<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 June 30, 1998


               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 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 August 11, 1998)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

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

                                     1
<PAGE>

                                 ELECTROSCOPE, INC.
                                          
                                    FORM 10-QSB
                                          
                        FOR THE QUARTER ENDED JUNE 30, 1998
                                          
                                          
                                       INDEX


                                                                         Page
                                                                        Number
                                                                        ------

PART I.    UNAUDITED FINANCIAL INFORMATION

      ITEM 1    -    Condensed Interim Financial Statements . . . . . .     3
                -    Condensed Balance Sheets as of June 30,
                     1998 and March 31, 1998 . . . . .. . . . . . . . .     3
                -    Condensed Statements of Operations for 
                     the Three Months Ended June 30, 1998 and 1997. . .     4
                -    Condensed Statements of Cash Flows for
                     the Three Months Ended June 30, 1998 and 1997. . .     5
                -    Notes to Condensed Interim Financial
                     Statements . . . . . . . . . . . . . . . . . . . .     6

      ITEM 2    -    Management's Discussion and Analysis
                     of Financial Condition and Results of Operations .     9

PART II.   OTHER INFORMATION

      ITEM 1         Legal Proceedings. . . . . . . . . . . . . . . . .    13

      ITEM 6    -    Exhibits and Reports on Form 8-K . . . . . . . . .    13

      SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14

      EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . .    15

                                      2
<PAGE>

PART I      FINANCIAL INFORMATION

ITEM 1 -  CONDENSED INTERIM FINANCIAL STATEMENTS
                                          
      
                                ELECTROSCOPE, INC.


                              CONDENSED BALANCE SHEETS
                                    (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 June 30,      March 31,
                      ASSETS                                       1998           1998
                                                              --------------  -------------

<S>                                                            <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents                                     $ 1,492,421    $ 2,525,026
  Short-term investments                                          4,280,078      3,674,729
  Accounts receivable, net of allowance for doubtful
     accounts of $7,040 and $7,500, respectively                    188,903        321,150
  Inventory, net of reserve for obsolescence of $70,318
     and $140,000, respectively                                     496,417        543,006
  Prepaid expenses                                                  102,359         63,259
                                                              --------------  -------------
          Total current assets                                    6,560,178      7,127,170
                                                              --------------  -------------
EQUIPMENT, at cost:
  Furniture, fixtures and equipment                                 625,350        621,607
  Less - Accumulated depreciation                                  (413,796)      (380,659)
                                                              --------------  -------------
          Equipment, net                                            211,554        240,948
                                                              --------------  -------------
PATENTS, net of accumulated amortization of $13,036 
  and $11,830, respectively                                         174,562        186,454
OTHER ASSETS                                                         11,450         11,450
                                                              --------------  -------------
          Total assets                                          $ 6,957,744    $ 7,566,022
                                                              --------------  -------------
                                                              --------------  -------------

                  LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                              $    98,235    $    99,430
  Accrued compensation                                              108,801        150,635
  Other accrued liabilities                                         208,506        191,871
  Customer deposits and other accrued liabilities                     4,828         11,015
                                                              --------------  -------------
          Total current liabilities                                 420,370        452,951
                                                              --------------  -------------
LONG-TERM LIABILITIES:
     Other long-term liabilities                                      5,503          5,331
                                                              --------------  -------------
          Total long-term liabilities                                 5,503          5,331
                                                              --------------  -------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
                                                                           
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                                           (10,699,846)   (10,123,977)
                                                              --------------  -------------
          Total shareholders' equity                              6,531,871      7,107,740
                                                              --------------  -------------
          Total liabilities and shareholders' equity            $ 6,957,744    $ 7,566,022
                                                              --------------  -------------
                                                              --------------  -------------
</TABLE>

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

                                     3
<PAGE>

                                 ELECTROSCOPE, INC.


                         CONDENSED STATEMENTS OF OPERATIONS
                                    (Unaudited)


<TABLE>
<CAPTION>
                                                    For the Three Months
                                                       Ended June 30,
                                                 --------------------------
                                                     1998           1997
                                                 -----------    -----------
<S>                                              <C>            <C>
REVENUE, net                                       $ 313,878    $   311,564

COST OF SALES                                        265,118        274,962
                                                 -----------    -----------
          Gross profit                                48,760         36,602
                                                 -----------    -----------
OPERATING EXPENSES:
  Sales and marketing                                315,968        561,741
  General and administrative                         260,232        408,579
  Research and development                           127,043        209,675
                                                 -----------    -----------
          Total operating expenses                   703,243      1,179,995
                                                 -----------    -----------
INCOME (LOSS) FROM OPERATIONS                       (654,483)    (1,143,393)

OTHER INCOME:
  Interest income                                     78,980        112,949
  Other income (expense)                                (366)       (15,433)
                                                 -----------    -----------
NET INCOME (LOSS)                                  $(575,869)   $(1,045,877)
                                                 -----------    -----------
                                                 -----------    -----------
NET INCOME (LOSS) PER SHARE (Note 2):
  Basic and diluted net income (loss) per 
     common share                                     $(0.11)        $(0.19)
                                                 -----------    -----------
                                                 -----------    -----------
  Basic and diluted weighted average shares 
   used in computing net income (loss) 
   per common share                                5,383,507      5,374,950
                                                 -----------    -----------
                                                 -----------    -----------
</TABLE>

          The accompanying notes are an integral part of these statements.

                                     4
<PAGE>

                                 ELECTROSCOPE, INC.


                         CONDENSED STATEMENTS OF CASH FLOWS
                                    (Unaudited)

<TABLE>
<CAPTION>

                                                                       For the Three Months
                                                                          Ended June 30,
                                                                  -----------------------------
                                                                        1998           1997
                                                                  -------------- --------------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 
  Net income (loss)                                                 $   (575,869)  $ (1,045,877)
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities-
       Depreciation and amortization                                      49,877         33,462
       Amortization of discount                                          (39,678)      (109,005)
       Common stock issued as stock bonus                                    -           40,000
       Inventory reserves                                                (69,682)           -  
       Changes in operating assets and liabilities-
          Accounts receivable                                            132,707        (60,626)
          Inventory                                                      116,271        (85,004)
          Other assets                                                   (39,100)        25,240
          Accounts payable                                                (1,195)       (84,957)
          Accrued compensation, Customer deposits and other 
            accrued liabilities                                          (31,217)      (208,738)
                                                                  -------------- --------------
          Net cash used in operating activities                         (457,886)    (1,495,505)
                                                                  -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment                                                  (3,743)       (98,696)
  Patent costs                                                            (5,305)        (4,484)
  Purchases of short-term investments                                 (2,877,671)            --
  Sale of short-term investments                                       2,312,000      8,099,999
                                                                  -------------- --------------
          Net cash used in investing activities                         (574,719)     7,996,819
                                                                  -------------- --------------
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                  (1,032,605)     6,344,599

CASH AND CASH EQUIVALENTS, beginning of period                         2,525,026        527,015
                                                                  -------------- --------------
CASH AND CASH EQUIVALENTS, end of period                            $  1,492,421   $  6,871,614
                                                                  -------------- --------------
                                                                  -------------- --------------
</TABLE>

          The accompanying notes are an integral part of these statements.

                                     5
<PAGE>
                                          
                                 ELECTROSCOPE, INC.
                                          
                                          
                  NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
                                          
                                   JUNE 30, 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 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 USA.  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.

The Company has incurred losses since its inception and has an accumulated 
deficit of $10,699,846 at June 30, 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.

                                     6
<PAGE>

     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 June 30, 1998, the Company's 
short-term investments consist primarily of government 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. 
 

     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>
                                                      June 30,       March 31,
                                                        1998           1998
                                                     ----------     ----------
<S>                                                  <C>            <C>
     Raw materials                                     $395,724       $448,486
     Finished goods                                     171,011        234,520
                                                     ----------     ----------
                                                        566,735        683,006
     Less - Reserve for obsolescence                    (70,318)      (140,000)
                                                     ----------     ----------
                                                       $496,417       $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.  The 
Company's deferred tax assets have been completely offset by a 

                                     7
<PAGE>

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.

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.

     BASIC AND DILUTED LOSS PER COMMON SHARE

Loss per basic and diluted common share for all fiscal years presented is 
computed using the sum of the weighted average number of shares of common 
stock outstanding.  Fully diluted shares which 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.  As of June 30, 1998 the Company believes it was in substantial 
compliance with all known regulations.

Because of seasonal and other factors including the continuing development of 
the sales force discussed in Item 2, Historical Perspective and Outlook, 
Results of Operations, the results of operations for the quarter ended June 
30, 1998, should not be taken as an indication 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 and 
Exchange Commission, filed on Form 10-KSB on June 15, 1998.

                                     8
<PAGE>

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.

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 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 has modified 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 EM2 product and its accessories.  The Company is 
developing a line of disposable products, and intends to explore product 
development and acquisition opportunities with third parties.

The Company believes that it has sufficient cash resources on hand to 
successfully complete the development of the sales force, 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.  There can be no 
assurance however, that the Company's efforts in this area will result in 
increased revenues or the achievement of profitability. 

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.

                                     9
<PAGE>

     HISTORICAL PERSPECTIVE AND OUTLOOK

The Company was organized in February 1991.  During its first two years, the 
Company developed the EM2 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- Active Electrode Monitoring 
(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 EM2 and EM2+ Electronic Monitors has 
continued to increase since the introduction of the product in 1994.  The 
Company believes such installed base has the potential for increasing as the 
independent sales representatives of the Company 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 
EM2+ Electronic Monitors are installed.  The Company  continues to 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 EM2+ EMS, the 
Company has broadened 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 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 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. Management does not expect that profitable 
revenue levels will be reached in fiscal year 1999, and 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 $10,699,846 as of June 30, 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 through the 
independent sales network, which could 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.

                                     10
<PAGE>

     RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED 
JUNE 30, 1997.

NET REVENUES.  Revenues for the three months ended June 30, 1998, were 
$313,878, compared to $311,564 for the three months ended June 30, 1997, an 
increase of 1%.  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 expects to introduce new products during Fiscal Year 1999 which 
are expected to contribute to increased revenues.  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.  The gross profit for the three months ended June 30, 1998, of 
$48,760 increased by 33% from the three months ended June 30, 1997 gross 
profit of $36,602.  Gross profit as a percentage of revenue (gross margin) 
increased from 12% for the three months ended June 30, 1997 to 16% in the 
three months ended June 30, 1998.  The increase in gross profit is primarily 
the result of lower manufacturing overhead spending.  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.  Sales and marketing expenses of $315,968 for 
the three months ended June 30, 1998 decreased by 44% compared to $561,741 
for the three months ended June 30, 1997.  The decrease is the result of the 
Company's transition from a direct sales force to a network of independent 
sales representatives who are paid on a commission only basis.  In addition, 
in the quarter ended June 30, 1997 the Company incurred significant 
expenditures on a communications campaign to increase market awareness of the 
hazards inherent in laparoscopic surgery.  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 of 
$260,232 for the three months ended June 30, 1998 decreased by 36% compared 
to $408,579 for the three months ended June 30, 1997.  This decrease was 
primarily the result of the transfer of certain personnel to Marketing and 
Sales, and also reflected the payment in stock of a bonus to the Chief 
Executive Officer in the three months ended June 30, 1997, with no comparable 
payment in the 1998 period.

RESEARCH AND DEVELOPMENT.  Research and development expenses of $127,043 for 
the three months ended June 30, 1998 decreased by 39% compared to $209,675 
for the three months ended June 30, 1997.  This decrease reflects the reduced 
level of engineering support required for the Company's EM2+ product, offset 
in part by spending on new product development efforts. 

                                     11
<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES

The Company has historically satisfied its cash requirements principally 
through sales of Common Stock which approximated $17.3 million through June 
30, 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 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.  

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 is traded on the Nasdaq National Market.  The 
Company must also maintain certain requirements in order to be listed on 
Nasdaq.  These requirements include maintaining a specified level of net 
tangible assets, as defined, market capitalization or net income.  
Additionally, the Company must maintain a specified level of publicly traded 
shares, market value of the publicly traded shares, minimum bid price, number 
of market makers and shareholders.  On July 14, 1998 the Company was notified 
by Nasdaq that it was not in compliance with the Nasdaq listing requirements. 
The Company has 90 days to respond to Nasdaq with its plans to stay in 
compliance.  There can be no assurance that the Company will be able to 
continue to be traded on the Nasdaq National Market exchange.

     INCOME TAXES

Net operating loss carryforwards totaling approximately $10.2 million are 
available to reduce taxable income as of June 30, 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.

                                     12
<PAGE>

PART II.  OTHER INFORMATION

     ITEM 1         LEGAL PROCEEDINGS

                    THE COMPANY IS EXPOSED TO VARIOUS ASSERTED AND UNASSERTED 
CLAIMS ARISING IN THE NORMAL COURSE OF BUSINESS.  THE COMPANY DOES NOT 
BELIEVE THAT THESE CLAIMS WILL HAVE ANY MATERIAL IMPACT ON THE FINANCIAL 
POSITION, RESULTS OF OPERATIONS OR CASH FLOWS OF THE COMPANY.

     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)  On April 6, 1998, the Registrant filed a report with the 
SEC on Form 8-K, and under Item 5 reported that the Class Action Complaint 
brought against the Registrant in June of 1997 had been dismissed with 
prejudice on March 24, 1998 by the United States District Court in the 
District of Minnesota.

                    On April 17, 1998, the Registrant filed a report with the 
SEC on Form 8-K, and under Item 5 reported that a Schedule 13D had been filed 
with the SEC by Vern D. Kornelsen and CMED Partners, LLLP indicating that Mr. 
Kornelsen had obtained sole dispositive power over 36.1% of the Registrants 
outstanding Common Stock.

                    On April 30, 1998, the Registrant filed a report with the
SEC on Form 8-K, and under Item 5 reported that Vern D. Kornelsen had been
elected to the Board of Directors of the Registrant, and that Roger C. Odell had
transferred 88% of his direct holdings of the Common Stock of the Registrant to
CMED Partners, LLLP.

                                     13
<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.

           Name                  Title                       Date
----------------------------------------------------------------------------



    /s/ Karl D. Hawkins      Chief Financial Officer        August 11, 1998
-------------------------- (Principal Accounting Officer)
     Karl D. Hawkins     
          
                                     14
<PAGE>



                                   EXHIBIT INDEX




                                                            Sequentially
          Exhibit No.            Description               Numbered Page
-----------------------------------------------------------------------------

              27             Financial Data Schedule             16

                                     15