<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, 1995

                                     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                 90025
(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.

                                                     Outstanding at
           Class of Common Stock                     November 1, 1995
              $.001 par value                        21,225,192 shares

Transitional Small Business Disclosure Format     Yes       No  X

         Number of sequentially numbered pages in the document: 48



<PAGE>

                                  FORM 10-QSB
                      Securities and Exchange Commission
                            Washington, D.C. 20549

                     INTERACTIVE MEDICAL TECHNOLOGIES LTD.

                                    Index


PART I - FINANCIAL INFORMATION                                          Page

     Item 1. Consolidated Financial Statements

          Condensed Consolidated Balance Sheets at
           December 31, 1994 and September 30, 1995 (unaudited)            3

          Condensed Consolidated Statements of Operations
           for the three months and nine months ended September 30, 1994
           (unaudited) and 1995 (unaudited)                                 5

          Condensed Consolidated Statements of Cash Flows
           for the nine months ended September 30, 1994 (unaudited)
           and 1995 (unaudited)                                             6

          Notes to Condensed Consolidated Financial Statements              7

     Item 2. Management's Discussion and Analysis of Financial Condition
             and Results of Operations.                                    26

PART II. - OTHER INFORMATION

     Item 1. Legal Proceedings                                             45

     Item 4. Submission of Matters of a Vote to Security Holders           46

     Item 5. Other Information                                             47

     Item 6. Exhibits and Reports on Form 8-K                              47

Signatures                                                                 48


                                      -2-

<PAGE>

                        PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS

                   December 31, 1994 and September 30, 1995

                                    ASSETS

<TABLE>
<CAPTION>
                                                         DECEMBER 31,          SEPTEMBER 30,
                                                            1994                    1995
                                                         -----------           -------------
                                                                                (UNAUDITED)
<S>                                                      <C>                   <C>
CURRENT ASSETS:
  Cash                                                   $   25,215              $  389,486
  Accounts receivable, net of allowance for doubtful
   accounts of $170,000 as of December 31, 1994             110,587                 183,045
  Interest receivable, net of allowance for doubtful
   accounts of $45,000 as of December 31, 1994 and $48,000
   as of September 30, 1995                                   3,795                  40,955
  Notes receivable from shareholder                          60,186                  16,548
  Leases receivable                                         141,414                 189,559
  Inventory                                                  11,200                  11,200
  Deferred financing cost                                   168,967                  10,138
  Due from related parties                                    5,590                 109,571
  Prepaid expenses                                              -                   225,000
                                                         ----------              ----------
    Total current assets                                    499,954               1,175,502
                                                         ----------              ----------
PROPERTY, EQUIPMENT AND LEASEHOLD
  IMPROVEMENTS, at cost, net of
  accumulated depreciation and amortization of
  $1,021,857 as of December 31, 1994 and $1,526,279
  as of September 30, 1995
  Office equipment                                          166,357                 119,810
  Leasehold improvements                                    253,710                 172,823
  Magnetic resonance imaging systems                      2,743,890               2,382,873
                                                         ----------              ----------
    Property, equipment and leasehold
    improvements, net                                     3,163,957               2,675,506
                                                         ----------              ----------
OTHER ASSETS:
  Patents, net of accumulated amortization of
  $84,371 as of December 31, 1994 and $101,445
  as of September 30, 1995                                  282,510                 292,034
  Investment in KCD Incorporated, at cost                      -                    217,243
  Deposits and other assets                                  59,900                  59,900
                                                         ----------              ----------
Total other assets                                          342,410                 569,177
                                                         ----------              ----------
      TOTAL ASSETS                                       $4,006,321              $4,420,185
                                                         ----------              ----------
                                                         ----------              ----------
</TABLE>


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

                                      -3-

<PAGE>

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES

                    CONDENSED CONSOLIDATED BALANCE SHEETS

                   December 31, 1994 and September 30, 1995



                   LIABILITIES AND SHAREHOLDERS' INVESTMENT

<TABLE>
<CAPTION>
                                                          DECEMBER 31,    SEPTEMBER 30,
                                                             1994              1995
                                                          ------------    -------------
                                                                           (UNAUDITED)
<S>                                                       <C>             <C>
CURRENT LIABILITIES
  Loans payable                                           $    34,437     $    84,437
  Convertible notes                                           900,000       1,100,000
  Current portion long term note payable                      387,599         470,661
  Accrued compensation and payroll taxes                       68,512         297,346
  Professional services payable                               207,383         476,899
  Trade payables and other accrued expenses                   104,305         121,633
  Royalties and arbitration award payable                     100,000         298,516
  Income taxes payable                                          3,200           2,771
  Deferred rent                                                12,300           9,870
  Unearned deposit                                             15,000          15,000
  Interest payable - long term note                            38,555          57,251
  Interest payable - convertible notes                          9,000          66,883
                                                          -----------      ----------
      Total current liabilities                             1,880,291       3,001,267
                                                          -----------      ----------

LONG TERM NOTE PAYABLE,
  net of current portion                                    1,085,403         817,320
                                                          -----------      ----------
COMMITMENTS AND CONTINGENCIES (Note 4)

SHAREHOLDERS' INVESTMENT:
   Common stock, authorized 25,000,000 shares
   of $.001 par value; issued and outstanding
   17,173,121 as of December 31, 1994 and 20,959,008
   as of September 30, 1995                                    17,173          20,959
   Additional paid-in capital                              12,828,395      13,690,811
   Accumulated deficit                                    (11,419,567)    (12,975,216)
                                                          -----------     ------------
                                                            1,426,001          736,554
                                                          -----------     ------------
   Note receivable from sale of stock, net of allowance
     for doubtful accounts of $125,000 as of December 31, 1994
     and September 30, 1995                                    -                -
   Prepaid consulting and financing cost                     (385,374)       (134,956)
                                                          -----------     ------------
      Total  shareholders' investment                       1,040,627          601,598
                                                          -----------     ------------
    TOTAL LIABILITIES AND
      SHAREHOLDERS' INVESTMENT                             $4,006,321        4,420,185
                                                          -----------     ------------
                                                          -----------     ------------

</TABLE>


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

                                      -4-


<PAGE>

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

    For the three months and nine months Ended September 30, 1994 and 1995

                                 (Unaudited)

<TABLE>
<CAPTION>
                                                    FOR THE                    FOR THE
                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                   SEPTEMBER 30,              SEPTEMBER 30,
                                               -------------------         ------------------
                                              1994             1995       1994            1995
                                             ------           ------     ------          ------
<S>                                          <C>              <C>        <C>             <C>
REVENUES
  Products and services                     $   280,356    $   237,127   $   490,663    $   717,685
  Lease rentals                                 203,868        113,779       573,680        341,337
                                            -----------    -----------   -----------    -----------
                                                484,224        350,906     1,064,343      1,059,022
                                            -----------    -----------   -----------    -----------
COST AND EXPENSES
  Cost of revenues
    Products and services                        27,990         92,163       102,962        285,895
    Lease operations                            120,339        120,339       361,017        361,017
                                            -----------    -----------   -----------    -----------
                                                148,329        212,502       463,979        646,912

  Research and development                       97,828         38,177       311,727        184,968
  Selling, general and administrative expenses  632,610        491,592     2,152,130      1,289,744
                                            -----------    -----------   -----------    -----------
                                                878,767        742,271     2,927,836      2,121,624
                                            -----------    -----------   -----------    -----------
    Loss from operations                       (394,543)      (391,365)   (1,863,493)    (1,062,602)
                                            -----------    -----------   -----------    -----------

INTEREST EXPENSE AND OTHER
  Interest expense - other                        2,127         88,031         6,189        309,477
  Interest expense - lease obligations           39,377         31,176       106,344         99,867
  Interest income                                (4,865)       (11,991)      (17,381)       (55,022)
  Settlements and arbitration award                 -            9,721           -          136,325
                                            -----------    -----------   -----------    -----------
  Interest expense and other, net                36,639        116,937        95,152        490,647
                                            -----------    -----------   -----------    -----------

  Loss before provision for income taxes       (431,182)      (508,302)   (1,958,645)    (1,553,249)

PROVISION FOR INCOME TAXES                          800            800         2,400          2,400
                                            -----------    -----------   -----------    -----------

NET LOSS                                      $(431,982)     $(509,102)  $(1,961,045)   $(1,555,649)
                                            -----------    -----------   -----------    -----------
                                            -----------    -----------   -----------    -----------

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING                  16,740,332     19,817,305    16,553,679     18,243,811
                                            -----------    -----------   -----------    -----------
                                            -----------    -----------   -----------    -----------

NET LOSS PER SHARE                          $      (.03)   $      (.03)  $      (.12)    $    (.09)
                                            -----------    -----------   -----------    -----------
                                            -----------    -----------   -----------    -----------

</TABLE>

               The accompanying notes are an integral part of
              these condensed consolidated financial statements.

                                      -5-

<PAGE>

            INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
                                 (Unaudited)

<TABLE>
<CAPTION>

                                                                        FOR THE NINE MONTHS
                                                                         ENDED SEPTEMBER 30,
                                                                        --------------------
                                                                         1994           1995
                                                                        ------         ------
<S>                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                           $(1,961,045)   $(1,555,649)
  Adjustments to reconcile net loss to
   net cash (used in) operating activities:
    Research and development efforts contributed as capital              150,000         30,000
    Depreciation and amortization                                        532,865        930,741
    Issuance of warrants                                                  48,400         68,500
    Stock issued for financial consulting and legal services             172,019           -
    Decrease (increase) in:
      Accounts receivable                                                (77,379)       (72,458)
      Interest receivable                                                (16,401)       (37,160)
      Notes receivable                                                    24,283         43,638
      Lease receivable                                                   104,801        (75,145)
      Inventory                                                           19,950           -
      Prepaid expenses                                                      -          (225,000)
    Increase (decrease) in:
      Due (from) to related parties and former shareholders               48,743       (103,981)
      Professional fees and other payables                               374,974        713,765
      Deferred revenues                                                    5,445           -
      Deferred rent                                                        1,470         (2,430)
      Interest payable                                                   (47,320)        76,579
                                                                     -----------    -----------
        NET CASH USED IN OPERATING ACTIVITIES                           (619,195)      (208,600)
                                                                     -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Expenditures for property, equipment and
   leasehold improvements, net                                           (43,985)       (15,970)
  Expenditures for patents                                               (15,854)       (26,597)
  Investments in KCD Incorporated                                           -          (217,243)
                                                                     -----------    -----------
        NET CASH USED IN INVESTING ACTIVITIES                            (59,839)      (259,810)
                                                                     -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment on long-term note                                             (261,572)      (185,021)
  Proceeds from exercise of warrants                                      81,336         54,511
  Proceeds from loans payable                                             34,437         75,000
  Proceeds from issuance of convertible notes                               -           300,000
  Proceeds from sale of common stock                                     715,287        266,245
  Additional capital contribution from shareholders                         -           121,946
  Proceeds from repayment of shareholder loan                             70,000            -
  Issuance of common stock to escrow, net                                   -           200,000
                                                                     -----------    -----------
        NET CASH PROVIDED BY FINANCING ACTIVITIES                        639,488        832,681
                                                                     -----------    -----------
NET INCREASE (DECREASE) IN CASH                                          (39,546)       364,271
CASH, beginning of period                                                 46,420         25,215
                                                                     -----------    -----------
CASH, end of period                                                  $     6,874    $   389,486
                                                                     -----------    -----------
                                                                     -----------    -----------

</TABLE>


               The accompanying notes are an integral part of
             these condensed consolidated financial statements.

                                      -6-


<PAGE>

                    INTERACTIVE MEDICAL TECHNOLOGIES LTD.
                             and SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)
                            September 30, 1995

1.  SIGNIFICANT RISKS

     During 1994 and the nine months ended September 30, 1995 consolidated
revenues of Interactive Medical Technologies Ltd. (Interactive) and
subsidiaries (the Company) were generated from the sale and royalties from
the sale of fat sequestrant product and technology, the sale of microspheres
and related laboratory services and lease revenues from magnetic resonance
imaging systems.

     The Company has incurred net losses since inception (1986) including
losses of $1,351,902, $3,057,193 and $3,084,495 for the years ended December
31, 1992, 1993 and 1994 and $1,555,649 for the nine months ended September
30, 1995. Continuing losses have adversely affected the liquidity of the
Company, as well as the Company's ability to raise necessary additional
capital. As of September 30, 1995, the Company had an accumulated deficit of
$12,975,216 and negative working capital of $1,825,765.  In addition, the
Company is 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 and
distribution issues. The Company and its management have been named in
certain litigation. The Company is subject to various claims, lawsuits,
lawsuit settlements and judgements. The Company's legal costs have been paid
from available funds and unpaid amounts have been accrued. There is no
assurance such funds will continue to be available, and the inability to pay
judgements when due or fees of defense counsel may result in settlement of
the actions on unfavorable terms to the Company.

     The Company has shifted the allocation of its resources to licensing the
fat sequestrant technology, development of new weight control products  and
to product development work on the human imaging contrast microspheres, the
expected primary product line of the Company in the future. Should required
funding for operating needs or research and development programs not be
available to the Company through the sale of securities, the Company
anticipates that it would accelerate its efforts to secure one or more
strategic corporate partners for its contrast microspheres. Should the
Company's operations require funding that is not available to the Company at
that time, the Company could be required to curtail or eliminate certain of
its current operations or research and development activities for the
contrast microspheres.

     In March 1994, the Company entered into a license agreement for the
product technology in the United States and Canada with KCD Incorporated
("KCD"), a company which has access


                                      -7-

<PAGE>

to the major domestic retail pharmacy and health food chains. KCD is a
recently formed organization that has limited management and financial
resources, and there can be no assurance that it will continue to be
successful in marketing its fat sequestrant product or that it will be able
to pay all of the required minimum royalty payments to the Company under the
license agreement. KCD was seriously delinquent in making royalty payments to
the Company. In May 1995, the Company and KCD entered into an amended license
agreement. Under the terms of the amended agreement, one-half ($217,243) of
past due royalties and interest (aggregating $434,487) as of April 1, 1995 is
scheduled to be paid in twelve equal monthly installments of $18,104 plus
monthly payment of interest at 1.5% per month on the outstanding balance
beginning July 1, 1995. The remaining one-half ($217,243) of past due
royalties and interest was satisfied by KCD's issuance to the Company of
100,000 shares of KCD restricted common stock. The amended agreement
generally provides for a royalty equal to 6% of gross sales (less freight and
shipping) of licensed products payable monthly within thirty days. Through
September 30, 1995, the Company has received from KCD licensing fees and
royalties of $645,743, 100,000 KCD restricted common shares ($217,243) and
has earned additional royalties of $169,000. KCD has advised the Company that
during the period April 1994 through September 1995, sales of the product
covered under the license have approximated $7,300,000 at wholesale value.
Payments from KCD are current under the terms of the amended agreement as of
September 30, 1995.

     Management anticipates 1995 revenues from microspheres, laboratory
services, fat sequestrant royalties and MRI leasing operations will be
adequate to provide only the cash needed for direct commercial operations.
There are no assurances that revenue goals for microspheres, laboratory
services, fat  sequestrant royalties and MRI leasing operations will be
achieved. A substantial amount of these revenues (consisting of revenues from
MRI leasing operations and the fat sequestrant royalties) have been accrued
but have not yet generated cash flow.

     Due to the above factors, losses may continue in the future. At this
date, there is no assurance that market acceptance of existing products will
generate sales sufficient to create adequate cash flow, nor that the contrast
microsphere products will be successfully developed, on a timely basis, or
that adequate future financing will be obtained to complete development
projects in process, obtain necessary regulatory approvals and sustain other
business operations. Management's goal of filing an IND (investigational new
drug application) with the FDA to obtain approval to commence human testing
of the contrast microspheres will require significant additional funding.

     The Company's revised financial plan is in the process of being
implemented. During the third quarter, management's efforts were focused on
settling old debts, settlement of lawsuits, and raising working capital.
These efforts will continue during the fourth quarter. Management believes
that the Company will be in a position to move forward during 1996 and is in
the process of developing plans to expand distribution of the Company's
existing dietary products and plans on launching several new products during
1996. The Company is also focusing on expanding its  microsphere and
laboratory services business and is pursuing a licensing agreement and
research grants on its contrast microspheres for human development.


                                      -8-

<PAGE>

     The Company estimates that to initiate and complete the clinical
development program for the first diagnostic indication for its contrast
microspheres will require the expenditure by the Company or a strategic
partner of between $3,000,000 and $10,000,000 over the next 36 months.
Operating revenues are not expected to be sufficient to fund this development
program, which will need to be financed out of the proceeds, if any, from
exercise of the Company's outstanding warrants, through the sale of
additional securities by the Company or by any license fee or advance
marketing payments that the Company is able to obtain in connection with the
future licensing of its contrast microsphere or other products or by a
combination of these sources.

     Dr. Shell has potential conflicts of interest with the Company.  These
conflicts include operation of an independent research activity under his
control, and engaging in his private medical practice which detracts from the
time devoted to the Company. The Company depends on Dr. Shell to perform
clinical trials on fat sequestrant agents and to provide expensive color flow
Doppler echocardiographic equipment to assess the contrast spheres.  Dr.
Shell does not charge the Company for these services but contributes them to
the Company as capital. In view of the fact that the value assigned to these
services is the estimated actual cost incurred, were the Company required to
pay a third party for these clinical trials, it would  increase the cost of
this research and development work by approximately 15% to 20%  and would
create a material adverse effect on cash flow as Dr. Shell's services are
contributed to capital. Despite Dr. Shell's intention to continue this
arrangement for the foreseeable future, any change in this arrangement could
severely impact the Company's ability to perform clinical trials.  Dr. Shell
operates an independent medical practice which performs clinical research for
pharmaceutical companies as well as traditional patient care.  Despite the
expressed intention of Dr. Shell to give preference to Company business,
these obligations may restrict and/or reduce his involvement in Company
affairs at a time when his services are critically important.

     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.

     These factors raise substantial doubt that the Company may be able to
continue as a going concern.  The financial statements do not include any
adjustment relating to the realization or classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.


                                      -9-

<PAGE>

2. ACCOUNTING POLICIES

     Basis of Presentation

          The accompanying condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
following matters raise substantial doubt about the Company's ability to
continue as a going concern. As discussed in Note 1 to the financial
statements, the Company operates under extreme liquidity constraints and,
because of recurring losses, increasing difficulty in raising necessary
additional capital. As of September 30, 1995, the Company has an accumulated
deficit of $12,975,216 and negative working capital of $1,825,765. The
Company faces continuing significant business risks, including but not
limited to, its ability to maintain vendor and supplier relationships by
making timely payments, the resolution of various claims and lawsuits
(discussed in the following paragraph), and overcoming future and ongoing
product development and distribution issues. 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.

          As more fully discussed in the Company's December 31, 1994 Form
10-KSB, the Company is subject to various claims, lawsuits, lawsuit
settlements and judgements. The Company's legal costs and portions of
judgements have been paid from available funds and unpaid amounts have been
accrued. However, there is no assurance such funds will continue to be
available, and the inability to pay judgements, when due or fees of defense
counsel may result in settlement of the actions on unfavorable terms to the
Company.

          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 September 30, 1995, the results of its operations for the three
months and nine months ended September 30, 1995 and 1994 and the cash flows
for the nine months ended September 30, 1995 and 1994. 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, 1994 Form 10-KSB.

          The results of operations for the nine months ended September 30,
1995 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1995.


                                     -10-

<PAGE>

     INCOME TAXES

          No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December
31, 1994, the Company incurred net operating losses for tax purposes of
approximately $10,000,000 and approximately $11,420,000 for accounting
purposes. Differences between accounting and tax losses consist primarily of
differences in the accounting and tax treatment of depreciation, allowance
for doubtful accounts and research and development expenses. The net
operating loss carryforward may be used to reduce taxable income through the
year 2008. The Company's tax returns have not been audited by the Internal
Revenue Service. The carryforward amounts may therefore be subject to audit
and adjustment. As a result of the Tax Reform Act, the availability of net
operating loss carryforwards 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 carryforward period has generally
been reduced from fifteen years to five years beginning in 1993.

3.  CAPITAL TRANSACTIONS AND LONG TERM DEBT

     The Company currently has public warrants outstanding as follows:
242,050 "B" warrants at $1.00 per share, 508,950 "C" warrants at $1.25 per
share, and 710,000 "D" warrants at $1.50 per share. From January 1, 1993
through September 30, 1995, 2,095,100 public warrants were exercised at
$2,210,965 less transfer agent fees of $24,800. As of September 30, 1995,
1,461,000 publicly traded warrants may potentially be exercised, which would
generate approximately $1,943,238 additional gross proceeds if all of such
warrants are exercised. These warrants, which were scheduled to expire
December 31, 1994, were extended by the Company to that date which is sixty
(60) days subsequent to the effective date of the Company's Registration
Statement post-effective amendment currently filed with the Securities and
Exchange Commission but in no event later than December 31, 1995. Exercise of
the extended warrants is subject to an effective registration statement with
the Securities and Exchange Commission. Each class of the extended warrants
also will be redeemable at any time by the Company (either separately or
collectively) upon 30 days prior notice to the warrantholders by the Company
at $.01 for each unexercised warrant. Each warrant entitles the holder
thereof the right to purchase one share of the Company's common stock. In
addition, there were other privately held warrants outstanding as of
September 30, 1995, to purchase a total of 4,051,889 shares of the Company's
common stock at purchase prices per share ranging from $.10 to $4.00.

     In February 1994, the Company issued 20,000 warrants to purchase
restricted shares at $1.88 per share over a three-year period to unaffiliated
third parties for financial consulting services and recorded $10,000 as the
value of the warrants, as consulting fees.

     In March 1994, the Company issued 87,500 warrants to purchase restricted
shares at $4.00 per share over a five-year period to an unaffiliated third
party for financial advisory services and recorded $8,750 as the value of the
warrants, as consulting fees.


                                     -11-

<PAGE>


     In March 1994, the Company issued 55,500 shares of restricted stock to
an unaffiliated third party for financial advisory services and recorded
$104,340 as consulting fees and issued an additional 32,000 restricted shares
in exchange for $60,160.

     In April 1994, the Company issued 36,000 restricted shares and 36,000
warrants to purchase restricted shares at $2.05 per share over a three-year
period to an attorney for legal services rendered. The Company recorded
$67,680 as the value of the shares and $14,400 as the value of the warrants
as legal fees.

     In April 1994, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which it
raised net proceeds of approximately $640,000. In connection with the
completed  offering, the Company issued 360,000 units. Each unit consists of
one share of restricted common stock at $2.00 per share, plus a warrant to
purchase one-half additional share of restricted common stock at $3.00 per
share during a three-year period. The placement agent for the initial closing
received warrants to purchase 125,000 shares of the Company's restricted
common stock on the same terms as the Regulation S investors. The Company
recorded $15,250 as the value of the warrants as financing and consulting
fees.

     In September 1994, the Company issued 150,000 shares of common stock to
an unaffiliated third party in consideration for shareholder services to be
provided over a two year period and $15,000 of cash consideration. The
Company recorded $309,450 as the value of the shares, and $294,450 as prepaid
consulting fees as an offset to equity.

     In October 1994, the Company issued 2,500 warrants to purchase
restricted shares at $.01 per share over a three-year period to unaffiliated
parties for consideration of a short-term promissory note in the amount of
$50,000. The Company recorded $3,750 as the value of the warrants as interest
expense. These warrants were exercised in December 1994.

     In November 1994, the Company issued 4,000 warrants to purchase
restricted shares at $.01 per share over a three year period to unaffiliated
third parties for consideration of extension of a short-term promissory note.
The Company recorded $6,000 as the value of the warrants as interest expense.
These warrants were exercised in December 1994.

     In November 1994, the Company completed a private placement to foreign
investors in an offering under Regulation S of $900,000 one-year convertible
promissory notes in which it raised net proceeds of approximately $714,770.
The notes are convertible, commencing four months from issue date, into
Company common stock at $1.20 per share plus 90-day warrants to acquire
additional shares at $.01 per share in an amount equal to 40% of the shares
issued upon conversion. The convertible promissory notes accrue interest at
8% per annum which is payable quarterly. Accrued and unpaid interest as of
the date of conversion is forfeited upon conversion and is not converted into
shares or warrants. In connection with issuance of the notes, the Company
pledged its second MRI unit until all the notes have been repaid or converted
into Company common stock. The placement agent received warrants to purchase
157,500 shares of


                                     -12-

<PAGE>


Company common stock at $2.00 per share over a three year period valued at
$7,875 which was recorded as deferred financing costs. In November 1995: (i)
$775,000 of these notes were converted into 6,200,000 shares of Company
common stock (ii) $50,000 of these notes were repaid; and all other
obligations of the Company under these notes were released. The remaining
$75,000 of these notes were extended for an additional six-month period and
the conversion price was amended to be a 30% discount to the market at time
of conversion but not greater than $0.50 per share or less than $0.125 per
share. Other terms and conditions remain as originally issued.

     In November 1994, the Company concluded agreements under which Raifinanz
AG, Zurich, Switzerland ("RAI"), will assist the Company in securing
strategic partnering agreements for its products and technologies and will
provide financial advisory services to the Company. In connection with these
agreements, the Company issued 500,000 warrants to purchase shares issued
under Regulation S over a three-year period as follows:

     NUMBER OF WARRANTS    EXERCISE PRICE    VESTING DATE       VALUE
     ------------------    --------------    ------------       -----
           100,000             $.01          November 1994     $90,000
           100,000              .86          November 1994       5,000
           150,000             2.00          November 1994       7,500
           150,000         Market price      25,000 per month    7,500
                           on vesting date   for six months
                                             beginning in
                                             November 1994
         ----------                                          ---------
           500,000                                            $110,000
         ----------                                          ---------

     The value of these warrants of $110,000 was recorded as prepaid
financing cost as an offset to equity. 100,000 of these warrants were
exercised in January 1995.

     In December 1994, the Company issued 242,593 restricted shares to an
officer in connection with his employment agreement and recorded $208,630 as
compensation in satisfaction of amounts due in the first quarter of 1994.

     In December 1994, the Company issued 300,000 warrants to an unaffiliated
third party in consideration for financial advisory services to be provided
over a two year period as follows:

     NUMBER OF WARRANTS    EXERCISE PRICE    VESTING DATE       VALUE
     ------------------    --------------    ------------       -----
          50,000             $  .01          December 1994     $45,000
         150,000               1.00          December 1994       7,500
          50,000               1.50          June 1995           2,500
          50,000               2.00          December 1995       2,500
       ----------                                              ---------
         300,000                                               $57,500
       ----------                                              ---------


                                     -13-


<PAGE>

     The warrants have a term of three years from vesting date and contain
registration rights. The Company recorded $57,500 as the value of the
warrants, as prepaid consulting fees as an offset to equity. In February,
1995, these warrants were modified as follows:

     NUMBER OF WARRANTS    EXERCISE PRICE    VESTING DATE       VALUE
     ------------------    --------------    ------------       -----
          150,000           $  .01           February 1995     $118,500
           50,000              .75           February 1995        2,500
           50,000             1.00           August 1995          2,500
           50,000             1.50           February 1996        2,500
        ----------                                             ---------
          300,000                                              $126,000
        ----------                                             ---------

     The Company recorded an additional $68,500 as the value of the
modification of the warrants, as prepaid consulting fees as an offset to
equity. 150,000 of these warrants were exercised in April 1995. Effective as
of May 15, 1995, these services were terminated, the remaining 150,000
warrants were cancelled and the remaining balance of prepaid consulting fees
was written off.

     In May 1995, the Company issued 555,555 shares of restricted stock and
400,000 warrants to purchase restricted shares at $.10 per share in exchange
for $100,000, to a current shareholder. These warrants contain certain
registration rights. During November 1995, 200,000 of these warrants were
exercised.

     In May 1995, the Company issued 200,000 warrants to purchase restricted
shares at $.16 per share in lieu of compensation, to a current employee.
These warrants contain certain registration rights.

     In May 1995, the Company authorized issuance of 5,200,000 warrants (of
which 1,560,000 immediately vested) to purchase restricted shares at prices
ranging from $.30 to $.50 per share, vesting over a 24-month period, to
current officers and directors.

          In August 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which it
raised net proceeds of approximately $140,348. In connection with the
completed offering, the Company issued 725,168 shares of restricted stock at
prices ranging from $0.36 to $0.42 per share, plus 725,168 warrants to
purchase additional shares of restricted common stock at $0.50 per share
during a two-year period. During August 1995, 116,279 of these warrants were
exercised.

          In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount
of $300,000 which mature on December 31, 1995. In order to fulfill the
Company's obligation to deliver shares of the Company's common stock upon
conversion of the notes, an aggregate of 2,000,000 shares have


                                     -14-

<PAGE>


been issued under Regulation S and are being held in escrow. During September
1995, $100,000 of these notes were converted into 549,448 shares of Company
common stock. In October 1995, an additional $200,000 of these notes were
converted into 1,714,736 shares of Company common stock.

          In October 1995, the Company entered into a third party advisory
and consulting agreement, effective as of May 1995. In consideration of the
consulting services to be provided by consultant to the Company under this
agreement, and for services previously rendered to the Company, the Company
shall issue to consultant an aggregate of 1,000,000 warrants, which shall
become exercisable as follows: 600,000 warrants shall be immediately
exercisable; an additional 50,000 warrants shall become exercisable every
three months from the date of this agreement until the second anniversary of
the date of this agreement. Each warrant shall be exercisable to purchase one
share of common stock of the Company at a purchase price of .35CENTS per share.
Each warrant shall be exercisable for a period of two years from the date of
issue. These warrants contain demand registration rights.

     One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") 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 first Unit to a third party finance company of $37,926
through September 1997, $18,580 from October 1997 through August 1999 and
$68,589 in September 1999. As of September 30, 1995, the balance of this debt
aggregated $1,345,232 (including interest currently due of $57,251) of which
$527,913 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 first Unit.

     Tri-County was delinquent in making certain of its lease payments to VMI
under the terms of the lease agreement concerning the first 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 first Unit.  As a result, the third party
finance company commenced a lawsuit against MFA and the Company in which it
sought repayment in full of MFA's note to that company (the debt service on
which was to be serviced by VMI) and return of the first Unit to that
company. The finance company subsequently dismissed its lawsuit without
prejudice. Should Tri-County fail to make its future lease payments to VMI
and should VMI be unable to make its future required payments to the finance
company (i) VMI could lose ownership and possession of the first Unit and
(ii) the entire remaining balance of the MFA note would become immediately
payable, with VMI and the Company being liable, together with MFA, for any
deficiency in repayment of the note. The Company, VMI, MFA and Tri-County are
currently negotiating a rescheduled financing for this debt.


                                     -15-

<PAGE>

     The second of the two Units has not yet been placed in service. MFA has
leased the second Unit from VMI under a five-year lease. The payments under
this lease were to commence as of January 27, 1994 (the first twenty-one
payments which total approximately $630,630 being delinquent as of September
30, 1995). The lease provides for monthly payments of $30,030. Although VMI
has commenced litigation against  MFA for payment of delinquent lease
payments, there can be no assurance that MFA will be able to make any of
those required lease payments to VMI. Receivables of $270,270 related to a
portion of these lease payments were written off during 1994 (Note 4).
Depreciation on the second Unit commenced during the first quarter of 1994.
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 second Unit,
but not to exceed fifteen percent (15%) of the original capitalized cost
($1,350,000), payable during the year following the expiration of the initial
term of such lease in twelve equal monthly payments.

     In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought
an action against MFA and VMI in connection with a loan made by J&J Finance
to MFA that was secured by a lien granted by MFA on the Resonex MRI unit
owned by VMI. After MFA defaulted on the foregoing loan, J&J Finance, in June
1995, obtained a writ of attachment on the Resonex MRI unit and has taken
physical possession of that unit.

     It is the Company's position that MFA had no authority to secure the
foregoing loan with VMI's MRI unit (which was carried on the Company's
September 30, 1995 balance sheet at $1,012,500 after accumulated
depreciation), since the loan was made solely for the benefit of MFA, the
lien was placed on the MRI unit without VMI's knowledge or consent, and none
of the loan proceeds were received by VMI or the Company. VMI intends to
vigorously assert its right to recover from J&J Finance the MRI unit or any
proceeds received by J&J Finance from the sale of the unit. In the event J&J
Finance prevails in its assertion that it was entitled to foreclose upon and
retain the MRI unit and any proceeds from the sale of that unit, VMI and the
Company intend to assert their rights against MFA for fraudulently pledging
the MRI unit to J&J Finance. Although the Company believes VMI is entitled to
recover the MRI unit from J&J Finance and that VMI should prevail in its
claims against MFA should J&J Finance be permitted to retain the MRI unit,
there can be no assurance that VMI will prevail against either party or that
VMI will be able to collect any judgement that it may obtain against MFA.


                                     -16-

<PAGE>


4.  COMMITMENTS AND CONTINGENCIES

     LITIGATION

          The Securities and Exchange Commission's New York Regional and
Enforcement staff commenced an inquiry in December 1990 concerning possible
securities violations of the registration, anti-fraud, notice and reporting
provisions under various provisions of the federal securities laws that may
have occurred between July 1989 through January 1990 resulting from the
actions of the Company and certain members of its management during that
period. As part of a settlement agreement, the Company, Dr. William Shell,
and Philip Dascher, the Company's former President, without admitting or
denying any violations, and without any findings of fact, consented in August
1992 to the entry of a judgement for a permanent injunction enjoining them
from further violations of various provisions of the federal securities laws.
The settlement included a rescission offer that was made by the Company to 17
individuals who had previously exercised warrants to purchase the Company's
common stock at a time when a current registration statement was not in
effect. None of the individuals, however, elected to exercise this right of
rescission.

          In September 1993, Dr. Shell commenced an action against Dynamic
Products, Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25%
shareholder of FATCO in the Orange County Superior Court of the State of
California seeking damages from these parties for their alleged breach of
contract and misappropriation of certain trade secrets of FATCO and the
Company relating to the first generation fat sequestrant product. Dr. Shell
has asserted in this action that Dynamic has sold the first generation fat
sequestrant product to Herbalife for resale in the United States without the
required payment of royalties to FATCO (which is obligated to pay Dr. Shell
25% of its royalty income, which Dr. Shell then contributes to the Company)
based on those sales. Dr. Shell and the Company have agreed to share the
damages, if any, recovered by Dr. Shell in this lawsuit on a basis to be
negotiated by the Company and Dr. Shell. There can be no assurance that the
defendants in this litigation in response to Dr. Shell's action will not
commence litigation against the Company that will result in the Company
incurring legal fees to defend such litigation. In October 1994, Dr. Shell
filed a related lawsuit against FATCO in the same court seeking the
termination of a 1987 agreement between FATCO and Shell licensing certain fat
sequestrant technology of Dr. Shell to FATCO based upon failure of FATCO to
fully exploit the transferred technology for the benefit of Shell, failure to
fully exploit the products, knowingly permitting sales of products made
utilizing the technology transferred to continue even though no royalties
were being paid on those sales, refusing to pursue legal action to collect
the unpaid royalties and stopping the unauthorized sales, and by entering
into a renewal of an agreement with a distributor on the same unfavorable
terms which previously existed and which diverted monies which should have
been paid to FATCO to other entities owned and controlled by some of the
shareholders and members of the Board of Directors of FATCO. FATCO has filed
a cross-complaint in this action against Shell alleging breach of the
licensing agreement between Shell and FATCO. The basis of this cross
complaint appears to pertain to the license agreement between EHI and KCD,
Inc.


                                     -17-

<PAGE>

          In January 1995, Dr. Shell, on behalf of FATCO, filed another
action in the Orange County Superior Court of the State of California
substantially similar to the action filed by Dr. Shell in 1993 against
Dynamic Products, Inc. This newly filed action names certain individual
shareholders and directors of FATCO, Dynamic and D&F Industries as well as
Herbalife International Inc. ("Herbalife"). In March 1995, this action and
the lawsuit against Herbalife described below were settled with respect to
Herbalife and its directors, with neither party making any payments to the
other in connection with this settlement.

          In March 1994, the Company and S/S sued Herbalife (settled with
respect to Herbalife) and D&F in Superior Court for the County of Orange,
California for fraud, breach of contract and conspiracy to misappropriate
trade secrets. The Company alleges in this lawsuit that S/S provided certain
confidential information and trade secrets to D&F, which misappropriated this
information to manufacture an advanced fat sequestrant product. The Company
is seeking in this lawsuit injunctive relief and damages in an unspecified
amount from defendants. This matter has been consolidated for trial with the
action against Dynamic Products, Inc. and the action against the officers and
Directors of Dynamic Products, Inc. and D&F Industries, Inc.

          In April 1994, Rod Sherman and Computer Buddy sued Clark Holcomb
and the Company in Superior Court for the County of Los Angeles for breach of
an alleged oral contract pursuant to which Holcomb and the Company were to
pay Sherman a finder's fee for all shares of the Company's stock sold to
third parties introduced by Sherman to Holcomb or the Company of which
Sherman alleges that $58,000 remains owing to him. Sherman is seeking this
amount in his lawsuit although the Company believes that it has no obligation
or liability to Sherman in connection with this matter. A trial date has
currently been scheduled for March 1996.

          In August 1994, VMI sued MFA in Supreme Court for the County of New
York, New York, for breach of contract and accounts due. VMI alleges in this
lawsuit that MFA breached an equipment lease agreement for VMI's second MRI
unit, the Resonex Machine, by failure to make lease payments due January 27,
1994, and thereafter in the sum of $210,210 as well as interest thereon. VMI
is seeking in this lawsuit a judgement against MFA in the sum of $210,210
plus interest thereon with costs, attorney's fees and disbursements and other
relief. VMI will also seek a judgement for all unpaid lease payments
subsequent to August 1994 which total an additional $420,420 through
September 30, 1995.

          In August 1995, the Company, Dr. Jackie See and Francis Pizzulli
entered into preliminary settlement agreements regarding the pending
arbitration proceedings before the Judicial Arbitration and Mediation
Service, Inc. in Santa Monica, California. As part of the proposed settlement
agreements the Company agreed: 1) to pay Dr. See and Mr. Pizzulli starting in
July, 1995 a total of 3% of the Company's net sales of products, and 30% of
the Company's receipt of royalties from the Company's licensees under


                                     -18-

<PAGE>

certain patents owned by the Company covering colored microspheres, contrast
microspheres and fat sequestrant product; 2) to pay to Dr. See and Mr.
Pizzulli on a monthly basis over time, a total of 3% of the Company's net
sales of products, and 3% of the Company's receipt of royalties from the
Company's licensees under certain patents owned by the Company covering
colored microspheres, contrast microspheres and fat sequestrant product of
$46,789 through June 30, 1995, attorney fees of $126,604 incurred incident to
the arbitration, and $124,431 in settlement of certain contingent liability
issues raised in the arbitration proceedings; and 3) to transfer to Dr. See
and Mr. Pizzulli 25,000 restricted shares of KCD Incorporated common stock.
Dr. See executed a formal agreement during September 1995.

          In addition, the Company has proposed a settlement of Mr.
Pizzulli's claim for damages he alleged he suffered as the result of the
Company's timing to permit him to publicly resell up to 283,000 shares of the
Company's common stock under Rule 144, by the Company issuing Mr. Pizzulli
183,000 shares of the Company's common stock under Rule 144 with an agreement
to issue Mr. Pizzulli an additional 75,000 shares of the Company's common
stock issued under Rule 144 in the event that the price per share of the
Company's common stock does not reach an agreed level by March 31, 1996, and
an officer of the Company transferring to Mr. Pizzulli 117,000 free trading
shares of the Company's common stock. Mr. Pizzulli has declined the Company's
offer and negotiations are continuing.

          In January 1995, Roger Donenfeld sued Clark Holcomb, William
Pelzer, Jr. and the Company in Superior Court for the County of Los Angeles
for rescission and restitution, fraudulent misrepresentation, fraud based
upon active concealment and suppression of information, fraud based on
negligent misrepresentation of fact, conspiracy to defraud and action on a
promissory note, all regarding the sale in 1994 by Holcomb to Donenfeld of
Company stock. Donenfeld alleges general damages exceeding $100,000 plus
punitive damages of $1,000,000. This matter was settled in September 1995 at
no cost to the Company.

          In April 1995, Richard Willmon and Nancy Holling sued Clark
Holcomb, KCD Incorporated, Dr. Shell and the Company in Superior Court for
the County of Ventura for rescission, breach of contract, breach of fiduciary
duty, fraud, negligent misrepresentation, constructive trust and negligence
all regarding the sales in July 1993 and September 1993 by Holcomb to Holling
and Willmon of Company stock. Willmon and Holling allege general damages of
$107,250 and $4,275 respectively plus interest, as well as punitive damages
in an amount to be proven at time of trial. In July 1995, the Company
executed a Settlement Agreement with Nancy Holling. There was no money
demanded and none paid in connection with this settlement. The Company
believes it has no obligation to Willmon or Holling in connection with this
matter.

          In April 1995, David Eastman filed a complaint in the Superior
Court of the County of Orange, California against Clark Holcomb, Anita
Kavanagh, Dr. Shell and the Company. This action alleges fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud. This action was served on Dr. Shell and the Company in
July 1995. The only allegations of wrong doing are directed at Holcomb and
Holcomb is alleged to have been acting as an agent of the other defendants.
It is alleged that Holcomb represented that although the shares purchased by
the plaintiff contained a legend, they would be free trading in sixty to
ninety days. It is also alleged that Holcomb misrepresented the financial
condition of the Company. The complaint seeks damages in the amount of
$200,000 as well as unspecified punitive damages.  The Company and Dr. Shell
deny that Holcomb was their agent.


                                     -19-

<PAGE>

          In March 1995, Donald Seidel sued Clark Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not
less than $170,000, together with exemplary and punitive damages. It is
alleged that the Company conspired to defraud plaintiff of his shares of
Company stock and deprive him of payment for services. The Company has denied
these allegations.

          Except as otherwise specifically indicated above, management
believes that the Company does not have any material liability for any
lawsuits, settlements, judgements or fees of defense counsel which have not
been paid or accrued as of September 30, 1995.

          There can be no assurance that the Company will prevail in any of
the foregoing lawsuits. The Company may incur substantial expense in
connection with this litigation and any unfavorable settlement or judgement
against the Company in which the Company is a defendant could have a material
adverse effect upon the Company.

     TRANSACTIONS IN COMPANY SECURITIES

          In certain private placements of the Company's shares, a majority
of which were shares issued to a former Company director that subsequently
became subject to a possible court-ordered sale, a total of approximately
2,506,982 shares of the Company's Common Stock were issued to a small number
of individuals. These issuances were structured by the Company in reliance
upon the advice of its 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 resales of these shares, commencing in June 1992, by the original
purchasers or their transferees to a total of approximately 330 investors
have 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 Holcomb.

          The shares involved in the foregoing transactions have been
included in a registration statement filed with the Securities and Exchange
Commission ("SEC") in October 1993 so as to enable the holders of these
shares to publicly resell. The Company continued through 1994 to pursue
having that filing become effective, without success. The holders of the
shares involved in the transactions described above, however, could have a
right of rescission against the persons from whom they acquired the shares
or, under certain circumstances, against the Company, if any of those
transactions constituted a distribution requiring registration. The Company
believes that such holders do not have a valid and enforceable right to such
rescission. (The Company's belief is based in part upon the opinion of its
current special securities counsel, who has advised the Company that, based
on the facts known to such counsel and its analysis of the applicable laws,
such counsel believes that these holders do not have a valid and enforceable


                                     -20-

<PAGE>

right to such rescission.) However, subject to any applicable statutes of
limitation that might bar such further 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. There can be no
assurance, however, that the Company would be successful in asserting any
claim for indemnification or contribution or that Mr. Holcomb or any other
party required to provide such indemnification or contribution would have
adequate financial resources to do so. Any attempt by the Company to obtain
indemnification or contribution from Mr. Holcomb could have a material
adverse effect upon the Company's relationship with KCD (which is an
affiliate of Mr. Holcomb) under its license agreement with KCD, which might
elect to terminate, or improperly withhold payments, under the license
agreement under these circumstances.

          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 Company is seeking to dissuade the SEC from taking formal
action against the Company but believes that it is likely that the SEC will
seek permanent injunctive relief. In that event the Company would attempt to
enter into a consent decree with the SEC in which 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 to offer
rescission to the purchasers of some or all of the shares involved in the
unregistered transactions. Although the Company believes 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 enjoining them from
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 legal counsel believes, on the basis of the facts currently known,
that it is not probable that the Company would have any material liability.

     LEASEHOLD IMPROVEMENTS

          The Company completed major reconstruction of its facility as of
December 31, 1993. As of December 31, 1993, costs of approximately $431,000
were incurred. This construction was being funded to the extent of $350,000
by a shareholder (Clark Holcomb) who


                                     -21-

<PAGE>

was issued 500,000 shares in December 1992 in exchange for his $350,000
commitment to the reconstruction of the facility. As of September 30, 1995,
$225,000 of this funding has been received from the shareholder. Currently
the unpaid portion of $125,000 is shown as a note receivable, as an offset to
the equity section of the Company's balance sheet. This obligation was
payable  in monthly installments of not less than $10,000 plus accumulated
interest through May 1, 1994 with the remaining principal balance plus
interest originally due on June 1, 1994 and interest accrued at 1% per month
on the unpaid balance.  This note was subsequently extended to November 1,
1994 under the existing terms and conditions with the exception that the
Company has the right to call the note on thirty days notice. As of September
30, 1995, this note plus accrued interest was delinquent in the approximate
amount of $173,000 and the Company recorded a provision for possible
uncollectible accounts for that amount. The Company is currently negotiating
a settlement of the outstanding balances.

     LICENSE AGREEMENTS

          In March 1994, the Company entered into a license agreement for the
 Company's fat sequestrant technology in the United States and Canada with
KCD,  a recently formed distribution organization having access to the major
domestic retail pharmacy and health food chains. KCD was seriously delinquent
in making royalty payments to the Company. In May 1995, the Company and KCD
entered into an amended license agreement. Under the terms of the amended
agreement, one-half ($217,243) of past due royalties and interest
(aggregating $434,487) as of April 1, 1995 is scheduled to be paid in twelve
equal monthly installments of $18,104 plus monthly payment of interest at
1.5% per month on the outstanding balance beginning July 1, 1995. The
remaining one-half ($217,243) of past due royalties and interest was
satisfied by KCD's issuance to the Company of 100,000 shares of KCD
restricted common stock. The amended agreement generally provides for a
royalty equal to 6% of gross sales (less freight and shipping) of licensed
products payable monthly within thirty days. Through September 30, 1995, the
Company has received from KCD licensing fees and royalties of $645,743 and
has earned additional past due royalties of $169,000. KCD has advised the
Company that during the period April 1994 through September 1995, sales of
the product covered under the license have approximated $7,300,000 at
wholesale value. The license agreement also provides for initial licensing
fees from KCD of $100,000 (paid between March and May 1994) and minimum total
royalty payments to the Company to keep the agreement in effect over the
first three years of the agreement of at least $1,258,000. Over the balance
of the term of the agreement (which runs until at least 2014), KCD shall be
required, in order to keep the agreement in effect, to pay minimum royalties
in accordance with a formula but in no event less than $436,000 per year.
Payments from KCD are current under the terms of the amended agreement as of
September 30, 1995.

          Although the Company believes that it is entitled to terminate the
license agreement providing FATCO with the right to exclusively manufacture
and market the fat sequestrant product under the Company's patent as a result
of certain breaches of the agreement by FATCO (and Dr. Shell has filed a
lawsuit as the licensor of record to terminate his license agreement with
FATCO), FATCO could assert that its agreement with the Company is still in
effect and that the provisions


                                     -22-

<PAGE>

of the Company's agreement permitting KCD to manufacture the fat sequestrant
product violate the terms of FATCO's agreement with the Company. Should FATCO
successfully assert that its agreement with the Company is still in effect,
the Company believes that it would nonetheless be permitted to license the
marketing of the fat sequestrant technology to KCD in the event KCD would be
willing to license the marketing (but not the manufacture) of this product.
KCD is an affiliate of Clark Holcomb.

          In February 1995, the Company entered into an agreement with a
large European nutritional food company for a new formulation of the
Company's fat sequestrant technology. Under the terms of the agreement, human
clinical studies of the Company's fat (lipid) sequestrant technology will be
conducted to evaluate its applicability as a food supplement, medical food,
functional food, and/or food additive to aid in weight control.  The clinical
studies will evaluate the sequestrant's ability to reduce dietary fat
absorption and to reduce blood cholesterol. Initially, the Company will
receive up to $100,000 plus reimbursement for its costs related to the
clinical studies. Upon completion of the studies, the Swiss company will have
the option to exercise its exclusive rights to purchase, manufacture, use and
sell this technology in Europe and other markets. In turn, the Company will
receive royalty payments on product sales.

     EMPLOYMENT CONTRACTS

          On March 31, 1995, Mr. Pelzer notified the Company of his intention
to terminate his employment with the Company as both chief executive officer
and director effective April 13, 1995. Mr. Pelzer's resignation cited both
cause due to failure of consideration under the terms of his December 24,
1992 employment agreement as well as personal reasons. The Company is
negotiating a settlement with Mr. Pelzer.

5.  RELATED PARTIES

     Dr. Shell contributes research support services which are accounted for
as a contribution to capital with an offsetting charge to research and
development expense in the Company's statement of operations. These services
are performed by Dr. Shell (who also operates a medical practice which
performs traditional clinical medicine) at his own facility, and primarily
involve usage of imaging equipment and computers, along with salaries for
research personnel.  The equipment includes computers, digital imaging
equipment to analyze x-ray and ultrasound images, and a full color flow
Doppler echocardiographic imaging device with digital acquisition capability.
The personnel include a research nurse and data analyst who devote their
full time to research.  Research is performed for the Company and for major
pharmaceutical companies.  Utilization of the resources of this facility for
Company projects ranged from 50% to 75% during 1994, and up to 50% for the
nine months ended September 30, 1995, which management believes is a
reasonable allocation, and the value assigned to the time and use of
facilities and computer equipment by Dr. Shell was $150,000 for the nine
months ended September 30, 1994 and $30,000 for the nine months ended
September 30, 1995. The Company anticipates continued contribution of these
facilities from Dr. Shell for the foreseeable future. However, were the
Company required


                                     -23-

<PAGE>

to pay a third party for this work, the Company believes that this would
increase the cost of this research and development work by approximately 15%
to 20%, and would create a material adverse effect on cash flow as Dr.
Shell's services are contributed to capital.

     FATCO is a company formed by Drs. See, Shell and others to research and
develop a product formulation to reduce and bind dietary fat intake into the
blood resulting in weight control.  FATCO owns two license agreements
concerning market rights of the fat sequestrant product from which it
receives royalties. Dr. Shell acquired 25 percent of the issued and
outstanding FATCO stock. Dr. Shell has assigned any FATCO income due him to
the Company and reduces his fees under a consulting agreement with the
Company by the amount of FATCO income he might receive directly. Total
royalties offset against consulting fees and applied as contributed capital
from Dr. Shell in 1994 were $41,975. There were no such royalties for the
nine months ended September 30, 1994. Royalties for the nine months ended
September 30, 1995 were $121,947

     In February 1995, the Company entered into an agreement and issued a
promissory note in the principal amount of $50,000 with Sam Shell, father of
Dr. Shell and Richard N. Shell, in consideration of Sam Shell's loan to the
Company of $50,000.  The note is due on December 31, 1995 together with
interest at the rate of 8% per annum. At any time during the term of this
note, the holder may elect to take payment of the principal and accrued
interest thereon in the form of restricted shares of Company common stock at
a price equal to that provided in the Company's next private placement after
the date of the note. Sam Shell exercised his option to convert $25,000 of
the principal amount of this note on July 3, 1995 and received 138,889
restricted shares of the Company's common stock, and warrants to acquire an
additional 100,000 restricted shares of the Company's common stock at $.10
per share.

     In March 1995, Richard N. Shell guaranteed $20,000 of debt to an
unrelated third party on behalf of the Company. In April, 1995, the Company
entered into an agreement and issued a promissory note in the principal
amount of $25,000 with Richard N. Shell in consideration of Richard Shell's
loan to the Company of $25,000. The note is due on December 31, 1995 together
with interest at the rate of 8% per annum. At any time during the term of
this note, the holder may elect to take payment of the principal and accrued
interest thereon in the form of restricted shares of the Company common stock
at a price equal to that provided in the Company's next private placement
after the date of the note.

6.  SUBSEQUENT EVENTS

     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.


                                     -24-

<PAGE>

     The Seattle Regional Office of the Federal Trade Commission has advised
the Company that the staff believes that the Company's fat sequestrant
product, which currently is marketed by a licensee under the name
"SeQuester," has been improperly represented in advertising claims, and that
the sequestrant 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 sequestrant product and is likely
to involve the payment of a fine or other financial penalty by the Company
(the amount of which currently is unknown but could be substantial).

     In November 1995, the Company completed a private placement, to foreign
investors under Regulation S (with a six months lock-up) of 4,200,000 shares
of common stock in which it raised gross proceeds of approximately $525,000.


                                     -25-

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The Company commenced operations in 1990, when it acquired 82.5% of
See/Shell Biotechnology, Inc. ("S/S"), which was organized in 1987 and had
commenced operations in 1988. The Company's activities to date have consisted
primarily of planning, research and development, and marketing of its
microspheres and related products and services, performing clinical trials
and licensing of its fat sequestrant technology and development of its
biodegradable microspheres for human imaging applications, which the Company
believes represents its most significant long-term growth opportunity.  On
June 30, 1993, the Company acquired Venus Management, Inc. ("VMI"), whose MRI
leasing operations are reflected in the Company's operating results since
that date.

RESULTS OF OPERATIONS

     NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995

<TABLE>
<CAPTION>

                                                        FOR THE NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                               -------------
                                                           1994               1995
                                                           ----               ----
                                                               % OF                % OF
                                                     $       REVENUES     $       REVENUES
                                                    ---      --------    ---      --------
<S>                                                 <C>      <C>         <C>      <C>
Revenues - Products and Services
 Microspheres and laboratory services.............$167,844     34%    $191,828     27%
 Fat sequestrant - Products.......................   2,985      1         -         -
                 - Licensing fees and royalties..  319,834     65      525,857     73
                                                  --------    ----    --------    ----
                                                  $490,663    100%    $717,685    100%
                                                  --------    ----    --------    ----
Cost of Revenues - Products and Services
 Microspheres and laboratory services............ $101,162     60%    $ 94,199     33%
 Fat sequestrant - Products......................     -         -         -         -
                 - Licensing fees and royalties..    1,800     60      191,696     37
                                                  --------            --------
                                                  $102,962     21%    $285,895     40%
                                                  --------            --------
Gross Margin - Products and Services............. $387,701     79%    $431,790     60%
                                                  --------    ----    --------    ----
                                                  --------    ----    --------    ----

Revenues - Lease Rentals......................... $573,680    100%    $341,337    100%
Cost of Revenues - Lease Operations..............  361,017     63      361,017    106
                                                  --------    ----    --------    ----
Gross Margin - Lease Operations.................. $212,663     37%    $(19,680)    (6)%
                                                  --------    ----    --------    ----
                                                  --------    ----    --------    ----

</TABLE>

     For the nine months ended September 30, 1995, revenues from products and
services were $717,685, an increase of $227,022 (or 46%) over the nine months
ended September 30, 1994.  The increase in 1995 over 1994 was primarily due
to a change in Company direction regarding the sales of the fat sequestrant
and to the resulting increases in licensing fees and royalties of $206,023
for the fat sequestrant technology which were earned during the first nine
months of

                                     -26-

<PAGE>

1995. Volume increases in sales of the fat sequestrant were offset by a
reduction in the royalty rate from 15% of Gross Margin to 6% of Gross Sales
effective April 1, 1995 in accordance with the terms of the Company's amended
license agreement with KCD.

     In March 1994, the Company entered into a license agreement (amended in
May 1995) for the fat sequestrant product technology in the United States and
Canada with KCD. KCD is a recently formed organization having access to the
major domestic retail pharmacy and health food chains. KCD has limited
management and financial resources, and there can be no assurance that it
will continue to be successful in marketing its fat sequestrant product or
that it will continue to be able to pay all of the required minimum royalty
payments to the Company under the license agreement. KCD has advised the
Company that during the period April 1994 through September 1995, KCD sales
of the product covered under the license have approximated $7,300,000 at
wholesale value. From April 1994 through September 30, 1995, the Company has
earned from KCD licensing fees and royalties of $1,020,100.

     Revenues from microspheres and related laboratory services increased
$23,984  (or 14%) for the nine months ended September 30, 1995 over 1994. The
Company has directed a portion of its efforts to completing the development
of an entirely new, more cost effective automated microsphere counting system
employing flow cytometry technology. The Company anticipates that revenues
from colored microspheres and related services will continue to increase
during the remainder of 1995 as the Company expands its customer base through
the introduction of the new automated counting machine to further increase
analysis speed and to enhance automation, and completion, in June 1995, of a
marketing and sales agreement with a recognized worldwide leader in the
marketing of services, supplies and equipment to research laboratories.

     MRI lease operations resulted in a net loss of $119,547 and a net loss
of $163,951 for the first nine months of 1995 and 1994, respectively. Lease
revenues of $573,680 for the first nine months of 1994 which included two MRI
units, the second of which has no associated debt obligations, were offset by
interest on lease obligations of $106,344 and depreciation on the two units
of $361,017. Cash flows from lease revenues for one of the two units owned by
VMI of $37,926 per month are offset in full through September 1997 by
required payments of interest and principal of $37,926 per month to a third
party finance company. Lease revenues for the first nine months of 1994
include $270,270 of delinquent payments with respect to the second unit owned
by VMI, for which none of the scheduled lease payments have to date been
received by VMI. Receivables related to these lease payments were written off
during 1994. In August 1994, VMI commenced litigation to collect delinquent
lease payments with respect to this unit. Lease revenues for the first nine
months of 1995 of $341,337, which includes only one unit, were offset by
interest on lease obligations of $99,867 and depreciation on the two units of
$361,017. The second unit has not yet been placed in service.

     While the Company to date has not encountered any significant
difficulties in connection with its sale of products in foreign markets, any
future developments such as significant increases in customs duties, export
quotas or other trade restrictions or large fluctuations in foreign currency
rates could have an adverse effect on the Company.


                                     -27-

<PAGE>

     For the nine months ended September 30, 1995, total operating expenses
were $2,121,624 compared to $2,927,836 for 1994.  Total operating expenses
for the nine months ended September 30, 1995, included selling, general and
administrative (SG&A) of $1,289,744, cost of revenues for products and
services of $285,895, cost of revenues for lease operations of $361,017 and
research and development of $184,968, compared to $2,152,130 (SG&A), cost of
revenues for products and services of $102,962, cost of revenues for lease
operations of $361,017 and research and development of $311,727, in 1994.

     The overall cost of revenues for products and services as a percentage
of sales increased for the first nine months of 1995 to 40% from 21% for
1994. Decreases in cost of revenues for the first nine months of 1995
resulted primarily from increased sales of high margin microspheres to large
volume customers offset by increases in wages. Increases were due to
settlement of royalty litigation and a resulting increase in royalties
payable rate for the fat sequestrant product from 6% to 36%. Revenues for the
fat sequestrant product for 1995 were in the form of $525,857 of royalties,
from KCD, with minor direct cost of revenues other than royalty expense of
$189,842.

     Research and development expense decreased to $184,968 from $311,727 for
the nine months ended September 30, 1995 from 1994 due to a planned decrease
in Dr. Shell's research support services and curtailment of certain
development activities for the contrast microspheres.

     Dr. Shell contributes research support services which are accounted for
as a contribution to capital with an offsetting charge to research and
development expense in the Company's statement of operations.  These services
are performed by Dr. Shell (who also operates a medical practice which
performs traditional clinical medicine) at his own facility, and primarily
involve usage of imaging equipment and computers, along with salaries for
research personnel. The equipment includes computers, digital imaging
equipment to analyze x-ray and ultrasound images, and a full color flow
Doppler echocardiographic imaging device with digital acquisition capability.
 The personnel include a research nurse and data analyst who devote their
full time to research.  Research is performed for the Company and for a
number of major pharmaceutical companies.  Utilization of the resources of
this facility for Company projects ranged from 50% to 75% during 1994 and up
to 50% for the first nine months of 1995, which management believes is a
reasonable allocation, and the value assigned to the time and use of
facilities and computer equipment by Dr. Shell was $30,000 and $150,000 for
the nine months ended September 30, 1995 and 1994, respectively. The Company
anticipates continued contribution of these facilities from Dr. Shell for the
foreseeable future.  However, were the Company required to pay a third party
for this work, the Company believes that this would increase research and
development cost by approximately 15% to 20%, and would create a material
adverse effect on cash flow as Dr. Shell's services are contributed to
capital.

     During 1994, the Company enhanced its production capability for contrast
microspheres for clinical trial purposes.  The Company has identified four
specific imaging applications for its technology and initiated development on
two of them. These products include a contrast microsphere to CAT scan and
detect lung blood clots (pulmonary emboli), an ultrasound contrast


                                     -28-

<PAGE>

microsphere for detection of heart perfusion (myocardial perfusion), an MRI
contrast microsphere for abdominal visualization and a contrast microsphere
to compete with liquid x-ray contrast media.

     SG&A expense decreased to $1,289,744 from $2,152,130 for the first nine
months of 1995, from 1994.  The first nine months of 1994 includes $220,420
of non-recurring financial consulting and legal fees. These fees were paid to
unaffiliated third parties for (i) services in the areas of shareholder and
financial public relations paid in the form of 55,000 shares of the Company's
common stock and warrants to purchase an additional 107,500 shares of such
stock (ii) legal services rendered paid in the form of 36,000 shares of the
Company's common stock and warrants to purchase an additional 36,000 shares
of such stock, and (iii) services in connection with a private placement of
Company common stock paid in the form of warrants to purchase an additional
305,000 shares of such stock. The first nine months of 1994 includes a
provision for uncollectible lease revenues receivable of $270,270. The first
nine months of 1995 includes non-cash expenditures for amortization of
prepaid consulting fees of $236,419 for shareholder services. In addition,
the Company incurred officers' and directors' fees of $42,000 during the
first nine months of 1995. The Company experienced increases in legal fees of
$113,318 during the first nine months of 1995 in connection with various
litigation, regulatory compliance and other business agreements. The Company
also experienced reductions in accounting fees, salaries and wages, travel
expense, selling and marketing expense and shareholder expenses during the
nine months ended September 30, 1995. Expenses for the annual meeting of
shareholders will be incurred during the last quarter of 1995 versus the
first nine months of 1994.

     Interest expense for operations for the first nine months of 1995 was
$309,477 compared to $6,189 for 1994, an increase of $303,288. The first nine
months of 1995 includes non-cash expenditures for amortization of deferred
financing costs of $241,328 incurred in connection with financial advisory
services and a private placement of convertible notes in November 1994 as
well as accrued interest on such notes of $54,000. Interest expense for MRI
lease operations increased to $99,867 in 1995 from $106,344 in 1994 as the
result of a reduction in debt offset by the January 1994 payment being
deferred to September 1999.

     Interest income increased to $55,022 for the first nine months of 1995
compared to $17,381 for 1994 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.

     Settlement for an employee termination and an arbitration award in
connection with royalty matters aggregating $136,325 were incurred during the
first nine months of 1995.

     No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December
31, 1994, the Company incurred net operating losses for tax purposes of
approximately $10,000,000 and approximately $11,420,000 for accounting
purposes. Differences between accounting and tax losses consist primarily of
differences in the accounting and tax treatment of depreciation, allowance
for doubtful accounts


                                     -29-

<PAGE>

and research and development expenses. The net operating loss carryforward
may be used to reduce taxable income through the year 2008. The Company's tax
returns have not been audited by the Internal Revenue Service. The
carryforward amounts may therefore be subject to audit and adjustment. As a
result of the Tax Reform Act, the availability of net operating loss
carryforwards 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 carryforward period has generally been
reduced from fifteen years to five years beginning in 1993.

THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995

<TABLE>
<CAPTION>

                                                        FOR THE NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                               -------------
                                                           1994               1995
                                                           ----               ----
                                                               % OF                % OF
                                                     $       REVENUES     $       REVENUES
                                                    ---      --------    ---      --------
<S>                                                 <C>      <C>         <C>      <C>
Revenues - Products and Services
 Microspheres and laboratory services.............$ 60,522     22%    $ 52,161     22%
 Fat sequestrant - Products.......................    -         -         -         -
                 - Licensing fees and royalties..  219,834     78      184,966     78
                                                  --------    ----    --------    ----
                                                  $280,356    100%    $237,127    100%
                                                  --------    ----    --------    ----
Cost of Revenues - Products and Services
 Microspheres and laboratory services............ $ 27,990     46%    $ 34,012     65%
 Fat sequestrant - Products......................     -         -         -         -
                 - Licensing fees and royalties..     -         -%      58,151     31
                                                  --------            --------
                                                  $ 27,990     10%    $ 92,163     39%
                                                  --------            --------
Gross Margin - Products and Services............. $252,366     90%    $144,964     61%
                                                  --------    ----    --------    ----
                                                  --------    ----    --------    ----

Revenues - Lease Rentals......................... $203,868    100%    $113,779    100%
Cost of Revenues - Lease Operations..............  120,339     59      120,339    106
                                                  --------    ----    --------    ----
Gross Margin - Lease Operations.................. $ 83,529     41%    $( 6,560)    (6)%
                                                  --------    ----    --------    ----
                                                  --------    ----    --------    ----

</TABLE>

     For the three months ended September 30, 1995, revenues from products
and services were $237,127, a decrease of $43,229 (or 15%) over the three
months ended September 30, 1994. The decrease in 1995 over 1994 was primarily
due to royalties for the fat sequestrant technology which were earned during
the three months ended September 30, 1995.Volume increases in sales of the
fat sequestrant were offset by a reduction in the royalty rate from 15% of
Gross Margin to 6% of Gross Sales effective April 1, 1995 in accordance with
the terms of the Company's amended license agreement with KCD.

     Revenues from microspheres and related laboratory services decreased
$8,361 (or 14%) for the three months ended September 30, 1995 over 1994. The
Company has directed a portion of its efforts to completing the development
of an entirely new, more cost effective automated


                                     -30-

<PAGE>

microsphere counting system employing flow cytometry technology. The Company
anticipates that revenues from microspheres and related services will
increase during the remainder of 1995 as the Company expands its customer
base through the introduction of the new automated counting machine to
further increase analysis speed and to enhance automation, and completion, in
June 1995, of a marketing and sales agreement with a recognized worldwide
leader in the marketing of services, supplies and equipment to research
laboratories.

     MRI lease operations resulted in a net loss of $37,736 and a net loss of
$45,938 for the three months ended September 30, 1995 and 1994, respectively.
Lease revenues of $203,868 for the three months ended September 30, 1994
which included two MRI units, the second of which has no associated debt
obligations, were offset by interest on lease obligations of $39,377 and
depreciation on the two units of $120,339. Cash flows from lease revenues for
one of the two units owned by VMI of $37,926 per month are offset in full
through September 1997 by required payments of interest and principal of
$37,926 per month to a third party finance company. Lease revenues for the
three months ended September 30, 1994 include $90,090 of delinquent payments
with respect to the second unit owned by VMI, for which none of the scheduled
lease payments have to date been received by VMI. Receivables related to
these lease payments were written off during 1994. In August 1994, VMI
commenced litigation to collect delinquent lease payments with respect to
this unit. Lease revenues for the three months ended September 30, 1995 of
$113,779, which includes only one unit, were offset by interest on lease
obligations of $31,176 and depreciation on the two units of $120,339. The
second unit has not yet been placed in service.

     For the three months ended September 30, 1995, total operating expenses
were $742,271 compared to $878,767 for 1994.  Total expenses for the three
months ended September 30, 1995, included selling, general and administrative
(SG&A) of $491,592, cost of revenues for products and services of $92,163,
cost of revenues for lease operations of $120,339 and research and
development of $38,177, compared to $632,610 (SG&A), cost of revenues for
products and services of $27,990, cost of revenues for lease operations of
$120,339 and research and development of $97,828, in 1994.

     The overall cost of revenues for products and services as a percentage
of sales increased for the three months ended September 30, 1995 to 39% from
10% for 1994. Increases in cost of revenues for the three months ended
September 30, 1995 resulted from increases in wages combined with increases
due to settlement of royalty litigation and a resulting increase in royalties
payable rate for the fat sequestrant product from 6% to 36%. Revenues for the
fat sequestrant product for 1995 were in the form of $184,966 of royalties,
from KCD, with minor direct cost of revenues other than royalty expense of
$56,297.

     Research and development expense decreased to $38,177 from $97,828 for
the three months ended September 30, 1995 from 1994 due to a planned decrease
in Dr. Shell's research support services and curtailment of certain
development activities for the contrast microspheres as well as a reduction
in research staff personnel.


                                     -31-

<PAGE>

     SG&A expense decreased to $491,592 from $632,610 for the three months
ended September 30, 1995, from 1994.  The three months ended September 30,
1994 includes a provision for uncollectible lease revenues receivable of
$90,090. The three months ended September 30, 1995 includes non-cash
expenditures for amortization of prepaid consulting fees of $137,015 for
shareholder services. In addition, the Company incurred officers' and
directors' fees of $42,000 during the three months ended September 30, 1995.
The Company also experienced reductions in accounting fees, salaries and
wages, travel expense, selling and marketing expense and shareholder expenses
during the three months ended September 30, 1995. Expenses for the annual
meeting of shareholders will be incurred during the last quarter of 1995
versus the first half of 1994.

     Interest expense for operations for the three months ended September 30,
1995 was $88,031 compared to $2,127 for 1994, an increase of $85,904. The
three months ended September 30, 1995 includes non-cash expenditures for
amortization of deferred financing costs of $62,276 incurred in connection
with financial advisory services and a private placement of convertible notes
in November 1994 as well as accrued interest on such notes of $18,000.

     Interest income increased to $11,991 for the three months ended
September 30, 1995 compared to $4,865 for 1994 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.

     Settlement cost for a terminated employee of $9,721 were incurred during
the three months ended September 30, 1995.

LIQUIDITY AND CAPITAL RESOURCES

     Since the inception of S/S, the Company has received capital for
operations, research and development from private investors in the Company's
securities, issuance of private party debt and bank financing.  During this
period, the Company received additional capital derived from FATCO income
assigned to the Company by Dr. Shell and royalty payments from the Upjohn
Company in 1988.  In addition, revenues have been derived from sales of
microspheres and related products and services, from sales and licensing of
the fat sequestrant product and technology and from MRI leasing operations.
To date, revenues have been insufficient to satisfy operating expenses,
research and development, costs of litigation, construction costs, and patent
development.  The Company, therefore, has been dependent on private
placements of securities, bank debt, loans from private investors and the
exercise of warrants.  There are no assurances that private capital will
continue to be available or that revenues from operations will increase to
meet the Company's cash needs, particularly as these needs relate to
development of the contrast microspheres, which the Company believes
represents its most significant long-term growth opportunity.


                                     -32-

<PAGE>

     The Company's consolidated financial statements have been prepared
assuming that 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, is currently unable to pay its on-going obligations
as they become due, and faces significant product development and
distribution issues that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are described below.  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.

     Management anticipates growth of revenues during the remainder of 1995
from products and services resulting from sales of microspheres and the
Investigator Partner Services program from the Company's new automated
microsphere counting system, completion (in June 1995) of a marketing and
sales agreement with a recognized worldwide leader in the marketing of
services, supplies and equipment to research laboratories, and from royalty
revenues from KCD under the Company's license agreement with KCD for the fat
sequestrant technology.

     The Company's amended license agreement with KCD provided for initial
licensing fees from KCD of $100,000 (which were paid between March and May
1994) and minimum total royalty payments to the Company to keep the agreement
in effect over the first three years of the agreement of at least $1,258,000.
Over the balance of the term of the agreement (which runs until at least
2014), KCD shall be required, in order to keep the agreement in effect, to
pay minimum royalties in accordance with a formula but in no event less than
$436,000 per year. KCD has advised the Company that it has orders from, or
has shipped product to selected stores of more than 15 large domestic store
chains,  and that during the period April 1994 through September 1995, sales
of the product covered under the license have approximated $7,300,000 at
wholesale value.  However, there can be no assurance that these chains will
continue to order KCD's product, that KCD will otherwise continue to be
successful in marketing the product or that KCD (which is a newly formed
company and has limited financial assets) will be able to pay all of the
required minimum royalty payments if it is not successful in marketing the
product. Through September 30, 1995, the Company has received from KCD
licensing fees and royalties of $645,743, 100,000 KCD restricted common
shares ($217,243) and has earned additional royalties of  $169,000. The
amended license agreement provides for payment of a remaining past due
balance in twelve monthly installments of $18,104 plus monthly payment of
interest at 1.5% per month on the outstanding balance beginning July 1, 1995.
This remaining balance was $162,931 as of September 30, 1995. Payments from
KCD are current under the terms of the terms of the amended agreement as of
September 30, 1995.

     The license agreement provided for KCD to fund up to $100,000 of the
costs of a double blind trial for the fat sequestrant product (which is the
total estimated cost of the trial and of which the Company received an
advance of $15,000).  Under terms of the agreement, KCD was to make
additional payments as costs were incurred by the Company.  However,
beginning in June 1994, KCD took direct responsibility for paying the third
party performing the clinical trial.


                                     -33-

<PAGE>

     Although the Company believes that it is entitled to terminate the
license agreement providing FATCO with the right to exclusively manufacture
and market the fat sequestrant product under the Company's patent as a result
of certain breaches of the agreement by FATCO (and Dr. Shell has filed a
lawsuit as the licensor of record to terminate his license agreement with
FATCO), FATCO could assert that its agreement with the Company is still in
effect and that the provisions of the Company's agreement permitting KCD to
manufacture the fat sequestrant product violate the terms of FATCO's
agreement with the Company. Should FATCO successfully assert that its
agreement with the Company is still in effect, the Company believes that it
would nonetheless be permitted to license the marketing of the fat
sequestrant technology to KCD in the event KCD would be willing to license
the marketing (but not the manufacture) of this product. KCD is an affiliate
of Clark Holcomb.

     In February 1995, the Company entered into an agreement with a large
European nutritional food company for a new formulation of the Company's fat
sequestrant technology. Under the terms of the agreement, human clinical
studies of the Company's fat (lipid) sequestrant technology will be conducted
to evaluate its applicability as a food supplement, medical food, functional
food, and/or food additive to aid in weight control. The clinical studies
will evaluate the sequestrant's ability to reduce dietary fat absorption and
to reduce blood cholesterol. Initially, the Company will receive up to
$100,000 plus reimbursement for its costs related to the clinical studies.
Upon completion of the studies, the Swiss company will have the option to
exercise its exclusive rights to purchase, manufacture, use and sell this
technology in Europe and other markets. In turn, the Company will receive
royalty payments on product sales.

     The Company does not anticipate product revenues from the contrast
microspheres program for human use before late 1998, at the earliest.  The
Company has retained a regulatory consultant to begin preliminary work on FDA
applications for its human imaging microspheres.  Substantial expenditures by
the Company for research and development, and for manufacturing and marketing
(if these activities are not performed by future strategic partners or
licensees of the Company) will be required before significant revenues from
human contrast microspheres are realized, and the Company will require
additional funds to develop the contrast microspheres for human imaging.

     There are no assurances that increases in sales of microspheres,
automated counting machines and the Investigator Partner Services program and
royalties from the fat sequestrant product will be achieved or that the
Company will ultimately generate revenues from the contrast microspheres.
Moreover, the Company estimates that to initiate and complete the clinical
development program for the first diagnostic indication for its contrast
microspheres will require the expenditure by the Company and/or a strategic
partner of between $3,000,000 and $10,000,000 over the next 36 months.
Operating revenues are not expected to be sufficient to fund this development
program, which will need to be financed at least in part out of the proceeds,
if any, from exercise of the Company's outstanding warrants, through payments
from potential future strategic partners or licensees for the Company's human
contrast microspheres or through the sale of additional securities by the
Company or through a combination of these sources.


                                     -34-

<PAGE>

     The Company historically has been able to generate funds from private
placements to provide capital for growth.  The Company filed a registration
statement with the SEC in October 1993 covering the potential public sale of
up to 1,000,000 shares of its Common Stock, which has not yet become
effective.  However, the Company has not identified any purchasers for these
shares and does not have any commitments from any broker-dealer firms to
underwrite or sell these shares on behalf of the Company following the
registration becoming effective.  There can be no assurance that a sufficient
amount of the Company's securities will be sold or the 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, 1995 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 only approximately $82,000.)

     In April 1994, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which it
raised net proceeds of approximately $640,000. In November 1994, the Company
completed a private placement to foreign investors in an offering under
Regulation S of $900,000 one-year convertible promissory notes in which it
raised net proceeds of approximately $715,000. In November 1995: (i) $775,000
of these notes were converted into 6,200,000 shares of Company common stock
(ii) $50,000 of these notes were repaid and all other obligations of the
Company under these notes were released. The remaining $75,000 of these notes
were extended for an additional six-month period.

     In August 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which it
raised net proceeds of approximately $140,348. In connection with the
completed offering, the Company issued 725,168 shares of restricted stock at
prices ranging from $0.36 to $0.42 per share, plus 725,168 warrants to
purchase additional shares of restricted common stock at $0.50 per share
during a two-year period. During August 1995, 116,279 of these warrants were
exercised.

     In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount
of $300,000 which mature on December 31, 1995. In order to fulfill the
Company's obligation to deliver shares of the Company's common stock upon
conversion of the notes, an aggregate of 2,000,000 shares have been issued
under Regulation S and are being held in escrow. During September 1995,
$100,000 these notes were converted into 549,448 shares of Company common
stock. In October 1995, an additional $200,000 of these notes were converted
into 1,714,736 shares of Company common stock.

     In November 1995, the Company completed a private placement, to foreign
investors under Regulation S (with a six months lock-up) of 4,200,000 shares
of common stock in which it raised gross proceeds of approximately $525,000.

     Should required funding for operating needs or research and development
programs through the sale of securities not be adequate, the Company
anticipates that it would attempt to


                                     -35-

<PAGE>

accelerate its efforts to secure one or more strategic corporate partners for
its contrast microspheres.  The terms of any strategic partnership would need
to be negotiated but would be expected to include one or more up front
payments to the Company for marketing rights that would be licensed to these
partners for these products.  The Company has had preliminary negotiations
with respect to the licensing of the contrast microspheres, however,  there
can be no assurance that the Company will be able to enter into any such
agreement on terms attractive to the Company or at all.

     The Company's revised financial plan is in the process of being
implemented. During the third quarter, management's efforts were focused on
settling old debts, settlement of lawsuits, and raising working capital.
These efforts will continue during the fourth quarter. Management believes
that the Company will be in a position to move forward during 1996 and is in
the process of developing plans to expand distribution of the Company's
existing dietary products and plans on launching several new products during
1996. The Company is also focusing on expanding its  microsphere and
laboratory services business and is pursuing a licensing agreement and
research grants on its contrast microspheres for human development.

     As of September 30, 1995, the Company's working capital position
decreased by $445,428 from a negative $1,380,337 at December 31, 1994 to a
negative $1,825,765, primarily as a result of increases in accrued
compensation and payroll taxes, professional services payable, royalties
payable, trade payables and other accrued expenses. At September 30, 1995,
the Company's cash position had increased to $389,486 from $25,215 on
December 31, 1994.  Cash was provided by issuance of notes of $75,000,
exercise of warrants of $54,511 and private placements of the Company's
common stock and convertible notes of $566,245, offset by payments on notes
payable of $185,021. Cash requirements to fund losses of $1,555,649 through
September 30, 1995 were reduced by significant non-cash charges for
depreciation and amortization of $930,741, contributed research and
development of $30,000 and $68,500 for warrants issued for financial advisory
and shareholders services.

     Negative cash flow from operations for the nine months ended September
30, 1995 of $1,555,649 was reduced by non-cash charges of $930,741 for
depreciation and amortization, $30,000 for research and development and
$68,500 for warrants issued for financial advisory and shareholder services.
Negative cash flow from operations for the nine months ended September 30,
1994 of $1,961,045 was reduced by non-cash charges of $532,865 for
depreciation and amortization, $150,000 for research and development and
$220,420 for stock and warrants issued for financial consulting and legal
services. Negative cash flow from operations after reduction for non-cash
charges was $526,408 and $1,057,760 for the nine months ended September 30,
1995 and 1994, respectively.

     At September 30, 1995, the Company had assets of $4,420,185 compared to
$4,006,321 on December 31, 1994.  In addition, the Company had a total
shareholders' equity of $601,598 on September 30, 1995 compared to $1,040,627
on December 31, 1994, a decrease of $439,029.  The decrease was the result of
a net loss from operations of $1,555,649 offset by a contribution


                                     -36-

<PAGE>

to capital of research and development expense of $30,000, payments from
FATCO contributed to capital of $121,947, amortization of prepaid consulting
and financing cost offset against equity of $250,418, conversion of debt to
equity of $25,000, issuance of warrants of $68,500 and proceeds from exercise
of warrants, issuance of convertible notes and sale of stock of $620,756.
Payments on a long term note with a balance of $1,345,232 (including interest
currently due of $57,251) as of September 30, 1995 of which $527,913 is due
within the next twelve months have been assumed by the Company as part of its
acquisition of VMI; and this note is secured by guaranteed lease payments of
an equivalent amount.

     One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") 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 first Unit to a third party finance company of $37,926
through September 1997, $18,580 from October 1997 through August 1999 and
$68,589 in September 1999. 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 first Unit.

     Tri-County was delinquent in making certain of its lease payments to VMI
under the terms of the lease agreement concerning the first 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 first Unit.  As a result, the third party
finance company commenced a lawsuit against MFA and the Company in which it
sought repayment in full of MFA's note to that company (the debt service on
which was to be serviced by VMI) and return of the first Unit to that
company. The finance company subsequently dismissed its lawsuit without
prejudice. Should Tri-County fail to make its future lease payments to VMI
and should VMI be unable to make its future required payments to the finance
company (i) VMI could lose ownership and possession of the first Unit and
(ii) the entire remaining balance of the MFA note would become immediately
payable, with VMI and the Company being liable, together with MFA, for any
deficiency in repayment of the note. The Company, VMI, MFA and Tri-County are
currently negotiating a rescheduled financing for this debt.

     The second of the two Units has not yet been placed in service. MFA has
leased the second Unit from VMI under a five-year lease. The payments under
this lease were to commence as of January 27, 1994 (the first twenty-one
payments which total approximately $630,630 being delinquent as of September
30, 1995). The lease provides for monthly payments of $30,030. Although VMI
has commenced litigation against  MFA for payment of delinquent lease
payments, there can be no assurance that MFA will be able to make any of
those required lease payments to VMI. Receivables of $270,270 related to a
portion of these lease payments were written off during 1994 (Note 4).
Depreciation on the second Unit commenced during the first quarter of 1994.
This


                                     -37-

<PAGE>

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 second Unit, but not to
exceed fifteen percent (15%) of the original capitalized cost ($1,350,000),
payable during the year following the expiration of the initial term of such
lease in twelve equal monthly payments.

     The MRI services business is highly regulated.  The ownership and
operation of outpatient diagnostic centers are subject to various federal and
state laws, regulations and approvals concerning such matters as physician
referrals, licensing of facilities and personnel and certificates of need.
Violations of these laws and regulations can result in, among other
penalties, the shut down of the facilities using the Company's MRI machines
and loss of Medicare and Medicaid reimbursement. MFA has entered into
agreements with VMI pursuant to which MFA is responsible for the management
of the business operations of the Units, and MFA, accordingly, is primarily
responsible for monitoring on behalf of VMI the operations of the Units by
the lessees of the Units.  Although the Company believes that it and its
lessees are in substantial compliance with all material applicable laws and
regulations, any future failure to comply therewith could have a materially
adverse effect on the Company's MRI services business.  The MRI services
business in general and that business in the New York metropolitan area
(where VMI's units are operating or will operate) in particular have been
marked recently by intense and increasing competition, with a relatively
large number of MRI units in operation at a time when managed health care
controls are tending to limit the utilization of, and prices charged for, MRI
testing in general.  Although VMI's MRI units are leased to third parties
under long-term leases at fixed rental rates, the foregoing factors could
adversely affect the ability of these lessees to make their lease payments to
VMI in the future, which could materially adversely affect the Company's
future operating results.

     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 of
the Company's shares, a total of approximately 2,506,982 shares of the
Company's Common Stock was issued to a small 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 resales 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
Holcomb.  Based solely on Mr. Holcomb's records (the accuracy of which cannot
be verified by the Company), the Company estimates that the investors
acquiring the shares in these resales paid a total consideration to Mr.
Holcomb or the other sellers of these shares of approximately $3,500,000 to
$4,000,000.


                                     -38-

<PAGE>

     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.  There can be no
assurance, however, that the Company would be successful in asserting any
claim for indemnification or contribution or that Mr. Holcomb or any other
party required to provide such indemnification or contribution would have
adequate financial resources to do so. Any attempt by the Company to obtain
indemnification or contribution from Mr. Holcomb could have a material
adverse effect upon the Company's relationship with KCD (which is an
affiliate of Mr. Holcomb) under its license agreement with KCD, which might
elect to terminate, or improperly withhold payments under, the license
agreement under these circumstances.

     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 Company is seeking to dissuade the SEC from taking formal action
against the Company but believes that it is likely that the SEC will seek
permanent injunctive relief. In that event the Company would attempt to enter
into a consent decree with the SEC in which 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 to offer rescission to the purchasers
of some or all of the shares involved in the unregistered transactions.
Although the Company believes 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 enjoining them from violating the federal securities
laws.


                                     -39-

<PAGE>

     In September 1993, Dr. Shell commenced an action against Dynamic
Products, Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25%
shareholder of FATCO in the Orange County Superior Court of the State of
California seeking damages from these parties for their alleged breach of
contract and misappropriation of certain trade secrets of FATCO and the
Company relating to the first generation fat sequestrant product. Dr. Shell
has asserted in this action that Dynamic has sold the first generation fat
sequestrant product to Herbalife for resale in the United States without the
required payment of royalties to FATCO (which is obligated to pay Dr. Shell
25% of its royalty income, which Dr. Shell then contributes to the Company)
based on those sales. Dr. Shell and the Company have agreed to share the
damages, if any, recovered by Dr. Shell in this lawsuit on a basis to be
negotiated by the Company and Dr. Shell. There can be no assurance that the
defendants in this litigation in response to Dr. Shell's action will not
commence litigation against the Company that will result in the Company
incurring legal fees to defend such litigation. In October 1994, Dr. Shell
filed a related lawsuit against FATCO in the same court seeking the
termination of a 1987 agreement between FATCO and Shell licensing certain fat
sequestrant technology of Dr. Shell to FATCO based upon failure of FATCO to
fully exploit the transferred technology for the benefit of Shell, failure to
fully exploit the products, knowingly permitting sales of products made
utilizing the technology transferred to continue even though no royalties
were being paid on those sales, refusing to pursue legal action to collect
the unpaid royalties and stopping the unauthorized sales, and by entering
into a renewal of an agreement with a distributor on the same unfavorable
terms which previously existed and which diverted monies which should have
been paid to FATCO to other entities owned and controlled by some of the
shareholders and members of the Board of Directors of FATCO. FATCO has filed
a cross-complaint in this action against Shell alleging breach of the
licensing agreement between Shell and FATCO. The basis of this cross
complaint appears to pertain to the license agreement between EHI and KCD,
Inc.

     In January 1995, Dr. Shell, on behalf of FATCO, filed another action in
the Orange County Superior Court of the State of California substantially
similar to the action filed by Dr. Shell in 1993 against Dynamic Products,
Inc. This newly filed action names certain individual shareholders and
directors of FATCO, Dynamic and D&F Industries as well as Herbalife
International Inc. ("Herbalife"). In March 1995, this action and the lawsuit
against Herbalife described below were settled with respect to Herbalife and
its directors, with neither party making any payments to the other in
connection with this settlement.

     In March 1994, the Company and S/S sued Herbalife (settled with respect
to Herbalife) and D&F in Superior Court for the County of Orange, California
for fraud, breach of contract and conspiracy to misappropriate trade secrets.
The Company alleges in this lawsuit that S/S provided certain confidential
information and trade secrets to D&F, which misappropriated this information
to manufacture an advanced fat sequestrant product. The Company is seeking in
this lawsuit injunctive relief and damages in an unspecified amount from
defendants. This matter has been consolidated for trial with the action
against Dynamic Products, Inc. and the action against the officers and
Directors of Dynamic Products, Inc. and D&F Industries, Inc.


                                     -40-

<PAGE>

     In April 1994, Rod Sherman and Computer Buddy sued Clark Holcomb and the
Company in Superior Court for the County of Los Angeles for breach of an
alleged oral contract pursuant to which Holcomb and the Company were to pay
Sherman a finder's fee for all shares of the Company's stock sold to third
parties introduced by Sherman to Holcomb or the Company of which Sherman
alleges that $58,000 remains owing to him. Sherman is seeking this amount in
his lawsuit although the Company believes that it has no obligation or
liability to Sherman in connection with this matter. A trial date has
currently been scheduled for March 1996.

     In August 1994, VMI sued MFA in Supreme Court for the County of New
York, New York, for breach of contract and accounts due. VMI alleges in this
lawsuit that MFA breached an equipment lease agreement for VMI's second MRI
unit, the Resonex Machine, by failure to make lease payments due January 27,
1994, and thereafter in the sum of $210,210 as well as interest thereon. VMI
is seeking in this lawsuit a judgement against MFA in the sum of $210,210
plus interest thereon with costs, attorney's fees and disbursements and other
relief. VMI will also seek a judgement for all unpaid lease payments
subsequent to August 1994 which total an additional $420,420 through
September 30, 1995.

     In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc. in
Santa Monica, California. As part of the proposed settlement agreements the
Company agreed: 1) to pay Dr. See and Mr. Pizzulli starting in July, 1995 a
total of 3% of the Company's net sales of products, and 30% of the Company's
receipt of royalties from the Company's licensees under certain patents owned
by the Company covering colored microspheres, contrast microspheres and fat
sequestrant product; 2) to pay to Dr. See and Mr. Pizzulli on a monthly basis
over time, a total of 3% of the Company's net sales of products, and 3% of
the Company's receipt of royalties from the Company's licensees under certain
patents owned by the Company covering colored microspheres, contrast
microspheres and fat sequestrant product of $46,789 through June 30, 1995,
attorney fees of $126,604 incurred incident to the arbitration, and $124,431
in settlement of certain contingent liability issues raised in the
arbitration proceedings; and 3) to transfer to Dr. See and Mr. Pizzulli
25,000 restricted shares of KCD Incorporated common stock. Dr. See executed a
formal agreement during September 1995.

     In addition, the Company has proposed a settlement of Mr. Pizzulli's
claim for damages he alleged he suffered as the result of the Company's
timing  to permit him to publicly resell up to 283,000 shares of the
Company's common stock under Rule 144, by the Company issuing Mr. Pizzulli
183,000 shares of the Company's common stock under Rule 144 with an agreement
to issue Mr. Pizzulli an additional 75,000 shares of the Company's common
stock issued under Rule 144 in the event that the price per share of the
Company's common stock does not reach an agreed level by March 31, 1996, and
an officer of the Company transferring to Mr. Pizzulli 117,000 free trading
shares of the Company's common stock. Mr. Pizzulli has declined the Company's
offer and negotiations are continuing.


                                     -41-

<PAGE>

     In January 1995, Roger Donenfeld sued Clark Holcomb, William Pelzer, Jr.
and the Company in Superior Court for the County of Los Angeles for
rescission and restitution, fraudulent misrepresentation, fraud based upon
active concealment and suppression of information, fraud based on negligent
misrepresentation of fact, conspiracy to defraud and action on a promissory
note, all regarding the sale in 1994 by Holcomb to Donenfeld of Company
stock. Donenfeld alleges general damages exceeding $100,000 plus punitive
damages of $1,000,000. This matter was settled in September 1995 at no cost
to the Company.

     In April 1995, Richard Willmon and Nancy Holling sued Clark Holcomb, KCD
Incorporated, Dr. Shell and the Company in Superior Court for the County of
Ventura for rescission, breach of contract, breach of fiduciary duty, fraud,
negligent misrepresentation, constructive trust and negligence all regarding
the sales in July 1993 and September 1993 by Holcomb to Holling and Willmon
of Company stock. Willmon and Holling allege general damages of $107,250 and
$4,275 respectively plus interest, as well as punitive damages in an amount
to be proven at time of trial. In July 1995, the Company executed a
Settlement Agreement with Nancy Holling. There was no money demanded and none
paid in connection with this settlement. The Company believes it has no
obligation to Willmon or Holling in connection with this matter.

     In April 1995, David Eastman filed a complaint in the Superior Court of
the County of Orange, California against Clark Holcomb, Anita Kavanagh, Dr.
Shell and the Company. This action alleges fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud. This action was served on Dr. Shell and the Company in
July 1995. The only allegations of wrong doing are directed at Holcomb and
Holcomb is alleged to have been acting as an agent of the other defendants.
It is alleged that Holcomb represented that although the shares purchased by
the plaintiff contained a legend, they would be free trading in sixty to
ninety days. It is also alleged that Holcomb misrepresented the financial
condition of the Company.  The complaint seeks damages in the amount of
$200,000 as well as unspecified punitive damages.  The Company and Dr. Shell
deny that Holcomb was their agent.

     In March 1995, Donald Seidel sued Clark Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not
less than $170,000  together with exemplary and punitive damages.  It is
alleged that the Company conspired to defraud plaintiff of his shares of
Company stock and deprive him of payment for services. The Company has denied
these allegations.

     In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought
an action against MFA and VMI in connection with a loan made by J&J Finance
to MFA that was secured by a lien granted by MFA on the Resonex MRI unit
owned by VMI. After MFA defaulted on the foregoing loan, J&J Finance, in June
1995, obtained a writ of attachment on the Resonex MRI unit and has taken
physical possession of that unit.


                                     -42-

<PAGE>

     It is the Company's position that MFA had no authority to secure the
foregoing loan with VMI's MRI unit (which was carried on the Company's
September 30, 1995 balance sheet at $1,012,500 after accumulated
depreciation), since the loan was made solely for the benefit of MFA, the
lien was placed on the MRI unit without VMI's knowledge or consent, and none
of the loan proceeds were received by VMI or the Company. VMI intends to
vigorously assert its right to recover from J&J Finance the MRI unit or any
proceeds received by J&J Finance from the sale of the unit. In the event J&J
Finance prevails in its assertion that it was entitled to foreclose upon and
retain the MRI unit and any proceeds from the sale of that unit, VMI and the
Company intend to assert their rights against MFA for fraudulently pledging
the MRI unit to J&J Finance. Although the Company believes VMI is entitled to
recover the MRI unit from J&J Finance and that VMI should prevail in its
claims against MFA should J&J Finance be permitted to retain the MRI unit,
there can be no assurance that VMI will prevail against either party or that
VMI will be able to collect any judgement that it may obtain against MFA.

     In October 1995, the Seattle Regional Office of the Federal Trade
Commission advised the Company that the staff believes that the Company's fat
sequestrant product, which currently is marketed by a licensee under the name
"SeQuester," has been improperly represented in advertising claims, and that
the sequestrant 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 sequestrant product and is likely
to involve the payment of a fine or other financial penalty by the Company
(the amount of which currently is unknown).

     There can be no assurance that the Company will prevail in any of the
foregoing lawsuits. The Company may incur substantial expense in connection
with this litigation and any unfavorable settlement or judgement against the
Company in which the Company is a defendant could have a material adverse
effect upon the Company.

     In August 1992, the Company initiated a construction program, which was
completed during 1993, for its laboratory and office facility to augment and
improve product development and production capability.  In December 1992, the
Company issued 500,000 restricted shares of the Company's Common Stock to
Clark Holcomb in exchange for his offer to fund $350,000 of the construction
costs. Costs of approximately $431,000 were expended by the Company, of which
Mr. Holcomb has reimbursed $225,000.  As of September 30, 1995, the unpaid
portion of $125,000 is shown as a note receivable, as an offset to the equity
section of the Company's balance sheet. This obligation was payable in
monthly installments of not less than $10,000 plus accumulated interest
through May 1, 1994,  with the remaining principal balance plus interest
originally due on June 1, 1994, and interest accrued at 1% per month on the
unpaid balance.  This note was subsequently extended to November 1, 1994
under the existing terms and conditions with


                                     -43-

<PAGE>

the exception that the Company has the right to call the note on 30 days
notice. As of September 30, 1995, this note plus accrued interest was
delinquent in the approximate amount of $173,000 and the Company recorded a
provision for possible uncollectible accounts for that amount. The Company is
currently negotiating a settlement of the outstanding balance.

     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.


                                     -44-

<PAGE>

                         PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

     In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc. in
Santa Monica, California. As part of the proposed settlement agreements the
Company agreed: 1) to pay Dr. See and Mr. Pizzulli starting in July, 1995 a
total of 3% of the Company's net sales of products, and 30% of the Company's
receipt of royalties from the Company's licensees under certain patents owned
by the Company covering colored microspheres, contrast microspheres and fat
sequestrant product; 2) to pay to Dr. See and Mr. Pizzulli on a monthly basis
over time, a total of 3% of the Company's net sales of products, and 3% of
the Company's receipt of royalties from the Company's licensees under certain
patents owned by the Company covering colored microspheres, contrast
microspheres and fat sequestrant product of $46,789 through June 30, 1995,
attorney fees of $126,604 incurred incident to the arbitration, and $124,431
in settlement of certain contingent liability issues raised in the
arbitration proceedings; and 3) to transfer to Dr. See and Mr. Pizzulli
25,000 restricted shares of KCD Incorporated common stock. Dr. See executed a
formal agreement during September 1995.

     In addition, the Company has proposed a settlement of Mr. Pizzulli's
claim for damages he alleged he suffered as the result of the Company's
timing to permit him to publicly resell up to 283,000 shares of the Company's
common stock under Rule 144, by the Company issuing Mr. Pizzulli 183,000
shares of the Company's common stock under Rule 144 with an agreement to
issue Mr. Pizzulli an additional 75,000 shares of the Company's common stock
issued under Rule 144 in the event that the price per share of the Company's
common stock does not reach an agreed level by March 31, 1996, and an officer
of the Company transferring to Mr. Pizzulli 117,000 free trading shares of
the Company's common stock. Mr. Pizzulli has declined the Company's offer and
negotiations are continuing.

     The Seattle Regional Office of the Federal Trade Commission has advised
the Company that the staff believes that the Company's fat sequestrant
product, which currently is marketed by a licensee under the name
"SeQuester," has been improperly represented in advertising claims, and that
the sequestrant 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 sequestrant product and is likely
to involve the payment of a fine or other financial penalty by the Company
(the amount of which currently is unknown but could be substantial).

                                     -45-

<PAGE>

          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 Company is seeking to dissuade the SEC from taking formal
action against the Company but believes that it is likely that the SEC will
seek permanent injunctive relief. In that event the Company would attempt to
enter into a consent decree with the SEC in which 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 to offer
rescission to the purchasers of some or all of the shares involved in the
unregistered transactions. Although the Company believes 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 enjoining them from
violating the federal securities laws.

     There can be no assurance that the Company will prevail in any of the
foregoing legal proceedings. The Company may incur substantial expense in
connection with this litigation and any unfavorable settlement or judgement
against the Company in which the Company is a defendant could have a material
adverse effect upon the Company. For a description of certain other
litigation involving this Company see the Company's Form 10-QSB-Part I for
the nine months ended September 30, 1995.

Item 4.  Submission of Matters of a Vote to Security Holders

     On September 17, 1995, the Company submitted a notice of annual meeting
of shareholders to be held on October 26, 1995 and a proxy statement to all
holders of record of Company's common stock as of August 28, 1995 which is
incorporated herein by reference.

     On October 26, 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.


                                     -46-

<PAGE>

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)  Notice of Annual Meeting of Shareholders October 26, 1995 and Proxy
          Statement dated September 17, 1995.

     (b)  On July 5, 1995, the Company filed a report on Form 8-K which
          reported under Items 5 and 7 of  such form.

          On August 4, 1995, the Company filed a report on Form 8-K which
          reported under Item 5 of such form.

          On August 21, 1995 the Company filed a report on Form 8-K which
          reported under Item 5 of such form.

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



                                     -47-


<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:     11-13-95       By:  /s/ WILLIAM E. SHELL
      ------------           ----------------------------------------
                              Dr. William E. Shell
                             (Chief Scientific Officer and Director)


Date:     11-13-95       By:  /s/ STEVEN R. WESTLUND
      ------------           ----------------------------------------
                              Steven R. Westlund
                             (President, Chief Executive Officer and Director)


Date:     11-13-95       By:  /s/ PETER T. BENZ
      ------------           -----------------------------------------
                              Peter T. Benz
                             (Chief Financial Officer and Director)


Date:     11-13-95       By:  /s/ RICHARD N. SHELL
      ------------           ------------------------------------------
                              Richard N. Shell.
                             (Vice President, General Counsel and Director)


Date:     11-13-95       By:  /s/ MICHAEL GRECHKO
      ------------           -----------------------------------------
                              Michael Grechko
                             (Chief Accounting Officer and Secretary)


Date:     11-13-95       By:  /s/ JOHN C. OSBORNE
      ------------           -----------------------------------------
                              John C. Osborne
                             (Director)


                                     -48-