Combine potatoes and water; microwave on high for 7 to 8 minutes or until potatoes are tender when pierced with a fork.
Using a large saute' pan, cut bacon into 1/4 inch pieces and cook for 3 to 4 minutes until crisp. Stir in sugar and vinegar; cook and stir for 1 to 2 minutes or until sugar dissolves. Reduce heat to low.
Stir potatoes into bacon and cover. Cook and stir for 4 to 5 minutes or until potatoes begin to break down slightly and sauce has thickened. Remove pan from heat. Stir in pepper. Cover and let stand until ready to serve.