<PAGE>

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

                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549
                                  FORM 10-K

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

                   For the fiscal year ended September 30, 1998


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

               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
        incorporation or organization)                Identification No.)

                              490 Villaume Avenue
                     South St. Paul, Minnesota 55075-2445
                   (Address of Principal Executive Offices)

                                (651) 455-1621
               (Registrant's Telephone Number, Including Area Code)

     SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                   None                           None
             (Title of Class)    (Name of Each Exchange on Which Registered)

     SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                 Common Stock
                                 $.01 Par Value
                                (Title of class)

      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.  Yes  X     No 
                                               ---       ---
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )

     The aggregate market value of the voting stock of the Registrant, as of
December 14, 1998, computed by reference to the closing sale price of the voting
stock held by non-affiliates on such date, was approximately $8,685,000.

     As of December 21, 1998, there were outstanding 13,353,982 shares of Common
Stock.

                     DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the issuer's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1999 have been incorporated by reference
into Part III of this Report.  See the Cross Reference Sheet set forth on 
page (2).

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                         DESTRON FEARING CORPORATION

                            CROSS REFERENCE SHEET

                          BETWEEN ITEMS IN PART III
                              OF FORM 10-K AND
           PROXY STATEMENT FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
       Pursuant to Paragraph G-(3) of General Instructions to Form 10-K
<TABLE>
<CAPTION>
Item Number and Caption                      Section Headings in Proxy Statement
-----------------------                      -----------------------------------
<S>                                          <C>
Item 10  Directors and Executive Officers    Election of Directors;
         of the Registrant                   Information Concerning Directors 
                                             and Executive Officers;
                                             Section 16(a)  Beneficial
                                             Ownership Reporting Compliance

Item 11  Executive Compensation              Election of Directors

Item 12  Security Ownership of Certain       Beneficial Ownership of
         Beneficial Owners and Management    Common Stock

Item 13  Certain Relationships and Related   Election of Directors;
         Transactions                        Information Concerning Directors
                                             and Executive Officers
</TABLE>

                                      -2-
<PAGE>

                            DESTRON FEARING CORPORATION

                                 Table of Contents

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
                                       PART I

Item 1.   Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

Item 2.   Properties . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

Item 3.   Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . .  12

Item 4.   Submission of Matters to a Vote of Security Holders  . . . . . .  13

                                      PART II

Item 5.   Market for Registrant's Common Equity and
          Related Stockholder Matters  . . . . . . . . . . . . . . . . . .  14

Item 6.   Selected Financial Data  . . . . . . . . . . . . . . . . . . . .  14

Item 7.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations  . . . . . . . . .  15

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk . . .  18

Item 8.   Financial Statements and Supplementary Data  . . . . . . . . . .  18

Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure . . . . . . . . . . . . . . . . . . . .  18

                                      PART III

Item 10.  Directors and Executive Officers of the Registrant . . . . . . .  19

Item 11.  Executive Compensation . . . . . . . . . . . . . . . . . . . . .  19

Item 12.  Security Ownership of Certain Beneficial Owners
          and Management . . . . . . . . . . . . . . . . . . . . . . . . .  19

Item 13.  Certain Relationships and Related Transactions . . . . . . . . .  19

                                      PART IV

Item 14.  Exhibits, Financial Statement Schedules, and
          Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . .  19
</TABLE>


                                      -3-
<PAGE>

                                     PART I


ITEM 1.   BUSINESS

Certain statements in this Annual Report on Form 10-K constitute 
"forward-looking statements" within the meaning of Section 27A of the 
Securities Act of 1933, as amended (the "Securities Act"), and Section 21B of 
the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Any 
statements contained herein or incorporated herein that are not statements of 
historical fact may be deemed to be forward-looking statements.  Without 
limiting the foregoing, the words "believes," "anticipates," "plans," and 
"expects" and similar expressions are intended to identify forward-looking 
statements.  All forward-looking statements involve risks and uncertainties, 
and actual results may be materially different from those anticipated by the 
Company.  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.

BACKGROUND AND OVERVIEW

The Company was incorporated in 1984 as a Canadian corporation (subsequently
changed to a Delaware corporation on October 1, 1993) under the name Destron
Technologies, Inc.  In 1987, Destron acquired the assets of Identification
Devices, Inc. (IDI) of Boulder, Colorado, a manufacturer of radio frequency
identification (RFID) products and a supplier to Destron.  Concurrent with such
acquisition, Destron changed its name to Destron/IDI, Inc.

Fearing Manufacturing Co., Inc. ("Fearing"), a wholly-owned subsidiary of
Destron, manufactures identification and pesticide ear tags for livestock.
Fearing's business was founded in 1945 and incorporated on September 30, 1955 in
the State of Minnesota.  Fearing became a subsidiary of Destron pursuant to a
merger effective on November 12, 1993.

On August 2, 1994, the shareholders authorized the Company to change its name to
"Destron Fearing Corporation."  (As used hereinafter, the term "Destron" or the
"Company" shall mean Destron Fearing Corporation and Fearing Manufacturing Co.,
Inc. on a consolidated basis.)

Destron  manufactures animal identification systems and devices.  Its products
can be divided into two classes, Radio Frequency Identification (RFID) devices
and visible plastic tags used mainly for production animals.  Where the two
classes of devices are used together, such as an ear tag which incorporates a
transponder, the device is treated as an RFID device.  Some of the RFID products
have other applications outside the animal market, but such uses are only
incidental to the strategic focus of the Company.

ANIMAL ID MARKET SEGMENTS

Destron's animal ID market segments and their corresponding percentages of
Destron's total revenues for the fiscal years ended September 30, 1998, 1997 and
1996 consist of products for the identification of the following:

<TABLE>
<CAPTION>
                                       1998        1997       1996
                                       ----        ----       ----
          <S>                          <C>         <C>        <C>
          Livestock                      46%         45%        50%
          Companion animals              27          30         32
          Fish                           25          22         15
          Other                           2           3          3
                                       -----       -----      -----
                                        100%        100%       100%
                                       -----       -----      -----
                                       -----       -----      -----
</TABLE>

                                      -4-
<PAGE>

The livestock segment consists mainly of visual tag sales, although RFID
products are expected to become increasingly important in future years.  The
other segments currently consist primarily of RFID product sales.  Sales of
Destron products outside the United States have been primarily in Europe.
Export sales as a percentage of total revenue were 22% for fiscal 1998, 30% for
fiscal 1997 and 32% for fiscal 1996.  Destron generally sells its products in
United States dollars although it is reviewing the potential for sales in
certain local currencies in the future.  See "Item 8: Financial Statements and
Supplementary Data" for further information regarding export sales by geographic
area.

RFID PRODUCTS

The RFID products that Destron currently manufactures and markets to the 
animal identification industry consist principally of transponders, portable 
readers, stationary readers, and transponder injecting devices. RFID products 
accounted for 54%, 56% and 51% of the Company's revenues during fiscal years 
1998, 1997 and 1996, respectively.

TRANSPONDERS

The identification devices manufactured by Destron are passive and operate at
low radio frequencies, below 500 kHz.  Operating range is restricted by the
power range limitations set by the Federal Communications Commission, generally
50 centimeters (20 inches) or less.  Destron manufactures permanently programmed
transponders.  The programmed device contains a custom integrated circuit ("IC")
whose identification code is inscribed during the manufacturing process.
Transponders for animal ID generally contain the custom IC and a tuned radio
frequency circuit consisting of a small inductor and capacitor.  Destron's
transponders for animal ID are packaged in sealed glass rods ranging in size
from 11 to 28 millimeters in length and from 2.1 to 3.5 millimeters in diameter
and are compatible with subcutaneous injection in animals.  Other packaging
designs are used for non-injected applications related to animal markets.  The
distribution prices of each of the Company's transponders range from $1.50 for
units sold in bulk form to $7.00 for units included with the non-reusable
injector system.

"INTELLIGENT" PORTABLE READERS

Transponders are powered and their identification codes are read by a variety of
scanning devices (readers).  Portable readers are battery operated and easily
hand-carried.  The portable readers manufactured by Destron are all based on
similar electronic designs and differ principally in the hardware and software
options offered and packaging design.  The resulting identification code is
displayed and can be relayed via computer interface to other equipment.
Portable readers range in price from $150 to $225, depending upon the operating
features provided.

"INTELLIGENT" STATIONARY READING SYSTEMS

For fish, farm animals, and certain other applications, it is necessary to read
the codes transmitted by the transponders implanted into animals as they pass by
or through a fixed scanner.  These stationary reading systems manufactured by
Destron may take the form of a gate, a panel, a loop, or other configuration.
These systems are usually linked to a computer, via sophisticated communications
facilities.  Custom installations are the norm, but modular standardization is
enlarging the scope of applications of this type of system at reasonable costs.
Prices vary from $2,000 for a single system up to $20,000 for systems that
include multiple reading stations.

INJECTING SYSTEMS

In order to identify animals in a secure, unalterable manner, the transponder
devices require subcutaneous injections by means of a hypodermic-type injector.
Destron currently supplies a variety of injecting devices intended for a wide
range of animal applications, including livestock, pets and laboratory animals.
The Company purchases some of its injection devices from outside suppliers.  The
prices of the Company's injecting systems range from $2.00 for a non-reusable
product to $55.00 for a larger, heavy-duty, reusable system.


                                      -5-
<PAGE>

POTENTIAL NEW PRODUCTS

The Company follows a clear policy of requiring either joint development
projects or very strong market potential before committing funds for new
products.  In this regard, the Company not only works closely with major new
users, but also maintains close liaisons with users, certain potential joint
developers, and the ongoing work of the International Standards Organization
('ISO') in anticipating market needs.  Destron has development projects underway
in three countries with three species of livestock, with the expectation of
being able to offer complete new systems on a global basis within one to two
years.  Success in any one of these countries would place Destron in a leading
position in the world market for livestock RFID systems.  Most of the basic
technology is available within the Company.  No assurance can be given that any
of these projects will be successful since the approval and implementation of
the program is at the sole discretion of the government or customer involved.

VISUAL IDENTIFICATION PRODUCTS

Destron also manufactures and sells identification and insecticide ear tags for
herd animals, as well as various equine products.  Visual identification
products accounted for 46%, 44% and 49% of the Company's revenues during fiscal
years 1998, 1997 and 1996, respectively.

IDENTIFICATION EAR TAGS

Identification ear tags manufactured by the Company  are numbered plastic tags
that hang from the ear of farm animals and are used for visual identification.
Animals marked in this manner generally include beef and dairy cattle, hogs and
sheep.  The purpose of this identification includes tracking of dairy
production, weight gain in beef cattle and hogs, identification of animals
requiring feed supplements, maintenance of animal health records and farm
inventory control.  The Company holds a patent, which expires in February 2002,
on the applicator that applies the ear tag, and a patent, which expires in
December 2000, on an antiseptic coating that is placed on the stud that holds
the ear tag in the animal's ear.  The antiseptic coating is marketed under the
trade name Infecta-Guard-TM-. The Company currently offers 14 different styles
of identification products and seven to nine colors in each style.  Fearing
began manufacturing insecticide ear tags in 1984 and also manufactures the studs
used to attach these ear tags to the animal's ear.  The Company supplies such
devices to the largest insecticide ear tag distributor in the United States.
Ear tags are typically packaged in quantities of 25, and these packages sell for
$7.50 to $30.00, depending upon the size and configuration of the tags.

NEW ELECTRONIC EAR TAGS

As a result of the combination of the technologies of Destron and Fearing, an
electronic ear tag management system developed by Destron was introduced in 1994
and patented in 1995.  These ear tags are read using the intelligent readers
described above.  The electronic ear tags and intelligent readers described
above are being sold to system integrators and large corporate farms.  These
systems give the farmer "source data entry" directly in the barn or on the range
and, as a result, offer the opportunity to improve management of the farm's
resources, improve overall productivity, reduce manual data entry errors and
allow direct connection to proven herd management systems.  Destron expects to
continue the development and marketing of this electronic ear tag.  However, no
assurance can be given that this market will develop or that Destron will be
successful in selling this electronic ear tag.  Electronic ear tags have a unit
distribution price ranging from $1.50 to $5.00 depending upon product function
and design.

MARKETING OF RFID PRODUCTS

Destron serves three major markets for RFID products.  The companion animal
market, which exists mainly in Europe, requires portable low-cost readers,
injectable transponders to ISO standards and a strong distribution network to
associations, veterinarians, and others.  In the fisheries market, which exists
principally in the United States, Destron's strategy is to use a very
sophisticated, permanently installed reading system, special injectable
transponders, ongoing technical support and development, and a variety of lesser
services and products.  Destron's strategy in the livestock market is to use
"Value Added Resellers" ("VARs") who combine devices and software to install and
service complete management information systems


                                      -6-
<PAGE>

in farms.  The Destron transponders are of several types, and are either 
injectable or external. Additionally, Destron typically supplies the product 
through VARs, in a wide variety of industries.  The most important of these is 
the laboratory animal market served by Bio Medic Data Systems, Inc., a highly 
sophisticated VAR and marketer with several patents and its own manufacturing 
capability.  Most of the distributors and VARs have exclusive territories and 
markets with annual commitments.  Certain major clients with special needs are 
served directly.

COMPANION ANIMALS

Dogs, cats and pets of all kinds present risk of loss, theft, disease
transmission, and illness.  In Europe, mainly because of the threat of disease
transmission and the suffering of stray animals, an increasing number of
countries require the identification of all companion animals.  Moreover, the
use of RFID is increasingly either a recommended option or the only acceptable
method.  Normally, the identification is done by a veterinarian, and  Destron
has developed sales distributorships to serve this particular market.  Unlike 
the "volunteer" markets, such as the United States, where pet owners often do 
not use RFID to protect their companion animals, compliance rates in western 
Europe are over 75% of dogs identified where legislation is in effect.  Although
this business is not seasonal, it is irregular because purchases for official
campaigns to identify dogs are often controlled by local governments.

Destron has appointed several exclusive distributors worldwide to serve this
developing market for companion animal ID.  Each distributor maintains a
relationship with a central computerized registry serving its franchised country
or countries.  These registries link the animal's unique ID number to
information on its owner, providing electronic retrieval networks for the return
of lost animals.

In Europe, companion animal market distribution is effected through exclusive
distributor arrangements with two veterinary product companies -- AnimalCare
Limited ("AnimalCare") in the United Kingdom and Merial (formerly known as Rhone
Merieux) in certain other European countries.  In the United States, an
operating unit of Schering-Plough Corporation ("Schering-Plough") is the
exclusive distributor for Destron's electronic identification products for
companion animals.

Under its distribution agreement with Destron, AnimalCare is responsible for
soliciting purchasers of Destron's animal ID products in the United Kingdom and
for all advertising, while Destron is obligated to provide products to
AnimalCare and to provide general, technical, marketing and advertising support.
AnimalCare must meet certain minimum purchase commitments to maintain its
distribution rights, revised annually.  The minimum purchase obligations were
achieved in fiscal years 1998, 1997 and 1996.  AnimalCare has established the
companion animal infrastructure of Destron readers and sells Destron's products
to key veterinary clinics.  As a result, Destron's products have established
strong name recognition and veterinary/shelter acceptance in the United Kingdom.
Government approvals are not required in the United Kingdom for distribution of
ID products for companion animals.

In 1997,  Rhone Merieux merged  with Merck Sharpe, Dohme to form Merial,
resulting in a much larger firm which provides a wider range of animal products.
Merial sells the Destron products under its own  name, "INDEXEL."

Merial is the world's largest animal health company and is the largest vaccine
marketer in Europe.  It markets Destron's products in connection with its own
vaccines through its companion animal distribution channels.  Merial also is
establishing placement of Destron readers at the veterinary/shelter level and
has undertaken a multicountry promotional effort through its direct sales force
in continental Europe.  Under its distribution agreement, Merial is responsible
for obtaining necessary government approvals for distribution of the products.
Destron's initial five-year agreement with Merial was renewed in December 1990
for an additional term of 15 years ending February 28, 2005.  Merial failed to
meet minimum purchase requirements under its distribution agreement for the
fiscal periods ended September 30, 1998, 1997 and 1996.  Destron subsequently
waived these requirements in view of the market disturbance caused by the change
to the ISO technology and replacement of all readers in use.

In the United States, Schering-Plough distributes and markets the companion
animal permanent identification products manufactured by the Company.
Statistics from the United States Humane Society


                                      -7-
<PAGE>

indicate that up to 20 million pets stray or are abandoned each year, and up to 
13 million are euthanized annually.  As a result, a large potential market 
exists for the Company's products. However, the domestic market has developed 
slower than the international markets because, at the present time, companion 
animal electronic identification is largely non-mandated in the United States.  
As of September 30, 1998, more than 300,000 companion animals in the United 
States had received injectable transponders and were included in the Company's 
database registry.

Schering-Plough has continued its marketing efforts, which include campaigns
aimed at veterinarians and animal shelters, as well as those focusing directly
on pet owners as the ultimate consumers.  Various municipalities also are being
targeted, since government-mandated identification is an important means for
achieving increased product placement.  There can be no assurance of any success
in capitalizing on these market opportunities.

FISH AND WILDLIFE.

The tagging of fish, especially salmon, has been conducted for many years for
identification in migratory studies and other purposes.  Destron's injectable
transponder has been accepted as a safe, reliable alternative to traditional
identification methods because the fish can be identified without capturing or
sacrificing the fish.

To date, several million Destron transponders have been sold for implanting into
salmon to monitor their passage through the hydroelectric diversion systems of
the Pacific Northwest.  In fiscal 1997, the United States Department of Energy
named the Company as its exclusive supplier of readers and microchips for a
five-year period in a program to track salmon and steelhead trout migrating
through hydroelectric dams in the Pacific Northwest.  The Company expects
revenue from this contract to exceed $8.0 million over the five-year period.
This business is entirely seasonal and is related to the timing of the salmon
downstream runs.

LIVESTOCK.

Through  fiscal 1997, most sales of Destron's transponders for use with
livestock have been outside of the United States.  Countries that export
significant quantities of meat or animals have recognized the potential uses of
RFID to trace diseases or drug residues which could adversely affect sales of
their products.  An RFID system works well for this purpose because the animals
are permanently identified with an encoded, injected transponder within a few
weeks of birth and retain this identification through the point at which they
are weighed and graded.  Injection is generally considered to be the only
feasible method of providing unalterable, complete life-cycle identification
with reliability close to 100%.

In fiscal 1996, the ISO published a new standard for animal ID products that
includes Destron's products through a two-year transition period.  The Company
completed development of the new ISO qualified products and began shipments of
these products during fiscal 1996.

Destron believes that major sales of identification systems for livestock will
likely be achieved  when a substantial stimulus to the use of a system is
provided by a government or some association.  For example, this may occur if a
government requires that all animals of a certain type be identified by RFID
methods or if a marketing organization, breed association or similar group
conditions a right, such as participating in a market or obtaining breed status
certification, upon identifying the animals by an RFID system.  Portions of
these markets will be seasonal because they will relate to the season of birth
in the various species.  There can be no assurance as to when such governmental
or association requirements will be adopted and implemented.

In the fiscal year ended 1996, the United States Department of Agriculture
("USDA") and the United States Food and Drug Administration ("FDA") approved the
use of transponders for injection into livestock in the United States  thereby
permitting Destron to sell transponders for use in the United States livestock
market.  The Company plans to leverage its traditional core business of visual
identification products in domestic and overseas markets to promote permanent
electronic identification of livestock.  As the size of farms has increased,
automated permanent individual identification will become a desirable tool for
managing large


                                      -8-
<PAGE>

livestock herds.  With over four billion livestock animals worldwide, the 
Company believes that implantable electronic identification devices will be 
used in an increasing number of programs to manage herds, to reduce the loss of 
livestock, to implement feeding programs, and to track, control and eradicate 
diseased livestock.  However, the success of the Company's electronic 
identification product is contingent upon the customer's ultimate acceptance of 
this technology, the perceived economic value of the product and the 
technological and functional strengths of competing products.

Destron's distributors are primarily responsible for providing information and
assistance to governmental agencies in the countries that they service in order
to facilitate the adoption of RFID programs in which Destron's products can
participate.  Destron actively cooperates with its distributors in all such
efforts.

MARKETING AND DISTRIBUTION OF VISUAL IDENTIFICATION PRODUCTS

Destron's visual identification products are sold through a long-established
network of approximately 200 distributors.  Fearing assists distributors with
their inventory planning through a sophisticated computer network that monitors
inventory levels and prepares reordering documents.  Fearing bar codes all of
its products, on a custom basis if requested, to enable distributors and dealers
to control their inventories with scanners.  The business is highly seasonal,
concentrated between November and April.

PRODUCT DEVELOPMENT

Destron has developed substantially all of its own products internally, and it
presently maintains an internal research and development department.  This
department is responsible for all new product development as well as for ongoing
product technical support and maintenance.  Destron supplements its design staff
with several consulting and contract design engineering firms that specialize in
areas that Destron considers outside its core technology focus.  Contracted
design work has included mechanical packaging, software development, and
drafting/documentation support.  Destron uses computer-based design technologies
for electrical and mechanical design as well as for record keeping and
documentation control.  Research and development expenses for the Company were
$1,017,000, $870,000 and $955,000 for the years ended September 30, 1998, 1997
and 1996 respectively.

SIGNIFICANT CUSTOMERS

During the fiscal years ended September 30, 1998, 1997 and 1996, Pacific States
Marine, a customer who uses the Company's product to identify fish, accounted
for 18%, 10% and 10% of the Company's sales, respectively.  Also during fiscal
1997 and 1996, Merial, a distributor of Destron, accounted for 16% and 18% of
the Company's sales, respectively.  The loss of either of these significant
customers would have an adverse effect on the Company's operations.

BACKLOG

The Company generally produces goods to fill orders received and anticipated
orders based on distributors' forecasts, and it also maintains inventories of
finished goods to fill customer orders with short lead times.  As a result, the
Company generally has no significant backlog of orders, and any such backlog is
not necessarily indicative of future sales.

COMPETITION

RFID

In the fisheries market, Destron enjoys a significant lead in technology when
compared to its competitors. Destron's proposal to replace all existing
installations under the control of the authority of the U.S. Department of
Energy was accepted.  The Company also won the right to supply transponders to
the related users for a number of years, including the largest single user of
fisheries systems in the world.  The competing bids were evaluated based upon
product availability, performance and price.

In the companion animal market, there are two primary competitors, one in Europe
and one in the United


                                      -9-
<PAGE>

States.  Other competitors are expected to enter the European market in 1999.  
Because Europe requires that all transponders comply with ISO standards, 
competition is based on features, distribution arrangements and price.  In the 
United States, there is no standardization and, therefore, competition is based 
primarily on distribution arrangements.

In the livestock market, Destron has strong competition from two other firms,
both of which are well-financed and are effective marketers.  To date, the
market has not yet adopted the ISO standards, thus, competition is based on
features, total system price, and distribution arrangements between incompatible
systems.  However, the market is relatively small at present, and it is moving
toward standardization required for official disease control and residue
traceback programs.  The Company believes that pricing of systems components
will become much more critical as a basis of competition.  The Company plans to
compete by providing ISO compliant systems and components at relatively low
costs.

VISUAL IDENTIFICATION

The ear tag industry, which includes the insecticide ear tag segment, is highly
competitive.  Destron believes that it effectively competes with other
manufacturers based  primarily on its network of qualified and responsible
distributors and its quality customer service approach.

PATENTS AND TRADE NAMES

Destron considers its patented technologies as important strategic and
competitive assets in the RFID market for animal identification.  Four key U.S.
patents in RFID technology (Milheiser No. 5,041,826 - expiration August 20,
2008, Milheiser No. 4,730,188 - expiration March 8, 2005, Walton No. 4,546,241 -
expiration October 8, 2003 and Taylor, Koturov, Bradin and Loeb No. 5,211,129 -
expiration May 18, 2010) provide Destron with protection for its product
designs.  Destron's U.S. Patent No. 5,211,129 by Taylor et al. is an improved
transponder for transmitting an identification signal for an animal.  The
transponder is sufficiently miniaturized and encapsulated in glass to be
syringe-implantable in the animal, thus avoiding the necessity of surgical
procedures.  This transponder uses a coil to receive an interrogation signal and
then transmits an identification signal in response to interrogation.  The
transponder receives the energy required for transmission from the interrogation
signal and transmits the identification signal immediately upon commencement of
the interrogation signal.  The Company considers this patent to have significant
value.

Destron has also applied for international patent protection in jurisdictions
where it intends to focus its marketing efforts.  Patents have been granted, or
are pending, in Canada, Japan, New Zealand and European countries for the
technologies of the Milheiser patents and the syringe injectable transponder.

Destron continues to develop new products with patentable technologies in order
to further protect its business interests.  There can be no assurance, however,
that the protection afforded by these patents will provide Destron with a
competitive advantage or that Destron will be able to successfully assert its
intellectual property rights in any infringement action.  In addition, there can
be no assurance that Destron's current products and products under development
will not infringe any patent or other rights of others.  Destron is currently
involved in litigation relating to certain of its patents.  See "Item 3. Legal
Proceedings."

Destron holds a patent, which expires in February 2002, on the applicator which
attaches the ear tags to the animal, and a patent, which expires in December
2000, on an antiseptic coating which is placed on the stud which holds the ear
tag to the animal's ear.  The antiseptic coating is marketed under the trade
name Infecta-Guard-TM-.  The Company does not expect the expiration of these
patents to have a material effect on its business.

OPERATIONS

The Company presently purchases its transponders solely from a European
manufacturer who has the capability to produce up to 10 million transponders per
year.  The Company expects to continue the relationship with this supplier,
although continuance of such purchases depends upon the competitiveness of the
price, quality and delivery of the products purchased.  The Company presently is
evaluating additional


                                     -10-
<PAGE>

sources for the purchase of transponders.  If the Company experienced a 
disruption or termination of product supply from the sole European 
manufacturer, that event would have a materially adverse effect on the 
Company's RFID operations.

Destron supports its RFID manufacturing by using several outside contractors. 
These suppliers, located primarily in Minnesota, produce and repair some models 
of the Company's electronic readers and provide needle assembly, packaging and 
sterilization services for the sale of transponders.

Manufacturing of visual identification products is done in the Company's
facility located in South St. Paul, Minnesota and is supported by subcontract
plastic injection molders located in the Minneapolis-St. Paul metropolitan area,
Detroit, Michigan, and Chicago, Illinois.

GOVERNMENT REGULATION

Many of the products manufactured by Destron are subject to compliance with
government agency requirements.  Destron's readers are tested for compliance
with the FCC Part 15 Regulations for Electromagnetic Emissions.  When
appropriate, products are also tested by independent product safety testing
organizations to ensure that user injury hazards do not exist with respect to
the equipment's operation and storage.  In fiscal 1996, the USDA and the FDA
approved the use of transponders for injection into livestock, thereby
permitting Destron to sell transponders for use in the United States livestock
market.  Heretofore, most sales of Destron's transponders for use with livestock
have been outside of the United States.  The Company's current efforts to
address the U.S. livestock market are principally based upon the use of
electronic ear tags which do not require FDA approval.  The Company believes
that electronic ear tags and implantable electronic identification devices will
be used in an increasing number of programs to manage herds, to reduce the loss
of livestock, to implement feeding programs, and to track, control and eradicate
diseased livestock.  No FDA approval is required for transponders injected into
fish because the transponders are injected into the fishes' abdominal cavities,
which are discarded when the fish are processed.  As a result, the transponders
do not appear in any part of the fish that is used as food.

Destron's products are also subject to compliance with foreign government agency
requirements.  Destron's contracts with its distributors generally require the
distributors to obtain all necessary regulatory approvals from the governments
of the countries into which they sell Destron's products.  Destron supports the
distributors' regulatory compliance efforts by making any technical changes to
the products that may be required.

Fearing insecticide products are approved by the EPA and produced under EPA
regulations.  The Company strictly controls the manufacture of these products
and prepares and maintains all necessary registration documents.

The Company believes that it complies with all environmental regulations and
this compliance does not have a material effect on the Company's capital
expenditures, earnings or competitive position.  Further, it is expected that
future compliance will not have a material effect on future fiscal years'
operating results.

EMPLOYEES

As of September 30, 1998, Destron employed 64 full-time and 17 part-time
individuals, 27 of whom are represented by the United Food and Commercial
Workers Union.  The Company has not experienced any work stoppages.  Destron
believes that its employee relations are good.

ITEM 2.   PROPERTIES

The Company owns one facility of approximately 25,000 square feet in South St.
Paul, Minnesota.  The facility consists of the corporate headquarters in
approximately 5,000 square feet of office space, approximately 10,000 square
feet of manufacturing space, and approximately 10,000 square feet of
distribution space.  All of this space is fully utilized.


                                      -11-
<PAGE>

Manufacturing demand for visual identification products ranges from a seasonal
low of 50% of capacity to a seasonal high of 100%, which is accomplished through
two work shifts and weekend production.  RFID products, with a more stable
demand, utilize approximately 40% of the Company's production capacity.  Demand
can reach 100% of capacity, however, when initial orders are filled for new,
incremental customers.

ITEM 3.   LEGAL PROCEEDINGS

COLORADO ACTIONS

On January 8, 1996, the Company commenced a patent infringement trial against
four competitors in the United States District Court of Colorado.  (The patent
involved is No.  5,211,129, which relates to the Company's injectable
transponder technology.)  On January 29, 1996, the jury in the trial returned a
verdict in favor of the Company and found that the defendants had willfully
infringed on the Company's patent and awarded damages of $444,000, including
prejudgment interest.  The defendants appealed the judgment against them, and
the Company cross-appealed the failure of the court to increase Destron'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 to determine 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 Court of Appeals was
held on December 8, 1998.  A decision is not expected in the appeal until early
1999.

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

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 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.  The Company anticipates that the
District Court will have a hearing and rule on the matter in early 1999.

MINNESOTA ACTIONS

On December 17, 1996, the same three competitors found to be willful infringers
in the Colorado 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'


                                      -12-
<PAGE>

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 action.

If the Company is successful in obtaining an affirmance of the judgment of
enforceability in the Colorado Action, the Company's exposure, if any, in the
Minnesota litigation may be reduced.  As a result of the favorable ruling in the
Colorado 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 action, which is not expected until 1999, at the
earliest.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998 ended September 30, 1998 or during the period from that
date to the date of this Annual Report of fiscal 1998.


                                     -13-
<PAGE>

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

<TABLE>
<CAPTION>
                         FISCAL YEAR ENDED         FISCAL YEAR ENDED
   QUARTERS              SEPTEMBER 30, 1998        SEPTEMBER 30, 1997
   --------              ------------------        ------------------
                         High          Low         High          Low
                         ------------------        ------------------
   <S>                   <C>          <C>          <C>          <C>
   First                 $3.50        $1.56        $4.19        $2.13
   Second                $1.94        $1.50        $3.88        $2.00
   Third                 $2.00        $1.31        $2.50        $1.38
   Fourth                $1.69        $0.63        $2.50        $1.25
</TABLE>

The above quotes for the fiscal years ended September 30, 1998 and 1997 
represent the high and low prices on The Nasdaq SmallCap market that were 
provided by Nasdaq.  As of December 14, 1998, there were 361 shareholders 
of record.

DIVIDEND POLICY

Certain of the Company's debt agreements prohibit the payment of dividends.  To
date, Destron has not paid any cash dividends on its Common Stock, and it does
not anticipate doing so in the foreseeable future.

ITEM 6.   SELECTED FINANCIAL DATA

The following table sets forth selected financial data regarding the Company's
results of operations and financial position for, and as of the end of, each of
the years in the five-year period ended September 30, 1998, which are derived
from the consolidated financial statements of the Company and its subsidiaries,
which have been audited.  The consolidated financial statements and notes
thereto as of September 30, 1998 and 1997, and for the years ended September 30,
1998, 1997 and 1996, and the report of Arthur Andersen LLP thereon are included
elsewhere in this Annual Report.  The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                   Fiscal Years Ended September 30
                                      ------------------------------------------------------
(in thousands except per share data)     1998        1997        1996        1995       1994
                                      ---------   ---------   ---------   ---------   --------
<S>                                   <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:

   Total revenue                      $ 12,601    $ 12,889    $ 10,830    $ 16,234    $ 9,652

   Gross margin                          3,353       4,311       2,296       5,745      4,263

   Income (loss) from operations        (1,980)       (772)     (3,855)        695        131

   Net income (loss)                    (1,980)       (772)     (3,855)        661        491

   Net income (loss) per
     common share                        (0.15)      (0.06)      (0.33)       0.06       0.05


BALANCE SHEET DATA:

   Working capital                    $  1,407    $  5,566    $  1,264    $    893    $ 1,068

   Total assets                         11,563      12,682      13,022      13,496      8,519

   Current liabilities                   6,170       2,923       7,038       7,111      2,640

   Long-term debt obligations,
      net of current portion               677       3,121       1,688         281      1,538

   Shareholders' equity                  4,716       6,638       4,296       6,104      4,341
</TABLE>


                                     -14-
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL 1998 COMPARED TO FISCAL 1997

Revenue in fiscal 1998 of $12,601,000 was 2% lower than the $12,889,000 recorded
in fiscal 1997.  Overall, revenues from electronic products declined 6% in
fiscal 1998 although gains occurred in sales to the United States fisheries
industry and the United Kingdom companion animal market.  These increases were
offset by lower shipments to the European continent and to Japan.  Revenue from
visual identification products was up 3% from fiscal 1997 primarily because of
increased unit sales.

Gross profit as a percentage of revenue was 27% compared to 33% in the prior
year.  The lower margins in fiscal 1998 resulted from rework costs incurred to
improve the operating performance of electronic readers through replacement and
upgrades of components.  Additionally, costs increased because of a program to
exchange, without charge, electronic readers at certain animal shelters in the
United States.  The margins reported from the sale of visual identification
products also declined in fiscal 1998 because of changes in the mix of products
sold and lower manufacturing efficiency.

Selling, general and administrative expenses increased to $3,774,000 in fiscal
1998 from $3,651,000 in fiscal 1997.  Selling expenses increased during the year
as a result of additions to the sales staff and increased domestic and
international travel expense.  Such increases were offset by lower general and
administrative expenses resulting from reduced investor relations activities and
lower legal fees, primarily related to reduced patent litigation costs.

Research and development expenses were $1,017,000 in fiscal 1998 compared to
$870,000 in the previous year.  The higher spending in fiscal 1998 primarily
results from the salaries of new personnel and increased use of outside
engineering resources that were retained to develop enhanced scanning products
for the United States fisheries industry.

Interest and other expenses of $542,000 remained relatively unchanged between
fiscal 1998 and 1997.

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.

FISCAL 1997 COMPARED TO FISCAL 1996

Revenue in fiscal 1997 was $12,889,000 which represented a 19% increase over the
$10,830,000 recorded in fiscal 1996.  Revenue from the sale of electronic
products increased 30% principally because of higher sales volume in the United
States fisheries market and the introduction of electronic products into the
companion animal market in Japan.  Revenue from visual identification products
rose 8% over fiscal 1996 as a result of price increases and higher unit volumes.

Gross profit as a percentage of revenue for fiscal 1997 was 33% compared to 21%
in the prior year.  The improvement in gross margins resulted from a more
profitable mix of electronic and visual products combined with higher margins on
the sales of electronic readers and an increase in unit prices of certain visual
identification products.  Also, in fiscal 1996, as noted below, the Company
incurred significant costs to retrofit and update certain reader technologies.
These costs were less significant in fiscal 1997.

Selling, general and administrative expenses declined by 27% to $3,651,000 from
$4,972,000 in fiscal 1996, in part due to a $400,000 reduction in legal fees in
fiscal 1997.  Additionally, in fiscal 1996, charges of $1,043,000 were recorded
for the amortization of electronic readers provided under a marketing and
distribution agreement, with no similar amortization expenses  incurred in
fiscal 1997.  Selling expenses remained relatively unchanged between fiscal 1997
and 1996.
Research and development expenses of $870,000 in fiscal 1997 were 9% lower than
the previous year's $955,000.  The decrease primarily resulted from lower
outside production development expenses.

Interest and other expenses of $562,000 increased in fiscal 1997 compared to
$224,000 for the prior year,


                                     -15-
<PAGE>

partially due to the collection in fiscal 1996 of an indebtedness that had been 
charged to expense in a prior fiscal year. Further, in fiscal 1997, the Company 
recognized certain imputed interest on an outstanding balance payable to a 
vendor.  This balance was converted into a term note in June 1997.  (See 
"Liquidity and Capital Resources.")

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 September 30, 1998 and funds available under its
existing credit agreement combined with funds generated by operations will
provide the Company with adequate liquidity and capital resources for working
capital and other cash requirements for the next 12 months.  Also see discussion
below regarding additional liquidity and cash flow considerations.

However, the information set forth in the preceding paragraph is 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.

The Company's operating activities used $212,000 during fiscal 1998, $43,000 in
fiscal 1997, and $2,272,000 in fiscal 1996, primarily to finance the net losses
incurred in each of those years.  Net cash used in 1998 operations also reflects
increases in accounts receivable and deposits on purchase commitments to a
vendor.  In fiscal 1998 and 1997, cash flow from operating activities was also
affected by depreciation and amortization and decreases in inventories.
Further, fiscal 1998 funding benefitted from down payments from certain
customers on new orders placed with the Company.  In fiscal 1996, an additional
use of cash in operations was for the increase in inventories.  This was offset
by depreciation and amortization, reductions in accounts receivable, increases
in accounts payable and accrued liabilities and the collection of royalties
receivable.

The Company's investing activities used $268,000, $192,000 and $261,000 for the
purchase of fixed assets in fiscal 1998, 1997 and 1996 respectively.  The
Company expects to expend approximately $300,000 for fixed asset additions in
fiscal 1999.

In fiscal 1998, the Company's financing activities used net cash of $491,000.
Funds were provided by an increase in net borrowings on the bank line of credit
of $905,000 and were used to repay long-term obligations of $1,454,000.  In
fiscal 1997 and 1996, the Company's financing activities provided net cash of
$1,271,000 and $2,483,000, respectively.  Primary sources of cash included the
issuance of common stock in private placements and borrowings under long-term
obligations and lines of credit.  These were offset by repayments on long-term
obligations in each year, as well as a $493,000 net reduction in bank line of
credit borrowings in fiscal 1997.

As of September 30, 1998, the Company had net working capital of $1,407,000 with
a current ratio of 1.2 to 1.0, which represents a $4,159,000 decrease in working
capital from September 30, 1997.

In January 1997, the Company sold an aggregate of 650,000 shares of common stock
to two United States


                                     -16-
<PAGE>

investors for gross proceeds of $1.3 million.  Also in January 1997, the 
Company sold an aggregate of 1,000,000 shares of common stock in a private 
placement to three foreign investors pursuant to Regulation S under the 
Securities Act of 1933 for gross proceeds of $2,000,000.

In June 1997, the Company entered into a $3,000,000 revolving credit facility 
with Coast Business Credit, a division of Southern Pacific Thrift & Loan 
Association of Los Angeles, California.  The credit facility is secured by 
all of the Company's receivables, inventories, investment property, equipment 
and general intangibles, as defined in the agreement.  Borrowings under the 
facility are payable on demand and are limited to a portion of eligible 
accounts receivable and inventories, as defined in a borrowing formula in the 
agreement. The agreement is effective through June 30, 1999, with provisions 
for extensions of the maturity date.  Interest on the credit facility is paid 
monthly at a rate equal to the greater of eight percent (8%) or prime plus 
one and three-quarters percent (1 3/4 %).  At September 30, 1998, the Company 
had outstanding borrowings of $1,278,000 under the facility and had a total 
maximum availability under the borrowing formula of $2,079,000.  The new 
revolving credit facility replaces a previous credit line agreement with a 
bank, and it has been used for general corporate working capital needs.

In June 1997, the Company completed an agreement with a vendor whereby a
$4,290,000 trade payable was converted into an unsecured promissory note.  The
note provides for monthly payments of $175,000 in fiscal 1999.  An additional
principal payment of $600,000 was required in October 1998 and further principal
payments are called for under certain conditions set forth in the agreement.
The note bears interest at 9.25% per annum as of September 30, 1998, with a
scheduled increase to 11.25% per annum at the beginning of fiscal year 1999.
The scheduled term of the note is twenty-seven (27) months, with the final
payment due in August 1999.

In August 1998, the Company advised the vendor it could not comply with the
original payment schedule of the promissory note and requested that the vendor
reschedule the terms of the note to lower the monthly payment, retain the
present interest rate and extend the payment schedule by 52 months.  Beginning
in September 1998, the Company unilaterally reduced the monthly payment to
$50,000 and, in October, it did not make the required $600,000 payment.  To
date, there has been no definitive response to the Company's request to
restructure the terms of the promissory note.

In July 1998, the Company retained investment bankers to assist the Company in
exploring strategic alternatives for increasing shareholder value.  The
potential alternatives could include, among others, the sale of the Company or a
division, locating a strategic investor, or making a strategic acquisition.

As discussed above and as reflected in the financial statements included in this
Annual Report, 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.  In
addition, the Company has not complied with certain payment terms on its vendor
note payable, as discussed previously, and could also be placed in default on
its line-of-credit agreement based on the status of the vendor note.
Additionally, the Company's current line of credit agreement is effective
through June 30, 1999, and although management expects to be able to renew the
agreement, there can be no assurance that a renewal agreement with acceptable
terms will be reached.  Fiscal 1999 cash flow projections are dependent on the
availability of an operating line of credit with sufficient borrowing base and
achievable financial covenants from the present lender or another financing
source.

As a result of these events and conditions, the auditors' report on the
Company's financial statements as of and for the year ended September 30, 1998
contains a modification which indicates substantial doubt about the Company's
ability to continue as a going concern.


                                     -17-
<PAGE>

Management believes that agreements will be reached with the above-mentioned
vendor to restructure the outstanding note, and with the lender to renew the
line of credit agreement, and that cash available under the line of credit and
provided by operations will provide sufficient liquidity through at least fiscal
1999.  However, there can be no assurance that the Company will be able to
achieve these plans.

In November 1998, the Company received notice from Nasdaq that the Company's
common stock would be delisted from the Nasdaq Small Cap Market if the closing
bid price does not trade above $1.00 for 10 consecutive trading days prior to
February 17, 1999.  The Company is currently evaluating plans to comply with
this requirement including the possibility of a reverse stock split that would
convert up to five (5) shares of currently issued and outstanding shares of
common stock into one (1) issued and outstanding share of common stock.

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 the evaluation and replacement of 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 annual 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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 1998, the Company did not have any market risk exposure
categories, as defined in Item 305 of Regulation S-K, and therefore, no related
market risks.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item begins on page F-1 hereto.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with the Company's principal
independent public accountant during the Company's last two fiscal years or
since the end of the Company's last fiscal year to the date of this report.


                                     -18-
<PAGE>

                                     III

ITEM 10.  DIRECTORS AND  EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the
information under the caption "Election of Directors" of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the
information under the caption "Election of Directors" of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference to the
information under the caption "Beneficial Ownership of Common Stock" of the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the
information under the caption "Election of Directors" of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders.

                                   PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                        Page Reference
                                                                        --------------
<S>                                                                     <C>
Consolidated Balance Sheets as of September 30, 1998 and 1997                 F-1
Consolidated Statements of Operations for the Years Ended
    September 30, 1998, 1997 and 1996.                                        F-2
Consolidated Statements of Shareholders' Equity for the Years Ended
    September 30, 1998, 1997 and 1996                                         F-3
Consolidated Statements of Cash Flows for the Years Ended
    September 30, 1998, 1997 and 1996                                         F-4
Notes to Consolidated Financial Statements                                    F-5
Report of Independent Public Accountants                                      F-15

</TABLE>

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

(a)(3) EXHIBITS

Exhibit
Number                                Description
---------                             -----------
     3.1       Certificate of Incorporation of Destron/IDI, Inc., a Delaware
               corporation.  Filed as Exhibit 3.3 to the Company's S-4
               Registration Statement ("S-4 Registration Statement") declared
               effective by the Securities and Exchange Commission
               ("Commission") on October 12, 1993.

     3.2       Bylaws of Destron/IDI, Inc., a Delaware corporation.  Filed as
               Exhibit 3.4 to the Company's S-4 Registration Statement.

     3.3       Amendment to Certificate of Incorporation of the Company as filed
               with the Delaware Secretary of State on August 2, 1994.  Filed as
               Exhibit 3.5 to the Company's 1995 Annual Report on Form 10-KSB.


                                     -19-
<PAGE>

Exhibit
Number                                Description
---------                             -----------
     10.1      Common Stock Warrant issued by the Company to Hughes Aircraft
               Company dated September 27, 1991.  Filed as Exhibit 10(j) to the
               Company's Form 10 Registration Statement.

     10.2      License Agreement between the Company and Charles A. Walton dated
               June 5, 1991.  Filed as Exhibit 10(m) to the Company's Form 10
               Registration Statement.

     10.3      License Agreement between Identification Devices, Inc. and Bio
               Medic Data Systems, Inc. dated May 16, 1986.  Filed as Exhibit
               10(n) to the Company's Form 10 Registration Statement.

     10.4      License Agreement between the Company and Anitech Identification
               Systems, Inc. dated November 11, 1988.  Filed as Exhibit 10(p) to
               the Company's Form 10 Registration Statement.

     10.5      Distribution Agreement between the Company and Nippon ID System
               Co., Ltd. Dated July 13, 1989.  Filed as Exhibit 10(q) to the
               Company's Form 10 Registration Statement.

     10.6      Development Agreement between the Company and Nippon ID System
               Co., Ltd. dated July 13, 1989.  Filed as Exhibit 10(r) to the
               Company's Form 10 Registration Statement.

     10.7      Distribution Agreement between the Company and AnimalCare Limited
               dated May 25, 1989.  Filed as Exhibit 10(s) to the Company's Form
               10 Registration Statement.

      10.8     Distribution Agreement between the Company and Rhone Merieux
               dated September 26, 1989 and amendments.  Filed as Exhibit 10(t)
               to the Company's Form 10 Registration Statement.

      10.9     Distribution Agreement between the Company and Milk Marketing
               Board of England and Wales dated September 30, 1989.  Filed as
               Exhibit 10(v) to the Company's Form 10 Registration Statement.

      10.10    Development Agreement between the Company and Milk Marketing
               Board of England and Wales dated September 30, 1989.  Filed as
               Exhibit 10(w) to the Company's Form 10 Registration Statement.

      10.11    Distribution Agreement between the Company and Animal Electronics
               ID Systems PTY Limited dated December 1, 1989.  Filed as Exhibit
               10(x) to the Company's Form 10 Registration Statement.

      10.12    Distribution Agreement between the Company and Superior
               Identification Systems dated December 31, 1989.  Filed as Exhibit
               10(y) to the Company's Form 10 Registration Statement.

      10.13    Development Agreement between the Company and Superior
               Identification Systems dated December 31, 1989.  Filed as Exhibit
               10(z) to the Company's Form 10 Registration Statement.

      10.14    Distribution Agreement between the Company and Identity Devices
               (PTY) Ltd. dated January 1, 1990.  Filed as Exhibit 10(aa) to the
               Company's Form 10 Registration Statement.

      10.15    Distribution Agreement between the Company and Kubota, Ltd. dated
               January 20, 1990.  Filed as Exhibit 10(bb) to the Company's Form
               10 Registration Statement.

      10.16    Development Agreement between the Company and  Kubota, Ltd. dated
               January 20, 1990.  Filed as Exhibit 10(cc) to the Company's Form
               10 Registration Statement.,

      10.17    Distribution Agreement between the Company and Electronic
               Livestock Systems, Inc. dated January 23, 1990.  Filed as Exhibit
               10(ad) to the Company's Form 10 Registration Statement.

      10.18    Development Agreement between the Company and Electronic
               Livestock Systems, Inc. dated January 23, 1990.  Filed as Exhibit
               10(ae) to the Company's Form 10 Registration Statement.


                                     -20-
<PAGE>

Exhibit
Number                                Description
---------                             -----------
     10.19     License Agreement between the Company and Anitech Identification
               Systems, Inc., dated February 1, 1990.  Filed as Exhibit 10(af)
               to the Company's Form 10 Registration Statement.

     10.20     Distribution Agreement between the Company and Animal Electronics
               ID Systems PTY Limited dated February 1, 1990.  Filed as Exhibit
               10(ag) to the Company's Form 10 Registration Statement

     10.21     Development Agreement between the Company and Animal Electronics
               ID Systems PTY Limited dated February 1, 1990.  Filed as Exhibit
               10(ah) to the company's Form 10 Registration Statement

     10.22     Basic Ordering Agreement between the Company and Nippon ID System
               Co., Ltd. dated April 27, 1990.  Filed as Exhibit 10(ai) to the
               Company's Form 10 Registration Statement.

     10.23     Basic Ordering Agreement between the Company and Nippon ID System
               Co., Ltd. dated April 27, 1990.  Filed as Exhibit 10(aj) to the
               Company's Form 10 Registration Statement.

     10.24     Distribution Agreement between the Company and Identity Devices
               (PTY) Ltd. dated July 1, 1990.  Filed as Exhibit 10(al) to the
               Company's Form 10 Registration Statement.

     10.25     Distribution Agreement between the Company and Identity Devices
               (PTY) Ltd. dated July 31, 1990.  Filed as Exhibit 10(am) to the
               Company's Form 10 Registration Statement.

     10.26     Development Agreement between the Company and Identity Devices
               (PTY) Ltd. dated July 31, 1990.  Filed as Exhibit 10(an) to the
               Company's Form 10 Registration Statement.

     10.27     Distribution Agreement between the Company and Anitech
               Identification Systems, Inc. dated April 22, 1991.  Filed as
               Exhibit 10(ao) to the Company's Form 10 Registration Statement.

     10.28     Distribution Agreement between the Company and Kubota, Ltd. dated
               February 26, 1988.  Filed as Exhibit 10(ap) to the Company's Form
               10 Registration Statement.

     10.29     Destron/IDI, Inc. Employee Stock Option Plan.  Filed as Exhibit
               10.42 to the Company's 1992 Annual Report on Form 10-K.

     10.30     Destron/IDI, Inc. Nonemployee Director Stock Option Plan.  Filed
               as Exhibit 10.43 to the Company's 1992 Annual Report on 
               Form 10-K.

     10.31     Employment Agreement between the Company and Randolph K. Geissler
               dated November 12, 1993.  Filed as Exhibit 10.48 to the Company's
               1993 Transition Report on Form 10-KSB.

     10.32     Promissory Note, dated June 1, 1997, with Hughes Microelectronics
               Europa Espana S.A.  Filed as Exhibit 10.32 to the Company's 1997
               Annual Report on Form 10-K.

     10.33     Loan and Security Agreement, dated June 25, 1997, with Coast
               Business Credit.  Filed as Exhibit 10.33 to the Company's 1997
               Annual Report on Form 10-K.

     21.1      List of subsidiaries of Destron Fearing Corporation.  Filed as
               Exhibit 22.1 to the Company's 1995 Annual Report on Form 10-KSB.

     23.1      * Consent of Arthur Andersen LLP.

     27.1      * Financial Data Schedule.

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

* Filed herewith.


                                     -21-
<PAGE>

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the fourth quarter of fiscal 1998 or
during the period from the end of that quarter to the date of this Annual
Report.



                                     -22-
<PAGE>

                                 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

Date:   December 21, 1998
                                  By:  /s/ Randolph K. Geissler
                                       -------------------------------
                                       Randolph K. Geissler, Chief Executive
                                       Officer, Chairman, President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
      Signature                       Title                         Date
--------------------------    ----------------------          -----------------
<S>                           <C>                             <C>
/s/ Randolph K. Geissler      Chief Executive Officer,        December 21, 1998
------------------------      Chairman, President
Randolph K. Geissler          and Director

/s/ Thomas J. Ahmann          Vice President, Chief           December 21, 1998
------------------------      Financial Officer, Secretary,
Thomas J. Ahmann              Treasurer and Principal
                              Accounting Officer

/s/ John R. Beattie           Director                        December 21, 1998
------------------------
John R. Beattie


/s/ Stanley Goldberg          Director                        December 21, 1998
------------------------
Stanley Goldberg


/s/ David A. Henderson        Director                        December 21, 1998
------------------------
David A. Henderson


/s/ Richard E. Jahnke         Director                        December 21, 1998
------------------------
Richard E. Jahnke


/s/ Gary S. Kohler            Director                        December 21, 1998
------------------------
Gary S. Kohler


/s/ Kenneth D. Larson         Director                        December 21, 1998
------------------------
Kenneth D. Larson


/s/ Thomas J. Patin           Director                        December 21, 1998
------------------------
Thomas J. Patin


/s/ Douglas M. Pihl           Director                      December 21, 1998
------------------------
Douglas M. Pihl
</TABLE>

                                     -23-
<PAGE>

                 DESTRON FEARING CORPORATION AND SUBSIDIARIES

                          Consolidated Balance Sheets

                              As of September 30
<TABLE>
<CAPTION>
                                                                       1998            1997
                                                                 --------------  --------------
<S>                                                              <C>             <C>
                                     ASSETS

CURRENT ASSETS:
   Cash                                                           $    104,000    $  1,075,000
   Accounts receivable, net of allowance for doubtful accounts
     of $134,000 and $127,000                                        2,212,000       1,911,000
   Inventories                                                       4,753,000       5,292,000
   Vendor deposits                                                     475,000         162,000
   Prepaid expenses and other current assets                            33,000          49,000
                                                                  -------------   -------------
               Total current assets                                  7,577,000       8,489,000

PROPERTY AND EQUIPMENT, net                                          1,922,000       2,001,000

GOODWILL, net                                                        1,917,000       2,001,000

OTHER ASSETS, net                                                      147,000         191,000
                                                                  -------------   -------------
                                                                  $ 11,563,000    $ 12,682,000
                                                                  -------------   -------------
                                                                  -------------   -------------
                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Line of credit                                                 $  1,278,000    $    373,000
   Accounts payable                                                    988,000         524,000
   Customer deposits                                                   865,000               -
   Accrued liabilities                                                 495,000         472,000
   Current portion of long-term obligations                          2,544,000       1,554,000
                                                                  -------------   -------------
               Total current liabilities                             6,170,000       2,923,000

LONG-TERM OBLIGATIONS, net of current portion                          677,000       3,121,000
                                                                  -------------   -------------
               Total liabilities                                     6,847,000       6,044,000
                                                                  -------------   -------------
COMMITMENTS AND CONTINGENCIES (Note 6)

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value, 20,000,000 shares authorized;
     13,354,000 and 13,294,000 shares issued and outstanding           134,000         133,000
   Additional paid-in capital                                       19,846,000      19,789,000
   Accumulated deficit                                             (15,264,000)    (13,284,000)
                                                                  -------------   -------------
               Total shareholders' equity                            4,716,000       6,638,000
                                                                  -------------   -------------
                                                                  $ 11,563,000    $ 12,682,000
                                                                  -------------   -------------
                                                                  -------------   -------------
</TABLE>

               The accompanying notes are an integral part of these consolidated
                                       balance sheets.


                                            F-1
<PAGE>

                  DESTRON FEARING CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations

                        For the Years Ended September 30
<TABLE>
<CAPTION>
                                              1998             1997             1996
                                          -------------    -------------    -------------
<S>                                       <C>              <C>              <C>
NET SALES                                 $ 12,601,000     $ 12,889,000     $ 10,830,000
                                          -------------    -------------    -------------
COSTS AND EXPENSES:
  Cost of sales                              9,248,000        8,578,000        8,534,000
  Selling, general and administrative        3,774,000        3,651,000        4,972,000
  Research and development                   1,017,000          870,000          955,000
  Interest expense and other                   542,000          562,000          224,000
                                          -------------    -------------    -------------
             Total costs and expenses       14,581,000       13,661,000       14,685,000
                                          -------------    -------------    -------------
NET LOSS                                  $ (1,980,000)    $   (772,000)    $ (3,855,000)
                                          -------------    -------------    -------------
                                          -------------    -------------    -------------
BASIC AND DILUTED LOSS PER
  COMMON SHARE
                                          $      (0.15)    $      (0.06)    $       (.33)
                                          -------------    -------------    -------------
                                          -------------    -------------    -------------
WEIGHTED AVERAGE COMMON AND
  COMMON EQUIVALENT
  SHARES OUTSTANDING
                                            13,315,000       12,886,000       11,520,000
                                          -------------    -------------    -------------
                                          -------------    -------------    -------------
</TABLE>

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


                                            F-2
<PAGE>

                        DESTRON FEARING CORPORATION AND SUBSIDIARIES

                       Consolidated Statements of Shareholders' Equity

                    For the Years Ended September 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                   Common Stock        Additional                      Total
                                                              ---------------------     Paid-In      Accumulated    Shareholders'
                                                                Shares      Amount      Capital        Deficit        Equity
                                                              ----------   --------   -----------   -------------   -------------
<S>                                                           <C>          <C>        <C>           <C>             <C>
BALANCE, September 30, 1995                                   10,982,000   $110,000   $14,651,000   $ (8,657,000)   $6,104,000
   Issuance of common stock in private placement                 625,000      6,000     1,994,000              -     2,000,000
   Issuance of common stock upon exercise of stock options        34,000          -        47,000              -        47,000
   Net loss                                                            -          -             -     (3,855,000)   (3,855,000)
                                                              ----------   --------   -----------   -------------   -------------
BALANCE, September 30, 1996                                   11,641,000    116,000    16,692,000    (12,512,000)    4,296,000
   Issuance of common stock in private placements              1,650,000     17,000     3,092,000              -     3,109,000
   Issuance of common stock upon exercise of stock options         3,000          -         5,000              -         5,000
   Net loss                                                            -          -             -       (772,000)     (772,000)
                                                              ----------   --------   -----------   -------------   -------------
BALANCE, September 30, 1997                                   13,294,000    133,000    19,789,000    (13,284,000)    6,638,000
   Issuance of common stock upon exercise of stock options
      and warrants                                                60,000      1,000        57,000              -        58,000
   Net loss                                                            -          -             -     (1,980,000)   (1,980,000)
                                                              ----------   --------   -----------   -------------   -------------
BALANCE, September 30, 1998                                   13,354,000   $134,000   $19,846,000   $(15,264,000)   $4,716,000
                                                              ----------   --------   -----------   -------------   -------------
                                                              ----------   --------   -----------   -------------   -------------
</TABLE>

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

                                            F-3
<PAGE>

                  DESTRON FEARING CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                        For the Years Ended September 30

<TABLE>
<CAPTION>
                                                                          1998            1997            1996
                                                                     ------------     -----------     ------------
<S>                                                                  <C>              <C>             <C>
OPERATING ACTIVITIES:
   Net loss                                                          $(1,980,000)     $ (772,000)     $(3,855,000)
   Adjustments to reconcile net loss to net cash used in
      operating activities-
         Depreciation and amortization                                   475,000         494,000        1,536,000
         Equity in income of joint venture and other                           -         225,000          (14,000)
         Change in operating items:
            Accounts receivable                                         (301,000)       (895,000)         807,000
            Inventories                                                  539,000       1,927,000       (2,079,000)
            Vendor deposits                                             (313,000)       (162,000)               -
            Prepaid expenses and other current assets                     16,000         (21,000)          33,000
            Royalties receivable                                               -               -          402,000
            Accounts payable and accrued liabilities                     487,000        (839,000)         898,000
            Customer deposits                                            865,000               -                -
                                                                     ------------     -----------     ------------
               Net cash used in operating activities                    (212,000)        (43,000)      (2,272,000)
                                                                     ------------     -----------     ------------
INVESTING ACTIVITIES:
   Purchase of fixed assets                                             (268,000)       (192,000)        (261,000)
   Change in other assets                                                      -               -           27,000
                                                                     ------------     -----------     ------------
               Net cash used in investing activities                    (268,000)       (192,000)        (234,000)
                                                                     ------------     -----------     ------------
FINANCING ACTIVITIES:
   Issuance of common stock, net                                          58,000       3,114,000        2,047,000
   Borrowings under long-term obligations                                      -               -        1,558,000
   Repayments of long-term obligations                                (1,454,000)     (1,350,000)      (1,550,000)
   Net borrowings (repayments) on bank lines of credit                   905,000        (493,000)         428,000
                                                                     ------------     -----------     ------------
               Net cash provided by (used in) financing activities      (491,000)      1,271,000        2,483,000
                                                                     ------------     -----------     ------------
NET CHANGE IN CASH                                                      (971,000)      1,036,000          (23,000)

CASH, beginning of year                                                1,075,000          39,000           62,000
                                                                     ------------     -----------     ------------
CASH, end of year                                                        104,000      $1,075,000      $    39,000
                                                                     ------------     -----------     ------------
                                                                     ------------     -----------     ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid                                                     $   549,000      $  512,000      $   448,000
                                                                     ------------     -----------     ------------
                                                                     ------------     -----------     ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
   Readers provided under marketing agreement                        $         -     $         -      $   165,000
                                                                     ------------     -----------     ------------
                                                                     ------------     -----------     ------------
   Conversion of trade payable to term loan                          $         -     $ 4,290,000      $         -
                                                                     ------------     -----------     ------------
                                                                     ------------     -----------     ------------
</TABLE>

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


                                            F-4
<PAGE>

                  DESTRON FEARING CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997


1.   DESCRIPTION OF BUSINESS AND GOING CONCERN MATTERS:

DESCRIPTION OF BUSINESS

Destron Fearing Corporation (Destron or the Company) manufactures a broad line
of electronic and visual identification devices for the companion animal,
livestock, laboratory animal, fish and wildlife markets worldwide. The Company's
products are marketed primarily through a wide network of domestic and
international distributors. In November 1993, the Company acquired Fearing
Manufacturing Co., Inc. (Fearing), a 50-year-old company engaged in the
manufacture of visual identification products for the livestock market.

GOING CONCERN MATTERS

As reflected in the accompanying consolidated financial statements, 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. In addition, due to cash
flow constraints, the Company has not complied with certain payment terms of its
note payable to a significant vendor, including a default on a required $600,000
principal payment which was due on October 1, 1998, and reduced payments of
certain regular monthly installments. The Company has had discussions with the
vendor regarding restructuring of the note, and management believes that the
vendor will not call for immediate repayment of these borrowings. However, there
can be no assurance that such forbearance will continue. In the event the vendor
does call for repayment of the note, the Company may be unable to satisfy the
obligation in the normal course of business and would then be required to
develop alternate plans for repayment.

Additionally, the Company's ability to meet its cash flow requirements in fiscal
year 1999 is dependent on its ability to borrow funds under a short-term
line-of-credit arrangement or potential alternate financing sources. The
Company's current line-of-credit agreement is effective through June 30, 1999,
and management believes that the Company will be able to renew this agreement
under terms acceptable to the Company and its lender; however, there can be no
assurance that a renewal agreement will be reached. At September 30, 1998, the
Company was in compliance with the required covenants under the line-of-credit
agreement, subject to satisfactory resolution of the current default status of
the Company's vendor note payable, as discussed above. If the Company is not
able to restructure the vendor note and further defaults on that note occur, the
Company could also be placed in default on its line-of-credit under certain
cross-default provisions in the line-of-credit agreement.

Management's plans to address the above matters include negotiations regarding
restructuring of its vendor note payable, as well as continuing negotiations
with its lender regarding extension of the Company's credit facility beyond June
30, 1999, along with acceptable terms and covenants. Management believes that
such agreements will be reached, and that cash available under the line of
credit, in conjunction with cash provided from operations, will provide
sufficient liquidity to allow the Company to continue as a going concern;
however, there can be no assurance that such plans will be successful.
Accordingly, the consolidated


                                     F-5
<PAGE>

financial statements do not include any adjustments relating to the 
recoverability and classification of recorded asset amounts or the amounts and 
classification of liabilities or any other adjustments that might result should 
the Company be unable to continue as a going concern.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.

REVENUE RECOGNITION

The Company recognizes product revenue, net of estimated returns, at the time
the products are shipped.

INVENTORIES

Inventories consist of materials, labor and overhead and are valued at the lower
of first-in, first-out cost, or market. Inventories consisted of the following
at September 30:

<TABLE>
<CAPTION>
                                           1998                1997
                                        ----------          ----------
          <S>                           <C>                 <C>
          Raw materials                 $2,481,000          $2,354,000
          Finished goods                 2,272,000           2,938,000
                                        ----------          ----------
                     Total              $4,753,000          $5,292,000
                                        ----------          ----------
                                        ----------          ----------
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are recorded at the lower of cost or net realizable
value. Depreciation and amortization are recorded on a straight-line basis over
the following useful lives:
<TABLE>
          <S>                                             <C>
          Building                                           30 years
          Improvements                                    10-20 years
          Equipment                                        7-10 years
          Furniture and fixtures                              7 years
</TABLE>
Fixed assets consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                          1998           1997
                                                      ------------    ----------
          <S>                                         <C>             <C>
          Land, building and improvements             $ 1,351,000     $1,349,000
          Equipment                                     1,541,000      1,378,000
          Furniture and fixtures                          357,000        254,000
                                                      ------------    ----------
                                                        3,249,000      2,981,000
          Accumulated depreciation and amortization    (1,327,000)      (980,000)
                                                      ------------    ----------
                                                      $ 1,922,000     $2,001,000
                                                      ------------    ----------
                                                      ------------    ----------
</TABLE>


                                     F-6
<PAGE>

GOODWILL AND OTHER ASSETS

Goodwill represents the excess of the purchase price of Fearing (see Note 1)
over the fair value of its net assets, and is being amortized on a straight-line
basis over 30 years. Other assets consist primarily of patents and licenses
related to the Company's technologies, which are being amortized over their
estimated useful lives of 17 to 20 years. Total accumulated amortization of
these other assets was $892,000 and $766,000 as of September 30, 1998 and 1997.

The Company periodically evaluates whether events or circumstances indicate that
the carrying values of goodwill and other assets may not be recoverable, or
whether the remaining estimated useful lives should be revised. The Company's
evaluation at September 30, 1998 indicated that no impairment write-down was
necessary.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of long-term obligations approximated carrying value at September
30, 1998 and 1997. The fair values of all other financial instruments also
approximated carrying value at September 30, 1998 and 1997, due to the short
maturities of those instruments.

WARRANTIES

The Company provides various warranties on certain of its products. Estimated
warranty costs are accrued in the same period in which the related revenue is
recognized, based on anticipated parts and labor costs, and utilizing historical
experience.

RESEARCH AND DEVELOPMENT

Research and development costs consist primarily of salaries, supplies and other
direct costs and are charged to expense as incurred.

INCOME TAXES

The Company accounts for income taxes under the liability method, which requires
recognition of deferred income tax assets and liabilities for the expected
future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets and
liabilities as well as the expected future effects of loss carryforwards and tax
credit carryforwards. Resulting net deferred tax assets are reduced by a
valuation allowance for the amount of any tax benefits which may not be
realized.

NET LOSS PER COMMON SHARE

Net 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


                                     F-7
<PAGE>

options, warrants and other securities. In the Company's calculations, the 
impact of common stock equivalents has been excluded from the computation of 
weighted average common shares outstanding as the effect would be antidilutive. 
As a result, basic and diluted EPS are equal for all periods presented in the 
accompanying consolidated statements of operations.

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 fiscal year 1999 when required.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
periods presented. Estimates are used for such items as allowances for doubtful
accounts, inventory reserves, amortization periods for goodwill and other
assets, useful lives of property and equipment, warranty reserves and others.
Ultimate results could differ from those estimates.

3.   LINES OF CREDIT AND LONG-TERM OBLIGATIONS:

LINES OF CREDIT

Through May 1997, the Company maintained a $5,000,000 line-of-credit agreement
with a bank. In June 1997, the Company replaced this line of credit with a
$3,000,000 revolving credit facility with a different institution. This credit
facility bears interest at the greater of 8% or prime plus 1.75%, payable
monthly, and carries a commitment fee equal to 3/4% of the unused portion of the
commitment under the facility. Borrowings under this facility are payable on
demand and are limited to certain eligible accounts receivable and inventories
($2,079,000 at September 30, 1998). The agreement is effective through June 30,
1999, with certain provisions for extension of the maturity date, and is
collateralized by accounts receivable, inventories, property and equipment, and
intangibles.

The following information relates to these credit facilities for the years ended
September 30:

<TABLE>
<CAPTION>
                                                        1998             1997
                                                    -----------      -----------
<S>                                                 <C>              <C>
Balance outstanding at end of year                  $1,278,000       $  373,000
Maximum amount outstanding during the year           2,083,000        1,276,000
Average borrowings during the year                   1,234,000          346,000
Weighted average interest rate during the year           10.25%            9.6 %
Interest rate at end of year                             10.25%           10.25%

</TABLE>


                                     F-8
<PAGE>

The Company's current credit facility contains various restrictive covenants
which require the Company to maintain minimum levels of tangible net worth and
remain current on all other outstanding debt obligations, among other matters.
The credit facility also limits additional indebtedness, capital expenditures
and dividends. As discussed in Note 1, the Company was in compliance with all
such covenants at September 30, 1998, with the exception of its current default
status on its vendor note payable.

LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at September 30:

<TABLE>
<CAPTION>
                                                                           1998         1997
                                                                        ----------    ----------
<S>                                                                     <C>           <C>
Note payable to vendor (see below)                                      $2,488,000    $3,891,000
Note payable, interest at 8.98%, payable in monthly installments of 
   principal and interest through March 2001 with a balloon 
   payment of approximately $533,000 due April 2001; collateralized 
   by real estate                                                          598,000       622,000
Noncompete obligation; interest at 9%                                      135,000       162,000
                                                                        ----------    ----------
               Total long-term obligations                               3,221,000     4,675,000
Less- Current portion of long-term obligations                           2,544,000     1,554,000
                                                                        ----------    ----------
               Long-term obligations, net of current portion            $  677,000    $3,121,000
                                                                        ----------    ----------
                                                                        ----------    ----------
</TABLE>

In June 1997, the Company converted a $4,290,000 trade payable into an unsecured
term note. The note bears interest at 9.25% as of September 30, 1998, with a
scheduled increase to 11.25% at October 1, 1998. Monthly principal and interest
payments of $175,000 are required in fiscal year 1999, with an additional
principal payment of $600,000 that was due in October 1998. As discussed in Note
1, the Company failed to make the $600,000 payment and is attempting to
restructure the note agreement while making reduced monthly principal payments
in the interim. All amounts outstanding under this vendor note payable are
classified as current in the accompanying September 30, 1998 consolidated
balance sheet.

Future maturities of long-term obligations are as follows as of September 30,
1998:

<TABLE>
          <S>                                               <C>
          1999                                              $2,544,000
          2000                                                  62,000
          2001                                                 576,000
          2002                                                  38,000
          2003                                                   1,000
                                                            ----------
                                                            $3,221,000
                                                            ----------
                                                            ----------
</TABLE>

4.   PRIVATE PLACEMENTS OF COMMON STOCK:

In January 1997, the Company completed private placements of 1,000,000 and
650,000 shares of common stock for $2 per share, for net proceeds of $3,109,000.
The proceeds were used to repay outstanding indebtedness and to provide working
capital for operations.


                                     F-9
<PAGE>

5.   STOCK OPTIONS AND WARRANTS:

STOCK OPTIONS

The Company has established an Employee Stock Option Plan (the Employee Plan), a
Nonemployee Director Stock Option Plan (the Nonemployee Director Plan), and a
Consultant Stock Option Plan (the Consultant Plan).

The Employee Plan authorizes the grant of options to purchase an aggregate of up
to 2,300,000 shares of common stock. All persons who are employees of the
Company, including directors who are also employees, are eligible to
participate. The plan provides for the grant of incentive stock options (ISOs),
as defined in the Internal Revenue Code (the Code), and nonincentive stock
options (NSOs). Options under this plan are granted at the discretion of a
committee of the Company's board of directors.

The Nonemployee Director Plan authorizes the grant of NSOs to purchase an
aggregate of 300,000 shares of common stock to nonemployee directors of the
Company. Each nonemployee director is granted an option to purchase 15,000
shares of common stock when elected or appointed to the board of directors and
receives an option to purchase an additional 2,500 shares of common stock upon
each reelection to the Company's board of directors. Options are granted at
exercise prices equal to the fair market value of the common stock at the date
of grant, and vesting terms are determined by the board of directors or its
designee.

The Consultant Plan authorizes the grant of options to purchase an aggregate of
500,000 shares of common stock to consultants of the Company who may be
directors, but not employees of the Company. Stock options granted under the
Consultant Plan are administered by a committee of the board of directors, which
determines the grants, exercise prices, number of shares and vesting terms.

The Company accounts for its stock options under Accounting Principles Board
Opinion No. 25 and has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of operations. Had
compensation cost related to these options been determined based on the fair
value at the grant date for awards granted in fiscal years 1998, 1997 and 1996,
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                     1998          1997           1996
                                                 ------------   -----------   ------------
<S>                                              <C>            <C>           <C>
Net loss:
   As reported                                   $(1,980,000)   $ (772,000)   $(3,855,000)
   Pro forma                                      (2,258,000)   (1,082,000)    (4,025,000)

Net loss per common share (basic and diluted):
   As reported                                   $     (0.15)   $    (0.06)   $     (0.33)
   Pro forma                                           (0.17)        (0.08)         (0.35)

</TABLE>

Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.


                                    F-10
<PAGE>

The weighted average fair values of options granted in fiscal years 1998, 1997
and 1996 were $0.93, $1.73 and $2.56. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in fiscal years 1998,
1997 and 1996, respectively: risk-free interest rates of 5.6%, 6.4% and 5.7%;
expected volatility of 74%, 78% and 76%; and expected lives of four years.
Dividend yields were not used in the fair value computations as the Company has
never declared or paid dividends on its common stock and currently intends to
retain any earnings for use in operations.

Shares subject to option are summarized as follows, with per share exercise
prices presented in the currency in which they were denominated, without
conversion:

<TABLE>
<CAPTION>
                                                Weighted      Non-     Weighted
                                    Incentive   Average    qualified   Average
                                      Stock     Exercise     Stock     Exercise
                                     Options     Price      Options     Price
                                    ---------   --------   --------    --------
<S>                                 <C>         <C>        <C>         <C>
Balance, September 30, 1995          241,500     $1.83     185,000      $1.96
   Granted                           235,000      4.25       7,500       4.63
   Exercised                          (9,750)     2.13     (25,000)      1.08
                                    ---------   --------   --------    --------

Balance, September 30, 1996          466,750      3.04     167,500       2.21
   Granted                           210,000      3.00      50,000       2.12
   Exercised                          (2,500)     2.13           -       -
   Forfeited or canceled              (2,000)     2.13     (20,000)      2.45
                                    ---------   --------   --------    --------

Balance, September 30, 1997          672,250      3.04     197,500       2.17
   Granted                           215,000      1.69      57,500       0.99
   Exercised                               -      -         (5,000)      0.69
   Forfeited or canceled             (28,750)     3.49          -        -
                                    ---------   --------   --------    --------
Balance, September 30, 1998          858,500     $2.68     250,000      $1.93
                                    ---------   --------   --------    --------
                                    ---------   --------   --------    --------
Options exercisable at:
   September 30, 1998                541,000     $2.76     250,000      $1.93
                                    ---------   --------   --------    --------
                                    ---------   --------   --------    --------
   September 30, 1997                384,000     $2.69     197,500      $2.17
                                    ---------   --------   --------    --------
                                    ---------   --------   --------    --------
   September 30, 1996                236,583     $2.39     167,500      $2.21
                                    ---------   --------   --------    --------
                                    ---------   --------   --------    --------
</TABLE>


                                     F-11
<PAGE>

Additional information regarding stock options outstanding and exercisable at
September 30, 1998 is as follows:

<TABLE>
<CAPTION>
                                        Options Outstanding            Options Exercisable
                              -------------------------------------   ----------------------
                                                        Weighted
                                            Weighted     Average                    Weighted
                  Range of                  Average     Remaining                   Average
   Option         Exercise      Options     Exercise   Contractual      Options     Exercise
    Type           Prices     Outstanding    Price     Life (Years)   Exercisable     Price
------------    -----------   -----------   --------   ------------   -----------   ---------
<S>             <C>           <C>           <C>        <C>            <C>           <C>
Incentive       $0.88-$2.13     423,500      $1.66         7.2          262,250      $1.64
                $3.00-$4.56     435,000       3.68         7.7          278,750       3.81
                -----------     -------      -----         ---          -------      ------
                $0.88-$4.56     858,500      $2.68         7.5          541,000      $2.76
                -----------     -------      -----         ---          -------      ------
                -----------     -------      -----         ---          -------      ------

Nonqualified    $0.69-$1.94      90,000      $1.30         8.9           90,000      $1.30
                $2.13-$4.63     160,000       2.28         3.0          160,000       2.28
                -----------     -------      -----         ---          -------      ------
                $0.69-$4.63     250,000      $1.93         5.1          250,000      $1.93
                -----------     -------      -----         ---          -------      ------
                -----------     -------      -----         ---          -------      ------
</TABLE>

WARRANTS

Warrants to purchase 528,000 and 742,000 shares of the Company's common stock at
prices ranging from $1.00 to $4.81 were outstanding at September 30, 1998 and
1997. The warrants are exercisable at various times through January 2002.

6.   COMMITMENTS AND CONTINGENCIES:

LITIGATION

Destron has been a party to litigation in which it asserted infringement by a
competitor of one of the Company's patents related to certain of its
technologies. The defendants asserted that the patent was not infringed, was
invalid and was unenforceable. The defendants also asserted antitrust and unfair
competition claims against the Company and Hughes Aircraft Company (now a
division of Raytheon Company).

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, awarding damages of approximately $444,000. The defendants appealed the
verdict, and on July 24, 1997, the appellate court affirmed the trial court's
judgment. Additionally, on November 7, 1997, the trial court ruled that there
had been no inequitable conduct on the part of Destron in connection with the
issuance of the patent and, as such, upheld the validity and enforceability of
the patent. On February 9, 1998, the court entered a judgment confirming the
previous finding of no inequitable conduct. An appeals court hearing was held on
December 8, 1998 in these matters, and a decision on the appeal is expected in
early 1999. Although there can be no assurance regarding the ultimate outcome of
this litigation, the Company and its legal counsel continue to believe that the
litigation will not have a significant adverse impact on the Company's future
financial position, cash flows, or results of operations.

On April 21, 1997, the defendants in the above litigation filed suit against the
Company, alleging patent infringement and unfair competition on the part of the
Company, among other


                                    F-12
<PAGE>

matters. As a result of the favorable ruling in the above-described lawsuit on 
February 9, 1998, this litigation has been stayed pending the court's final 
judgment in the other suit. Although management is unable, at this time, to 
estimate the potential impact of this litigation, the Company and its legal 
counsel believe that the ultimate resolution of the litigation will not have a 
significant adverse impact on the Company's future financial position, cash 
flows, or results of operations; however, there can be no assurance of the 
ultimate outcome.

EMPLOYEE BENEFIT PLAN

The Company has a tax-deferred employee savings plan which was established in
accordance with Section 401(k) of the Code. The plan covers all employees of the
Company. Participants may contribute up to 15% of their annual compensation on a
before-tax basis, subject to certain limits. The Company may elect to make
matching and/or discretionary contributions to the Plan.

7.   INCOME TAXES:

As of September 30, 1998 and 1997, the Company had approximately $9.5 million
and $7.8 million of net operating loss (NOL) carryforwards. Further, the Company
has approximately $130,000 of research and development tax credits available to
offset future federal tax, subject to limitations for alternative minimum tax.
The NOL and credit carryovers expire from 2004 through 2018 and are subject to
examination by the tax authorities. Approximately $1.5 million of the $9.5
million of NOL carryforwards at September 30, 1998 relates to the exercise and
subsequent sale of stock options. The tax benefit of approximately $555,000
associated with this stock option deduction will be recorded as additional
paid-in capital when realized.

The Tax Reform Act of 1986 contains provisions which may limit the net operating
loss and credit carryovers available to be used in any given year upon the
occurrence of certain events, including significant changes in ownership
interests. The Company does not believe that a change in ownership has occurred
since the NOLs were generated.

The components of deferred income taxes at September 30 were as follows:

<TABLE>
<CAPTION>
                                                        1998           1997
                                                    ------------   ------------
          <S>                                       <C>            <C>
          Net operating loss carryforwards          $ 3,392,000    $ 2,785,000
          Other, net                                    160,000         32,000
          Less- Valuation allowance                  (3,552,000)    (2,817,000)
                                                    ------------   ------------
                                                    $         -    $         -
                                                    ------------   ------------
                                                    ------------   ------------
</TABLE>

The Company has determined that certain deferred tax benefits may not be
realizable because such realization requires future taxable income, the
attainment of which is uncertain. Accordingly, a valuation allowance has been
established to eliminate the net deferred tax asset related to these items.


                                    F-13
<PAGE>

The reconciliation between income taxes using the statutory federal income tax
rate and the recorded tax provision is as follows:

<TABLE>
<CAPTION>
                                               1998         1997          1996
                                            ----------   ----------   ------------
          <S>                               <C>          <C>          <C>
          Federal taxes at
             statutory rate                 $(673,000)   $(262,000)   $(1,311,000)
          Effect of nonutilization of net
             operating losses and 
             permanent differences            673,000      262,000      1,311,000
                                            ----------   ----------   ------------
          Tax provision                     $       -    $       -    $         -
                                            ----------   ----------   ------------
                                            ----------   ----------   ------------
          Effective rate                            -            -              -
                                            ----------   ----------   ------------
                                            ----------   ----------   ------------
</TABLE>

8.   Export Sales and Significant Customers:

The Company generally sells its products at prices quoted in U.S. dollars to
limit the risks associated with currency exchange rate fluctuations. Sales to
locations outside of the United States are summarized as follows for the years
ended September 30:

<TABLE>
<CAPTION>
                                            1998         1997          1996
                                         ----------   ----------   ----------
          <S>                            <C>          <C>          <C>
          Europe                         $1,690,000   $2,575,000   $2,331,000
          Canada                            694,000      570,000      616,000
          Asia and other                    372,000      713,000      499,000
                                         ----------   ----------   ----------
          Total                          $2,756,000   $3,858,000   $3,446,000
                                         ----------   ----------   ----------
                                         ----------   ----------   ----------
</TABLE>

For the year ended September 30, 1998, sales to one customer represented 18% of
net sales. During the years ended September 30, 1997 and 1996, sales to two
customers represented 16% and 10%, and 18% and 10% of net sales, respectively.


                                    F-14
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Destron Fearing Corporation:

We have audited the accompanying consolidated balance sheets of Destron Fearing
Corporation (a Delaware corporation) and Subsidiaries as of September 30, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Destron Fearing Corporation and
Subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and experienced negative cash flow from operations. In addition, the Company has
not complied with certain payment terms of a significant vendor note payable.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.



                                       ARTHUR ANDERSEN LLP


Minneapolis, Minnesota,
   November 9, 1998


                                     F-15