<PAGE>


                   U. S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-QSB

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

               For the quarterly period ended December 31, 1997

             For the transaction period from __________ to________

                      Commission file number 0-28604
                                             ------- 


                              ELECTROSCOPE, INC.
       -----------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

            COLORADO                                 84-1162056
-------------------------------         ------------------------------------
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
incorporation or organization)

                      4828 STERLING DRIVE, BOULDER, COLORADO  80301
                      ---------------------------------------------
                        (Address of principal executive offices)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 444-2600
      ------------------------------------------------------------------
                          (Issuer's telephone number)

CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 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
    -----         -----

STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE:

       COMMON STOCK, NO PAR VALUE                    5,383,507 SHARES
       --------------------------            ---------------------------------
               Class                         (outstanding at January 30, 1998)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

YES            NO   X
    -----         -----


                                       1

<PAGE>

                              ELECTROSCOPE, INC.

                                  FORM 10-QSB

                    FOR THE QUARTER ENDED DECEMBER 31, 1997


                                     INDEX

<TABLE>
                                                                         Page
                                                                        Number
                                                                        ------
<S>       <C>                                                           <C>
PART I.   FINANCIAL INFORMATION

     ITEM 1  -  Condensed Interim Financial Statements                      3
             -  Condensed Balance Sheets as of December 31,
                 1997 and March 31, 1997                                    3
             -  Condensed Statements of Operations for
                 the Three Months Ended December 31, 1997 and 1996          4
                Condensed Statements of Operations for
                 the Nine Months Ended December 31, 1997 and 1996           5
             -  Condensed Statements of Cash Flows for
                 the Nine Months Ended December 31, 1997 and 1996           6
             -  Notes to Condensed Interim Financial Statements             7

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

PART II.   OTHER INFORMATION

     ITEM 1     Legal Proceedings                                          17

     ITEM 6  -  Exhibits and Reports on Form 8-K                           18

     SIGNATURES                                                            19

     EXHIBIT INDEX                                                         20
</TABLE>


                                       2

<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1 -  CONDENSED INTERIM FINANCIAL STATEMENTS

                              ELECTROSCOPE, INC.

                           CONDENSED BALANCE SHEETS

<TABLE>
                                   ASSETS                   December 31,  March 31,
                                                               1997         1997
                                                           -----------   -----------
                                                           (Unaudited)
<S>                                                        <C>           <C>
CURRENT ASSETS:
  Cash and cash equivalents                                $ 4,340,591   $   527,015
  Short-term investments, net                                2,380,600     9,631,427
  Accounts receivable, net of allowance for doubtful
    accounts of $7,500 and $25,000, respectively               144,961       155,446
  Inventory, net of reserve for obsolescence of $140,000
    and $102,596, respectively                                 622,937       521,696
  Prepaid expenses                                              96,677       110,777
                                                           -----------   -----------
      Total current assets                                   7,585,766    10,946,361
                                                           -----------   -----------

EQUIPMENT, at cost:
  Furniture, fixtures and equipment                            616,681       503,871
  Less - Accumulated depreciation                             (339,852)     (258,983)
                                                           -----------   -----------
      Equipment, net                                           276,829       244,888
                                                           -----------   -----------
PATENTS, net of accumulated amortization of $11,190
  and $9,270, respectively                                     152,607       138,078

OTHER ASSETS                                                    11,450        11,450
                                                           -----------   -----------
      Total assets                                         $ 8,026,652   $11,340,777
                                                           -----------   -----------
                                                           -----------   -----------

                  LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                         $    69,268   $   327,682
  Accrued compensation                                         128,474       155,908
  Other accrued liabilities                                    245,848       454,295
  Customer deposits                                              9,150        20,223
  Other current liabilities                                      6,639         6,639
                                                           -----------   -----------
      Total current liabilities                                459,379       964,747
                                                           -----------   -----------
LONG-TERM LIABILITIES:
  Other long-term liabilities                                    6,991        17,593
                                                           -----------   -----------
      Total long-term liabilities                                6,991        17,593
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value, 10,000,000 shares 
    authorized, no shares outstanding                                -             -
  Common stock, no par value, 100,000,000 shares 
    authorized, 5,383,507 and 5,389,986 shares 
    outstanding, respectively                               16,941,317    16,997,282
  Warrants to purchase common stock                            290,400       290,400
  Accumulated deficit                                       (9,671,435)   (6,929,245)
                                                           -----------   -----------
      Total shareholders' equity                             7,560,282    10,358,437
                                                           -----------   -----------
      Total liabilities and shareholders' equity           $ 8,026,652   $11,340,777
                                                           -----------   -----------
                                                           -----------   -----------
</TABLE>

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


                                       3
<PAGE>

                              ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF OPERATIONS
                                  (Unaudited)


<TABLE>

                                                       For the Three Months
                                                        Ended December 31,
                                                       ---------------------
                                                           1997        1996
                                                       -----------  ----------
<S>                                                    <C>          <C>
REVENUE, net                                           $   266,530  $  378,887
COST OF SALES                                              319,360     323,613
                                                       -----------  ----------
      Gross profit                                         (52,830)     55,274
                                                       -----------  ----------
OPERATING EXPENSES:
  Sales and marketing                                      396,329     329,305
  General and administrative                               327,610     272,408
  Research and development                                 122,957     160,565
                                                       -----------  ----------
      Total operating expenses                             846,896     762,278
                                                       -----------  ----------
INCOME (LOSS) FROM OPERATIONS                             (899,726)   (707,004)

OTHER INCOME:
  Interest income                                          101,388     150,162
  Other income (expense)                                       (82)      4,310
                                                       -----------  ----------
NET INCOME (LOSS)                                      $  (798,420) $ (552,532)
                                                       -----------  ----------
                                                       -----------  ----------
NET INCOME (LOSS) PER SHARE (Note 3):
  Net income (loss) per common share and net income
    (loss) per common share - assuming dilution        $     (0.15) $    (0.10)
                                                       -----------  ----------
                                                       -----------  ----------
  Shares used in computing net income (loss) per
    common share and common share - assuming dilution    5,383,507   5,340,820
                                                       -----------  ----------
                                                       -----------  ----------
</TABLE>

       The accompanying notes are an integral part of these statements.


                                       4

<PAGE>

                              ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF OPERATIONS
                                  (Unaudited)


<TABLE>
                                                        For the Nine Months
                                                         Ended December 31,
                                                       -----------------------
                                                            1997       1996
                                                       -----------  ----------
<S>                                                    <C>          <C>
REVENUE, net                                           $   907,274  $ 1,151,816

COST OF SALES                                              906,647      948,459
                                                       -----------  -----------
      Gross profit                                             627      203,357
                                                       -----------  -----------
OPERATING EXPENSES:
  Sales and marketing                                    1,455,635      750,082
  General and administrative                             1,076,864      615,913
  Research and development                                 512,737      446,395
                                                       -----------  -----------
      Total operating expenses                           3,045,236    1,812,390
                                                       -----------  -----------
INCOME (LOSS) FROM OPERATIONS                           (3,044,609)  (1,609,033)

OTHER INCOME:
  Interest income                                          325,089      323,022
  Other income (expense)                                  (22,668)       16,199
                                                       -----------  -----------
NET INCOME (LOSS)                                      $(2,742,188) $(1,269,812)
                                                       -----------  -----------
                                                       -----------  -----------
NET INCOME (LOSS) PER SHARE (Note 3):
  Net income (loss) per common share and net income 
    (loss) per common share - assuming dilution        $     (0.51) $     (0.26)
                                                       -----------  -----------
                                                       -----------  -----------
  Shares used in computing net income (loss) per
    common share and common share - assuming dilution    5,375,488    4,950,343
                                                       -----------  -----------
                                                       -----------  -----------
</TABLE>

       The accompanying notes are an integral part of these statements.


                                       5
<PAGE>

                              ELECTROSCOPE, INC.
                                       
                                       
                      CONDENSED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
                                                          For the Nine Months
                                                           Ended December 31,
                                                     ----------------------------
                                                          1997           1996
                                                     -------------   ------------
<S>                                                  <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                  $ (2,742,188)   $(1,269,812)
  Adjustments to reconcile net income (loss) to 
   net cash used in operating activities-
     Depreciation and amortization                        153,437         71,587
     Amortization of discount                            (163,268)      (260,141)
     Common stock issued in lieu of cash                  100,750            ---
     Changes in operating assets and liabilities-
       Accounts receivable                                 10,485        (82,777)
       Inventory                                         (101,241)       178,307
       Prepaid expenses                                    14,100        (34,616)
       Other assets                                           ---         19,997
       Accounts payable                                  (258,414)       (17,413)
       Accrued compensation and other accrued                          
        liabilities                                      (235,881)       (31,591)
       Customer deposits                                  (11,073)       (96,298)
       Other liabilities                                  (10,602)       (17,562)
                                                     ------------    -----------
         Net cash used in operating activities         (3,243,895)    (1,540,319)
                                                     ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment                                 (181,621)      (145,847)
  Patent costs                                            (16,449)       (29,457)
  Purchases of short-term investments                  (1,611,743)   (19,212,474)
  Sale of short-term investments                        9,023,999      9,965,000
                                                     ------------    -----------
         Net cash provided by (used in) investing    
          activities                                    7,214,186     (9,422,778)
                                                     ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                      ---     13,437,053
  Repurchase of common stock                             (156,715)           ---
  Proceeds from issuance of warrants                          ---             50
  Stock issuance costs                                        ---     (1,403,300)
                                                     ------------    -----------
         Net cash (used in) provided by 
          financing activities                           (156,715)    12,033,803
                                                     ------------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH 
 EQUIVALENTS                                            3,813,576      1,070,706

CASH AND CASH EQUIVALENTS, beginning of period            527,015        538,708
                                                     ------------    -----------
CASH AND CASH EQUIVALENTS, end of period             $  4,340,591    $ 1,609,414
                                                     ------------    -----------
                                                     ------------    -----------
</TABLE>
       The accompanying notes are an integral part of these statements.
                                       
                                       6
<PAGE>

                              ELECTROSCOPE, INC.
                                       
                                       
                NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
                                       
                               DECEMBER 31, 1997
                                  (Unaudited)



(1)  ORGANIZATION AND NATURE OF BUSINESS

Electroscope, Inc. (the "Company") was incorporated as a Colorado corporation 
on February 1, 1991.  The Company designs, develops, manufactures and markets 
a patented monopolar electrosurgical shielding system and integrated surgical 
instruments, which are designed to provide greater safety to patients who 
undergo laparoscopic surgery.  The products can be used with most 
electrosurgical instruments available today in the United States (US).  It 
has also developed and is marketing its own line of integrated, shielded, 
five millimeter diameter electrosurgical instruments which incorporate the 
Company's proprietary technology.  These products monitor for stray 
electrical energy during laparoscopy and deactivate the electrosurgical unit 
when this energy creates potentially dangerous conditions.  At the end of the 
three months ended September 30, 1997, the Company introduced a disposable 
scissors product.

The Company's sales to date have been made principally in the United States 
and primarily to one customer from September 1995 through March 31, 1997.  
During the nine months ended December 31, 1997, sales to this customer were 
not significant.

The Company has incurred losses since its inception and has an accumulated 
deficit of $9,671,435 at December 31, 1997.  During fiscal year 1997, which 
ended March 31, 1997, the formerly exclusive distributor of the Company's 
products did not purchase products from the Company in sufficient amounts to 
maintain the distributor's exclusivity.  As a result, the sales, marketing 
and market development activities conducted by this distributor have now 
become the responsibility of the Company.  The Company's operations are 
subject to certain risks and uncertainties, which are discussed in Item 2, 
Risk Factors Which May Affect Future Performance.

In September 1995, the Company entered into an exclusive Distribution 
Agreement for the Company's products with Valleylab Inc., a part of the 
Hospital Products Group of Pfizer, Inc.  ("Valleylab").  The terms of this 
agreement required Valleylab to purchase minimum amounts of the Company's 
products in specified time frames in order to maintain exclusivity. Valleylab 
did not meet the minimum purchase requirements for calendar year 1996, and 
the agreement has now become non-exclusive for the remainder of its term 
through calendar year 1998. See Part I, Item 2.

During the third quarter of fiscal year 1997, sales to Valleylab accounted 
for essentially all of the Company's revenue.  Sales to Valleylab in the 
third quarter of fiscal year 1998 were not significant.

(2)  INITIAL PUBLIC OFFERING

In June 1996, the Company completed an initial public offering (IPO) of 
1,200,000 shares of its common stock at a price per share of $10.50, of which 
all shares were sold by the Company.  After 

                                      7
<PAGE>

underwriting discounts, commissions and other expenses, net proceeds to the 
Company from the offering were approximately $11.4 million.

In connection with the IPO, the Company sold, for a nominal purchase price, a 
five-year warrant to purchase up to 120,000 shares of common stock, 
exercisable at 120% of the initial offering price, or $12.60 per share.  In 
accordance with Statement of Financial Accounting Standards No. 123 (SFAS No. 
123), "Accounting for Stock-Based Compensation," the fair value of the 
warrant sold is estimated using an option-pricing model.  In accordance with 
SFAS No. 123, the option-pricing model takes into account as of the date the 
warrant is issued the exercise price, life of the warrant, current price of 
the common stock, expected common stock volatility and the risk-free interest 
rate for the expected term of the warrant.  Based on this valuation 
methodology, the Company has recorded the fair value of the warrant sold at 
$290,400.  The difference between the fair value of the warrant and the 
nominal purchase price has been recorded as a deduction from the net proceeds 
to the Company from the offering.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions. 
Such estimates and assumptions affect the reported amounts of assets and 
liabilities as well as disclosure of contingent assets and liabilities at the 
date of the financial statements, and the reported amounts of revenue and 
expense during the reporting period.  Actual results could differ from those 
estimates.

   CASH AND EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all cash
and highly liquid investments with an original maturity of three months or less
to be cash equivalents.

   FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, short-term investments 
and short-term trade receivables and payables.  The carrying values of cash, 
short-term investments and short-term receivables and payables approximate 
their fair value.

   SHORT-TERM INVESTMENTS

As required under Statement of Financial Accounts Standards No. 115, 
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 
115) management determines the appropriate classification of its investments 
in debt securities at the time of purchase.  At December 31, 1997, the 
Company's short-term investments consist primarily of government and 
corporate securities which the Company classifies as held-to-maturity.

The amortized cost of debt securities classified as held-to-maturity is 
adjusted for amortization of premiums and accretion of discounts to maturity. 
Such amortization and accretion of discounts are included in interest income. 

                                      8
<PAGE>

   INVENTORY

Inventory consists primarily of component parts and raw materials, and is 
valued at the lower of cost (first-in, first-out basis) or market.  Inventory 
consists of the following:
<TABLE>
                                             December 31,   March 31,
                                                 1997         1997
                                              ----------   ----------
<S>                                           <C>          <C>
       Raw materials                          $ 523,317    $ 266,299
       Work in process                              ---      225,353
       Finished goods                           239,620      132,640
                                              ---------    ---------
                                                762,937      624,292
       Less- Reserve for obsolescence          (140,000)    (102,596)
                                              ---------    ---------
                                              $ 622,937    $ 521,696
                                              ---------    ---------
                                              ---------    ---------
</TABLE>

Due to the nature of the Company's manufacturing process, which features 
short manufacturing cycle times and substantial reliance on a variety of 
sub-contractors, the Company has reviewed the classification of its 
inventories and has reclassified materials previously considered to be 
Work-In Process to primarily raw materials, including sub-assemblies, and 
finished goods.

   INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of 
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 
No. 109").  SFAS No. 109 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.  SFAS No. 109 requires recognition 
of deferred tax assets for the expected future tax effects of all deductible 
temporary differences, loss carryforwards and tax credit carryforwards.  
Deferred tax assets have been completely offset by a valuation allowance 
because the realization criteria set forth in SFAS 109 are not currently 
satisfied, primarily due to the Company's history of operating losses.

   NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board, ("FASB") issued 
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". 
This statement establishes standards for computing and presenting earnings 
per share.  The Company has adopted this standard for the fiscal quarter 
ended December 31, 1997.  Adoption of the standard has had no material impact 
on reported earnings per share and required financial statement disclosures.

   LOSS PER COMMON SHARE

Loss per common share and loss per common share - assuming dilution for all 
fiscal periods presented is computed using the weighted average number of 
shares of common stock outstanding during the fiscal periods presented. 
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 
83, common stock and common stock equivalent shares issued by the Company 
during the period beginning twelve months prior to the filing of the 
Company's initial public offering at prices significantly below the public 
offering price have been included in the earnings per share calculation as if 
they were outstanding for all periods prior to the initial public offering 
(using the treasury stock method and the initial public offering price of 
$10.50 per share for 

                                      9
<PAGE>

stock options and warrants) regardless of whether they are antidilutive. 
Options and warrants for the Company's common stock issued other than in this 
one-year period have been excluded as they are antidilutive for the periods 
presented.

(4)  COMMITMENTS AND CONTINGENCIES

The Company is subject to regulation by the United States Food and Drug 
Administration ("FDA").  The FDA provides regulations governing the 
manufacture and sale of the Company's products and regularly inspects the 
Company and other manufacturers to determine their compliance with these 
regulations.

Under the terms of the Distribution Agreement, after termination, Valleylab 
may sell for a period of six months, any inventory of hardware products held 
by it at the date of termination.  In the event of termination, the Company 
has the obligation to purchase from Valleylab products held in Valleylab's 
inventory, if any, to the extent such products are salable and non-obsolete 
and have been received by Valleylab within nine months of the latter of the 
date of termination or the post-termination sales period.  Valleylab has not 
notified the Company of any intent to terminate the Agreement.  See Part I, 
Item 2.

Because of seasonal and other factors including the continuing development of 
the sales force and the changes in management discussed in Item 2, Historical 
Perspective and Outlook, Results of Operations, the results of operations for 
the quarter ended December 31, 1997, should not be taken as an indication of 
the results of operations for all or any part of the balance of the year.

On June 4, 1997, as discussed more fully in Part II, Item 1, Legal 
Proceedings, a  class action lawsuit was filed naming the Company and certain 
individuals associated with the Company as defendants.  The Company believes 
that the claims of such lawsuit are without merit, and intends to defend 
itself vigorously against such claims.

(5)  MANAGEMENT'S REPRESENTATIONS

The condensed interim financial statements included herein have been prepared 
by the Company, without audit, pursuant to the rules and regulations of the 
Securities and Exchange Commission.  Certain information and footnote 
disclosures normally included in financial statements prepared in accordance 
with generally accepted accounting principles have been condensed or omitted 
pursuant to such rules and regulations, although the Company believes that 
the disclosures made are adequate to make the information presented not 
misleading. The condensed interim financial statements and notes thereto 
should be read in conjunction with the financial statements and the notes 
thereto, included in the Company's Annual Report to the Securities Exchange 
Commission, for the fiscal year ended March 31, 1997, filed on Form 10-KSB.

The accompanying condensed interim financial statements have been prepared, 
in all material respects, in conformity with the standards of accounting 
measurements set forth in Accounting Principles Board Opinion No. 28 and 
reflect, in the opinion of management, all adjustments, which are of a normal 
recurring nature, necessary to summarize fairly the financial position and 
results of operations for such periods.  The results of operations for such 
interim periods are not necessarily indicative of the results to be expected 
for the full year.

                                      10
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

   GENERAL

The Company manufactures and markets a line of proprietary electrosurgical 
products that are designed to provide greater safety to patients who undergo 
minimally invasive electrosurgery (MIS).  The Company believes that its 
patented Electroshield-REGISTERED TRADEMARK- Monitoring System offers 
surgeons significant advantages compared to other electrosurgical systems in 
use because of its ability to monitor dynamically for stray electrical energy 
out of the view of the surgeon during MIS procedures.  The Company has 
received three FDA Form 510(k) notifications for these products and obtained 
patent protection for these products' basic shielding and monitoring 
features.  The Company has also received (as of January 16, 1998) an FDA Form 
510(k) notification for a Bi-Polar arthroscopic probe and an additional 
510(k) notification for a Bi-Polar Electroscopic Pencil.

In September 1995, the Company entered into an exclusive worldwide 
Distribution Agreement (the "Agreement") with Valleylab, part of the Hospital 
Products Group of Pfizer, Inc., pursuant to which Valleylab was required to 
make minimum purchases through calendar year 1998 in order to retain its 
exclusive distribution rights. Valleylab did not meet its minimum purchase 
requirements in calendar 1996 and the Agreement has become a non-exclusive 
distribution arrangement for calendar year 1997.  To replace the Valleylab 
distribution resources, the Company has contracted with a network of 
independent sales representative organizations covering approximately 60% of 
the U.S.  The company has also contracted with (as of January 22, 1998) 
independent distributors in Australia, Taiwan and Canada.  In addition, the 
Company has engaged a specialized marketing communications firm to broaden 
the awareness of the hazards inherent in monopolar electrosurgery.

The Company recognizes that market awareness and acceptance of the hazards 
inherent in monopolar electrosurgery and acceptance of the Company's products 
to address such hazards has been slower to occur than the Company had 
believed would be the case.  The Company has modified its marketing 
strategies, including the engagement of the marketing communications firm 
referred to above and the significant expansion of the Company's sales and 
marketing functions, to address the issues of market acceptance of the 
technology.  The Company has also undertaken efforts to broaden the product 
line offerings beyond the original EM-2 product and its accessories, with the 
arthroscopic products referred to above being the first results of that 
effort.

The Company recognizes that its efforts to develop its own sales force and 
marketing programs will require increased use of cash and additional 
management resources beyond those which were necessary while Valleylab had an 
exclusive right to distribute the Company's products.

As more fully discussed in Part II, Item 1, Legal Proceedings, a class action 
lawsuit has been filed in the United States District Court in Minnesota.  
While the Company believes that this suit is without merit, defense against 
such suit will take management time, legal resources and could result in 
significant expenditures.

   HISTORICAL PERSPECTIVE

The Company was organized in February 1991.  During its first two years, the 
Company developed the EM-2 Electronic Monitor and adaptive sheaths to work 
with traditional electrosurgical instruments.  During this period, the 
Company applied for patents with the United States Patent Office and 
conducted clinical trials.  The Company also continued work on its patent 
applications and formulated development plans for shielded hinged tip and 
fixed tip electrosurgical instruments.

                                      11
<PAGE>

The installed base of the Company's EM-2 Electronic Monitor has continued to 
increase since the introduction of the product in 1994.  The approximate 
number of EM2 and EM2+ Electronic Monitors sold were 567 and 257 in the 
fiscal years ended March 31, 1996 and 1997, respectively.  The Company 
continues to devote resources to increasing market awareness of the inherent 
hazards of monopolar electrosurgeryGiven the system's short history of usage, 
the Company cannot predict the rate of its electrosurgical instrument sales.  
As a result of the lack of immediate market acceptance of the EMS, the 
Company has broadened its R&D efforts to possibly reduce its dependence on 
products involving AEM-Registered Trademark- technology.

The Company believed that the most cost effective way to educate the market 
to the hazards of monopolar electrosurgery and to generate significant 
revenues for the Company was to utilize the Valleylab sales force, 
supplemented by support from the Company.  As noted above, this Agreement did 
not meet its objectives and the Company has taken steps to develop its own 
direct sales force, made up of Company employees and independent sales 
representative organizations, which together provide market presence in most 
of the major market areas in the United States. The Company has also begun to 
address market opportunities outside the US, signing distribution contracts 
with independent organizations in Australia and Taiwan in the fiscal quarter 
ended December 31, 1997 and in Canada in January, 1998.  In addition, the 
Company has hired a Chief Executive Officer with substantial experience in 
the medical device industry.

   RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE THREE MONTHS 
ENDED DECEMBER 31, 1996.

NET REVENUES.  Revenues for the three months ended December 30, 1997, 
decreased by 30% from the three months ended December 31, 1996 to $266,530.  
The decrease is attributable to the Company continuing to develop its own 
sales and marketing efforts to replace those provided by Valleylab in the 
third quarter of fiscal year 1997.  During the third quarter of fiscal 1998 
the Company's sales force, which had previously been focused on direct sales, 
was committed to the training of the independent sales representative 
organizations.  This investment in time and resources reduced the amount of 
time that the sales force dedicated to direct selling and contributed 
directly to the reduced levels of revenue.

GROSS PROFIT.  Costs of Sales for the three months ended December 31, 1997 
exceeded revenues by $52,830, as compared to gross profit of $55,274 for the 
three months ended December 31, 1996.  Gross profit as a percentage of 
revenue (Gross Margin) decreased from 15% for the three months ended December 
31, 1996 to a negative percentage in the three months ended December 31, 1997.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses for the three 
months ended December 31, 1997 increased by 20% from the three months ended 
December 31, 1996 to $396,329.  The increase is the result of the Company's 
efforts to develop its own direct sales force and group of independent sales 
representatives after the exclusive distribution agreement with Valleylab 
converted to a non-exclusive arrangement.  The Company also invested in a 
significant marketing communications effort to increase market awareness of 
the hazards inherent in monopolar electrosurgery.

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses for 
the three months ended December 31, 1997 increased by 20% from the three 
months ended December 31, 1996 to $327,610.  This net increase was primarily 
due to the addition of a Chief Executive Officer, the hiring of a new Chief 
Financial Officer, increased legal expenses, primarily related to the 
shareholder lawsuit filed in June of 1997 (See Part II, Item 1, Legal 
Proceedings), and also reflects reductions in spending levels in several 
areas compared to the comparable quarter in fiscal year 1997.

                                     12
<PAGE>

RESEARCH AND DEVELOPMENT.  Research and development expenses for the three 
months ended December 31, 1997 decreased by 23% from the three months ended 
December 31, 1996 to $122,957.  This decrease reflected the transfer of 
certain engineering projects from development to maintenance status, with 
correspondingly fewer resources required for the maintenance activity.

   RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE NINE MONTHS ENDED 
DECEMBER 31, 1996.

NET REVENUES.  Revenues for the nine months ended December 31, 1997 decreased 
by 21% from the nine months ended December 31, 1996 to $907,274.  The 
decrease is attributable to the Company developing its own sales and 
marketing efforts to replace those provided by Valleylab in the first nine 
months of fiscal year 1997.

GROSS PROFIT.  Gross Profit for the nine months ended December 31, 1997 was 
$627, and for  the nine months ended December 31, 1996 gross profit was 
$203,357.  Gross profit as a percentage of revenue (Gross Margin) decreased 
from 18% for the nine months ended December 31, 1996 to Zero % in the nine 
months ended December 31, 1997.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses for the nine 
months ended December 31, 1997 increased 94% from the nine months ended 
December 31, 1996 to $1,455,635.  The increase is the result of the Company's 
efforts to develop its own direct sales force and group of independent sales 
representatives after the exclusive distribution agreement with Valleylab 
converted to a non-exclusive arrangement.  In addition, the Company made 
substantial investments in developing its own marketing programs to replace 
the marketing efforts of Valleylab.

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses for 
the nine months ended December 31, 1997 increased 75% from the nine months 
ended December 31, 1996 to $1,076,864.  This increase was primarily due to 
the addition of a Chief Executive Officer, the hiring of a new Chief 
Financial Officer, increased legal expenses, primarily related to the 
shareholder lawsuit filed in June of 1997. (See Part II, Item 1, Legal 
Proceedings), costs associated with the annual shareholders meeting and other 
expenses related to being a public company, and increased spending on 
regulatory matters associated with new product development.

RESEARCH AND DEVELOPMENT.  Research and development expenses for the nine 
months ended December 31, 1997 increased by 15% from the nine months ended 
December 31, 1996 to $512,737, reflecting the Company's ongoing product 
development efforts, primarily in the first and second quarters of fiscal 
1998, related to both the current product line and new products, one of which 
was introduced at the end of the quarter ended September 30, 1997.

   LIQUIDITY AND CAPITAL RESOURCES

The Company has historically satisfied its cash requirements principally 
through sales of Common Stock which approximated $17.1 million through 
December 31, 1997, and, to a substantially lesser degree, funds provided by 
sales of the Company's products.  In the first quarter of Fiscal Year 1997, 
the Company completed its initial public offering, raising net proceeds of 
$11.4 million, and raised an additional $585,000 in cash from the exercise of 
warrants issued in connection with previous sales of Common Stock.  
Historically, these funds have been used for working capital and general 
corporate purposes including research and development.

Capital expenditures historically have been relatively minor, and have 
consisted of specialized equipment, manufacturing equipment, office equipment 
and leasehold improvements.

                                     13
<PAGE>

   INCOME TAXES

Net operating loss carryforwards totaling approximately $9.8 million are
available to reduce taxable income as of December 31, 1997.  The net operating
loss carryforwards expire, if not previously utilized, at various dates
beginning in the year 2006.  The Company has not paid income taxes since its
inception.  The Tax Reform Act of 1986 and other income tax regulations contain
provisions which may limit the net operating loss carryforwards available to be
used in any given year, if certain events occur, including changes in ownership
interests.  The Company has established a valuation allowance for the entire
amount of its deferred tax asset since inception due to its history of
operating losses.


   OUTLOOK

     Statements contained in this section on Outlook are not historical facts,
including statements about the Company's strategies and expectations about new
and existing products and market demand and acceptance of new and existing
products, technologies and opportunities, market and industry segment growth,
and return on investments in products and markets.  These statements are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements.  All forward looking statements in this section on
Outlook are based on information available to the Company on the date of this
document, and the Company assumes no obligation to update such forward looking
statements.  Readers of this 10-Q are strongly encouraged to review the section
entitled "Risk Factors Which May Affect Future Performance".

INSTALLED BASE OF MONITORING EQUIPMENT:  The Company believes that the
installed base of EM-2+ monitors has the potential for increasing as the
network of independent sales representatives and the Company's international
distributors become familiar with the EMS and sell the system to their
customers.  The Company expects that the sales of electrosurgical instruments
and accessories should increase as additional EM-2 Electronic Monitors are
installed  The Company believes that the measures taken to increase the number
of sales representatives carrying the AEM-Registered Trademark- product line,
along with increased marketing efforts and the introduction of new products,
will provide the basis for increased revenues and will ultimately lead to
profitable operations.  The Company believes that selling the Company's
products directly in the US will generate additional gross profits as the
Company will be retaining the margins formerly recorded by the Company's
distributor.  The Company also believes that the investment made in training
the network of independent sales representatives will produce substantially
higher revenues in the future than could be generated by a direct sales force
employed by the Company.  Management does not expect that profitable revenue
levels will be reached in fiscal year 1998.

   The Company's Agreement with Valleylab allows the Company to terminate the
Agreement in the event that Valleylab is sold.  Pfizer, Inc., Valleylab's
parent company, has announced that Valleylab has been sold to US Surgical
Corp., and it is the Company's intent to terminate the Agreement with
Valleylab.


PROBABILITY OF CONTINUED OPERATING LOSSES:  The Company has incurred losses
from operations since inception and has an accumulated deficit of $9,671,435 as
of December 31, 1997.  Due to the need to continue the development and training
of a sales and distribution network and the need to increase revenues to a
level adequate to cover fixed manufacturing costs, the Company believes that it
may continue to operate at a net loss for several quarters.  The Company
believes its results of operations may fluctuate on a quarterly basis as a
result of the size and frequency of sales through the independent sales network
and the international distributors, and result in increased sales expenses.
Such fluctuations may be significant, and may result in the Company operating
at a loss in any one period even after a period of profitability.


                                       14

<PAGE>

REVENUE GROWTH:  The Company anticipates that revenue for the fiscal year ended
March 31, 1998 ("Fiscal Year 1998") will be approximately the same as that
recorded in fiscal year 1997.  The company also expects to introduce additional
new products in fiscal year 1998 which are expected to contribute to increased
revenues, primarily in fiscal 1999 and beyond.

GROSS PROFIT AND GROSS MARGINS:  Gross profit and gross margin can be expected
to fluctuate from quarter to quarter, as a result of product sales mix and
sales volume.  Gross margins are expected to be higher at higher levels of
production and sales.  These higher gross margins are currently not being
achieved because of the expenses related to manufacturing capacity, which is
currently underutilized due to the reduced levels of product revenues and
other, generally fixed, manufacturing costs.

SALES AND MARKETING EXPENSES:  The Company believes that sales and marketing
expenses will decrease as a percentage of net revenue with increasing sales
volume.  The Company will continue its efforts to expand its international
distribution capability.

RESEARCH AND DEVELOPMENT EXPENSES:  The Company has invested in new product
development, which has resulted in one new product being introduced in the
third fiscal quarter of 1998 and others which are anticipated to be introduced
later in fiscal year 1998.  The Company intends to explore additional product
development and acquisition opportunities from third parties.

LIQUIDITY AND CAPITAL RESOURCES:  The Company may use working capital to build
inventories, to ensure that orders can be filled in a timely manner, to support
the sales efforts of the Company's sales force and to accommodate anticipated
growth.  While net proceeds from the Company's initial public offering are
currently invested primarily in money market instruments and government
securities, the Company may also use a substantial portion of the net proceeds
for the acquisition or development of complementary products or businesses, if
such acquisition or development opportunities arise.  The Company currently has
no understanding, commitment or agreement with respect to any such acquisition
or development program.  The Company anticipates that its cash on hand will be
sufficient to fund its operations, including the development of the sales
force, working capital and capital requirements for at least the next twelve
months, and that it has attracted and can continue to attract the additional
human resources necessary to manage the development of the sales force, the
increased marketing efforts, and the general growth of the business.

LEGAL PROCEEDINGS: The Company expects a ruling on the Motion to dismiss the
Class Action law suit by the end of Fiscal 1998 (March 31, 1998).  See Part II,
Item 1.

   RISK FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE:

Among the factors which could cause future results to be materially different
from expectations are:

ABILITY TO INCREASE REVENUES:  The Company's attempts to develop and train a
network of independent sales representatives in the US and to expand its
international distribution efforts may take longer than expected, may not be as
successful as the Company anticipates, and, due to the independent nature of
the selling organizations in the US, may result in considerable amounts of
retraining effort as the organizations change their product lines and their
personnel.  The Company may not be able to obtain full coverage of the US by
independent sales representatives as quickly as it currently anticipates.  In
addition, market acceptance of the Company's products may be slower than the
Company anticipates.  The Company may also encounter more difficulties than
anticipated in expanding its international presence, due to regulatory issues
and its ability to successfully manage international operations.


                                       15

<PAGE>

ABILITY TO INCREASE PRODUCTION TO MEET DEMAND:  The Company relies on sub-
contractors to provide much of its product, either in the form of finished
goods or sub-assemblies which the Company then assembles and tests.  While
these sub-contractors reduce the cost of carrying manufacturing capabilities
inside the Company, they may not be as responsive to increased demand as the
Company would be if it had its manufacturing capacity entirely in-house .  The
Company intends to carry an appropriate inventory of critical materials,
however, a sudden increase in demand may create a backorder situation as lead
times for some of the Company's critical materials are in excess of 12 weeks.

DELAYS IN DEVELOPING NEW PRODUCTS:  While the Company has an established
program for developing new products, not all development programs proceed as
smoothly as planned.  Significant delays in developing new products could cause
the Company to fail to introduce products on time, or cause the Company to miss
market opportunities.  In addition, the Company could develop products for
which there is only a limited market, contrary to the Company's expectations
while the product(s) are under development.

DELAYS IN RECEIVING MARKETING AUTHORIZATION FROM THE FDA:  As the Company's
products are all subject to FDA review, delays in receiving 510(k)
authorization to market new products could cause the Company to fail to
introduce new products as planned or could cause the Company to miss market
opportunities.

CLASS ACTION LAWSUIT:  Should the lawsuit result in a significant payment to
the plaintiff(s) or significant legal fees beyond the coverage of such fees
provided by insurance carried by the Company, such payments could have a
material adverse impact on the Company's liquidity.

Other risk factors which may cause future results to be materially different
from the Company's expectations are discussed in the Registration Statement,
Form SB-2 filed with the Securities and Exchange Commission and which became
effective on June 25, 1996.  Those which the Company believes to be still
relevant to current conditions include:

   Uncertainty of Market Acceptance
   Competition
   Potential Fluctuations in Future Quarterly Results
   Dependence on Patents, Patent Applications and Proprietary Rights
   Potential Negative Impact of Changes in or Failure to Comply with Government
    Regulations
   Manufacturing Subject to Government Regulations
   Limited Manufacturing Experience for Large Scale Production
   History of Operating Losses
   Dependence on New Product Development
   Dependence on Single Source Suppliers
   Product Liability Risk; Limited Insurance Coverage

Readers of this 10-Q are strongly encouraged to review the risk factors
discussion in the SB-2 Form.


                                       16

<PAGE>


PART II.   OTHER INFORMATION

     ITEM 1 - LEGAL PROCEEDINGS

On June 4, 1997 a class action lawsuit was filed in the United States District
Court for the District of Minnesota against the Company, the members of the
Board of Directors as of the date of the Company's initial public offering, and
John G. Kinnard and Company, Inc., the underwriter of the Company's initial
public offering.  The complaint was filed by Avron Gart, a former shareholder
of the Company, individually and on behalf of all others similarly situated.
The complaint alleges that the Company's Registration Statement which became
effective on or about June 25, 1996, of which the prospectus was a part, was
materially false and misleading, contained untrue statements of material facts,
omitted to state other facts necessary to make the statements therein not
misleading, and failed to disclose adequately material facts.

The plaintiff alleges in the complaint that the Company's prospectus failed to
disclose, among other things, the fact that stock-in sales to Valleylab were
non-repetitive sales, that the growth rate shown in the prospectus was already
reversing itself and that the reduced revenues would be reported for the first
fiscal quarter ended three business days after the offering.  The plaintiff
requests, on behalf of himself and the class, the difference between the price
they paid for the Company's stock and either the current market value of such
stock if currently held or the price at which such stock was disposed of in the
market if disposed of before the commencement of the action, together with
costs and expenses of the litigation, including reasonable attorney's fees and
experts' fees and other costs.

The Company's Directors and Officers Liability Insurance provides coverage for
up to $1,000,000 of the cost of defense against and costs associated with the
complaint, with a retention of $200,000.

The Company intends to vigorously defend itself against this litigation.  The
Company has filed a Motion to Dismiss the suit, and a hearing on the motion was
held in US District Court in Minneapolis, Minnesota on December 19, 1997.  The
lawsuit may have a material adverse effect on the business and financial
condition of the Company in terms of legal fees and costs incurred to defend
the claims, the possibility of an award of damages, and the loss of management
time needed to deal with the lawsuit.

     ITEM 2 - Not Applicable

     ITEM 3 - Not Applicable

     ITEM 4 - Not Applicable

     ITEM 5 - Not Applicable







                                       17

<PAGE>


     ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

             (a)    Exhibits

                    11 (a) - Computation of Net Income (Loss) per Common
                    Share and Net Income (Loss) per Common Share - assuming 
                    dilution for the three months ended December 31, 1997 
                    and 1996.

                    11 (b) - Computation of Net Income (Loss) per Common Share 
                    and Net Income (Loss) per Common Share - assuming dilution
                    for the Nine Months ended December 31, 1997 and 1996.

                    27  - Financial Data Schedule.

             (b)    The Registrant did not file any reports on Form 8-K during
                    the quarter ended December 31, 1997.













                                       18

<PAGE>

                                  SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Electroscope has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.


<TABLE>
           Name                                Title                        Date
-------------------------------    ------------------------------     ----------------
<S>                                <C>                                <C>
    /s/ Karl D. Hawkins            Chief Financial Officer            February 5, 1998
-------------------------------    (Principal Accounting Officer)
     Karl D. Hawkins
</TABLE>



































                                       19

<PAGE>

                                 EXHIBIT INDEX



<TABLE>
                                                                   Sequentially
Exhibit No.                       Description                      Numbered Page
-----------      ----------------------------------------------    -------------
<S>              <C>                                               <C>
   11(a)         Computation of Net Income (Loss) per Common
                 Share and Net Income (Loss) per Common Share -
                 assuming dilution for the three months ended
                 December 31, 1997 and 1996.                            21

   11(b)         Computation of Net Income (Loss) per Common
                 Share and Net Income (Loss) per Common Share -
                 assuming dilution for the nine months ended
                 December 31, 1997 and 1996.                            22


   27            Financial Data Schedule                                23
</TABLE>
























                                       20