<PAGE>
 
                                  FORM 10-QSB
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

              [X] Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

           For the quarterly period ended    September  30, 1997
                                            --------------------------

                                       OR

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

       For the transition period from _______________ to _______________

                        Commission file number  0-21384
                                               ---------

                     INTERACTIVE MEDICAL TECHNOLOGIES LTD.
            -------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Delaware                                        13-3367421
-------------------------------                       -----------------------
(State or other jurisdiction of                           (I.R.S. employer
incorporation or organization)                         identification number)

  2139 Pontius Avenue, Los Angeles , California                        90021
  --------------------------------------------------------------------------
    (Address of principal executive offices)                        (Zip Code)

       Registrant's Telephone number, including area code: (310) 312-9652
                                                           --------------

                                Not Applicable
 ----------------------------------------------------------------------------
 (former, name, address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.        Yes  X       No ___
                                              ---            

State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
                                                      Outstanding at
           Class of Common Stock                    September 30, 1997
           ---------------------                    ------------------
<S>                                                <C>               
              $.001 par value                       69,066,761 shares
</TABLE> 
 
Transitional Small Business Disclosure Format      Yes      No  X
                                                      -----   -----

Number of sequentially numbered pages in the document: 21
                                                       --

                                      -1-
<PAGE>
 
                                  FORM 10-QSB
                      Securities and Exchange Commission
                            Washington, D.C. 20549

                     INTERACTIVE MEDICAL TECHNOLOGIES LTD.

                                     Index
<TABLE> 
<S>                                                                        <C>
PART I - FINANCIAL INFORMATION                                             Page
                                                                           ----
     Item 1. Consolidated Financial Statements
 
             Condensed Consolidated Balance Sheets at
              December 31, 1996 and September 30, 1997 (unaudited)           3
 
             Condensed Consolidated Statements of Operations
              for the three and nine months ended September 30,
              1996 (unaudited) and 1997 (unaudited)                          5
 
             Condensed Consolidated Statements of Cash Flows
              for the nine months ended September 30, 1996 (unaudited)
              and 1997 (unaudited)                                           6
 
             Notes to Condensed Consolidated Financial Statements            7
 
     Item 2. Management's Discussion and Analysis of
             Financial Condition and Results of Operations.                 14
 
 
PART II. - OTHER INFORMATION
 
     Item 1. Legal Proceedings                                              17
 
     Item 4. Submission of Matters of a Vote to Security Holders            19
 
     Item 5. Other Information                                              19
 
     Item 6. Exhibits and Reports on Form 8-K                               20
 
Signatures                                                                  21
</TABLE>

                                      -2-
<PAGE>
 
                         PART I. FINANCIAL INFORMATION
                         -----------------------------

             INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    December 31, 1996 and September 30, 1997

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
 
                                                          December 31,   September 30,
                                                              1996           1997
                                                          ------------   -------------
                                                                          (unaudited)
<S>                                                       <C>            <C>
 
CURRENT ASSETS
  Cash                                                      $  192,421          12,850
  Accounts receivables                                          15,897          68,340
  Lease receivables                                            226,448         317,039
  Prepaid expense                                               60,874          60,874
                                                            ----------       ---------
    Total Current Assets                                       434,766         459,103
 
PROPERTY, EQUIPMENT AND LEASEHOLD
 IMPROVEMENTS, at cost, net of accumulated
 Depreciation of $1,747,219 in 1996 and $2,107,569
 In 1997
 Total property, equipment and leasehold
     Improvements, net                                       1,097,590         791,152
 
OTHER ASSETS
Patents, net of accumulated amortization of $131,554
 In 1996 and $149,619 in 1997                                  265,399         247,334
 
Investment in pending acquisitions (Note 4)                     70,000         769,216
 
Deposits and other assets                                       35,133          30,264
                                                            ----------       ---------
   TOTAL ASSETS                                             $1,902,888       2,297,069
                                                            ----------       ---------
</TABLE> 
              See the accompanying notes to these consolidated statements

                                      -3-
<PAGE>
 
             INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    December 31, 1996 and September 30, 1997

                     LIABILITIES AND SHAREHOLDERS' DEFICIT
                     -------------------------------------
<TABLE>
<CAPTION>
 
                                                               December 31,        September 30,
                                                                  1996                 1997
                                                              -------------       --------------
                                                                                    (unaudited)
<S>                                                           <C>                 <C>
CURRENT LIABILITIES
 Loans payable                                                  $     78,330           78,330
 Convertible note payable                                            106,001          333,945
 Current portion of notes payable - MRI equipment                    454,716          454,716
 Accrued compensation and payroll taxes                              145,065          168,808
 Professional services and other accrued expenses                    227,604          219,279
 Trade payables and other accrued expenses                           215,292          269,703
 Royalties payable                                                   238,186          195,050
 Reg S convertible notes                                                   -          204,720
 Income taxes payable                                                  7,946            8,746
 Interest payable - note payable - MRI equipment                      63,799           87,502
 Interest payable - convertible note                                  27,116          102,807
 Deferred rent                                                         8,460            8,460
  Other accrued liabilities                                           70,992          167,066
                                                                ------------      -----------
   Total Current Liabilities                                       1,643,507        2,299,132
                                                              
LONG TERM NOTES PAYABLE, net of current portion (Note 3)      
 Note payable - MRI equipment                                        654,162          654,162
 Convertible notes                                                   568,000        1,037,655
                                                                ------------      -----------
   Total Liabilities                                               2,865,669        3,990,949
                                                              
COMMITMENT AND CONTINGENCIES (Note 5)                         
                                                              
SHAREHOLDERS' DEFICIT                                         
     Common stock, authorized 100,000,000 shares              
  of $.001 par value; issued and outstanding                  
  69,066,761 in 1997 and 50,654,872 in 1996                           45,655           61,881
  Additional paid-in-capital                                      16,456,437       17,457,445
  Accumulated deficit                                            (17,464,873)     (19,215,206)
                                                                ------------      -----------
   Total Shareholders' Deficit                                      (962,781)      (1,693,880)
                                                                ------------      -----------
TOTAL LIABILITIES AND SHAREHOLDERS;                           
 DEFICIT                                                        $  1,902,888        2,297,069
                                                                ------------      -----------
</TABLE>
             See the accompanying notes to these consolidated statements

                                      -4-
<PAGE>
 
             INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1997
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                 For the                      For the
                                                           Three Months Ended             Six Months Ended
                                                              September 30,                 Septemeber 30,
                                                      --------------------------     --------------------------
                                                          1996           1997            1996           1997
                                                      -----------     ----------     -----------    -----------
<S>                                                   <C>             <C>            <C>            <C>
REVENUES                                                              
Products and Services                                 $   200,452     $    72,392    $   443,526    $   215,778
Lease Rentals                                              97,081               -        281,242         90,590
                                                      -----------     -----------    -----------    -----------
                                                          297,533          72,392        734,768        306,368
COSTS and EXPENSES                                                    
Cost of Revenues                                                      
   Product and Services                                    66,502          54,706        147,545        106,689
   Lease                                                   72,126          72,126        216,378        216,378
                                                      -----------     -----------    -----------    -----------
                                                          138,628         126,832        363,923        323,067
                                                                      
Research and development                                   71,177           5,156        199,804         85,495
Selling, general and administrative                       498,356         234,311      1,120,255        804,462
                                                      -----------     -----------    -----------    -----------
   Total Expenses                                         708,161         366,299      1,683,982      1,213,024
                                                      -----------     -----------    -----------    -----------
Loss from Operations                                     (410,628)       (293,907)      (949,214)      (906,656)
                                                                      
INTEREST EXPENSE and OTHER                                            
Interest expense - other                                    6,952          19,292          9,880         80,308
Interest expense - lease operations                        28,072               -         88,299         23,703
Interest Income                                            (3,802)          2,264        (10,502)         2,264
Net Losses on pending acquisition                          35,000                         35,000        734,601
                                                      -----------                    -----------    -----------
   Total interest expense and other                        66,222          21,887        122,677        840,876
                                                      -----------     -----------    -----------    -----------
Loss before provision for state                                
 Income  tax                                             (476,850)       (315,794)    (1,071,889)    (1,747,532)
                                                                      
Provision for state income taxes                              800               -          4,800            800
                                                                      
NET LOSS                                                 (477,650)       (315,794)    (1,076,689)    (1,748,332)
                                                      -----------     -----------    -----------    -----------
Weighted average shares outstanding                    45,875,066      61,394,301     38,621,477     52,393,463
                                                      -----------     -----------    -----------    -----------
Net loss per share                                    $      0.01     $      0.01    $      0.09    $      0.03
                                                      -----------     -----------    -----------    -----------
</TABLE>
                     See the accompanying notes to these consolidated statements

                                      -5-
<PAGE>
 
             INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
        FOR THE THREE AND NINE  MONTHS ENDED SEPTEMBER 30, 1996 and 1997
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                  For the
                                                         Nine Months Ended September 30,
                                                         ------------------------------
                                                              1996            1997
                                                         ------------    --------------
<S>                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss                                                  $(1,076,689)    $(1,748,332)
Adjustments to reconcile net loss to net cash
   (used in) operating activities:
     Depreciation and amortization                            271,581         327,276
Decrease (increase) in:
     Accounts receivable                                      (17,363)        (52,443)
     Lease receivable                                         (66,306)        (90,591)
     Inventories                                             (109,800)
     Prepaid expenses                                          (7,112)        (60,874)
     Increase (decrease) in:
     Professional fees and other payables                    (249,677)         99,024
     Accrued compensation                                     (16,761)         23,743
     Deferred Rent                                             (2,820)              -
     Income taxes payable                                       2,019             800
     Interest payable                                          27,837          99,394
                                                         ------------    ------------
          Net cash used in operating activities            (1,245,091)     (1,402,003)
                                                         ------------    ------------
CASH FLOWS USED IN INVESTING ACTIVTIES
     Investment in Nutra Quest                               (122,504)       (699,217)
     Expenditures for property, equipment and
      Leasehold improvements                                  (71,463)         (2,773)
                                                         ------------    ------------
          Net cash used in investing activities              (193,967)       (701,990)
CASH FLOWS FROM FINANCING ACTIVITES
     Decrease in Deposits                                           -           4,868
     Payments on notes payable                                (10,170)              -
     Payments on long term note                               (48,524)              -
     Proceeds from loans payable                              258,379               -
     Proceeds from issuance of convertible notes                    -         902,319
     Proceeds from issuance of common stock                 1,104,818       1.017,235
                                                         ------------    ------------
          Net cash provided by financing activities         1,304,503       1,924,422
                                                         ------------    ------------
NET INCREASE (DECREASE) IN CASH                              (134,555)       (179,571)
                                                         ------------    ------------
CASH, beginning of period                                     374,128         192,421
                                                         ------------    ------------
CASH, end of period                                      $    239,573    $     12,850
                                                         ------------    ------------
</TABLE>
          See the accompanying notes to these consolidated statements

                                      -6-
<PAGE>
 
             INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)
                               September 30, 1997

1.  Significant Risks
    -----------------

     The Company has incurred net losses of $3,978,579 and $2,066,727 for the
years ended December 31, 1995 and 1996, respectively and an additional loss of
$315,794 and $1,748,332 for the three and nine months ended September 30, 1997.
The continuing losses are the result of unprofitable operations, excessive
general and administrative expense and start up costs associated with the
pending acquisition of Nutra Quest (which was reported as acquired in July
1997), as well as the costs of being a publicly reported company. The
accumulative effect of the continuing losses have adversely affected the
liquidity of the Company. Future losses will likely negatively impact the
Company's ability to raise future working capital.
 
      As of September 30, 1997, the Company had an accumulated deficit of
$19,215,206 and negative working capital of $1,840,029. In addition, the Company
remains subject to various business risks including but not limited to its
ability to maintain vendor and supplier relationships by paying bills when due,
and overcoming future and ongoing product development, distribution and
marketing issues.
 
      The Company's condensed consolidated financial statements have been
prepared on the assumption the Company will continue as a going concern. The
Company has suffered recurring losses from operations, has an accumulated
deficit, has negative working capital and faces product development and
distribution issues that raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount of liabilities that might result should the Company be unable to
continue as a going concern.

      Beginning in June 1995, new management implemented a plan of restructure.
Initial efforts were focused on reducing losses, settling the accumulation of
debt and lawsuits and raising working capital.  By October 1995, Management
began shifting some of its resources to the internal development of new dietary
and food supplement products, development of alternative financing for research
projects and the acquisition of strategic consumer product companies.
 
      The results of these efforts produced a research grant for the National
Institute of Health (NIH) to help finance ongoing contrast microshpere studies,
a strategic partner agreement which includes a provision for funding advanced
pre-clinical and FDA studies as well as outlining a basic manufacturing and
distribution understanding.  Additionally, the Company had pending the
acquisition of two consumer products companies, each with a number of ready to
market personal care and nutritional consumer products.  The acquisition of the
personal care product line company did not go through as a result of to the
personal care company not meeting certain key criteria necessary for the
acquisition to be successful.  The nutritional products company (Nutra Quest,
Inc.)

                                      -7-
<PAGE>
 
acquisition was completed in July 1997, with the Company funding its initial
distribution phase. The funding advanced during this start up phase was provided
under a "Proposed Acquisition" agreement. Proforma financials for Nutra Quest,
Inc. will be included in the period ending December 31, 1997.
 
      On October 24, 1997, a letter of intent was signed to merge Interactive
Medical Technologies, Ltd. with Kaire International, Inc. ("Kaire"), a network
marketing firm based in Colorado.  Best known for its introduction of Pycnogenol
to network marketing in 1994, Kaire currently markets more than 35 products to
an active network of approximately eighty thousand (80,000) home based
distributors.  The final agreement has not been signed as of this filing.
 
      Even though operating losses have been substantially reduced from previous
years, Management anticipates that the revenues from the sales of existing
microsphere products, laboratory services and nutritional products operations
during its initial phases of distribution will not be adequate to fund present
scaled down commercial operations.  Management intends to raise additional
working capital to fund present commercial operations during the initial
distribution phase of the new consumer products.
 
      Due to the above factors, losses are expected to continue at least for the
immediate future.  In the event working capital is not available to the Company,
the Company would curtail all non commercial operations while accelerating the
distribution and sale of nutritional products and its efforts to license its
contrast microsphere technologies.
 
      The Company carries no direct product liability insurance, relying instead
on the coverage afforded by its distributors and the manufacturers from whom it
obtains products.  These coverages directly protect the insured that pay the
premiums and only secondarily the Company.  There is no assurance that such
coverages will adequately cover any claims that may be brought against the
Company.  In addition, the Company does not have any general liability coverage.

2.      Summary of Significant Accounting Policies
        ------------------------------------------

         Basis of Presentation
         ---------------------
 
      The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.  Certain
matters raise substantial doubt about the Company's ability to continue as a
going concern.  As discussed in Note 1, the Company operates under extreme
liquidity constraints and, because of recurring losses, increasing difficulty in
raising necessary additional capital.  Management's plan in regard to these
matters is described above.  The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

      In the opinion of the management the accompanying consolidated financial
statements contain all adjustments necessary (consisting of only normal
recurring accruals) to present fairly the

                                      -8-
<PAGE>
 
financial position at September 30, 1997, the results of its operations for
three and nine months ended September 30, 1996 and 1997 and the cash flows for
nine months ended September 30, 1996 and 1997. Certain information and footnote
disclosures normally included in financial statements that would have been
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, although management of the Company believes that the
disclosures in these financial statements are adequate to make the information
presented therein not misleading. It is suggested that these condensed financial
statements and notes thereto be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31, 1996
Form 10-KSB.
 
      The results of operations for the three and nine months ended September
30, 1997 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1997.

        Income Taxes
        ------------

      Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of state income taxes currently due.  No
federal income taxes are due as a result of the Company's net operating loss
carryforwards.

        Loss Per Share
        --------------

      Loss per share is based upon weighted average number of common shares
outstanding during the periods.
 

3.      Capital Transactions and Long Term Debt
        ---------------------------------------
 
      The Company's  magnetic resonance imaging (MRI) system (the "Unit")
currently is installed in a mobile van at an operating site in Jefferson Valley,
New York and has been in use since September 1992 and is leased to Tri-County
Mobil MRI, L.P. ("Tri-County"), whose general partner is Diagnostics Resource
Funding. This lease provides for monthly payments of $37,926 to Venus
Management, Inc. ("VMI") through August 1999 and $68,589 in September 1999 (with
such payments being guaranteed by Medical Funding of America, Inc., "MFA"), and
VMI is required to make monthly installment payments (which includes interest at
10.5% per annum on the unpaid principal balance) for the Unit to a third party
finance company of $32,360 through August 1999 and $68,589 in September 1999. As
of September 30, 1997, the balance of this debt aggregated is $1,082,797. This
lease provides for a purchase option at the expiration of the initial term of
such lease equal to the then fair market value of the Unit.
 
      Venus Management, Inc. ("VMI") and Medical Management, Inc. ("MMI")
entered into an agreement on or about October 9, 1997 whereby VMI transferred
(with the consent of Siemens Credit Corporation) its entire interest and
obligations in the magnetic resonance imaging system contract to MMI. In
addition to being released from the contract, VMI agreed that all Uniform
Commercial Code

                                      -9-
<PAGE>
 
financing statements covering the equipment and filed against VMI, shall remain
filed until satisfaction of all obligations under the contract.
 
      During the quarter ended March 31, 1997, a subscription was placed for
5,000,000 common shares  at $.09 per share and warrants to purchase an
additional 3,000,000 at $.09. The shares were issued under the transaction
exemption afforded by Regulation S.
 
      During the quarter ended March 31, 1997, the Company placed $117,211
Convertible Debentures due 365 days from date of subscription, bearing interest
at 10% per annum and convertible (including accrued interest) at any time by the
buyer into Company's common stock at a conversion price to be calculated by
applying a 35% discount to the market price based upon the average bid price of
the Company's common stock for the 5 day period immediately prior to conversion,
with a floor of $.08 and a ceiling of $.14 per share, in reliance upon the
transaction exemption afforded by Regulation S.
 
      During the quarter ended June 30, 1997, the Company placed $240,000 in
Convertible Debentures due 365 days and $250,000 in Convertible Debentures due
three years from date of subscription, bearing interest at 10% per annum and
convertible (including accrued interest) at any time by the buyer into Company's
common stock at a conversion price to be calculated by applying a 35% discount
to the market price based upon the average bid price of the Company's common
stock for the 5 day period immediately prior to conversion, with a floor of $.08
and a ceiling of $.14 per share, in reliance upon the transaction exemption
afforded by Regulation S.
 
      During the quarter ended September 30, 1997, the company received $433,214
in funds derived from subscription agreements under both Regulation S and
Regulation D. An additional $44,000 was received upon the exercise of a
Convertible Debenture with shares being issued in reliance upon the transaction
exemption afforded by Regulation S.
 
      In April 1997, as a result of a Special Shareholder Meeting, the Company's
Certificate of Incorporation was amended to increase the number of authorized
shares of common stock from 50,000,000 to 100,000,000.
 
4.   Pending Acquisitions
     --------------------

      On May 17, 1996, the Company made a proposal to acquire all of the assets,
subject to liabilities, of Pastels International, Inc. ("Pastels"), a private
California company that has developed and distributes several beauty and skin
care formulations sold commercially. During the quarter ended June 30, 1997 this
acquisition was terminated as a result of Pastels not meeting certain key
criteria necessary for the acquisition to be successful. Under the proposal, the
Company was obligated to pay Ms. Cecilia Lascu, Pastels' founder and sole
shareholder, a total of $250,000 and warrants to purchase 500,000 shares of the
Company's common stock exerciseable for a period of 5 years at $.15 per share,
subject to the achievement of certain performance criteria. It was decided not
to proceed with the proposed acquisition. Prior to June 30, 1997, the Company
had advanced $272,437 to Pastels. These advances have been expensed in full.

                                      -10-
<PAGE>
 
      The Company had one other pending acquisition for Nutra Quest Inc.  The
Company was obligated to pay a total of $600,000 for all of Nutra Quest issued
and outstanding shares, of which $200,000 was to be paid in cash over a period
of 15 months, subject to Nutra Quest achieving certain predetermined levels of
gross sales within specific time period, and the balance of $400,000 was payable
in shares of the Company's common stock valued at $.15 per share.  The total
number of shares payable to Nutra Quest was also subject to Nutra Quest
achieving set performance goals.  The acquisition was reported completed in July
1997.  As of March 31, 1997, $1,038,733 had been advanced on the acquisition of
which $80,000 has been capitalized, $454,551 was expensed for the year ended
December 31, 1996 and $504,182 was expensed during the three months ended March
31, 1997.   During the three months ended June 30, 1997 an additional $556,912
was advanced to Nutra Quest, of which $200,000 was expensed and $356,912 was
capitalized.  Nutra Quest was advanced $332,304 during the three months ended
September 30, 1997, of which the full amount was capitalized.
 
      On October 24, 1997, a letter of intent was signed to merge Interactive
Medical Technologies, Ltd. with Kaire International, Inc. ("Kaire"), a network
marketing firm based in Colorado.  Best known for its introduction of Pycnogenol
to network marketing in 1994, Kaire currently markets more than 35 products to
an active network of approximately eighty thousand (80,000) home based
distributors.  The final agreement has not been signed as of this filing.

5.      Contingencies
        -------------
 
               SEC Proceedings Settled
               -----------------------
 
     In July 1993 the Company formed an independent committee of its Board of
Directors to determine whether certain prior private placements of the Company's
securities complied with all of the registration requirements of federal and
state securities laws. In certain prior private placements, a total of
approximately 2,506,982 shares of the Company's common stock was issued to a
smaller number of individuals. Those issuances were structured in reliance upon
the advice of the Company's then securities counsel, and the Company believes
that these issuances, standing alone, would have qualified for exemptions from
registration under federal and state securities laws. However, certain
subsequent resale's of these shares, commencing in June 1992, by the original
purchasers or their transferees, to a total of approximately 330 investors,
raised an issue as to whether a technical distribution occurred that might have
required either the original issuances or the resales to have been registered.
All of the foregoing resales were either directly effected or arranged for by
Clark M. Holcomb.
 
     In October 1993, the Company filed a registration statement with the SEC to
register all of the foregoing 2,506,982 shares with the SEC. However, even if
the registration statement becomes effective so as to permit public resales by
the holders of the shares involved in the transactions described above, these
holders could have a right of rescission to recover the purchase price they paid
for their shares plus interest from the date of purchase against the persons
from whom they acquired the shares.
 
     The Company believes (based in part upon the opinion of its current special
securities counsel)

                                      -11-
<PAGE>
 
that these holders do not have a valid and enforceable right to such rescission.
However, subject to any applicable statutes of limitation that might bar such
future claims, these shareholders could assert such claims, and the Company has
not set aside any reserves to fund any potential liabilities that it might incur
in connection with any such future potential claims, which could be material.
Should the Company incur any such liabilities, it might seek indemnification or
contribution for such liabilities from Mr. Holcomb or other third parties.
 
     In October 1995, the staff of the SEC advised the Company that it was
considering filing a civil injunctive action against the Company and Dr. William
Shell for alleged violations of the registration provisions of the federal
securities laws. The alleged violations related to the sale by the Company of
unregistered shares of its common stock which involved a series of resales of
these shares that were either directly effected or were arranged for by Clark
Holcomb. These transactions have been the subject of an SEC investigation which
was previously disclosed by the Company.
 
     The SEC disclosed in 1995 that it was seeking permanent injunctive relief
against the Company concerning the above matters. The Company entered into a
consent decree with the SEC in which in the Company, without admitting or
denying any wrongdoing, would be enjoined from violating the registration
provisions of the federal securities laws in the future. This consent agreement
was accepted by the SEC in June, 1997. No monetary penalties were assessed
against Interactive.
 
     Federal Trade Commission Proceedings Settled
     --------------------------------------------
 
     The Seattle Regional Office of the Federal Trade Commission had advised the
Company that the staff believed that the Company's fat sequesterant product,
which was marketed by KCD, a former licensee, under the name "SeQuester," had
been improperly represented in advertising claims, and that the sequesterant
product, when previously marketed by the Company under the name "Lipitrol", also
was improperly represented in advertising claims. (Note, this product is no
longer marketed). The FTC indicated that it was prepared to recommend that a
complaint be filed against the licensee, the Company and certain individuals in
connection with the foregoing. Subsequently the Company and the FTC agreed upon
a proposed settlement in this matter in which the Company would consent to a
permanent injunction prohibiting it from making misrepresentations relating to
weight loss or weight reduction products or services, or with respect to tests
or studies relating to such programs or services. In addition, the Company would
pay consumer redress to the FTC in an aggregate amount of $35,000 over a period
of twelve months. The Company's Board of Directors voted to accept the proposal
in March 1996, which was formally approved by the FTC on June 16, 1997.
 
     Other matters
     -------------
 
     In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the United States District Court for the Central District of California
against Clark M. Holcolm, Lawrence Gibson, Murray Bettingen, Bettingen, Inc.,
and the Company. This action alleges civil RICO, violation of the Securities Act
of 1933, violation of California Corporation Code, fraud, deceit and intentional
misrepresentation, negligent misrepresentation, conversion, constructive trust
and breach of contract. The complaint seeks damages of $201,333, rescission
punitive and exemplary damages. The Company

                                      -12-
<PAGE>
 
believes it has no obligation to the Rudolf Steiner Research Foundation in
connection with the matter. The Company denies the allegations and intends to
vigorously contest the matter.
 
      On or about October 17, 1997, the CEO of Nutra Quest, Inc., a wholly owned
subsidiary of Interactive Medical Technologies, Ltd. ("IMT") was terminated. On
or about that time, the terminated CEO took possession of and removed certain
company financial and administrative records of the company and is disputing
IMT's ownership of Nutra Quest, Inc. This matter is currently in litigation
whereby IMT has obtained a restraining order whereby the terminated CEO cannot
represent himself as being connected with Nutra Quest, Inc. and for the return
of company records. All remaining matters in this litigation are expected to be
settled some time in November 1997. The dollar value of the remaining assets in
the possession of the terminated CEO are not of material value to the operations
of the company. Proforma financial statements will be reported once the
litigation is settled.
 
      Except as otherwise specifically indicated above, management believes that
the Company doesn't have any material liability for any lawsuits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as of
September 30, 1997.
 
      While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice of
legal counsel believes, on the basis of the facts currently known, that it is
not probable that the Company would have any material liability.  However, there
can be no assurance that the Company will prevail in any of the above
proceedings.  Also the Company may be required to continue to defend itself
resulting in substantial additional expense.  In the event the Company is unable
to pay the defense costs associated with the foregoing an unfavorable settlement
or judgment could be awarded against the Company which could have a material
adverse effect upon the Company.

                                      -13-
<PAGE>
 
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

   The Company is currently funding the startup phase of Nutra Quest, Inc., a
network marketing company acquired in 1996.  This acquisition, which was
reported finalized in July 1997, represents a significant opportunity for future
growth in both revenues and income.  In April 1997, Nutra Quest began
distribution of "Royal Hawaiian Noni", a natural fruit used for restoring and
regenerating the body.  The Noni fruit, which is based on Morinda Citrifolia,
has a 2000 year history of use with Tahitian and Hawaiian people. The Company
has funded Nutra Quest Inc. under a "Proposal to Acquire".   As of September 30,
1997, under the proposal to acquire, the Company has funded Nutra Quest, a total
of $1,921,486.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 1996 Compared to September 30, 1997
<TABLE>
<CAPTION>
 
                                                         For the           For the
                                                       Three Months      Nine Months
                                                          Ended             Ended
                                                       September 30,    September 30,   
                                                       -------------    -------------
                                                        1996   1997     1996     1997
                                                        ----   ----     ----     ----
<S>                                                     <C>    <C>      <C>      <C>
($ Thousands)
Revenues - Products and Services
     Microspheres & Lab Services                        $201   $  72    $ 354    $ 216
     Fat Sequestration - License Fees
           and  Royalties                                  -       -       90        -
                                                        ----   -----    -----    -----
                                                         201      72      444      216
 
Cost of Revenues
Microspheres & Lab Services                               67      55      148      106
 Fat Sequestration - License Fees
        And Royalties                                      -       -        -        -
                                                        ----   -----    -----    -----
                                                          67      55      148      106
Gross Margin Product & Services                          134      17      296      110
                                                        ----   -----    -----    -----
 
Revenues - Lease Operations                               97       -      291       90
Cost of Revenues - Lease operations                      100      72      304      216
                                                        ----   -----    -----    -----
Gross margin - lease operations                         $  3     (72)    ($13)    (126)
                                                        ----   -----    -----    -----
</TABLE>

     For the three and nine months ended September 30, 1997, revenues from
products and services were approximately $72,000 and $216,000, a decrease of
$129,000 or 64.1% and $228,000

                                      -14-
<PAGE>
 
or 51.3%, respectively, from the same periods in 1996. The decrease was for the
three months ended September 30, 1997 was due to the recording of approximately
$97,000 in 1996 third quarter of revenues from Pastels and Nutra Quest (1997
does not include revenues from Pastels and Nutra Quest). The nine month decrease
is partially due to the termination of the fat sequestrant license agreement
with KCD which during the first three months of 1996 had generated approximately
$90,000 in license revenues with the remaining decrease a result of the revenues
recorded for Pastels and Nutra Quest in the third quarter of 1996.

     The overall cost of revenues for products and services as a percentage of
sales for the three and nine months ended September 30, 1997 were 76.3% and
49.1% respectively, compared to 33.3% and 33.3% for 1996.  The increase in cost
of revenues as a percentage of sales for the three and nine months ended
September 30, 1997 resulted primarily from absence of  license revenues from KCD
and revenues from Pastels and Nutra Quest.

     Research and development expense decreased approximately $66,021 or 92.6%
for the three month period ended September 30, 1997 from the comparable 1996
period due reductions in personnel.  The decrease in the nine month period ended
September 30, 1997 of $114,309 or 57.2% from the comparable period in 1996 was a
result of the expenditure reduction in personnel that was discussed above.

     SG&A expense decreased to $234,311 from $498,356 or 53.0% over prior year
for the three months ended September 30, 1997. This decrease is due to the
effects of cost reduction programs implemented during the current quarter.  For
the nine months ended September 30, 1997, SG&A decreased to 804,462 from
$1,102,255 or $315,793 in 1996, a reduction of 28.2%.  The decrease was a result
of restructuring and down sizing of operations which includes reductions in
accounting fees, salaries, wages, selling and marketing expenses, and
shareholder expenses.

     Interest expense for operations for the three month period ended September
30, 1997 was $19,292 compared to $6,952 for the comparable three month period
prior year.  The increase for the nine month period ended September 30, 1997 was
$70,428 from the comparable 1996 period. The increase resulted from interest due
on convertible notes which were issued during the nine month period ending
September 30, 1997.

     Interest income for the third quarter of 1997 was $0 compared to $3,802 for
1996.  For the nine months ended September 30, 1997 interest income decreased to
$0 from $10,502 from the comparable 1996 six month period.  The decreases were
due to 1996 interest earned on an outstanding note receivable from a shareholder
and an outstanding note receivable from the sale of stock.

     No provision was made for Federal income tax since the Company has incurred
significant net operating losses from inception. Through December 31, 1996, the
Company incurred net operating losses for tax purposes of approximately
$14,767,000. The net operating loss carry forward may be used to reduce taxable
income through the year 2011. The Company's tax returns have not been audited by
the Internal Revenue Service. The carry forward amounts may therefore be

                                      -15-
<PAGE>
 
subject to audit and adjustment. As a result of the Tax Reform Act, the
availability of net operating loss carry forwards can be deferred, reduced or
eliminated under certain circumstances. Net operating losses in the State of
California were not available for use during 1992 and the carry forward period
has generally been reduced from fifteen years to five years beginning in 1993.


Liquidity and Capital Resources
-------------------------------

     The Company has received capital for operations and research from private
investors, through issuance of private party debt, bank financing and from
licensing and product sales.  Currently, revenues generated from licensing and
product sales have been insufficient to cover operating expenses, research and
development, costs of litigation, construction costs and patent development
costs.  As a result, in order to sustain operations, the Company has been
dependent on private placements of securities, bank debt, loans from private
investors and the exercise of warrants.  To correct this imbalance, management
has made cuts and changes in the Company's operations in an effort to reduce
operating expense.  Until such time as the Company can increase revenues, the
Company will continue to be dependent on private or institutional investment
capital to support a large percentage of the planned 1997 operations.
Historically, the Company has been able to generate private placement funds to
provide capital for operations and growth.  During 1995 and 1996, new management
was responsible for approximately $2,500,000 in private placements of debt and
equity.  Subsequent to December 31, 1996, an additional $1,924,422 has been
raised.  However, there can be no assurances that private or other capital will
continue to be available, or that revenues will increase to meet the Company's
cash needs. Additionally, there can be no assurance that a sufficient amount of
the Company's securities can or will be sold or that any warrants will be
exercised to fund any operating needs of the Company or its research and
development programs.  (Even assuming all of the warrants outstanding as of
September 30, 1997 with exercise prices at or below the current market price of
the common stock were to be exercised, the total gross proceeds to the Company
from such exercise would be insignificant).

     As of September 30, 1997, the Company's working capital position declined
to a negative $1,840,029 from a negative $1,208,741 at December 31, 1996
primarily as a result of funding pending acquisitions and the note on the MRI
equipment totaling approximately $989,381. The stock subscriptions and
convertible notes will be converted to equity over the next four quarters.  At
September 30, 1997, the Company's cash position had decreased to $12,850 from
$192,421 at December 31, 1996.
 
     At September 30, 1997, the Company had assets of $2,297,069 compared to
$1,902,888 on December 31, 1996.  In addition, the Company had a total
shareholders' deficit of $1,693,880 on September 30, 1997 compared to $962,781
on December 31, 1996, an increase of $731,099.  The increase was the result of a
net loss from operations of $1,748,332, which included losses of $734,601
resulting from the funding of pending acquisitions.  The balance of $1,082,797
as part of September 30, 1997 liabilities is a note for MRI equipment which had
been assumed by the Company as part of its acquisition of VMI.  This note has
been assigned to Medical Management,

                                      -16-
<PAGE>
 
Inc. as of October 9, 1997. The assignment is a complete transfer of VMI's
interest and obligations in the contract.
 
 
                          PART II.  OTHER INFORMATION
                          ---------------------------
                                        
ITEM 1.  LEGAL PROCEEDINGS

               SEC Proceedings
               ---------------
 
     In July 1993 the Company formed an independent committee of its Board of
Directors to determine whether certain prior private placements of the Company's
securities complied with all of the registration requirements of federal and
state securities laws. In certain prior private placements, a total of
approximately 2,506,982 shares of the Company's common stock was issued to a
smaller number of individuals. Those issuances were structured in reliance upon
the advice of the Company's then securities counsel, and the Company believes
that these issuances, standing alone, would have qualified for exemptions from
registration under federal and state securities laws. However, certain
subsequent resale's of these shares, commencing in June 1992, by the original
purchasers or their transferees, to a total of approximately 330 investors,
raised an issue as to whether a technical distribution occurred that might have
required either the original issuances or the resales to have been registered.
All of the foregoing resales were either directly effected or arranged for by
Clark M. Holcomb.
 
     In October 1993, the Company filed a registration statement with the SEC to
register all of the foregoing 2,506,982 shares with the SEC. However, even if
the registration statement becomes effective so as to permit public resales by
the holders of the shares involved in the transactions described above, these
holders could have a right of rescission to recover the purchase price they paid
for their shares plus interest from the date of purchase against the persons
from whom they acquired the shares.
 
     The Company believes (based in part upon the opinion of its current special
securities counsel) that these holders do not have a valid and enforceable right
to such rescission. However, subject to any applicable statutes of limitation
that might bar such future claims, these shareholders could assert such claims,
and the Company has not set aside any reserves to fund any potential liabilities
that it might incur in connection with any such future potential claims, which
could be material. Should the Company incur any such liabilities, it might seek
indemnification or contribution for such liabilities from Mr. Holcomb or other
third parties.
 
     In October 1995, the staff of the SEC advised the Company that it was
considering filing a civil injunctive action against the Company and Dr. William
Shell for alleged violations of the registration provisions of the federal
securities laws. The alleged violations related to the sale by the Company of
unregistered shares of its common stock which involved a series of resales of
these shares that were either directly effected or were arranged for by Clark
Holcomb. These transactions have been the subject of an SEC investigation which
was previously disclosed by the Company.

                                      -17-
<PAGE>
 
     The SEC disclosed in 1995 that it was seeking permanent injunctive relief
against the Company concerning the above matters. The Company entered into a
consent decree with the SEC in which in the Company, without admitting or
denying any wrongdoing, would be enjoined from violating the registration
provisions of the federal securities laws in the future. This consent agreement
was accepted by the SEC in June, 1997. No monetary penalties were assessed
against Interactive.
 
     Federal Trade Commission Proceedings
     ------------------------------------
 
     The Seattle Regional Office of the Federal Trade Commission had advised the
Company that the staff believed that the Company's fat sequesterant product,
which was marketed by KCD, a former licensee, under the name "SeQuester," had
been improperly represented in advertising claims, and that the sequesterant
product, when previously marketed by the Company under the name "Lipitrol", also
was improperly represented in advertising claims. The FTC indicated that it was
prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing. Subsequently
the Company and the FTC agreed upon a proposed settlement in this matter in
which the Company would consent to a permanent injunction prohibiting it from
making misrepresentations relating to weight loss or weight reduction products
or services, or with respect to tests or studies relating to such programs or
services. In addition, the Company would pay consumer redress to the FTC in an
aggregate amount of $35,000 over a period of twelve months. The Company's Board
of Directors voted to accept the proposal in March 1996, which was formally
approved by the FTC on June 16, 1997.
 
Other matters
-------------
 
      In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the United States District Court for the Central District of California
against Clark M. Holcolm, Lawrence Gibson, Murray Bettingen, Bettingen, Inc.,
and the Company. This action alleges civil RICO, violation of the Securities Act
of 1933, violation of California Corporation Code, fraud, deceit and intentional
misrepresentation, negligent misrepresentation, conversion, constructive trust
and breach of contract. The complaint seeks damages of $201,333, rescission
punitive and exemplary damages. The Company believes it has no obligation to the
Rudolf Steiner Research Foundation in connection with the matter. The Company
denies the allegations and intends to vigorously contest the matter.
 
      On or about October 17, 1997, the CEO of Nutra Quest, Inc., a wholly owned
subsidiary of Interactive Medical Technologies, Ltd. ("IMT") was terminated. On
or about that time, the terminated CEO took possession of and removed certain
company financial and administrative records of the company and is disputing
IMT's ownership of Nutra Quest, Inc. This matter is currently in litigation
whereby IMT has obtained a restraining order whereby the terminated CEO cannot
represent himself as being connected with Nutra Quest, Inc. and for the return
of company records. All remaining matters in this litigation are expected to be
settled some time in November 1997. The dollar value of the remaining assets in
the possession of the terminated CEO are not of material value to the operations
of the company. Proforma financial statements will be reported once the
litigation is settled.

                                      -18-
<PAGE>
 
      Except as otherwise specifically indicated above, management believes that
the Company doesn't have any material liability for any lawsuits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as of
September 30, 1997.
 
      While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice of
legal counsel believes, on the basis of the facts currently known, that it is
not probable that the Company would have any material liability.  However, there
can be no assurance that the Company will prevail in any of the above
proceedings.  Also the Company may be required to continue to defend itself
resulting in substantial additional expense.  In the event the Company is unable
to pay the defense costs associated with the foregoing an unfavorable settlement
or judgment could be awarded against the Company which could have a material
adverse effect upon the Company.

      The Company currently has no firm commitments for material capital
expenditures, with any such future commitments being dependent upon the
availability of funds.  The Company does not anticipate that future compliance
with existing environmental and occupational safety regulations will have a
significant impact on its capital expenditures or on its financial condition or
future operating results.

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

      During April 1997, a Special Shareholder Meeting was held at which the
shareholders of the Company approved amendments to the Company's certificate of
Incorporation to provide for an increase in the number of authorized shares of
common stock from 50,000,000 to 100,000,000.

 
ITEM 5.   OTHER INFORMATION

Termination of Nutra Quest, Inc. Chief Executive Officer
--------------------------------------------------------

      On or about October 17, 1997, the CEO of Nutra Quest, Inc., a wholly owned
subsidiary of Interactive Medical Technologies, Ltd. ("IMT") was terminated. On
or about that time, the terminated CEO took possession of and removed certain
company financial and administrative records of the company and is disputing
IMT's ownership of Nutra Quest, Inc. This matter is currently in litigation
whereby IMT has obtained a restraining order prohibiting the terminated CEO from
representing himself as being connected with Nutra Quest, Inc. and for the
return of company records. All remaining matters being litigated in this action
are expected to be settled some time in November 1997. The dollar value of the
assets in the possession of the terminated CEO are not of material value to the
operations of the company. Proforma financial statements will be reported once
the litigation is settled.

Letter of Intend Signed to Merge With Kaire International, Inc.
---------------------------------------------------------------

      On October 24, 1997, a letter of intent was signed to merge Interactive
Medical Technologies, Ltd. with Kaire International, Inc. ("Kaire"), a network
marketing firm based in

                                      -19-
<PAGE>
 
Colorado. Best known for its introduction of Pycnogenol to network marketing in
1994, Kaire currently markets more than 35 products to an active network of
approximately eighty thousand (80,000) home based distributors. The final
agreement has not been signed as of this filing.

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

      (a)  Exhibits

           27  Financial Data Schedule

      (b)  The Company filed the following Reports on form 8-K:

           1.  Form 8-K dated March 17, 1997, reporting Common Stock and
               Convertible debentures Issuance.

           2.  Form 8-K dated July 21, 1997, reporting pursuant to an
               Acquisition Agreement between the Company and Nutra Quest, Inc.,
               a Nevada Corporation, the Company purchased from Nutra Quest all
               its issued and outstanding shares of common stock.

                                      -20-
<PAGE>
 
                                   SIGNATURES
                                   ----------

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

                INTERACTIVE MEDICAL TECHNOLOGIES LTD.
              -----------------------------------------
                  (Registrant)



Date:  11/18/97                   By: /s/ STEVEN R. WESTLUND
       -------------------------      --------------------------
                                      Steven Westlund
                                      (Chief Executive Officer)



Date:  11/18/97                   By: /s/ PETER T. BENZ
       ------------------------       --------------------------
                                      Peter T. Benz
                                      (President)

 
 
Date:  11/18/97                   By:  /s/ OWEN M. NACCARATO
       -------------------------       -------------------------
                                       Owen M. Naccarato
                                       (Chief Financial Officer)
 

                                      -21-