SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                     For the fiscal year ended June 30, 1997

                         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: (612) 647-6370

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

             Securities Registered Under Section 12(g) of the Act:
                          Common Stock, $.01 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. [ X ]

The Issuer's revenues for the fiscal year ended June 30, 1997 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  24,  1997,  was  approximately  $ 5,761,833
(based on the closing sale price of the Issuer's Common Stock on such date).

   Shares of Common Stock, $.01 par value, outstanding on September 24, 1997:
                                51,040,759 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  Proxy  Statement  for its 1997 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..................................   4
     Item 2.   Description of Property..................................  20
     Item 3.   Legal Proceedings........................................  21
     Item 4.   Submission of Matters to a Vote of Security Holders......  21

PART II
     Item 5.   Market for Common Equity and Related Stockholder Matters.. 22
     Item 6.   Management's Discussion and Analysis or Plan of Operation. 23
     Item 7.   Financial Statements...................................... 26
     Item 8.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure.................................. 44

PART III
     Item 9.   Directors, Executive Officers, Promoters and Control Persons;
               Compliance  with Section 16(a) of the Exchange Act........ 45
     Item 10.  Executive Compensation.................................... 46
     Item 11.  Security Ownership of Certain Beneficial Owners and
               Management................................................ 46
     Item 12.  Certain Relationships and Related Transactions............ 46
     Item 13.  Exhibits and Reports on Form 8-K.......................... 46
Signatures............................................................... 47




<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Company Summary

     Quantech Ltd. ("Quantech" or the "Company") is seeking to commercialize its
proprietary Surface Plasmon Resonance ("SPR") technology for use in the critical
care medical  diagnostic  market and  sublicense its SPR technology to strategic
partners for use in areas  outside  Quantech's  core  market.  The use of SPR in
Quantech's  medical diagnostic system allows for the integration of the existing
diagnostic methodologies of immunoassays, DNA probes and chemical binding into a
single,  simple,  economical  system in order to  provide  rapid,  quantitative,
diagnostic results near the patient. The Quantech system configuration  consists
of a  bench  top  instrument  and a  series  of  disposables,  each  offering  a
particular test or series of tests.  This system is expected to have the ability
to analyze  body fluids  (e.g.,  whole  blood,  urine)  without  preparation  or
addition of reagents by lab technicians,  providing  hospital  physicians faster
test results than obtained from labs.

     Excluding  home  diagnostics,  the overall world wide  in-vitro  diagnostic
market is growing,  estimated at $13.2 billion in 1994,  and expected to grow to
$17.5 billion by the year 2000.  Central labs currently account for the majority
of this  market  while  near  patient  ("NP")  products  represent  only a small
portion.  Introduction of additional NP products, such as Quantech's system, are
expected  to cause  the NP  testing  market to gain a larger  percentage  of the
overall  in-vitro  diagnostic  market.  The extent of such market  shift will be
affected by the availability of fast, cost effective and quantitative NP testing
products.

     Quantech's   business   strategy  is  to  capitalize  on  the  flexibility,
sensitivity  and relatively  low cost of its diagnostic  system to penetrate the
diagnostic market.  Quantech's  intended entry into this market will be Critical
Care Units of hospitals,  the first unit being the Emergency  Department  ("ED")
where the most pressing and unmet  customer  needs are found.  The Critical Care
Units  represent  a  significant  market  as they  require  a  number  of  rapid
turn-around  tests.  Although there are some NP tests available for the Critical
Care Units, the Company is not aware of any FDA approved NP testing product that
provides a single instrument that will perform most of the tests required in the
ED.  Additionally,  minimal  competition  exists for NP  products in the ED from
multinational companies that are focused on the central lab market.

     There are  approximately  30 commonly ordered tests in the ED, all of which
are ordered STAT (very urgent).  Some of the most important  diagnostic tests in
the ED are  cardiac  markers.  These  tests help to  identify  whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack). The
Company  believes  there is no FDA approved  product that has the  capability of
economically  performing NP STAT, whole blood testing with quantitative results.
Quantech's  first tests are expected to quantify  these  markers in less than 10
minutes.  Similar results are presently  available from the central lab in 45 to
90 minutes.

     Quantech  believes the benefits of its system over other NP testing systems
will be that  the same  instrument  can be used  for a full  range of tests  and
provide  quantitative  results.  After  the  initial  introduction  of tests for
myocardial  infarction,  the  Company  intends to  introduce  additional  tests.

<PAGE>

Selection of these tests will be based upon clinical value, ease of development,
regulatory hurdles and profit margins. The Company intends future expansion into
other critical care diagnostic markets which have needs similar to the ED.

     To date Quantech has  experienced  extensive  delays in  development of its
system and in response to these  delays is  completing  a  restructuring  of its
organization.  Upon  completion  of this  restructuring  in early  October,  the
Company will announce its timetable for market  introduction.  Although Quantech
believes  it has  made  significant  development  progress  and  will be able to
continue this progress,  submission of its system to the FDA and introduction to
the  market  will be  influenced  by the  Company's  ability  to raise  addition
funding,  timely  completion  of the  development  of its system  and  necessary
testing for  submission to the FDA and delays it may  encounter  with the FDA in
its  review of the  system.  Although  Quantech  has met with past  delays,  the
Company  continues  to  believe  that it can  complete  a rapid  and  economical
diagnostic  testing  platform  which  meets  the  needs  of  the  critical  care
diagnostic  market,  and will enable  Quantech to be  competitive  in the global
medical diagnostics market.

Strategy

     Quantech's   objective  is  to  establish  its  SPR  biosensor   diagnostic
technology as the standard for Critical Care  diagnostic  testing,  and steadily
expand the number of tests available for its system through the  introduction of
additional  disposables.  To reach that  objective,  Quantech  intends to do the
following:

         .   Finalize  FDA  510(K)  work on the  instrument  and first test
             initially configured for the cardiac marker CK-MB.
         .   Pursue  strategic  relationships  in  manufacturing, distribution
             and testing  applications of Quantech's SPR Technology outside 
             Quantech's core market.
         .   Submit 510(K) for CK-MB marker to the FDA for regulatory review.
         .   Develop test for additional cardiac marker Troponin.
         .   Submit 510(K) for cardiac marker Troponin to the FDA for 
             regulatory review.
         .   Market initial  system for detection of cardiac  markets CK-MB
             and  Troponin  through   strategic  partner  with  established
             distribution channels.
         .   Develop  additional  markers  for  other  clinically  relevant
             critical  care  tests  (specifically,  pregnancy,  therapeutic
             drugs such as Digoxin,  additional  cardiac markers,  drugs of
             abuse and infectious diseases).
         .   Market system internationally.
         .   Develop second generation system for expansion into 
             additional markets.

Product Description

     The Instrument.  The Company's first  instrument will combine accuracy with
simplicity  of use and  process one test  disposable  at a time with one or more
tests  per  disposable.   Subsequently  developed  instruments  may  offer  more
automation which would provide greater throughput required by larger facilities.
The ability of biosensors to convert biological data into digital signals should
also  permit  designs  that  capitalize  on  future  advances  in  microcomputer
technology.

<PAGE>

     The  Quantech  instrument  is  designed  to fill the  anticipated  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 is of a size capable of sitting on a bench top or cart so it
can be moved from room to room if necessary. It contains a white light source, a
microprocessor,  a number of optical components, a computer screen, keyboard and
an internal and external  bar-code reader.  When the test disposable is inserted
into the instrument, the internal bar-code reader will identify the type of test
to be  performed  and  contain  certain  calibration  information  necessary  to
effectively  maintain  quality  control.  The  instrument  computer  screen will
display results of a given test and buttons near the screen, a built in keyboard
and/or external bar-code reader will enable the user to enter both a user number
and the  patient or  specimen  ID number.  The data or results  produced  by the
instrument will also be stored on an internal hard drive,  thereby  allowing the
user to download data to a central computer upon demand,  and may be provided on
a hard copy through use of a printer.

     The small size and  configuration  of the  instrument  will enable it to be
located in the ED or associated  satellite lab. It is anticipated  that Critical
Care Units  such as the ED will have  several  of these  instruments  at various
locations.  For customers who wish to purchase the instrument,  the retail price
is  anticipated  to be  $22,000.  There will also be several  industry  standard
reagent rental programs  whereby the instrument 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.

     The  Disposable.  Quantech's  disposable  test will consist 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. One unique planned aspect of the Quantech disposable is
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  tests  may be  performed  on a single  disposable  providing
Quantech the  capability  to develop  panel  related  tests by simply adding the
appropriate  analytes.  Future  disposables  for  certain  tests  can  easily 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
panels of multiple  diagnostically-related  tests.  Because the same  disposable
configuration may be used for all tests, manufacturing and quality control costs
should be  minimized.  The tests are  expected to initially  have retail  prices
ranging from $4.00 to $22.00 per disposable slide. Additional development of the
disposable is currently being conducted and future  development will continue to
expand  the  number  of  tests  that may be  performed  in  general  and on each
disposable.

<PAGE>

     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. Central laboratory  automated systems have mechanized,  rather than
eliminated  many of these steps.  Current  diagnostic  methods are also indirect
measures of the analyte and require the addition of a variety of chemicals.  The
Company's technology,  in contrast,  directly measures the analyte in the sample
with no additional reagents.

     Although the  requirements of NP testing  instruments are clearly  defined,
not all NP tests have been able to move away from certain  disadvantages  of the
central  lab,  or  provide  results  that are  comparable  to the  central  lab.
Quantech's  system  incorporates NP testing needs and, as a result of its single
test  throughput  near  the  patient,  is  expected  to  significantly   shorten
turnaround time for test results.  As such,  Quantech's system has been designed
to  employ  the  same  basic  technologies  as those of the  central  labs,  but
simplifies the process to provide the following expected advantages:

     o  Faster time to test result
     o  Quantitative result
     o  Ease of use (independent of operator skill or interpretation of results)
     o  Competitively priced  instrument and disposables
     o  Rapid operator training
     o  Compact, reliable instrument
     o  State of the art sensitivity and specificity
     o  Whole Blood/closed tube capability

     To date,  NP testing has been limited to a few tests,  most  notably  blood
gases and electrolytes,  glucose and blood  coagulation.  Technology and quality
control  have kept NP tests from  being  introduced  that  provide  whole  blood
quantitative  results for the immunoassay  market segment (e.g.  cardiac makers,
pregnancy, therapeutic drug monitoring, drugs of abuse and infectious diseases),
the market segment  representing  the greatest  growth  potential  within the NP
testing market.

The Market

     General.  The medical  diagnostics  market can be divided  into three broad
segments: home diagnostics,  the traditional central lab and near patient ("NP")
testing. Excluding home diagnostics,  the overall world wide in-vitro diagnostic
market is growing,  estimated  at $13.2  billion in 1994 and expected to grow to
$17.5 billion by the year 2000.  Central labs currently account for the majority
of this market while NP testing represents only a small portion. Introduction of
additional NP testing products, such as Quantech's system, are expected to cause
the NP  testing  market  to gain a larger  percentage  of the  overall  in-vitro
diagnostic  market.  The extent of such  market  shift will be  affected  by the
availability of fast, cost effective and efficient NP testing products.

<PAGE>

     Near Patient Testing. NP testing represents one of the most rapidly growing
segments of the in-vitro  diagnostics market. Part of this growth is a result of
the  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, the 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 quantitative  clinically
relevant tests.

     The  strategic  direction  chosen by Quantech  is to exploit  the  inherent
technological  advantages of its SPR  technology by  identifying  the diagnostic
market segment where such technological advantages provide both economic savings
and significant  patient  benefits.  The Company's  primary  strategy will be to
focus on the critical care diagnostics  area.  Quantech has identified this area
as one that fulfills both the above  criteria.  At this time,  the large medical
diagnostic  testing companies have little presence in this segment as they focus
their resources on the central  laboratory.  This absence should enable Quantech
to  competitively  enter the market.  However,  there is no  assurance  that the
Quantech system will be accepted by its intended market or that competition from
diagnostic companies will not be forthcoming.

     In the Critical Care  departments  and surgical  suites,  a wide variety of
testing is now conducted  that was formerly  restricted to the main  laboratory.
For  example,  tests that were done in the  central  labs,  like blood gases and
electrolytes,  are now available as NP tests. Conducting testing in proximity to
the patient provides rapid results and avoids the delays, communication problems
and  increased  costs  often  associated  with a  centralized  testing  process.
Continued  NP testing  market  growth will be driven by the economic and patient
care advantages NP testing has over central laboratories.

     Critical  Care.  Critical  Care is  defined  as the  area  where  immediate
diagnostic information is needed to effect either the treatment or processing of
a patient. When test results are needed in these areas they must be processed in
a STAT manner,  thereby significantly  increasing the cost. The solution to this
difficulty is to bring a system of diagnostic  methodologies to the patient site
in a manner that will provide test results promptly and accurately.

     A part of the Critical Care Unit is the emergency  department  ("ED").  The
Company believes that there are approximately 30 different diagnostic tests that
require  rapid  results in the ED.  During its first several years of operation,
Quantech  intends  to  develop  products  primarily  focused  on the high  value
clinically relevant tests required by the ED. Since the needs of the other areas
of critical care are similar to the ED, the Company anticipates that growth into
these other areas will be evolutionary.

     Cardiac Markers. Of the tests needed by the critical care segment of the NP
testing market,  the Company has selected those tests that the Company  believes
will minimize  development time and regulatory  processes and, most importantly,
satisfy unmet demands of the users.  Tests for cardiac markers meet all of these
criteria.  These markers are needed to triage and treat  individuals that arrive

<PAGE>

at the ED with chest pain. An estimated  5.5 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  myocardial  infarction  ("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% to 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,
but in the past,  making a rapid  definitive  diagnosis of chest pain was not as
important  as it is  today.  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 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 if the  patient has not
suffered an AMI, rapid, accurate testing for an AMI is very important.

     During an 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,
myoglobin and CA-III.  To identify  patients who have suffered an AMI,  tests to
identify  these  proteins/cardiac  markers  have become  important.  Such tests,
however, are most effective if they can be performed in under fifteen minutes in
the ED or mobile care unit so that medical  personnel may take immediate action.
Presently,  there is no FDA  approved  method  available to provide such results
quantitatively.   Most  of  the  existing  test  modalities  require  a  central
laboratory  system that may delay the results beyond their effective need or are
approximate thereby requiring operator interpretation of the results. Quantech's
system is expected to provide  emergency  personnel  with the ability to receive
accurate quantitative results in less than ten minutes.

     The high cost of therapy, the urgency of the associated  conditions and the
difficulty of a definitive  diagnosis  create an urgent demand for these cardiac
marker tests in the  critical  care  setting.  Quantech has begun to develop the
disposable  necessary  for its  first  cardiac  marker  tests  for the ED.  This
disposable,  and Quantech's related reading instrument,  are intended to provide
results in a timely, accurate and economic manner.

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
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.  In  other  words,  a  biosensor  converts  a
biological event into an electrical signal.

<PAGE>

     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  slide composed of a
clear plastic base with a fine grating  molded into its surface.  The grating is
coated  with a very thin layer of gold.  Gold is used since it does not  oxidize
like other metals as oxidation  affects the ability of the system to perform the
test.  The gold is  subsequently  coated  with  binding  molecules.  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
binds 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.

     In the  Quantech  system,  an  antibody  is coated  onto the surface of the
grating  in the  Quantech  disposable  against a  specific  antigen  such as the
cardiac marker CK-MB.  As the antigen is captured by the antibody on the surface
of the grating,  the  wavelength  of light that causes the SPR signal  alters in
proportion to the amount of antigen  present in the sample.  Thus,  the shift or
wavelength  difference  between the initial  and final  reading by the  Quantech
instrument provides the quantitative results.

     Quantech's SPR biosensor combines the strengths of biology and physics into
a single entity.  Applications  of SPR that have been reported in the scientific
literature or explored by the Company include  immunoassays for cardiac markers,
hormones, drugs, viruses and bacteria, quantitation of anesthetic gases, and DNA
binding  assays.  The  Company's  SPR  biosensor  technology  presents a simple,
unified  platform that is capable of performing a wide range of diagnostic tests
and is protected by a number of patents.

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.  These  systems  are
generally complex and expensive,  incorporating  designs appropriate to the labs
they serve which employ  skilled  operators  who are expected to perform  sample
preparation, system calibration and basic instrument maintenance.

<PAGE>

     Both the health care providers and their suppliers are heavily committed to
the current central  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. Even though the economic savings and medical utility afforded by NP
testing  is  becoming  widely  recognized,  it is  not  necessarily  immediately
attractive to the most successful laboratories and the strongest suppliers.

     There are more than 150 companies serving this central clinical  laboratory
market.  Most of them compete in only one or two segments of the overall market.
Abbott  Laboratories,  Boehringer  Mannheim,  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 NP testing  market in general  must  compete  with the
central  laboratory  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 for such system.

     There is  significant  activity  in the  Critical  Care  segment  of the NP
testing   market.   The  majority  of  current  systems  address  the  areas  of
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
NP testing instruments.  The Company does not believe current products of i-STAT
or Diametrics are capable, however, of diagnosing analytes that indicate cardiac
markers, pregnancy,  infectious diseases or other immunoassay based tests. There
can be no  assurance  that  current  or future NP testing  companies  or current
companies providing instruments to the central laboratory market will not invent
systems  that  will have  broad  immunoassay  testing  capabilities  like  those
expected by the Company's system.

     With respect to testing for cardiac  markers to diagnose  AMI, most testing
is done in the Central  Labs with  turnaround  time from 45 to 90  minutes.  The
Company is aware of only a limited  number of companies  that provide NP testing
for AMI. Of such companies,  Spectral  Diagnostics  Limited, a Canadian company,
markets a manual method  available for certain  cardiac  markers and  Boehringer
Mannheim  markets  a  manual  test  for  troponin  T.  As  configured,   neither
Spectral's,  Boehringer's  nor the other NP AMI tests can  provide  quantitative
results. In addition, Biosite Diagnostics has announced development of a product
called CareLink,  a NP instrument it claims will provide  quantitative  results.
The first products to be introduced on the CareLink are for cardiac markers, but
a specific  market launch date has not been  announced.  Biosite has stated they
will also provide additional tests for their CareLink system.

     The  Company  believes  that  there  is a  need  for  rapid,  accurate  and
quantitative measurement of cardiac markers, pregnancy, drugs and other critical
care tests and that such need  continues to be  unfulfilled.  Quantech  plans to

<PAGE>

enter the market by serving the unmet needs for quantitative cardiac markers and
to extend its  penetration by delivering a full range of high value,  clinically
relevant ED 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 the SPR technology will enable
it to provide  products  to the  Critical  Care STAT  testing  market,  a market
segment believed by the Company to be less competitive.

The Ares-Serono License

     The Company 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  and  diagnostic
products,  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.  If the payments of the 6
percent royalty and the sublicense  royalty fail to reach at least $1,000,000 by
December 31, 1997, an  additional  payment of $150,000 by December 31, 1997 will
be required.  The Company has paid to date $850,000 of $1,000,000 required under
the license.  If such payment is 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.  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. Finally,  Ares-Serono has retained the right to further develop the SPR
technology,  provided,  however,  that any  products  commercialized  from  such
development  may only be sold through  Ares-Serono  under its name.  Quantech is
unaware of any attempts by Ares-Serono to further develop the SPR technology.

<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  grating
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. Because the
Company's  licensed  patents do not  expire in less than ten years and  Quantech
intends  to  file  additional  patents,  the  Company  believes  that it has the
opportunity to complete development of its product,  establish a market position
and seek  additional  patents  on  improvements  and  related  technologies.  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 filed  patents,  if  granted,  will
protect the Company's technology.

Government Regulation

     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.

Research and Development

     For the year ended June 30,  1997,  the year ended June 30,  1996,  and the
period from September 30, 1991 (date of inception) to June 30, 1997, the Company
spent  $2,114,586,  $991,701  and  $4,645,705,  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

     The Company does not presently  have any  manufacturing  capabilities.  The
Company  intends to  manufacture  its test  disposable  and will  outsource  the
manufacture of its instrument.  Such third party  manufacturer  has not yet been
engaged by the Company.

Employees

     The Company employs 11 people on a full-time basis and engages  consultants
and independent  contractors to provide  services  related to the development of
the SPR technology. The Company expects to hire other personnel as necessary for
FDA work, sales and marketing,  manufacturing  and  administration,  including a
CEO.

<PAGE>

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

     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:

Immediate and Future Capital Needs

     The Company does not have sufficient  funds to complete  development of its
system, submit its system to the FDA or commence commercial production and sales
of its system.  The Company's  ability to continue as a going concern,  complete
its system, submit its system 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.  Additional funds will have to be immediately  raised through equity
or debt financing.  There can be no assurance that any additional  financing can
be obtained on favorable terms, if at all. Such additional  financing may result
in dilution to Company  shareholders  and/or additional debt to the Company.  If
funding is not available  immediately and in the future when needed, the Company
may be forced to cease  operations  and  abandon  its  business.  In such event,
Company shareholders could lose their entire investment.


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
and  has  experienced  significant  delays  in  completing  development,  but is
continuing  research  and  development  on its  prototype  and  associated  test
disposables.  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, 1997, the Company

<PAGE>


had an  accumulated  deficit  of  $14,408,300.  The  report  of the  independent
auditors on the  Company's  financial  statements  for the period ended June 30,
1997,  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  losses from  operations,  requires  additional
financing,  and ultimately needs to successfully  attain profitable  operations.
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.

New Product Development

     The Company's reading  instrumentation and associated disposables are under
development.  Such  development  is being  conducted  by the Company  using both
internal resources and outside contractors.  To date, the Company and certain of
its outside  contractors have not met their development  timetables and budgets.
No assurance can be given that the Company's current  development  timetable can
be met, that the budget for development will be maintained,  or that development
efforts will be successful.

Uncertainty of Market Acceptance

     The  commercial  success of the  Company's  products will depend upon their
acceptance by the medical community and third-party  payers as useful,  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.  The availability of NP test systems
for a wide  variety  of tests has been  limited  to date.  The  Company  is thus
targeting an emerging market. Diagnostic tests similar to those developed by the
Company are generally performed by a central 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  there  will  be
resistance  by  central  laboratories  to  yield  control  of  tests  they  have
previously  performed.  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  central  laboratory  systems.  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 product in both the United States and in foreign markets through a
strategic partner with an established  distribution system, but no assurance can
be given that such an arrangement can be made. If the Company markets  directly,
it  believes  that the ED market  is  focused  enough so that a small  sales and
marketing force can produce significant results. There is no guaranty,  however,
that Quantech's sales and marketing plan will succeed.


<PAGE>

Lack of FDA Product Approval

     The Company's products will be regulated as medical devices by the Food and
Drug Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act ("FDC
Act"),   and   as   such   require   premarket   regulatory   clearance   before
commercialization  in the United  States.  The Company  believes that  premarket
clearance  can be obtained for its  systems,  except for a few tests the Company
may  introduce  at a  later  time,  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 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 premarket  approval  ("PMA") of its system,  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 cleared.

Limited Manufacturing and Production Experience

     To be successful  the Company must  manufacture  its products in compliance
with regulatory  requirements,  in sufficient  quantities and on a timely basis,
while  maintaining  product  quality and  acceptable  manufacturing  costs.  The
Company  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.

Competition

     The diagnostic testing market is highly competitive.  As NP testing markets
expand,  the Company expects that  manufacturers  of central and STAT laboratory
testing  equipment  will compete to maintain  their revenue and market share and
that new NP 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.

<PAGE>

Technological Obsolescence

     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 disposables.

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 market its diagnostic
system.

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  issue  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
licenser 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 has the obligation to defend the patents they
have licensed to the Company,  Quantech will be  responsible  for the defense of
any patents issued to it. 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 Ares-Serono  affiliated  companies (the  "Ares-Serono  Group"),
based in  Switzerland,  comprise  a  multinational  organization  engaged in the

<PAGE>

development and marketing of ethical pharmaceuticals,  primarily in the field of
human fertility, human growth, immunology and virology. 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. To date, the Company has paid $850,000. If the payments of the 6
percent royalty and the sublicense  royalty fail to reach at least $1,000,000 by
December 31, 1997, an  additional  payment of $150,000 by December 31, 1997 will
be required.  If such payment is 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.  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. Finally,  Ares-Serono has retained the right to further develop the SPR
technology,  provided,  however,  that any  products  commercialized  from  such
development  may only be sold through  Ares-Serono  under its name.  Quantech is
unaware of any attempts by Ares-Serono to further develop the SPR technology.

Government Regulation

     If the  Company  becomes a provider of health  care  diagnostic  devices as
intended,  the Company will be subject to laws and  regulations  administered by
federal,  state and foreign  governments.  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.  The industry in which the Company
expects to operate is subject to frequent regulatory changes and there can be no
assurance that the Company will be able to comply with  applicable  regulations.
In the event of noncompliance, the Company may be unable to market any products.

Changes in Management

     In  June  1997,  R.H.  Joseph  Shaw  resigned  as the  Company's  chairman,
president and chief executive  officer and subsequently  resigned as a director.
Mr. Shaw remains a consultant to the Company. The Company is seeking a new chief
executive officer with a strong background in operating a commercial diagnostics
company.  In the  interim,  Robert  Case,  a director of the  Company,  has been
elected to serve as the chief  executive  officer of  Quantech.  James Lyons was
elected chairman of the Company's board. In July 1997,  Gregory G. Freitag,  the
Company's CFO, assumed the additional  position of Chief Operating Officer.  Mr.
Freitag had also  previously  held the position of Executive  Vice  President of
Corporate Development.  The Company also accepted the resignations of Michael P.
Nagel,  formerly Director of Sales and Marketing,  and Todd L. Jensen,  formerly
Director  of  Chemistry  Development.  In  addition,  the  Company  completed  a
workforce  reduction  during the summer of 1997.  As of  September  24, 1997 the
total number of full-time  employees  was 11.  Although the Company  believes it
maintains a core group of employees  sufficient for it to  effectively  continue
its  operations,  there can be no assurance  that these changes will not have an
adverse effect on operations and future development.

<PAGE>


 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  utilizing  the SPR  equipment and
disposables  developed  by the  Company.  Although  the  Company  will  evaluate
obtaining liability insurance when the products come 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  presently  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 3,365,000 shares of the Company's  outstanding  Common Stock may be
sold in the public  market.  In  addition  20,604,080  of a total of  23,035,403
shares that may be obtained  upon exercise of  outstanding  options and warrants
may be  sold  in the  public  market  if  and  when  exercised.  The  sale  of a
substantial number of the shares available for sale or shares underlying options
and  warrants  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
not listed on any stock  exchange or NASDAQ.  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.


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 of
approximately  $5,000 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.


<PAGE>

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 1997.

<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  24,  1997,  the  Company  had   approximately  525
shareholders  of record and the bid, asked and closing sale prices of its Common
Stock  were  $0.115,  $0.125  and  $0.125,  respectively.  The  following  table
summarizes the quarterly high and low sale prices for the Company's Common Stock
for the prior two fiscal years.

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

  Fiscal 1996
      First Quarter                          $0.34                  $0.187
      Second Quarter                         $0.81                  $0.50
      Third Quarter                          $1.06                  $0.50
      Fourth Quarter                         $1.625                 $0.68
 Fiscal 1997
      First Quarter                          $1.09                  $0.59
      Second Quarter                         $0.96                  $0.46
      Third Quarter                          $0.66                  $0.38
      Fourth Quarter                         $0.41                  $0.20

     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.

     In June 1997 the Company  sold  365,000  shares of its Common Stock at $.30
per share to an  accredited  investor.  The shares were sold pursuant to Section
4(2) of the Securities  Act of 1933, as amended (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  June  and  July  1997,  the  Company  completed  an  offering  of
Convertible  Secured  Promissory  Notes in the principal amount of $1,095,000 to
accredited  investors and issued  warrants in  connection  with the sale of such
notes to the investors for the purchase of 3,285,000 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 $84,949 to a
registered investment bank for acting as selling agent and issued the investment
bank a warrant to purchase up to 232,800  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.


<PAGE>

     Finally,  in September  1997,  Quantech was  finalizing  an agreement  that
issues  3,000,000  shares and  warrants to purchase  1,650,000  shares of Common
Stock to an accredited investor. The sales were made in reliance upon exemptions
from  registration  provided  under Section 4(2) of the 1933 Act. The securities
were obtained by the  accredited  investors for their own account and not with a
view to any distribution thereof to the public.


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

History

     Quantech Ltd.  ("Quantech"  or the  "Company") 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, the core technology
of  Quantech's  proposed  medical  diagnostic  system,  enables  the  Company to
integrate the existing diagnostic methodologies of immunoassays,  DNA probes and
chemical  binding into a single,  simple  economical  system in order to provide
rapid, quantitative,  diagnostic results. The Quantech system configuration will
consist  of a bench  top  instrument  and a series  of  disposable  slides  with
multiple 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  Company  plans to first  market its
system and related  disposables to hospital  Critical Care Units,  initially the
Emergency Department.  Its first test will aid physicians in assessing whether a
patient has suffered a heart attack.

     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 $14,408,300  from September 30, 1991
(date of inception)  through June 30, 1997 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, 1997 the Company had interest income of $80,854
compared  to $42,038 for the 1996 fiscal year as a result of higher cash on hand

<PAGE>

obtained from Quantech's private placements. General and administration expenses
increased from $1,218,674 for the year ended June 30, 1996 to $1,516,737 for the
year ended June 30, 1997. The increase in Quantech's  general and administration
expenses  in  fiscal  1997 was a  result  of  additional  personnel,  and  costs
associated  with  such  personnel,  severance  expenses,  and  increased  public
relations costs including those  associated with pursuing  additional  short and
long term funding.

     Research  and  development   costs  increased  from  $991,701  in  1996  to
$2,114,586  in 1997.  This  increase  is a result of  accelerated  research  and
development  activity including hiring of employees and consultants,  purchasing
of chemistry supplies,  and engaging firms to perform contract development work,
including  producing  sensor  gratings  and  design  engineering  on  Quantech's
disposable and instrument.

     The Company incurred sales and marketing expenses of $282,380 for the year.
There are no comparative  periods for such expenditures as the Company began its
sales and marketing activity during 1997. Sales and marketing activity consisted
of market  research,  including  attending  the winter  symposium  of  Emergency
Physicians,  integrating user requirements into the system designs and preparing
the Quantech  marketing  plan.  As a result of the  completion  of the Company's
market research and marketing plan, the Company has suspended  significant sales
and marketing activity at least until it submits its system to the FDA.

     Minimum royalty  expense  decreased in 1997 as compared to 1996 as a result
of  the  declining  minimum   royalties  owed  under  Quantech's   license  with
Ares-Serono.  Financing  expenses  decreased  in 1997 as  compared  to 1996 as a
result of lower average debt during the year. Financing expenses are expected to
increase in 1998 due to an increase in debt as a result of the Company's sale of
convertible promissory notes in June 1997 and the need for additional capital.

     For the year ended  June 30,  1997  Quantech  had a loss of  $3,925,460  as
compared to  $2,396,963  for the same period ended June 30, 1996.  This increase
was  a  result  of  the  rise  in  research  and  development  and  general  and
administrative  expenses in 1997  exceeding  decreases in such period in minimum
royalty and financing expenses and the increase in interest income.

     In June 1997 the Company  began to  restructure  its  operations  to reduce
expenses and focus its resources on  completing  development  of its  diagnostic
system. Current general and administrative and research and development spending
is below the 1997 rate, and sales and marketing expenses are at a minimal level.
The Company anticipates that operating expenses will increase significantly when
it  completes  development  of its  system  and  begins  its FDA  work,  product
manufacturing and distribution,  and development of additional  disposable tests
for its system.

     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,  it has  not  been  able to  achieve
reproducible  results at sensitivity levels necessary for quantitative  analysis

<PAGE>

throughout the entire required  clinical range for its initial test.  Quantech's
development is focused upon the system reproducibility and sensitivity necessary
for FDA approval and market acceptance.  After such development is complete, the
next  major  step  will be to submit  its  system  to the FDA for  approval.  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,  research and development  collaborations  for medical
and industrial applications of Quantech's technology, distribution of its system
once  developed  and device  manufacturing.  The timetable  for  submitting  the
Company's system to the FDA and introduction to the market will be influenced by
the  Company's   ability  to  obtain  further  funding,   enter  into  strategic
relationships,  complete 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 sytem.

Liquidity and Capital Resources

     From  inception  to  June  30,  1997,  Quantech  has  raised  approximately
$16,600,000  through a  combination  of public stock sales and private  sales of
stock and debt obligations.  The Company estimates that it has funds to continue
current operations  through October 1997.  Additional funds will be needed after
that date to continue operations, including 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 when needed or that
additional  capital  will not 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.  See  "Cautionary
Statements - Immediate and Future Capital Needs."

     During June and July 1997,  Quantech received $1,006,000 of net proceeds as
a result of a private  placement of convertible notes (the "Notes") and warrants
(the  "Warrants").  The Notes will be due and payable on June 1, 1998 or earlier
upon  Quantech  completing  a  transaction  that  provides  it with a minimum of
$5,000,000.  Interest on the Notes is 13.5%, and the Notes are secured by all of
the assets of the  Company.  For each dollar  invested in the Note the  investor
received a Warrant to  purchase  three  shares of  Quantech  Common  Stock at an
exercise  price  equal to the lower of $0.35 or 80% of the  market  price of the
Company's  Common  Stock for: (i) the 20  consecutive  trading days prior to the
issuance  of the  Warrant  or June 1,  1998,  or (ii) the  price  at  which  the
transaction  which triggers  repayment of the Notes is completed.  The principal
amount of the Notes are 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 with the exception that there is no $.35 maximum.

     Quantech incurred capital  expenditures of approximately  $99,000 in fiscal
1997. Current capital spending is running below this rate, however,  the Company
anticipates   significantly  higher  capital  expenditures  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.  In  addition to capital  expenditures,  the
Company has a final minimum  royalty  payment of $150,000 due to  Ares-Serono on
December 31, 1997.

<PAGE>

     The Company currently has outstanding 51,040,759 shares of Common Stock. It
also has options and warrants  outstanding to purchase an additional  23,035,403
shares.

ITEM 7.  FINANCIAL STATEMENTS

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

                                                                       Page
                                                                    ---------
 Financial Statements for Fiscal Years 1997 and 1996
 Independent Auditors Report........................................    27
 Balance Sheets as of June 30, 1997 and 1996........................    28
 Statements of Operations For the Period from Inception 
 (September 30, 1991) through June 30, 1997 and for the Years Ended
 June 30, 1997 and 1996.............................................    30
 Statements of Stockholders' Equity (Deficit) For the Period 
 from Inception (September 30, 1991) through June 30, 1997..........    31
 Statement of Cash Flows For the Period from Inception 
 (September 30, 1991) through June 30, 1997 and for the Years 
 Ended June 30, 1997 and 1996......................................     33
 Notes to Financial Statements......................................    36

<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
State  Company) as of June 30,  1997 and 1996,  and the  related  statements  of
operations,  stockholders' equity (deficit),  and cash flows for the years ended
June 30,  1997 and  1996,  and the  period  from  September  30,  1991  (date of
inception),  to June 30, 1997. 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, 1997 and 1996,  and the results of its operations
and its cash flows for the years  ended June 30,  1997 and 1996,  and the period
from  September  30, 1991 (date of  inception),  to June 30, 1997, 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 losses from operations,  requires additional financing,  and ultimately
needs  to  successfully  attain  profitable  operations.   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
                                      McGladrey & Pullen, LLP

Minneapolis, Minnestoa
July 17, 1997
                             


<PAGE>

QUANTECH LTD. (A Development Stage Company)

<TABLE>
<CAPTION>


BALANCE SHEETS
June 30, 1997 and 1996

ASSETS (Note 3)                                                                      1997               1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>    
Current Assets
     Cash and cash equivalents                                                 $        718,893   $       2,942,871
     Debt issue costs                                                                    78,699                   -
     Prepaid expenses                                                                    35,452              41,269
                                                                               -------------------------------------
                   Total current assets                                                 833,044           2,984,140
                                                                               -------------------------------------




Property and Equipment
     Equipment                                                                          329,780             268,058
     Leasehold improvements                                                              15,000              15,000
                                                                               -------------------------------------
                                                                                        344,780             283,058

     Less accumulated depreciation                                                      139,267              78,657
                                                                               -------------------------------------
                                                                                        205,513             204,401
                                                                               -------------------------------------


Other Assets
     License agreement, at cost, less amortization (Note 4)                           2,096,558           2,320,334
     Patents                                                                              8,895                   -
     Organization expenses, at cost, less amortization                                      113               4,675
                                                                               -------------------------------------
                                                                                      2,105,566           2,325,009
                                                                               -------------------------------------
                                                                               $      3,144,123   $       5,513,550
                                                                               =====================================

See Notes to Financial Statements.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                       1997               1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C>    
Current Liabilities
     Short-term debt (Note 3)                                                  $      1,070,000   $          24,455
     Accounts payable                                                                   100,794             114,934
     Accrued expenses:
         Minimum royalty commitment (Note 4)                                            112,500                   -
         Spectrum Diagnostics, Inc. obligations (Note 8)                                 36,509              53,637
         Payroll and vacation                                                            54,226                   -
         Accrued severance                                                               77,265                   -
         Other                                                                           14,704                   -
                                                                               -------------------------------------
                   Total current liabilities                                          1,465,998             193,026
                                                                               -------------------------------------

Long-Term Obligations
     Minimum royalty commitment (Note 4)                                                      -              37,500
                                                                               -------------------------------------

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

Stockholders' Equity (Deficit) (Notes 2, 3, and 6)
     Common stock, $0.01 par value; authorized 90,000,000 shares;
         shares outstanding, 48,040,759 and 46,900,759 in 1997
         and 1996, respectively                                                         480,408             469,008
     Additional paid-in capital                                                      15,606,017          15,296,856
     Deficit accumulated during the development stage                               (14,408,300)        (10,482,840)
                                                                               -------------------------------------
                                                                                      1,678,125           5,283,024
                                                                               -------------------------------------
                                                                               $      3,144,123   $       5,513,550
                                                                               =====================================

</TABLE>


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

<TABLE>
<CAPTION>


STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996, and Period From  September 30, 1991 (Date of
     Inception) to June 30, 1997

                                                                                                     September 30,
                                                                                                     1991 (Date of
                                                                                                     Inception) to
                                                                   Years Ended June 30                June 30,
                                                           -------------------------------------
                                                                 1997                1996               1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                <C>    
Interest income                                            $          80,854   $         42,038   $         170,781
                                                           ---------------------------------------------------------

Expenses:
     General and administrative                                    1,516,737          1,218,674           7,658,208
     Research and development                                      2,114,586            991,701           4,645,705
     Sales and marketing                                             282,380                  -             282,380
     Minimum royalty expense (Note 4)                                 75,000            125,000             962,500
     Losses resulting from transactions with Spectrum
         Diagnostics, Inc. (Note 8)                                        -                  -             556,150
     Net exchange gain                                                     -                  -             (67,172)
     Financing                                                        17,611            103,626             498,715
                                                           ---------------------------------------------------------
                                                                   4,006,314          2,439,001          14,536,486
                                                           ---------------------------------------------------------

                   Loss before income taxes                       (3,925,460)        (2,396,963)        (14,365,705)

Income taxes (Note 7)                                                      -                  -              42,595
                                                           ---------------------------------------------------------
                   Net loss                                $      (3,925,460)  $     (2,396,963)  $     (14,408,300)
                                                           =========================================================

Loss per common share                                      $           (0.08)  $          (0.07)  
Weighted average common shares outstanding                        47,318,280         31,991,150


See Notes to Financial Statements.


</TABLE>




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

<TABLE>
<CAPTION>


STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From September 30, 1991 (Date of Inception) to June 30, 1997

                                                                                                              
                                                                                                             Deficit
                                           Common Stock                                                     Accumulated
                                        --------------------  Additional  Paid For,                          During the  Cumulative
                                         Shares   Par Value    Paid-In     But Not  Subscriptions  Due From  Development Translation
                                         Issued     Amount     Capital     Issued    Receivable    Officers    Stage     Adjustment
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>         <C>        <C>         <C>         <C>          <C>        <C>   
Balance, at inception                          -  $        -  $       -  $       -   $      -    $       -    $      -   $        -
  Net loss                                     -           -          -          -          -            -    (594,620)           -
  Common stock transactions:
    Common stock issued, October 1991  3,200,000   3,154,574          -          -          -            -           -            -
    Common stock issued, November 1991   600,000     611,746   1,788,254         -          -            -           -            -
    Common stock issuance costs                -           -    (889,849)        -          -            -           -            -
 Cumulative translation adjustment             -           -           -         -          -            -           -      387,754
                                      ----------------------------------------------------------------------------------------------
Balance, December 31, 1991             3,800,000   3,766,320     898,405         -          -            -    (594,620)     387,754
  Net loss                                     -           -           -         -          -            -  (2,880,988)           -
  Common stock transactions:
    Common stock issued, September 1992  700,000     699,033     875,967         -    (53,689)           -           -            -
    Common stock issuance costs                -           -    (312,755)        -          -            -           -            -
    160,000 shares of common stock to 
    be issued                                  -           -           -   120,000          -            -           -            -
  Officer advances, net                        -           -           -         -          -      (27,433)          -            -
  Cumulative translation adjustment            -           -           -         -          -            -           -     (209,099)
  Elimination of cumulative translation 
  adjustment                                   -           -           -         -          -            -           -     (178,655)
                                     -----------------------------------------------------------------------------------------------
Balance, December 31, 1992             4,500,000   4,465,353   1,461,617   120,000    (53,689)     (27,433) (3,475,608)           -
  Net loss                                     -           -           -         -          -            -    (996,089)           -
  Common stock transactions:
    Common stock issued, January 1993    160,000       1,600     118,400  (120,000)         -            -           -            -
    Common stock issued, April 1993       30,000         300      11,700         -          -            -           -            -
    Change in common stock par value
    resulting from merger                      -  (4,420,353)  4,420,353         -          -            -           -            -
  Repayments                                   -           -           -         -          -        5,137           -            -
                                     -----------------------------------------------------------------------------------------------
Balance, June 30, 1993                 4,690,000      46,900   6,012,070         -    (53,689)     (22,296) (4,471,697)           -
  Net loss                                     -           -           -         -          -            -  (1,543,888)           -
  240,000 shares of common stock to
  be issued                                    -           -           -    30,000          -            -           -            -
  Repayments                                   -           -           -         -     53,689       22,296           -            -
                                     -----------------------------------------------------------------------------------------------

                                                    (Continued)

</TABLE>





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

<TABLE>
<CAPTION>


STATEMENTS OF STOCKHOLDERS'  EQUITY (DEFICIT)  (Continued)
Period From September 30, 1991 (Date of Inception) to June 30, 1997


                                                                                                              
                                                                                                             Deficit
                                           Common Stock                                                     Accumulated
                                        --------------------  Additional  Paid For,                          During the  Cumulative
                                         Shares   Par Value    Paid-In     But Not  Subscriptions  Due From  Development Translation
                                         Issued     Amount     Capital     Issued    Receivable    Officers    Stage     Adjustment
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>        <C>        <C>         <C>                <C>  <C>                <C>
Balance, June 30, 1994                4,690,000     46,900     6,012,070   30,000           -             -   (6,015,585)         -
  Net loss                                    -          -             -        -           -             -   (2,070,292)         -
  Common stock issued, June 1995      2,150,000     21,500       276,068  (30,000)    (20,000)            -            -          -
  Warrants issued for services                -          -        40,200        -           -             -            -          -
                                     -----------------------------------------------------------------------------------------------
Balance, June 30, 1995                6,840,000     68,400     6,328,338        -     (20,000)            -   (8,085,877)         -
  Net loss                                    -          -             -        -           -             -   (2,396,963)         -
  Common stock issued, net of issuance
  costs of $848,877:
      July 1995                       6,160,000     61,600     1,304,450        -           -             -            -          -
      August 1995                       717,600      7,176       161,460        -           -             -            -          -
      September 1995                 13,807,296    138,073     2,370,389        -           -             -            -          -
      November 1995                   1,897,840     18,978       425,482        -           -             -            -          -
      December 1995                  11,217,157    112,172     1,292,473        -           -             -            -          -
      May 1996                        6,275,000     62,750     3,300,422        -           -             -            -          -
      June 1996                           5,058         51         3,650        -           -             -            -          -
  Payment received on subscription
  receivable                            (19,192)      (192)      (14,808)       -      20,000             -            -          -
  Compensation expense recorded on
  stock options                               -          -       125,000        -           -             -            -          -
                                     -----------------------------------------------------------------------------------------------
Balance, June 30, 1996               46,900,759    469,008    15,296,856        -           -             -  (10,482,840)         -
  Net loss                                    -          -             -        -           -             -   (3,925,460)         -
  Stock offering costs                        -          -       (12,310)       -           -             -            -          -
  Common stock issued upon exercise of
      options and warrants:
      September 1996                     10,000        100         2,400        -           -             -            -          -
      October 1996                      170,000      1,700        40,800        -           -             -            -          -
      November 1996                      15,000        150         3,600        -           -             -            -          -
      December 1996                     270,000      2,700        64,800        -     (57,500)            -            -          -
      January 1997                       20,000        200         4,800        -           -             -            -          -
      February 1997                     150,000      1,500        17,250        -           -             -            -          -
      March 1997                        140,000      1,400        33,600        -           -             -            -          -
  Payments received on subscription
  receivable                                  -          -             -        -      57,500             -            -          -
  Compensation expense recorded on 
  stock options                               -          -        48,000        -           -             -            -          -
  Common stock issued, June 1997        365,000      3,650       105,850        -           -             -            -          -
  Warrants issued with notes payable          -          -           371        -           -             -            -          -
                                     -----------------------------------------------------------------------------------------------
Balance, June 30, 1997               48,040,759   $480,408   $15,606,017  $     -   $       -   $         - $(14,408,300)   $     -
                                     ===============================================================================================

See Notes to Financial Statements.

</TABLE>



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

<TABLE>
<CAPTION>


STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996, and Period From  September 30, 1991 (Date of
     Inception) to June 30, 1997

                                                                                                   September 30,
                                                                                                   1991 (Date of
                                                                                                   Inception) to
                                                                   Years Ended June 30                June 30,
                                                           -------------------------------------
                                                                 1997                1996               1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>               <C>            
Cash Flows From Operating Activities
     Net loss                                              $      (3,925,460)  $     (2,396,963)  $     (14,408,300)
     Adjustments to reconcile net loss to net cash used
         in operating activities:
         Elimination of cumulative translation adjustment                  -                  -            (178,655)
         Depreciation                                                 60,610             37,400             185,621
         Amortization                                                228,338            238,926           1,356,617
         Noncash compensation and interest                            48,000            187,050             537,250
         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                               5,817             72,390              40,986
            Increase (decrease) in accounts payable                  (14,140)          (670,187)             99,239
            Increase (decrease) in accrued expenses                  204,067           (647,270)            569,328
                                                           ---------------------------------------------------------
                   Net cash used in operating activities          (3,392,768)        (3,178,654)        (11,174,264)
                                                           ---------------------------------------------------------

Cash Flows From Investing Activities
     Purchase of property and equipment                              (99,097)          (187,711)           (421,538)
     Proceeds on disposition of property                              37,375                  -              37,375
     Organization expenses                                                 -                  -             (97,547)
     Patent expenses                                                  (8,895)                 -              (8,895)
     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            (149,316)          (187,711)         (4,401,507)
                                                           ---------------------------------------------------------

                                                    (Continued)

</TABLE>



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

<TABLE>
<CAPTION>


STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997 and 1996, and Period From  September 30, 1991 (Date of
     Inception) to June 30, 1997

                                                                                                     September 30,
                                                                                                     1991 (Date of
                                                                                                     Inception) to
                                                                   Years Ended June 30                June 30,
                                                           -------------------------------------
                                                                 1997                1996               1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>               <C>   
Cash Flows From Financing Activities
     Net proceeds from the sale of common stock
         and warrants                                                215,061          6,676,125          12,880,797
     Proceeds on debt obligations                                  1,070,000             30,555           3,728,435
     Payments received on stock subscription receivables              57,500              5,000               5,000
     Payments on debt obligations                                    (24,455)          (406,720)           (522,810)
                                                           ---------------------------------------------------------
                   Net cash provided by financing
                       activities                                  1,318,106          6,304,960          16,091,422
                                                           ---------------------------------------------------------

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

                   Net increase (decrease) in cash                (2,223,978)         2,938,595             718,893

Cash
     Beginning                                                     2,942,871              4,276                   -
                                                           ---------------------------------------------------------
     Ending                                                $         718,893   $      2,942,871   $         718,893
                                                           =========================================================


Cash Payments for Interest                                 $           6,925   $         49,736   $         140,096
                                                           =========================================================

Supplemental Schedule of Noncash Investing and
     Financing Activities
     Acquisition of Spectrum Diagnostics, Inc.
         (Note 8):
         Cash purchase price, less $5,199 cash
            acquired                                       $               -   $              -   $       1,204,500
                                                           =========================================================

     Fair value of other assets acquired,
         principally the license agreement                 $               -   $              -   $       1,489,500
     Liabilities assumed                                                   -                  -            (285,000)
                                                           ---------------------------------------------------------
                                                           $               -   $              -   $       1,204,500
                                                           =========================================================

                                                    (Continued)

</TABLE>



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

<TABLE>
<CAPTION>



STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997 and 1996, and Period From  September 30, 1991 (Date of
     Inception) to June 30, 1997

                                                                                                     September 30,
                                                                                                     1991 (Date of
                                                                                                     Inception) to
                                                                   Years Ended June 30                June 30,
                                                           -------------------------------------
                                                                 1997                1996               1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>               <C>            
Supplemental Schedule of Noncash Investing and
     Financing Activities (Continued)
     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 debt obligation for services and
         accounts payable                                                  -                  -              40,200
     Issuance of warrants for services                                     -                  -              90,000
                                                           =========================================================

     Common stock issued/to be issued for:
         Services and interest                             $               -   $         62,050   $         274,050
         Subscriptions receivable                                          -            (15,000)              5,000
         Debt obligations                                                  -          2,227,500           2,318,125
         Accounts payable                                                  -                  -              40,000
         Accrued expenses                                                  -            293,451             360,394
                                                           ---------------------------------------------------------
                                                           $               -   $      2,568,001   $       2,997,569
                                                           =========================================================

See Notes to Financial Statements.


</TABLE>

<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  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 has been accounted for as if it
were a pooling of interests and,  accordingly,  all prior  financial  statements
include SDS. The  Company's  fiscal year end is June 30 and SDS' fiscal year end
was December 31.

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.  The Company  anticipates  that it will grant  trade  credit to future
customers on credit terms it establishes with individual customers.

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.  As of June 30, 1997,
cash equivalents include approximately $652,000 invested in money market funds.

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 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  offered to the  Company
having  the  same  or  similar  remaining  maturities  with  similar  collateral
requirements. At June 30, 1997, cost approximated fair value.

Debt issue costs:  Costs to issue debt are amortized over the life of the debt.

Other  assets:  The license  agreement is being  amortized by the  straignt-line
method  over the  remaining  life of the  related  patents of 15 years (Note 4).
Organization  expenses are being  amortized by the  straignt-line  method over 5
years.  Costs of obtaining  patents are  capitalized  and will be amortized over
their useful life.


<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

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

The Company  reviews its  intangible  assets  quarterly to  determine  potential
impairment  by comparing  the carrying  value of the  intangibles  with expected
future net cash flows provided by operating  activities of the business.  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 will be determined
based on estimated  expected future  discounted cash flows. 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
lease, whichever is less.

Income taxes:  Deferred income tax assets and liabilities are computed  annually
for  differences  between the financial and tax bases 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: Loss per common share is computed based upon the weighted
average number of common shares outstanding during the period. Primary and fully
diluted loss per common share are the same amounts for all periods presented.

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 a
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 a loss or increase the income
per common share from continuing  operations.  All entities  required to present
per-share  amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.

The adoption of Statement No. 128 would have had no effect on reported  earnings
(loss) per share.

<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

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

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.

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.

The  Company is a  development  stage  company  which has  suffered  losses from
operations,  requires additional financing, and ultimately needs to successfully
attain  profitable  operations.  These factors raise substantial doubt about the
Company's  ability to continue as a going concern.  The financial  statements do
not  reflect any  adjustment  which  might be  necessary  should the Company not
remain a going concern.

The Company  does not have  sufficient  funds to remain a going  concern,  or to
complete  development of and bring its instrument and  disposables to commercial
production, without immediate funding from equity or debt financing.  Management
is working to obtain this needed funding.  In addition,  management is exploring
strategic  partner  relationships  to  provide  intellectual   resources  and/or
licensing  revenues.   There  is  no  assurance  that  additional  financing  or
relationships can be obtained.


Note 3.  Short-term Debt Obligations

Short-term debt obligations as of June 30, 1997 and 1996, are as follows:

                                                       1997          1996

13.5% convertible secured promissory notes,
  payable June 1998, secured by substantially
  all of the Company's assets                     $1,070,000    $         -
Others, paid in 1997                                       -         24,455
                                                  -------------------------
                                                  $1,070,000    $    24,455
                                                  =========================

<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Note 3.  Short-term Debt Obligations (Continued)

In June 1997, the Company  completed an offering of secured  promissory notes of
$1,070,000  to accredited  investors  and issued three  warrants for every $1 of
principal in  connection  with the sale of such notes to the  investors  for the
purchase of 3,210,000  shares of common  stock.  In addition,  the selling agent
also received  warrants to purchase 232,800 shares of common stock. All warrants
issued  were  valued at $371.  The notes are  convertible  into shares of common
stock at a price equal to 80 percent of the market price of the common stock for
(i) the 20  consecutive  trading days prior to the issuance of the notes or June
1, 1998, 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,  except the exercise price is limited to a
maximum of $0.35.


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, and $1,000,000 by December 31, 1997,  then
each  time  one of such  benchmarks  is not met the  licensor  has the  right to
deprive the Company of its exclusive rights under the license  agreement.  As of
June 30, 1997,  the Company has paid  $850,000 of the  cumulative  payment.  The
Company has also ratably accrued additional minimum royalty payments of $112,500
as of June 30, 1997,  because sales or sublicense  revenues through December 31,
1997, may not be adequate to meet the cumulative  minimum royalty payments.  The
Company intends to accrue the entire $150,000 by December 31, 1997.

The  obligations  of the  Company  to pay  royalties  terminates  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.

Employment agreements:  The Company has the following employment agreements with
various officers:

<TABLE>
<CAPTION>

                                                                                    Annual
                   Officer                                 Term        Expires    Compensation

<S>                                                       <C>          <C>          <C>   
Executive Vice President of Research and Development      3 years      04/30/98     $125,000
Chief Financial Officer                                   2 years      12/01/97      125,000
Executive Vice President of Manufacturing                 1 year       10/28/97      105,000
Senior Director of Engineering                            1 year       02/01/98      100,000

</TABLE>

All  employment  agreements  are  subject to  adjustments  and bonuses as may be
determined by the Board of Directors. In the event the employment agreements are
terminated for any reason by the Company, other than for cause as defined in the
agreements,  the officers would receive  compensation for the greater of (i) the
salary due under the remaining terms of the agreement or (ii) one year's salary.

<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

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:
     1998                            $ 43,500
     1999                              38,000
     2000                              26,000

Rental  expense for the years ended June 30, 1997 and 1996,  and the period from
September  30, 1991 (date of  inception)  to June 30,  1997,  was  approximately
$68,000, $82,000, and $443,000, respectively.


Note 6.  Stockholders' Equity

Capital  stock:  The  Company  has  authorized  120,000,000  of  capital  shares
consisting of 90,000,000 common shares and 30,000,000 undesignated shares.

Common  stock  placements:  During  the year ended June 30,  1996,  the  Company
completed  three private  offerings of its common stock.  From July to September
1995,  the Company  received net  proceeds of  approximately  $2,883,000  from a
private  placement  of units at $1.00 per unit.  In November  1995,  the Company
received net proceeds of approximately  $430,000 also from the private placement
of $1.00 units.  Each unit  consisted of four (4) shares of Company common stock
and a warrant to purchase one share of common  stock at $0.25 per share.  In May
1996, the Company  completed its third private  offering of 6,275,000  shares of
common  stock at $0.60 per share,  resulting  in net  proceeds of  approximately
$3,363,000.

Debt  conversions:  In  September  and  December  1995,  the  Company  converted
approximately  $2,565,000 of convertible debentures and related accrued interest
to shares of common stock. The debentures conversion prices were $0.125 to $0.25
per share.

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
1997 and 1996  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:

                                              1997               1996
                           
Net loss, as reported                     $(3,925,460)      $(2,396,963)
Net loss, pro forma                        (4,197,373)       (2,462,865)
Net loss per share, as reported                 (0.08)            (0.07)
Net loss per share, pro forma                   (0.09)            (0.08)

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.

<PAGE>


QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Note 6.  Stockholders' Equity (Continued)

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 1997 and 1996:

                                               1997             1996
 
Expected dividend yield                    $        -       $        -
Expected stock price volatility                 71.63%           76.14%
Risk-free interest rate                           6.0%             6.0%
Expected life of options (years)                    3                3

Transactions involving stock options and warrants during the two years ended
June 30, 1997, are summarized as follows:


                                                                  Weighted
                                                Stock          Average Exercise
                               Warrants        Options         Price Per Share 
 
Balance, June 30, 1995         6,072,603             -          $         0.20
  Granted                      5,977,500     3,725,000                    0.31
  Exercised                            -             -                       -
  Expired                              -             -                       -
                              --------------------------------------------------
Balance, June 30, 1996        12,050,103     3,725,000                    0.27
  Granted                      3,442,800     1,123,500                    0.43
  Exercised                     (455,000)     (320,000)                   0.23
  Expired                       (250,000)     (218,315)                   0.48
                              --------------------------------------------------
Balance, June 30, 1997        14,787,903     4,310,185          $         0.31
                              ==================================================

The weighted  average fair value of options and warrants granted during 1997 and
1996  was  $0.36  and  $0.16,  respectively.   The  following  tables  summarize
information about stock options and warrants outstanding as of June 30, 1997:

                        OPTIONS AND WARRANTS OUTSTANDING

                                                  Weighted
                                                   Average
                             Number of            Remaining       Weighted
Range of                        Units            Contractual       Average 
Exercise Price               Outstanding            Life        Exercise Price

$0.12-$0.125                  2,278,000              2.5         $      0.12
$0.25-$0.35                  14,494,903              3.5                0.27
$0.55-$0.90                   2,307,685              3.3                0.68
$5.40                            17,500              0.2                5.40
                             ----------                          -----------
                             19,098,088                          $      0.31
                             ==========                          ===========

<PAGE>


QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Note 6.  Stockholders' Equity (Continued)

                        OPTIONS AND WARRANTS EXERCISABLE


                                          Number of              Weighted
Range of                                    Units                 Average
Exercise Price                           Exercisable           Exercise Price

$0.12-$0.125                             2,278,000              $        0.12
$0.25-$0.35                             14,018,803                       0.27
$0.55-$0.90                              1,626,462                       0.69
$5.40                                       17,500                       5.40
                                        ---------------------------------------
                                        17,940,765              $        0.30
                                        =======================================

Compensation  expense  related to stock  option  grants was  $48,000 in 1997 and
$125,000 in 1996.

In July 1997,  additional  stock options to purchase  2,500,000 shares of common
stock were granted to employess.  These options vest over a two-year  period and
have an exercise price of $0.25.  In addition,  the Company reduced the exercise
price on all options  granted to  employees  (approximately  943,500  shares) to
$0.25.


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,  as 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 $8,963,000 in operating
loss carryforwards and $208,000 in research and development  credits at June 30,
1997,  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  relates 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  $5,934,000  that are not limited.  Further changes of control may
result in the additional  expiration of a portion of the remaining  carryforward
before  it can be  used  and are  also  dependent  upon  the  Company  attaining
profitable operations in the future.

<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Note 7.  Income Taxes (Continued)

Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 1997, 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
                             ----------------------------------------
                              $ 8,963,000             $     208,000
                             ========================================

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

                                                            June 30
                                                1997                     1996

Loss carryforwards                        $  3,047,000            $   1,800,000
Royalties                                       38,000                        -
Research and development credits 
  and deductions                               414,000                  296,000
Guarantee of Spectrum Diagnostics, Inc. debt   115,000                  115,000
Compensation expense                            59,000                   43,000
Other accruals                                 (10,000)                       -
                                        ----------------------------------------
Gross deferred tax assets                    3,663,000                2,254,000

Valuation allowance for deferred tax assets (3,663,000)              (2,254,000)
                                        ----------------------------------------
                                           $         -            $           -
                                        ========================================

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, 1997 and 1996, due to the valuation allowance recorded against deferred
tax assets.
             

<PAGE>

QUANTECH LTD. (A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

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 $37,000 as of June 30, 1997.


Note 9.  Subsequent Event

Subsequent to year end, the Company was in process of finalizing an agreement to
issue  3,000,000  shares of the  Company's  common  stock,  convertible  secured
promissory notes totaling $550,000, and warrants to purchase 1,650,000 shares of
common stock in return for the cancellation of certain license agreements.

The convertible secured promissory notes carry an interest rate of 13.5 percent,
are payable  June 1998,  and are  convertible  into shares of common  stock at a
price of the  lesser of $0.35 per share or a price  equal to 80  percent  of the
market price of the common stock for (i) the 20  consecutive  trading days prior
to the  issuance  of the notes or June 1,  1998,  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, except the maximum price is limited to $0.25.

<PAGE>

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

     None.


<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             52     Chief Executive Officer (interim) and Director

Gregory G. Freitag      35     Chief Financial Officer, Chief Operating Officer
                               and Director

Robert R. McKiel, Ph.D. 54     Executive Vice President-Research and Development


     Robert Case has been interim Chief Executive  Officer since June 1997 and a
director since October 1996. He 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  Financial  Officer and  Secretary of the
Company since December 1995 and Chief Operating  Officer since July 1997, having
previously   held  the  position  of  Executive   Vice  President  of  Corporate
Development.  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,  is
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.

     Robert R. McKiel,  Ph.D.,  has been Executive Vice  President-Research  and
Development  since 1992.  From 1984 to 1987, Dr. McKiel served as Vice President

<PAGE>

of Amersham International, a large medical company, based in the United Kingdom.
From 1987  until  joining  the  Company  he served as a  consultant  to  various
companies  in  the  medical  diagnostics  industry,  including  Ares-Serono  and
Boehringer  Mannheim  Corporation.  In that capacity,  he has been involved in a
variety of projects including the design of a clinical immunochemistry analyzer,
implementation of a GMP (Good  Manufacturing  Practices)  program for a clinical
device manufacturer and a redesign of a pharmaceutical  quality control program.
He earned his  baccalaureate  degree in organic  chemistry at the  University of
Notre  Dame  and a  doctorate  in  biological  chemistry  at the  University  of
Illinois.  After completion of his post-doctoral residency in clinical chemistry
at the University of Illinois  Medical  Center,  he joined the Illinois  Medical
Center  staff.  From 1973 to 1979,  he served as an  assistant  Director  of the
University of Illinois  Hospital  Laboratories  and as head of  Radioimmunoassay
Laboratory, held various faculty appointments,  and taught in the departments of
Biological  Chemistry  and  Pathology.  In  1979,  Dr.  McKiel  joined  Amersham
Corporation to establish a U.S. based technical support system for the company's
products, and to enhance Amersham's effectiveness in the design and marketing of
new products in the U.S. In 1984, he took on the  additional  responsibility  of
managing the marketing of clinical products.

     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 1997 Annual Meeting
of Shareholders.

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 1997 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 1997 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 1997 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, 1997.


<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: September 25, 1997              By:   /s/ Robert Case
                                            ----------------
                                            Robert Case,
                                            CEO

     In accordance with the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

                               (Power of Attorney)

     Each person whose signature  appears below  constitutes and appoints ROBERT
CASE and GREGORY G. FREITAG as his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and  resubstitution,  for him
and in his name, place and stead, in any and all capacities,  to sign any or all
amendments to this Annual  Report on Form 10-KSB and to file the same,  with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  each acting alone,  full power and authority to do and perform each and
every  act and  thing  requisite  and  necessary  to be done  in and  about  the
premises,  as  fully  to all  intents  and  purposes  as he might or could do in
person,  hereby ratifying and confirming all said  attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.

Signature                   Title                                  Date

/s/ Robert Case             Chief Executive Officer, 
Robert Case                 and Director                     September 25, 1997

/s/ Gregory G. Freitag      Chief Financial Officer, 
Gregory G. Freitag          COO, Secretary and      
                            Treasurer (Chief Financial 
                            and Accounting Officer)          September 25, 1997

/s/ James F. Lyons          Chairman                         September 25, 1997
James F. Lyons

/s/ Richard W. Perkins      Director                         September 25, 1997
Richard W. Perkins

/s/ Edward E. Strickland    Director                         September 25, 1997
Edward E. Strickland


<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON D.C.

                          EXHIBIT INDEX TO FORM 10-KSB
                                       OF
                                  QUANTECH LTD.

                     For The Fiscal Year Ended June 30, 1997
                         Commission File Number: 0-19957


Exhibit     Description
Number

2.1         Plan of Reorganization, dated November 24, 1992, by and among 
            Quantech Ltd. and Spectrum Diagnostics S.p.A. (incorporated by 
            reference to Exhibit 2.1 of the Registrant's Registration Statement
            on Form S-4; Reg. No. 33-55356).

2.2         Amendment and Restatement Agreement and Plan of Merger dated 
            January 20, 1993 by and among Quantech Ltd., Spectrum Diagnostics
            S.p.A. and Spectrum Diagnostics Corp. (incorporated by reference to
            Exhibit 2.2 of the Registrant's Registration Statement on Form S-4;
            Reg. No. 33-55356).

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).



<PAGE>

10.3*       Employment Agreement with Robert M. McKiel (incorporated by 
            reference to Exhibit 10.4 of the Registrant's Form 10-KSB for the 
            Year Ended June 30, 1995).

10.4        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).

10.5*       Warrant  to  purchase  830,841  shares  by  Robert  M.  McKiel
            (incorporated   by   reference   to   Exhibit   10.13  of  the
            Registrant's Form 10-KSB for the Year Ended June 30, 1995).

10.6*       Employment Agreement with Gregory G. Freitag  (incorporated by
            reference  to Exhibit  10.8 of the  Registrant's  Registration
            Statement on Form SB-2; Reg. No. 333-6809).

10.7        Severance and Settlement Agreement and Mutual Release of All Claims
            with R.H. Joseph Shaw dated June 13, 1997 (incorporated by reference
            to Exhibit 10.9 of the Registrant's Registration Statement on 
            Form SB-2; Reg. No. 333-6809).

21          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.