<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 September 30, 1997


             For the transaction period from __________ to________

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

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

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

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

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

CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 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                  SHARES  5,383,507
          --------------------------         ---------------------------------
                     Class                   (outstanding at October 24, 1997)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

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




                                       1

<PAGE>

                              ELECTROSCOPE, INC.
                                       
                                  FORM 10-QSB
                                       
                   FOR THE QUARTER ENDED SEPTEMBER 30, 1997
                                       
                                       
                                     INDEX

                                                                          Page
                                                                         Number
                                                                         ------

PART I.   FINANCIAL INFORMATION

   ITEM 1 - Condensed Interim Financial Statements                           3
          - Condensed Balance Sheets as of September 30,
              1997 and March 31, 1997                                        3
          - Condensed Statements of Operations for
              the Three Months Ended September 30, 1997 and 1996             4
          - Condensed Statements of Operations for
              the Six Months Ended September 30, 1997 and 1996               5
          - Condensed Statements of Cash Flows for
               the Six Months Ended September 30, 1997 and 1996              6
          - Notes to Condensed Interim Financial
               Statements                                                    7

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

PART II.  OTHER INFORMATION

   ITEM 1   Legal Proceedings                                               16

   ITEM 2 - Changes in Securities                                           16

   ITEM 4 - Submission of Matters to a Vote of Security Holders             17

   ITEM 6 - Exhibits and Reports on Form 8-K                                17

   SIGNATURES                                                               18

   EXHIBIT INDEX                                                            19


                                       2

<PAGE>

PART I.   FINANCIAL INFORMATION

ITEM 1 -  CONDENSED INTERIM FINANCIAL STATEMENTS

                              ELECTROSCOPE, INC.

                           CONDENSED BALANCE SHEETS

<TABLE>
                                                               September 30,    March 31,
                                                                    1997          1997
                                                               -------------   -----------
                                                                (Unaudited)
<S>                                                            <C>             <C>
                                ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                     $ 4,603,498    $   527,015
  Short-term investments                                          2,989,740      9,631,427
  Accounts receivable, net of allowance for doubtful
    accounts of $10,000 and $25,000, respectively                   183,743        155,446
  Inventory, net of reserve for obsolescence of $92,943
    and $102,596, respectively                                      691,002        521,696
  Prepaid expenses                                                   68,012        110,777
                                                                -----------    -----------
          Total current assets                                    8,535,995     10,946,361
                                                                -----------    -----------
EQUIPMENT, at cost:
  Furniture, fixtures and equipment                                 647,952        503,871
  Less - Accumulated depreciation                                  (321,145)      (258,983)
                                                                -----------    -----------
          Equipment, net                                            326,807        244,888
                                                                -----------    -----------
PATENTS, net of accumulated amortization 
  of $10,550 and $9,270 respectively                                148,695        138,078
OTHER ASSETS                                                         11,450         11,450
                                                                -----------    -----------
          Total assets                                          $ 9,022,947    $11,340,777
                                                                -----------    -----------
                                                                -----------    -----------

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                              $   246,463    $   327,682
  Accrued compensation                                              136,996        155,908
  Other accrued liabilities                                         244,135        454,295
  Customer deposits                                                  15,737         20,223
  Other current liabilities                                           6,639          6,639
                                                                -----------    -----------
          Total current liabilities                                 649,970        964,747
                                                                -----------    -----------
LONG-TERM LIABILITIES:
    Other long-term liabilities                                      14,273         17,593
                                                                -----------    -----------
          Total long-term liabilities                                14,273         17,593
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value, 10,000,000 shares 
    authorized, no shares outstanding                                                                  -            -
  Common stock, no par value, 100,000,000 shares authorized,
    5,383,507 and 5,389,986 shares outstanding, respectively     16,941,317     16,997,282
  Warrants to purchase common stock                                 290,400        290,400
  Accumulated deficit                                            (8,873,013)    (6,929,245)
                                                                -----------    -----------
          Total shareholders' equity                              8,358,704     10,358,437
                                                                -----------    -----------
          Total liabilities and shareholders' equity            $ 9,022,947    $11,340,777
                                                                -----------    -----------
                                                                -----------    -----------
</TABLE>

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


                                       3

<PAGE>

                                ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF OPERATIONS
                                 (Unaudited)


                                                     For the Three Months
                                                      Ended September 30,
                                                   ------------------------
                                                      1997          1996
                                                   -----------   ----------

REVENUE, net                                       $   329,179   $  359,287

COST OF SALES                                          312,323      315,330
                                                   -----------   ----------
          Gross profit                                  16,856       43,957
                                                   -----------   ----------
OPERATING EXPENSES:
  Sales and marketing                                  497,567      237,550
  General and administrative                           340,674      187,937
  Research and development                             180,105      159,128
                                                   -----------   ----------
          Total operating expenses                   1,018,346      584,615
                                                   -----------   ----------

INCOME (LOSS) FROM OPERATIONS                       (1,001,490)    (540,658)

OTHER INCOME:
  Interest income                                      110,690      164,065
  Other income (expense)                                (7,090)       4,630
                                                   -----------   ----------
NET INCOME (LOSS)                                  $  (897,890)  $ (371,963)
                                                   -----------   ----------
                                                   -----------   ----------
NET INCOME (LOSS) PER SHARE (Note 3):
  Net income (loss) per common share and 
    common equivalent share                        $     (0.17)  $    (0.07)
                                                   -----------   ----------
                                                   -----------   ----------
  Shares used in computing net income (loss) per
    common share and common equivalent share         5,368,007    5,295,253
                                                   -----------   ----------
                                                   -----------   ----------

    The accompanying notes are an integral part of these statements.


                                       4

<PAGE>

                                ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF OPERATIONS
                                 (Unaudited)


                                                      For the Six Months
                                                      Ended September 30,
                                                   ------------------------
                                                       1997         1996
                                                   -----------   ----------

REVENUE, net                                       $   640,743   $  772,929

COST OF SALES                                          587,285      624,846
                                                   -----------   ----------
          Gross profit                                  53,458      148,083
                                                   -----------   ----------
OPERATING EXPENSES:
  Sales and marketing                                1,059,306      420,777
  General and administrative                           749,254      343,505
  Research and development                             389,779      285,830
                                                   -----------   ----------
          Total operating expenses                   2,198,339    1,050,112
                                                   -----------   ----------
INCOME (LOSS) FROM OPERATIONS                       (2,144,881)    (902,029)

OTHER INCOME:
  Interest income                                      223,639      172,860
  Other income (expense)                               (22,524)      11,889
                                                   -----------   ----------
NET INCOME (LOSS)                                  $(1,943,766)  $ (717,280)
                                                   -----------   ----------
                                                   -----------   ----------
NET INCOME (LOSS) PER SHARE (Note 3):
  Net income (loss) per common share and common
    equivalent share                               $     (0.36)  $    (0.15)
                                                   -----------   ----------
                                                   -----------   ----------
  Shares used in computing net income (loss) per
    common share and common equivalent share         5,371,479    4,753,035
                                                   -----------   ----------
                                                   -----------   ----------

       The accompanying notes are an integral part of these statements.


                                       5

<PAGE>

                              ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF CASH FLOWS
                                 (Unaudited)

                                                         For the Six Months
                                                         Ended September 30,
                                                     ---------------------------
                                                        1997            1996
                                                     ------------  -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                   $(1,943,766)  $   (717,280)
 Adjustments to reconcile net income (loss) to 
  net cash used in operating activities-
   Depreciation and amortization                          93,770         42,757
   Amortization of discount                             (130,569)           ---
   Common stock issued in lieu of cash                   100,750            ---
   Inventory Reserves                                     (9,653)           ---
   Changes in operating assets and liabilities-
    Accounts receivable                                  (28,297)       (77,302)
    Inventory                                           (159,653)        97,885
    Accrued Interest and other current assets             42,765       (225,963)
    Other assets                                             ---         24,959
    Accounts payable                                     (81,219)       (32,008)
    Accrued compensation and other accrued
     liabilities                                        (229,072)       (65,242)
    Customer deposits                                     (4,486)       (85,360)
    Deferred revenue                                         ---        (12,909)
    Other liabilities                                     (3,320)        (3,520)
                                                     ------------  ------------
      Net cash used in operating activities           (2,352,750)    (1,053,983)
                                                     ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of equipment                                 (174,411)       (50,436)
 Patent costs                                            (11,897)       (14,415)
 Purchases of short-term investments                  (1,611,743)   (10,469,748)
 Sale of short-term investments                        8,383,999           ---
                                                     ------------  ------------
      Net cash provided by (used in) investing 
        activities                                     6,585,948    (10,534,599)
                                                     ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                       ---    13,224,552
 Repurchase of common stock                             (156,715)           ---
 Proceeds from issuance of warrants                           ---            50
 Stock issuance costs                                         ---    (1,346,812)
                                                     ------------  ------------
      Net cash (used in) provided by financing 
        activities                                      (156,715)    11,877,790
                                                     ------------  ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   4,076,483        289,208

CASH AND CASH EQUIVALENTS, beginning of period           527,015        538,708
                                                     ------------  ------------
CASH AND CASH EQUIVALENTS, end of period             $ 4,603,498   $    827,916
                                                     ------------  ------------
                                                     ------------  ------------



       The accompanying notes are an integral part of these statements.


                                       6
<PAGE>

                              ELECTROSCOPE, INC.
                                       
                                       
                NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
                                       
                              SEPTEMBER 30, 1997
                                  (Unaudited)


(1)  ORGANIZATION AND NATURE OF BUSINESS

Electroscope, Inc. (the "Company") was incorporated as a Colorado corporation 
on February 1, 1991.  The Company designs, develops, manufactures and markets 
a patented monopolar electrosurgical shielding system and integrated surgical 
instruments, which are designed to provide greater safety to patients who 
undergo laparoscopic surgery.  The products can be used with most 
electrosurgical instruments available today in the 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.  At the end of the 
three months ended September 30, 1997 the Company introduced a disposable 
scissors product.  The Company's sales to date have been made principally in 
the United States and have been made primarily to one customer for the past 
two fiscal years.  During the six months ended September 30, 1997, sales to 
this customer were not significant.

The Company has incurred losses since its inception and has an accumulated 
deficit of $8,873,013 at September 30, 1997.  During fiscal year 1997, which 
ended March 31, 1997, the formerly exclusive distributor of the Company's 
products did not purchase products from the Company in sufficient amounts to 
maintain the distributor's exclusivity.  As a result, the sales, marketing 
and market development activities conducted by this distributor have now 
become the responsibility of the Company.  The Company's operations are 
subject to certain risks and uncertainties, which 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; the 
need to develop a distribution channel for the Company's products; current 
and potential competitors with greater financial, technical and marketing 
resources; management's plans for growth and expansion; and the Company's 
limited manufacturing experience for large-scale production.  In addition, a 
class action lawsuit regarding the Company's initial public offering was 
filed against the Company and certain individuals associated with the Company 
on June 4, 1997.  The Company believes that the claims are without merit and 
intends to vigorously defend itself against the claims filed (See Part II, 
Item 1, Legal Proceedings).

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

                                       7
<PAGE>

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

(2)  INITIAL PUBLIC OFFERING

In June 1996, the Company completed an initial public offering (IPO) of 
1,200,000 shares of its common stock at a price per share of $10.50, of which 
all shares were sold by the Company.  After underwriting discounts, 
commissions and other expenses, net proceeds to the Company from the offering 
were approximately $11.4 million.

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

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

     CASH AND EQUIVALENTS

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

     SHORT-TERM INVESTMENTS

As required under Statement of Financial Accounts Standards No. 115, 
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 
115) management determines the appropriate classification of its investments 
in debt securities at the time of purchase.  At September 30, 1997, the 
Company's short-term investments consist primarily of government and 
corporate securities which the Company classifies as held-to-maturity.

                                       8
<PAGE>

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:

                                          September 30,      March 31,
                                              1997             1997  
                                          -------------      ---------
          Raw materials                    $198,703          $266,299
          Work in process                   236,457           225,353
          Finished goods                    348,785           132,640
                                           --------          --------
                                            783,945           624,292
          Less- Reserve for obsolescence    (92,943)         (102,596)
                                           --------          --------
                                           $691,002          $521,696
                                           --------          --------
                                           --------          --------

     INCOME TAXES

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

     NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board, ("FASB") issued 
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". 
This statement establishes standards for computing and presenting earnings 
per share.  The Company will adopt this standard for its third fiscal quarter 
ending December 31, 1997, and does not expect that adoption will have a 
material impact on reported earnings per share and required financial 
statement disclosures.

     LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE

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

                                       9
<PAGE>

$10.50 per share for stock options and warrants) regardless of whether they 
are antidilutive.  Options and warrants for the Company's common stock issued 
other than in this one-year period have been excluded as they are 
antidilutive.  For the first and second quarters of fiscal years 1997, 
(subsequent to the effective date of the IPO) and 1998, the Company has 
reported earnings per share in accordance with Accounting Principles Board 
Opinion No. 15, "Earnings per Share".

(4)  COMMITMENTS AND CONTINGENCIES

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

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

Because of seasonal and other factors including the continuing development of 
the sales force and the changes in management discussed in Item 2, Historical 
Perspective and Outlook, Results of Operations, the results of operations for 
the quarter ended September 30, 1997, should not be taken as an indication of 
the results of operations for all or any part of the balance of the year.

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

(5)  MANAGEMENT'S REPRESENTATIONS

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

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

                                      10
<PAGE>

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

     GENERAL

The Company manufactures and markets a line of proprietary electrosurgical 
products that are designed to provide greater safety to patients who undergo 
minimally invasive electrosurgery (MIS).  The Company believes that its 
patented Electroshield Monitoring System offers surgeons significant 
advantages compared to other electrosurgical systems in use because of its 
ability to monitor dynamically for stray electrical energy out of the view of 
the surgeon during MIS procedures.  The Company has received three FDA Form 
510(k) notifications for its products and obtained patent protection for its 
products' basic shielding and monitoring features.

In September 1995, the Company entered into an exclusive worldwide 
Distribution Agreement (the "Agreement") with Valleylab, part of the Hospital 
Products Group of Pfizer, Inc., pursuant to which Valleylab was required to 
make minimum purchases through calendar year 1998 in order to retain its 
exclusive distribution rights. Valleylab did not meet its minimum purchase 
requirements in calendar 1996 and the Agreement has become a non-exclusive 
distribution arrangement for calendar year 1997.  To replace the Valleylab 
distribution resources, the Company has hired and trained a direct sales 
force, and has begun to contract with a network of independent sales 
representative organizations across the U.S.  In addition, the Company has 
engaged a specialized marketing communications firm to broaden the awareness 
of the hazards inherent in monopolar electrosurgery.

The Company recognizes that market awareness and acceptance of the hazards 
inherent in monopolar electrosurgery and acceptance of the Company's products 
to address such hazards has been slower to occur than the Company had 
believed would be the case.  The Company has modified its marketing 
strategies, including the engagement of the marketing communications firm 
referred to above and the significant expansion of the Company's sales and 
marketing functions, to address the issues of market acceptance of the 
technology.  The Company has also undertaken efforts to broaden the product 
line offerings beyond the original EM-2 product and its accessories.  The 
Company is developing a line of disposable products, introduced the first of 
such disposable products at the end of the second quarter of Fiscal Year 1998 
and intends to explore additional product development and acquisition 
opportunities from third parties.

The Company recognizes that its efforts to develop its own sales force, 
including both direct sales representatives and independent representative 
organizations, will require increased use of cash and additional management 
resources beyond those which were necessary while Valleylab had an exclusive 
right to distribute the Company's products.  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.

As more fully discussed in Part II, Item 1, Legal Proceedings, a class action 
lawsuit has been filed in the United States District Court in Minnesota.  
While the Company believes that this suit is without merit, defense against 
such suit will take management time, legal resources and could result in 
significant expenditures.  Should the lawsuit result in a significant payment 
to the plaintiff(s) or significant legal fees beyond the coverage of such 
fees provided by insurance carried by the Company, such payments could have a 
material adverse impact on the Company's liquidity.

                                      11
<PAGE>

Statements herein that are not historical facts, including statements about 
the Company's strategies and expectations about new and existing products, 
technologies and opportunities, market and industry segment growth, demand 
and acceptance of new and existing products, and return on investments in 
products and markets are forward looking statements that involve substantial 
risks.

     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 believes 
such installed base has the potential for increasing as the sales 
representatives of the Company and the network of independent sales 
representatives become familiar with the EMS and sell the system to their 
customers.  The approximate number of EM-2 Electronic Monitors sold were 567 
and 257 in the fiscal years ended March 31, 1996 and 1997, respectively.  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 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 broadened its R&D efforts 
to possibly reduce its dependence on products involving AEM technology.

The Company believed that the most cost effective way to educate the market 
to the hazards of monopolar electrosurgery and to generate significant 
revenues for the Company was to utilize the Valleylab sales force, 
supplemented by support from the Company.  As noted above, this Agreement did 
not meet its objectives and the Company has taken steps to develop its own 
direct sales force, made up of Company employees and independent sales 
representative organizations, which together provide market presence in most 
of the major market areas in the United States.  In addition, the Company has 
hired a Chief Executive Officer with substantial experience in the medical 
device industry. 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.  The Company believes that selling the Company's 
products directly will generate additional gross profits as the Company will 
be retaining the margins formerly recorded by the Company's distributor.  
Management does not expect that profitable revenue levels will be reached in 
fiscal year 1998, 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 $8,873,013 as of September 30, 1997.  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 

                                      12
<PAGE>

quarterly basis as a result of the size and frequency of sales 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 operating at a loss in any one period even 
after a period of profitability.

     RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS 
ENDED SEPTEMBER 30, 1996.

NET REVENUES.  Revenues for the three months ended September 30, 1997, were 
$329,179, compared to $359,287 for the three months ended September 30, 1996, 
a decrease of 8%.  The decrease is attributable to the Company having to 
develop its own sales and marketing efforts to replace those provided by 
Valleylab in the second quarter of fiscal year 1997.  The Company anticipates 
revenue growth for the fiscal year ended March 31, 1998 ("Fiscal Year 1998") 
compared to fiscal year 1997 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 1998 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.  Gross profit for the three months ended September 30, 1997 was 
$16,856, a decrease of $27,101 from the three months ended September 30, 1996 
gross profit of $43,957.  Gross profit as a percentage of revenue (Gross 
Margin) decreased from 12.2% for the three months ended September 30, 1996 to 
5.1% in the three months ended September 30, 1997.  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 $497,567 for 
the three months ended September 30, 1997 increased by $260,017 (a 109% 
increase) compared to $237,550 for the three months ended September 30, 1996. 
The increase is the result of the Company's efforts to develop its own 
direct sales force and group of independent sales representatives after the 
exclusive distribution agreement with Valleylab converted to a non-exclusive 
arrangement. The Company is also investing in a significant marketing 
communications effort to increase market awareness of the hazards inherent in 
monopolar electrosurgery.  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 
increased $152,737 (81%) from $187,937 for the three months ended September 
30, 1996 to $340,674 for the three months ended September 30, 1997.  This 
increase was primarily due to the addition of a Chief Executive Officer, the 
hiring of a new Chief Financial Officer, increased legal expenses, primarily 
related to the shareholder lawsuit filed in June of 1997. (See Part II, Item 
1, Legal Proceedings), costs associated with the annual meeting of 
shareholders and directors compensation.

RESEARCH AND DEVELOPMENT.  Research and development expenses increased to 
$180,105 from $159,128 for the three months ended September 30, 1996, a 13% 
increase, reflecting the Company's ongoing product development efforts 
related to both the current product line and new products, one of which was 
introduced at the end of the quarter ended September 30, 1997, and others 
which are anticipated to be introduced later in fiscal year 1998.

                                      13
<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES

The Company has historically satisfied its cash requirements principally 
through sales of Common Stock which approximated $17.1 million through 
September 30, 1997, and, to a substantially lesser degree, funds provided by 
sales of the Company's products.  In the first quarter of Fiscal Year 1997, 
the Company completed its initial public offering, raising net proceeds of 
$11.4 million, and raised an additional $585,000 in cash from the exercise of 
warrants issued in connection with previous sales of Common Stock. 
Historically, these funds have been used for working capital and general 
corporate purposes including research and development.  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.

     INCOME TAXES

Net operating loss carryforwards totaling approximately $6.3 million are 
available to reduce taxable income as of September 30, 1997.  The net 
operating loss carryforwards expire, if not previously utilized, at various 
dates beginning in the year 2006.  The Company has not paid income taxes 
since its inception.  The Tax Reform Act of 1986 and other income tax 
regulations contain provisions which may limit the net operating loss 
carryforwards available to be used in any given year, if certain events 
occur, including changes in ownership interests.  The Company has established 
a valuation allowance for the entire amount of its deferred tax asset since 
inception due to its history of operating losses.

     RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE SIX MONTHS ENDED 
SEPTEMBER 30, 1996.

NET REVENUES.  Revenues for the six months ended September 30, 1997, were 
$640,743, compared to $772,929 for the six months ended September 30, 1996, a 
decrease of 17%.  The decrease is attributable to the Company developing its 
own sales and marketing efforts to replace those provided by Valleylab in the 
first six months of fiscal year 1997.  The Company anticipates revenue growth 
for the fiscal year ended March 31, 1998 ("Fiscal Year 1998") compared to 
fiscal year 1997 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 1998 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.  Gross Profit for the six months ended September 30, 1997 was 
$53,458 a decrease of $94,625 from the six months ended September 30, 1996 
gross profit of $148,083.  Gross profit as a percentage of revenue (Gross 
Margin) decreased from 19.2% for the six months ended September 30, 1996 to 
8.3% in the six months ended September 30, 1997.  Gross profit and gross 
margin can be expected to fluctuate from quarter to quarter, as a result of 
product sales mix and sales volume.  

                                      14
<PAGE>

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 sales and other, generally 
fixed, manufacturing costs.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses of $1,059,306 for 
the six months ended September 30, 1997 increased by $638,529 (a 152% 
increase) compared to $420,777 for the six months ended September 30, 1996.  
The increase is the result of the Company's efforts to develop its own direct 
sales force and group of independent sales representatives after the 
exclusive distribution agreement with Valleylab converted to a non-exclusive 
arrangement.  In addition, the Company made substantial investments in 
developing its own marketing programs to replace the marketing efforts of 
Valleylab.  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 
increased $405,749 (118%) from $343,505 for the six months ended September 
30, 1996 to $749,254 for the six months ended September 30, 1997.  This 
increase was primarily due to the addition of a Chief Executive Officer, the 
hiring of a new Chief Financial Officer, increased legal expenses, primarily 
related to the shareholder lawsuit filed in June of 1997. (See Part II, Item 
1, Legal Proceedings), costs associated with the annual shareholders meeting, 
directors compensation and increased spending on regulatory matters 
associated with new product development.

RESEARCH AND DEVELOPMENT.  Research and development expenses increased 
$103,949 from $285,830 for the six months ended September 30, 1996, a 36% 
increase, reflecting the Company's ongoing product development efforts 
related to both the current product line and new products, one of which was 
introduced at the end of the quarter ended September 30, 1997, and others 
which are anticipated to be introduced later in fiscal year 1998.






                                      15
<PAGE>

PART II.   OTHER INFORMATION

     ITEM 1      --  LEGAL PROCEEDINGS

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

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

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

The Company intends to vigorously defend itself against this litigation.  The 
Company has filed a Motion to Dismiss the suit, and expects a hearing on the 
motion in the fourth quarter of Fiscal Year 1998.  The lawsuit may have a 
material adverse effect on the business and financial condition of the 
Company in terms of legal fees and costs incurred to defend the claims, the 
possibility of an award of damages, and the loss of management time needed to 
deal with the lawsuit.

     ITEM 2      --  CHANGES IN SECURITIES

                 (a)  On August 15, 1997, The Board of Directors approved the 
issuance of 16,000 shares of common stock as compensation for certain outside 
directors for the Fiscal Year ended March 31, 1998.  The Board also approved 
the issuance of 15,000 shares of common stock as payment in full for services 
rendered by a vendor in the prior fiscal year.  These transactions were exempt 
from registration under the Securities Act of 1933 by virtue of the 
provisions of Section 4(2) thereof.

     ITEM 3      --  Not Applicable

                                      16
<PAGE>

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

             (a)  On August 15, 1997 the Annual Meeting of the shareholders of 
                  the Company was held.  The purpose of the meeting was to 
                  elect Directors for the coming year, to approve the adoption 
                  of the 1997 Stock Option Plan, and to ratify the appointment 
                  of Arthur Andersen LLP as independent public accountants for 
                  the Company.  Results of the voting were:
             
                  (1)  To Elect Directors:
                       Name                    Votes For     Votes Withheld
                       ----                    ---------     --------------
                       David C. Auth           4,298,440         14,731
                       Patrick F. Crane        4,298,440         14,731
                       David W. Newton         4,142,803        170,368
                       Roger C. Odell          4,141,603        171,568
                       Donald R. Temple        4,217,882         95,289
                       Joe W. Tippett          4,222,832         90,339
                       Robert D. Tucker        4,293,490         19,681
                       C. Randle Voyles        4,298,435         14,736

                  (2)  To Approve the Adoption of the 1997 Stock Option Plan 
                       which authorizes options to purchase 800,000 Shares:

                       Votes For:           2,328,791
                       Votes Against:         859,891
                       Abstain:                12,850
                       Not Voted:           1,111,639

                  (3)  To Ratify the appointment of Arthur Andersen LLP as
                       independent public accountants for the Company:

                       Votes For:           4,297,198
                       Votes Against:           8,473
                       Abstain:                 7,500

     ITEM 5      --  Not Applicable

     ITEM 6      --  EXHIBITS AND REPORTS ON FORM 8-K

             (a) Exhibits

                 11(a) - Computation of Net Income (Loss) per Common Share and
                 Common Equivalent Share for the Three Months ended September
                 30, 1997.

                 11(b) - Computation of Net Income (Loss) per Common Share and
                 Common Equivalent Share for the Six Months ended September 30, 
                 1997.

                 27 - Financial Data Schedule.

             (b) The Registrant did not file any reports on Form 8-K during the
                 quarter ended September 30, 1997.
                                       
                                      17
<PAGE>
                                       
                                  SIGNATURES



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



         Name                       Title                        Date
---------------------   --------------------------------   ------------------
 /s/ Karl D. Hawkins        Chief Financial Officer         October 30, 1997
   Karl D. Hawkins       (Principal Accounting Officer)



                                      18
<PAGE>
                                       
                                 EXHIBIT INDEX




                                                                  Sequentially
Exhibit No.  Description                                         Numbered Page
-----------  -----------                                         -------------
  11(a)      Computation of Net Income (Loss) per
               Common Share and Common Equivalent Share
               for the three months ended September 30, 1997
               and 1996                                                20

  11(b)      Computation of Net Income (Loss) per
               Common Share and Common Equivalent Share
               For the Six months ended September 30, 1997
               And 1996                                                21


  27         Financial Data Schedule                                   22







                                      19