meaning of the Securities Litigation Reform Act of 1995 
that are based on current expectations, estimates and projections about the 
Company's business, management's beliefs and assumptions made by management.  
Words such as "expects," "anticipates," "intends," "plans," "believes," 
"seeks," "estimates" and variations of such words and similar expressions are 
intended to identify such forward-looking statements.  These statements are 
not guarantees of future performance and involve certain risks, uncertainties 
and assumptions that are difficult to predict.  Therefore, actual outcomes and 
results may differ materially from what is expressed or forecasted in such 
forward-looking statements due to numerous factors, including, but not limited 
to factors that could cause unforeseen increases or decreases in the expenses 
expected to be incurred in connection with the operations of the Pryon 
subsidiary in Oregon, the Company's increased marketing and sales efforts in 
1998, the establishment of direct sales organizations in France and Germany 
during 1998, the Company's ability to identify and remediate Year 2000 issues 
or the reliability of third party assessments and certifications relating to 
Year 2000 issues.  In addition, such statements could be affected by other 
factors discussed in this Quarterly Report and from time to time in the 
Company's other Securities and Exchange Commission filings and reports and by 
general industry and market conditions and growth rates, and general domestic 
and international economic conditions.

<PAGE>16

The Company's quarterly operating results have fluctuated in the past and may 
continue to fluctuate in the future depending on factors such as increased 
competition, timing of new product announcements, pricing changes by the 
Company or its competitors, length of sales cycles, market acceptance or 
delays in the introduction of new products or enhanced versions of existing 
products, timing of significant orders, regulatory approval requirements, 
product mix and economic factors and conditions generally and in the market 
for the Company's products specifically.  In particular, the Company's 
quarterly operating results have fluctuated as a result of the unpredictable 
size and timing of military patient monitoring equipment procurements, and 
seasonal or other changes in customer buying patterns.  A substantial portion 
of the Company's revenue in each quarter results from orders booked in that 
quarter.  Accordingly, revenue from quarter to quarter is difficult to 
forecast.  The Company's expense levels are based, in part, on its 
expectations as to future revenue.  If revenue levels are below expectations, 
operating results are likely to be adversely affected.  In particular, net 
income may be disproportionately affected by a reduction in revenue because 
only a small portion of expenses vary with revenue.  Results of operations in 
any period should not be considered indicative of the result to be expected 
for any future period, and fluctuations in operating results may also result 
in fluctuations in the price of the Company's common stock.  No assurance can 
be given that the Company will be able to grow in future periods or that its 
operations will remain profitable.



<PAGE>17

                          PART II.  OTHER INFORMATION



Item 2.  Changes in Securities

During the quarter ended September 30, 1998, the Company sold securities 
without registration under the Securities Act of 1933, as amended (the 
"Securities Act") upon the exercise of certain stock options granted under the 
Company's stock option plans.  An aggregate of 15,519 shares of Common Stock 
were issued at an exercise prices ranging from $1.32 to $6.00.  These 
transactions were effected in reliance upon the exemption from registration 
under the Securities Act provided by Rule 701 promulgated by the Securities 
and Exchange Commission pursuant to authority granted under Section 3 (b) of 
the Securities Act.


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

No matters were submitted to a vote of security holders during the quarter 
ended September 30, 1998.

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

(a)  Exhibits:  
               10.1 Sublease between NIKE, Inc. and Protocol Systems, Inc.
                        dated August 13, 1998 
               10.2 Executive Employment Agreement between Protocol Systems, 
                        Inc. and Allen L. Oyler dated July 1, 1998
               10.3 Executive Employment Agreement between Protocol Systems,  
                        Inc. and Carl P. Hollstein dated July 1, 1998
               10.4 Executive Employment Agreement between Protocol Systems, 
                        Inc. and Craig M. Swanson dated July 1, 1998 
               10.5 Executive Employment Agreement between Protocol Systems, 
                        Inc. and James P. Fee dated July 1, 1998
               10.6 Executive Employment Agreement between Protocol Systems, 
                        Inc. and James B. Moon dated July 1, 1998
               10.7 Executive Employment Agreement between Protocol Systems, 
                        Inc. and James P. Welch dated July 1, 1998
               10.8 Executive Employment Agreement between Protocol Systems, 
                        Inc. and Richard L. Roa dated July 1, 1998
               10.9 Executive Employment Agreement between Protocol Systems, 
                        Inc. and Donald M. Abbey dated July 1, 1998
               27.1 Financial Data Schedule

(b)  No reports were filed on Form 8-K during the quarter for which
             this report is filed.






<PAGE>18


                                  SIGNATURES


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


                                                   PROTOCOL SYSTEMS, INC.
                                                        (Registrant)


Date: November 12, 1998                            By  /s/ David F. Bolender
                                                       ---------------------
                                                       David F. Bolender
                                                       Chief Executive Officer
                                                       and Chairman of the     
                                                       Board of Directors

                                                   By  /s/ Craig M. Swanson
                                                       ---------------------
                                                       Craig M. Swanson
                                                       Vice-President and
                                                       Chief Financial Officer