<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 March 31, 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)

          1717 Stewart Street, Santa Monica, California         90404
        -------------------------------------------------------------  
         (Address of principal executive offices)           (Zip Code)

      Registrant's Telephone number, including area code: (310) 586-5532
                                                          --------------

                                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.
                                                  Outstanding at
               Class of Common Stock              April 30, 1997
               ---------------------              --------------
                  $.001 par value               50,654,872 shares 
 
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>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                 Page
                                                                               ----

     Item 1. Consolidated Financial Statements
<S>                                                                             <C>
 
             Condensed Consolidated Balance Sheets at
              December 31, 1996 and March 31, 1997 (unaudited)                   3
                                                                                
             Condensed Consolidated Statements of Operations                    
              for the three months ended March 31, 1996 (unaudited)             
              and 1997 (unaudited)                                               5
                                                                                
             Condensed Consolidated Statements of Cash Flows                    
              for the three months ended March 31, 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.                                         12
                                                                                
     Item 3. Legal Proceedings                                                  17
                                                                                
                                                                                
PART II. - OTHER INFORMATION                                                    
                                                                                
     Item 5. Other Information                                                  20
                                                                                
     Item 6. Exhibits and Reports on Form 8-K                                   20
                                                                                
Signatures                                                                      21
 
 
</TABLE>

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

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     December 31, 1996 and March 31, 1997

                                    ASSETS
                                    ------

                                                     December 31,       March 31,
                                                        1996              1997
                                                     ----------        ----------      
                                                                       (unaudited)

<S>                                                  <C>                <C>
CURRENT ASSETS
        Cash                                         $  192,421        $  244,197
        Accounts receivables                             15,897            37,532
        Lease receivables                               226,448           317,039
                                                     ----------        ----------      
           Total Current Assets                         434,766           598,767

PROPERTY, EQUIPMENT AND LEASEHOLD
 IMPROVEMENTS, at cost, net of accumulated
 depreciation of $1,747,219 in 1996 and $1,877,319
 in 1997
        Office Equipment                                 50,259            11,048
        Leasehold improvements                          101,038            84,774
        Magnetic resonance imaging system               946,293           874,167
                                                     ----------        ----------     
           Total property, equipment and leasehold
             improvements, net                        1,097,590           969,989

OTHER ASSETS
Patents, net of accumulated amortization of $131,554
  in 1995 and $137,575 in 1997                          265,399           259,377


Investment in pending acqusitions (Note 4)               70,000            80,000

Deposits and other assets                                35,133            30,264

                                                     ----------        ----------     
           TOTAL ASSETS                              $1,902,888        $1,938,397
                                                     ==========        ==========    
</TABLE> 
                The accompanying notes are an integral part
                of these consolidated financial statements

                                      -3-

<PAGE>

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     DECEMBER 31, 1996 AND MARCH 31, 1997

                     LIABILITIES AND SHAREHOLDERS' DEFICIT
                     -------------------------------------
<TABLE>
<CAPTION>

                                                               DECEMBER 31,           MARCH 31,
                                                                  1996                  1997
                                                                  ----                  ----
                                                                                    (unaudited)
<S>                                                               <C>                 <C>

CURRENT LIABILITIES
        Loans payable                                           $   78,330          $   78,330  
        Convertible notes payable                                  106,001             104,001  
        Current portion of note payable - MRI equipmen             454,716             541,150  
        Accrued compensation and payroll taxes                     145,065             167,572  
        Professional services payable                              227,604             222,779  
        Trade payables and other accrued expenses                  215,292             207,485  
        Royalties payable                                          238,186             213,050  
        Reg S convertible notes                                          -             117,211  
        Income taxes payable                                         7,946               8,746  
        Interest payable - note payable - MRI equipment             63,799              87,502  
        Interest payable - convertible note                         27,116              50,680  
        Deferred rent                                                8,460               8,460   
        Other accrued liabilities                                   70,992              76,823  
                                                                 ---------           ---------    
           Total Current Liabilities                             1,643,507           1,883,788  
                                                                                                
LONG TERM NOTES PAYABLE, net of current portion (Note 3)                                        
        Note Payable - MRI equipment                               654,162             567,728
        Convertible Notes                                          300,000             300,000
        Callable convertible notes                                 268,000             578,109
                                                                 ---------           --------- 
          Total Liabilites                                       2,865,669           3,329,625
                                                                                             
COMMITMENTS AND CONTINGENCIES (Note 5)                                                       
                                                                                             
SHAREHOLDERS' DEFICIT                                                                        
        Common stock, authorized 100,000,000 shares                                          
         of $.001 par value; issued and outstanding                                          
         45,654,872 in 1997 and 50,654,872 in 1996                  45,655              50,655
        Additional paid-in capital                              16,456,437          16,901,437
        Accumulated deficit                                    (17,464,873)        (18,343,319)
                                                                ----------          ----------
           Total Shareholders' Deficit                            (962,781)         (1,391,228)
                                                                ----------          ---------- 
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                     $1,902,888          $1,938,397                      
                                                                ==========          ========== 
</TABLE> 
                  The accompanying notes are an integral part
                  of these consolidated financial statements

                                      -4-

<PAGE>

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                      For the Three Months Ended
                                                               March 31,
                                                      1996                  1997
                                                   ----------            ----------      
<S>                                                 <C>                    <C>
REVENUES
 Products and services                              $ 161,823              $ 69,585    
 Lease rentals                                         97,081                90,591
                                                   ----------            ----------      
                                                      258,904               160,175 
COST AND EXPENSES                                  
 Cost of revenues                                  
  Product and services                                 37,845                36,927
  Lease operations                                     72,126                27,126
                                                   ----------            ---------- 
                                                      109,971               109,053
                                                                            
 Research and development                              55,564                62,339
 Selling, general and                                                       
  administrative expenses                             346,548               283,931
                                                   ----------            ---------- 
                                                      512,083               455,323
                                                                            
                                                   ----------            ---------- 
    Loss from operations                             (253,179)             (295,148)
                                                                            
INTEREST EXPENSE AND OTHER                                                  
 Interest expense - other                               2,268                24,431 
 Interest expense - lease obligations                  30,988                23,703
 Interest income                                       (3,130)                 (237)
 Net losses on pending acquistions                                          534,601
                                                   ----------            ---------- 
  Total interest expense and other, net                30,126               582,498 
                                                   ----------            ---------- 
    Loss before provision for state                                         
      income taxes                                   (283,305)             (877,646)
                                                                            
PROVISION FOR STATE INCOME TAXES                        3,200                   800
                                                   ----------            ---------- 
NET LOSS                                            ($286,505)             (878,446)
                                                   ==========            ========== 
                                                   
WEIGHTED AVERAGE NUMBER OF COMMON                  
 SHARES OUTSTANDING                                32,378,785            46,237,181
                                                   ==========            ==========
                                                   
NET LOSS PER SHARE                                     ($0.01)               ($0.02)  
                                                   ==========            ==========     
</TABLE> 
                  The accompanying notes are an intgral part
                  of these consolidated financial statements

                                      -5-
<PAGE>


            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                           For the Three Months Ended
                                                                    March 31,
                                                             1996                1997
                                                          ---------           ---------
<S>                                                      <C>                  <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
        Net loss                                          ($286,505)          ($878,446)
        Adjustments to reconcile net loss to net
          cash (used in) operating activities:
                Depreciation and amortization               121,128             136,121
        Decrease (increase) in:
                Accounts receivable                          37,742             (21,635)
                Lease receivable                            (17,893)            (90,591)
        Increase (decrease) in:
                Professional fees and other payables       (139,545)            (27,069)
                Accrued Compensation                        (52,194)             22,507
                Deferred rent                                (1,410)                  -
                Income taxes payable                          3,200                 800
                Interest payable                              9,379              47,267
                                                          ---------           ---------
        Net cash used in operating activities              (326,098)           (811,045)
                                                          ---------           ---------

CASH FLOWS USED IN INVESTING
 ACTIVITIES
        Investment in pending acquisitions                        -             (10,000)
        Expenditures for property, equipment and
          leasehold improvements                               (671)             (2,499)
                                                          ---------            - ------
                Net cash used in investing activities          (671)            (12,499)

CASH FLOWS FROM FINANCING ACTIVITIES
        Payments on notes payable                                 -              (2,000)
        Payments on long term note                          (57,376)                  -
        Proceeds from Reg S convertible note
          subscription                                            -             117,211
        Proceeds from loans payable                         110,000                   -
        Proceeds from issuance of convertible notes               -             310,109
        Net proceeds from the sale of common stock           70,569             450,000
                                                           --------            --------
                Net cash provided by financing
                  activities                                123,193             875,320 

NET INCREASE (DECREASE) IN CASH                            (203,576)             51,776

CASH, beginning of period                                   374,128             192,421

                                                           --------            --------
CASH, end of period                                        $170,552            $244,197
                                                           ========            ========
</TABLE> 
The accompanying notes are an integral part of these
consolidated financial statements

                                      -6-
                                                                                
                                                                                
                                                                              
 


<PAGE>
 
            INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)
                                March 31, 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
$878,446 for the three months ended March 31, 1997. The continuing losses are
the result of unprofitable operations, unbalanced G&A expense ( excessive in
light of the Company's unprofitable history), start up costs associated with the
pending acquisition of two consumer product companies, and in the past excessive
litigation and defense costs resulting from the Company's previous business
relationships and activities including repeated regulatory agency investigations
relating to possible securities violations and false or misleading marketing
claims for its dietary products. 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 March 31, 1997, the Company had an accumulated deficit of $18,343,319
and negative working capital of $1,285,021. 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 and has
negative working capital, and faces significant 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 have 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 has pending the
acquisition of two consumer products companies, each with a number of ready to
market personal 

                                      -7-
<PAGE>
 
care and nutritional consumer products. The acquisition of the personal care
product line company has been postponed and will be reviewed during the second
and third quarter to determine whether there will sufficient resources to
acquire. The nutritional products company (Nutra Quest, Inc.) acquisition is
proceeding with the Company funding its initial distribution phase. The funding
advanced during this start up phase was provided under a "Proposed Acquisition".
agreement. The agreement contains contingencies concerning pre-established
performance criteria based on gross product sales, which if not achieved by
Nutra Quest allows for the Company to terminate the agreement and convert the
monies previously invested into a promissory note to be repaid by Nutra Quest.

  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 the consumer products operations
during their 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 consumer 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 who pay the
premiums and only secondarily the Company.  There is no assurance that such
coverages will adequately cover any claims which 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 statement 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 of the Company, the accompanying condensed
unaudited financial statements contain all adjustments, consisting of only
normal recurring accruals, necessary to present fairly the financial position at
March 31, 1997, the results of its operations for the three 

                                      -8-
<PAGE>
 
months ended March 31, 1996 and 1997 and the cash flows for the three months
ended March 31, 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 months ended March 31, 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 taxes currently due plus deferred taxes
related primarily to differences between the adjusted bases of fixed assets and
patents for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.

     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
     ---------------------------------------

  There were privately held warrants outstanding as of March 31, 1997, to
purchase a total of 17,151,889 shares of the Company's common stock at purchase
prices per share ranging from $0.09 to $4.00.

  The Company's magnetic resonance imaging (MRI) systems (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 

                                      -9-
<PAGE>
 
March 31, 1997, the balance of this debt aggregated $1,196,380 (including
interest currently due of $87,502) of which $541,150 is due within the next
twelve months. 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.

  Tri-County was delinquent in making certain of its lease payments to VMI under
the terms of the lease agreement concerning the Unit, and MFA failed to make
these payments to VMI under its guarantee of Tri-County's payments to VMI.
Accordingly, VMI had not made certain payments due to the third party finance
company for the Unit.  As a result, the third party finance company has issued a
notice of default to the Company.  Tri-County is currently in discussions with
the third party finance company to restructure the obligation, to assume the
debt and to take title to the Unit.  It is expected that the third party finance
company will accept the restructure and the Company  will release its title to
the equipment in exchange for the third party finance company releasing the
Company from its debt obligation.  Accordingly, the Company, as of December 31,
1996, had provided $63,450 to write off the Company's net investment in this
equipment, including the lease receivable offset by the remaining debt and
interest payable.  However, if the parties are unable to resolve this matter, it
is likely that the third party finance company will institute an action against
the Company, VMI and Tri-County for the balance due plus other costs and relief.

  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 per share for $450,000.  Shares to be 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.  Subsequent to March 31, 1997,
an additional $250,000 of these convertible debentures were placed.

  In October 1995, the shareholders of the Company approved amendments to the
Company's Certificate of Incorporation to provide for: (i) a reverse stock split
of not less than one share for every four old shares nor more than one share for
every eight old shares, with the specific exchange ratio to be determined by the
Board of Directors; (ii) an increase in the number of authorized shares of
common stock from 25,000,000 to 50,000,000.

  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., a private California
company that has developed and distributes several

                                      -10-
<PAGE>
 
beauty and skin care formulations sold commercially. Under the proposal, the
Company was 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. The proposed
acquisition is currently under review to determine whether to proceed. As of
March 31, 1997, the Company advanced $272,437 to Pastels. These advances have
expensed in full.

  The Company has one other pending acquisition for Nutra Quest Inc. The
Company was 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. A new agreement to acquire is currently being negotiated. 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.

5.        Contingencies
          -------------

     SEC Proceedings
     ---------------

  In July 1993, based on a concern the Company formed an independent committee
of its Board of Directors whose purpose was 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 of the Company's shares, 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 

                                      -11-
<PAGE>
 
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 recommending that the SEC file 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 appear to
relate 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 previously disclosed by the Company.

  The SEC has disclosed that it is seeking permanent injunctive relief against
the Company. Previously, the Company sought to dissuade the SEC from taking
formal action against the Company, but believed that is likely that the SEC
would seek permanent injunctive relief against the Company. The Company is
attempting to enter 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.
However, it also is possible that the SEC could seek to impose significant
monetary penalties on the Company or to require the Company of offer rescission
to the purchasers of some or all of the shares involved in the unregistered
transactions. Although the Company believes that it is not likely that these
additional forms of relief would be imposed upon the Company, any such
additional relief imposed could have a materially adverse effect upon the
Company. The Company also is not in a position to predict what, if any,
additional remedies the SEC might seek against Dr. Shell. The Company and Dr.
Shell are subject to a 1992 permanent injunction enjoin them form violating the
federal securities laws.

  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
counsel believes, on the basis of the facts currently know, that it is not
probable that the Company would have any material liability.

   Federal Trade Commission Proceedings
   ------------------------------------

  The Seattle Regional Office of the Federal Trade Commission has advised the
Company that the staff believes that the Company's fat sequesterant product,
which currently is marketed by KCD, a former licensee, under the name
"SeQuester," has 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 staff has
indicated that it is prepared to recommend that a complaint be filed against the
licensee, the Company and certain individuals in connection with the foregoing.
The Company presently is discussing this matter with the FTC staff with the
objective of settling the matter. There is no assurance that a settlement will
be reached or as to the impact on the Company of any settlement, although it is
presently believed that any settlement may impact the claims utilized in the
marketing of the sequesterant product and is likely to involve the payment of a
fine or other financial penalty by the Company.  The Company and the FTC staff
have agreed upon the terms of a proposed settlement in this matter, pursuant to
which the Company would consent to a permanent injunction prohibiting it from
making misrepresentations 

                                      -12-
<PAGE>
 
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 amounts of
$35,000 over a period of twelve months. The Company's Board of Directors voted
to accept the proposal in March 1996, which now must be formally approved by the
FTC.

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.

  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
March 31, 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. for
which the acquisition is pending. This acquisition represents a significant
opportunity for future growth in both revenues and income. In April 1997, Nutra
Quest began distribution of its "Royal Hawaiian Noni", natural botanical for
restoring and regenerating the body. Nutra Quest, Inc. is beginning to
experience significant sales growth, although a break-even level of sales is not
expected until the fourth quarter of 1997. The Company has funded Nutra Quest
Inc. under a "Proposal to Acquire". The Company is currently in the final stages
of negoiating the agreement to acquire Nutra Quest, Inc. and is expected to be
completed by the end of May 1997. If agreement is not reached, the "Proposal to
Acquire" provides for a note to the Company for the amounts advanced, less
amounts for salaries. As of March 31, 1997 the Company has funded a total of
$1,039,270.

RESULTS OF OPERATIONS

Three Months Ended March 31,1996 Compared to March 31, 1997:
------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                    For the Three Months Ended March 31                         
                                                                    -----------------------------------                         
                                                                    1996                          1997             
                                                                    ----                          ----
                                                                          % of                          % of   
                                                              $         Revenues            $         Revenues 
                                                           --------     --------         -------      --------
<S>                                                        <C>          <C>              <C>          <C> 
Revenues - Product & Services                                                                                  
  Microspheres & Lab Services                              $ 71,823          44%         $69,585          100% 
  Fat Sequesterant - License Fees & Royalties                90,000          56%               -            0% 
                                                           --------         ----         -------          ----
                                                            161,823         100%          69,585          100% 
                                                                                                              
Cost of Revenues - Product & Services                                                                         
  Microspheres & Lab Services                                37,845          53%          36,927           53%
  Fat Sequesterant - License Fees & Royalties                     -           0%               -           N/A
                                                           --------         ----         -------          ----
                                                             37,845          23%          36,927           53%
                                                           --------         ----         -------          ----
Gross Margin - Product & Services                          $123,978          77%         $32,658           47%
                                                           ========         ====         =======          ====
                                                                                                              
Revenues - Lease Operations                                $ 97,081         100%         $90,591          100%
Cost of Revenues - Lease Operations                         120,339         124%          72,126           80%
                                                           --------         ----         -------          ----
Gross Margin - Lease Operations                            ($23,258)        -24%         $18,465           20%
                                                           ========         ====         =======          ==== 
                                                  
</TABLE> 

For the three months ended March 31, 1997, revenues from products and services
were approximately $70,000, a decrease of 57% from 1996. The decrease was 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.

  Revenues from product and services decreased approximately $2,200 or 3% for
the three months ended March 31, 1997 over 1996. The decrease was a result of
repairs that had to be 

                                      -14-
<PAGE>
 
performed on the Company's flow cytometer during the first quarter of 1997. In
order to avoid future problems that have been encountered with reliance on one
critical piece of equipment and to meet an increasing level of demand, the
Company has leased another flow cytometer.

  The overall cost of revenues for products and services as a percentage of
sales for the three months ended March 31, 1997 were 53%, compared to 23% for
1996. Increase in cost of revenues as a percentage of sales resulted primarily
from absence of license revenues from KCD.

  Research and development expense increased approximately $7,000 or 12% for the
three month period ended March 31, 1997 from the comparable 1996 period due to
the increased efforts associated with the Company's National Institute of Health
research grant report and Phase II proposal efforts and the Company's consumer
products research and development.

  SG&A expense decreased to approximately $63,000 from approximately $347,000
for the three months of 1996, to approximately 284,000 for the three months
ended March 31, 1996, a reduction of 18%. 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 increased 997% for the three month period
ended March 31, 1997 from the comparable 1996 period. The 1997 period increase
resulted from the issuance to the convertible notes which occurred during six
month period ending March 31, 1997.

  Interest income decreased to approximately $3,800 for the third quarter of
1996 compared to approximately $12,000 for 1995. For the nine months ended
September 30, 1996 interest income decreased to $10,500 from $55,000 from the
comparable 1995 nine month period. The decreases were due to interest earned on
an outstanding note receivable from a shareholder, an outstanding note
receivable from the sale of stock and delinquent royalties receivable.

  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 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
-------------------------------

  Since the inception of S/S, the Company has received capital for operations
and research 

                                      -15-
<PAGE>
 
from private investors, issuance of private party debt, bank financing, and from
licensing and product sales. Revenues have been insufficient to cover operating
expenses, research and development, costs of litigation, construction costs, and
patent development, which costs have been unnecessarily well above the revenues
from licensing and product sales. The Company, therefore, has been dependent on
private placements of securities, bank debt, loans from private investors and
the exercise of warrants in order to sustain operations. To correct this
imbalance management made significant cuts and changes in the Company's
operations resulting in reduced operating expense. However, 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 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 $1,277,000 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, and 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 March 31, 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 March 31, 1997, the Company's working capital position declined to a
negative $1,285,021 from a negative $1,208,741 at December 31, 1996, primarily
as a result of the Reg S stock subscriptions and convertible notes, totaling
$567,211, which will be converted to equity during the quarter ended June 30,
1997. At March 31, 1997, the Company's cash position had increased to $244,197
from $192,421 at December 31, 1996.

  At March 31, 1997, the Company had assets of $1,938,397 compared to $1,902,888
on December 31, 1996. In addition, the Company had a total shareholders' deficit
of $1,391,228 on March 31, 1997 compared to $962,781 on December 31, 1996, an
increase of $428,447. The increase was the result of a net loss from operations
of $878,446, which included losses of $534,601 resulting from the funding of
pending acquisitions offset by $450,000 from the issuance of common stock under
Regulation S. Payments on a long term note with a balance of $1,162,679
(including interest currently due of $42,494) as of March 31, 1997 of which
$403,144 is due within the next twelve months had been assumed by the Company as
part of its acquisition of VMI; this note is secured by guaranteed lease
payments of an equivalent amount.

                                      -16-
<PAGE>
 
ITEM 3.   LEGAL PROCEEDINGS

SEC Proceedings
---------------

  In July 1993, based on a concern the Company formed an independent committee
of its Board of Directors whose purpose was 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 of the Company's shares, 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 recommending that the SEC file 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 appear to
relate 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 previously disclosed by the Company.

  The SEC has disclosed that it is seeking permanent injunctive relief against
the Company. Previously, the Company sought to dissuade the SEC from taking
formal action against the Company, but believed that is likely that the SEC
would seek permanent injunctive relief against the Company.  The Company is
attempting to enter 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 

                                      -17-
<PAGE>
 
provisions of the federal securities laws in the future. However, it also is
possible that the SEC could seek to impose significant monetary penalties on the
Company or to require the Company of offer rescission to the purchasers of some
or all of the shares involved in the unregistered transactions. Although the
Company believes that it is not likely that these additional forms of relief
would be imposed upon the Company, any such additional relief imposed could have
a materially adverse effect upon the Company. The Company also is not in a
position to predict what, if any, additional remedies the SEC might seek against
Dr. Shell. The Company and Dr. Shell are subject to a 1992 permanent injunction
enjoing them form violating the federal securities laws.

  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
counsel believes, on the basis of the facts currently know, that it is not
probable that the Company would have any material liability.

     Federal Trade Commission Proceedings
     ------------------------------------

  The Seattle Regional Office of the Federal Trade Commission has advised the
Company that the staff believes that the Company's fat sequesterant product,
which currently is marketed by KCD, a former licensee, under the name
"SeQuester," has 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 staff has
indicated that it is prepared to recommend that a complaint be filed against the
licensee, the Company and certain individuals in connection with the foregoing.
The Company presently is discussing this matter with the FTC staff with the
objective of settling the matter. There is no assurance that a settlement will
be reached or as to the impact on the Company of any settlement, although it is
presently believed that any settlement may impact the claims utilized in the
marketing of the sequesterant product and is likely to involve the payment of a
fine or other financial penalty by the Company.  The Company and the FTC staff
have agreed upon the terms of a proposed settlement in this matter, pursuant to
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 amounts of $35,000 over a period of twelve months.  The Company's
Board of Directors voted to accept the proposal in March 1996, which now must be
formally approved by the FTC.

     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.

                                      -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
December 31, 1996.

  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.

EFFECT OF INFLATION

  The Company does not believe that general inflation would have a material
effect on its operations.

                                      -19-
<PAGE>
 
                          PART II.  OTHER INFORMATION
                          ---------------------------


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

     On July 6, 1995, the Company's common stock was deleted from the Nasdaq
Small-Cap Market. The Company then requested a hearing before the Nasdaq Hearing
Review Committee ("Committee"). On September 22, 1995, the Committee affirmed
its original delisting decision.


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

     (a)  Form 8-K - Common Stock and Convertible Debentures Issuance - dated
          March 17, 1997

     (27) Financial Data Schedule (included only in EDGAR filing).

                                      -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:     5-16-97             By: /s/ STEVEN  R. WESTLUND
       -------------------        ---------------------------
                                      Steven Westlund
                                      (Chief Executive Officer)


Date:     5-16-97             By: /s/ PETER T. BENZ
       -------------------        --------------------------
                                      Peter T. Benz
                                      (President)


Date:     5-16-97             By: /s/ WILLIAM R. NEIL
       -------------------        ----------------------------
                                      William R. Neil, CPA
                                      (Chief Financial Officer)

                                      -21-