SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB/A-1

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                     For the fiscal year ended June 30, 1998

                         Commission file number 0-19957

                                  QUANTECH LTD.
                 (Name of Small Business Issuer in its Charter)

             Minnesota                                      41-1709417
(State or Other Jurisdiction of             (IRS Employer Identification Number)
Incorporation or Organization)

                             1419 Energy Park Drive
                            St. Paul, Minnesota 55108
               (Address of Principal Executive Offices; Zip Code)

          Issuer's Telephone Number Including Area Code: (651) 647-6370

           Securities Registered Under Section 12(b) of the Act: None

Securities Registered Under Section 12(g) of the Act: Common Stock, no par value

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 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.
  X   Yes           No

Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

The Issuer's revenues for the fiscal year ended June 30, 1998 were $0.

The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of September 23, 1998, was approximately $ 2,643,000
(based on the closing sale price of the Issuer's Common Stock on such date).

Shares of Common Stock, no par value, outstanding on September 23, 1998:
2,587,395 shares as adjusted for a 1-for-20 reverse stock split with record date
of June 2, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format (check one):  Yes       No   X

<PAGE>


                                      INDEX
PART I                                                                      Page
Item 1. Description of Business..............................................  3
Item 2. Description of Property.............................................. 27
Item 3. Legal Proceedings.................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.................. 27

PART II
Item 5. Market for Common Equity and Related Stockholder Matters............. 28
Item 6. Management's Discussion and Analysis or Plan of Operation............ 30
Item 7. Financial Statements................................................. 33
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................... 33

PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................ 58
Item 10. Executive Compensation.............................................. 59
Item 11. Security Ownership of Certain Beneficial Owners and Management...... 59
Item 12. Certain Relationships and Related Transactions...................... 59
Item 13. Exhibits and Reports on Form 8-K.................................... 59

Signatures................................................................... 60


<PAGE>

Item 1 of Part I, Items 6 and 7 of Part II, Item 13(a) of Part III and Exhibits
23 and 27 of the Registrant's Form 10-KSB for the fiscal year ended June 30, 
1998 are hereby amended; the remaining portions of such Form 10-KSB which are
not being amended are also included herein for ease of reference.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Company Summary

General

         Quantech Ltd. ("Quantech" or the "Company") is completing development
of its multi-test critical care DBx diagnostic system. The DBx uses Quantech's
proprietary and robust digital biosensor Surface Plasmon Resonance ("SPR")
technology. The use of SPR by Quantech enables it to integrate multiple
diagnostic methodologies, such as immunoassays, DNA probes and chemical binding,
into a single, simple system. This flexibility should allow the DBx to provide
an extensive menu of rapid, quantitative STAT tests in hospital critical care
units.

         Excluding home diagnostics, the overall world wide in-vitro diagnostic
market is more than $15 billion. Central and STAT laboratories currently account
for the majority of this market with testing divided between non-urgent and
urgent (STAT) tests. The Company is focused on the STAT testing portion of this
market. STAT tests are required by critical care physicians in areas such as
surgical suites, ICUs/CCUs and emergency departments because of the time
sensitive nature of their treatment. However, results of STAT tests from the
central laboratory can take a minimum of 45 minutes and up to three hours for
physicians to receive. This delay affects patient treatment and increases costs.
Although STAT laboratories have been established to reduce this time delay, test
costs are often 2-4 times that of the central lab and reduced test time
turnaround is not always achieved.

          The Emergency Department ("ED") represents the most pressing and unmet
customer need for critical care STAT testing. The ED is a significant market
requiring a complete menu of clinically related, quantitative, rapid turnaround
tests on a single instrument. Although there are some STAT testing products
available for the ED, only systems in the central and STAT labs provide the
required test menu and quality of results. However, time delays and interruption
of batch testing in the central lab, and the cost of tests run in STAT labs,
have caused both to fall well short of meeting the burden of providing fast and
economic STAT test results to the ED and other critical care areas of the
hospital.

         Quantech is designing its DBx system for the ED. To meet the needs of
the ED, the DBX is expected to have the STAT test menu and test performance of
central and STAT labs, but with tests results in 10 to 20 minutes. The DBx
system configuration will consist of a bench top instrument and a series of
disposables each offering a single test or a panel of clinically related STAT
tests. The system analyzes both whole blood and urine without preparation or
addition of reagents by lab technicians or removal of sample from the collection
device. This ease of use and ability to locate the DBx in the ED will provide
hospital physicians with faster STAT test results, at a comparable price, to
those run in hospital central laboratories.


<PAGE>

         Some of the most important STAT tests in the ED are those for cardiac
markers and pregnancy. Cardiac tests help to identify whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack) and
represent what Quantech believes is more than a $350 million market. Pregnancy
tests are important in the ED to determine if a procedure that could harm a
fetus can be performed, or to identify an ectopic pregnancy. The DBx is expected
to be launched with a panel of three cardiac tests (myoglobin, CK-MB and
troponin I) and a single whole blood quantitative test for pregnancy. Additional
STAT tests are expected to be added to the DBx system to provide a complete ED
STAT testing menu such as white blood count panel, coagulation panel,
electrolytes, amylase, liver enzymes panel, therapeutic drugs, drugs of abuse
panel and infectious diseases.

         The expected extensive test menu of the DBx system is a result of
Quantech's SPR technology. The robust nature of this SPR technology is confirmed
by its ability to be used in many areas other than medical diagnostics. In this
regard, Quantech and The Perkin-Elmer Corporation ("PE"), a leading supplier of
life science systems and analytical instruments with sales in excess of $1
billion, are parties to a License Agreement. The agreement provides PE with
exclusive licenses to certain Quantech technology for use outside of Quantech's
core area of medical diagnostics.

         Quantech has licensed back from PE technology that provides a large
density, high throughput diagnostic testing capacity for its SPR technology.
Through the optical and chemistry deposition advancements made by PE, they are
able to read up to 100 test areas on a single 1 cm by 1 cm SPR disposable and
plan to expand capacity to beyond 5,000 tests within the same area. Such two
dimensional (2D) array capability, as now used in genomic screening research,
provides Quantech the ability to expand its digital SPR technology upstream from
the critical care area to the central lab and provide further vertical expansion
to ICU/CCU, ambulatory, doctor office and home testing. Future generations of
Quantech's proposed DBx system may also benefit from the PE technology by
reducing the number of unique disposables needed to perform the same number of
tests which reduces inventory requirements and manufacturing costs.

         Quantech has received FDA 510(k) approval for its first cardiac marker
test myoglobin. It has also begun FDA 510(k) data collection on its cardiac
marker test for CK-MB. Quantech expects submission to the FDA of this test in
fall of 1998. Launch of the DBx system is expected in mid 1999. Quantech
believes the capabilities of its DBx system as a diverse diagnostic testing
platform will meet the needs of the critical care STAT testing market enabling
Quantech to be competitive in the global medical diagnostics market and a
valuable strategic partner.

Strategy

         Quantech's objective is to establish its DBx system as the standard for
ED STAT testing, steadily increase the number of tests available for its system
through the introduction of additional tests or test panels and expand its SPR
technology platform beyond the ED. To reach these objectives, Quantech intends
to do the following:


<PAGE>

     o    Complete system and additional test development and submit to the FDA
          Quantech's system and tests for the cardiac markers CK-MB and troponin
          I and pregnancy marker hCG.

     o    Pursue strategic relationships in distribution, manufacturing and
          testing applications of Quantech's SPR technology outside of
          Quantech's core ED market.

     o    Market initial system with single disposable for cardiac panel
          consisting of myoglobin, CK-MB and troponin I and a test disposable
          for pregnancy.

     o    Develop additional clinically relevant STAT tests (white blood count
          panel, coagulation panel, electrolytes, amylase, liver enzymes panel,
          therapeutic drugs, drugs of abuse panel, infectious diseases, etc.).

     o    Market system domestically and internationally via strategic
          distribution partners. 

     o    Develop second generation system for expansion into additional
          markets.

The Market

         General. Excluding home diagnostics, the overall world wide in-vitro
diagnostic market ("IVD") is more than $15 billion. Central and STAT/rapid
response laboratories currently account for the majority of this market with
testing divided between non-urgent and urgent (STAT) tests. The Company is
focused on the STAT testing portion of this market. STAT tests are required by
critical care physicians in areas such as surgical suites, ICUs/CCUs and
emergency departments because of the time sensitive nature of their treatment.
However, results of STAT tests from the central laboratory can take a minimum of
45 minutes and up to three hours for the physician to receive the results. This
delay affects patient treatment and increases costs. Although STAT laboratories
have been established to reduce this time delay, test costs are often 2-4 times
that of the central lab and reduced test time turnaround is not always achieved.

         Point of care ("POC ") testing represents a growing segment of the IVD
market and a response to rising costs of health care that have produced changes
in hospital reimbursement. Pressure has increased to reduce the length of
patient stay and provide a greater portion of services in ambulatory and
outpatient settings. Because the cost of providing care in Critical Care Units
far exceeds those of general medical or surgical units, a primary goal of
critical care medicine is to determine the appropriate care path for a patient
so they may be treated, sent home or moved to a different area of the hospital.
Quick determination of this care path is made possible by rapid, accurate and
clinically relevant quantitative tests. For this reason STAT labs were
established to reduce test turnaround time, but their high test cost and still
often lengthy turnaround time have limited the effectiveness of STAT labs to
reduce patient treatment costs. POC instruments have tried to fill this gap, but
lack of central and STAT lab features have kept them from penetrating the
critical care testing market.

         The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology which allow it to address the
shortfalls of the central and STAT labs and POC instruments. As such, Quantech

<PAGE>

will focus on the STAT testing needs of hospital Critical Care Units which are
defined as those areas where immediate diagnostic information is needed to
effect either the treatment or processing of a patient. These critical care
areas require a large menu of STAT tests and represent a significant market.

         Critical Care/Emergency Department. Critical Care Units include
Intensive Care Units, Surgical Suites and Emergency Departments ("ED").
Quantech's DBx system will first be marketed to EDs. EDs must respond to
critical patient conditions and conduct tests on an as needed basis in order to
support the health care team when a patient's condition is life threatening.
Most tests conducted in the ED are required STAT (urgent) and are processed 24
hours a day. Tests processed in a STAT manner significantly increase cost as
they require the hospital central or STAT laboratory to remain open whether or
not any tests are being conducted. The hospital must staff laboratories around
the clock, use sophisticated technology, respond to urgent and critical patient
needs, and yet do not have the large test volumes that allow them to spread the
operating and capital costs across a broader base. The solution to this
difficulty and expense is to bring a system designed for STAT testing to the
patient site in a manner that will provide test results promptly and accurately.

         Because of space limitations in the ED and a desire not to train
personnel on a number of different instruments, a single instrument for the ED's
STAT test needs is required. Such ED STAT test menu includes:

     o    Cardiac marker panel (CK-MB, troponin I, myoglobin)

     o    hCG (Pregnancy)

     o    White Blood Count panel

     o    Coagulation

     o    Therapeutic Drug Monitoring (Digoxin, Theophylline)

     o    Drugs of Abuse (e.g., Cocaine, Marijuana)

     o    Electrolytes

     o    Amylase

     o    Liver Enzymes

     o    Bun/Creatinine

         Quantech will introduce its DBx system with a cardiac panel to test for
heart attacks and a test for pregnancy. The combination of these two tests
provides a significant market and is expected to allow initial market
penetration. Quantech will then expand its menu beyond these first tests by
adding the additional STAT tests required by the ED. Since the needs of other
areas of critical care are similar to those tests required by the ED, the
Company anticipates that growth into these other areas will be evolutionary.

         Cardiac Markers (heart attack). Cardiac markers are needed to triage
and treat individuals that arrive at the ED with chest pain. Hospitals are aware
of a need for more rapid cardiac diagnosis and in response have started to
establish chest pain centers in emergency departments for triaging patients.
Lacking, however, are rapid cardiac test results. Quantech has chosen a test
panel for heart attacks as one of its initial tests because of the high need,
reimbursement and volume these tests represent.


<PAGE>

         During a myocardial infarction ("AMI"), certain proteins are released
from the damaged heart muscle into the blood stream as a result of damage to the
muscle. These proteins are in varying concentrations and consist of CK-MB,
troponin, myosin light chain and myoglobin. Myoglobin is the earliest of the
markers to be detected and the first to leave the body. CK-MB and troponin I are
later markers but stay in the body longer and are more specific to cardiac
damage. Combinations of these markers are thus used to cover the required time
frames.

         Cardiac markers are important to help to identify patients who have
suffered an AMI. Such tests, however, are most useful if they can be performed
in under twenty minutes in the ED or mobile care unit so that medical personnel
may take immediate action. Most of the existing test modalities require a
central laboratory system that may delay the results beyond their effective
need. Quantech's system will provide emergency personnel with the ability to
receive quantitative results in 10 to 20 minutes.

         An estimated 6 million patients are evaluated for chest pain annually
in the United States with approximately 3 million admitted to an Intensive Care
Unit for further evaluation. Of those admitted, only 30% subsequently "rule-in"
for acute AMI. Assuming an average cost of $3,000 per admission, this represents
a total expenditure of $6 billion annually on patients who do not have AMI. This
also does not take into account that 2-8% of patients with acute chest pain that
are released from the ED without treatment subsequently fulfill criteria for AMI
resulting in deaths and complications that represent greater than 20% of the
malpractice dollars awarded in the field of emergency medicine.

         Not only are costs of admission and malpractice claims an important
issue, making a rapid definitive diagnosis of chest pain has become more
important. In the past when a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within four to six hours of the onset of a heart attack, it can dissolve
the blood clot, clear arteries and save heart muscle tissue. Because these
therapies are expensive and present undesirable side effects (allergic
reactions, bleeding) if the patient has not suffered an AMI, rapid accurate
testing for an AMI is very important.

         The high cost of therapy, the urgency of the associated conditions and
the difficulty of a definitive diagnosis creates an urgent demand for cardiac
marker tests in the critical care setting. Quantech's disposable test for
cardiac markers is being completed. This disposable, and Quantech's related
reading instrument, are expected to provide the rapid and cost effective tests
required by the ED.

         Pregnancy. Along with a test panel for cardiac markers, the Company
intends to also provide a test for the pregnancy marker hCG. Every woman of
child bearing age who enters the ED and requires a procedure that could injure a

<PAGE>

fetus (x-ray or drugs) should have a pregnancy test. Because of the delays in
obtaining tests from the central lab, women may be treated without the physician
receiving the results of the pregnancy test or spend considerable time waiting
to be treated.

         A rapid pregnancy test is also important for diagnosis of ectopic
pregnancies. Ectopic pregnancy is a leading cause of abdominal pain for women
presenting to the ED. Determination of an ectopic pregnancy is made through the
quantitative testing of hCG. The ability of the Quantech system to perform
pregnancy and other tests, along with its cardiac marker panel, will show its
advantage as a quantitative multi-test platform.

Product Description

         The Instrument. The Company's instrument combines accuracy with
simplicity of use and will process up to four tests at a time on a single
disposable. Additional reading ports will be designed to be attached to the
initial instrument to provide greater throughput required by higher volume
testing facilities. The ability of Quantech's biosensor system to convert
biological data into digital signals will also permit designs that capitalize on
future advances in microcomputer technology.

         The Quantech instrument is designed to fill the needs of hospital
Critical Care Units, in particular the ED. Most importantly, the instrument is
designed to be compatible with new test disposables when Quantech introduces
them to the market. As a result, when Quantech adds tests through the
introduction of new disposables, its original instrument will accommodate these
various tests without system obsolescence or significant training of ED
personnel.

         The instrument will be of a size capable of sitting on a bench top or
cart and moved from room to room if necessary. It contains a white light source,
a microprocessor, a number of optical components, a computer touch screen and
barcode readers. The light is split into a number of channels, providing for
quality controls and multiple tests per disposable. When the test disposable is
inserted into the instrument, an internal bar-code reader identifies the type of
test to be run. A touch screen and/or an external barcode reader will enable the
user to enter both a user number and the patient or specimen ID number. The
instrument's computer screen will display results of a given test. The data or
results produced by the instrument will also be stored on an internal hard
drive, downloaded to the hospital information system, and may be provided on a
hard copy through use of a printer.

         The small size and configuration of the instrument enables it to be
located in the ED or associated STAT or rapid response lab. It is anticipated
that Critical Care Units such as the ED will have several of these instruments
at various locations. Quantech intends to offer several industry standard
reagent rental programs whereby the DBx will be provided to the hospital and it
may retain the instrument without cost as long as a specified number of test
disposables are purchased. For customers who wish to purchase the instrument,
the retail price is anticipated to be $20,000.


<PAGE>

         The Disposable. Quantech's disposable consists of an injection molded
plastic carrier containing a metal coated sensor surface. The metallic surface
is overlaid with reagents that react specifically with the analyte to be
identified and measured. An important feature of the Quantech disposable will be
the ability to attach a standard vacutainer tube, complete with its top intact,
to the disposable so that it is easy to use and the user has minimal exposure to
the patient sample. The disposables will be configured identically for all of
the tests manufactured by the Company. The only difference between the
disposables will be the reagents coated on each grating to define the particular
test. One or more separate tests may be performed on a single disposable
providing Quantech the capability to develop clinically related panels of tests
by simply adding the appropriate reagents. Future disposables for certain tests
may also be configured to handle samples of urine and other body fluids.

         A further advantage of Quantech's disposable will be that an operator
will not be required to add reagents. This simplicity translates into easier use
and immediacy of results. Disposables will be configured to provide single tests
or multiple clinically-related tests. Because the same disposable configuration
may be used for all tests, manufacturing and quality control costs should be
minimized. Disposables are expected to have retail prices ranging from $6.50 to
$35.00 per disposable depending on the tests provided. Additional development of
the disposable is currently being conducted and future development will be
undertaken to expand the number of tests that may be performed in general and on
each disposable.

         Comparison of Product Technologies. A number of basic methods, whether
performed manually or by automated instruments, are utilized in diagnostic
testing including immunoassays, DNA probes and chemical reactions. Each of these
testing methods requires the performance of a series of operations by a skilled
technologist. These operations consist of sample preparation, addition of
reagents, further method-specific manipulations, and reading and interpretation
of raw data. Each method also requires a specific technology to perform the
particular test. Central and STAT laboratory automated systems have mechanized,
rather than eliminated many of these steps and attempt to combine different
technologies into a single system. Quantech's digital SPR technology, in
contrast, is able to be used for these and other basic testing methods within a
single instrument, but without complicated processing by the operator.

         Central labs provide quality results on a menu of tests, but STAT test
results take from 45 minutes to 3 hours to be returned to the ED and STAT tests
disrupt the batch testing of central labs. Although STAT and rapid response labs
have the quality advantages of the central lab with quicker turnaround time,
personnel and equipment requirements of STAT labs result in high test costs.
Point of care instruments have reduced turnaround time, and in some instances
have lower test costs than STAT labs, but fail to meet laboratory quality and
critical care needs due to limited test menu, lack of interface to laboratory
information system, manipulation of patient sample, nonconcordance with central
lab results and lack of quantitative results. Quantech's DBx system is expected
to eliminate all of these disadvantages by providing the following features and
capabilities:


<PAGE>

     o    STAT test menu (cardiac panel, pregnancy, white blood count panel,
          coagulation panel, electrolytes, amylase, therapeutic drugs, drugs of
          abuse panel, etc.)

     o    Rapid turn-around time (10-20 minutes)

     o    Quantitative results using whole blood (no sample processing by user)

     o    Multi-test, single use disposable (up to four clinically related tests
          per disposable)

     o    User-friendly 

     o    Cost effective (comparable to central lab STAT test costs, 2x-4x less
          than STAT lab test costs)
 
     o    No addition of reagents by the operator

     o    Transportable, bench top instrument

     o    Concordance with central lab test results
               
     o    Whole blood/closed tube (vacutainer) patient sample capability
 
     o    Full-time laboratory information system interface

     o    Automatic user/patient/test/QC input

Marketing

         Introduction. The ED testing market is highly concentrated.
Approximately two thousand (2,000) of the Critical Care institutions represent
over 75% of the potential market. In the United States, the majority of
hospitals belong to a small number of buying groups such as Columbia/HCA and the
Voluntary Hospital Association of America Inc. (VHA). This enables a focused
sales effort to cover a significant amount of the market.

         Quantech will form a strategic marketing group of approximately three
persons. Initially this marketing group will begin creating awareness of
Quantech and its DBx system. It is intended that Quantech will engage a
strategic distribution partner with a presence in diagnostic testing to market
its products in the United States and internationally. If this distribution
partner is engaged, the marketing group will support this distribution partner
and maintain contact with customers to help Quantech to monitor the market for
future products. If an appropriate distribution partner cannot be engaged, then
the marketing group will focus on sales of the system to the highest volume
emergency departments. Because of the small number of emergency departments in
the United States, and the large amount of revenue that can be provided by each
one, the Company believes that a small focused sales effort will enable it to
effectively penetrate the ED market.

         International. The international market is greater in potential revenue
and size than that of the United States. The regulatory environment is less
stringent in most countries other than the United States. The Company will
manage and support international distributors, if a strategic distribution
partner is not engaged. Quantech expects to begin international sales
approximately six months after its United States market launch.

         Clients. The purchasing decision for diagnostic testing equipment is in
the hands of the laboratory manager, although the end user of the Quantech DBx
system will be ED personnel. Under CLIA regulation the laboratory is responsible
for training, instrument calibration and quality assurance of testing systems.
As such, the laboratory wishes a STAT testing instrument to have the following
features:


<PAGE>

     o    Comparable performance to central lab instrument with concordant
          results

     o    One (maximum of two) instruments for ED STAT menu
 
     o    Full-time, bi-directional laboratory information system ("LIS")
          interface with information automatically downloaded to LIS

     o    Automated user/patient/test/QC information input

     o    User ID and lockout capability by laboratory

     o    Minimum user training

     o    Physically robust - large enough so it does not get stolen or dropped

     o    Costs comparable to central lab STAT tests and less than STAT lab

         ED personnel as the ultimate users must also accept any system that
will be used for their STAT testing needs. Although they cannot buy a testing
system without the laboratory agreeing, they are capable of keeping a system
from being purchased. A system that is acceptable to the ED must provide the
following features:

     o    Comparable performance to central lab instrument with concordant
          results

     o    Rapid turnaround time (less than 20 minutes)

     o    One (maximum of two) instruments for ED STAT menu

     o    Whole blood, closed collection tube sampling and transfer

     o    Automatic LIS download

     o    User friendly - minimum training and time at instrument
 
     o    High reliability and large enough to find and not be stolen or
          misplaced

         To achieve market penetration of its DBx system, Quantech's marketing
strategy will be focused on achieving the acceptance of both laboratory and ED
personnel. Testing systems to date have been unable to meet the needs of both
groups because of technology limitations. Quantech believes its digital SPR
technology is capable of providing a STAT system that will meet the requirements
of both groups.

         Internal Support. A support staff will be maintained to provide 24 hour
product service both in the interpretation of results and the use of the system,
as well as emergency shipping. There will be no field service. Faulty
instruments will be replaced in the event of failure.

The Technology

         Biosensors. The Quantech system is a biosensor using the Company's
proprietary Surface Plasmon Resonance (SPR) technology as its core. A biosensor
is defined as an analytical device incorporating a biological sensing element
coupled to a suitable transducer that converts biochemical activity into a
measurable form of energy. Almost all analytical systems combine sensing (i.e.,
detection) and transducing components. The distinct feature of biosensors is
that the two functions are coupled in a single physical entity. A biosensor's
input is a specific biological event (e.g., binding of an antigen to an

<PAGE>

antibody). Its output is a measurable signal that corresponds to the input. A
biosensor's biological component provides specificity, the ability to
selectively recognize one type of chemical or event. Its transducer confers
sensitivity, the ability to transform the very low energy of the biological
event into a measurable signal.

         Surface Plasmon Resonance (SPR) Technology. Surface Plasmon Resonance
is an optical-electrical phenomenon involving the interaction of light with the
electrons of a metal. The optical-electronic basis of SPR is the transfer of the
energy carried by photons of light to a group of electrons (a plasmon) at the
surface of a metal. Quantech's SPR sensor is a disposable composed of a plastic
base with a fine grating molded into its surface through the use of compact
disk/DVD manufacturing technology. The grating is coated with a very thin layer
of gold. Gold is used since it does not oxidize like other metals which can
affect chemistry binding. The gold is subsequently coated with binding molecules
or other substances. The binding molecules may be antibodies, DNA probes,
enzymes or other reagents chosen because they react exclusively with a specific
analyte. The analyte is the substance being measured and defines the test to be
done such as a cardiac marker.

         The coated metal surface interacts with light at a characteristic
resonant wavelength that depends upon the molecular composition at the metal's
surface. When the coated metal is exposed to a sample that contains analyte, the
analyte becomes bound to the metal through its specific interaction with the
binding molecules. As an analyte is bound, the composition at the surface
changes and consequently the resonant wavelength shifts. The magnitude of the
change in the resonant wavelength is proportional to the amount of binding that
takes place, which is proportional to the concentration of the analyte in the
sample.

         Quantech's SPR biosensor combines the strengths of biology and physics
into a single entity bringing digital diagnostic technology to STAT testing.
Applications of SPR that have been reported in the scientific literature or
explored by the Company include immunoassays for cardiac markers, pregnancy,
hormones, drugs, viruses and bacteria, quantitation of anesthetic gases, DNA
binding assays, glucose, blood coagulation and other tests. The Company's SPR
biosensor technology thus represents a simple, unified platform that is capable
of performing a wide range of diagnostic tests. SPR is also a valuable research
tool that the Company expects will allow it to quickly and efficiently develop
further tests for its system.

Competition

         The majority of in-vitro medical diagnostic testing is conducted in
hospital and commercial reference laboratories. These facilities are
particularly suited for efficiently processing a large number of clinical
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single samples, most of the samples handled by
central laboratories are processed in batches. The competitors for this market
have addressed these laboratories' needs for high sample throughput, low reagent
cost and low labor cost by developing automated systems. STAT/rapid response

<PAGE>

labs have developed to address the needs of STAT testing and generally use the
same instrumentation found in the central lab. These central lab systems are
generally complex and expensive, incorporating designs appropriate to the
central labs they serve which employ skilled operators who are expected to
perform sample preparation, system calibration and basic instrument maintenance.

         Both the health care providers and their suppliers are heavily
committed to the current central/STAT laboratory model. The laboratories are
constrained by their organization structure, their substantial capital
investment in instrumentation and the task of processing a large number of
routine (i.e., non-STAT) samples. The suppliers' corporate infrastructures,
marketing and sales organizations, research and development activities and
production capabilities are committed to this market. As a result, hospitals may
maintain their established means of having testing performed.

         There is a significant number of companies serving this central
clinical laboratory market. Most of them compete in only one or two segments of
the overall market. Abbott Laboratories, Roche Diagnostics, and Johnson &
Johnson are notable exceptions. These companies have achieved their broad market
penetration by developing several technologies, each targeted for the specific
needs of a market segment and focusing their marketing, distribution and sales
activities on the central lab. The Quantech DBx system in general must compete
with central and /or STAT laboratory systems to gain market share and, as a
result, Quantech will meet with competition from these companies in both sales
of its system and the individual tests to be provided on the DBx.

         There is significant activity in certain areas of the Critical Care
STAT testing segment. Point of care systems are addressing limited testing areas
such as coagulation, blood gas and basic chemistry (including electrolytes). Two
such systems, i-STAT Corp. and Diametrics Medical, which market biosensor
instruments capable of determining blood gas and electrolyte levels have become
recognized point of care testing instruments. The Company does not believe
current products of i-STAT or Diametrics are capable, however, of providing the
test menu and features required by the ED.

         With respect to testing for cardiac markers to diagnose AMI, most
testing is done in the Central and STAT labs with turnaround time from 45 to 90
minutes. The Company is aware of only a limited number of companies that provide
rapid testing for AMI. Of such companies, Spectral Diagnostics Limited, a
Canadian company, markets a manual method available for certain cardiac markers
and Roche Diagnostics through its acquisition of Boehringer Mannheim markets a
manual test for troponin T. As configured, neither Spectral's nor Boehringer's
AMI tests can provide quantitative results. Biosite Diagnostics has introduced
an instrument and tests for the cardiac markers myoglobin, CK-MB and troponin I.
It is unclear what the extent of their sales activity is as they have announced
problems in the supply of their test disposable. However, the Company believes
that such system is not able to provide the breadth of test menu and other STAT
testing requirements expected to be available on the Quantech system and this
menu limitation by its competitors provides Quantech a competitive advantage.


<PAGE>

         The Company believes that there is a need for rapid, accurate and
quantitative measurement of cardiac markers, pregnancy and other STAT tests.
Quantech plans to enter the market by serving this unmet need first with tests
for heart attacks and pregnancy and to extend its penetration by delivering a
full range of high value, clinically relevant ED STAT tests on a single
platform. In doing so, the Company will compete directly with providers of
currently available testing methods. All of the industry leaders, and many of
the other companies participating in the diagnostic testing market, have
substantially greater resources than those available to the Company, including,
but not limited to, financial resources and skilled personnel. However, the
Company believes its SPR technology will enable it to provide products to the
Critical Care STAT testing market, a market segment believed by the Company to
lack testing systems that adequately address its needs. There can be no
assurance that current or future companies will not invent systems that will
have broad testing capabilities and features like those expected in Quantech's
DBx system. If Quantech is able to launch its system, no assurance exists that
competitive pressures will not negatively affect its pricing.

Significant Agreements

         Ares-Serono License. Quantech has acquired from Ares-Serono at a total
cost of $3.4 million a worldwide exclusive license (the "License"), to certain
patents, proprietary information and associated hardware (e.g. molds, test rigs,
prototypes) related to the SPR technology. The Ares-Serono affiliated companies
(the "Ares-Serono Group"), based in Switzerland, comprise a multinational
organization engaged in the development and marketing of ethical
pharmaceuticals, primarily in the field of human fertility, human growth,
immunology and virology. The SPR diagnostic technology was developed by a
research and development partnership (the "R&D Partnership"), the General
Partner of which was a company belonging to the Ares-Serono Group.

         The License calls for an ongoing royalty of 6 percent on all products
utilizing the SPR technology which are sold by the Company. If the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. Quantech has paid
$1,000,000 in minimum royalties to date and must pay additional payments of
$150,000 each December 31 of 1998 and 1999. If such payments are not made,
Ares-Serono has the right to cause a reversion to it of a royalty-free license,
thereby depriving the Company of its exclusive rights under the License. The
obligations of Quantech to pay royalties terminate when the total royalty
payments reach a gross amount of $18 million. After such date, Quantech's rights
in the licensed SPR technology continue in perpetuity with no further
obligations to Ares-Serono.

         Ares-Serono specifically reserved, and did not license to Quantech, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the License is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
technology for applications outside the field of the commercial interests of the
Company.


<PAGE>

         The Perkin-Elmer Corporation Agreements. Quantech and The Perkin-Elmer
Corporation ("Perkin-Elmer"), a leading supplier of life science systems and
analytical instruments, are parties to a technology and development agreement.
Such agreement provides Perkin-Elmer with exclusive licenses to certain Quantech
technology for use outside of medical diagnostics and co-exclusive rights to
nucleic acid medical diagnostics. Perkin-Elmer, pursuant to the agreement,
provides technical assistance related to Quantech's medical diagnostic system
and future royalty payments if Perkin-Elmer sells products using Quantech's
technology.

         The technical assistance provided by Perkin-Elmer covers many areas
including math, software, system hardware, optics, chemistry, optical molding,
microfluidics, mechanical engineering, environmental and regulatory performance
and value engineering. Four phases of assistance have been established with a
reduction in Perkin-Elmer's royalty each time a phase is completed. Phase I and
II have been completed setting the royalty at 8% of gross sales of Perkin-Elmer
products which include Quantech technology. If all phases are met, the royalty
will be set at 6% of gross sales. Minimum royalties of $500,000 per year begin
in December of 2000 and expire in conjunction with the related patents,
provided, however, that if Perkin-Elmer does not proceed to commercialize the
licensed SPR technology prior to such date all rights revert back to Quantech.

         Quantech granted Perkin-Elmer a warrant to purchase 1.4 million shares
of Quantech Common Stock. The warrant expires in December 2002 and is
immediately exercisable. The exercise price of the warrant is 95% of the average
market price of Quantech's Common Stock for the 25 days prior to the date
Perkin-Elmer provides notice to Quantech of its intent to exercise the warrant.

         Quantech, pursuant to an exclusive license agreement with PE, has
licensed PE technology that provides a large density, high throughput diagnostic
testing capacity for Quantech's SPR technology in medical diagnostics other than
nucleic acid testing. Through the optical and chemistry deposition advancements
made by PE, they are able to read up to 100 test areas on a single 1 cm by 1 cm
SPR disposable and plan to expand capacity to beyond 5,000 tests within the same
area. Such two dimensional (2D) array capability, as now used in genomic
screening research, puts Quantech on the leading edge of micro lab/lab on chip
pursuits that are expected to redefine diagnostic testing in the next decade.
Quantech believes this PE technology capability should allow Quantech to expand
its digital SPR technology upstream from the critical care area to the central
lab and provide further vertical expansion to ICU/CCU, ambulatory, doctor office
and home testing. Future generations of Quantech's current DBx system are also
expected benefit from the PE technology by reducing the number of unique
disposables needed to perform the same number of tests which reduces inventory
requirements and manufacturing costs.

         The royalty to be owed by Quantech will be 8% of gross sales of
Quantech products which include the PE technology. Minimum royalties of $500,000
per year begin in December of 2000, provided, however, that if Quantech does not
proceed to commercialize the licensed SPR technology prior to such date, all
rights revert back to PE. The PE technology will not be initially incorporated
into the DBx system.




<PAGE>

Patents and Proprietary Rights

         The Ares-Serono license covers a total of eight patents. The two
principal patents covering the SPR technology gratings, one patent covering
cellulose nitrate films and one covering calibration notches have been granted
in the United States, Canada, Australia and Europe and all but one of the
granted patents have been issued in Japan. These patents are awaiting
examination in Great Britain. Three of the remaining four patents are either
issued or pending in the United States, Canada, Australia, Europe, Japan and
Great Britain. The remaining patent which is not critical to the Quantech system
has been granted in Great Britain. All developments by the Company pursuant to
the License, either proprietary or patentable in nature, will be the property of
the Company. The Company has made a number of advances that it intends to
patent. No assurance can be given, however, that other companies will not
develop technologies substantially equivalent to those owned, or to be
developed, by the Company or that granted or pending and to be filed patents, if
granted, will protect the Company's technology.

Government Regulations

         The Company believes that the products it initially proposes to
manufacture and market will be classified as medical devices and will therefore
be subject to regulation by the United States Food and Drug Administration (the
"FDA") and, in some instances, by foreign government authorities. Under the 1976
amendments to the Federal Food, Drug and Cosmetics Act (the "FFDCA") and
regulations promulgated thereunder, manufacturers of medical devices must comply
with certain regulations governing the testing, manufacturing and packaging of
medical devices. Under the FFDCA, medical devices are subject to different
levels of testing and review. The most comprehensive level of review requires
that a clinical evaluation program be conducted before a device receives
premarket approval by the FDA for commercial distribution. As a manufacturer of
medical devices, the Company will also be subject to certain other FDA
regulations, and its manufacturing processes and facilities will be subject to
periodic inspection, without warning, to ensure compliance. Comparable agencies
in certain states and foreign countries will also regulate the Company's
activities. The Company's products could be subject to recall by the FDA or the
Company itself, if it appears that the products and their use do not conform to
regulations.

         Generally, medical devices intended for human use that are to be
marketed in the United States are placed in one of three regulatory
classifications depending upon the degree of testing and review to which the
device will be subject. The Company expects that its products will not be
subjected to the highest level of scrutiny because they are in-vitro (outside of
the body) diagnostic devices which do not come into contact directly with a
living human being. Specifically, the systems would be classified as either
Class I or Class II devices as distinct from implantable devices, which are
classified as Class III devices.


<PAGE>

         The Company believes that premarket clearance can be obtained for its
initial system and tests through submission of a 510(k) premarket notification
("510(k) Notification") demonstrating the product's substantial equivalence to
another device legally marketed pursuant to 510(k) Notification clearance. The
FDA may also require, in connection with the 510(k) Notification, that it be
provided with the test results supporting this claim. The FDA may further
require, in connection with the 510(k) Notification, that it be provided with
test results demonstrating the safety and efficacy of the device. Under certain
circumstances, such clinical data can be obtained only after submitting to the
FDA an application for an Investigational Device Exemption ("IDE").

         For new products that are not considered to be "substantially
equivalent" to an existing device, two levels of FDA approval will probably be
required before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve the Company's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to the
Company a Premarket Approval ("PMA"). The FDA should grant a PMA if it finds
that the product complies with all regulations and manufacturing standards. In
addition, the FDA may require further clinical evaluation of the product, or it
may grant a PMA but restrict the number of devices distributed or require
additional patient follow-up for an indefinite period of time. Completion of
this process could take up to 12 months and involve significant costs. The
Company believes it is unlikely that it will be required to obtain a PMA with
respect to any of its currently proposed products, except where mandated by the
FDA such as HIV, cancer and hepatitis detection tests. Any claims of panel
diagnostics are subject to a PMA procedure. The Company anticipates that it will
make claims in reference to its cardiac markers. These claims will be made after
the products are marketed with only single claim implications. Accordingly, the
products should not be delayed in their initial introduction. If a PMA is
required for the Company's initial system and CK-MB test, introduction of the
initial system likely would be significantly delayed, which could have a
material adverse effect on the Company, although preliminary indications from
the FDA are consistent with a 510(k) filing.

         For products subject to either 510(k) or PMA regulations, the FDA
requires that the Company conduct any required studies following Good Clinical
Practice and Good Laboratory Practice guidelines. Also, the manufacture of
products subject to 510(k) or PMA regulations both must be in accordance with
current Good Manufacturing Practice. For sale in foreign countries, compliance
with ISO 9000 standards will be required. Sales of medical devices outside the
U.S. are subject to foreign regulatory requirements. For countries in the EU, in
January 1995, CE mark certification procedures became available for medical
devices, the successful completion of which would allow certified devices to be
placed on the market in all EU countries. After June 1998, medical devices may
not be sold in EU countries unless they display the CE mark. The Company's
products will be manufactured according to ISO 9001 and EN 46001 quality
standards and the Company expects to be able to apply the CE mark to its

<PAGE>

products. In addition, international sales of medical devices manufactured in
the U.S. but not approved by the FDA for distribution in the U.S. are subject to
FDA export requirements. Under these requirements, the Company must assure that
the product is not in conflict with the laws of the country for which it is
intended for export, in addition to complying with the other requirements of
Section 801(e) of the United States Food, Drug and Cosmetic Act.

         Specific requirements demanded of a laboratory depend upon the
complexity of the test performed. CLIA regulations establish three categories of
laboratory tests, for which regulatory requirements become increasingly
stringent as the complexity of the test rises: (1) tests that require little or
no operator skill which allows for a waiver of the regulations; (2) tests of
moderate complexity; and (3) highly complex tests which require significant
operator skill or training. All laboratories performing tests of moderate or
high complexity must obtain either a registration certificate or a certificate
of accreditation from HCFA or an organization to whom HCFA has delegated such
authority. HCFA has allowed electronic controls for some NP instruments to serve
the function of daily quality control performance to allow non-laboratory
personnel to run such NP systems. The tests to be performed by the Company's
system are initially expected to fall within the moderate complexity class as
defined by current CLIA regulations, as all analogous NP instruments that are
presently on the market are classified in this manner. In practical terms,
performing a test of moderate complexity means that the individual supervising
the test, i.e. the physician, pathologist or laboratory director, must be well
educated and well trained, whereas the individual who operates the machine
requires no formal laboratory education and only task-specific training. The
Company may, but has not yet, applied for the waiver.

         The Company has received FDA approval for its myoglobin test for use in
the clinical environment. It will also submit additional tests for hCG and CK-MB
for FDA approval, also for clinical use. The Company will submit its system to
the FDA for approval for use for point-of-care and after such approval obtained
required approvals for test use at the point-of-care.

Research and Development

         For the year ended June 30, 1998, the year ended June 30, 1997, and the
period from September 30, 1991 (date of inception) to June 30, 1998, the Company
spent $1,608,361, $2,114,586 and $6,254,066, respectively, on research and
development of its medical diagnostic system. The Company will continue to spend
funds on final development of its system, development of additional tests and
research and development related to future products.

Manufacturing

         Quantech's system is comprised of an instrument and disposable. The
instrument consists of electronics and optics and does not require complicated
assembly procedures. Production of the instrument will be performed by a
contract manufacturer to Quantech under quality standards set by the Company.
The contract supplier has not yet been selected. Quantech will take delivery of
the instrument, perform final quality inspection and inventory the instrument
for final shipment.


<PAGE>

         Quantech's disposable consists of two parts, the sensor grating piece
with the metal coating and the carrier for such piece. Both the coated sensor
grating and carrier will be produced by contract suppliers according to Quantech
specifications. These pieces will be shipped to either Quantech or another
contract manufacturer to complete final manufacturing of the disposable. This
final manufacturing will consist of applying the assay (chemistry) on the gold
coated sensor grating, placing the final grating piece into the carrier,
performing the final assembly, labeling the unit and packaging the disposable
for final shipment.

Employees and Property

         The Company employs 14 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the DBx system and marketing. The Company expects to hire other
personnel as necessary for chemistry development, quality control, sales and
marketing, manufacturing and administration, including a CEO with diagnostic
industry experience.

         The Company leases offices (comprised of approximately 6,800 sq. ft.)
at 1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent and
operating expenses of approximately $5,600 pursuant to a lease arrangement which
expires February 2000 and will thereafter proceed on a month-to-month basis.

Legal Proceedings

         The Company is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operations.


CAUTIONARY STATEMENTS

         Certain statements contained in this Form 10 KSB and other written and
oral statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategy, financial results, product approvals, development programs and
marketing efforts. One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be affected by inaccurate assumptions, including,
among others, those discussed herein. Consequently, no forward-looking statement
can be guaranteed and actual results may vary materially. The Company notes
these factors as permitted by the Private Securities Litigation Reform Act of
1995. The Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual operations and cause such operations to differ
materially from those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company:




<PAGE>

Immediate and Future Capital Needs

         The Company does not have sufficient funds to complete commercial
development or commence production and sales of its system. The Company's
ability to continue as a going concern, complete its system, submit its
commercial system and tests to the FDA and commence sales will depend upon the
continued availability of investment capital, funding made by strategic
partner(s) or licensing revenues, until the revenues from sale of the
instruments and associated test disposables are sufficient to maintain
operations. In addition, the Company has $3.4 million of promissory notes that
came due September 30, 1998. If such notes are not paid by October 31, 1998, or
arrangements made with the holders of the notes, the note holders will obtain
control of all of the Company's assets. There can be no assurance that any such
additional financing can be obtained on favorable terms, if at all. Such
additional financing may result in dilution to Company shareholders. If funding
is not available when needed, the Company may be forced to cease operations and
abandon its business. In such event, Company shareholders could lose their
entire investment.

         In October 1998 the Company began offering for sale a minimum of $1.5
million and a maximum of $3.0 million shares of its Common Stock to accredited
investors. The shares are priced at $0.75.  The Company is also negotiating
with its noteholders to convert approximately $3.4 million of notes payable
into Common Stock at $0.75 per share. Quantech is currently obtaining minimal
funding from its directors to maintain operations.

No History of Operations; Development Stage Company; Going Concern Uncertainty

         To date, the Company does not have a product ready to be brought to
market. Accordingly, the Company has no operating history and its proposed
operations are subject to all of the risks inherent in a new business
enterprise, including commercial development of its products, lack of marketing
experience and lack of production history.

         The likelihood of the success of the Company must be considered in
light of the expenses, difficulties and delays frequently encountered in
connection with the start-up of new businesses, those historically encountered
by the Company, and the competitive environment in which the Company will
operate. The Company has not had any significant revenues to date. As of June
30, 1998, the Company had an accumulated deficit of $18,057,048. The report of
the independent auditors on the Company's financial statements for the period
ended June 30, 1998, includes an explanatory paragraph relating to the
uncertainty of the Company's ability to continue as a going concern. The Company
is a development stage company which has suffered significant losses from
operations, requires additional financing, and ultimately needs to continue
development of its product, generate revenues, and successfully attain
profitable operations to realize the value of its license agreement and remain a
going concern. These factors raise substantial doubt about the Company's ability
to continue as a going concern. There can be no assurance that the Company will
be able to develop a commercially viable product or marketing system or attain
profitable operations.


<PAGE>

No Assurance of Successful and Timely Development of Company's System

         The Company's DBx system, consisting of its reading instrumentation and
associated disposables, is under various stages of development. Such development
is being conducted by the Company using both internal and external resources.
Further development and testing will be required to prove additional testing
capability beyond Quantech's current tests, commercial viability of Quantech's
system, and to obtain all required FDA clearances. Until the development process
for the commercial system is completed and cleared through the FDA, there can be
no assurance that such system will be finished according to the Company's
current development timetable and budget, or that development will result in a
system that will perform in the manner anticipated by the Company. Additionally,
the final cost of the Company's instrument and disposables cannot be finalized
until system completion. The Company's success, if any, will depend on its
ability to timely complete its system within estimated cost parameters and
efficiently develop tests to expand the system's menu of tests.

Uncertainty of Market Acceptance

         The commercial success of the Company's DBx system will depend upon its
acceptance by the medical community and third-party payers as reliable, accurate
and economical. Market acceptance will depend upon several factors, including
the establishment of the utility and cost-effectiveness of the Company's tests,
the receipt of regulatory clearances in the United States and elsewhere and the
availability of third-party reimbursement. Diagnostic tests similar to those
developed by the Company are generally performed by a central or STAT laboratory
at a hospital or clinic. The approval of the purchase of diagnostic equipment by
a hospital is generally controlled by its central laboratory. The Company
expects that there will be resistance by some central laboratories to a new
instrument like that of Quantech's. The Company will also have to demonstrate to
physicians that its diagnostic products perform as intended, meaning that the
level of accuracy and precision attained by the Company's products must be
comparable to test results achieved by the hospital lab. Failure of the
Company's products to achieve market acceptance or third-party payer approval
would have a material adverse effect on the Company.

Lack of Marketing Experience

         The Company has had no experience in marketing its system. Quantech
intends to market its system in both the United States and in foreign markets
through a strategic partner(s) with an established distribution system, but no
assurance can be given that such an arrangement can be made. If such a strategic
relationship is not entered into prior to product launch, the Company will
market its system through a combination of its own sales force and distributors.
Establishing a sales and marketing capability sufficient to support the level of
sales necessary for the Company to attain profitability will require substantial
efforts and significant management and financial resources. There can be no
assurance that the Company will be able to recruit and retain direct sales and
marketing personnel in order to build a sales and marketing organization, engage
distributors to supplement the United States direct sales activity and sell
products in foreign markets or have its marketing efforts be successful.


<PAGE>

         If the Company is required to rely heavily upon distributors, as will
be the case outside of the United States, sales by such distributors could
account for a significant portion of the Company's revenues. There can be no
assurance that these distributors will devote the resources necessary to provide
effective sales and marketing support to the Company. In addition, Company
distributors may not give their full efforts to sell the Company's products.
Company distributors, if any, may not be contractually committed to make future
purchases of the Company's products and could therefore discontinue carrying the
Company's products in favor of a competitor's at any time and for any reason. If
the Company is unable to establish appropriate arrangements with distributors
when required, or if distributors are engaged and they become unwilling or
unable to promote, market and sell the Company's system, the Company's business
and financial condition would be adversely affected.

Limited Manufacturing and Production Experience

         Quantech's system consists of a reading instrument and a series of
disposable testing cartridges. To be successful, the Company must manufacture
these items in compliance with regulatory requirements and Good Manufacturing
Process ("GMP"), in sufficient quantities and on a timely basis, while
maintaining product quality and acceptable manufacturing costs. The instrument
and many components of the test disposables will be manufactured for the Company
by outside vendors. The Company has not entered into agreements with vendors to
manufacture the instrument or certain parts of the disposables. There can be no
assurance that the Company can engage such vendors. Further, if engaged, the
limited control the Company has over any third party manufacturers as to
timeliness of production, delivery and other factors could affect the Company's
ability to supply products on a timely basis.

         The Company ultimately intends to chemically coat and assemble its test
disposables. The Company has never operated a manufacturing/assembly business
and it will have to establish a manufacturing facility, or contract with a third
party for manufacturing, which is registered with the FDA. Production of the
Company's disposables requires the placement of antibodies or other binding
reagents on metalized sensor surfaces. The chemical and physical conditions for
coating are substantially equivalent to those used to produce other solid state
binding assays. Although the Company believes that its production methods will
be effective for manufacturing its disposables, there can be no assurance that
the methods will be applicable to all the tests it expects to develop or that
the Company will be able to manufacture accurate and reliable products in large
commercial quantities on a timely basis and at an acceptable cost. Inability to
manufacture a full range of diagnostic tests would limit the Company's access to
its intended market.

Government Regulation

         The Company's instrument and test disposables are human diagnostic
medical devices subject to regulation by the United States Federal Government
and federal agencies of foreign countries. The United States Food and Drug
Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act ("FDC
Act") will regulate the Company's system as a medical device. As such,
Quantech's system will require pre-market regulatory clearance before its
commercialization in the United States. The Company believes that pre-market
clearance can be obtained for its instrument and substantially all of its test
disposables through submission of a 510(k) pre-market notification ("510(k)

<PAGE>

Notification") demonstrating the product's substantial equivalence to another
device legally marketed pursuant to 510(k) Notification clearance. In this
regard, the Company has received FDA approval for its cardiac marker myoglobin
test. The Company will have to perform in-house clinical trials designed to
produce the data necessary to demonstrate the substantial equivalence of its
instrument and tests. Although 510(k) submissions are supposed to be completed
by the FDA within 90 days of submission, there can be no assurance the FDA will
approve the Company's initial system pursuant to a 510(k) Notification, or do so
in a timely manner, and therefore there can be no assurance that the Company
will be able to introduce its initial system in the United States within its
anticipated time frame. If the Company cannot establish to the satisfaction of
the FDA that its products are substantially equivalent, the Company will have to
seek pre-market approval ("PMA") of its system pursuant to Section 515 of the
FDC Act, requiring submission of a PMA application supported by extensive data
to prove safety and efficacy. If a PMA is required, introduction of the initial
system likely would be significantly delayed, which could have a material
adverse effect on the Company. By regulation, FDA review of PMA applications is
required within 180 days of its acceptance for filing; however, reviews more
often occur over a significantly protracted period, usually 12 to 18 months, and
a number of products have never been approved.

         The degree of regulation and areas of concern differ in each country or
region. The Company will be required to comply with regulations regarding
product approval and performance and, in addition, regulations concerning
electronic devices. For example, the European Community has drafted a Directive
for In vitro Diagnostic Products which the Company intends to comply with when
the Directive becomes effective and the Company's products will be required to
have "CE Marks" for sale in major European markets. Additionally, manufacturing
facilities are subject to inspection by the FDA and, for International Standards
Organization ("ISO") certified facilities, by notified bodies, on a periodic
basis. The Company and its contract manufacturers must demonstrate compliance
with applicable quality system requirements. No regulatory clearances have yet
been obtained in any country and there is no assurance that any will be
obtained. Further, regulations and standards are subject to frequent changes. If
regulatory clearances are not obtained, compliance with changes in regulations
or standards are not met or the Company's manufacturing facilities and those of
its contract manufacturers are in violation of applicable regulations, the sale
of the Company's system could be materially adversely affected.

Competition

         The diagnostic testing market is highly competitive. The Company
expects that manufacturers of central and STAT laboratory testing equipment will
compete to maintain their revenue and market share and that new testing products
will be developed. All of the industry leaders and many of the other companies
participating in this market have substantially greater resources than the
resources available to the Company, including, but not limited to, financial
resources and skilled personnel. There can be no assurance that, if the
Company's system is completed, it can successfully compete in its market.


<PAGE>

Compliance with CLIA

         Quantech's products will be subject to the Clinical Laboratory
Improvement Act of 1988 ("CLIA") which has been implemented by the Health Care
Financing Administration ("HCFA"). This law is intended to ensure the quality
and reliability of all medical testing in the United States regardless of where
tests are performed. The Company's marketing plan is based on non-laboratory
personnel operating its system. HCFA has allowed electronic controls for some
instruments to serve the function of daily quality control performance to allow
non-laboratory personnel to run such testing systems. The Company has not yet
applied for this exception. If the Company is unable to obtain this exception,
it would eliminate the user-friendly operation advantage of the Company's system
which could have an adverse affect on sales. Further, there can be no assurance
that CLIA regulations or future administrative interpretations of CLIA or
various state regulations requiring licensed technicians to operate diagnostic
systems will not have a material adverse effect on the Company.

Adverse Changes in Government Health Care Policy and Reimbursement

         Purchases of the Company's system and test disposables will be affected
by cost reimbursement requirements and regulations, including regulations
promulgated by HCFA, and uncertainties often faced by proposed changes in
government health care policy. Sales volumes and prices of the Company's test
disposables will in part be dependent on the level of availability of
reimbursement to health care providers for tests from third-party payers, such
as government and private insurance plans, health maintenance organizations and
preferred provider organizations. There can be no assurance that current
reimbursement amounts for tests will not be decreased in the future, and that
any such decreases will not reduce the demand for, or the price of, the
Company's tests. Any health care reform measures adopted by the federal
government could adversely affect the amount of test reimbursement available in
the United States, and consequently could adversely affect the prices received
by the Company for its tests.

Technological Obsolescence/Single Technology Basis

         The Company's reading instrument and test disposables, all of which are
based upon a single set of core technologies, are currently the Company's only
products and are expected to account for substantially all of the Company's
revenues, if any, for the foreseeable future. The Company operates in a market
characterized by rapid and significant technological change. While the Company
is not aware of any developments in the medical industry which would render the
Company's current or planned products less competitive or obsolete, there can be
no assurance that future technological changes or the development of new or
competitive products by others will not do so. To remain competitive, the
Company must continually make substantial expenditures for development of both
equipment and testing disposables. Because the Company's system represents
Quantech's sole product focus, lack of market acceptance or obsolescence of its
system would have a significant adverse effect.


<PAGE>

Obtaining Antibodies and Chemistries

         Many of the chemistries that will be necessary for the Company's
diagnostic system must be obtained through commercial suppliers or agreements
for the licensing of such chemistries. Although the Company believes it can
obtain the necessary chemistries, there can be no assurance that the Company
will be able to make satisfactory arrangements to provide its customers with as
wide a variety of products as they might desire. The lack of a sufficient number
of chemistries would greatly limit the Company's ability to expand the test menu
for its system and market it.

Patent Protection

         No assurance can be given that other companies will not develop
technologies substantially equivalent to those owned or to be acquired or
developed by the Company or that the Company will be able to protect its
proprietary technology. The Company is not aware of any issued patents that
would prohibit the use of any technology the Company currently has under
development. However, patents may exist or be issued in the future to other
companies covering elements of the Company's systems. The existence or issuance
of such patents may require the Company to make significant changes in the
design of its systems or operational plans. Although the Company believes that
its proposed products will not infringe patent rights of others, there can be no
assurance that such infringement does not, or will not, exist with respect to
the completed product. The Company has not conducted an independent patent
search or evaluation with respect to the SPR technology. Ares-Serono, the
licensor to the Company of its basic SPR technology, has made no warranties as
to the enforceability of any of its patents or the commercial potential of the
technology. Although Ares-Serono may defend the patents they have licensed to
the Company, Quantech will be responsible for the defense of any patents
Ares-Serono elects not to defend or those issued to Quantech. Cost of defending
patents can be substantial.

Dependence on the Ares-Serono License

         The Company is dependent upon the worldwide license (the "License") it
acquired from Ares-Serono to certain patents, proprietary information and
associated hardware (e.g. molds, test rigs, prototypes) related to the SPR
technology. The License calls for an ongoing royalty of 6 percent on all
products utilizing the SPR technology which are sold by the Company. If the
Company sublicenses the technology, the Company will pay a royalty of 15 percent
of all revenues received by the Company under any sublicense. The Company must
make a $150,000 minimum royalty payment on each of December 31, 1998 and 1999.
If such payments are not made, Ares-Serono has the right to cause a reversion to
Ares-Serono of a royalty-free license, thereby depriving the Company of its
exclusive rights under the License.

         Ares-Serono specifically reserved, and did not license to Quantech, any
rights to or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the License is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
technology for applications outside the field of the commercial interests of the
Company.


<PAGE>

Dependence on Personnel

         The Company has a small number of employees and although it believes it
maintains a core group sufficient for it to effectively conduct its operations,
the loss any of its personnel could, to varying degrees, have an adverse effect
on Company operations and system development. The loss of either Robert Case,
CEO or Greg Freitag, COO and CFO would have a material adverse effect on the
Company.

Possibility of Exposure to Product Liability Claims

         The Company could be exposed to risk of product liability claims or
other lawsuits in the event of incorrect diagnosis caused by a failure of its
system. Although the Company will evaluate obtaining liability insurance when
its products are brought to market, there can be no assurance that the Company
will be able to obtain or maintain such insurance or that the Company will not
be subject to claims in excess of its insurance coverage.

Absence of Dividends

         The Company has not declared or paid any cash dividends on its Common
Stock since its inception and the Board of Directors intends to retain all
earnings for use by the Company for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors and will depend upon a number of factors,
including among others, earnings of the Company, the operating and financial
condition of the Company, the Company's capital requirements, and general
business conditions.

Shares Eligible for Future Sale

         All but 30,033 shares of the Company's outstanding Common Stock are
eligible to be sold in the public market along with certain shares that may be
obtained upon exercise of outstanding options and warrants or conversion of
notes eligible to be sold in the public market if and when exercised or
converted. The Company intends to file registrations in the near future making
all outstanding shares and shares that may be obtained upon exercise of options
and warrants or conversion of notes eligible for sale. The sale of a substantial
number of the shares available for sale or shares underlying options, warrants
and convertible notes could adversely affect the market price and liquidity of
the Company's securities.

Limited Market for Securities

         There is a limited trading market for the Company's Common Stock, which
is quoted on the OTC Bulletin Board. Although trading in the Company's Common
Stock does occur on a consistent basis, the volume of shares traded has been
sporadic. There can be no assurance that an established trading market will
develop, the current market will be maintained or a liquid market for the
Company's Common Stock will be available in the future.


<PAGE>

Volatility of Stock Price

         The Company believes that factors such as announcements of developments
by the Company or its competitors, general conditions in the health care or
medical diagnostic markets and conditions in the financial markets could cause
the price of the Company's Common Stock to fluctuate substantially. In addition,
the stock market has recently experienced extreme price and volume fluctuations
which have affected the market prices for many emerging growth companies and
which have often been unrelated to the operating performance of the specific
companies. These market fluctuations may adversely affect the price of the
Company's Common Stock.

Year 2000 Compliance

         Although the Company's internal systems and products are year 2000
computer compliant, its customers may not be in compliance. The result of
noncompliance by customers, if any, could result in delays in installing the
Company's systems, extra expense in installation or a failure in the system's
ability to communicate with hospital computers for down-loading information.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company leases office space (comprised of approximately 6,800 sq.
ft.) at 1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent and
operating expenses of approximately $5,600 pursuant to a lease arrangement which
expires February, 2000 and will thereafter proceed on a month-to-month basis.
The Company will require at least 15,000 sq. ft. of space prior to commercial
manufacturing of its system. The Company will review its space needs prior to
product commercialization.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 1998.

<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER  MATTERS

         The Company's Common Stock is traded on the local over-the-counter and
the National Association of Securities Dealers Bulletin Board markets under the
symbol QQQQ. At September 23, 1998, the Company had approximately 525
shareholders of record and the bid, asked and closing sale prices of its Common
Stock were $0.97, $1.13 and $1.13, respectively. The following table summarizes
the quarterly high and low sale prices for the Company's Common Stock for the
prior two fiscal years as adjusted for a 1-for-20 reverse stock split effected
on June 2, 1998:

                                                High              Low
                                            -------------     --------------

            Fiscal 1997
                     First Quarter              $21.20           $11.80
                     Second Quarter             $15.00           $ 9.40
                     Third Quarter              $12.40           $ 8.20
                     Fourth Quarter             $ 8.00           $ 4.20
            Fiscal 1998
                     First Quarter              $ 5.60           $ 2.20
                     Second Quarter             $ 5.60           $ 2.80
                     Third Quarter              $ 4.00           $ 2.70
                     Fourth Quarter             $ 7.00           $ 2.60
                                                            

         The Company has never paid a cash dividend on its Common Stock. Payment
of dividends is at the discretion of the Board of Directors. The Board of
Directors plan to retain earnings, if any, for operations and does not intend to
pay dividends in the near future.

         During May 1998 holders of the Company's Convertible Secured Promissory
Notes agreed to convert $219,300 of accrued interest into Notes and extend the
maturity date of the Notes to September 30, 1998 from June 1, 1998. The Note
holders received warrants to purchase 178,618 shares of Common Stock. The
extension of the Notes and issuance of the warrants were made in reliance upon
exemptions from registration provided under Section 4(2) of the 1933 Act and
Rule 506 of Regulation D. The holders of these notes and warrants acquired these
securities for their own account and not with a view to any distribution thereof
to the public.

         During May through August 1998, the Company completed an offering of
Convertible Secured Promissory Notes in the principal amount of $497,500 to
accredited investors and issued warrants in connection with the sale of such
notes to the investors for the purchase of 74,625 shares of Common Stock. The
sales were made in reliance upon exemptions from registration provided under
Section 4(2) of the 1933 Act and Rule 506 of Regulation D. The Company paid
commissions and accountable expenses in the aggregate amount of $20,900 to a

<PAGE>

registered investment bank for acting as selling agent and issued the investment
bank a warrant to purchase up to 3,134 shares of Common Stock as additional
compensation. Such warrant was sold pursuant to Section 4(2) of the 1933 Act.
The purchasers of these notes and warrants acquired these securities for their
own account and not with a view to any distribution thereof to the public.

         In October 1998 the Company began offering for sale a minimum of $1.5
million and a maximum of $3.0 million shares of its Common Stock to accredited
investors. The shares are priced at $0.75. The sales will be made in reliance
upon exemptions from registration provided under Section 4(2) of the 1933 Act
and Rule 506 of Regulation D. The purchasers will acquire these securities for
their own account and not with a view to any distribution thereof to the public.

         In July 1998 the Company sold 9,196 shares of its Common Stock at $3.00
per share to an accredited investor. The shares were sold pursuant to Section
4(2) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.

         Also in July 1998, 2,000 shares of Common Stock were issued pursuant to
conversion of a promissory note. The shares were sold pursuant to Section 4(2)
of the 1933 Act. The purchaser of such Common Stock acquired these securities
for its own account and had available Rule 144 pursuant to the 1933 Act for
distribution thereof to the public.

         In August 1998 the Company sold 5,714 shares of its Common Stock at
$3.50 per share to an accredited investor. The shares were sold pursuant to
Section 4(2) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.

         Also in August 1998, 2,045 shares of Common Stock were issued pursuant
to exercise of a warrant. The shares were sold pursuant to Section 4(2) of the
1933 Act. The purchaser of such Common Stock acquired these securities for its
own account and not with a view to any distribution thereof to the public.

         In September 1998, 3,400 shares of Common Stock were issued pursuant to
conversion of a promissory note. The shares were sold pursuant to Section 4(2)
of the 1933 Act. The purchaser of such Common Stock acquired these securities
for its own account and had available Rule 144 pursuant to the 1933 Act for
distribution thereof to the public.




<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

History

         Quantech was formed under the laws of Minnesota for the purpose of
effecting the change of domicile of Spectrum Diagnostics S.p.A ("SDS") from
Italy to the state of Minnesota through the merger with SDS on April 14, 1993.
Quantech had no operations prior to the merger and is continuing the business of
SDS to commercialize Surface Plasmon Resonance ("SPR") technology licensed from
Ares-Serono. SPR is the core technology of Quantech's proposed DBx medical
diagnostic system. The DBx will first be marketed to hospital emergency
departments ("ED") and is expected to provide a single, simple economical system
providing the rapid, quantitative STAT test menu EDs require. The Quantech
system configuration will consist of a bench top instrument and a series of
disposable tests with one or up to four tests per disposable. It is anticipated
that the Quantech system will have the ability to analyze body fluids (e.g.
whole blood, urine) without preparation or addition of reagents. The first tests
to be offered on the DBx will be a cardiac panel consisting of myoglobin, CK-MB
and troponin I and whole blood quantitative pregnancy.

         Quantech is a development stage company which has suffered losses from
operations and will require additional financing to complete development, obtain
FDA approval and commercialize its product. The Company's product development
must be completed, FDA approval obtained, the product introduced to the market
and ultimately Quantech will need to successfully attain profitable operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.

Results of Operations

         The Company has incurred a net loss of $18,057,048 from September 30,
1991 (date of inception) through June 30, 1998 due to expenses related to
formation and operation of SDS in Italy, continuing costs of raising capital,
normal expenses of operating over an extended period of time, funds applied to
research and development, royalty payments related to the SPR technology, losses
due to expenses of Quantech's predecessor, Spectrum Diagnostics Inc. and
interest on borrowed funds. In addition, an investment of $3,356,629 was made
when Quantech purchased the rights to the SPR technology.

         For the year ended June 30, 1998 the Company had interest income of
$12,435 compared to $80,854 for the 1997 fiscal year as a result of less cash on
hand as proceeds obtained from Quantech's private placements of securities have
been used for operations and research and development.

         General and administration expenses decreased from $1,799,117 for the
year ended June 30, 1997 to $1,221,196 for the year ended June 30, 1998. The
decrease in general and administration expenses resulted from the restructuring
that the Company implemented in the second half of 1997. The restructuring was

<PAGE>

aimed at reducing expenses and focusing the Company's resources on completing
development of its diagnostic system. Changes that were made included reducing
the number of employees, consultants and outside services employed in the
administrative functions. The Company anticipates that these expenses will
increase significantly in the future as the Company completes development of its
system and begins to manufacture and distribute its products.

         Research and development costs decreased from $2,114,586 in 1997 to
$1,608,361 in 1998. The decrease was due to the above mentioned restructuring,
with cost reductions resulting primarily from reduced outside contract
development work as the Company focused its resources on completing system
development with a reconfigured internal development team. Spending began to
increase significantly, however, near the end of fiscal 1998 as the Company
incurred expenses necessary to prepare and file its first 510(k) submission with
the FDA, and engaged outside design engineering firms to assist in finishing the
commercial development of its DBx system. The Company expects R&D spending to
continue at a considerably higher rate in fiscal 1999 as the Company completes
the commercial development of its system, conducts additional FDA work, and
begins to establish higher volume manufacturing capabilities.

         Minimum royalty expense increased to $112,500 in 1998 as compared to
$75,000 in 1997 as a result of the higher minimum royalties owed under
Quantech's amended license with Ares-Serono. Royalty expense is expected to
increase to $150,000 in fiscal 1999 to reflect the minimum royalties owed under
Quantech's amended license with Ares-Serono.

         Interest expense increased in 1998 to $719,126 as compared to $17,611
in 1997. The higher interest expense was primarily the result of increased debt
from the sale of promissory notes including a $441,542 charge to reflect the
beneficial conversion feature of the notes. Interest expense during fiscal 1999
is expected to be similar to 1998, but may change depending upon the future
capital structure of the Company.

         For the year ended June 30, 1998 Quantech had a loss of $3,648,748 as
compared to $3,925,460 for the same period ended June 30, 1997. This decrease
was a result of the decrease in research and development and general and
administrative expenses in 1998 exceeding increases in such period in minimum
royalty and interest expenses and the decrease in interest income.

         The Company has made significant progress in the development of its
system, but this progress has been much slower than anticipated. Although
Quantech has been able to complete prototype systems that demonstrate that its
SPR technology does work to detect certain conditions and obtained FDA approval
for its cardiac marker test myoglobin, it has not been able to achieve
reproducible results at sensitivity levels necessary for quantitative analysis
throughout the entire required clinical range for all of its intended STAT test
menu. Quantech's development is focused upon expanding its test menu and
completing its system for FDA approval and market launch. In addition to
development activity, the Company is in discussions with potential strategic
partners regarding the sublicensing of Quantech's technology outside of its core
medical area, distribution of its system once developed and device
manufacturing. The timetable for submitting the Company's system to the FDA and

<PAGE>

introduction to the market will be influenced by the Company's ability to obtain
further funding, enter into strategic relationships, complete commercial
prototype development of its system, necessary testing for submission of its FDA
filing and delays it may encounter with the FDA in its review of the system.
There can be no assurance that the Company will be able to obtain the required
funding, enter into any strategic agreements or ultimately complete its system.

Liquidity and Capital Resources

         From inception to June 30, 1998, Quantech has raised approximately
$18,400,000 through a combination of public stock sales and private sales of
stock and debt obligations. The Company requires additional funding to continue
operations and must make arrangements with holders of convertible notes as to
their conversion or repayment prior to October 31, 1998. Funds to continue
operations will be applied to obtaining FDA approval, establishing sales and
marketing and production capabilities, and beginning any significant sales of
the Company's product once development is completed. There can be no assurance
that the Company will obtain additional capital, and additional capital will
have a dilutive effect on current shareholders. Although the Company has a
limited lending arrangement with its bank, it does not anticipate receiving
significant funding from lenders.

         During May through August 1998, Quantech received $476,000 of net
proceeds as a result of a private placement of convertible notes (the "Notes")
and warrants (the "Warrants"). The Notes came due and payable on September 30,
1998 for which there is a 30 day cure provision. Interest on the Notes is 13.5%,
and the Notes are secured by all of the assets of the Company. The investors
received Warrants to purchase 74,625 shares of Quantech Common Stock at an
exercise price equal to the lower of $3.53 or 80% of the market price of the
Company's Common Stock for: (i) the 20 consecutive trading days prior to
September 30, 1998, or (ii) the price at which the transaction which triggers
repayment of the Notes is completed. The principal amount of the Notes is
convertible into shares of the Company's Common Stock at a price equal to, and
calculated in the same manner as, the Warrant Exercise Price.

         In October 1998 the Company began offering for sale a minimum of $1.5
million and a maximum of $3.0 million shares of its Common Stock to accredited
investors. The shares are priced at $0.75.  The Company is also negotiating
with its noteholders to convert approximately $3.4 million of notes payable
into Common Stock at $0.75 per share.  Quantech is currently obtaining minimal
funding from its directors to maintain operations.

         Quantech incurred capital expenditures of approximately $40,000 in
fiscal 1998. The Company anticipates significantly higher capital expenditures
in the near future for laboratory and production equipment and office expansion
as the Company nears product introduction. The timing and amount of such
expenditures will be governed by the Company's development and market
introduction schedules which are subject to change due to a number of factors
including development delays, FDA approval and availability of future financing.

         On June 2, 1998 the Company effected a 1-for-20 reverse split of its
Common Stock to reduce the number of outstanding and authorized shares. All
share amounts in this report have been adjusted to reflect this change. The
Company currently has outstanding 2,587,395 shares of Common Stock. It also has
options and warrants outstanding to purchase an additional 3,257,221 shares, and
notes convertible into a minimum of 2,875,329 shares.


<PAGE>

New Accounting Pronouncements

         Comprehensive Income. The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Statement No. 130 requires reporting items which are componenets of other
comprehensive income, such as foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. The Company will
adopt this statement in the fiscal year ending June 30, 1999. However, it is not
expected to have an effect on the presentation of the Company's financial
statements.

         Segments. The FASB has issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, effective for fiscal years
beginning after December 15, 1997. Statement No. 131 requires disclosure of
certain information for each reportable segment, including general information,
profit and loss information, segment assets, etc. The Company will adopt this
statement in the fiscal year ending June 30, 1999. The Company does not expect
this statement to have an effect on its financial statements.

ITEM 7.  FINANCIAL STATEMENTS

         The following financial information of the Company is included as
follows:

                                                                            Page
                                                                            ----
Financial Statements for Fiscal Years 1998 and 1997
Independent Auditors Report................................................34
Balance Sheets as of June 30, 1998 and 1997................................35-36
Statements of Operations For the Period from Inception (September 30, 
 1991) through June 30, 1998 and for the Years Ended June 30, 1998 
 and 1997..................................................................37
Statements of Stockholders' Equity (Deficit) For the Period from Inception
 (September 30, 1991) through June 30, 1998................................38-43
Statement of Cash Flows For the Period from Inception (September 30, 1991)
 through June 30, 1998 and for the Years Ended June 30, 1998 and 1997......44-46
Notes to Financial Statements..............................................47-57

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

         None.

<PAGE>
                          INDEPENDENT AUDITOR'S REPORT

To the Stockholders and the
    Board of Directors
Quantech Ltd.
St. Paul, Minnesota

We have audited the accompanying balance sheets of Quantech Ltd. (A Development
Stage Company) as of June 30, 1998 and 1997, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1998 and 1997, and for the period from September 30, 1991 (date of
inception), to June 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quantech Ltd. (A Development
Stage Company) as of June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years ended June 30, 1998 and 1997, and for the
period from September 30, 1991 (date of inception), to June 30, 1998, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company which has
suffered significant losses from operations, requires additional financing, and
ultimately needs to continue development of its product, generate revenues, and
successfully attain profitable operations to realize the value of its license
agreement and remain a going concern. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                                   /s/ McGladrey & Pullen, LLP

Minneapolis, Minnesota
August 3, 1998



<PAGE>

QUANTECH LTD. (A Development Stage Company)

BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>

ASSETS (Note 3)                                                               1998         1997
                                                                          ----------   ----------
<S>                                                                       <C>          <C>       
Current Assets
     Cash and cash equivalents                                            $   46,135   $  718,893
     Debt issuance costs                                                        --         78,699
     Prepaid expenses:
         Product development expense                                         115,000         --
         Other                                                                42,044       35,452
                                                                          ----------   ----------
                   Total current assets                                      203,179      833,044
                                                                          ----------   ----------

Property and Equipment
     Equipment                                                               366,493      329,780
     Leasehold improvements                                                   15,000       15,000
                                                                          ----------   ----------
                                                                             381,493      344,780

     Less accumulated depreciation                                           202,201      139,267
                                                                          ----------   ----------
                                                                             179,292      205,513
                                                                          ----------   ----------

Other Assets
     License agreement, at cost, less accumulated amortization (Note 4)    2,735,807    2,096,558
     Prepaid product development expense, less current portion                57,500         --
     Patents                                                                   9,029        8,895
     Organization expenses, net                                                 --            113
                                                                          ----------   ----------
                                                                           2,802,336    2,105,566
                                                                          ----------   ----------
                                                                          $3,184,807   $3,144,123
                                                                          ==========   ==========
</TABLE>

See Notes to Financial Statements.


<PAGE>


<TABLE>
<CAPTION>



LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                         1998            1997
                                                                 ------------    ------------
Current Liabilities
<S>                                                              <C>             <C>         
     Short-term debt (Note 3)                                    $  3,112,818    $  1,070,000
     Accounts payable                                                  97,333         100,794
     Accrued expenses:
         Minimum royalty commitment (Note 4)                           75,000         112,500
         Spectrum Diagnostics, Inc. obligations (Note 8)               19,846          36,509
         Payroll and vacation                                         103,157          54,226
         Accrued severance                                               --            77,265
         Interest                                                      48,594          10,685
         Other                                                           --             4,019
                                                                 ------------    ------------
                   Total current liabilities                        3,456,748       1,465,998
                                                                 ------------    ------------

Commitments and Contingencies (Notes 4, 5, and 8)


Stockholders' Equity (Deficit) (Notes 2, 3, and 6)
     Common stock, no par value; authorized 10,000,000 shares;
         outstanding, 2,565,040 and 2,402,035 shares in 1998
         and 1997, respectively                                    16,308,438         480,408
     Additional paid-in capital                                     1,476,669      15,606,017
     Deficit accumulated during the development stage             (18,057,048)    (14,408,300)
                                                                 ------------    ------------
                                                                     (271,941)      1,678,125
                                                                 ------------    ------------
                                                                 $  3,184,807    $  3,144,123
                                                                 ============    ============

</TABLE>

<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF OPERATIONS
YearsEnded June 30, 1998 and 1997, and for the Period From September 30, 1991
     (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>

                                                                                                      September 30,
                                                                                                      1991 (Date of
                                                                             Years Ended June 30      Inception) to
                                                                       ----------------------------       June 30,
                                                                             1998            1997           1998
                                                                       ------------    ------------    ------------
<S>                                                                    <C>             <C>             <C>         
Interest income                                                        $     12,435    $     80,854    $    183,216
                                                                       ------------    ------------    ------------

Expenses:
     General and administrative                                           1,221,196       1,799,117       9,161,784
     Research and development                                             1,608,361       2,114,586       6,254,066
     Minimum royalty expense (Note 4)                                       112,500          75,000       1,075,000
     Losses resulting from transactions with Spectrum
         Diagnostics, Inc. (Note 8)                                            --              --           556,150
     Net exchange gain                                                         --              --           (67,172)
     Interest                                                               719,126          17,611       1,217,841
                                                                       ------------    ------------    ------------
                                                                          3,661,183       4,006,314      18,197,669
                                                                       ------------    ------------    ------------

                   Loss before income taxes                              (3,648,748)     (3,925,460)    (18,014,453)

Income taxes (Note 7)                                                          --              --            42,595
                                                                       ------------    ------------    ------------
                   Net loss                                            $ (3,648,748)   $ (3,925,460)   $(18,057,048)
                                                                       ============    ============    ============

Loss per basic and diluted common share                                $      (1.45)   $      (1.66)
                                                                       ============    ============

Weighted-average common shares outstanding                                2,523,975       2,365,914
                                                                       ============    ============
</TABLE>

See Notes to Financial Statements.



<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From September 30, 1991 (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>

                                                                                                                             
                                                                                                               Common Stock  
                                                                                                Additional       Paid For,   
                                                                       Common Stock               Paid-In        But Not     
                                                                 Shares Issued     Amount         Capital        Issued      
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>        <C>            <C>            <C>            
Balance, at inception                                                    --     $      --      $      --      $      --      
     Net loss                                                            --            --             --             --      
     Common stock transactions:
         Common stock issued, October 1991                            160,000     3,154,574           --             --      
         Common stock issued, November 1991                            30,000       611,746      1,788,254           --      
         Common stock issuance costs                                     --            --         (889,849)          --      
     Cumulative translation adjustment                                   --            --             --             --      
                                                                     --------   -----------    -----------    -----------    
Balance, December 31, 1991                                            190,000     3,766,320        898,405           --      
     Net loss                                                            --            --             --             --      
     Common stock transactions:
         Common stock issued, September 1992                           35,000       699,033        875,967           --      
         Common stock issuance costs                                     --            --         (312,755)          --      
         8,000 shares of common stock to be issued                       --            --             --          120,000    
     Officer advances, net                                               --            --             --             --      
     Cumulative translation adjustment                                   --            --             --             --      
     Elimination of cumulative translation adjustment                    --            --             --             --      
                                                                     --------   -----------    -----------    -----------    
Balance, December 31, 1992                                            225,000     4,465,353      1,461,617        120,000    
     Net loss                                                            --            --             --             --      
     Common stock transactions:
         Common stock issued, January 1993                              8,000         1,600        118,400       (120,000)   
         Common stock issued, April 1993                                1,500           300         11,700           --      
         Change in common stock par value resulting
            from merger                                                  --      (4,420,353)     4,420,353           --      
     Repayments                                                          --            --             --             --      
                                                                     --------   -----------    -----------    -----------    
Balance, June 30, 1993                                                234,500        46,900      6,012,070           --      
     Net loss                                                            --            --             --             --      
     12,000 shares of common stock to be issued                          --            --             --           30,000    
     Repayments                                                          --            --             --             --      
                                                                     --------   -----------    -----------    -----------    
</TABLE>

<TABLE>
<CAPTION>
(Table continued)
                                                                                                 Deficit
                                                                                               Accumulated
                                                                 Common Stock                   During the    Cumulative
                                                                 Subscriptions    Due From     Development    Translation
                                                                  Receivable      Officers        Stage       Adjustment
----------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>            <C>
Balance, at inception                                           $      --      $      --      $      --      $      --
     Net loss                                                          --             --         (594,620)          --
     Common stock transactions:
         Common stock issued, October 1991                             --             --             --             --
         Common stock issued, November 1991                            --             --             --             --
         Common stock issuance costs                                   --             --             --             --
     Cumulative translation adjustment                                 --             --             --          387,754
                                                                -----------    -----------    -----------    -----------
Balance, December 31, 1991                                             --             --         (594,620)       387,754
     Net loss                                                          --             --       (2,880,988)          --
     Common stock transactions:
         Common stock issued, September 1992                        (53,689)          --             --             --
         Common stock issuance costs                                   --             --             --             --
         8,000 shares of common stock to be issued                     --             --             --             --
     Officer advances, net                                             --          (27,433)          --             --
     Cumulative translation adjustment                                 --             --             --         (209,099)
     Elimination of cumulative translation adjustment                  --             --             --         (178,655)
                                                                -----------    -----------    -----------    -----------
Balance, December 31, 1992                                          (53,689)       (27,433)    (3,475,608)          --
     Net loss                                                          --             --         (996,089)          --
     Common stock transactions:
         Common stock issued, January 1993                             --             --             --             --
         Common stock issued, April 1993                               --             --             --             --
         Change in common stock par value resulting
            from merger                                                --             --             --             --
     Repayments                                                        --            5,137           --             --
                                                                -----------    -----------    -----------    -----------
Balance, June 30, 1993                                              (53,689)       (22,296)    (4,471,697)          --
     Net loss                                                          --             --       (1,543,888)          --
     12,000 shares of common stock to be issued                        --             --             --             --
     Repayments                                                      53,689         22,296           --             --
                                                                -----------    -----------    -----------    -----------
</TABLE>
                                                    (Continued)


<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Period From September
30, 1991 (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>

                                                                                                                             
                                                                                                               Common Stock  
                                                                                                 Additional     Paid For,   
                                                                     Common Stock                 Paid-In        But Not     
                                                              Shares Issued     Amount            Capital        Issued      
---------------------------------------------------------------------------------------------------------------------------

<S>                                                             <C>             <C>              <C>            <C>               
Balance, June 30, 1994                                            234,500         46,900           6,012,070      30,000          
     Net loss                                                           -              -                   -           -          
     Common stock issued, June 1995                               107,500         21,500             276,068     (30,000)         
     Warrants issued for services                                       -              -              40,200           -          
                                                                ---------       --------          ----------     -------        
Balance, June 30, 1995                                            342,000         68,400           6,328,338           -          
     Net loss                                                           -              -                   -           -          
     Common stock issued, net of issuance costs of $848,877:
         July 1995                                                308,000         61,600           1,304,450           -          
         August 1995                                               35,880          7,176             161,460           -          
         September 1995                                           690,364        138,073           2,370,389           -          
         November 1995                                             94,892         18,978             425,482           -          
         December 1995                                            560,857        112,172           1,292,473           -          
         May 1996                                                 313,750         62,750           3,300,422           -          
         June 1996                                                    252             51               3,650           -          
     Payment received on subscription receivable                     (960)          (192)            (14,808)          -          
     Compensation expense recorded on stock options                     -              -             125,000           -          
                                                                ---------       --------          ----------     -------    
Balance, June 30, 1996                                          2,345,035        469,008          15,296,856           -          
     Net loss                                                           -              -                   -           -          
     Stock offering costs                                               -              -             (12,310)          -          
     Common stock issued upon exercise of
         options and warrants:
         September 1996                                               500            100               2,400           -          
         October 1996                                               8,500          1,700              40,800           -          
         November 1996                                                750            150               3,600           -          
         December 1996                                             13,500          2,700              64,800           -          
         January 1997                                               1,000            200               4,800           -          
         February 1997                                              7,500          1,500              17,250           -          
         March 1997                                                 7,000          1,400              33,600           -          
     Payments received on subscription receivable                       -              -                   -           -          
     Compensation expense recorded on stock options                     -              -              48,000           -          
     Common stock issued, June 1997                                18,250          3,650             105,850           -          
     Warrants issued with notes payable                                 -              -                 371           -          
                                                                ---------       --------          ----------     -------   
</TABLE>
(Table Continued)
<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                                 Common Stock                        During the          Cumulative
                                                                 Subscriptions       Due From        Development        Translation
                                                                  Receivable         Officers           Stage            Adjustment
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>               <C>            <C>                    <C>    
Balance, June 30, 1994                                                    -                 -         (6,015,585)                 -
     Net loss                                                             -                 -         (2,070,292)                 -
     Common stock issued, June 1995                                 (20,000)                -                  -                  -
     Warrants issued for services                                         -                 -                  -                  -
                                                                    -------           -------        -----------            -------
Balance, June 30, 1995                                              (20,000)                -         (8,085,877)                 -
     Net loss                                                             -                 -         (2,396,963)                 -
     Common stock issued, net of issuance costs of $848,877:
         July 1995                                                        -                 -                  -                  -
         August 1995                                                      -                 -                  -                  -
         September 1995                                                   -                 -                  -                  -
         November 1995                                                    -                 -                  -                  -
         December 1995                                                    -                 -                  -                  -
         May 1996                                                         -                 -                  -                  -
         June 1996                                                        -                 -                  -                  -
     Payment received on subscription receivable                     20,000                 -                  -                  -
     Compensation expense recorded on stock options                       -                 -                  -                  -
                                                                    -------           -------        -----------            -------
Balance, June 30, 1996                                                    -                 -        (10,482,840)                 -
     Net loss                                                             -                 -         (3,925,460)                 -
     Stock offering costs                                                 -                 -                  -                  -
     Common stock issued upon exercise of
         options and warrants:
         September 1996                                                   -                 -                  -                  -
         October 1996                                                     -                 -                  -                  -
         November 1996                                                    -                 -                  -                  -
         December 1996                                              (57,500)                -                  -                  -
         January 1997                                                     -                 -                  -                  -
         February 1997                                                    -                 -                  -                  -
         March 1997                                                       -                 -                  -                  -
     Payments received on subscription receivable                    57,500                 -                  -                  -
     Compensation expense recorded on stock options                       -                 -                  -                  -
     Common stock issued, June 1997                                       -                 -                  -                  -
     Warrants issued with notes payable                                   -                 -                  -                  -
                                                                    -------           -------        -----------            -------
</TABLE>
                                                    (Continued)


<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Period From September
30, 1991 (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>
                                                                                                                             
                                                                                                                      Common Stock
                                                                                                         Additional     Paid For, 
                                                                         Common Stock                     Paid-In        But Not   
                                                                  Shares Issued        Amount             Capital        Issued    
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>              <C>                 <C>       
Balance, June 30, 1997                                             2,402,035            480,408          15,606,017          -     
     Net loss                                                              -                  -                   -          -     
     Conversion of common stock from par
         value to no par value                                             -         15,392,446         (15,392,446)         -     
     Common stock issued for license agreement:
         September 1997                                              150,000            390,000                   -          -     
     Common stock issued for equipment and
         services received:
         March 1998                                                   13,078             45,584                   -          -     
     Warrants issued for services received:
         March 1998                                                        -                  -              15,215          -     
         April 1998                                                        -                  -                 500          -     
     Warrants issued with notes payable                                    -                  -                 939          -     
     Amount attributable to value of debt conversion
         feature                                                           -                  -             988,444          -     
     Warrants issued for license agreement:
         December 1997                                                     -                  -             230,000          -     
     Compensation expense recorded on stock options                        -                  -              28,000          -     
     Adjustment of fractional shares due to 1-for-20
         reverse stock split                                             (73)                 -                   -          -     
                                                           --------------------------------------------------------- -------------
Balance, June 30, 1998                                             2,565,040       $ 16,308,438       $   1,476,669      $   -    
                                                           ========================================================= =============
</TABLE>
(Table continued)
<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                                 Common Stock                        During the          Cumulative
                                                                 Subscriptions       Due From        Development        Translation
                                                                  Receivable         Officers           Stage            Adjustment
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>              <C>                  <C>
Balance, June 30, 1997                                                  -                -            (14,408,300)            -
     Net loss                                                           -                -             (3,648,748)            -
     Conversion of common stock from par                                                          
         value to no par value                                          -                -                      -             -
     Common stock issued for license agreement:                                                   
         September 1997                                                 -                -                      -             -
     Common stock issued for equipment and                                                        
         services received:                                                                       
         March 1998                                                     -                -                      -             -
     Warrants issued for services received:                                                       
         March 1998                                                     -                -                      -             -
         April 1998                                                     -                -                      -             -
     Warrants issued with notes payable                                 -                -                      -             -
     Amount attributable to value of debt conversion                                              
         feature                                                        -                -                      -             -
     Warrants issued for license agreement:                                                       
         December 1997                                                  -                -                      -             -
     Compensation expense recorded on stock options                     -                -                      -             -
     Adjustment of fractional shares due to 1-for-20                                              
         reverse stock split                                            -                -                      -             -
                                                           ------------------------------------------------------------------------
Balance, June 30, 1998                                              $   -           $    -           $(18,057,048)        $   -
                                                           ========================================================================
</TABLE>              
See Notes to Financial Statements.



<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF CASH FLOWS
YearsEnded June 30, 1998 and 1997, and for the Period From September 30, 1991
     (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>
                                                                                                            September 30,
                                                                                                            1991 (Date of
                                                                              Years Ended June 30           Inception) to
                                                                        ---------------------------------
                                                                             1998             1997          June 30, 1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>               <C>             
Cash Flows From Operating Activities
     Net loss                                                           $  (3,648,748)   $  (3,925,460)    $ (18,057,048)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
         Elimination of cumulative translation adjustment                           -                -          (178,655)
         Depreciation                                                          62,934           60,610           248,555
         Amortization                                                         379,727          228,338         1,736,344
         Noncash compensation services and interest                           787,429           48,000         1,324,679
         Losses resulting from transactions with Spectrum
            Diagnostics, Inc. (Note 8)                                              -                -           556,150
         Write-down of investment                                                   -                -            67,500
         Changes in assets and liabilities, net of effects 
            from purchase of Spectrum Diagnostics, Inc.:
            Decrease in prepaid expenses                                        1,062            5,817            42,048
            Increase (decrease) in accounts payable                           (10,128)         (14,140)           89,111
            Increase (decrease) in accrued expenses                           (48,607)         204,067           520,721
                                                                        -------------------------------------------------
                   Net cash used in operating activities                   (2,476,331)      (3,392,768)      (13,650,595)
                                                                        -------------------------------------------------

Cash Flows From Investing Activities
     Purchase of property and equipment                                       (16,713)         (99,097)         (438,251)
     Proceeds on disposition of property                                            -           37,375            37,375
     Organization expenses                                                          -                -           (97,547)
     Patent expenses                                                             (134)          (8,895)           (9,029)
     Officer advances, net                                                          -                -          (109,462)
     Purchase of investment                                                         -                -          (225,000)
     Purchase of license agreement                                                  -                -        (1,950,000)
     Advances to Spectrum Diagnostics, Inc.                                         -                -          (320,297)
     Prepaid securities issuance costs                                              -          (78,699)         (101,643)
     Purchase of Spectrum Diagnostics, Inc., net of cash and cash
         equivalents acquired                                                       -                -        (1,204,500)
                                                                        -------------------------------------------------
                   Net cash used in investing activities                      (16,847)        (149,316)       (4,418,354)
                                                                        -------------------------------------------------
</TABLE>

                                                       (Continued)


<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1998 and 1997, and for the Period From September 30, 1991
     (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>

                                                                                                              September 30,
                                                                                                              1991 (Date of
                                                                                 Years Ended June 30          Inception) to
                                                                        ---------------------------------
                                                                               1998             1997          June 30, 1998
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
<S>                                                                           <C>              <C>              <C>       
     Net proceeds from the sale of common stock and warrants                          -          215,061        12,880,797
     Proceeds from debt obligations                                           1,820,420        1,070,000         5,548,855
     Payments received on stock subscriptions receivable                              -           57,500             5,000
     Payments on debt obligations                                                     -          (24,455)         (522,810)
                                                                        ---------------------------------------------------
                   Net cash provided by financing activities                  1,820,420        1,318,106        17,911,842
                                                                        ---------------------------------------------------

Effect of Exchange Rate Changes on Cash                                               -                -           203,242
                                                                        ---------------------------------------------------

                   Net increase (decrease) in cash and cash
                       equivalents                                             (672,758)      (2,223,978)           46,135

Cash and Cash Equivalents
     Beginning                                                                  718,893        2,942,871                 -
                                                                        ---------------------------------------------------
     Ending                                                             $        46,135  $       718,893   $        46,135
                                                                        ===================================================


Cash Payments for Interest                                              $        20,374  $         6,925   $       160,470
                                                                        ===================================================

Supplemental Schedule of Noncash Investing and Financing Activities 
     Issuance of debt obligations for services, accounts payable,
         and accrued interest                                           $       219,300  $             -   $       259,500
     Issuance of debt for acquisition of license                                550,000                -           550,000
     Issuance of warrants for:
         Product development                                                    230,000                -           230,000
         Acquisition of sublicense agreement                                        165                -               165
         Issuance of convertible debt                                               451                -               451
         Guarantee of debt                                                       15,716                -            15,716
     Amount attributable to value of beneficial debt conversion
         feature                                                                988,444                -           988,444
     Capital expenditures included in accounts payable                            6,667                -             6,667
                                                                        ===================================================
</TABLE>

                                                       (Continued)


<PAGE>
QUANTECH LTD. (A Development Stage Company)

STATEMENTS OF CASH FLOWS (Continued)
YearsEnded June 30, 1998 and 1997, and for the Period From September 30, 1991
     (Date of Inception) to June 30, 1998
<TABLE>
<CAPTION>

                                                                                                        September 30,
                                                                                                        1991 (Date of
                                                                              Years Ended June 30       Inception) to
                                                                            1998          1997          June 30, 1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>            <C>       
Supplemental Schedule of Noncash Investing and Financing
     Activities (Continued)
     Acquisition of Spectrum Diagnostics, Inc. (Note 8):
         Fair value of other assets acquired, principally the license
            agreement                                                   $        -     $      -       $ 1,489,500
         Liabilities assumed                                                     -            -          (285,000)
                                                                        ------------------------------------------
                   Cash purchase price paid, less $5,199 cash
                       acquired                                         $        -     $      -       $ 1,204,500
                                                                        ==========================================


     Advances to Spectrum Diagnostics, Inc. (Note 8)                    $        -     $      -       $    20,000
     Prepaid security issuance costs (acquired from Spectrum
         Diagnostics, Inc.) ultimately used to reduce proceeds from
         the sale of common stock                                                -            -            58,830
     Due from Ital-American Securities, Inc.                                     -            -          (674,374)
     Stock issuance costs to be paid                                             -            -           237,201
     Subscriptions receivable offset by accrued compensation                     -            -            53,689
     Officer advances offset by accrued compensation                             -            -           109,462
     Issuance of warrants for services                                           -            -            90,000
                                                                        ==========================================

     Common stock issued for:
         Services, equipment, and interest                              $   45,584     $      -       $   319,634
         Acquisition of license agreement                                  390,000            -           390,000
         Issuance of options and warrants for compensation and
            services                                                        45,203            -            45,203
         Subscriptions receivable                                                -            -             5,000
         Debt obligations                                                        -            -         2,318,125
         Accounts payable                                                        -            -            40,000
         Accrued expenses                                                        -            -           360,394
                                                                        ------------------------------------------
                                                                        $  480,787     $      -       $ 3,478,356
                                                                        ==========================================
</TABLE>

See Notes to Financial Statements.



<PAGE>


QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

Note 1:  Nature of Business and Significant Accounting Policies

Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of the state of Minnesota, for the purpose of effecting the change in
domicile of Spectrum Diagnostics S.p.A (SDS) from Italy to the state of
Minnesota through a merger with SDS on April 14, 1993. The merger was accounted
for as if it were a pooling of interests.

The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize the Surface Plasmon Resonance (SPR) technology.
Commercialization will consist of developing and introducing an instrument which
will run various tests capable of diagnosing various human health conditions,
and which the Company intends to market to the world medical diagnostic
industry.

A summary of the Company's significant accounting policies follows:

Cash equivalents: The Company maintains its cash in bank deposit and money
market accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.

Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating the fair value of each class of financial
instruments:

Cash and cash equivalents: The carrying amount approximates fair value because
of the nature or short maturity of those instruments.

Short-term debt: The fair value of the Company's short-term debt is estimated
based on interest rates for the same or similar debt having the same or similar
remaining maturities with similar risk and collateral requirements. The recorded
value of short-term debt approximates its fair value.

Prepaid product development expense: Prepaid product development expense arises
from the valuation of warrants issued to a licensee in return for technical
assistance to be rendered to the Company by the licensee over a period of
approximately two years. The expense is being recognized over this period (see
Note 4).

Other assets: The license agreement is being amortized using the straight-line
method over the remaining life of the underlying patents of 15 years (see Note
4). Costs of obtaining additional patents are capitalized and will be amortized
over their useful life.




<PAGE>



Note 1. Nature of Business and Significant Accounting Policies (Continued) 

The Company reviews its intangible assets periodically to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows. Though the Company has had no sales to date nor an
established market for its product, it has performed market studies to determine
potential size of the market and expected acceptance of its product. This has
been the basis for the Company's expected future net cash flows. Should the sum
of the expected future net cash flows be less than the carrying value, the
Company would determine whether an impairment loss should be recognized. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the intangible. Fair value would be determined
based on estimated expected future discounted cash flows or appraised value. To
date, management has determined that no impairment of intangible assets exists.

Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over five years, or the life of the
related lease, whichever is less.

Debt discount attributable to value of conversion feature: The Company has
allocated a portion of the proceeds of its debt to a beneficial conversion
feature, measured by the intrinsic value of that feature. This amount is being
amortized to interest expense using the straight-line method over the remaining
term of the debt based on the expected conversion date (see Note 3).

Income taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.

Research and development: The Company contracts with certain outside parties for
the design and development of its product in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.

Loss per common share: The FASB has issued Statement No. 128, Earnings Per
Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in public market. Those entities that have only common
stock outstanding are required to present basic earnings per share amounts. All
other entities are required to present basic and diluted per share amounts.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations.



<PAGE>



Note 1. Nature of Business and Significant Accounting Policies (Continued) 

The Company has granted options and warrants to purchase shares of common stock
at various amounts per share (see Note 6). Those options and warrants were not
included in the computation of diluted earnings per share because the Company
has incurred losses in all periods. The inclusion of potential common shares in
the calculation of diluted loss per share would have an antidilutive effect.
Therefore, basic and diluted loss per share amounts are the same in each period
presented.

Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Comprehensive income: The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Statement No. 130 requires reporting items which are components of other
comprehensive income, such as foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. The Company will
adopt this statement in the fiscal year ending June 30, 1999. However, it is not
expected to have an effect on the presentation of the Company's financial
statements.

Segments: The FASB has issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, effective for fiscal years beginning
after December 15, 1997. Statement No. 131 requires disclosure of certain
information for each reportable segment, including general information, profit
and loss information, segment assets, etc. The Company will adopt this statement
in the fiscal year ending June 30, 1999. The Company does not expect this
statement to have an effect on its financial statements.

Translation of foreign currency statements: Prior to September of 1992, the
functional and reporting currency for SDS was the Italian lire. Concurrent with
the receipt of net proceeds from its initial public offering of common stock in
the United States in September 1992, and in connection with the phase out of its
Italian operations, the functional and reporting currency of SDS changed from
the Italian lire to the United States dollar. As a result, the cumulative
translation adjustment component of equity was eliminated in 1992.


Note 2.  Basis of Presentation

The Company was incorporated for the purpose of acquiring, developing, and
commercializing SPR technology for use in medical diagnostics. The Company has
had no sales, and the only revenue generated by the Company since its inception
has been interest income.



<PAGE>



Note 2.   Basis of Presentation (Continued)

The Company is a development stage company which has suffered significant losses
from operations, requires additional financing, and ultimately needs to continue
development of its product, generate revenues, and successfully attain
profitable operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern and realize the value of its assets,
including its license agreement. The financial statements do not reflect any
adjustments which might be necessary should the Company not remain a going
concern.

Without immediate funding from equity or debt financing, the Company does not
have sufficient funds to remain a going concern, or to complete commercial
development of and bring its instrument and disposables to commercial production
and realize the value of the license agreement. Management is working to obtain
the funding through a private offering of its common stock, which began in
October 1998. The Company is offering for sale a minimum of $1.5 million and a
maximum of $3.0 million worth of shares of its common stock to accredited
investors. The shares are priced at $0.75. The Company is also currently
negotiating to convert notes payable, due September 30, 1998, to equity and has
also increased its note payable to a bank by $250,000. Quantech is currently
obtaining minimal funding from its directors to maintain operations. In
addition, the Company intends to pursue a $5 to $7 million offering in early
1999 with terms yet to be determined. There is no assurance that additional
financing can be obtained or debt can be converted.


Note 3.  Short-Term Debt Obligations

Short-term debt obligations as of June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>

                                                                              1998          1997
                                                                          -----------   ------------
<S>                                                                       <C>           <C>              
13.5% convertible secured promissory notes, payable September
   1998, secured by substantially all of the Company's assets             $ 3,159,720   $  1,070,000
Less discount attributable to value of  beneficial conversion
   feature                                                                   (546,902)            --
8.5% unsecured note payable to a bank, due December 1998,
   guaranteed by certain shareholders                                         500,000             --
                                                                          -----------   ------------
                                                                          $ 3,112,818   $  1,070,000
                                                                          ===========   ============
</TABLE>


In April 1998, the Company completed an offering of secured promissory notes of
$1,625,150 to accredited investors and issued warrants in connection with the
sale of such notes to the investors for the purchase of 243,773 shares of common
stock. In addition, the selling agent also received warrants to purchase 1,451
shares of common stock. All warrants issued were valued at $488. The notes are
convertible into shares of common stock at a price equal to the lesser of $3.53
or 80 percent of the market price of the common stock for (i) the 20 consecutive
trading days prior to the maturity date of the notes or (ii) the price at which
the transaction which triggers repayment of the notes is completed. The warrants
exercise price is calculated in the same manner as the notes conversion price.



<PAGE>



Note 3.     Short-Term Debt Obligations (Continued)

During May 1998, holders of the Company's convertible secured promissory notes
agreed to convert $219,300 of accrued interest in notes and extend the maturity
date of the notes to September 30, 1998, from June 1, 1998. The note holders
received additional warrants to purchase 178,618 shares of common stock in
conjunction with the agreement.

During May 1998, the Company began an offering of convertible secured promissory
notes to accredited investors. The maximum amount of notes to be issued was
$500,000. As of June 30, 1998, notes in the amount of $245,270 were issued.
Purchasers of the notes also received warrants for the purchase of 36,790 shares
of common stock. Conversion and warrant exercise terms are the same as those
discussed above.

Subsequent to year end, the Company completed the offering by selling an
additional $252,230 of the notes. Warrants to purchase 37,835 shares of common
stock were issued. In conjunction with this offering, the selling agent received
warrants to purchase 3,134 shares of common stock.


Note 4.     Agreements

License agreement: The Company has a license agreement for certain patents,
proprietary information, and associated hardware related to the SPR technology.
The license calls for an ongoing royalty of 6 percent on all products utilizing
the SPR technology which are sold by the Company. In addition, if the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the cumulative
payments of these two royalties fail to reach at least $500,000 by December 31,
1993, $850,000 by December 31, 1995, $1,000,000 by December 31, 1997, $1,150,000
by December 31, 1998, and $1,300,000 by December 31, 1999, the licensor has the
right to deprive the Company of its exclusive rights under the license agreement
(each time one of such benchmarks is not met). As of June 30, 1998, the Company
has paid $1,000,000 of the cumulative payment. The Company has also ratably
accrued additional minimum royalty payments of $75,000 as of June 30, 1998,
because sales or sublicense revenues through December 31, 1998, may not be
adequate to meet the cumulative minimum royalty payments. The Company intends to
accrue $150,000 by December 31, 1998, and continue accruing and paying minimum
royalties for future periods until royalties based on revenues exceed the
minimum payment amounts.

The obligations of the Company to pay royalties terminate when the total royalty
payments reach a gross amount of $18,000,000, which amount would be increased by
$2,000,000 each time a benchmark is not met. After such date, the Company's
rights in the licensed SPR technology continue in perpetuity with no further
royalty obligations.

In September 1997, the Company entered into an agreement to cancel certain
sublicense rights that had been granted to an investor group which included a
shareholder of the Company. In return for these sublicense rights, the Company
issued 150,000 shares of the Company's common stock, convertible secured
promissory notes totaling $550,000, and warrants to purchase 82,500 shares of
the Company's common stock. The Company has capitalized the sublicense rights at
an amount that approximates the fair market value of the common stock,
convertible promissory notes, and stock purchase warrants.



<PAGE>



Note 4.     Agreements (Continued)

Technology and development agreement: During the year ended June 30, 1998, the
Company entered into a technology and development agreement with a leading
supplier of life science systems and analytical instruments, which provides
exclusive license rights to certain of the Company's technology, for use outside
of medical diagnostics and co-exclusive rights to nucleic acid medical
diagnostics. The licensee, pursuant to the agreement, is providing technical
assistance related to the Company's medical diagnostic system and will be
required to pay future royalty payments if the licensee sells products
containing the Company's technology. The royalties to be received will vary
between 6 and 12 percent, depending on the phase of assistance. When all phases
are complete, the royalty will be 6 percent. Minimum annual royalties to be paid
by the licensee will be $500,000 beginning December 2000, expiring in
conjunction with the related patents. Should the licensee fail to commercialize
the licensed technology, all rights will revert back to the Company.

The licensee also received a warrant to purchase 1,400,000 shares of common
stock. The warrant expires December 2002 and is exercisable immediately. The
exercise price of the warrant is 95 percent of the average market price of the
Company's common stock for the 25 days prior to the date the licensee elects to
exercise the warrant. The warrant was valued at $230,000.

In conjunction with the above technology and development agreement, the Company
has licensed additional technology. The Company will be required to pay
royalties at 8 percent of sales on products featuring the technology. Minimum
annual royalties of $500,000 begin in December 2000, expiring in conjunction
with the related patents. Should the Company fail to commercialize the license
technology, all rights will revert back to the licensor, and future minimum
annual royalty obligations will be canceled.

Employment agreements: The Company has at-will employment agreements with its
Chief Executive Officer and Chief Financial Officer. The agreements require the
payment of one year's salary (for the chief financial officer) or $150,000 (for
the chief executive officer) if employment is terminated due to the sale of the
Company or a greater than 50 percent change in ownership. In addition, the Chief
Financial Officer is entitled to six months' salary if he is terminated without
cause.


Note 5.   Leases
The Company leases its office space under an agreement which expires February
28, 2000. Approximate minimum aggregate rental commitments under this lease are
as follows:

Years ending June 30:
   1999                                    $ 38,000
   2000                                      26,000


Rental expense for the years ended June 30, 1998 and 1997, and for the period
from September 30, 1991 (date of inception) to June 30, 1998, was approximately
$58,000, $68,000, and $501,000, respectively.



<PAGE>



Note 6.    Stockholders' Equity

Capital stock: The Company has authorized 12,500,000 of capital shares
consisting of 10,000,000 common shares and 2,500,000 undesignated shares.

Reverse stock split: On June 2, 1998, the Company reduced the number of shares
outstanding in a 20-for-1 reverse stock split. All share and per share amounts
presented have been retroactively adjusted to reflect the split.

Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to reduce the number of authorized shares from 90,000,000 to
12,500,000. In addition, the common stock was changed from $0.01 per share par
value to no par value. The cumulative amount paid in excess of the previously
stated par value has been reclassed from additional paid-in capital to common
stock on the statement of stockholders' equity (deficit) for the year ended June
30, 1998.

Options and warrants: The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Had compensation cost for the Company's stock option and warrant
grants been determined based on the fair value at the grant date for awards in
1998 and 1997 consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:


                                                          1998           1997
                                                    ------------   ------------
Net loss, as reported                               $ (3,648,748)  $ (3,925,460)
Net loss, pro forma                                   (4,016,450)    (4,197,373)
Net loss per basic and diluted share, as reported          (1.45)         (1.66)
Net loss per basic and diluted share, pro forma            (1.59)         (1.77)


The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net loss for future years because
options vest over several years and additional awards generally are made each
year.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997:


                                                    1998                1997
                                            -------------         -----------
Expected dividend yield                     $         --          $       --
Expected stock price volatility                    67.31%              71.63%
Risk-free interest rate                             6.00%               6.00%
Expected life of options (years)                       3                   3




<PAGE>



Note 6.     Stockholders' Equity  (Continued)
Transactions involving stock options and warrants during the two years ended
June 30, 1998, are summarized as follows:


                                                                   Weighted-
                                                       Stock    Average Exercise
                                    Warrants          Options    Price Per Share
                                    ---------       ---------        --------
Balance, June 30, 1996                602,505         186,250        $   5.40
   Granted                            172,140          56,175            8.60
   Exercised                          (22,750)        (16,000)           4.60
   Expired                            (12,500)        (10,916)           9.60
                                    ---------       ---------        --------
Balance, June 30, 1997                739,395         215,509            6.20
   Granted                          2,120,148         521,000            3.30
   Exercised                              --              --              --
   Expired                           (187,828)       (243,009)           7.26
                                    ---------       ---------        --------
Balance, June 30, 1998              2,671,715         493,500        $   3.58
                                    =========       =========        ========
                                                                               

The weighted-average fair value of options and warrants granted during 1998 and
1997 was $1.09 and $7.20, respectively. The following tables summarize
information about stock options and warrants outstanding as of June 30, 1998:


                        OPTIONS AND WARRANTS OUTSTANDING

                                                Weighted-
                                                 Average
                          Number of             Remaining         Weighted-
     Range of               Units              Contractual         Average
  Exercise Price         Outstanding              Life         Exercise Price
----------------         -----------           -----------     --------------
$2.40 - $2.50                 113,900            1.5             $    2.47
$3.00                         396,000            3.9                  3.00
$3.08                       1,400,000 (1)        4.5                  3.08
$3.53                         720,148            4.9                  3.53
$5.00                         495,292            2.1                  5.00
$12.00                         10,000            1.5                 12.00
$14.40                         29,875            2.8                 14.40
                            ---------                            ---------
                            3,165,215                            $    3.58
                            =========                            =========



<PAGE>



Note 6.     Stockholders' Equity  (Continued)



                        OPTIONS AND WARRANTS EXERCISABLE

                                      Number of                Weighted-
     Range of                           Units                   Average
  Exercise Price                     Exercisable            Exercise Price
----------------                     -----------            --------------
$2.40 - $2.50                          113,900                $    2.47
$3.00                                  324,667                     3.00
$3.08                                1,400,000 (1)                 3.08
$3.53                                  720,148                     3.53
$5.00                                  495,292                     5.00
$12.00                                  10,000                    12.00
$14.40                                  29,875                    14.40
                                     ---------                ---------
                                     3,093,882                $    3.60
                                     =========                =========


(1)   These warrants are exercisable at a price equal to 95 percent of the
      average of the last sale price of the Company's common stock in 25
      consecutive trading days immediately preceding the date of the first
      notice of exercise of the warrant received by the Company. The exercise
      price of these warrants will change as the market value of the Company's
      common stock changes.

Compensation expense related to stock option grants was $28,000 in 1998 and
$48,000 in 1997.


Note 7.  Income Taxes

The Company's income tax expense consists solely of a franchise tax in Italy
during the year ended December 31, 1992, since the Company has incurred no
United States income taxes. For United States income tax purposes, under
provisions of the Internal Revenue Code, the Company has approximately
$11,920,000 in operating loss carryforwards and $316,000 in research and
development credits at June 30, 1998, which may be used to offset otherwise
future taxable income. These carryforwards are subject to certain limitations
under the provisions of the Internal Revenue Code, Section 382, which relate to
a 50 percent change in control over a three-year period. The annual net
operating loss carryforward limitation due to Section 382 is approximately
$200,000 per year, which reduced the carryforward by $2,800,000. The Company has
"post change" carryforwards of approximately $8,888,000 that are not limited.
Further changes of control may result in the additional expiration of a portion
of the remaining carryforwards before they can be used and are also dependent
upon the Company attaining profitable operations in the future.



<PAGE>



Note 7.     Income Taxes (Continued)

Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 1998, have the following expiration
dates:


                                      Net            Research and
Expiration                         Operating          Development
   Date                               Loss              Credits
                                -------------         -----------
   2006                         $     241,000         $    --
   2007                             1,115,000              --
   2008                               827,000            20,000
   2009                               849,000            26,000
   2010                                   --             45,000
   2011                             2,193,000              --
   2012                             3,738,000           117,000
   2013                             2,957,000           108,000
                                -------------         ---------
                                $  11,920,000         $ 316,000
                                =============         =========


The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:


                                                                 June 30
                                                         1998           1997
                                                     -----------    -----------
Deferred tax assets (liabilities):
   Loss carryforwards                                $ 4,053,000    $ 3,047,000
   Royalties                                              26,000         38,000
   Research and development credits and deductions       521,000        414,000
   Guarantee of Spectrum Diagnostics, Inc. debt          115,000        115,000
   Compensation expense                                   30,000         59,000
   Beneficial conversion feature                         150,000            --
   Other accruals                                         29,000        (10,000)
                                                     -----------    -----------
                                                       4,924,000      3,663,000

Valuation allowance for deferred tax assets           (4,924,000)    (3,663,000)
                                                     -----------    -----------
Net deferred tax assets                              $       --     $       --
                                                     ===========    ===========


The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
June 30, 1998 and 1997, due to the valuation allowance recorded against deferred
tax assets.



<PAGE>



Note 8.   Spectrum Diagnostics, Inc.

During 1991, SDS acquired substantially all of the assets of Spectrum
Diagnostics, Inc. (SDI) for 1,200,000 shares of SDS common stock plus the
assumption of certain SDI liabilities and guarantees.

As a result of its merger with SDS (see Note 1), Quantech now guarantees payment
of certain SDI liabilities previously guaranteed by SDS. SDI expects to sell an
investment it has in Quantech's common stock, the proceeds of which are expected
to be used to pay certain of SDI's obligations, but are not expected to be
sufficient to pay the entire amount guaranteed by Quantech.

Quantech has accrued its estimated loss which may result should SDI be unable to
pay the obligations discussed above. The Company has recorded a liability of
approximately $19,800 as of June 30, 1998.


Note 9.   Subsequent Events

During July and August 1998, the Company sold 14,910 shares of its common stock
at prices ranging from $3.00 per share to $3.50 per share. In addition, 2,000
shares were issued pursuant to the conversion of a promissory note, and 2,045
shares were issued pursuant to the exercise of a warrant.



<PAGE>


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The names, ages and positions of the Company's executive officers are
as follows:

         Name                      Age      Position

         Robert Case               54       Chief Executive Officer and Director

         Gregory G. Freitag        36       Chief Financial Officer, Chief 
                                            Operating Officer and Director


         Robert Case has been Chief Executive Officer since June 1997 and a
director since October 1996. Mr. Case founded Case + Associates, Inc. in 1978
and has been its President since such time. Case + Associates is a leading
consultant in the research, design, development and engineering of medical
products. Its consulting activities include work for major multinational, as
well as development stage, medical companies in the design of products from
diagnostic instrumentation and implantable devices to surgical instruments. He
has served as a Chairman of the Industrial Designers Society of America, and was
a member of its national Board of Directors. Mr. Case has also been a longtime
member of the Biomedical Marketing Association. In addition, Mr. Case conducts
both US and European seminars in product definition and development for Frost &
Sullivan, the Society of Plastics Engineers, the Society for the Advancement of
Medical Packaging Institute and Northwestern University. His educational
background includes product design, engineering and marketing at Syracuse
University, the Illinois Institute of Technology and DePaul University.

         Gregory G. Freitag has been Chief Operating Officer of the Company
since June 1997, and Chief Financial Officer and Secretary of the Company since
December 1995. From 1987 until joining the Company, Mr. Freitag was a lawyer
with the Minneapolis, Minnesota law firm of Fredrikson & Byron, P.A. As a
shareholder with Fredrikson & Byron, he practiced in the corporate, securities
and merger and acquisition areas of law. Mr. Freitag has his J.D. and CPA, has
served on securities advisory committees to the Minnesota Commissioner of
Commerce, was included in the Minnesota Business Guide to Law & Leading
Attorneys, and received from City Business its "40 Under 40" award recognizing
Mr. Freitag as one of the Twin Cities' next generation of business and community
leaders.

         The information required by Item 9 relating to directors is
incorporated herein by reference to the section entitled "Election of Directors"
which appears in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders.



<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The information required by Item 10 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 11 is incorporated herein by reference
to the section entitled "Shareholdings of Principal Shareholders and Management"
which appears in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 12 is incorporated herein by reference
to the section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits.  See "Exhibit Index" on page following signatures.

         (b)      Reports on Form 8-K. No reports on Form 8-K were filed during
                  the fourth quarter ended June 30, 1998.

<PAGE>


                                   SIGNATURES

                  In accordance with the requirements of Section 13 of the
Securities Exchange Act of 1934, the Registrant caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
                                                     QUANTECH LTD.
                                                     ("Registrant")

Dated: October 13, 1998                              By:   /s/ Robert Case
                                                           Robert Case, CEO

 
<PAGE>




                       SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON D.C.

                          EXHIBIT INDEX TO FORM 10-KSB
                                       OF
                                  QUANTECH LTD.

                     For The Fiscal Year Ended June 30, 1998
                         Commission File Number: 0-19957


 Exhibit                                           Description
 Number

3.1      Articles of Incorporation of Quantech Ltd., as amended (incorporated by
         reference to Exhibit 3.2 of the Registrant's Registration Statement on
         Form S-4; Reg. No. 33-55356).

3.2      Bylaws of Quantech Ltd. (incorporated by reference to Exhibit 3.2 of
         the Registrant's Registration Statement on Form S-4; Reg. No.
         33-55356).

4.1      Form of Stock Certificate (incorporated by reference to Exhibit 4.1 of
         the Registrant's Registration Statement on Form S-4; Reg. No.
         33-55356).

4.2      Form of Private Placement Warrant (incorporated by reference to Exhibit
         4.2 of the Registrant's Registration Statement on Form SB-2; Reg. No.
         333-6809).

10.1     Lease for office space at 1419 Energy Park Drive, St. Paul, MN 55108
         (incorporated by reference to Exhibit 10.1 of the Registrant's Form
         10-KSB for the Year Ended June 30, 1995).

10.2     Option Agreement with Ares-Serono, as amended (including license)
         assigned to Quantech Ltd. pursuant to the Merger (incorporated by
         reference to Exhibit 10.2 of the Registrant's Registration Statement on
         Form S-4; Reg. No. 33-55356).

10.3     Letter of Amendment to Ares-Serono License (incorporated by reference
         to Exhibit 10.6 of the Registrant's Form 10-KSB for the Year Ended June
         30, 1995).

10.4*    Employment Agreement with Gregory G. Freitag (incorporated by reference
         to Exhibit 10.1 of the Registrant's Form 10-Q for the Quarter Ended
         March 31, 1998).

10.5*    Employment Agreement with Robert Case (incorporated by reference to
         Exhibit 10.2 of the Registrant's Form 10-Q for the Quarter Ended March
         31, 1998).

10.6*    Technology and Development License Agreement dated December 16, 1997
         (incorporated by reference to Exhibit 1 of Schedule 13D filed by The
         Perkin-Elmer Corporation on December 23, 1997, File No. 0-19957).

10.7     Perkin Elmer/Quantech License Agreement dated June 29, 1998 (previously
         filed as Exhibit 10.7 of the Registrant's initial filing of Form 10-KSB
         for the year ended June 30, 1998).

22       Quantech has no subsidiaries.

23       Accountants Consent

24       Power of Attorney (included on signature page)

27       Financial Data Schedule

*  Management contract or compensatory plan or arrangement.