<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, 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             SHARES  5,383,507
       --------------------------             -----------------
                 Class                        (outstanding at October 23, 1998)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

YES        NO  X
   ----      ----

<PAGE>

                                 ELECTROSCOPE, INC.

                                    FORM 10-QSB

                      FOR THE QUARTER ENDED SEPTEMBER 30, 1998


                                       INDEX

<TABLE>
<CAPTION>
                                                                        Page
                                                                       Number
                                                                       ------
<S>                                                                    <C>

PART I.        FINANCIAL INFORMATION

     ITEM 1    -    Condensed Interim Financial Statements . . . . . .    3
               -    Condensed Balance Sheets as of September 30,
                      1998 and March 31, 1998. . . . . . . . . . . . .    3
               -    Condensed Statements of Operations for 
                      the Three Months Ended September 30, 1998 
                      and 1997 . . . . . . . . . . . . . . . . . . . .    4
                    Condensed Statements of Operations for
                      the Six Months Ended September 30, 1998 
                      and 1997 . . . . . . . . . . . . . . . . . . . .    5
               -    Condensed Statements of Cash Flows for
                      the Six Months Ended September 30, 1998 
                      and 1997 . . . . . . . . . . . . . . . . . . . .    6
               -    Notes to Condensed Interim Financial
                      Statements . . . . . . . . . . . . . . . . . . .    7

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

PART II.       OTHER INFORMATION

     ITEM 4    -    Submission of Matters to a Vote of Security 
                    Holders. . . . . . . . . . . . . . . . . . . . . .   15

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

     SIGNATURE       . . . . . . . . . . . . . . . . . . . . . . . . .   16

     EXHIBIT INDEX   . . . . . . . . . . . . . . . . . . . . . . . . .   17

</TABLE>

                                       2

<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1    -    CONDENSED INTERIM FINANCIAL STATEMENTS


                                 ELECTROSCOPE, INC.

                              CONDENSED BALANCE SHEETS
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                 September 30,      March 31,
                       ASSETS                        1998             1998
                       ------                    -------------     -----------
<S>                                              <C>               <C>

CURRENT ASSETS:
  Cash and cash equivalents                         $ 1,315,898      $ 2,525,026
  Short-term investments                              4,059,033        3,674,729
  Accounts receivable, net of allowance 
     for doubtful accounts of $7,500 and 
     $7,500, respectively                               154,672          321,150
  Inventory, net of reserve for obsolescence 
     of $70,318 and $140,000, respectively              495,452          543,006
  Prepaid expenses                                       76,903           63,259
                                                   -------------     -----------
       Total current assets                           6,101,958        7,127,170
                                                   -------------     -----------

EQUIPMENT, at cost:
  Furniture, fixtures and equipment                     647,423          621,607
  Less- Accumulated depreciation                       (447,650)        (380,659)
                                                   -------------     -----------
       Equipment, net                                   199,773          240,948
                                                   -------------     -----------
PATENTS, net of accumulated amortization 
       of $14,380 and $11,830 respectively              156,153          186,454
OTHER ASSETS                                             14,077           11,450
                                                   -------------     -----------
       Total assets                                $  6,471,961      $ 7,566,022
                                                   -------------     -----------
                                                   -------------     -----------


                        LIABILITIES AND SHAREHOLDERS' EQUITY
                        ------------------------------------

CURRENT LIABILITIES:
  Accounts payable                                 $    131,302      $    99,430
  Accrued compensation                                  134,612          150,635
  Other accrued liabilities                             174,928          191,871
  Customer deposits                                          --            4,376
  Other current liabilities                              21,025            6,639
                                                   -------------     -----------
       Total current liabilities                        461,867          452,951
                                                   -------------     -----------
LONG-TERM LIABILITIES:
     Other long-term liabilities                          4,447            5,331
                                                   -------------     -----------
       Total long-term liabilities                        4,447            5,331
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value, 10,000,000 
     shares authorized, no shares outstanding                --               --
  Common stock, no par value, 100,000,000 
     shares authorized, 5,383,507 and 5,383,507 
     shares outstanding, respectively                16,941,317       16,941,317
  Warrants to purchase common stock                     290,400          290,400
  Accumulated deficit                               (11,226,070)     (10,123,977)
                                                   -------------     -----------
       Total shareholders' equity                     6,005,647        7,107,740
                                                   -------------     -----------
       Total liabilities and shareholders' equity  $  6,471,961      $ 7,566,022
                                                   -------------     -----------
                                                   -------------     -----------

</TABLE>

          The accompanying notes are an integral part of these statements.

                                       3

<PAGE>

                                 ELECTROSCOPE, INC.

                         CONDENSED STATEMENTS OF OPERATIONS
                                    (Unaudited)


<TABLE>
<CAPTION>

                                                        For the Three Months
                                                         Ended September 30,
                                                      -------------------------
                                                         1998           1997
                                                      ---------     -----------
<S>                                                   <C>           <C>
REVENUE, net                                          $ 368,428     $   329,179

COST OF SALES                                           244,787         312,323
                                                      ---------     -----------
       Gross profit                                     123,641          16,856
                                                      ---------     -----------
OPERATING EXPENSES:
  Sales and marketing                                   330,524         497,567
  General and administrative                            253,605         340,674
  Research and development                              138,964         180,105
                                                      ---------     -----------
       Total operating expenses                         723,093       1,018,346
                                                      ---------     -----------
INCOME (LOSS) FROM OPERATIONS                          (599,452)     (1,001,490)

OTHER INCOME:
  Interest income                                        77,339         110,690
  Other income (expense)                                 (4,111)         (7,090)
                                                      ---------     -----------
NET INCOME (LOSS)                                     $(526,224)    $  (897,890)
                                                      ---------     -----------
                                                      ---------     -----------
NET INCOME (LOSS) PER SHARE (Note 2):
  Basic and diluted net income (loss) per 
     common share                                     $   (0.10)    $     (0.17)
                                                      ---------     -----------
                                                      ---------     -----------
  Basic and diluted weighted average shares 
     used in computing net income (loss) per 
     common share                                     5,383,507       5,368,007
                                                      ---------     -----------
                                                      ---------     -----------

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       4

<PAGE>

                              ELECTROSCOPE, INC.

                     CONDENSED STATEMENTS OF OPERATIONS
                                 (Unaudited)


<TABLE>
<CAPTION>

                                                         For the Six Months
                                                         Ended September 30,
                                                    ---------------------------
                                                        1998           1997
                                                    -----------     -----------
<S>                                                 <C>             <C>

REVENUE, net                                        $   682,306     $   640,743

COST OF SALES                                           509,905         587,285
                                                    -----------     -----------
       Gross profit                                     172,401          53,458
                                                    -----------     -----------
OPERATING EXPENSES:
  Sales and marketing                                   646,492       1,059,306
  General and administrative                            513,837         749,254
  Research and development                              266,007         389,779
                                                    -----------     -----------
       Total operating expenses                       1,426,336       2,198,339
                                                    -----------     -----------
INCOME (LOSS) FROM OPERATIONS                        (1,253,935)     (2,144,881)

OTHER INCOME:
  Interest income                                       156,319         223,639
  Other income (expense)                                 (4,477)        (22,524)
                                                    -----------     -----------
NET INCOME (LOSS)                                   $(1,102,093)    $(1,943,766)
                                                    -----------     -----------
                                                    -----------     -----------
NET INCOME (LOSS) PER SHARE (Note 2):
  Basic and diluted net income (loss) per 
     common share                                   $     (0.21)    $     (0.36)
                                                    -----------     -----------
                                                    -----------     -----------
  Basic and diluted weighted average shares 
     used in computing net income (loss) per 
     common share                                     5,383,507       5,371,479
                                                    -----------     -----------
                                                    -----------     -----------

</TABLE>

      The accompanying notes are an integral part of these statements.

                                       5

<PAGE>

                                 ELECTROSCOPE, INC.

                         CONDENSED STATEMENTS OF CASH FLOWS
                                    (Unaudited)

<TABLE>
<CAPTION>

                                                         For the Six Months
                                                         Ended September 30,
                                                    ---------------------------
                                                        1998           1997
                                                    -----------     -----------
<S>                                                 <C>             <C>

CASH FLOWS FROM OPERATING ACTIVITIES: 
  Net income (loss)                                 $(1,102,093)    $(1,943,766)
  Adjustments to reconcile net income 
     (loss) to net cash used in 
     operating activities-
       Depreciation and amortization                     89,743          93,770
       Amortization of discount                         (90,452)       (130,569)
       Common stock issued in lieu of cash                   --         100,750
       Inventory Reserves                                    --         (9,653)
       Loss on retirement of assets                      22,633              --
       Changes in operating assets and liabilities-
         Accounts receivable                            166,478         (28,297)
         Inventory                                       47,554        (159,653)
         Accrued Interest and other current assets      (13,644)         42,765
         Other assets                                    (2,627)             --
         Accounts payable                                31,872         (81,219)
         Accrued compensation and other accrued
          liabilities                                   (18,580)       (229,072)
         Customer deposits                               (4,376)         (4,486)
         Other liabilities                                 (884)         (3,320)
                                                    -----------     -----------
           Net cash used in operating activities       (874,376)     (2,352,750)
                                                    -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment                                (29,818)       (174,411)
  Patent costs                                          (11,694)        (11,897)
  Purchases of short-term investments-net            (4,540,240)     (1,611,743)
  Sale of short-term investments                      4,247,000       8,383,999
                                                    -----------     -----------
           Net cash (used in) provided by 
            investing activities                       (334,752)      6,585,948
                                                    -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repurchase of common stock                                 --        (156,715)
                                                    -----------     -----------
           Net cash used in financing activities             --        (156,715)
                                                    -----------     -----------
NET (DECREASE) INCREASE IN CASH AND CASH 
  EQUIVALENTS                                        (1,209,128)      4,076,483

CASH AND CASH EQUIVALENTS, beginning of period        2,525,026         527,015
                                                    -----------     -----------
CASH AND CASH EQUIVALENTS, end of period            $ 1,315,898     $ 4,603,498
                                                    -----------     -----------
                                                    -----------     -----------

</TABLE>

       The accompanying notes are an integral part of these statements.

                                       6

<PAGE>

                                 ELECTROSCOPE, INC.

                  NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

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

The Company has incurred losses since its inception and has an accumulated 
deficit of $11,226,070 at September 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.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                       7

<PAGE>

      CASH AND CASH EQUIVALENTS

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

     SHORT-TERM INVESTMENTS

As required under Statement of Financial Accounts Standards No. 115, 
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 
115) management determines the appropriate classification of its investments 
in debt securities at the time of purchase.  At September 30, 1998, the 
Company's short-term investments consist primarily of government and 
corporate securities that the Company classifies as held-to-maturity.  

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

     INVENTORY

Inventory consists primarily of component parts and raw materials, and is 
valued at the lower of cost (first-in, first-out basis) or market.  Inventory 
consists of the following:

<TABLE>
<CAPTION>

                                     September 30,     March 31,
                                          1998           1998
                                     -------------     ---------
<S>                                  <C>               <C>
     Raw materials                      $ 437,442      $ 448,486
     Finished goods                       128,328        234,520
                                        ---------      ---------
                                          565,770        683,006
     Less- Reserve for obsolescence       (70,318)      (140,000)
                                        ---------      ---------
                                        $ 495,452      $ 543,006
                                        ---------      ---------
                                        ---------      ---------

</TABLE>

     INCOME TAXES

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

     NEW ACCOUNTING PRONOUNCEMENTS

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

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

                                       8

<PAGE>

     BASIC AND DILUTED LOSS PER COMMON SHARE

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

(3)  COMMITMENTS AND CONTINGENCIES

The Company is subject to regulation by the United States Food and Drug 
Administration ("FDA").  The FDA provides regulations governing the 
manufacture and sale of the Company's products and regularly inspects the 
Company and other manufacturers to determine their compliance with these 
regulations.  As of September 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 the results of operations for the quarter ended September 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 Exchange 
Commission, for the fiscal year ended March 31, 1998, filed on Form 10-KSB on 
June 15, 1998.

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

                                       9

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

     GENERAL

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

The Company recognizes that market awareness and acceptance of the hazards 
inherent in monopolar electrosurgery and acceptance of the Company's products 
to address such hazards has been slower to occur than the Company had 
believed would be the case.  The Company is continuing to develop a sales 
force in the U.S. consisting primarily of independent sales representative 
organizations. The Company 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 
EM-2 product and its accessories.  The Company is developing a line of 
disposable products and intends to explore additional product development and 
acquisition opportunities from third parties.

The Company believes that it has sufficient cash resources on hand to attract 
and continue to attract the additional human resources necessary to manage 
the development of the sales force, the increased marketing efforts, and the 
general growth 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 a result of several factors the Company's 
Common Stock has been delisted from the Nasdaq National Market System and 
trades on the Over the Counter Bulletin Board, as previously announced.  (See 
Liquidity and Capital Resources)

Statements herein that are not historical facts, including statements about 
the Company's strategies and expectations about new and existing products and 
market demand and acceptance of new and existing products, technologies and 
opportunities, market and industry segment growth, and return on investments 
in products and markets are forward looking statements within the meaning of 
the Private Securities Litigation Reform Act of 1995.  These forward looking 
statements involve substantial risks and uncertainties that may cause actual 
results to differ materially from those indicated by the forward looking 
statements.  These forward looking statements should be read in conjunction 
with the risk factors discussed in the Form 10-KSB filed by the Company on 
June 15, 1998.  All forward looking statements are based on information 
available to the Company on the date of this document and the Company assumes 
no obligation to update such forward looking statements.

     HISTORICAL PERSPECTIVE AND OUTLOOK

The Company was organized in February 1991.  During its first two years, the 
Company developed the EM-2 Electronic Monitor and adaptive sheaths to work 
with traditional electrosurgical instruments.  During this period, the 
Company applied for patents with the United States Patent Office and 
conducted clinical trials.  The Company also continued work on its patent 
applications and formulated development plans for shielded hinged tip and 
fixed tip electrosurgical instruments.  As this development program proceeded 
it became apparent that the merging of electrical and mechanical engineering 
skills in the instrument development process for the Company's patented, 
integrated electrosurgical instruments was more difficult than was expected 
at first.  As a result, the development of the instruments with the 
Electroshield-Registered Trademark- AEM-Registered Trademark- technology was 
not completed until 1995. The Company introduced integrated instruments for 
the Electroshield-Registered Trademark- Monitoring System (EMS) in November 
1995.

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

                                       10
<PAGE>
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 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 $11,226,070 as of September 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 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, 1998 COMPARED TO THE THREE MONTHS 
ENDED SEPTEMBER 30, 1997.

NET REVENUES.  Revenues for the three months ended September 30, 1998 were 
$368,428, compared to $329,179 for the three months ended September 30, 1997, 
an increase of 12%.  The increase is attributable to the Company continuing 
to develop its own sales and marketing efforts and the introduction of 
disposable products at the end of September 1997.  The Company anticipates 
revenue growth for the fiscal year ended March 31, 1999 ("Fiscal Year 1999"), 
compared to fiscal year 1998 as the Company's continuing development of an 
independent sales force and marketing program mature and result in increased 
market coverage and increased sales.  The company also 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.  Gross profit for the three months ended September 30, 1998 was 
$123,641, compared to the three months ended September 30, 1997 gross profit 
of $16,856, an increase of 633%.  Gross profit as a percentage of revenue 
(Gross Margin) increased to 33.6% for the three months ended September 30, 
1998 from 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. The increase in gross profit is 
partly due to product mix and volumes, and partly to lower spending levels in 
the manufacturing facility.  Gross margins, while improved, are expected to 
be higher at higher levels of production and sales.  These higher gross 
margins are currently not being achieved because of the expenses related to 
manufacturing capacity, which is currently underutilized and other, generally 
fixed, manufacturing costs.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses for the three months
ended September 30, 1998 were $330,524 compared to $497,567 for the three months
ended September 30, 1997, a decrease of 34%.  The decrease is the result of the 
Company's change from a primarily direct sales force to one made up of 
independent sales representatives who are paid on a commission basis only.  In 
the three months ended September 30, 1997 the Company invested in a significant 
marketing communications effort to increase market awareness of the hazards 
inherent in monopolar electrosurgery, with no comparable levels of spending in 
the three months ended September 30, 1998.  Offsetting some of the reductions 
in marketing spending was the redeployment of certain employees from 
administrative and operations assignments to marketing and 

                                       11
<PAGE>
customer support roles.  The Company believes that sales and marketing 
expenses will decrease as a percentage of net revenue with increasing sales 
volume.  There can be no assurance, however, that such decrease will occur.

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses for 
the three months ended September 30, 1998 were $253,605, compared to $340,674 
for the three months ended September 30, 1997, a decrease of 26%.  The 
reduction is due to expense reduction programs, especially for outside 
services and lower spending on directors fees, plus the transfer of certain 
personnel to marketing and customer support functions.  In addition, in the 
three months ended September 1997 the Company was incurring significant legal 
fees in connection with its successful defense against the shareholder law 
suit, which was ultimately dismissed by a Federal Court in March of 1998.

RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses for the 
three months ended September 30, 1998 were $138,964 compared to $180,105 for 
the three months ended September 30, 1997, a decrease of 23%.  The primary 
contributors to the lower level of spending were reductions in headcount due 
to completion of some engineering projects, lower levels of inventory 
consumption required to test and modify products and lower levels of outside 
services, related again to completed projects.

     RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE SIX MONTHS ENDED 
SEPTEMBER 30, 1997.

NET REVENUES.  Revenues for the six months ended September 30, 1998 were 
$682,306, compared to $640,743 for the six months ended September 30, 1997, 
an increase of 6.5%. The increase is attributable to the Company continuing 
to develop its own sales and marketing efforts and the introduction of 
disposable products at the end of September 1997.  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 that 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, 1998 was 
$172,401, compared to the gross profit of $53,458 for the six months ended 
September 30, 1997, an increase of 222%.  Gross profit as a percentage of 
revenue (Gross Margin) increased to 25.3 % for the six months ended September 
30, 1998 compared to 8.3% for the six months ended September 30, 1997.  The 
increase in gross profit is the result of reductions in manufacturing 
headcount and spending reduction programs.  Gross profit and gross margin can 
be expected to fluctuate from quarter to quarter, as a result of product 
sales mix and sales volume.  Gross margins, while improved, are expected to 
be higher at higher levels of production and sales.  These higher gross 
margins are currently not being achieved because of the expenses related to 
manufacturing capacity, which is currently underutilized and other, generally 
fixed, manufacturing costs.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses for the six 
months ended September 30, 1998 were $646,492 compared to $1,059,306 for the 
six months ended September 30, 1997 a decrease of 39%.  The decrease is the 
result of the Company's change from a primarily direct sales force to one 
made up of independent sales representatives who are paid on a commission 
basis only.   In the six months ended September 30, 1997 the Company made 
substantial investments in a significant marketing communications effort to 
increase market awareness of the hazards inherent in monopolar 
electrosurgery, with no comparable level of expenditures in the six months 
ended September 30, 1998.  Some of the reduced levels of spending were offset 
by the reassignment of certain personnel from Administration and Operations 
to marketing and customer support roles.  The Company believes that sales and 
marketing expenses will decrease as a percentage of net revenue with 
increasing sales volume.  There can be no assurance, however, that such 
decrease will occur.

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses for 
the six months ended September 30, 1998 were $513,837 compared to $749,254 
for the six months ended September 30, 1997, a decrease of 31%.  In the six 
months ended September 30, 1997 the Company incurred significant legal 

                                       12
<PAGE>
expenses in connection with its successful defense against the shareholder 
lawsuit, which was dismissed by a Federal Court in March 1998.  In addition, 
certain administrative personnel were reassigned to marketing support 
functions in the six months ended September 30, 1998. 

RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses for the 
six months ended September 30, 1998 were $266,007 compared to $389,779 for 
the six months ended September 30, 1997, a decrease of 32%.  The decrease is 
the result of a decrease in headcount, reflecting the completion of certain 
engineering projects, a reduction in the utilization of outside consulting 
services and reduced consumption of inventories and supplies used in testing 
and modifying products.

     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, 1998, and, to a substantially lesser degree, funds provided by 
sales of the Company's products.  Historically, these funds have been used 
for working capital and general corporate purposes including research and 
development.  The Company may use working capital to build inventories to 
ensure that orders can be filled in a timely manner, to support the sales 
efforts of the Company's sales force and to accommodate anticipated growth.  
While the remaining net proceeds from the Company's initial public offering 
are currently invested primarily in money market instruments, government and 
corporate securities, the Company may also use a substantial portion of those 
net proceeds for the acquisition or development of complementary products or 
businesses, if such acquisition or development opportunities arise.  The 
Company currently has no understanding, commitment or agreement with respect 
to any such acquisition or development program.  

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

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

     INCOME TAXES

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

     YEAR 2000

Computer programs that rely on two-digit date codes to perform computations 
and decisions-making functions may cause computer systems to malfunction due 
to an inability of such programs to interpret the date code "00" as the year 
2000. The Company has determined that none of the products of the Company are 
subject to Year 2000 problems.  The Company is conducting an audit of the 
software and hardware used by the Company to assess the scope of Year 2000 
problems, if any. The Company is also conducting a review of its major 
suppliers of goods and services to understand their level of compliance with 
Year 2000 issues.  Both of these reviews are expected to be completed during 
the three months ended December 31, 1998.

The Company does not anticipate that its review of internal hardware and 
software will reveal material problems, as the Company uses current versions 
of software provided by major software vendors.  Likewise, the Company does 
not anticipate that any material issues will arise as a result of its review 
of hardware, as the Company utilizes hardware that is less than a year old 
for the most part.  The Company has adequate financial resources to replace 
any hardware and/or software that is determined not to be Year 2000 
compliant.  

                                       13
<PAGE>

The Company believes that most of its service providers will represent that 
they are Year 2000 compliant.  If in its survey of significant vendors of 
materials, the Company becomes concerned that one or more vendors either is 
not Year 2000 compliant or has what the Company believes to be inadequate 
programs to become Year 2000 compliant, the Company will develop additional 
programs to reduce or eliminate its reliance on such vendors.

                                       14

<PAGE>

PART II.  OTHER INFORMATION

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

           (a)  On August 21, 1998 the Annual Meeting of the shareholders of
                the Company was held.  The purpose of the meeting was to
                elect Directors for the coming year 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:

<TABLE>
<CAPTION>
                     Name                     Votes For    Votes Withheld
                     ----                     ---------    --------------
                     <S>                      <C>          <C>
                     Patrick F. Crane         4,506,637        11,005
                     Vernon D. Kornelsen      4,446,469        71,173
                     David W. Newton          4,505,637        12,005
                     Roger C. Odell           4,445,369        72,273
                     C. Randle Voyles         4,506,637        11,005

</TABLE>

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

<TABLE>
                         <S>                      <C>
                         Votes For:               4,507,576
                         Votes Against:               4,800
                         Abstain:                     5,266
</TABLE>

ITEM 6  -  EXHIBITS AND REPORTS ON FORM 8-K

           (a)  Exhibits

                27  - Financial Data Schedule.

           (b)  On August 26, 1998 the Registrant filed a report with the
                SEC on Form 8-K, and under Item 5 reported that the Board of
                Directors accepted the resignation of Patrick F. Crane as an
                Officer and the resignation of C. Randle Voyles as a
                Director, both resignations effective immediately.  The
                Registrant also reported that David W. Newton was appointed
                as Acting Chief Executive Officer.

           (c)  On September 30, 1998 the Registrant filed a report with the
                SEC on Form 8-K and under Item 5 reported that the
                Registrant had been notified by Nasdaq that it was not in
                compliance with certain requirements for continuing listing
                on the Nasdaq National Market System.  The Registrant also
                reported that it believed that the company would be delisted
                from the Nasdaq National Market System on October 12, 1998.

                                       15

<PAGE>

                                     SIGNATURE

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


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

/s/ Karl D. Hawkins           Chief Financial Officer          October 27, 1998
----------------------        (Principal Accounting Officer)
    Karl D. Hawkins


                                       16

<PAGE>

                                    EXHIBIT INDEX

<TABLE>
<CAPTION>

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

</TABLE>

                                       17