<PAGE>

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

                                   FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                  For the quarterly period ended June 30, 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                      5,352,507 SHARES    
         --------------------------               ------------------------------
                   Class                          (outstanding at July 24, 1997)

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT

YES         NO  X
    ---        ---


                                       1
<PAGE>

                               ELECTROSCOPE, INC.

                                  FORM 10-QSB

                      FOR THE QUARTER ENDED JUNE 30, 1997


                                     INDEX


                                                                       Page
                                                                      Number
                                                                      ------
PART I.   FINANCIAL INFORMATION

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

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

PART II.  OTHER INFORMATION

     ITEM 1 -  Legal Proceedings. . . . . . . . . . . . . . . . . . . . 15

     ITEM 2 -  Changes in Securities. . . . . . . . . . . . . . . . . . 15
     
     ITEM 6 -  Exhibits and Reports on Form 8-K . . . . . . . . . . . . 16

     SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

     EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . 18


                                       2



<PAGE>
PART I    FINANCIAL INFORMATION

ITEM 1 -  CONDENSED INTERIM FINANCIAL STATEMENTS

                               ELECTROSCOPE, INC.

                            CONDENSED BALANCE SHEETS

<TABLE>
                                                                   June 30,     March 31,
                        ASSETS                                       1997         1997
                                                                 -----------   -----------
                                                                 (Unaudited)
<S>                                                              <C>            <C>
CURRENT ASSETS:
     
     Cash and cash equivalents                                 $ 6,871,615    $    527,015
     Short-term investments                                      1,640,432       9,631,427
     Accounts receivable, net of allowance for doubtful                      
          accounts of $25,000 and $25,000, respectively            216,072         155,446
     Inventory, net of reserve for obsolescence of $65,349                   
          and $102,596, respectively                               606,700         521,696
     Prepaid expenses                                               85,537         110,777
                                                               -----------    ------------
                    Total current assets                         9,420,356      10,946,361
                                                               -----------    ------------
EQUIPMENT, at cost:                                                          
     Furniture, fixtures and equipment                             570,566         503,871
     Less- Accumulated depreciation                               (259,804)       (258,983)
                                                               -----------    ------------
                    Equipment, net                                 310,762         244,888
                                                               -----------    ------------
PATENTS, net of accumulated amortization of $9,910 and $9,270      141,922         138,078
          respectively                                                       
OTHER ASSETS                                                        11,450          11,450
                                                               -----------    ------------
                    Total assets                               $ 9,884,490    $ 11,340,777
                                                               -----------    ------------
                                                               -----------    ------------

         LIABILITIES AND SHAREHOLDERS' EQUITY                                
                                                                             
CURRENT LIABILITIES:
     Accounts payable                                          $   242,725    $    327,682
     Accrued compensation                                          132,748         155,908
     Other accrued liabilities                                     274,863         454,295
     Customer deposits                                              15,737          20,223
     Other current liabilities                                       6,639           6,639
                                                               -----------    ------------
                    Total current liabilities                      672,712         964,747
                                                               -----------    ------------
LONG-TERM LIABILITIES:                                                       
          Other long-term liabilities                               15,933          17,593
                                                               -----------    ------------
                    Total long-term liabilities                     15,933          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, 5,352,507 and 5,389,402 shares 
          outstanding, respectively                             16,880,567      16,997,282
     Warrants to purchase common stock                             290,400         290,400
     Accumulated deficit                                        (7,975,122)     (6,929,245)
                                                               -----------    ------------
                    Total shareholders' equity                   9,195,845      10,358,437
                                                               -----------    ------------
                    Total liabilities and shareholders' 
                         equity                                $ 9,884,490    $ 11,340,777
                                                               -----------    ------------
                                                               -----------    ------------
</TABLE>

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

                                        3

<PAGE>

                                ELECTROSCOPE, INC.


                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
                                                                For the Three Months
                                                                    Ended June 30,
                                                             --------------------------
                                                                 1997           1996
                                                             -----------     ----------
<S>                                                          <C>             <C>
REVENUE, net                                                 $   311,564     $  413,642

COST OF SALES                                                    274,962        309,516
                                                             -----------     ----------
                    Gross profit                                  36,602        104,126
                                                             -----------     ----------
OPERATING EXPENSES:
     Sales and marketing                                         561,740        183,227
     General and administrative                                  408,579        155,568
     Research and development                                    209,675        126,702
                                                             -----------     ----------
                    Total operating expenses                   1,179,994        465,497
                                                             -----------     ----------
INCOME (LOSS) FROM OPERATIONS                                 (1,143,393)      (361,371)

OTHER INCOME:
     Interest income                                             112,949          8,796
     Other income (expense)                                      (15,433)         7,258
                                                             -----------     ----------
NET INCOME (LOSS)                                            $(1,045,877)    $ (345,317)
                                                             -----------     ----------
                                                             -----------     ----------

NET INCOME (LOSS) PER SHARE (Note 2):                                     
     Net income (loss) per common share and common                        
        equivalent share                                     $     (0.19)    $    (0.08)
                                                             -----------     ----------
                                                             -----------     ----------
                                                                          
     Shares used in computing net income (loss) per                       
        common share and common equivalent share               5,374,950      4,210,817
                                                             -----------     ----------
                                                             -----------     ----------
</TABLE>

         The accompanying notes are an integral part of these statements.

                                        4
<PAGE>

                               ELECTROSCOPE, INC.


                      CONDENSED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
                                                                  For the Three Months
                                                                      Ended June 30,
                                                             -------------------------------
                                                                  1997              1996
                                                             ------------      -------------
<S>                                                          <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 
   Net income (loss)                                         $ (1,045,877)     $   (345,317)
   Adjustments to reconcile net income (loss) to net cash
     used in operating activities-
         Depreciation and amortization                             33,462            20,392
         Amortization of discount                                (109,005)              ---
         Common stock issued as stock bonus                        40,000               ---
         Changes in operating assets and liabilities-
            Accounts receivable                                   (60,626)           69,130
            Inventory                                             (85,004)           31,659
            Other assets                                           25,240           (11,517)
            Accounts payable                                      (84,957)           72,696
            Accrued compensation and other accrued
              liabilities                                        (202,592)         (112,611)
            Customer deposits                                      (4,486)          (61,550)
            Deferred revenue                                          ---            (7,762)
            Other liabilities                                      (1,660)           (1,659)
                                                             ------------      ------------
               Net cash used in operating activities           (1,495,505)         (346,539)
                                                             ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of equipment                                         (98,696)          (18,686)
   Patent costs                                                    (4,484)           (5,094)
   Purchases of short-term investments                                ---       (10,000,000)
   Sale of short-term investments                               8,099,999               ---
                                                             ------------      ------------
               Net cash used in investing activities            7,996,819       (10,023,780)
                                                             ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock                             ---        13,185,952
   Repurchase of common stock                                    (156,715)              ---
   Proceeds from issuance of warrants                                 ---                50
   Stock issuance costs                                               ---        (1,233,274)
                                                             ------------      ------------
               Net cash provided by financing activities         (156,715)       11,952,728
                                                             ------------      ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                       6,344,599         1,582,409

CASH AND CASH EQUIVALENTS, beginning of period                    527,015           538,708
                                                             ------------      ------------
CASH AND CASH EQUIVALENTS, end of period                     $  6,871,614      $  2,121,117
                                                             ------------      ------------
                                                             ------------      ------------
</TABLE>
       The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                                ELECTROSCOPE, INC.


                 NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

                                  JUNE 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.  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 three months ended June 30, 1997,
sales to this customer were not significant.

The Company has incurred losses since its inception and has an accumulated
deficit of $7,975,122 at June 30, 1997.  During fiscal year 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).

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. 

                                      -6-
<PAGE>

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 1999.

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


(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.

                                       7
<PAGE>

     SHORT-TERM INVESTMENTS

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

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

     INVENTORY

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

                                                 June 30,       March 31, 
                                                   1997           1997    
                                                ---------       --------  
          Raw materials                          $290,410       $266,299  
          Work in process                         159,327        225,353  
          Finished goods                          222,312        132,640  
                                                ---------       --------  
                                                  672,049        624,292  
          Less-Reserve for obsolescence           (65,349)      (102,596) 
                                                ---------       --------  
                                                 $606,700       $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 

                                       8

<PAGE>

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 $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 quarter 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, and Results of Operations, General and 
Administrative Expenses, the results of operations for the quarter ended June 
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, 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. 

                                       9

<PAGE>

(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, filed on form 10-KSB on June 30, 1997.

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

                                       10

<PAGE>

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

     GENERAL

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

                                       11

<PAGE>

expenditures. Should the lawsuit result in a significant payment to the 
plaintiff(s) or significant legal fees, such payments could have a material 
adverse impact on the Company's liquidity.

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.  In 1993, the Company hired a vice president of 
sales and marketing and recruited clinical sales specialists.  The Company 
also continued work on its patent applications and formulated development 
plans for shielded hinged tip and fixed tip electrosurgical instruments.  As 
this development program proceeded it became apparent that the merging of 
electrical and mechanical engineering skills in the instrument development 
process for the Company's patented, integrated electrosurgical instruments 
was more difficult than was expected at first.  As a result, the development 
of the instruments with the Electroshield-Registered Trademark- Active 
Electrode Monitoring (AEM-Registered Trademark-) technology was not completed 
until 1995.  The Company introduced integrated instruments for the 
Electroshield-Registered Trademark- Monitoring System (EMS) in November 1995.

The installed base of the Company's 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 new sales 
representatives of the Company 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 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 the 
Valleylab sales force.  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 
capturing the margins formerly 

                                       12

<PAGE>

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 $7,975,122 as of June 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 
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 JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED 
JUNE 30, 1996.

NET REVENUES.  Revenues for the three months ended June 30, 1997, were 
$311,564, compared to $413,642 for the three months ended June 30, 1996, a 
decrease of 25%.  The decrease is attributable to the Company developing its 
own sales and marketing efforts to replace those provided by Valleylab in the 
first 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.  The gross profit for the three months ended June 30, 1997, of 
$36,601 decreased by $67,524 (65%) from the three months ended June 30, 1996 
gross profit of $104,126.  Gross profit as a percentage of revenue (Gross 
Margin) decreased from 25% for the three months ended June 30, 1996 to 12% in 
the three months ended June 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 $561,739 for 
the three months ended June 30, 1997 increased by $378,512 (a 206% increase) 
compared to $183,227 for the three months ended June 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 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.

                                       13

<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased $253,011 (163%) from $155,568 for the three months ended June 30, 1996
to $408,579 for the three months ended June 30, 1997.  This increase was
primarily due to the addition of a Chief Executive Officer, the replacement of
the Chief Financial Officer, and increased legal expenses, primarily related to
the shareholder lawsuit filed in June of 1997. (See Part II, Item 1).

RESEARCH AND DEVELOPMENT.  Research and development expenses increased to
$209,674 from $126,702 for the three months ended June 30, 1996, a 65% increase,
reflecting the Company's ongoing product development efforts related to both the
current product line and new products which are anticipated to be introduced in
fiscal year 1998.

     LIQUIDITY AND CAPITAL RESOURCES

The Company has historically satisfied its cash requirements principally through
sales of Common Stock which approximated $17.1 million through June 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 June 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. 


                                        14
<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
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 of the loss of management
time needed to deal with the lawsuit.

     ITEM 2 - CHANGES IN SECURITIES

                (a) On May 5, 1997 the Company granted its new President and
Chief Executive Officer, Patrick F. Crane, a 22,222 share stock bonus.  This
transaction was exempt from registration under the Securities Act of 1933 by
virtue of the provisions of Section 4(2) thereof.

     ITEM 3 - Not Applicable

     ITEM 4 - Not Applicable 

     ITEM 5 - Not Applicable 

                                      15
<PAGE>

          
     ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

               (a)  Exhibits

                    11  - Computation of Net Income (Loss) per Common Share and 
                    Common Equivalent Share.

                    27  - Financial Data Schedule.    

               (b)  The Registrant did not file any reports on Form 8-K during
                    the quarter ended June 30, 1997. 




                                       16
<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            August 4, 1997
     Karl D. Hawkins          (Principal Accounting Officer)
          








                                         17
<PAGE>

                                  EXHIBIT INDEX




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

               11        Computation of Net Income (Loss) per
                         Common Share and Common Equivalent Share     19


               27        Financial Data Schedule                      20


 





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