<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,
                                   1998


           For the transition 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 OF 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 26, 1999)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

YES _____  NO __X__


                                       1
<PAGE>

                            ELECTROSCOPE, INC.

                                FORM 10-QSB

                  FOR THE QUARTER ENDED DECEMBER 31, 1998


                                   INDEX

<TABLE>
<CAPTION>
                                                                                                                 PAGE
                                                                                                                NUMBER
                                                                                                                ------
<S>                                                                                                             <C>
PART I.             FINANCIAL INFORMATION

         ITEM 1     -    Condensed Interim Financial Statements.............................................        3
                    -    Condensed Balance Sheets as of December 31,
                            1998 and March 31, 1998.........................................................        3
                    -    Condensed Statements of Operations for
                            the Three Months Ended December 31, 1998 and 1997...............................        4
                         Condensed Statements of Operations for
                            the Nine Months Ended December 31, 1998 and 1997................................        5
                    -    Condensed Statements of Cash Flows for
                            the Nine Months Ended December 31, 1998 and 1997................................        6
                    -    Notes to Condensed Interim Financial
                            Statements......................................................................        7

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

PART II.            OTHER INFORMATION

         ITEM 6     -    Exhibits and Reports on Form 8-K...................................................       15

         SIGNATURES ........................................................................................       16

         EXHIBIT INDEX .....................................................................................       17
</TABLE>



                                       2
<PAGE>

PART I            FINANCIAL INFORMATION

ITEM 1   -   CONDENSED INTERIM FINANCIAL STATEMENTS

                              ELECTROSCOPE, INC.

                           CONDENSED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                          December 31,        March 31,
                                                                              1998               1998
                                      ASSETS                              ------------      ------------
<S>                                                                       <C>               <C>
CURRENT ASSETS:
    Cash and cash equivalents                                             $  1,023,206      $  2,525,026
    Short-term investments, net                                              3,718,583         3,674,729
    Accounts receivable, net of allowance for doubtful
       accounts of $7,500 and $7,500, respectively                             269,697           321,150
    Inventory, net of reserve for obsolescence of $70,318
       and $140,000 respectively                                               464,512           543,006
    Prepaid expenses                                                            93,473            63,259
                                                                          ------------      ------------
              Total current assets                                           5,569,471         7,127,170
                                                                          ------------      ------------
EQUIPMENT, at cost:
    Furniture, fixtures and equipment                                          647,147           621,607
    Less- Accumulated depreciation                                            (483,359)         (380,659)
                                                                          ------------      ------------
              Equipment, net                                                   163,788           240,948
                                                                          ------------      ------------
PATENTS, net of accumulated amortization of $12,792 and $11,830,               120,336           186,454
              respectively
OTHER ASSETS                                                                    14,077            11,450
                                                                          ------------      ------------
              Total assets                                                $  5,867,672      $  7,566,022
                                                                          ------------      ------------
                                                                          ------------      ------------

                        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                                      $     67,571      $     99,430
    Accrued compensation                                                       107,437           150,635
    Other accrued liabilities                                                  203,975           191,871
    Customer deposits                                                              ---             4,376
    Other current liabilities                                                    4,224             6,639
                                                                          ------------      ------------
              Total current liabilities                                        383,207           452,951
                                                                          ------------      ------------
LONG-TERM LIABILITIES:
       Other long-term liabilities                                               3,391             5,331
                                                                          ------------      ------------
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 5,383,507 shares outstanding, respectively             16,941,317        16,941,317
    Warrants to purchase common stock                                          290,400           290,400
    Accumulated deficit                                                    (11,750,643)      (10,123,977)
                                                                          ------------      ------------
              Total shareholders' equity                                     5,481,074         7,107,740
                                                                          ------------      ------------
              Total liabilities and shareholders' equity                  $  5,867,672      $  7,566,022
                                                                          ------------      ------------
                                                                          ------------      ------------
</TABLE>
                                       
     The accompanying notes are an integral part of these balance sheets.

                                       3
<PAGE>
                                       
                               ELECTROSCOPE, INC.

                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                           For the Three Months
                                                                            Ended December 31,
                                                                       ---------------------------
                                                                          1998              1997
                                                                       ---------         ---------
<S>                                                                    <C>               <C>
REVENUE, net                                                           $ 405,007         $ 266,530

COST OF SALES                                                            262,134           319,360
                                                                       ---------         ---------
              Gross profit                                               142,873           (52,830)
                                                                       ---------         ---------
OPERATING EXPENSES:
    Sales and marketing                                                  374,938           396,329
    General and administrative                                           194,621           327,610
    Research and development                                             170,266           122,957
                                                                       ---------         ---------
              Total operating expenses                                   739,825           846,896
                                                                       ---------         ---------
INCOME (LOSS) FROM OPERATIONS                                           (596,952)         (899,726)

OTHER INCOME:
    Interest income                                                       73,585           101,388
    Other income (expense)                                                (1,203)              (82)
                                                                       ---------         ---------
NET INCOME (LOSS)                                                      $(524,570)        $(798,420)
                                                                       ---------         ---------
                                                                       ---------         ---------

NET INCOME (LOSS) PER SHARE (Note 2):
    Basic and diluted net income (loss) per common share               $   (0.10)        $   (0.15)
                                                                       ---------         ---------
                                                                       ---------         ---------

    Basic and diluted weighted average shares used in computing
       net income (loss) per common share                              5,383,507         5,383,507
                                                                       ---------         ---------
                                                                       ---------         ---------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       4
<PAGE>

                               ELECTROSCOPE, INC.

                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                           For the Nine Months
                                                                            Ended December 31,
                                                                      -----------------------------
                                                                          1998              1997
                                                                      -----------       -----------
<S>                                                                   <C>               <C>
REVENUE, net                                                          $ 1,087,313       $   907,274

COST OF SALES                                                             772,039           906,647
                                                                      -----------       -----------
              Gross profit                                                315,274               627
                                                                      -----------       -----------
OPERATING EXPENSES:
    Sales and marketing                                                 1,021,430         1,455,635
    General and administrative                                            708,458         1,076,864
    Research and development                                              436,273           512,737
                                                                      -----------       -----------
              Total operating expenses                                  2,166,161         3,045,236
                                                                      -----------       -----------
INCOME (LOSS) FROM OPERATIONS                                          (1,850,887)       (3,044,609)

OTHER INCOME:
    Interest income                                                       229,904           325,089
    Other income (expense)                                                 (5,683)          (22,668)
                                                                      -----------       -----------
NET INCOME (LOSS)                                                     $(1,626,666)      $(2,742,188)
                                                                      -----------       -----------
                                                                      -----------       -----------

NET INCOME (LOSS) PER SHARE (Note 2):
    Basic and diluted net income (loss) per common share              $     (0.30)      $     (0.51)
                                                                      -----------       -----------
                                                                      -----------       -----------

    Basic and diluted weighted average shares used in computing
       net income (loss) per common share                               5,383,507         5,375,488
                                                                      -----------       -----------
                                                                      -----------       -----------
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       5
<PAGE>

                               ELECTROSCOPE, INC.


                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     For the Nine Months
                                                                                      Ended December 31,
                                                                                -----------------------------
                                                                                    1998              1997
                                                                                -----------       -----------
<S>                                                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                           $(1,626,666)      $(2,742,188)
    Adjustments to reconcile net income (loss) to net cash
       used in operating activities-
          Depreciation and amortization                                             185,110           153,437
          Amortization of discount                                                 (133,028)         (163,268)
          Common stock issued in lieu of cash                                           ---           100,750
          Changes in operating assets and liabilities-
              Accounts receivable                                                    51,453            10,485
              Inventory                                                              78,494          (101,241)
              Prepaid expenses and other assets                                     (32,841)           14,100
              Accounts payable                                                      (31,859)         (258,414)
              Accrued compensation and other current accrued
                 liabilities                                                        (31,094)         (235,881)
              Customer deposits                                                      (4,376)          (11,073)
              Other liabilities                                                      (1,940)          (10,602)
                                                                                -----------       -----------
                 Net cash used in operating activities                           (1,546,747)       (3,243,895)
                                                                                -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of equipment                                                          (30,014)         (181,621)
    Patent costs                                                                    (12,467)          (16,449)
    Purchases of short-term investments, net                                     (6,564,592)       (1,611,743)
    Sale of short-term investments                                                6,652,000         9,023,999
                                                                                -----------       -----------
                 Net cash provided by investing activities                           44,927         7,214,186
                                                                                -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repurchase of common stock                                                          ---          (156,715)
                                                                                -----------       -----------
                 Net cash provided by / (used in) financing activities                  ---          (156,715)
                                                                                -----------       -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                             (1,501,820)        3,813,576

CASH AND CASH EQUIVALENTS, beginning of period                                    2,525,026           527,015
                                                                                -----------       -----------
CASH AND CASH EQUIVALENTS, end of period                                        $ 1,023,206       $ 4,340,591
                                                                                -----------       -----------
                                                                                -----------       -----------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       6
<PAGE>

                               ELECTROSCOPE, INC.


                 NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

                                DECEMBER 31, 1998
                                   (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. The product monitors 
for stray electrical energy during laparoscopic surgical procedures and 
deactivates the electrosurgical unit when this energy creates potentially 
dangerous conditions, thus enhancing patient safety for patients who undergo 
laparoscopic surgery. The product can be used with most electrosurgical 
instruments available today in the USA. The Company has also developed and is 
marketing its own line of integrated, shielded, five-millimeter diameter 
electrosurgical instruments that incorporate the Company's proprietary 
technology. The Company's sales to date have been made principally in the 
United States.

The Company has incurred losses since its inception and has an accumulated 
deficit of $11,750,643 at December 31, 1998. The Company's operations are 
subject to certain risks and uncertainties, which include the following: 
commercial acceptance of the Company's products will have to occur in the 
marketplace, in significant volumes, before the Company can attain profitable 
operations; the possibility of continued substantial operating losses and 
limitations on future capital availability; current and potential competitors 
with greater financial, technical and marketing resources; the potential 
impact of a failure to comply with or changes in government regulations; 
manufacturing being subject to Governmental regulations; dependence on new 
product development and intellectual property rights; dependence on single 
source suppliers and sub-contractors; the Company's limited manufacturing 
experience for large-scale production; potential fluctuations in future 
quarterly results; uncertainty of future efforts at health care reform; 
product liability risk and limited insurance coverage against such risk; 
potential risks associated with the Year 2000 computer software issue; and 
dependence on key personnel.

(2)  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.

     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.

                                       7
<PAGE>

     CASH AND CASH EQUIVALENTS

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

     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, 1998, the 
Company's short-term investments consist primarily of government and 
corporate securities that 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.

     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>
<CAPTION>
                                           December 31,       March 31,
                                              1998              1998
                                           ------------       --------
<S>                                        <C>                <C>
        Raw materials                       $383,787          $448,486
        Finished goods                       151,043           234,520
                                           ------------       --------
                                             534,830           683,006
        Less- Reserve for obsolescence       (70,318)         (140,000)
                                           ------------       --------
                                            $464,512          $543,006
                                           ------------       --------
                                           ------------       --------
</TABLE>

     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 PRONOUNCEMENTS

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 adopted this standard in its fiscal quarter ended 
December 31, 1997, and such adoption had no impact on reported loss per share.

The Company adopted the provisions of SFAS 130, "Reporting Comprehensive 
Income" as of April 1, 1998. SFAS 130 establishes standards for reporting and 
display of comprehensive income and its components in a full set of 
general-purpose financial statements. The adoption of this statement had no 
impact on the Company's financial statements as there are no differences 
between Net Income and Comprehensive Income.

                                       8
<PAGE>

     BASIC AND DILUTED LOSS PER COMMON SHARE

Loss per common share and common equivalent share for all fiscal periods 
presented is computed using the sum of the weighted average number of shares 
of common stock outstanding. Fully diluted shares that would result from the 
exercise of common stock options and warrants would be anti-dilutive and thus 
are not presented.

(3)    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. The Company received a Quality System Regulation Inspection in 
November 1998, with no regulatory follow-up indicated. The Company believes 
it has already corrected any points noticed in the inspection.

Because of seasonal and other factors, including the continuing development 
of the sales force and the initial sale to the Company's new stocking 
distributor, the results of operations for the quarter ended December 31, 
1998, should not be taken as indicative of the results of operations for all 
or any part of the balance of the year.

(4)   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, 1998, filed on Form 10-KSB on 
June 15, 1998.

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.






                                       9
<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 enhance patient safety for patients who undergo 
minimally invasive electrosurgery (MIS). The Company believes that its 
patented Electroshield(R) Monitoring System offers surgeons significant 
advantages compared to other electrosurgical systems in use because of its 
ability to dynamically monitor for stray electrical energy out of the view of 
the surgeon during MIS procedures. The Company has received five FDA Form 
510(k) notifications for its products and obtained patent protection for its 
products' basic shielding and monitoring features.

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 is continuing to develop a sales 
force in the U.S. consisting primarily of independent sales representative 
organizations. The Company is continuing to modify its marketing strategies 
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. The Company is developing a line 
of disposable products and is exploring additional product development and 
acquisition opportunities from third parties.

The Company believes that it has sufficient cash resources on hand to attract 
and continue to attract the additional human resources necessary to manage 
the development of the sales force, the increased marketing efforts, and the 
general growth and operation of the business. There can be no assurance 
however, that the Company's efforts in this area will result in increased 
revenues or the achievement of profitability or positive cash flow. As a 
result of several factors, the Company's common stock has been delisted from 
the Nasdaq National Market System and trades on the Over the Counter Bulletin 
Board. (See Liquidity and Capital Resources)

Statements herein that 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 are forward looking statements within the meaning of 
the Private Securities Litigation Reform Act of 1995. These forward looking 
statements involve substantial risks and uncertainties that may cause actual 
results to differ materially from those indicated by the forward looking 
statements. These forward looking statements should be read in conjunction 
with the risk factors discussed in the Form 10-KSB filed by the Company on 
June 15, 1998. All forward looking statements 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.

       HISTORICAL PERSPECTIVE AND OUTLOOK

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. As this development program proceeded it became 
apparent that the merging of electrical and mechanical engineering skills in 
the instrument development process for the Company's patented, integrated 
electrosurgical instruments was more difficult than was expected at first. As 
a result, the development of the instruments with the Electroshield-Registered 
Trademark- AEM-Registered Trademark- technology was not completed until 1995. 
The Company introduced integrated instruments for the Electroshield-Registered 
Trademark- Monitoring System (EMS) in November 1995.

The installed base of the Company's EM-2 Electronic Monitor has continued to 
increase since the introduction of the product in 1994. The Company expects 
that the sales of electrosurgical instruments and accessories should increase 
as additional EM-2 Electronic Monitors are installed. The Company continues 
to 

                                       10
<PAGE>

devote resources to increasing market awareness of the inherent hazards of 
monopolar electrosurgery. There can be no assurance, however, as to the rate 
of market acceptance of the EMS. Given 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 EM-2+ EMS, the 
Company has diversified its R&D efforts to 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 supplement a direct sales effort with an 
exclusive distribution agreement with Valleylab, Inc., then a division of 
Pfizer, Inc. This agreement did not meet its objectives and has been 
terminated by the Company. The Company has developed its own direct sales 
force, made up of Company employees and independent sales representative 
organizations, which together provide market presence in many of the major 
market areas in the United States. In addition, in Fiscal Year 1998 the 
Company began to sell through independent distributors in Australia, Canada 
and Taiwan. The Company continually evaluates the performance of the 
independent distributors and representative organizations and made several 
changes in the quarter ended December 31, 1998. These changes included the 
signing of the Company's new stocking distributor in the US which resulted in 
a $70,000 increase in revenue. The Company believes that such measures, 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. There can be no assurance that these measures, or any 
others that the company may adopt, will result in either increased revenues 
or profitable operations.

The Company has incurred losses from operations since inception and has an 
accumulated deficit of $11,750,643 as of December 31, 1998. Due to the need 
to continue the development and training of a sales and distribution network, 
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, (including first time stocking orders should those occur) through the 
independent sales network and the development of its internal sales force, 
resulting in increased sales expenses. Such fluctuations may be significant, 
and may result in the Company experiencing significant fluctuations in Gross 
Margins and/or operating at a loss in any one period even after a period of 
profitability.

     RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS 
ENDED DECEMBER 31, 1997.

NET REVENUES. Revenues for the three months ended December 31, 1998 increased 
by 52% to $405,007 compared to the three months ended December 31, 1997. The 
increase is attributable to the Company continuing to develop its own sales 
and marketing efforts, the signing of a new stocking distributor in the US 
(which placed initial stocking orders of approximately $70,000) and the 
introduction of disposable products at the end of September 1997. While there 
can be no assurance that the arrangement with the stocking distributor will 
result in recurring business, the Company believes that the distributor will 
be an effective marketing partner in its territory. The contract with the 
stocking distributor does not provide a right of return for the products sold 
to the distributor. The Company anticipates revenue growth for the fiscal 
year ended March 31, 1999 ("Fiscal Year 1999"), compared to fiscal year 1998 
as the Company's continuing development of an independent sales force and 
marketing program mature and result in increased market coverage and 
increased sales. The Company also introduced new bipolar products at the end 
of the quarter ended December 31, 1998, which are expected to contribute 
modest revenue growth in the remainder of fiscal year 1999. There can be no 
assurance, however, that the Company's sales and marketing efforts will lead 
to increased revenues, or that the new products will find adequate market 
acceptance to generate significant revenues.

GROSS PROFIT. Gross profit for the three months ended December 31, 1998 was 
$142,873, compared to the three months ended December 31, 1997 in which Costs 
of Sales exceeded Sales by $52,830. Gross profit as a percentage of revenue 
(Gross Margin) was 35% for the three months ended December 31, 1998. Gross 
profit and gross margin can be expected to fluctuate from quarter to quarter, 
as a result of product sales mix and sales volume. The increase in gross 
profit is partly due to product mix and volumes, and partly to lower overhead 
spending levels in the manufacturing facility. Gross margins, while improved, 
are expected to be higher at higher levels of production and sales. These 
higher gross margins are currently not being achieved 

                                       11
<PAGE>

because of the expenses related to manufacturing capacity, which is currently 
underutilized and other, generally fixed, manufacturing costs.

SALES AND MARKETING EXPENSES. Sales and marketing expenses for the three 
months ended December 31, 1998 decreased by 5% to $374,938 compared to the 
three months ended December 31, 1997. In the three months ended December 31, 
1997 the Company continued to invest in a significant marketing 
communications effort to increase market awareness of the hazards inherent in 
monopolar electrosurgery, with no comparable levels of spending in the three 
months ended December 31, 1998. Offsetting some of the reductions in 
marketing spending was the redeployment of certain employees from 
administrative and operations assignments to marketing and customer support 
roles. The Company believes that sales and marketing expenses will decrease 
as a percentage of net revenue with increasing sales volume. There can be no 
assurance, however, that such decrease will occur.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for 
the three months ended December 31, 1998 decreased by 41% to $194,621 
compared to the three months ended December 31, 1997. The reduction is due to 
expense reduction programs, especially for outside services, the resignation 
of the former Chief Executive Officer (who has been replaced at least on an 
interim basis by the Vice President of Engineering) and lower spending on 
directors fees, plus the transfer of certain personnel to marketing and 
customer support functions. In addition, in the three months ended December 
1997 the Company was incurring significant legal fees in connection with its 
successful defense against the shareholder lawsuit, which was ultimately 
dismissed by a Federal Court in March of 1998.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the 
three months ended December 31, 1998 increased by 39% to $170,266 compared to 
the three months ended December 31, 1997. The increase was attributable to 
the write-off of certain legal fees incurred in connection with the 
exploration of a possible patent on a product the Company has decided not to 
pursue.

     RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED 
DECEMBER 31, 1997.

NET REVENUES. Revenues for the nine months ended December 31, 1998 increased 
by 20% to $1,087,313 compared to the nine months ended December 31, 1997. The 
increase is attributable to the Company continuing to develop its own sales 
and marketing efforts, the signing of the first stocking distributor in the 
US (which placed initial stocking orders of approximately $70,000) and the 
introduction of disposable products at the end of September 1997. While 
there can be no assurance that the arrangement with the stocking distributor 
will result in recurring business, the Company believes that the distributor 
will be an effective marketing partner in its territory. The contract with 
the stocking distributor does not provide a right of return for the products 
sold to the distributor. The Company anticipates revenue growth for the 
fiscal year ended March 31, 1999 ("Fiscal Year 1999") compared to fiscal year 
1998 as the Company's efforts to develop an independent sales force and 
marketing program mature and result in increased market coverage and 
increased sales. The Company also introduced new bipolar products at the end 
of the quarter ended December 31, 1998, which are expected to contribute 
modest revenue growth in the remainder of fiscal year 1999. There can be no 
assurance, however, that the Company's sales and marketing efforts will lead 
to increased revenues, or that the new products will find adequate market 
acceptance to generate significant revenues.

GROSS PROFIT. Gross profit for the nine months ended December 31, 1998 was 
$315,274 compared to only minimal Gross Profits in the nine months ended 
December 31, 1997. Gross profit as a percentage of revenue (Gross Margin) 
increased to 29% for the nine months ended December 31, 1998 compared to 0.1% 
for the nine months ended December 31, 1997. The increase in gross profit is 
the result of reductions in manufacturing headcount and spending reduction 
programs plus the increase in sales. 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, while improved, 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 and other, generally 
fixed, manufacturing costs.

                                       12
<PAGE>

SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine 
months ended December 31, 1998 decreased by 30% to $1,021,430 compared to the 
nine months ended December 31, 1997. The decrease is the result of the 
Company's change from a primarily direct sales force to one made up of 
independent sales representatives who are paid on a commission basis only. In 
the nine months ended December 31, 1997 the Company made substantial 
investments in a significant marketing communications effort to increase 
market awareness of the hazards inherent in monopolar electrosurgery, with no 
comparable level of expenditures in the nine months ended December 31, 1998. 
Some of the reduced levels of spending were offset by the reassignment of 
certain personnel from Administration and Operations to marketing and 
customer support roles. The Company believes that sales and marketing 
expenses will decrease as a percentage of net revenue with increasing sales 
volume. There can be no assurance, however, that such decrease will occur.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for 
the nine months ended December 31, 1998 decreased by 34% to $708,458 compared 
to the nine months ended December 31, 1997. In the nine months ended December 
31, 1997 the Company incurred significant legal expenses in connection with 
its successful defense against the shareholder lawsuit, which was dismissed 
by a Federal Court in March 1998. In addition, certain administrative 
personnel were reassigned to marketing support functions in the nine months 
ended December 31, 1998.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the 
nine months ended December 31, 1998 decreased by 15% to $436,273 compared to 
the nine months ended December 31, 1997. The decrease is the result of a 
decrease in headcount, reflecting completion of certain engineering projects, 
a reduction in the utilization of outside consulting services and reduced 
consumption of inventories and supplies used in testing and modifying 
products. Some of the decreases were offset by the write-off of certain legal 
fees incurred in connection with the exploration of a possible patent on a 
product the Company has decided not to pursue.

     LIQUIDITY AND CAPITAL RESOURCES

The Company has historically satisfied its cash requirements principally 
through sales of Common Stock which approximated $17.2 million through 
December 31, 1998, and, to a substantially lesser degree, funds provided by 
sales of the Company's products. Historically, these funds have been used for 
working capital and general corporate purposes including research and 
development. 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 the remaining net proceeds from the Company's initial public offering 
are currently invested primarily in money market instruments, government and 
corporate securities, the Company may also use a substantial portion of those 
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.

Capital expenditures historically have been relatively minor, and have 
consisted of specialized equipment, manufacturing equipment, office equipment 
and leasehold improvements. The Company anticipates that its cash on hand 
will be sufficient to fund its operations, working capital and capital 
requirements for at least the next twelve months.

The Company's Common Stock trades on the Over the Counter Bulletin Board. The 
Company's Common Stock formerly traded on the Nasdaq National Market. On 
October 12, 1998, the Company's Common Stock was delisted from the Nasdaq 
National Market for failure to meet certain listing requirements.

     INCOME TAXES

Net operating loss carryforwards totaling approximately $10.2 million are 
available to reduce taxable income as of December 31, 1998. 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.

                                       13
<PAGE>

     YEAR 2000

Computer programs that rely on two-digit date codes to perform computations 
and decision-making functions may cause computer systems to malfunction due 
to an inability of such programs to interpret the date code "00" as the year 
2000. The Company has determined that none of the products of the Company are 
subject to Year 2000 problems. The Company has conducted an audit of the 
software and hardware used by the Company to assess the scope of Year 2000 
problems, if any. The results of that audit indicate that the hardware and 
software used by the Company is in substantial compliance with Year 2000 
requirements. The cost to replace hardware and software that was found not to 
be Year 2000 compliant is estimated to be less than $10,000. The Company is 
also conducting a review of its major suppliers of goods and services to 
understand their level of compliance with Year 2000 issues. Responses have 
been received from some suppliers indicating their level of compliance with 
the Year 2000 issue, however not all responses have been received. The 
Company believes that most of its service providers will represent that in 
general they are Year 2000 compliant or will be before the year 2000. If in 
its survey of significant vendors of materials, the Company becomes concerned 
that one or more vendors either are not Year 2000 compliant or have what the 
Company believes to be inadequate programs to become Year 2000 compliant to 
the extent that the Company believes that such issues may significantly 
impact the operations of the Company, the Company will develop additional 
programs to reduce or eliminate its reliance on such vendors.

The Company does not have control over many Year 2000 problems. The nature of 
its business and the interconnected systems of businesses, utilities, 
government agencies and even individuals could affect the Company's ability 
to provide products to our customers, and by extension, could affect the 
Company's financial position. The Company is making concerted efforts to 
evaluate the Year 2000 issue as it may affect the Company, but because of the 
interrelationships with its vendors, and their relationships with their 
vendors, it will not be possible to certify with 100% assurance that the 
Company will not be subject to some problems resulting from the Year 2000 
issue. The Company does not believe at this time that these potential 
problems will materially impact the ability of the Company to continue its 
operations, however, no assurance can be given that this will be the case.






                                       14
<PAGE>

PART II.            OTHER INFORMATION

         ITEM 1     -      Not Applicable

         ITEM 2     -      Not Applicable

         ITEM 3     -      Not Applicable

         ITEM 4     -      Not Applicable

         ITEM 5     -      Not Applicable

         ITEM 6     -      EXHIBITS AND REPORTS ON FORM 8-K

                         (a)  Exhibits


                              27  - Financial Data Schedule.

                         (b)  The Registrant did not file any reports on Form
                              8-K during the quarter ended December 31, 1998.












                                       15
<PAGE>

                                    SIGNATURE


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>
<CAPTION>
          Name                        Title                           Date
----------------------------   ------------------------------   ----------------
<S>                            <C>                              <C>
    /s/ Karl D. Hawkins        Chief Financial Officer          January 26, 1999
----------------------------   (Principal Accounting Officer)
     Karl D. Hawkins           

</TABLE>









                                       16
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                               Sequentially
    Exhibit No.               Description                      Numbered Page
------------------    -------------------------------------    -------------
<S>                   <C>                                      <C>
       27             Financial Data Schedule                        18
</TABLE>










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