INTERACT MEDICAL TECHNOLOGIES CORP, S-1/A, 1996-11-22

INTERACT MEDICAL TECHNOLOGIES CORP
S-1/A, 1996-11-22
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996

REGISTRATION NO. 333-7181

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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------

Amendment No. 1

Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------------------

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7373 13-3894450
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>

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1335 N. NORTHLAKE WAY, SUITE 102, SEATTLE, WASHINGTON 98103 (206) 547-8801

(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

DONALD L. JOHANSON

PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERACT MEDICAL TECHNOLOGIES CORPORATION

1335 N. NORTHLAKE WAY, SUITE 102

SEATTLE, WASHINGTON 98103

(206) 547-8801

(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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

WITH COPIES TO:

<TABLE>
<S> <C>
CRAIG S. ANDREWS, ESQ. ALAN I. ANNEX, ESQ.
MICHAEL S. KAGNOFF, ESQ. CAMHY KARLINSKY &
BROBECK, PHLEGER & HARRISON LLP STEIN LLP
550 WEST "C" STREET, SUITE 1300 1740 BROADWAY, 16TH FLOOR
SAN DIEGO, CALIFORNIA 92101 NEW YORK, NY 10019
</TABLE>

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

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

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

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 464(b) under the Securities Act of 1933, please check the
following box and list the Securities registration statement number of the
earlier effective registration statement for the same offering: [ ] _________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [X]

<PAGE> 2

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Units consisting of one share of
Common Stock $0.01 par value and one
Redeemable Common Stock Purchase
Warrant, each exercisable for one
share of Common Stock................. 2,300,000 shares(3) $9.10 $20,930,000 $6,343
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
the Warrants.......................... 2,300,000 shares $14.40 $33,120,000 $10,037
- ----------------------------------------------------------------------------------------------------------------------
Representative's Warrants, each
exercisable for one share of Common
Stock and/or one Warrant.............. 200,000 $0.001 $20 --(4)
- ----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Representative's Warrants............. 200,000 shares $12.60 $2,520,000 $764
- ----------------------------------------------------------------------------------------------------------------------
Warrants issuable upon exercise of
Representative's Warrants............. 200,000 $0.14 $28,000 $9
- ----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Warrants issuable upon exercise of
Representative's Warrants............. 200,000 shares $14.40 $2,880,000 $873
- ----------------------------------------------------------------------------------------------------------------------
Total................................. $18,026(5)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, (the
"Securities Act") there are also being registered such additional securities
as may become issuable pursuant to the antidilution provision of the
Warrants.

(2) Estimated solely for the purpose of computing the amount of the registration
fee.

(3) Includes 300,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.

(4) No fee required pursuant to Rule 457(g) of the Securities Act.

(5) Of this amount, $7,932 was previously paid.

THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.

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- --------------------------------------------------------------------------------
<PAGE> 3

SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1996

PROSPECTUS

2,000,000 SHARES OF COMMON STOCK AND

2,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

(AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE
WARRANT)

LOGO

This Prospectus relates to the offering (this "Offering") of 2,000,000
shares (the "Shares") of common stock (the "Common Stock") and 2,000,000
Redeemable Common Stock Purchase Warrants (the "Warrants") of Interact Medical
Technologies Corporation, a Delaware corporation (the "Company" or "Interact").
The Shares and the Warrants are sometimes hereinafter collectively referred to
as the "Securities." Until the completion of this Offering, the Shares and the
Warrants may only be purchased together as a unit on the basis of one share of
Common Stock and one Warrant. Each Warrant entitles the registered holder
thereof to purchase one share of Common Stock at an initial exercise price per
share equal to 160% of the initial public offering price per share of the Shares
sold in this Offering at any time over a four-year period commencing one year
from the date of this Prospectus. The Warrant exercise price is subject to
adjustment under certain circumstances. Commencing one year from the date of
this Prospectus, the Warrants are subject to redemption by the Company at $0.05
per Warrant on 30 days' prior written notice to the warrantholders if the
closing bid price of the Common Stock as reported on the Nasdaq National Market
("Nasdaq") averages an amount equal to or in excess of 300% of the initial
public offering price per share of Common Stock sold in this Offering for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the notice of redemption.

Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. It is currently estimated that the initial public
offering price per share of Common Stock will be between $7.00 and $9.00 per
share and the initial public offering price per Warrant will be $0.10. After
this Offering there will be no public market for the Securities as units. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application has been made to have the Common
Stock and the Warrants approved for quotation on the Nasdaq National Market
under the symbols "IACT" and "IACTW", respectively. The Common Stock and the
Warrants will trade separately immediately after this Offering.

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

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 11.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit................................. $ $ $
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Per Share................................ $ $ $
- -----------------------------------------------------------------------------------------------------------
Per Warrant.............................. $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $
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</TABLE>

(1) Excludes the value of warrants to be issued to the representative (the
"Representative") of the underwriters (the "Underwriters"). Does not include
a 2% non-accountable expense allowance payable to the Representative of
which $25,000 has been paid to date. See "Underwriting" for indemnification
arrangements with the several Underwriters.

(2) Before deducting expenses payable by the Company estimated at $675,000.

(3) The Company has granted to the Underwriters a 45-day option to purchase
300,000 Shares and Warrants as units or in any combination thereof on the
same terms and conditions set forth above, solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."

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

The Securities are offered by the several Underwriters subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of the Securities offered hereby will
be on or about , 1996 at the office of National Securities
Corporation in Seattle, Washington.

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

NATIONAL SECURITIES CORPORATION

, 1996

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 4

[INSIDE FRONT COVER]

The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent certified public
accountants and will make available copies of quarterly financial reports for
the first three quarters of each fiscal year containing unaudited financial
information.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The Company was formed in April 1996, and in May 1996, it
acquired its assets and technologies in connection with a business combination.
All references herein to Interact Medical Technologies Corporation ("Interact"
or the "Company") also shall be deemed to be references to the Company and its
predecessors, Ixion, Inc. ("Ixion") and Medical Media Systems ("MMS"). See "The
Company."

THE COMPANY

The Company is also currently field testing a pre-production prototype of
GastroSim(TM), an interactive virtual reality ("IVR") simulator for teaching and
training clinicians. GastroSim is designed to figuratively place the clinician
inside the upper and lower gastrointestinal tracts of a "virtual" patient and
allow the clinician to perform a number of simulated MIS procedures using
realistic medical instruments and devices.

The Company has a multi-faceted business relationship with Baxter
Healthcare Corporation ("Baxter"). A wholly-owned subsidiary of Baxter is a
principal stockholder of the Company and previously invested approximately $7.1
million in the development of the visualization technology upon which Preview is
based. In May 1996, the Company entered into a distribution agreement with
Baxter pursuant to which Baxter obtained an exclusive right to sell Preview for
use in connection with treating aortic and iliac aneurysms (except with regard
to sales to parties developing or manufacturing devices specifically designed
for endovascular treatment of aortic aneurysms for which Baxter's rights are
co-exclusive with the Company), including abdominal aortic aneurysms ("AAA").
Baxter has loans outstanding to the Company in the principal amount of $2.55
million of which $2.0 million together with certain accrued interest will be
converted into Common Stock upon the closing of this Offering (assuming such
closing takes place on or before February 28, 1997), and the remaining $550,000
together with certain accrued interest will be repaid in cash. After this
Offering, Baxter, together with a wholly-owned subsidiary will own approximately
22.8% of the outstanding Common Stock of the Company. See "Use of Proceeds" and
"Certain Transactions."

MIS procedures have revolutionized some areas of surgery, and the
advantages of MIS approaches over open surgical techniques (including reduced
trauma, complications, pain and suffering, convalescence time, procedure time
and ultimately lower overall medical costs), suggest that MIS procedures could
eventually be adopted in place of numerous other open surgical procedures. The
Company believes the growth in MIS procedures is being accelerated by today's
healthcare environment, in which more cost effective means for clinicians to
deliver services are aggressively being sought. Despite the benefits of
minimally invasive surgery, only select MIS procedures have attained widespread
adoption. In 1995, MIS procedures accounted for approximately 15% of the
surgical procedures performed in the United States. The Company believes that
its products will help address two of the major impediments to the widespread
adoption and performance of many additional MIS procedures. First, in performing
MIS procedures, parts of the physical anatomy that can be visualized and
manipulated during traditional surgeries are hidden from the eye and must be
handled remotely. Second, MIS procedures require proficiency in novel surgical
techniques potentially involving specialized MIS instruments and devices.

3
<PAGE> 6

Preview allows the clinician to visualize and plan surgical procedures by
using a three-dimensional model of the patient-specific anatomy. Although
Preview has been tested clinically to model most parts of the human anatomy,
initial marketing efforts have focused on the application of Preview to planning
surgical procedures to treat AAA. AAAs are lifethreatening aneurysms which form
in the abdominal aorta. The National Center for Health Care Statistics estimates
that approximately 1.5 million people in the United States have AAA, with
approximately 190,000 new patients diagnosed with AAA each year. The Company
believes that due to the drawbacks of open surgery, the recommended course of
treatment for AAA will ultimately be a MIS procedure. The Company believes that
Preview's ability to generate three-dimensional representations and present
thousands more pre-operative images than traditional imaging methods provides
clinicians with a valuable perspective for use in planning MIS procedures.

As an outgrowth of Preview, the Company is also developing DataFusion(TM),
a product designed to aid the clinician with visualization and navigation during
the performance of actual MIS procedures. DataFusion will use proprietary
software to track surgical instruments and overlay live images of a patient's
anatomy on the same three-dimensional model used in Preview. By helping the
clinician to compensate for the inability to directly visualize and manipulate
the operative area, the Company believes that Preview, (and DataFusion once
developed), will improve the results of MIS procedures and enable the
application of MIS technology to additional surgical procedures.

GastroSim is designed to create realistic clinical experiences for training
clinicians to conduct diagnostic tests and therapy on ulcers, polyps, cancers,
bile stone removals, bronchoscopies, endotracheal tube placements and ultrasound
echocardial procedures and in using sophisticated MIS instruments and devices.
Although the Company's initial market focus for its IVR simulator technology
will be on procedures typically performed in the areas of gastroenterology and
family practice medicine, the Company plans to apply its core IVR technology to
develop simulators designed to replicate MIS procedures utilized by clinicians
in a number of clinical specialties, including cardiology, cardiac surgery,
interventional radiology, urology, obstetrics/gynecology, neurosurgery and
various micro minimally invasive procedures such as functional endoscopic sinus
surgery. By allowing the clinician to replicate a multitude of complex surgical,
diagnostic and therapeutic procedures without the need for live patients,
cadavers or animals, the IVR simulators the Company intends to develop can be
anticipated to increase the number of physicians capable of performing advanced
MIS procedures, improve the general level of competency of clinicians performing
MIS procedures and help safely and expeditiously make MIS procedures more widely
available.

The Company has received 510(k) clearance from the United States Food and
Drug Administration ("FDA") for the use of Preview. This FDA clearance allows
the Company to use Preview to model many anatomical regions. The Company does
not believe that its GastroSim product will require FDA approval.

The Company's objective is to capitalize on advances in software and
medical imaging to become a leading provider of interactive products to promote
the effective use of MIS procedures. The Company's strategy is comprised of the
following key elements: (i) gain acceptance for use of Preview in planning AAA
procedures; (ii) bring GastroSim to production and establish it and other IVR
simulators as a standard for use in teaching, training and credentialing
clinicians to perform a variety of MIS procedures and other diagnostic and
therapeutic techniques; (iii) develop new products and new applications for
Preview and the Company's IVR simulator technology; and (iv) minimize upfront
investment costs to customers.

4
<PAGE> 7

THE OFFERING

Securities Offered............... 2,000,000 Shares of Common Stock and
2,000,000 Warrants initially as units, each
consisting of one share of Common Stock and
one Warrant. The Shares and the Warrants
will be separately transferable immediately
following the completion of this Offering.

Exercise Price of Warrants....... Each Warrant entitles the registered holder
thereof to purchase, at any time over a
four year period commencing one year after
the date of this Prospectus, one share of
Common Stock at a price equal to 160% of
the price per share of the Shares sold in
this Offering. The Warrant exercise price
is subject to adjustment under certain
circumstances. See "Description of Capital
Stock."

Redemption of Warrants........... Commencing one year after the date of this
Prospectus, the Warrants are subject to
redemption by the Company at $0.05 per
Warrant on 30 days' prior written notice to
the warrantholders if the average closing
bid price of the Common Stock equals or
exceeds 300% of the initial public offering
price per Share of Common Stock for any 20
trading days within a period of 30
consecutive trading days ending on the
fifth trading day prior to the date of the
notice of redemption. See "Description of
Capital Stock."

Common Stock to be outstanding
after this
Offering(1)(2)(3)(4)(5)(6)....... 5,755,287 shares

Use of proceeds.................. For commercialization of products, research
and development, clinical testing,
repayment of approximately $3.3 million of
indebtedness and other obligations, capital
expenditures, working capital and general
corporate purposes. See "Use of Proceeds."

Proposed Nasdaq National Market
symbols:

Common Stock................... IACT

Warrants....................... IACTW

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(1) Does not include (i) 1,000,000 shares of Common Stock reserved for issuance
pursuant to the Company's 1996 Stock Option/Stock Issuance Plan (of which
384,692 shares were subject to options outstanding at November 20, 1996),
(ii) 200,000 shares reserved for issuance under the Company's 1996 Employee
Stock Purchase Plan, (iii) 19,510 shares of Common Stock reserved for
issuance upon exercise of outstanding non-qualified stock options, and (iv)
73,162 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants. See "Capitalization," "Management--Benefit Plans,"
"Certain Transactions," "Description of Capital Stock--Warrants" and
"Shares Eligible for Future Sale."

(2) Includes approximately 275,000 shares of Common Stock to be issued
immediately following the closing of this Offering to investors in Ixion's
1995 Bridge Financing (the "Bridge Financing"). Such number of shares is
calculated by dividing the approximately $2,200,000 of Common Stock the
investors in the Bridge Financing are entitled to receive immediately
following the closing of this Offering pursuant to the terms of certain
agreements between the Company and such investors (the "Letter
Agreements"), by the initial public offering price for the sale of shares
of Common Stock offered hereby (assuming an initial public offering price
of $8.00 per Share (the midpoint of the range set forth on the cover page
of this Prospectus)).

5
<PAGE> 8

(3) Includes approximately 43,750 shares of Common Stock to be issued to Baxter
immediately following the closing of this Offering. Such number of shares
is calculated by dividing the $350,000 of Common Stock Baxter is entitled
to receive immediately following the closing of this Offering pursuant to
the terms of a certain agreement between the Company and Baxter (the
"Baxter Letter"), by the initial public offering price of the shares of
Common Stock offered hereby (assuming an initial public offering price of
$8.00 per Share (the midpoint of the range set forth on the cover page of
this Prospectus)).

(4) Includes approximately 265,516 shares of Common Stock to be issued
immediately following the closing of this Offering to Baxter in the event
that such closing occurs on or before February 28, 1997. Such number of
shares is calculated by dividing the $2,000,000 principal amount of a
promissory note issued by the Company to Baxter on May 24, 1996 (the
"$2,000,000 Note"), plus accrued interest calculated at a rate of 200 basis
points above the prime rate (assuming that the closing of this Offering
occurs on or before December 31, 1996), by the initial public offering
price (assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus)).

(5) Includes approximately 43,313 shares of Common Stock to be issued
immediately following the closing of this Offering to Larry J. Wells in
connection with a consulting agreement entered into between Mr. Wells and
the Company (the "Wells Consulting Agreement"). Such number of shares is
calculated by dividing the $346,500 of Common Stock Mr. Wells is entitled
to receive immediately following the closing of this Offering pursuant to
the terms of such consulting agreement, by the initial public offering
price per share of Common Stock offered hereby (assuming an initial public
offering price of $8.00 per Share (the midpoint of the range set forth on
the cover page of this Prospectus)).

(6) Does not include (i) 2,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in this Offering, (ii) 200,000 shares issuable upon
exercise of warrants to be issued to the Representative in connection with
this Offering (the "Representative's Warrants") and (iii) 200,000 shares
issuable upon exercise of the Warrants issuable upon exercise of the
Representative's Warrants.

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

Unless otherwise indicated, all information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) the issuance of
275,000 shares of Common Stock pursuant to the Letter Agreements, (iii) the
issuance of 43,750 shares of Common Stock pursuant to the Baxter Letter, (iv)
the issuance of 43,313 shares of Common Stock pursuant to the Wells Consulting
Agreement and (v) the conversion of the $2,000,000 Note into 265,516 shares of
Common Stock.

6
<PAGE> 9

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following should be read in conjunction with the Financial Statements,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Pro Forma Financial Information presented elsewhere in this
Prospectus.

Interact was formed in April 1996, and in May 1996, it acquired its assets
and technologies in connection with a business combination involving Ixion and
MMS. Inasmuch as former Ixion stockholders own the majority of Interact capital
stock after the business combination, Ixion is considered to be the acquiring
corporation for purposes of purchase accounting and the predecessor entity to
Interact for purposes of financial reporting. The Interact financial statements
for periods prior to the business combination are those of what was formerly
Ixion.

INTERACT MEDICAL TECHNOLOGIES CORPORATION

As more fully described in the Pro Forma Condensed Financial Information
appearing elsewhere in this Prospectus, the Company's unaudited Pro Forma
Statements of Operations Data for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 include the results of operations of Ixion
and MMS for the respective periods presented and give effect to pro forma
adjustments as if the contribution of MMS partnership interests to Interact and
merger of Ixion with and into Interact and receipt of $2.0 million cash pursuant
to a convertible note payable to Baxter had occurred at the beginning of the
respective periods. These Pro Forma Condensed Financial Statements are not
necessarily indicative of future financial positions or results of operations of
the Company.

PRO FORMA STATEMENTS OF OPERATIONS DATA

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Revenues................................................. $ 266 $ 59
------- -------
Expenses:
Research and development............................... 3,548 2,033
Selling, general and administrative.................... 1,518 1,871
------- -------
5,066 3,904
------- -------
Loss before interest..................................... (4,800) (3,845)
Interest expense......................................... 324 1,035
------- -------
Net loss(1).............................................. $(5,124) $ (4,880)
======= =======
Pro forma net loss per share............................. $ (1.82) $ (1.62)
======= =======
</TABLE>

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

(1) In accordance with guidelines established by the Securities and Exchange
Commission (the "SEC"), pro forma net loss does not include approximately
$2.2 million of expense recorded immediately subsequent to recording the
business combination relating to the estimated fair value of intangible
assets acquired associated with products in development which have not been
determined to have yet attained technological feasibility.

7
<PAGE> 10

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1993 1994 1995 1995 1996
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................ $1,359 $1,237 $ 266 $ 266 $ 59
------ ------ ------- ------- --------
Expenses:
Research and development.............. 951 1,189 1,332 1,044 1,501
Selling, general and administrative... 416 588 1,124 942 1,758
Write off of certain intangibles(1)... -- -- -- -- 2,251
------ ------ ------- ------- --------
1,367 1,777 2,456 1,986 5,510
------ ------ ------- ------- --------
Loss from operations.................... (8) (540) (2,190) (1,720) (5,451)
Interest expense........................ -- 9 132 73 1,017
------ ------ ------- ------- --------
Net loss................................ $ (8) $ (549) $(2,322) $(1,793) $ (6,468)
====== ====== ======= ======= ========
Net loss per share...................... $(0.01) $(0.45) $ (1.67) $ (1.32) $ (2.81)
====== ====== ======= ======= ========
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ------- -------------
<S> <C> <C> <C> <C>
Total assets....................................... $635 $489 $ 238 $ 6,979
Notes payable and accrued interest................. -- 192 1,014 4,757
Accumulated deficit................................ (61) (610) (2,932) (9,400)
Total stockholders' equity (deficit)............... 558 36 (1,762) 715
</TABLE>

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

(1) Represents the write off of intangible assets acquired relating to the
estimated fair value of MMS products in development which were capitalized
in purchase accounting, and which have not been determined to have yet
attained technological feasibility.

MEDICAL MEDIA SYSTEMS
(a development stage company)

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
THREE FIVE
MONTHS MONTHS
ENDED ENDED CUMULATIVE
MARCH MAY AMOUNTS FROM
YEARS ENDED DECEMBER 31, 31, 24, DATE OF
------------------------------- ----- ----- INCEPTION TO
1993 1994 1995 1995 1996 MAY 24, 1996
------- ------- ------- ----- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ----- ----- --------------
Expenses:
Research and
development........... 2,346 1,693 1,540 360 434 6,354
General and
administrative........ 170 168 394 56 113 850
------- ------- ------- ----- ----- --------------
2,516 1,861 1,934 416 547 7,204
------- ------- ------- ----- ----- --------------
Loss from operations....... (2,516) (1,861) (1,934) (416) (547) (7,204)
Interest income............ 13 11 13 4 13 51
------- ------- ------- ----- ----- --------------
Net loss................... $(2,503) $(1,850) $(1,921) $(412) $(534) $ (7,153)
======= ======= ======= ===== ===== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MAY 24,
1993 1994 1995 1996
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Total assets........................................ $1,507 $1,569 $1,059 $ 683
Note payable........................................ -- -- 400 550
Partners' equity(1)................................. 1,340 1,440 429 (105)
</TABLE>

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

(1) Partners' equity includes accumulated deficit of approximately $2.8 million,
$4.7 million, $6.6 million and $7.2 million at December 31, 1993, 1994 and
1995 and May 24, 1996, respectively.

8
<PAGE> 11

THE COMPANY

COMPANY BACKGROUND

Interact develops, markets and manufactures products designed to facilitate
the effective use of MIS procedures and enhance clinical performance. The
Company's initial product, Preview, was launched in June 1996. Preview provides
the clinician with a detailed three-dimensional model of the patient-specific
anatomy manufactured by processing CT or MR images on the Company's proprietary
software platform at its production facility. The Company delivers its Preview
models to the clinician embodied in user-friendly proprietary viewing software
that can be run on either a Windows-based or Macintosh personal computer. The
model and the viewing software augment traditional two-dimensional medical
imaging tools and allow the clinician, without significant computer expertise,
to manipulate information, perform measurements and conduct presurgical planning
for use primarily in MIS procedures.

The Company is also currently field testing a pre-production prototype of
GastroSim, an IVR simulator for teaching and training clinicians. GastroSim is
designed to figuratively place the clinician inside the upper and lower
gastrointestinal tracts of a "virtual" patient and allow the clinician to
perform a number of simulated MIS procedures using realistic medical instruments
and devices.

The Company was incorporated in April 1996. The Company's principal
executive offices are located at 1335 N. Northlake Way, Suite 102, Seattle,
Washington 98103, and its telephone number is (206) 547-8801.

COMPANY HISTORY

Medical Media Systems

MMS, a New Hampshire general partnership, was founded to incorporate
advances in scientific visualization and computer software into products that
would help improve the practice of surgery. A wholly-owned subsidiary of Baxter
provided MMS with approximately $7.1 million in financing in exchange for an
approximate 60% partnership interest in MMS. Additionally, MMS issued promissory
notes in the aggregate principal amount of $550,000 to Baxter in return for
working capital provided by Baxter to MMS. MMS developed Preview and performed
development work on DataFusion.

Ixion, Inc.

Ixion, a Delaware corporation, was founded to design and develop procedural
simulators for use in training clinicians to conduct a variety of medical
procedures. Ixion's development expenses were funded, in part, by approximately
$4.5 million of contract revenues received from Ethicon Endo-Surgery
("Ethicon"), its sole customer from 1991 through 1995, in connection with the
development of a laparoscopic skills simulator, and by approximately $2.0
million received from the investors in the Bridge Financing. Ixion performed
development work on GastroSim and developed additional IVR simulation
technology.

The Merger

The Company was incorporated in Delaware in April 1996 under the name
Medical Media Systems, Inc., and all of the partnership interests in MMS and
MMS' Preview and DataFusion technologies were contributed to the Company in May
1996 in exchange for 1,253,333 shares of Common Stock of the Company, the
Company's issuance of both a $200,000 promissory note (the "$200,000 Note") and
a $350,000 promissory note (the "$350,000 Note") to Baxter each with interest
accruing at the 8% per annum, to cancel outstanding debt owed to Baxter in such
amounts, and the Company's issuance of an aggregate of 6,188 shares of Common
Stock in exchange for certain MMS officers' accrued but unpaid compensation in
the aggregate amount of $46,410.

Later in May 1996, Ixion was merged with and into the Company and the
Company was renamed Interact Medical Technologies Corporation. In connection
with such merger, Ixion contributed the Com-

9
<PAGE> 12

pany's IVR simulator technology, and Ixion stockholders received 1,352,252
shares of Common Stock of the Company, and the Company assumed certain of
Ixion's obligations, including obligations under outstanding warrants to
purchase an aggregate of 73,162 shares of Common Stock of the Company, and
outstanding options to purchase an aggregate of 119,702 shares of Common Stock
of the Company and the obligation to issue an aggregate of 56,184 shares of
Common Stock of the Company in exchange for certain Ixion officers' and
consultants' accrued but unpaid compensation in the aggregate amount of
$421,364. In addition, upon the merger the Company assumed Ixion's obligations
under all promissory notes issued to investors in the Bridge Financing (the
"Bridge Notes") and Ixion's obligations to certain of its then existing officers
and directors with respect to approximately $95,000 of indebtedness. See "Risk
Factors -- Benefits of this Offering to Current Stockholders" and "Certain
Transactions."

The Company believes that the merger has brought together outstanding
management teams with significant marketing and manufacturing expertise and
development teams with complimentary skills in the areas of software
development, three-dimensional modeling and virtual reality visualization
techniques.

10
<PAGE> 13

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
Securities offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.

Early Stage of Development. The Company is at an early stage of
development. Only one of the Company's products is commercially available, and
limited revenues have been generated from sales since product launch in June
1996. To date the Company's resources have been dedicated to the research and
development of products based upon its expertise in digital medical imaging and
interactive software programming. The Company does not believe that certain of
its proposed products, including GastroSim and DataFusion will be commercially
viable absent significant further development and certain technological
advances, and there can be no assurance that development will be completed or
advances will be achieved. Product development involves a high degree of risk
and there can be no assurance the Company will ever finally develop, transfer to
manufacturing, or successfully commercialize, any additional products.

History of Operating Losses; Uncertainty of Profitability. The Company is
at an early stage of development, has generated little revenue to date, and has
not yet achieved profitability. Operating losses for Ixion in the years ended
December 31, 1994 and December 31, 1995 were approximately $549,000 and
$2,322,000, respectively. Operating losses for MMS in the years ended December
31, 1994 and December 31, 1995 were approximately $1,850,000 and $1,921,000,
respectively. The Company expects to continue to incur substantial losses over
at least the next several years as the Company's development, testing, marketing
and manufacturing scale-up efforts expand. To achieve profitability and
increased sales levels, the Company must, among other things, establish and
increase market acceptance of its products, respond effectively to competitive
pressures, offer high quality customer service and support, introduce on a
timely basis products incorporating its technologies and advanced versions and
enhancements to its products, and successfully market and support advanced
versions and enhancements. There can be no assurance that the Company will
complete the development of any product other than Preview, that products
developed will achieve market acceptance, or that the Company will ever produce
significant levels of revenue or achieve sustainable profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Independent Certified Public Accountants' Opinion--Going Concern. Ixion's
financial statements for the years ended December 31, 1993, 1994 and 1995 were
audited by the Company's independent certified public accountants, whose report
includes an explanatory paragraph stating that the financial statements have
been prepared assuming the Company will continue as a going concern and that the
Company has incurred significant operating losses and has stockholders' and
working capital deficiencies that raise substantial doubt about its ability to
continue as a going concern. See "Financial Statements."

Benefits of this Offering to Current Stockholders. As of November 20,
1996, there were approximately 3,127,708 shares of Common Stock outstanding,
excluding all shares of Common Stock to be issued in connection with the closing
of this Offering, held of record by approximately 56 stockholders. These
existing stockholders will recognize significant benefits from this Offering.
These benefits include the creation of a public market for the Company's Common
Stock, which will afford existing stockholders the ability to liquidate their
investments, subject in certain cases to volume limitations and other
limitations and restrictions upon the sale of their Common Stock. See "Shares
Eligible for Future Sale." None of the Company's existing stockholders are
selling shares in this Offering. Immediately upon the completion of this
Offering, in addition to the Common Stock and the Warrants issued to the public,
the Company will be obligated to issue approximately 627,579 shares of Common
Stock to existing stockholders. Of these 627,579 shares of Common Stock,
approximately 275,000 shares will be issued to investors in the Bridge
Financing, including 3,125 shares to Larry J. Wells, the Chairman of the Board
of Directors of the Company and 21,875 shares to DayStar Partners, L.P.
("DayStar") of which Larry Wells Co., of which Mr. Wells is President, is a
general partner, approximately 43,313 shares will be issued to Mr. Wells in
connection with the Wells Consulting Agreement, approximately 43,750 shares will
be issued to Baxter pursuant to the Baxter Letter and approximately 265,516
shares will be issued to Baxter upon the conversion of the $2,000,000 Note
(assuming that this

11
<PAGE> 14

Offering closes on or before February 28, 1997). In addition, upon the
completion of this Offering, approximately $3.3 million of the proceeds of this
Offering will be used to satisfy debts and other obligations owed by the Company
to certain existing stockholders (assuming repayment of debt on December 31,
1996). Of this $3.3 million, approximately $2.2 million will be repaid to
investors in the Bridge Financing, including approximately $27,000 to Mr. Wells
and approximately $190,000 to DayStar, and approximately $577,000 will be used
to repay the $350,000 Note and the $200,000 Note. Baxter, together with a
wholly-owned subsidiary, will own approximately 22.8% of the Company immediately
following this Offering. Upon completion of this Offering, the Company expects
to use approximately $633,746 to satisfy promissory notes, accrued interest and
certain other obligations owed by the Company to Bruce D. Sturman, the Company's
former President and Chief Executive Officer, David C. Hon, a director of the
Company and DayStar, of which Larry Wells Co. is a general partner, in the
approximate amounts of $256,475, $41,500 and $335,771, respectively. Mr. Wells,
the Chairman of the Board of Directors of the Company and President of Larry
Wells Co., is the only executive officer or director of the Company who is an
investor in the Bridge Financing. The Company's existing stockholders as a group
will own 3,755,287 shares of Common Stock upon completion of this Offering.
Based on an initial public offering price of $8.00, the value of such shares is
$30,042,296. The shares of Common Stock beneficially owned by the Company's
existing stockholders were purchased at an aggregate price of approximately
$9,100,000. Accordingly, after this Offering, these stockholders will have
substantial unrealized gains on their shares. See "Use of Proceeds," "Dilution,"
"Certain Transactions," "Shares Eligible for Future Sale; Registration Rights"
and "Principal Stockholders."

Developing Markets; Uncertain Market Acceptance. The markets for Preview
and the Company's products under development have only recently begun to
develop, are rapidly evolving and are either already characterized by, or
expected to be characterized by, an increasing number of market entrants who
will introduce or develop products competitive with the Company's products. As
is typical in the case of new and rapidly evolving industries, demand and market
acceptance for Preview and future products, if any, is subject to a high level
of uncertainty. The success of Preview and the Company's products under
development will depend, in large part, on the continued adoption, and the rate
of adoption, of MIS procedures by surgeons. The successful commercialization of
Preview (and DataFusion, if ever finalized), will depend on many other
variables, including their acceptance as reliable, accurate, cost-effective
tools for improving surgical performance and reducing time spent conducting
procedures. The successful commercialization of the Company's IVR simulators, if
ever finalized, also will depend on further variables, including market
acceptance of simulators as an alternative or supplement to traditional teaching
and training methods, such as practicing procedures on animals and cadavers and
observing and assisting trained physicians in performing procedures on live
patients. The markets in which the Company's products will compete are young and
have few proven products. There can be no assurance that the markets for Preview
and the Company's products under development will develop, that Preview or the
Company's products under development will be adopted or that surgeons will
continue to adopt MIS procedures at a rapid pace, if at all. If the markets for
Preview or the Company's products under development fail to develop, develop
more slowly than expected or become saturated with competitors, or if the
Company's products do not achieve market acceptance, the Company's business,
results of operations and financial condition would be materially adversely
affected. See "--Technological Change," "--Competition" and "Business--Industry
Background."

Uncertainty of Pricing. The Company's current sole product, Preview, was
launched in June 1996. The Company has completed only a limited number of sales
of this product. As a result, there can be no assurance of the price at which
the Company will be able to sell or lease Preview or any of its future products.
In addition, the Company anticipates that the price of Preview and its future
products will vary depending on a variety of factors, including competitive
factors at the time future products, if any, are launched, the level of
acceptance in the marketplace, the number of new MIS procedures developed, and
the rate of adoption of new and existing MIS procedures. The Company may
discount asking prices to facilitate early market penetration or in response to
market conditions, which may reduce the Company's gross profit margins. Any
reduction in the price of Preview or any of the Company's future products or in
gross profit margins could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

12
<PAGE> 15

Limited Sales, Marketing and Distribution Capability; Dependence on
Baxter. The Company has limited experience in sales, marketing and
distribution. To market Preview or any of its future products directly, the
Company must develop a marketing and sales force with technical expertise and
with supporting distribution capability. Alternatively, the Company may obtain
the assistance of another company with a large distribution system and sales
force. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or enter into profitable arrangements with
third parties with respect to marketing or distribution of its products. To the
extent the Company enters into arrangements with third parties with respect to
marketing or distribution of its products, any revenues received by the Company
will be dependent on the efforts of such third parties and there can be no
assurance that third party efforts will be successful.

The Company is dependent on its relationship with Baxter for a variety of
reasons, and the termination of this relationship could have a material adverse
effect on the Company. Baxter is engaged in the worldwide development,
distribution and manufacture of products, systems and services used primarily in
the healthcare field. Products are manufactured by Baxter in approximately 23
countries and sold in approximately 100 countries. Baxter's more than 200,000
products are used by hospitals, clinical and medical research laboratories,
blood and dialysis centers, rehabilitation centers, nursing homes, doctors'
offices and in homes. Pursuant to a distribution agreement between Baxter and
the Company, Baxter has an exclusive right to sell Preview models prepared for
use in connection with treating aortic and iliac aneurysms (except with regard
to sales to parties developing or manufacturing devices specifically designed
for endovascular treatment of aortic aneurysms for which Baxter's rights are
co-exclusive with the Company), and is responsible for sales activities relating
to these products. Baxter is entitled to receive between 23% and 30% of all
revenue generated from its Preview sales in this field. Sales of Preview for use
in treating aortic and iliac aneurysms and the Company's financial results will
depend in significant part on the extent to which Baxter commits adequate
resources to its product launch and to the subsequent distribution of Preview.
Baxter develops, manufactures and markets a wide variety of medical devices,
some of which may compete indirectly with Preview. There can be no assurance
that Baxter will commit significant resources to market Preview for use in
treating aortic and iliac aneurysms or that its marketing activities will be
effective. See "Business--Marketing, Sales and Distribution."

Limited Manufacturing Experience; Risk of Manufacturing Scale-Up. In order
to achieve significant revenue, the Company will have to produce or arrange for
third parties to produce its products on a commercial scale. It is the Company's
current intention to produce all Preview models at the Company's FDA registered
production facility. There can be no assurance that the Company will be able to
manufacture or cause third parties to manufacture its products in commercial
scale quantities at commercially viable costs. The Company may encounter
unexpected delays or costs in scaling-up its manufacturing operations or in
hiring and training additional personnel to manufacture its products. The
failure to scale-up manufacturing successfully in a timely or cost-effective
manner, future production problems or interruptions in supply could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company will be required to adhere to applicable
regulatory requirements, including FDA-mandated current Good Manufacturing
Practices ("GMPs") regulations in the manufacture of certain of its products.
Any failure to meet such requirements could delay or prohibit the manufacturing
of the Company's products, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Pursuant to
an agreement between Baxter and the Company, Baxter is entitled to obtain the
right to produce or to cause third parties to produce its requirements of
Preview models in the event that the Company is unable to supply its
requirements in a timely manner. If the Company were to surrender any rights
with respect to producing Preview models to Baxter, it could have a material
adverse effect on the Company's business, results of operations and financial
condition because the Company would receive only a 10% royalty on revenues
generated from Preview sales by Baxter. See "--Reliance on Single or Limited
Sources of Supply," "--Government Regulation; Uncertainty of Obtaining
Regulatory Approval" and "Business-- Manufacturing."

Technological Change. The Company's success will depend on its ability to
continually anticipate, and adapt its new and existing products to emerging
technologies and capabilities, such as improved graphic imaging and diminished
interactive lag times. The life cycles of the Company's products are difficult
to estimate because the markets that the Company targets are in the early stages
of development and because of

13
<PAGE> 16

the rapid pace of development of computer technology. If Preview or the
Company's future products, if any, become outdated or are not accepted by the
market, the Company's revenues, results of operations and financial condition
could be materially adversely affected. The markets in which Preview and the
Company's products under development will compete are characterized by rapid
technological innovation. There can be no assurance that the Company's
competitors and potential competitors will not succeed in developing and
marketing technologies and products that are more effective or more cost
effective than those developed and marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. The
applications for which Preview and the Company's products under development are
designed can also be addressed by other products, methods or techniques, many of
which are widely accepted in the medical community. There can be no assurance
that Preview or the Company's products under development will be able to replace
such established products, methods or techniques. Additionally, new products
could be developed that replace or reduce the importance of the Company's
products. See "--Developing Markets; Uncertain Market Acceptance."

Competition. Competition in the markets in which Preview and the Company's
products under development will compete is expected to be intense. A number of
companies currently compete or intend to compete directly and indirectly with
the Company's existing product and products under development. Many of the
Company's competitors and potential competitors have substantially greater name
recognition and capital resources than the Company and also have greater
resources and expertise in the areas of research and development. See
"--Technological Change," "--Developing Markets; Uncertain Market Acceptance"
and "Business--Competition."

Patents and Proprietary Technology. The Company's success is dependent, in
part, upon its extensive proprietary technology. The Company relies on a
combination of patent, trade secret, copyright and trademark protection and
nondisclosure agreements to protect its proprietary rights. As of November 20,
1996, the Company had approximately three issued United States patents, one
issued European patent, eight pending United States patent applications, four
pending foreign patent applications and seven international (Patent Cooperation
Treaty) patent applications relating to its interactive virtual reality and
surgical planning technologies. The Company intends to file additional patent
applications in the future. There can be no assurance that the Company will be
issued any patents or that if any patents are issued they will provide the
Company with significant protection or will not be challenged. Even if issued
patents are enforceable, the Company anticipates that any attempt to enforce its
patents would be time consuming and costly. Moreover, the laws of some foreign
countries do not protect the Company's proprietary rights in its products to the
same extent as do the laws of the United States.

The Company's patent positions are uncertain and involve complex legal and
factual issues. Additionally, the coverage originally claimed in a patent
application can be significantly reduced before the patent application is
allowed and a patent is created. As a consequence, there can be no assurance
that any of the Company's patent applications will result in the issuance of
patents or, if any patents issue, that they will provide significant proprietary
protection or will not be circumvented or invalidated. Because patent
applications in the United States are maintained in secrecy until patents issue
and publication of discoveries in scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it was the first
inventor of inventions covered by its pending patent applications or that it was
the first to file patent applications for such inventions. Moreover, the Company
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office ("PTO") to determine priority of invention
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no assurance that the
Company's patents if issued would be held valid by a court of competent
jurisdiction. An adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from or to
third parties or require the Company to cease using the technology in dispute.

14
<PAGE> 17

will not assert infringement claims against the Company in the future or that
any such assertions will not result in costly litigation or require the Company
to obtain a license to intellectual property rights of such parties. There can
be no assurance that any such licenses would be available on terms acceptable to
the Company, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to further develop or commercialize its products in the United
States and abroad and could result in the award of substantial damages. Defense
of any lawsuit or failure to obtain any such license could have a material
adverse effect on the Company. Finally, litigation, regardless of outcome, could
result in substantial cost to and a diversion of efforts by the Company.

The Company may require additional technology in the development of its
products to which the Company does not currently have rights. If the Company
determines that this additional technology is relevant to the development of its
products and further determines that a license to this additional technology is
needed, there can be no assurance that the Company will be able to obtain a
license from the relevant party or parties on commercially reasonable terms, if
at all. There can be no assurance that the Company will be able to obtain any
license to any technology that the Company determines it needs, on reasonable
terms, if at all, or that the Company could develop or otherwise obtain
alternate technology. The failure of the Company to obtain licenses, if needed,
could have a material adverse effect on the Company.

As part of its confidentiality procedures, the Company generally enters
into nondisclosure agreements with its employees and suppliers, and limits
access to and distribution of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology without authorization. In addition, competitors
may be able to engineer around the Company's patents and trade secrets, or
reverse-engineer around its trade secrets. Accordingly, there can be no
assurance that the Company will be successful in protecting its proprietary
technology or that the Company's proprietary rights will preclude competitors
from developing products or technology equivalent or superior to that of the
Company. See "Business--Patents and Proprietary Rights."

Government Regulation; Uncertainty of Obtaining Regulatory
Approval. Preview is and DataFusion, when developed, will be subject to
government regulation in the United States and other countries. In the United
States, the Federal Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and
other statutes and regulations govern the testing, manufacture, labeling,
storage, record keeping, distribution, sale, marketing, advertising and
promotion of such medical devices. Failure to comply with applicable
requirements could result in fines, recall or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution.

Prior to commercial distribution in the United States, most medical devices
must be cleared or approved by the FDA. The regulatory process is lengthy
(potentially taking up to several years), expensive and uncertain. Under the FDC
Act, medical devices are classified into one of three classes on the basis of
the controls necessary to reasonably ensure their safety and effectiveness.
Class I devices are those whose safety and effectiveness can reasonably be
ensured through general controls, such as labeling, premarket notification and
adherence to FDA-mandated current GMPs. Class II devices are those whose safety
and effectiveness can reasonably be ensured through the use of "special
controls," such as performance standards, post-market surveillance, patient
registries and FDA guidelines. Class III devices are devices that must receive
premarket approval ("PMA") from the FDA to ensure their safety and
effectiveness. They are generally life-sustaining, life-supporting, or
implantable devices, and also include most devices that were not on the market
before May 18, 1976 ("new devices") and for which the FDA has not made a finding
of substantial equivalence based upon a 510(k).

Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA clearance of a 510(k) or approval of a PMA
application. Following submission of a 510(k) or PMA application, the
manufacturer may not market the new device until an order is issued by the FDA
granting clearance or approval. While the Company has obtained FDA clearance
pursuant to a 510(k) to distribute Preview models of many anatomical regions,
even after FDA clearance the Company's application for clearance is subject to
continual review, and the later discovery of previously unknown problems may
result in

15
<PAGE> 18

restrictions on Preview's marketing or withdrawal of the product from market.
Withdrawal of the Company's 510(k) clearance with respect to Preview could have
a material adverse effect on the Company's business, results of operations and
financial condition.

Modification or enhancement of a product that has been cleared through the
510(k) process requires clearance of a new 510(k) if the modification or
enhancement could significantly affect the safety or effectiveness of the
original device. Since 510(k) clearance was obtained for Preview, the Company
has made, and anticipates the need to make additional improvements in the device
and its labeling. The Company has not sought 510(k) clearance for any of these
improvements in the device and its labeling, and currently, on the basis of the
Company's conclusion that none of the improvements or labeling changes could
significantly affect the safety or effectiveness of the original product, does
not intend to seek such clearance. Under the FDA's regulatory scheme, the
decision whether to seek 510(k) clearance for a modified device is left first to
the manufacturer. There can be no assurance, however, that the FDA would agree
with the Company's conclusion, that the FDA would not require the Company to
cease marketing and obtain 510(k) clearance for Preview (as improved), or that
such clearance, if required, would be obtained.

The Company believes that it will be necessary to file a PMA application
with respect to DataFusion. The PMA process is significantly more complex,
expensive and time consuming than the 510(k) process. The PMA process requires
the performance of at least two independent, statistically significant clinical
trials that must demonstrate the safety and effectiveness of the device in order
to obtain FDA approval of the PMA application. The PMA process typically
requires several years, and may never result in approval.

The Company does not believe that its IVR simulators would be subject to
FDA review or approval or any other governmental reviews. However, in the event
the FDA or any foreign regulatory body determined to regulate such products, no
assurance can be given that compliance with such regulatory process will be
achieved or that necessary clearances will be obtained in a timely manner, if at
all.

The FDC Act requires that medical devices be manufactured in accordance
with the current GMPs. These regulations require, among other things that (i)
the manufacturing process be regulated and controlled by the use of written
procedures and (ii) the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every aspect of
the process. They also require investigation of any deficiencies in the
manufacturing process or in the products produced and detailed record keeping.
Manufacturing facilities are therefore subject to FDA inspection on a periodic
basis to monitor compliance with current GMPs. If violations of the applicable
regulations are noted during FDA inspections of the Company's manufacturing
facilities or the manufacturing facilities of its contract manufacturers, if
any, there could be a material adverse effect on the continued marketing of the
Company's products.

The FDA regulates computer software that performs the function of a
regulated device or that is intimately associated with a given device, such as
control software for imaging or other diagnostic devices. The FDA is in the
process of reevaluating its regulation of such software, and if the FDA
undertakes increased or more rigorous regulation of such software (which the
Company cannot predict), Preview and DataFusion may become subject to further
regulatory processes and clearance requirements. No assurance can be given that
compliance with more extensive regulatory processes will be achieved or that the
necessary clearances for such products will be obtained by the Company on a
timely basis, if at all. The Company may, as a result, be required to expend
additional time, resources and effort in the areas of software design,
production and quality control to ensure full technical compliance.

Laws and regulations regarding the manufacture, sale and use of medical
devices are subject to change and depend heavily on administrative
interpretations. There can be no assurance that future changes in the
regulations or interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company.

The Company plans to sell its products in several foreign markets.
Requirements pertaining to such products vary widely from country to country,
ranging from simple product registrations to detailed submissions such as those
required by the FDA. The Company believes the extent and complexity of
regulation of medical devices is increasing worldwide. The Company anticipates
this trend will continue and

16
<PAGE> 19

that the cost and time required to obtain approval to market in any given
country will greatly increase, with no assurance that such approval will be
obtained. The ability to export into other countries may require compliance with
ISO 9000 and CE Mark certifications, which are analogous to and in some
instances more rigorous than compliance with the FDA's GMPs. The Company has not
obtained any regulatory approvals to market any of its products outside of the
United States, no regulatory clearances or certifications have yet been applied
for in any country other than the United States and there is no assurance that
any such clearance or certification, if applied for, would be issued.

The Company, its existing product and future products, if any, may be
subject to a variety of laws and regulations in those states and countries where
such products are or will be marketed. These restrictions may hinder the
Company's ability to market such products in those states or countries. See
"Business--Government Regulation."

Future Capital Needs; Uncertainty of Additional Funding. The development
and commercialization of the Company's product and products under development
will require substantial funds. The Company's future capital requirements will
depend on many factors, including the time and costs involved in obtaining any
required regulatory approvals, competing technological and market developments,
the cost of manufacturing scale-up and effective commercialization activities
and arrangements, continued progress in its development programs, and the
magnitude of these programs, and the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims. To date, the Company has
not received significant revenues from product sales. The Company anticipates
that its existing available cash, combined with the proceeds of this Offering,
and operating revenues and interest income from cash investments will be
adequate to fund the Company for at least 12 months following this Offering. The
Company intends to seek additional funding through public or private financings.
There can be no assurance that additional financing will be available on
acceptable terms, or at all. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders may result. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its development programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish certain rights to certain of its technologies or products
that the Company would not otherwise relinquish. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

Litigation. From time to time the Company may be exposed to litigation
arising out of its products and operations. As of the date of this Prospectus,
the Company is not engaged in any legal proceedings that are expected,
individually or in the aggregate to have a material adverse effect on the
Company, except that an assignee of a law firm at which the Company's former
corporate Secretary practiced law has initiated a lawsuit in a Washington state
court for approximately $200,000 of legal fees which are allegedly past due. The
Company denies owing these fees. Nonetheless, no assurance can be given that
this lawsuit will not be decided against the Company.

In April 1995, Ethicon Endo-Surgery, a subsidiary of Johnson & Johnson
Corp. ("Ethicon") indicated in certain correspondence with respect to a payment
for development work performed by Ixion on a certain laparoscopic skills
simulator, without further clarification for the basis of its belief, that it
believes it has rights beyond its license to use the laparoscopic skills
simulator delivered pursuant to a 1992 research, option and license agreement
("License Agreement") between Ixion and Ethicon to source code, software,
hardware, firmware and related intellectual property incorporated in such
simulator. Although the Company recognizes that Ethicon may have rights to
utilize certain of the intellectual property incorporated in the simulator
within the limited scope of the field defined in the License Agreement as
methods, processes, devices and instruments for the simulation of endoscopic and
minimally invasive surgery in humans through an extendable multi-plane
computer-based video laparoscopic surgical training apparatus with tactile
feedback for the teaching of surgical skills (the "Field"), the Company, based
strictly on its interpretation of the License Agreement, does not believe that
there is any basis to support Ethicon's position with respect to the use of the
Company's intellectual property rights outside of the Field. Nonetheless, if any
litigation were to arise with respect to the interpretation of the License
Agreement, there can be no assurance that it would not be decided against the
Company. Such an adverse determination could have a material adverse effect upon
the

17
<PAGE> 20

Company's business, results of operations and financial condition. See
"Business--Legal Proceedings" and "Business--Ethicon License Agreement."

Dependence on and Need to Attract Key Personnel. The success of the
Company is dependent, in part, on its ability to attract, retain and motivate
highly qualified personnel. Competition for such personnel is intense and the
inability to attract and retain additional key employees or the loss of one or
more current key employees could adversely affect the Company. There can be no
assurance that the Company will be successful in hiring or retaining requisite
personnel. Several of the Company's executive officers, including the Company's
Chief Executive Officer, have entered into employment arrangements with the
Company. See "Management--Employment Agreements" and "Certain Transactions."

Recent Change in Senior Management. The success of the Company is
dependent, in part, on the experience of the Company's senior managers. The
Company's President and Chief Executive Officer only recently joined the Company
in October 1996, and was elected to his current office following the resignation
of the Company's former President and Chief Executive Officer in November 1996.
Although the Company's new President and Chief Executive Officer has extensive
management experience, he has limited familiarity with the specific business of
this Company and limited experience in managing companies at an early stage of
development. See "Management -- Recent Change in Senior Management."

Management of Changing Business; Ability to Manage Growth. As a result of
the business combination involving Ixion and MMS in connection with which the
Company obtained its assets and technologies, the Company has recently
experienced a period of significant growth. The Company expects to continue to
experience significant growth as its products are commercialized and revenue
from product sales is obtained. Such growth has placed and is expected to
continue to place a significant strain on the Company's management, information
systems and operations. As the Company grows, recruiting and retaining
additional qualified personnel to supervise and manage the Company's operations
will be important to the Company's success. The Company's potential inability to
manage its changing business effectively and to attract and retain additional
qualified management, manufacturing, engineering and development personnel could
have a material adverse effect on the Company's business, results of operations
and financial condition.

Reliance on Single or Limited Sources of Supply. The Company anticipates
that certain key components of GastroSim and DataFusion will be obtained from
single or limited sources, will be available only in limited quantities and will
require substantial production lead times. The Company's reliance on outside
vendors generally, and a single qualified source or a limited group of
suppliers, in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over quality, pricing and timing of delivery of components. In the past
the Company has experienced delays in the delivery of components for GastroSim
prototypes. Because the manufacture of certain of these components is
specialized and requires long lead times, there can be no assurance that delays
or shortages caused by vendors will not reoccur. The Company anticipates that a
limited number of components of the Company's products will be manufactured to
the Company's specifications by third-party manufacturers. There can be no
assurance that custom-made components from alternative third-party manufacturers
would be available on terms satisfactory to the Company, if at all. If the
Company were to change manufacturers of these components, it could experience an
interruption in supply, which could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
the purchase of certain components by the Company is based on the Company's
internal forecasts of future product sales and there can be no assurance that
the Company's internal forecasts will be accurate or that purchases based on
forecasting will be adequate to meet the Company's requirements. See
"Business--Manufacturing."

Uncertainty of Third-Party Reimbursement and Healthcare Reform
Policies. In both domestic and foreign markets, sales of the Company's existing
product and future products, if any, will depend in part on the availability of
reimbursement by third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of new healthcare products. There can be no assurance that the Company's
proposed products will be considered cost-effective or that adequate third-party
reimbursement will be available to enable the Company

18
<PAGE> 21

to maintain price levels sufficient to realize an appropriate return on its
investment in product development. There can be no assurance that reimbursement
levels, once established, will not be decreased and that any such decrease will
not reduce the demand for, or the price of certain of the Company's products.
Healthcare reform measures adopted by United States federal or state governments
or by foreign governments could affect the price of medical devices or services
or the amount of reimbursement available, and consequently, could have a
material adverse effect on the Company's business, results of operations and
financial condition.

Product Liability; Availability of Insurance. The design, development and
manufacture of the Company's existing product and future products, if any,
involve an inherent risk of product liability claims and associated adverse
publicity. Although the Company currently maintains general and product
liability insurance, there can be no assurance that the coverage limits of the
Company's insurance policies will be adequate. There can also be no assurance
that the Company will be able to obtain or maintain insurance for any of its
commercial products. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms or at all. A successful claim
brought against the Company in excess of the Company's insurance coverage could
have a material adverse effect on the Company's business, results of operations
and financial condition.

No Prior Public Market; Possible Volatility of Stock Price; No
Dividends. Prior to this Offering, there has been no public market for the
Company's Securities and there can be no assurance that an active trading market
will develop or be sustained after this Offering. The initial public offering
price for the Securities and the exercise price and terms of the Warrants will
be determined by negotiations between the Company and the Representative. See
"Underwriting." There can be no assurance that an active public market will
develop or be sustained after this Offering or that the market price of the
Securities will not decline below the initial public offering price. Factors
such as the announcements of technological innovations or new products by the
Company, its competitors and other third parties, as well as variations in the
Company's results of operations, market conditions, analysts' estimates and the
stock market may cause the market price of the Company's Securities to fluctuate
significantly. Also, future sales of shares by existing stockholders pursuant to
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or
through the exercise of outstanding registration rights, could have an adverse
effect on the price of the Company's Common Stock. The Company currently intends
to retain any future earnings for use in its business and does not anticipate
paying any cash dividends in the future. See "Description of Capital
Stock--Registration Rights," "Dividend Policy" and "Shares Eligible for Future
Sale."

Shares Eligible for Future Sale; Registration Rights. Sales of a
substantial number of shares of the Company's Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. Upon completion of this Offering, the Company will have outstanding
5,755,287 shares of Common Stock (without taking into account shares of Common
Stock issuable upon exercise of outstanding options and warrants including the
Warrants). As of November 20, 1996, 384,692 shares of Common Stock are subject
to outstanding options under the Company's 1996 Stock Option Plan, 19,510 shares
of Common Stock are subject to outstanding non-qualified stock options, 73,162
shares of Common Stock are subject to outstanding warrants, 615,308 additional
shares are reserved for issuance under the Company's 1996 Stock Option Plan and
200,000 shares of Common Stock are reserved for issuance under the Company's
1996 Employee Stock Purchase Plan. See "Management--Benefit Plans." The
2,000,000 Shares sold in this Offering will be freely tradeable without
restrictions under the Securities Act, except for any such shares held by an
"affiliate" of the Company, which will be subject to the "control securities"
resale limitations of Rule 144 under the Securities Act. The remaining 3,755,287
shares of Common Stock were issued by the Company in private transactions in
reliance upon one or more exemptions under the Securities Act, are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act and may be sold in compliance with such Rule commencing no earlier than May
24, 1998, pursuant to registration under the Securities Act or pursuant to an
exemption therefrom. Of the outstanding shares, 3,755,287 shares are tradeable,
subject to the limitations set forth in Rule 144 and subject to the lock-up
period described below. Stockholders owning an aggregate of approximately
shares of Common Stock, representing approximately % of the total
shares outstanding (and shares issuable upon exercise of outstanding
warrants and options), including shares held by all officers and directors and
certain other

19
<PAGE> 22

stockholders of the Company, have agreed not to directly or indirectly offer or
sell, contract to sell, grant any option to purchase, make any short sale,
transfer or otherwise dispose of or make a distribution of any of their shares
or securities convertible or exchangeable for the Company's Common Stock for a
period of 365 days (180 days in the case of shares acquired pursuant to the
Company's 1996 Employee Stock Purchase Plan) from the date of this Prospectus
without the prior written consent of the Representative. See "Shares Eligible
for Future Sale."

Holders of approximately 614,266 shares of Common Stock will also be
entitled to certain rights with respect to registration of such shares of Common
Stock for offer or sale to the public (without taking into account shares of
Common Stock issuable upon the exercise of outstanding options and warrants).
Such sales may have an adverse effect on the Company's ability to raise needed
capital and may adversely affect the market price of the Securities. See "Shares
Eligible for Future Sale" and "Description of Capital Stock--Registration
Rights."

Dilution. The initial public offering price of the Securities is
substantially higher than the net tangible book value per share of the
Securities. Investors participating in this Offering will therefore incur an
immediate, substantial dilution in net tangible book value of approximately
$6.17 per share of Common Stock and may incur additional dilution upon exercise
of the Warrants, the Representative's Warrants and outstanding stock options and
warrants. See "Dilution" and "Use of Proceeds."

Potential Adverse Effect of Representative's Warrants. At the consummation
of this Offering, the Company will sell to the Representative for nominal
consideration the Representative's Warrants to purchase up to 200,000 shares of
Common Stock and/or 200,000 Warrants. The Representative's Warrants will be
exercisable for a period of three years commencing one year after the effective
date of this Offering, at an exercise price per share of 140% of the price per
share of the Securities sold in this Offering. For the term of the
Representative's Warrants, the holders thereof will have, at nominal cost, the
opportunity to profit from a rise in the market price of the Securities without
assuming the risk of ownership, with a resulting dilution in the interest of
other security holders. As long as the Representative's Warrants remain
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representative may be expected to exercise the
Representative's Warrants at a time when the Company would, in all likelihood,
be able to obtain any needed capital through a new offering of its securities on
terms more favorable than those provided by the Representative's Warrants. See
"Underwriting."

Potential Adverse Effect of Redemption of the Warrants. Commencing one
year after the date of this Prospectus, the Warrants are subject to redemption
at $0.05 per Warrant on 30 days' prior written notice to the warrantholders if
the average closing bid price of the Common Stock equals or exceeds 300% of the
initial public offering price per share of Common Stock for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. If the Warrants are redeemed,
holders of the Warrants will lose their rights to exercise the Warrants after
the expiration of the 30 day notice of redemption period. Upon receipt of a
notice of redemption, holders would be required to: (i) exercise the Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so, (ii) sell the Warrants at the current market price, if any, when they
might otherwise wish to hold the Warrants or (iii) accept the redemption price
which is likely to be substantially less than the market value of the Warrants
at the time of redemption. See "Description of Capital Stock -- Warrants."

Representative's Potential Influence on the Market. A significant amount
of the Securities offered hereby may be sold to customers of the Representative.
Such customers subsequently may engage in transactions for the sale or purchase
of such Securities through or with the Representative. Although it has no
obligation to do so, the Representative intends to make a market in the
Securities and may otherwise affect transactions in the Securities. If it
participates in such market, the Representative may influence the market, if one
develops, for the Securities. Such market-making activity may be discontinued at
any time. Moreover, if the Representative sells the securities issuable upon
exercise of the Representative's Warrants, it may be required under the
Securities Exchange Act of 1934, as amended, to temporarily suspend its
market-making activities. The prices and liquidity of the Common Stock and the
Warrants may be significantly affected by the degree, if any, of the
Representative's participation in such market. See "Underwriting."

20
<PAGE> 23

Legal Restrictions on Sales of Shares Underlying the Warrants. The
Warrants are not exercisable unless, at the time of the exercise, the Company
has a current prospectus covering the shares of Common Stock issuable upon
exercise of the Warrants, and such shares have been registered, qualified or
deemed to be exempt under the securities laws of the state of residence of the
exercising holder of the Warrants. The Warrants may be deprived of value if a
current prospectus covering the shares of Common Stock issuable upon the
exercise of the Warrants is not kept effective.

The Shares and the Warrants are separately transferable immediately upon
issuance. Purchasers may buy Warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants, and holders of Warrants would have no choice but to
attempt to sell the Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised. See "Description of Capital Stock."

Management Discretion Over Proceeds of this Offering. The Company
currently has no specific plan for a significant portion of the proceeds of this
Offering. As a consequence, the Company's management will have the discretion to
allocate a large percentage of the proceeds from this Offering to uses which the
stockholders may not deem desirable, and there can be no assurance that the
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."

Antitakeover Provisions. Certain provisions of the Company's Certificate
of Incorporation and of Delaware law could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions could diminish the opportunities for a stockholder to participate in
tender offers, including tender offers at a price above the then current market
value of the Common Stock. Such provisions may also inhibit increases in the
market price of the Common Stock that could result from takeover attempts. In
addition, the Board of Directors, without further stockholder approval, may
issue preferred stock that could have the effect of delaying, deterring or
preventing a change in control of the Company. The issuance of preferred stock
could also adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. The Company has no present plans
to issue any preferred stock. See "Description of Capital Stock--Delaware Law
and Certain Charter Provisions."

Control by Existing Stockholders. Following this Offering (assuming
exercise of all stock options and warrants beneficially owned by officers and
directors) the present executive officers and directors of the Company and their
affiliates will beneficially own approximately 11.7% of the outstanding shares
of Common Stock, and Baxter together with a wholly-owned subsidiary will
beneficially own approximately 22.8% of the outstanding shares of Common Stock.
Accordingly, the present officers and directors of the Company and their
affiliates, and Baxter will both have the ability to exercise significant
influence over the management and policies of the Company.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 Shares of
Common Stock and 2,000,000 Warrants offered hereby are estimated to be
approximately $13,743,000 ($15,905,700 if the Underwriter's over-allotment
option is exercised in full), assuming an initial public offering price of $8.00
per Share (the midpoint of the price range set forth on the cover page of this
Prospectus and $0.10 per Warrant) and after deducting the underwriting discounts
and commissions and other estimated offering expenses.

The Company intends to use a portion of the net proceeds to repay the
outstanding balance on certain promissory notes issued to Baxter on May 24, 1996
in order to fund ongoing operations (the "Baxter Notes") that will have an
outstanding balance, including accrued interest, of approximately $576,642 as of
December 31, 1996. The Company also plans to use a portion of the net proceeds
to repay all of the Bridge Notes that were assumed by the Company on May 24,
1996 that will have an outstanding balance, including accrued interest, of
$2,140,311 as of December 31, 1996. A Bridge Note in the principal amount of
$25,000 was issued to Larry J. Wells, a director of the Company and Bridge Notes
in the aggregate amount of $175,000 were issued to DayStar. Mr. Wells, the
Chairman of the Company's Board of Directors, is the President of Larry Wells
Co., a general partner of DayStar. The Company expects to use approximately
$633,746 to satisfy promissory notes, accrued interest and certain other
obligations owed by the Company to Bruce D. Sturman,

21
<PAGE> 24

the Company's former President and Chief Executive Officer, David C. Hon, a
director of the Company, and DayStar, in the approximate amounts of $256,475,
$41,500 and $335,771, respectively. The Baxter Notes and the Bridge Notes bear
interest at an annual rate equal to 8%.

The Company also expects to use the net proceeds, including the interest
thereon, for commercialization of products, research and development, clinical
testing, capital expenditures, working capital and general corporate purposes.
In the ordinary course of its business, the Company from time to time evaluates
technologies for acquisition or license that, if acquired, could be used in the
development of product candidates. The Company has no present commitments or
agreements and is not currently involved in any negotiations with respect to
such acquisitions or licenses. The Company has not identified precisely the
amounts it plans to spend on specific development or commercialization projects
or the timing of such expenditures. The amounts actually expended for each
purpose may vary significantly depending upon numerous factors, including future
revenue growth, the amount of cash generated by the Company's operations, the
progress of the Company's development projects, the timing of regulatory
approvals, the technological advances and the status of competitive products. In
addition, expenditures will also depend upon the availability of additional
financing and other factors. The Company believes that the net proceeds from
this Offering, together with interest thereon, and the Company's existing
capital resources will satisfy its capital requirements and fund operating
losses for at least 12 months following this Offering. Pending application of
the proceeds as described above, the Company intends to invest the net proceeds
of this Offering in investment-grade, short-term securities.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock. The
Company currently intends to retain all earnings, if any, to fund the
development and growth of its business and therefore does not anticipate paying
any cash dividends within the foreseeable future.

22
<PAGE> 25

CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
September 30, 1996 and (ii) as adjusted to give effect to (a) the sale by the
Company of 2,000,000 Shares of Common Stock and 2,000,000 Warrants offered
hereby, assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus), less
estimated underwriting discounts and commissions and other expenses of this
Offering resulting in net proceeds of $13,743,000, (b) application of a portion
of the proceeds of this Offering to repay the Bridge Notes and certain other
notes and obligations, (c) the issuance of approximately 275,000 shares of
Common Stock, assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus),
immediately following the closing of this Offering to investors in the Bridge
Financing, (d) the issuance of approximately 43,313 shares of Common Stock,
assuming an initial public offering price of $8.00 per Share (the midpoint of
the range set forth on the cover page of this Prospectus), immediately following
the closing of this Offering to Larry J. Wells, the Chairman of the Board of
Directors of the Company, in connection with the Wells Consulting Agreement, (e)
the issuance of approximately 43,750 shares of Common Stock to Baxter, assuming
an initial public offering price of $8.00 per Share (the midpoint of the range
set forth on the cover page of this Prospectus), immediately following the
closing of this Offering, and (f) the issuance of approximately 265,516 shares
of Common Stock to Baxter, assuming an initial public offering price of $8.00
per Share (the midpoint of the range set forth on the cover page of this
Prospectus), immediately following the closing of this Offering upon the
conversion of the $2,000,000 Note, and related accrued interest. See "Dilution"
and "Certain Transactions."

<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bridge Financing notes payable....................................... $ 2,000 $ --
------- -----------
Promissory notes payable to Baxter................................... 550 --
------- -----------
Convertible note payable to Baxter................................... 2,000 --
------- -----------
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized, none
issued or outstanding..............................................
Common Stock, $0.01 par value, 10,000,000 shares authorized,
3,115,514 shares issued and outstanding; 5,755,287 shares as
adjusted(1)(2)..................................................... 10,115 25,029
Accumulated deficit(3)............................................... (9,400) (11,064)
------- -----------
Total Stockholders' equity(4)...................................... 715 13,965
------- -----------
Total capitalization............................................ $ 5,305 $13,965
======= =========
</TABLE>

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

(1) As adjusted includes approximately $21 million of notes payable and related
accrued interest to be converted to Common Stock, net of approximately
$900,000 of unamortized debt issue costs relating to notes payable to be
converted to Common Stock. As adjusted also includes approximately $2.8
million representing the estimated fair value of 443,898 shares issued in
September 1996 in connection with the one year extension of the maturity
date of certain notes payable.

(2) Does not include (i) 2,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in this Offering and (ii) 200,000 shares of Common
Stock and 200,000 Warrants to purchase an additional 200,000 shares of
Common Stock issuable upon exercise of the Representative's Warrants.

(3) As adjusted includes approximately $1.7 million of amortization expense
relating to the write-off of deferred debt issue costs which represents the
estimated fair value of 443,898 shares issued in September 1996 in
connection with the one year extension of the maturity date of certain
notes payable which are to be repaid with a portion of the proceeds from
this Offering, net of the unamortized portion relating to notes payable to
be converted to Common Stock as described in (f) above.

(4) Does not include (i) 1,000,000 shares of Common Stock reserved for issuance
pursuant to the Company's 1996 Stock Option/Stock Issuance Plan (of which
384,692 shares were subject to options outstanding at November 20, 1996),
(ii) 200,000 shares reserved for issuance under the Company's 1996 Employee
Stock Purchase Plan, (iii) 19,510 shares of Common Stock reserved for
issuance upon exercise of non-qualified stock options, and (iv) 73,162
shares of Common Stock reserved for issuance upon exercise of outstanding
warrants. See "Management--Benefit Plans," "Description of Capital
Stock--Warrants" and "Shares Eligible for Future Sale."

23
<PAGE> 26

DILUTION

The net tangible pro forma book value of the Company at September 30, 1996
was negative ($3,200,000), or negative ($0.85) per share of Common Stock. Net
pro forma tangible book value per share of Common Stock represents the amount of
the Company's total tangible assets (total assets of $6,979,000, less intangible
assets of $5,986,000) less total liabilities of $6,264,000 plus $2,071,000
relating to the conversion of the $2,000,000 Note and related accrued interest
divided by the pro forma number of shares (3,755,287) of Common Stock
outstanding at September 30, 1996 (which gives effect to the issuance of
approximately 627,579 shares immediately following this Offering to existing
investors in connection with rights associated with previous borrowings and
conversion of the $2,000,000 Note, as more fully described elsewhere in this
Prospectus). After giving effect to the sale of the 2,000,000 Shares of Common
Stock and 2,000,000 Warrants offered by the Company hereby at an assumed initial
public offering price of $8.00 per Share (the midpoint of the range set forth on
the cover page of this Prospectus), and after deducting underwriter discounts
and commissions and estimated Offering expenses payable by the Company, the
Company's net tangible book value as of September 30, 1996 would have been
$10,543,000 or $1.83 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.68 per share to current stockholders
and an immediate dilution of $6.17 or 77% per share to new investors purchasing
Common Stock in this Offering. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share....................................... $8.00
Net pro forma tangible book value per share of Common Stock before this
Offering.................................................................... $(0.85)
Increase per share attributable to new investors............................ 2.68
------
Net pro forma tangible book value per share of Common Stock after this
Offering...................................................................... 1.83
-----
Dilution per share to new investors........................................... $6.17
=====
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $5.87 or 73% per share.

The following table summarizes, as of September 30, 1996, the pro forma
number of shares of Company Common Stock issued, the total consideration and the
average price per share presented for existing stockholders and new investors
(before deduction of underwriting discounts and commissions and estimated
offering expenses):

<TABLE>
<CAPTION>
SHARES TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(2)....................... 3,755,287 65% $ 9,100,000 36% $2.42
New investors.................................. 2,000,000 35% 16,000,000 64% 8.00
-------- --- ----------- ---
Total........................................ 5,755,287 100% $25,100,000 100%
======== === =========== ===
</TABLE>

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

(2) Includes all stockholders receiving shares immediately following the closing
of this Offering.

All of the above computations assume no exercise of outstanding options or
warrants to purchase Common Stock. As of November 20, 1996, (i) options to
purchase 384,692 shares of Common Stock at a weighted average exercise price of
approximately $5.41 per share under the Company's stock option plan, (ii)
options to purchase 9,755 and 9,755 shares of Common Stock pursuant to
non-qualified options at per share exercise prices of $15.38 and $0.02,
respectively, and (iii) warrants to purchase 73,162 shares of Common Stock at a
weighted average exercise price of approximately $10.65 per share (assuming an
initial public offering price of $8.00 per Share (the midpoint of the range set
forth on the cover page of this Prospectus)) were outstanding. To the extent
these options and warrants become vested and are exercised, there will be
further share ownership dilution to new investors. The Company also has an
additional 615,308 shares of Common Stock reserved for issuance pursuant to the
Company's 1996 Stock Option/Stock Issuance Plan and 200,000 shares reserved for
issuance under the Company's 1996 Employee Stock Purchase Plan. Further dilution
may result from the exercise of outstanding options or options granted in the
future. See "Management--Benefit Plans."

24
<PAGE> 27

SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to Interact and
MMS statements of operations for each of the three years in the period ended
December 31, 1995, and balance sheets at December 31, 1994 and 1995 are derived
from audited financial statements which are included elsewhere herein and are
qualified by reference to such Financial Statements and related Notes thereto.
The Interact Statement of Operations Data for the years ended December 31, 1991
and 1992, and Balance Sheet Data at December 31, 1991, 1992 and 1993 have been
derived from unaudited financial statements which are not included herein. The
unaudited interim financial information includes all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the 1996 interim periods are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1996. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Pro Forma Condensed Financial Information and Financial
Statements and related Notes included elsewhere in this Prospectus.

Interact was formed in April 1996, and in May 1996 it acquired its assets
and technologies in connection with a business combination involving Ixion and
MMS. Inasmuch as former Ixion stockholders own the majority of the Interact
capital stock after the business combination, Ixion is considered to be the
acquiring corporation for purposes of purchase accounting and the predecessor
entity to Interact for purposes of financial reporting. The Interact financial
statements for periods prior to the business combination are those of what was
formerly Ixion.

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

PRO FORMA STATEMENTS OF OPERATIONS DATA

The Company's Unaudited Pro Forma Statements of Operations Data for the
year ended December 31, 1995 and for the nine months ended September 30, 1996
include the results of operations of Ixion and MMS for the respective periods
presented and give effect to pro forma adjustments as if the contribution of MMS
partnership interests to Interact and merger of Ixion with and into Interact and
receipt of $2.0 million cash pursuant to a convertible note payable to Baxter
had occurred at the beginning of the respective periods. These Pro Forma
Condensed Financial Statements are not necessarily indicative of future results
of operations of the Company.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Revenues................................................. $ 266 $ 59
----------------- ----------
Expenses:
Research and development............................... 3,548 2,033
Selling, general and administrative.................... 1,518 1,871
----------------- ----------
5,066 3,904
----------------- ----------
Loss before interest..................................... (4,800) 3,845
Interest expense......................................... 324 1,035
----------------- ----------
Net loss(1).............................................. $(5,124) $ (4,880)
============= ==============
Pro forma net loss per share............................. $ (1.82) $ (1.62)
============= ==============
</TABLE>

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

(1) In accordance with guidelines established by the SEC, pro forma net loss
does not include approximately $2.2 million of expense recorded immediately
subsequent to recording the business combination relating to the estimated
fair value of intangible assets acquired associated with products in
development which have not been determined to have yet attained
technological feasibility.

25
<PAGE> 28

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 200 $1,413 $1,359 $1,237 $ 266 $ 266 $ 59
------ ------ ------ ------ ------- ------- --------
Expenses:
Research and development.................. 195 636 951 1,189 1,332 1,044 1,501
Selling, general and administrative....... 68 184 416 588 1,124 942 1,758
Write off of intangible assets(1)......... -- -- -- -- -- -- 2,251
------ ------ ------ ------ ------- ------- --------
263 820 1,367 1,777 2,456 1,986 5,510
------ ------ ------ ------ ------- ------- --------
Income (loss) from operations............... (63) 593 (8) (540) (2,190) (1,720) (5,451)
Interest expense............................ -- -- -- 9 132 73 1,017
------ ------ ------ ------ ------- ------- --------
Net income (loss)........................... $ (63) $ 593 $ (8) $ (549) $(2,322) $(1,793) $ (6,468)
====== ====== ====== ====== ======= ======= ========
Net income (loss) per share................. $(0.16) $ 1.62 $(0.01) $(0.45) $ (1.67) $ (1.32) $ (2.81)
====== ====== ====== ====== ======= ======= ========
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ----- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total assets............................................ $203 $699 $635 $ 489 $ 238 $ 6,979
Notes payable and accrued interest...................... 49 -- -- 192 1,014 4,717
Accumulated deficit..................................... (646) (53) (61) (610) (2,932) (9,400)
Total stockholders' equity (deficit).................... (29) 564 558 36 (1,762) 715
</TABLE>

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

MEDICAL MEDIA SYSTEMS
(a development stage company)

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
THREE MONTHS FIVE MONTHS DATE OF
ENDED MARCH ENDED MAY INCEPTION TO
1993 1994 1995 31, 1995 24, 1996 MAY 24, 1996
------- ------- ------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................................... $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------------ -------------
Expenses:
Research and development................... 2,346 1,693 1,540 360 434 6,354
General and administrative................. 170 168 394 56 113 850
------- ------- ------- ------- ------------ -------------
2,516 1,861 1,934 416 547 7,204
------- ------- ------- ------- ------------ -------------
Loss from operations......................... (2,516) (1,861) (1,934) (416) (547) (7,204)
Interest income.............................. 13 11 13 4 13 51
------- ------- ------- ------- ------------ -------------
Net loss..................................... $(2,503) $(1,850) $(1,921) $ (412) $ (534) $(7,153)
======= ======= ======= =========== ========== ==========
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MAY 24,
1993 1994 1995 1996
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Total assets........................................................... $1,507 $1,569 $1,059 $683
Note payable........................................................... -- -- 400 550
Partners' equity (deficit)(1).......................................... 1,340 1,440 429 (105)
</TABLE>

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

(1) Partners' equity includes accumulated deficit of approximately $2.8 million,
$4.7 million, $6.6 million and $7.2 million at December 31, 1993, 1994 and
1995 and May 24, 1996, respectively.

26
<PAGE> 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with Selected Financial Data
and Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus.

BACKGROUND

Interact was formed in April 1996, and in May 1996, it acquired its assets
and technologies through a business combination involving Ixion and MMS.
Inasmuch as former Ixion stockholders own the majority of Interact common stock
after the business combination, Ixion is considered to be the acquiring
corporation for purposes of purchase accounting and the predecessor entity to
Interact for purposes of financial reporting. The Interact financial statements
for periods prior to the business combination are those of what was formerly
Ixion. Accordingly, for purposes of Management's Discussion and Analysis of
Financial Condition and Results of Operations, the period-to-period comparisons
of results of operations are those of Ixion, as the predecessor entity to
Interact. Operating results comparisons relating to MMS are also presented.
Comments with respect to the Company's stage of development and future of
product development and liquidity and capital resources pertain to Interact.

Interact is at an early stage of development. Only one of the Company's
products is commercially available, and limited revenues have been generated
from product sales. To date the Company's resources have been dedicated to the
research and development of products based upon its expertise in digital medical
imaging and interactive software programming. The Company does not believe
certain of its proposed products will be commercially viable absent significant
further development and certain technological advances, and there can be no
assurance that development will be completed or advances will be achieved.

The Company expects to continue to incur substantial losses over at least
the next several years as the Company's development, testing, marketing and
manufacturing scale-up efforts expand. To achieve profitability and increased
sales levels, the Company must, among other things, establish and increase
market acceptance of its products, respond effectively to competitive pressures,
offer high quality customer service and support, introduce on a timely basis
products incorporating its technologies and advanced versions and enhancements
to its products, and successfully market and support advanced versions and
enhancements. The success of the Company's products and products under
development will depend, in large part, on the continued adoption, and the rate
of adoption, of MIS procedures by surgeons. There can be no assurance that the
Company will complete the development of any product, that products developed
will achieve market acceptance, or that the Company will ever produce
significant levels of revenue or achieve sustainable profitability.

The business combination involving Ixion and MMS resulted in approximately
$3.7 million of intangible assets, which will reduce future net income (or
increase net loss) as such intangible assets are amortized. The Company's
intangible assets were recorded in purchase accounting for the MMS acquisition
and represent the estimated value of products in development which are
considered to have attained technological feasibility, as such term is defined
and interpreted in accordance with generally accepted accounting principles, and
the estimated value attributable to contracts and agreements. The Company's
policy is to evaluate, at each balance sheet date, the appropriateness of the
carrying values of the unamortized balances of intangible assets on the basis of
estimated future cash flows (undiscounted) and other factors. If such evaluation
were to indicate a material impairment of these intangible assets, such
impairment would be recognized by a writedown of the applicable asset.

LIQUIDITY AND CAPITAL RESOURCES

Interact's annual financial statements were audited by the Company's
independent certified public accountants, whose report includes an explanatory
paragraph stating that the Company has incurred significant operating losses and
has stockholders' and working capital deficiencies that raise substantial doubt
about its ability to continue as a going concern. See "Financial Statements."

Prior to the May 1996 business combination and since 1994, Ixion incurred
operating losses which were funded primarily by contract revenues during 1994
and early 1995. Since early 1995, the Company's liquidity

27
<PAGE> 30

and capital resources have been primarily dependent upon fund raising activities
through private placements of short-term, unsecured promissory notes.

During 1994, 1995 and prior to the May 1996 business combination, cash
flows from financing activities provided approximately $200,000, $900,000 and
$900,000, respectively, from the issuance of short-term promissory notes. As a
yield adjustment and an incentive to lenders, the Company also agreed to issue
shares of its Common Stock. The Company continued to fund its operating losses
and cash used by operating activities through the aforementioned bridge
financing and through the continued forbearance of its creditors, many of whom
are Company stockholders.

Prior to the May 1996 business combination, MMS's liquidity and capital
resources were dependent upon capital contributions and loans from Baxter.
During 1993, 1994 and 1995, cash flows from capital contributions and cash
advances from Baxter approximated $2.8 million, $2.0 million and $1.3 million,
respectively. Cash was utilized to fund operating activities, primarily
operating losses, of approximately $2.1 million, $1.4 million and $1.5 million
during 1993, 1994 and 1995, respectively, and investing activities, primarily
capital expenditures, of approximately $700,000, $300,000 and $100,000 during
1993, 1994 and 1995, respectively.

In connection with the May 1996 business combination, Interact received
$2.0 million cash pursuant to a short-term, convertible promissory note payable
to a principal stockholder. Interact continues to be in the process of fund
raising, including a Common Stock and Warrant public offering to raise up to
approximately an additional $15 million. The Company intends to use a portion of
the net proceeds of this Offering to repay approximately $3.3 million of
existing indebtedness, representing the outstanding balance on certain
promissory notes issued to stockholders. The Company also expects to use the net
proceeds for commercialization of products, research and development, clinical
testing, capital expenditures, working capital and general corporate purposes.
Further, in this regard the Company expects to invest approximately $3.0 million
in development costs on products associated with the assets acquired from MMS.
Specifically, the Company's existing product, Preview, which is currently being
marketed, is expected to have several enhancements, and the Company will attempt
to complete development and bring to market DataFusion. In the ordinary course
of its business, the Company from time to time evaluates technologies for
acquisition or license that, if acquired could be used in the development of
products. The Company has no present commitments or agreements and is not
currently involved in any negotiations with respect to such acquisitions or
licenses. The Company has not identified precisely the amounts it plans to spend
on specific development or commercialization projects or the timing of such
expenditures. The amounts actually expended for each purpose may vary
significantly depending upon numerous factors, including future revenue growth,
the amount of cash generated by the Company's operations, the progress of the
Company's development projects, the timing of regulatory approvals,
technological advances and the status of competitive products. In addition,
expenditures will also depend upon the availability of additional financing and
other factors.

The Company's ability to meet its anticipated future obligations and to
continue as a going concern depends upon raising sufficient capital to fund its
operations and finance its contemplated business and product development, and
achieving profitable operations. The development and commercialization of the
Company's products will require substantial funds. The Company expects to
continue to incur substantial losses over at least the next several years and
its future capital requirements will depend on many factors, including the time
and costs involved in obtaining any required regulatory approvals, the cost of
manufacturing scale-up and effective commercialization activities and
arrangements, continued progress in its development programs and the magnitude
of these programs, and the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims. The Company anticipates that its
existing available cash, combined with the proceeds of this Offering and
interest income from cash investments will be adequate to fund the Company for
at least 12 months following this Offering. The Company intends to seek
additional funding through public or private financings to fund its operations
thereafter. There can be no assurances that additional financing will be
available on acceptable terms, or at all. If adequate funds are not available,
the Company may be required to delay, scale back or eliminate one or more of its
development programs or to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish certain rights to
certain of its technologies or products that the Company would not otherwise
relinquish.

28
<PAGE> 31

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

The net loss for the nine months ended September 30, 1996 increased
approximately $4.7 million over the comparative prior year period to $6.5
million due significantly to the write off of approximately $2.2 million of
intangible assets recorded in purchase accounting for certain products in
development and as a result of a decrease in revenues and increases in both
operating and interest expenses. As required by generally accepted accounting
principles, the estimated value of products in development acquired from MMS
which are not deemed to have attained technological feasibility, as defined,
were immediately expensed subsequent to recording the business combination.
Revenues decreased approximately $210,000 as revenues received during the nine
months ended September 30, 1995 represented final payments from Ethicon, Ixion's
sole customer, pursuant to research and license agreements and 1996 revenues of
$59,000 represent sales of MMS products during the period since its May
acquisition. Operating expenses for the nine months ended September 30, 1996
increased approximately $1.3 million or 64%. MMS operating results are included
in the Company's results of operations for periods subsequent to May 24, 1996,
the date of the business combination. Included in research and development
expense is approximately $412,000 of expenses incurred by MMS and $240,000 of
amortization relating to intangible assets recorded in the MMS acquisition.
Financing, legal and other consulting expenses increased over the comparative
prior year period resulting from stepped-up business development and financing
activities. Interest expense for the nine months ended September 30, 1996
increased approximately $944,000 due to increased bridge loan borrowings, which
were $900,000 at September 30, 1995 and $2.0 million at September 30, 1996, and
to a lesser extent due to borrowings from Baxter, which approximated $2.55
million during the period May 24 through September 30, 1996. Interest expense
during the nine months ended September 30, 1996 also includes approximately
$230,000 of amortization of deferred debt income costs incurred in connection
with September's one-year extension. Net cash used by operating activities for
the nine months ended September 30, 1996 increased approximately $1.7 million
over the comparative prior year period as a result of the increase in net loss
offset by increased non-cash charges relating primarily to the write-off and
amortization of intangible assets, issuances of common stock for services and
original issue discount amortization.

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

The net loss for 1995 increased over 1994 from $549,000 to $2,322,000 as a
result of decreased revenues and increased operating and interest expenses.
Revenues decreased $971,000 in 1994 to $266,000 in 1995 due to completion of
services for Ixion's sole customer. Operating expenses for 1995 increased
$679,000 or 38% primarily due to an increase in financing, legal and other
consulting expenses of $366,000, most of which relates to the issuance of Common
Stock to certain consultants in connection for, among others, marketing,
strategic planning, legal and other financial related services, and to a lesser
extent due to increased levels of product development, and sales and marketing
activities. Interest expense for the year ended December 31, 1995 increased
$123,000 over the prior year due to increased bridge loan borrowings, which were
$200,000 at December 31, 1994 and $1.1 million at December 31, 1995. Net cash
used by operating activities increased to $979,000 in 1995 as compared to
$256,000 for 1994 due primarily to the decrease in revenue.

Revenues of approximately $1.2 million in 1994 decreased $122,000 or 9% as
compared to 1993, due to a slightly lower level of contract services provided to
Ixion's sole customer. Operating expenses for 1994 increased $410,000, or 30%,
primarily due to Ixion incurring more costs related to increased research and
development activities and utilizing more outside consultants for business
development.

Deferred income taxes recorded for significant temporary differences
between tax and financial reporting basis of assets and liabilities approximate
$100,000 and $800,000 at December 31, 1994 and 1995, respectively, and primarily
relate to operating loss carryforwards. A valuation allowance has been recorded
for the full amount of deferred taxes as realization of such deferred tax asset
is not considered to be more likely than not.

29
<PAGE> 32

MEDICAL MEDIA SYSTEMS
(a development stage company)

FIVE MONTHS ENDED MAY 24, 1996 AND THREE MONTHS ENDED MARCH 31, 1995

There were no revenues received during the 1996 or 1995 interim periods.
Research and development expenses decreased modestly on a comparable period
basis resulting primarily from the Company utilizing consultants to a lesser
extent than the prior year.

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

There were no revenues received in any of the three years ended December
31, 1995. Operating expenses for 1995 increased approximately $73,000 or 4% over
1994 primarily due to an increase in salaries expense, resulting from the hiring
of three new employees during 1995. Consulting and travel fees also increased,
due to increased business development activities. Operating expenses decreased
in 1994 as compared to 1993 by $655,000 or 26% due to a decrease in research and
development expenses resulting from the completion of a project in 1994 that had
required a higher level of expense in 1993.

IMPACT OF INFLATION

The Company believes that the effects of inflation have not had a
significant effect on its financial condition or results of operations and
anticipates that the level of inflation, if moderate, will not have a
significant effect on operations.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), which establishes accounting standards for, among other
things, the impairment of long-lived assets and certain identifiable
intangibles, and Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), which establishes standards for accounting for stock-based compensation.
SFAS No. 121 will be effective for financial statements having fiscal years
beginning after December 15, 1995, and is not expected to have a significant
effect, if any, on the Company's financial condition or results of operations.
SFAS No. 123 is not expected to have a significant effect, if any, on the
Company's financial condition or results of operations. SFAS No. 123 will be
effective for financial statements for fiscal years beginning after December 15,
1995, and required pro forma disclosures will be included in such statements. It
is expected that the Company will not adopt the "fair value based method" of
accounting for stock options, which is encouraged by SFAS No. 123, but rather
will continue to account for such, utilizing the "intrinsic value based method"
as is allowed by such statement.

30
<PAGE> 33

BUSINESS

Interact develops, markets and manufactures products designed to facilitate
the effective use of minimally invasive surgical ("MIS") procedures and enhance
clinical performance. The Company's initial product, Preview(TM), was launched
in June 1996. Preview provides the clinician with a detailed three-dimensional
model of the patient-specific anatomy manufactured by processing computed
tomography ("CT") or magnetic resonance ("MR") images on the Company's
proprietary software platform at its production facility. The Company delivers
its Preview models to the clinician embodied in user-friendly proprietary
viewing software that can be run on either a Windows-compatible or Macintosh
personal computer. The model and the viewing software augment traditional
two-dimensional medical imaging tools and allow the clinician to manipulate
information, perform measurements and conduct pre-surgical planning for use
primarily in MIS procedures. The Company is also currently field testing a
pre-production prototype of GastroSim(TM), an interactive virtual reality
("IVR") simulator for teaching and training clinicians. GastroSim is designed to
figuratively place the clinician inside the upper and lower gastrointestinal
tracts of a "virtual" patient and allow the clinician to perform a number of
simulated MIS procedures using realistic medical instruments and devices. The
Company is also currently developing DataFusion, which is designed to aid the
clinician during the performance of MIS procedures by overlaying live images of
a patient's anatomy on the same three-dimensional model used in Preview, IVR
simulators depicting anatomical regions of the body other than the
gastrointestinal tract and interactive multimedia products to educate clinicians
to perform certain procedures.

In May 1996, the Company entered into a distribution agreement with Baxter
Healthcare Corporation ("Baxter"), a wholly-owned subsidiary of which is a
principal stockholder of the Company, pursuant to which Baxter obtained an
exclusive right to sell Preview for use in connection with treating aortic and
iliac aneurysms (except with regard to sales to parties developing or
manufacturing devices specifically designed for endovascular treatment of aortic
aneurysms for which Baxter's rights are co-exclusive with the Company's),
including abdominal aortic aneurysms ("AAA").

INDUSTRY BACKGROUND

Open surgery is an invasive procedure that generally requires large
incisions and significant tissue manipulation in order to provide the clinician
with direct access to the intended surgical site. A significant part of the
trauma suffered in connection with open surgery is a result of gaining access to
the surgical site and is not caused by the surgical repair itself. For example,
the clinician often must make large incisions through layers of muscle and
tissue, which may cause muscle or nerve damage, bleeding, scarring and other
complications such as infection, temporary or permanent debilitation and pain.
As a result, many open surgical procedures require extended operating times,
expose the patient to the risks of prolonged general anesthesia and involve
lengthy hospitalization and patient recovery times. In addition, because of the
severe trauma often associated with open surgical procedures, a significant
population of patients, which includes the elderly and physically weak, are not
considered good candidates for these surgical procedures.

In order to reduce the complications associated with open surgical
techniques, and driven by advances in both device technology and surgical
technique, a number of surgical approaches referred to as MIS procedures have
been developed. MIS procedures allow surgeons to access the surgical site
through the body's natural openings or by making small incisions to access body
cavities. The benefits of MIS procedures, as compared to open surgery, generally
include significantly reduced patient trauma (including muscle, nerve and other
tissue damage), complications, pain and suffering, convalescence time, procedure
time and ultimately lower medical costs.

The advantages of MIS approaches over open surgical techniques suggest that
minimally invasive surgery could revolutionize the manner in which surgery is
performed. The Company believes the growth in MIS procedures is being
accelerated by today's healthcare environment, in which more cost effective
means to deliver services are aggressively being sought. The development and
adoption of MIS procedures have already had a significant impact on many
surgical fields, including general surgery, cardiology, orthopedics, gynecology,
urology and neurosurgery. Notable examples of MIS procedures that have been
widely adopted include laparoscopic and arthroscopic procedures.

31
<PAGE> 34

Despite the benefits of minimally invasive surgery, only select MIS
procedures have attained widespread adoption. In 1995, MIS procedures accounted
for approximately 15% of the surgical procedures performed in the United States.
The Company believes that its products will help address two of the major
impediments to the growth in use of MIS procedures. First, in performing MIS
procedures, parts of the physical anatomy that can be visualized and manipulated
during traditional surgeries are hidden from the eye and must be handled
remotely. In order to enable clinicians to be able to effectively perform many
MIS procedures, the Company believes that there exists a need for products which
provide clinicians with improved visualization, navigation and support
capabilities. Second, MIS procedures require proficiency in novel surgical
techniques potentially involving specialized MIS instruments and devices. Due to
the increasing number of clinically accepted procedures and the increasing
number of devices and techniques that have been developed and are expected to
continue to be developed, even highly competent clinicians may not be able to
perform all of the various techniques or utilize all of the instruments and
devices developed within their area of specialty. The Company believes that a
training and teaching system capable of assisting in development of the skills
necessary to perform an increasing number of clinically accepted surgical and
diagnostic techniques and the use of an increasing number of complex medical
instruments and devices would greatly facilitate the adoption of MIS procedures.

THE INTERACT SOLUTION

The Company is developing products designed to facilitate the effective use
of MIS procedures and enhance clinical performance. Preview and the Company's
products under development incorporate technical advances in the fields of
medical imaging and computer software in order to provide clinicians with
information to assist in the more effective and efficient performance of MIS
procedures.

Visualization and Planning. The Company's initial product, Preview, allows
the clinician to visualize and plan surgical procedures by interacting with a
three-dimensional model of the patient-specific anatomy. MIS procedures strive
to apply precise treatment to specific anatomical locations identified in
pre-operative imaging. The Company believes that Preview's ability to generate
three-dimensional representations and present thousands more pre-operative
images than traditional imaging methods provides clinicians with a valuable
perspective for use in planning MIS procedures.

As an outgrowth of Preview, the Company is also developing DataFusion, a
product designed to aid the clinician with visualization and navigation during
the performance of actual MIS procedures. DataFusion will use proprietary
software to track surgical instruments and overlay live images of a patient's
anatomy on the same three-dimensional model used in Preview. By helping the
clinician to compensate for the inability to directly visualize and manipulate
the operative area, the Company believes that Preview (and DataFusion once
developed), will improve the results of MIS procedures and enable the
application of MIS technology to additional surgical procedures.

Teaching and Training. The Company is currently field testing a
pre-production prototype of GastroSim, an IVR simulator that is designed to
create realistic clinical experiences for training clinicians to conduct
diagnostic tests and therapy on ulcers, polyps, cancers, bile stone removals,
bronchoscopies, endotracheal tube placements and ultrasound echocardial
procedures and in using sophisticated MIS instruments and devices. Although the
Company's initial market focus for its IVR simulator technology will be on
procedures typically performed in the areas of gastroenterology and family
practice medicine, the Company plans to apply its core IVR technology to develop
simulators designed to replicate MIS procedures utilized by clinicians in a
number of clinical specialties, including cardiology, cardiac surgery,
interventional radiology, urology, obstetrics/gynecology, neurosurgery and
various micro minimally invasive procedures such as functional endoscopic sinus
surgery. By allowing the clinician to replicate a multitude of complex surgical,
diagnostic and therapeutic procedures without the need for live patients,
cadavers or animals, the IVR simulators the Company intends to develop can be
anticipated to increase the number of physicians capable of performing advanced
MIS procedures, improve the general level of competency of clinicians performing
MIS procedures and help safely and expeditiously make MIS procedures more widely
available.

The Company believes that Preview and its products under development, by
providing the clinician with information required in order to perform MIS
procedures and helping to ensure the competency with which

32
<PAGE> 35

such procedures are performed, will offer significant clinical benefits. These
benefits include reduced trauma and limited need for general anesthesia and cost
benefits, including lower procedure costs, reduced procedure time and shorter
hospital stays, as well as faster recovery times, as compared to open surgery.

COMPANY STRATEGY

- FOCUS INITIAL PREVIEW MARKETING EFFORTS ON AAA. In the near term the
Company has focused its marketing efforts on the application of Preview
to planning MIS procedures to treat AAA. After the Company has validated
Preview for use in connection with AAA, the Company intends to
concentrate significant resources on establishing the use of Preview as a
standard for the performance of a number of other MIS procedures.

- COMMERCIALIZE GASTROSIM AND ESTABLISH IT AS A TEACHING AND TRAINING
STANDARD. The Company plans to develop and maintain relationships with
leading medical institutions and clinicians in order to help establish
GastroSim as a standard for use in teaching and training
gastroenterologists and family practitioners to perform various MIS
procedures and diagnostic and therapeutic techniques. The Company
believes that because GastroSim is designed to be capable of providing
unbiased and objective results of the clinician's skills performance, it
can also be established as a standard by which medical institutions
accredit and credential clinicians to perform certain MIS procedures and
diagnostic and therapeutic techniques.

- EXPAND TO OTHER APPLICATIONS. The Company believes that Preview can be
applied in a number of procedures, including procedures for treating
kidney stones, tumors in solid abdominal organs, prostate tumors and
maxillofacial reconstructions. The Company further believes that in most
areas where Preview proves useful as a pre-surgical planning tool,
Preview may also prove valuable in conducting post-surgical exams and
evaluations. The Company's existing 510(k) clearance applies to its
entire Preview technology and not just a specific application for such
technology, and as such the Company believes that it is well positioned
to model a broad variety of anatomical structures without significant
additional United States regulatory pre-market clearance compliance
requirements. The Company's IVR simulator technology, although initially
applied in the Company's GastroSim product, is also suited to replicate
MIS procedures utilized by clinicians in a number of clinical
specialties, including, cardiology, cardiac surgery, interventional
radiology, urology, obstetrics/gynecology, neurosurgery and various micro
minimally invasive procedures such as functional endoscopic sinus
surgery. The Company does not believe that its IVR simulators are subject
to United States Food and Drug Administration ("FDA") regulation.

- MINIMIZE UPFRONT INVESTMENT COSTS TO CUSTOMERS. The Company seeks to
minimize upfront investment costs for its customers. Preview, unlike
other three-dimensional imaging products, does not require the purchase
of any equipment, other than imaging equipment typically available to
clinicians and either a Windows-compatible or Macintosh personal
computer. Furthermore, as the entertainment industry continues to drive
down the cost of computer graphic modeling and improvements are made in
computer video processing, the Company will be able to incorporate new
lower-cost hardware into its products under development. The Company
anticipates establishing equipment leasing programs to lower the upfront
costs required to purchase certain of its products under development.

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<PAGE> 36

PRODUCTS

The Company is developing products designed to be utilized by clinicians
from the operating room to the medical school classroom. The Company's initial
product and products under development are as follows:

PREVIEW

Preview allows the clinician to visualize and plan surgical procedures by
using a three-dimensional model of the patient-specific anatomy. Each Preview
model provides thousands of pre-operative images and a detailed
three-dimensional model of the patient-specific anatomy. The Company delivers
its Preview models to clinicians embodied in user-friendly proprietary viewing
software that can be run on either a Windows-compatible or Macintosh personal
computer and allows the clinician, without significant computer expertise, to
directly manipulate information, perform measurements and conduct pre-surgical
planning for use in MIS procedures. MIS procedures strive to apply precise
treatment to specific anatomical locations identified in pre-operative imaging.
The Company believes that Preview's ability to generate three-dimensional
representations and present thousands more pre-operative images than traditional
imaging methods provides clinicians with a valuable perspective for use in
planning MIS procedures. The Company believes that in most areas where Preview
proves useful as a pre-surgical planning tool, Preview may also prove valuable
in conducting post-surgical exams and evaluations.

Preview augments traditional two-dimensional medical imaging. In order to
obtain a three-dimensional patient-specific model, a clinician can order a
conventional CT or MR scan and send the images to the Company's production
facility for processing. Depending on the customer's preference, images can be
transferred to the Company through the Internet, through a private data network,
or via magnetic tape and overnight shipping. At the Company's FDA registered
production facility, trained production engineers create patient specific
computer models using the Company's proprietary software and advanced graphics
workstations. The resulting models are recorded on CD-ROM and returned to the
clinician embodied in the Company's proprietary viewing software.

Preview allows a clinician to address clinical planning needs without
making the sizeable investment in hardware, software and training that would be
required if a clinician were required to conduct the modeling him or herself.
Each Preview model the clinician orders currently costs between $900 and $1,500.
On an ongoing basis, Preview allows customers to outsource their
three-dimensional modeling needs and avoid service, maintenance and additional
staffing costs.

It is the Company's belief that Preview will eventually supersede the use
of the angiogram in a significant number of cases. Although the angiogram
continues to be a useful imaging procedure, some of the potential advantages of
Preview over the angiogram are as follows:

- Reduced trauma and overall risk--Preview models can be generated without
making a surgical incision and do not require anesthesia.

- Three-dimensional images--Preview provides the clinician with the
ability to view both two and three-dimensional images.

- Improved tissue differentiation--The Company believes Preview provides
clearer images of tissue than the angiogram.

- Reduced cost--A Preview model currently costs between $900-$1500,
significantly less than an angiogram.

Initial Application. The Company has focused its initial marketing efforts
on the application of Preview to planning surgical procedures to treat AAA.
Disruptions of blood flow to the aorta can lead to major cardiovascular
complications and death. AAAs result from a weakening in the aortic wall which
causes a bulge or aneurysm to form. Because of the blood pressure in the aorta,
AAAs are particularly susceptible to rupture, usually resulting in death. The
National Center for Health Care Statistics estimates that approximately 1.5
million people in the United States have AAA, with approximately 190,000 new
patients diagnosed with AAA each year and approximately 45,000 AAAs repaired
each year. The cost of treating aortic and iliac aneurysms in the United States
alone is estimated to be greater than $2.0 billion per year.

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<PAGE> 37

Until recently, the only means of repair for AAA was open surgery. Open
surgery is invasive, requires substantial incisions and long recovery times, and
can lead to complications such as blood loss and infection. For example, the
conventional treatment for AAA involves the opening and division of the
diaphragm, retraction of the intestines, opening of the retroperitoneum, and
clamping of the aorta above and below the aneurysm in preparation for vascular
graft insertion. This procedure typically lasts two to four hours and is
performed under general anesthesia. As a result of its invasiveness, open
surgical AAA repair has high mortality and complication rates and is often
deemed too dangerous to perform on the elderly and the weak.

Preview has been used by leading surgeons in a number of countries for
planning both minimally invasive and open repair of AAA. The Company believes
that due to the drawbacks of open surgical procedures, the recommended course of
treatment for AAA will ultimately be an MIS procedure. EndoVascular
Technologies, Inc. has developed and is conducting clinical trials of an MIS
procedure for AAA and Baxter, Boston Scientific, Medtronic Inc. and Pfizer are
all believed to be in the process of developing MIS procedures and instruments
to treat AAA. The Company believes that Preview will play a particularly key
role in these MIS procedures because the importance of pre-surgical planning is
heightened by the clinician's need to size a vascular graft to use in the
procedure without first being able to observe the aneurysm.

Other Applications. Preview has been tested clinically on many parts of
the human anatomy, including the peripheral vascular system, the kidney, the
liver, the head, the neck and the breast, and in a variety of MIS procedures.
The Company believes that Preview can be applied in a number of procedures,
including procedures for treating kidney stones, tumors in solid abdominal
organs, prostate tumors and maxillofacial reconstructions. Although the Company
currently does not market Preview for use other than in connection with AAA, the
Company recently received an order to prepare a number of kidney models. The
Company's existing 510(k) clearance covers its Preview technology, not just a
specific application for such technology, and, as such, the Company believes
that it is well positioned to model a broad variety of anatomical structures
without significant additional United States regulatory pre-market clearance
compliance requirements. The Company further believes that the ability to adopt
Preview to modeling different parts of the human anatomy is limited only by
ability of CT or MR scans to capture quality images of these areas.

IVR SIMULATORS

The Company is developing IVR simulators that consist of a platform which
is a computer system that is capable of being configured to control various
pavilions, each consisting of a specific robotic mannequin depicting one of
various anatomical regions of the body in which simulated diagnostic and
therapeutic procedures are performed. These procedures are simulated through the
use of proprietary software that monitors and actuates the pavilion and displays
video images on the platform computer monitor.

The Company's initial IVR simulator, GastroSim (which is currently in the
pre-production prototype stage), consists of a pavilion depicting two anatomical
regions, the upper gastrointestinal ("UGI") and lower gastrointestinal ("LGI")
tracts. GastroSim incorporates procedures designed for (i) training medical
personnel to conduct diagnostic tests and perform therapies on ulcers, polyps,
cancers, bile stone removals and other UGI procedures, such as bronchoscopy,
endotracheal tube placement and ultrasound echocardial procedures, (ii) teaching
clinicians to manipulate sophisticated MIS medical devices and instruments and
(iii) evaluating the clinicians' ability to accomplish these diagnostic and
therapeutic maneuvers. GastroSim is currently deployed in beta test at Swedish
Medical Center in Seattle, Washington and the Company is in negotiations to
establish additional beta test sites.

GastroSim displays realistic images of the UGI and LGI tracts of a
"virtual" patient on the platform computer monitor. While looking inside the
"virtual" patient, the clinician can perform a variety of diagnostic and
therapeutic procedures by inserting a flexible endoscope into the pavilion and
maneuvering the endoscope through the UGI and LGI tracts. While performing
procedures on the "virtual" patient, GastroSim replicates the feel and sound of
performing an actual procedure. GastroSim records digital data on the
clinician's performance that can be used to generate an unbiased and objective
evaluation of the clinician's therapeutic skills. Various characteristics of the
clinician's performance can be measured by GastroSim, such as "lapse time" to
perform a procedure or technique, the force used to perform such tasks and
psychomotor proficiency involved in utilizing or manipulating MIS instruments or
devices.

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<PAGE> 38

The Company believes that GastroSim, once commercially deployed, will be a
more cost-effective means of training clinicians than performing procedures on
animals and cadavers, and will reduce the time spent by trained physicians in
supervising procedures. The Company also believes that by providing the
clinician with the opportunity to practice an unlimited number of realistic
procedures without the need for a live patient, GastroSim will allow the
clinician to shorten the time needed to obtain a level of proficiency required
to perform a variety of new diagnostic methods and therapies, and to use new
medical instruments and devices. The Company further believes that with its
ability to provide in-depth evaluation of the clinician's performance, GastroSim
has the potential to become a standard for accrediting, credentialing and
privileging clinicians.

The initial procedure planned by the Company for GastroSim will allow the
simulator to replicate a sigmoidoscopy, the second most commonly performed
endoscopic procedure in the United States, with approximately 1.6 million such
procedures conducted in 1995 in the United States alone. The Company estimates
that there are over 100,000 clinicians, including gastroenterologists, family
practitioners, general practitioners, physicians assistants, nurses and
technicians who could benefit from using GastroSim to help master this
procedure. The Company further envisions the opportunity to model numerous
additional procedures for use with GastroSim. These procedures have the
potential to generate new sales from initial customers and will create a more
expansive product for potential additional customers. In order to capitalize on
this opportunity, the Company is currently developing a procedure to replicate a
colonoscopy, the third most commonly performed endoscopic procedure in the
United States, with approximately 1.4 million procedures conducted in 1995 in
the United States alone.

While GastroSim is focused on procedures typically performed by
gastroenterologists and family practitioners, the Company is evaluating market
data, and is currently planning to develop pavilions and procedures which
replicate MIS procedures utilized by clinicians in a number of clinical
specialties, including cardiology, cardiac surgery, interventional radiology,
urology, obstetrics/gynecology, neurosurgery and various micro MIS procedures
such as functional endoscopic sinus surgery. The Company does not believe that
its IVR simulators will be subject to FDA regulation.

ADDITIONAL PRODUCTS UNDER DEVELOPMENT

DATAFUSION

As an outgrowth of Preview, the Company is developing DataFusion, a product
designed to aid the clinician with visualization and navigation during the
performance of MIS procedures. DataFusion will use proprietary software to track
surgical instruments and overlay live images of a patient's anatomy on the same
three-dimensional model used in Preview. DataFusion is being developed to
address clinical problems that hinder the wider application of MIS procedures in
the operating room. These clinical problems result from the limited exposure and
visualization of anatomy possible using endoscopes and other MIS instruments and
devices.

MIS procedures strive to apply precise treatment to specific anatomical
locations identified in pre-operative imaging. Unfortunately, while MIS
procedures present a great need for precision, due to the very nature of these
procedures, only a small portion of the anatomy may be visible at any time.
DataFusion is being developed to provide an exact road map of the patient's
anatomy in the form of a three-dimensional model with the location of the
surgical instruments visually superimposed. DataFusion, through computer
tracking of surgical instruments, is designed to provide the clinician with
precise targeting to specific locations defined with respect to the
three-dimensional model.

DataFusion is designed to be integrated with the traditional real-time
imaging modalities (endoscopes, ultrasound, fluoroscopy, etc.) through digital
video processing and tracker interfaces. The Company anticipates that DataFusion
will use off-the-shelf computer hardware with some custom attachments to adapt
conventional surgical instrumentation for computer tracking, and that DataFusion
will be packaged on an operating room-compatible cart.

DataFusion is in the prototype stage and has been used in an initial series
of animal trials to demonstrate accuracy and hardware compatibility with the
operating room environment. It is anticipated that regulatory

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<PAGE> 39

clearance for the DataFusion product will require extensive clinical trials to
establish clinical efficacy, and that FDA premarket approval ("PMA") will be
required.

INTERACTIVE MULTIMEDIA PRODUCTS

In order to address the clinicians' need for improved information and
exposure to MIS techniques and diagnostic images from a wide range of disease
states, the Company is developing a series of educational multimedia products
which may be distributed via CD-ROM or over the Internet. These products are
being designed to integrate aspects of the Company's simulation technology to
create interactive illustrations of the best-demonstrated clinical practice. The
Company intends to include sophisticated simulation modules in its multimedia
products that are designed to allow the clinician to become involved in
performing the procedure depicted in the product. Using standard computer input
devices, the Company currently anticipates developing multimedia products that
allow the clinician to manipulate MIS instruments and devices and observe the
response of the simulated tissue on the computer monitor. The Company believes
that, once they are developed, it will be able to use its multimedia products as
another channel to gain revenue from the extensive database of clinical images
collected in the development of IVR simulators. The Company further believes
that the multimedia products that it plans to develop will appeal to both
medical students and practicing clinicians as part of their personal libraries.

MARKETING, SALES, AND DISTRIBUTION

The Company has limited experience in sales, marketing and distribution. To
market any of its products directly, the Company must develop a marketing and
sales force with technical expertise and with supporting distribution
capability. Alternatively, the Company may obtain the assistance of another
company with a large distribution system and a large sales force. There can be
no assurance that the Company will be able to establish sales and distribution
capabilities or enter into profitable arrangements with third parties with
respect to distribution of its products. To the extent the Company enters into
co-promotion or other licensing arrangements, any revenues received by the
Company will be dependent on the efforts of third parties and there can be no
assurance that third party efforts will be successful. The Company is dependent
on its relationship with Baxter for a variety of reasons, and the termination of
this relationship could have a material adverse effect on the Company. Pursuant
to a distribution agreement between Baxter and the Company, Baxter has an
exclusive right to sell Preview for use in connection with treating aortic and
iliac aneurysms (except with regard to parties developing or manufacturing
devices specifically designed for endovascular treatment of aortic aneurysms for
which Baxter's rights are co-exclusive with the Company's), including AAA. Sales
of Preview for use in treating aortic and iliac aneurysms and the Company's
financial results will depend in significant part on the extent to which Baxter
commits adequate resources to its product launch and to the subsequent marketing
of Preview. Baxter develops, manufactures and markets a wide variety of medical
devices, some of which may compete indirectly with Preview. There can be no
assurance that Baxter will commit significant resources to market Preview for
use in treating aortic and iliac aneurysms or that its marketing activities will
be effective. See "--Baxter Distribution Agreement."

The Company currently markets Preview for use in connection with AAA
through Baxter and through the Company's direct sales force. Sales of Preview
for other applications and sales of the Company's IVR simulators will be made
either through the Company's direct sales force, through distributors, by means
of collaborative arrangements, or by a combination of these methods.

In connection with the Company's initial marketing efforts, the Company has
established a Medical Advisory Board comprised of vascular surgeons,
gastroenterologists, family practitioners and other prominent surgeons. The
Company also plans to sponsor training programs designed to increase clinician
familiarity with the advantages of and applications for the Company's products.

BAXTER DISTRIBUTION AGREEMENT

In May 1996, the Company entered into a distribution agreement with Baxter,
a wholly-owned subsidiary of which is a principal stockholder of the Company,
pursuant to which Baxter has obtained an exclusive right to sell Preview for use
in connection with treating aortic and iliac aneurysms (except with regard to
parties developing or manufacturing devices specifically designed for
endovascular treatment of aortic aneurysms for

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<PAGE> 40

which Baxter's rights are co-exclusive with the Company's), including AAA. The
Company has retained all other rights, except as otherwise set forth below, with
respect to the marketing, sales and distribution of models generated using its
Preview technology. Under the distribution agreement, Baxter is entitled to
receive between 23% and 30% of all revenue generated from its Preview sales.
Baxter is currently developing products for the less invasive treatment of
aneurysms and has publicly announced plans to include Preview in its product
line.

Under the terms of the distribution agreement, Baxter has a right of first
offer to negotiate distribution agreements for any future products the Company
develops in the fields of peripheral vascular surgery and/or endovascular
grafting. Baxter also has the right to cause the Company to develop, at Baxter's
sole expense, a custom product based on the Company's Preview technology for use
in treating aortic aneurysms which would be marketed, distributed and sold
exclusively by Baxter. The term of the distribution agreement is five years, and
will be automatically extended for an additional five years unless Baxter
provides written notice of termination. The parties can each terminate the
distribution agreement under certain circumstances, including the material
breach by the other party. In addition, the Company can terminate the
distribution agreement if Baxter fails to achieve certain minimum sales figures.
See "Certain Transactions."

Baxter has agreed not to sell any products that are directly competitive
with the products distributed on behalf of the Company pursuant to the
distribution agreement. Baxter has also agreed to advertise and promote Preview
for use in connection with treating aortic and iliac aneurysms.

The Company believes that its distribution arrangement with Baxter will
enable it to establish a presence for Preview in the market more quickly and on
a more cost-effective basis than it could achieve by approaching the market
solely with its own sales and marketing network.

Pursuant to a manufacturing license agreement entered into between Baxter
and the Company in May 1996, during the term of the distribution agreement
between the parties, Baxter is entitled to obtain the right to produce or cause
third parties to produce its requirements of Preview models for use in
connection with treating aortic and iliac aneurysms in the event that the
Company is unable to supply its requirements in a timely manner. Baxter's right
to produce Preview models or have them produced will expire, in any instance
where Baxter has asserted its rights to produce Preview models, three months
after the Company notifies Baxter in writing that it can again meet its
requirements. If the Company were to surrender any rights with respect to
producing Preview models to Baxter, it could have a material adverse effect on
the Company's business, results of operations and financial condition.

MEDICAL ADVISORY BOARD

The Company has established a Medical Advisory Board composed of clinicians
with extensive expertise in the fields related to the Company's products. The
members are available to review product plans, identify clinical applications,
and consult as needed with the Company's staff. The members of the Medical
Advisory Board are consultants to the Company and have substantial constraints
on the amount of time they can devote to Company matters. The members of the
Medical Advisory Board are as follows:

<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- --------------------------------- ----------------------------------------------------------
<S> <C>
Mark Fillinger, M.D. Assistant Professor of Vascular
Surgery--Dartmouth-Hitchcock Medical Center, Lebanon, NH.
Richard Kozarek, M.D. Chief of Gastroenterology--Virginia Mason Hospital,
Seattle, WA
</TABLE>

<TABLE>
<S> <C>
Benjamin Krevsky, M.D. Associate Chairman, Gastroenterology -- Temple University,
Philadelphia, PA
Simon K. Lo, M.D. Director of Endoscopy--University of California, Los
Angeles-Harbor Medical Center
Mark D. Noar, M.D. Director--Endoscopic Microsurgery Associates, Baltimore,
MD
J. Patrick O'Leary, M.D. Head, Department of Surgery--Louisiana State University,
Baton Rouge, LA
</TABLE>

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<PAGE> 41

<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- --------------------------------- ----------------------------------------------------------
<S> <C>
John Payne, M.D. Head, Department of Surgery--Kaiser, Honolulu, HI
Wm. MacMillan Rodney, M.D. Chairman, Department of Family Medicine--University of
Tennessee, Knoxville, TN
Joseph Rosen, M.D. Associate Professor of Surgery, Division of Plastic and
Reconstructive Surgery--Dartmouth-Hitchcock Medical
Center, Lebanon, NH
Michael Tuggy, M.D. Faculty and Procedural Trainer, Department of Family
Medicine-- Swedish Medical Center, Seattle, WA
</TABLE>

Additional medical advisors and consultants have been made available to the
Company though its distribution agreement with Baxter. The following individuals
are ongoing consultants to Baxter's Vascular Systems Division who have been
involved in advising the Company with respect to Preview:

<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- --------------------------------- ----------------------------------------------------------
<S> <C>
Hugh Beebe, M.D. Director--Jobst Vascular Center, Toledo, Ohio
Thomas J. Fogarty, M.D. Professor of Surgery--Stanford Medical Center, Stanford,
CA
John Martin, M.D. Horizon Vascular Institute, Montgomery General Hospital,
Montgomery, AL
Geoff White, M.D. Chief of Vascular Surgery--Royal Prince Albert Hospital,
Sydney, Australia
Weiyun Yu, M.D. Assistant Chief of Vascular Surgery--Royal Prince Albert
Hospital, Sydney, Australia
</TABLE>

MANUFACTURING

Preview is software-based and DataFusion and the Company's IVR simulators
will include both software and hardware. Relatively few of the hardware
components contained in DataFusion and the Company's IVR simulators are expected
to be unique to such products. The Company's manufacturing experience to date
has been limited to the processing of a limited number of Preview models and the
assembly of a limited number of pre-production units of GastroSim. In order to
achieve significant revenue, the Company will have to produce or arrange for
third parties to produce its products on a commercial scale. There can be no
assurance that the Company will be able to produce or cause third parties to
produce its products in commercial-scale quantities at commercially viable
costs. The Company may encounter unexpected delays or costs in scaling-up
manufacturing operations or in hiring and training additional personnel to
produce its products. The failure to scale-up manufacturing successfully in a
timely or cost-effective manner, future production problems or interruptions in
supply could have a material adverse effect on the Company's business, results
of operations and financial condition.

The Company's manufacturing process for its Preview models consists of
various steps, including generating images from CT or MR scans using the
Company's proprietary software, using expert modelers to identify anatomical
structures within the images, converting anatomical structures and images into
three-dimensional computer-models using the Company's proprietary software and
recording models on a CD-ROM, and is performed at the Company's FDA-registered
facility in West Lebanon, New Hampshire, an approximately 2,000 square foot
leased facility. All steps in manufacturing the Company's Preview models are
performed by the Company.

The Company believes its FDA-registered manufacturing facility is
sufficient to meet its production requirements for the next twelve months. The
Company is negotiating with its landlord to increase the production capacity of
its current facility to meet the Company's production requirements for the next
several years. To date, the Company is capable of producing over one hundred
Preview models per month and expects that it will be able to produce up to three
hundred Preview models per month in its current facility. Although the Company
believes that it will be able to hire and train additional modelers and develop
additional

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<PAGE> 42

manufacturing capacity, to the extent that demand exceeds three hundred Preview
models per month, there can be no assurance that the Company will be able to do
so.

The Company anticipates that certain key components of GastroSim and
DataFusion will be obtained from single or limited sources, will be available
only in limited quantities and will require substantial production lead times.
The Company's reliance on outside vendors generally, and a single qualified
source or a limited group of suppliers, in particular, involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over quality, pricing and timing of delivery of
components.

The Company will be required to adhere to applicable regulatory
requirements, including FDA-mandated current Good Manufacturing Practices
("GMPs") regulations in the processing of Preview models and the eventual
manufacture of DataFusion. Any failure to meet such requirements could delay or
prohibit the manufacturing of the Company's products, which, could have a
material adverse effect on the Company's business, results of operations and
financial condition.

Pursuant to an agreement between Baxter and the Company, Baxter is entitled
to obtain the right to produce, or have third parties produce, its requirements
of Preview models in the event the Company is unable to supply its requirements
in a timely manner. See "--Baxter Distribution Agreement."

PRODUCT DEVELOPMENT

Ixion spent approximately $951,000, $1,189,000 and $1,332,000 on research
and development in 1993, 1994 and 1995, respectively. MMS spent approximately
$2,346,000, $1,693,000 and $1,540,000 on research and development in 1993, 1994
and 1995, respectively. The Company expects that it will continue to spend
substantial amounts on the development of products, and there can be no
assurance that any new products will be successfully developed or
commercialized. As of November 20, 1996, the Company had 11 persons engaged in
development activities.

COMPETITION

Competition in the markets in which Preview and the Company's products
under development will compete is expected to be intense. A number of companies
currently compete or intend to compete directly and indirectly with the
Company's existing products and products under development. Many of the
Company's competitors and potential competitors have substantially greater name
recognition and capital resources than the Company and also have greater
resources and expertise in the areas of research and development.

The markets in which Preview and the Company's products under development
will compete are characterized by rapid technological innovation. There can be
no assurance that the Company's competitors and potential competitors will not
succeed in developing and marketing technologies and products that are more
effective or more cost effective than those developed and marketed by the
Company or that would render the Company's technology and products obsolete or
noncompetitive. The applications for which Preview and the Company's products
under development are designed can also be addressed by other products, methods
or techniques, many of which are widely accepted in the medical community. There
can be no assurance that Preview or the Company's products under development
will be able to replace such established products, methods or techniques.
Additionally, new products could be developed that replace or reduce the
importance of the Company's products.

Preview. The Company believes that Preview competes with three-dimensional
imaging applications developed for traditional radiology workstations and
general purpose software visualization systems. Existing radiology workstations
with three-dimensional modeling capabilities include the Allegro Workstation
from ISG Technologies, Inc., Analyze software from the Mayo Clinic and CN
Software Inc., Advantage Windows from General Electric, EasyVision from
Phillips, Magic View from Siemens, and OmniPro from Algotec/Elscint. Other
companies believed to be developing products in this area include Picker, VoxL,
Cemax-Ikon and Toshiba. Suppliers of visualization software systems include AVS,
Inc., Iris Explorer, NAG, Inc., Data Explorer, KB Vision, Amerinex, Artificial
Intelligence, Inc., Interactive Data Language, Inc., VoxelView and Vital Images,
Inc. The Company believes that the primary competitive factors in the market

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<PAGE> 43

for three-dimensional imaging include efficacy, ease of use, quality,
reliability and cost effectiveness. In addition, the length of time required for
products to be developed and to receive regulatory approval is an important
competitive factor. The Company believes that it competes favorably with respect
to these factors, although there can be no assurance that it will continue to do
so.

IVR Simulators. The Company anticipates that its IVR simulators will
compete directly against other medical procedure simulators and, to a lesser
extent, against print textbooks, interactive software, and other methods of
training for conducting surgical procedures, including performing procedures on
animals and cadavers. The Company believes that the primary competitive factors
in the market in which its IVR simulators, when completed, are expected to
compete will be cost and the ability of simulators to provide a realistic
environment in which to practice procedures. The Company believes that the
numerous years of research and development that it has performed in the area of
simulation will allow it to compete favorably with respect to these factors,
although there can be no assurance that it will continue to do so. The Company
expects that the number of competing IVR simulators will increase as the
potential benefits of medical procedure simulators become more widely
recognized. The Company is aware that each of Boston Dynamics, Cine Med and High
Techsplanations, as well as a number of universities and research institutions,
are attempting to develop technologies and products that would directly compete
with the Company's IVR simulators.

Interactive Multimedia Products. The interactive software publishing
industry is intensely competitive. The Company's sales of the multimedia
products that it develops, if any, may be adversely affected by the increasing
number of competitive products. The Company's titles are expected, when
completed, to compete directly with educational software products on various
medical topics and, to a lesser extent, with traditional print textbooks on
various medical topics. There are a large number of competitors in this market,
including Engineering Animation, Inc., A.D.A.M. Software, Inc. and IVI
Publishing, Inc. Moreover, as the market for interactive software continues to
develop, the Company expects that it will be faced with many new competitors.

GOVERNMENT REGULATION

Preview is and DataFusion, when developed, will be subject to government
regulation in the United States and other countries. In the United States, the
Federal Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and other statutes
and regulations govern the testing, manufacture, labeling, storage, record
keeping, distribution, sale, marketing, advertising and promotion of such
medical devices. Failure to comply with applicable requirements could result in
fines, recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.

Prior to commercial distribution in the United States, most medical devices
must be cleared or approved by the FDA. The regulatory process is lengthy
(potentially taking up to several years), expensive and uncertain. Under the FDC
Act, medical devices are classified into one of three classes on the basis of
the controls necessary to reasonably ensure their safety and effectiveness.
Class I devices are those whose safety and effectiveness can reasonably be
ensured through general controls, such as labeling, premarket notification and
adherence to FDA-mandated current GMPs. Class II devices are those whose safety
and effectiveness can reasonably be ensured through the use of "special
controls," such as performance standards, post-market surveillance, patient
registries and FDA guidelines. Class III devices are devices that must receive
PMA from the FDA to ensure their safety and effectiveness. They are generally
life-sustaining, life-supporting, or implantable devices, and also include most
devices that were not on the market before May 18, 1976 ("new devices") and for
which the FDA has not made a finding of substantial equivalence based upon a
510(k).

41
<PAGE> 44

The FDC Act requires that medical devices be manufactured in accordance
with current GMPs. These regulations require, among other things that (i) the
manufacturing process be regulated and controlled by the use of written
procedures and (ii) the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every aspect of
the process. They also require investigation of any deficiencies in the
manufacturing process or in the products produced and detailed record keeping.
Manufacturing facilities are therefore subject to FDA inspection on a periodic
basis to monitor compliance with current GMPs. If violations of the applicable
regulations are noted during FDA inspections of the Company's manufacturing
facilities or the manufacturing facilities of its contract manufacturers, if
any, there could be a material adverse effect on the continued marketing of the
Company's products.

The FDA regulates computer software that performs the function of a
regulated device or that is intimately associated with a given device, such as
control software for imaging or other diagnostic devices. The FDA is in the
process of re-evaluating its regulation of such software, and if the FDA
undertakes increased or more rigorous regulation of such software (which the
Company cannot predict), Preview and DataFusion may become subject to further
regulatory processes and clearance requirements. No assurance can be given that
compliance with more extensive regulatory processes will be achieved or that the
necessary clearances for such products will be obtained by the Company on a
timely basis, if at all. The Company may, as a result, be required to expend
additional time, resources and effort in the areas of software design,
production and quality control to ensure full technical compliance.

42
<PAGE> 45

assurance that such approval will be obtained. The ability to export into other
countries may require compliance with ISO 9000 and CE Mark certifications, which
are analogous to and in some instances more rigorous than compliance with the
FDA's GMPs. The Company has not obtained any regulatory approvals to market any
of its products outside of the United States, no regulatory clearances or
certifications have yet been applied for in any country other than the United
States and there is no assurance that any such clearance or certification, if
applied for, would be issued.

PATENTS AND PROPRIETARY RIGHTS

The Company's success is dependent, in part, upon its extensive proprietary
technology. The Company relies on a combination of patent, trade secret,
copyright and trademark protection and nondisclosure agreements to protect its
proprietary rights. As of November 20, 1996, the Company had approximately three
issued United States patents, one issued European patent, eight pending United
States patent applications, four pending foreign patent applications and seven
international (Patent Cooperation Treaty) patent applications relating to its
interactive virtual reality and surgical planning technologies. The Company
intends to file additional patent applications in the future. There can be no
assurance that the Company will be issued any patents or that if any patents are
issued they will provide the Company with significant protection or will not be
challenged. Even if issued patents are enforceable, the Company anticipates that
any attempt to enforce its patents would be time consuming and costly. Moreover,
the laws of some foreign countries do not protect the Company's proprietary
rights in its products to the same extent as do the laws of the United States.

The Company has not been advised nor is it aware of any infringement of the
proprietary rights of others by the Company's existing product. With respect to
the Company's products under development, the Company has not been advised nor
is it aware of any proprietary rights of others which would prevent the Company
from completing and commercializing such products. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that any such assertions will not result in costly litigation or
require the Company to obtain a license to intellectual property rights of such
parties. There can be no assurance that any such licenses would be available on
terms acceptable to the Company, if at all. Furthermore, parties making such
claims may be able to obtain injunctive or other equitable relief that could
effectively block the Company's ability to further develop or commercialize its
products in the United States and abroad and could result in the award of
substantial damages. Defense of any lawsuit or failure to obtain any such
license could have a material adverse effect on the Company. Finally,
litigation, regardless of outcome, could result in substantial cost to and a
diversion of efforts by the Company.

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<PAGE> 46

to the development of its products and further determines that a license to this
additional technology is needed, there can be no assurance that the Company can
obtain a license from the relevant party or parties on commercially reasonable
terms, if at all. There can be no assurance that the Company can obtain any
license to any technology that the Company determines it needs, on reasonable
terms, if at all, or that the Company could develop or otherwise obtain
alternate technology. The failure of the Company to obtain licenses, if needed,
could have a material adverse effect on the Company.

ETHICON LICENSE AGREEMENT

The Company has succeeded to Ixion's rights and obligations under the
License Agreement between Ixion and Ethicon, which called for Ixion to design,
develop and deliver a laparoscopic surgical skills simulator. Pursuant to the
License Agreement, the Company has granted Ethicon an exclusive world-wide
license to use the Company's IVR simulator technology in the Field.

Pursuant to the License Agreement, the Company is entitled to receive from
Ethicon, with respect to sales of the laparoscopic skills simulator, continuing
royalty payments of at least $50,000 per calendar quarter through the first
quarter of 1999. Ethicon has not tendered to the Company the $50,000 minimum
royalty payments for the quarters ended March 31, June 30 and September 30 of
1996. If Ethicon does not make these payments to the Company it may lose its
exclusivity with respect to the laparoscopic skills simulator.

In April 1995, Ethicon indicated in certain correspondence with respect to
a payment for development work performed by Ixion on the laparoscopic skills
simulator, without further clarification for the basis of its belief, that it
believes it has rights beyond its license to use the laparoscopic skills
simulator delivered pursuant to the License Agreement to source code, software,
hardware, firmware and related intellectual property incorporated in such
simulator. Although the Company recognizes that Ethicon may have rights to
utilize certain of the intellectual property incorporated in the simulator
within the limited scope of the Field, the Company, based strictly on its
interpretation of the License Agreement, does not believe that there is any
basis to support Ethicon's position with respect to the use of the Company's
intellectual property rights outside of the Field. Nonetheless, if any
litigation were to arise with respect to the interpretation of the License
Agreement, there can be no assurance that it would not be decided against the
Company. Such an adverse determination could have a material adverse effect upon
the Company's business, results of operations and financial condition.

EMPLOYEES

As of November 20, 1996, the Company had 24 full-time employees and 3
part-time employees, including 11 persons engaged in research and development, 7
persons engaged in manufacturing and marketing, 1 person engaged in medical
education and training, and 8 persons engaged in administration, management,
operations and finance. The Company considers its relations with its employees
to be good. None of the Company's employees are represented by labor unions.

FACILITIES

The Company's principal executive offices and research and development
facilities are located in Seattle, Washington, where it occupies approximately
4,000 square feet of office, research and development space pursuant to two
leases with unaffiliated parties at a combined monthly rent of approximately
$4,500, expiring in December 1996. The Company also maintains facilities in
(i) West Lebanon, New Hampshire, where it occupies approximately 3,300 square
feet of office, research and development space pursuant to a lease with an
unaffiliated party at a monthly rent of approximately $3,500, expiring in July
1997 and (ii) New York, New

44
<PAGE> 47

York where it occupies approximately 2,000 square feet of office space at a
monthly rent of approximately $3,750. The Company leases approximately 1,000
square feet of its New York offices pursuant to a lease expiring in December
1997 and the remaining space on a month-to-month basis.

The Company anticipates a need for larger corporate offices and
manufacturing facilities and does not expect any interruption in the operation
of its business in connection with any move to a new location.

LEGAL PROCEEDINGS

From time to time the Company may be exposed to litigation arising out of
its products and operations. As of the date of this Prospectus, the Company is
not engaged in any legal proceedings that are expected, individually or in the
aggregate to have a material adverse effect on the Company, except that an
assignee of a law firm at which the Company's former corporate Secretary
practiced law has initiated a lawsuit in a Washington state court for
approximately $200,000 of legal fees which are allegedly past due. The Company
denies owing these fees and intends to vigorously defend this lawsuit. In
addition, the Company and Ethicon are in a dispute. See "--Ethicon License
Agreement."

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<PAGE> 48

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company as of November 20, 1996
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Donald L. Johanson................. 61 President, Chief Executive Officer and Director
Greg Claypool...................... 33 Vice President, Clinical Education
Thomas E. Mignanelli............... 48 Vice President, Finance, Chief Financial Officer and
Secretary
Valentino V. Montegrande........... 52 Vice President, Marketing
Steven D. Pieper, Ph.D............. 33 Vice President, Chief Technical Officer and Director
Harold J. Walbrink................. 45 Vice President, Manufacturing
Larry J. Wells..................... 53 Chairman of the Board of Directors
James C. Caillouette, M.D.(2)...... 69 Director
David C. Hon....................... 53 Director
Charles E. Hutchinson, Ph.D.(1).... 60 Director
John R. Lyon(1)(2)................. 50 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

Mr. Johanson joined the Company in October 1996 and initially served as the
Company's Senior Vice President and Chief Operating Officer, prior to being
promoted to the Company's President and Chief Executive Officer and being
elected to the Company's Board of Directors in November 1996. From April 1993 to
October 1996, Mr. Johanson served as Vice President, Venture Technology of
Baxter. From March 1982 to April 1993, Mr. Johanson was General Manager of the
Medsystems Division of C.R. Bard, Inc., a publicly-traded manufacturer of
medical products.

Mr. Claypool has served as Vice President, Clinical Education of the
Company since May 1996. Prior to joining the Company, Mr. Claypool was Vice
President of Ixion from March 1995 to May 1996. From August 1991 to March 1995,
Mr. Claypool was employed with U.S. Surgical Corporation, a publicly traded
healthcare company, as Manager of Education.

Mr. Mignanelli joined the Company in June 1996 and serves as the Company's
Vice President, Finance, Chief Financial Officer and Secretary. From February
1996 to June 1996, Mr. Mignanelli was Chief Information Officer and from May
1993 to June 1996 he served as Vice President of Finance and Chief Financial
Officer of Petals, a privately-held company in the business of manufacturing and
marketing home accessories. He also was Controller of Petals from November 1990
to May 1993. From 1982 to 1987, Mr. Mignanelli was Vice President and General
Manager of Cooper Lasersonics, Inc., a manufacturer of surgical laser systems
and a subsidiary of Cooper. From 1978 to 1981, Mr. Mignanelli also served as
Corporate Controller and Assistant Treasurer of Ealing Corporation, a
publicly-traded manufacturer of scientific and medical instruments.

Mr. Montegrande has served as the Company's Vice President, Marketing since
May 1996. From March 1994 to May 1996, he was Executive Vice President,
Marketing of Ixion. Since January 1995, he also has served as Chief Executive
Officer and Managing Partner of Global Nexus, Inc., a domestic and international

46
<PAGE> 49

consulting business specializing in strategic marketing within the medical
industry. Since September 1980, Mr. Montegrande also has been President and
Chief Executive Officer of V. Montegrande & Co., Inc., a strategic management
consulting business. Mr. Montegrande is currently a director of NT Company, a
privately-held dental products company and a director of Tycom Dental, a
privately-held dental products company.

Dr. Pieper has served as the Company's Vice President and Chief Technical
Officer and a director since the Company's formation in April 1996. From October
1995 to May 1996, Dr. Pieper was President of MMS. From November 1992 to October
1995, Dr. Pieper was Director of Technical Staff, Vice President of Research and
Development and a member of the Management Committee of MMS. Dr. Pieper was also
an Assistant Professor of Engineering Sciences at the Thayer School of
Engineering at Dartmouth College ("Thayer") from September 1991 to July 1994 and
remains an adjunct Assistant Professor of Engineering at Thayer. Dr. Pieper was
also a Research Assistant at the Massachusetts Institute of Technology Media
Laboratory from September 1986 to August 1991.

Mr. Walbrink has served as Vice President, Manufacturing, of the Company
since May 1996. Prior to joining the Company, Mr. Walbrink served as Vice
President, Manufacturing of Ixion, a position held since April 1995. Since
January 1995, Mr. Walbrink also has served as President of Xinetix Technologies,
Inc. ("Xinetix"), a privately held company which provides consulting services to
start-up and early stage medical device companies. From January 1990 to March
1995, he served as Senior Vice President of Birtcher Medical Systems, Inc., a
publicly-traded medical device company.

Mr. Wells has served as a director of the Company since October 1996. Since
July 1989, Mr. Wells has been President of Larry Wells Co., the general partner
of DayStar, as well as the management company for various venture capital funds.
Mr. Wells is also a director of the following publicly-held corporations:
Cellegy Pharmaceuticals, Inc., Atlanta Technology Group, Inc., Identix
Incorporated and Gateway Data Sciences Corporation.

Dr. Caillouette has served as a director of the Company and also on the
Company's Medical Advisory Board since May 1996. Since July 1972, he has been
President of James C. Caillouette, M.D., Incorporated, a medical practice. In
addition, Dr. Caillouette is currently serving as President of the Pacific Coast
Obstetrical and Gynecological Society. Dr. Caillouette has been a Clinical
Professor of Obstetrics and Gynecology at the University of Southern California
School of Medicine since 1978. Dr. Caillouette currently serves as President of
Femtek, Inc., a privately held corporation.

Mr. Hon has served as a director of the Company since May 1996. From
September 1983 to May 1996 he served as President of Ixion. Mr. Hon also was the
Director of Advanced Technology Development for the American Heart Association
from 1977 to 1983.

Dr. Hutchinson has served as a director of the Company since May 1996. Dr.
Hutchinson was Dean of Thayer from July 1984 to June 1994, and since July 1994
has remained as a Professor of Engineering at Thayer. Dr. Hutchinson is
currently a director of Specialty Equipment Companies, Inc., a publicly traded
domestic manufacturer of food service equipment, Hypertherm Incorporated, a
privately-held plasma cutting equipment company and Markem Corporation, a
privately-held designer and manufacturer of printing systems.

Mr. Lyon has served as a director of the Company since May 1996. Since July
1993, he has been President, Chief Executive Officer and a director of Vista
Medical Technologies ("Vista"), a privately held company with enabling
technology for minimally invasive surgical procedures. Mr. Lyon joined Kaiser
Aerospace and Electronics Corporation in January 1993 to develop the business
plan for Vista, and when Vista was incorporated in July 1993, Mr. Lyon was named
President. From January 1992 to January 1993, Mr. Lyon was President of
CooperSurgical Inc., a subsidiary of Cooper. From January 1991 to December 1992,
he was President, International Division of CooperSurgical, Inc.

BOARD COMMITTEES

The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee. The Compensation Committee, consisting of
Charles E. Hutchinson and John R. Lyon, provides

47
<PAGE> 50

recommendations concerning salaries and incentive compensation for executive
officers and key personnel, including stock options. Donald L. Johanson, the
Company's President and Chief Executive Officer, participates in the
deliberations of the Compensation Committee regarding executive compensation,
but does not take part in the deliberations regarding his own compensation. The
Audit Committee, consisting of John R. Lyon and James C. Caillouette, M.D.,
recommends the Company's independent auditors and reviews the results and scope
of audit and other services provided by such auditors.

DIRECTOR COMPENSATION

Directors are not currently compensated for serving on the Board of
Directors. Following the closing of this Offering, the Company intends to pay
its outside directors $1,500 per Board meeting. No additional payments will be
made with respect to attendance at committee meetings. Outside directors also
will be eligible to receive stock options under the Company's 1996 Stock
Option/Stock Issuance Plan following the closing of this Offering. See
"--Benefit Plans--1996 Stock Option/Stock Issuance Plan."

RECENT CHANGE IN SENIOR MANAGEMENT

On November 18, 1996, Bruce D. Sturman resigned from his positions as an
officer, director and employee of the Company shortly after a federal grand jury
returned an indictment against Mr. Sturman's two brothers, Mr. Sturman and an
independent accountant for alleged misrepresentation of notes payable in
financial statements in the late 1980s. Mr. Sturman has informed the Company
that he resigned to vindicate himself from these allegations and that he
believes such allegations are baseless and without merit, and that he will
vigorously defend himself.

EXECUTIVE COMPENSATION

The following table sets forth for the fiscal year ended December 31, 1995,
certain compensation of the Company's current President and Chief Executive
Officer and the other highest paid executive officers of the Company who earned
more than $100,000 in the fiscal year ended December 31, 1995 (collectively, the
"Named Executive Officers"). Because the Company was incorporated in April 1996
and acquired its assets and technology in May 1996 in connection with a business
combination involving Ixion and MMS, information shown below is as to
compensation which was paid by either Ixion or MMS during 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
FISCAL ------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
- ------------------------------------------------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Bruce D. Sturman(1).............................. 1995 $ 118,200 $-0- -0-
Former President, Chief Executive Officer and
Director
Steven D. Pieper, Ph.D.(2)....................... 1995 $ 106,537 $ 4,891 -0-
Vice President, Chief Technical Officer and
Director
</TABLE>

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

(1) For service as President and Chief Executive Officer of Ixion. Pursuant to a
consulting agreement entered into between Maxal Capital Corporation
("Maxal") and Ixion in May 1994, Maxal agreed to provide the services of
Mr. Sturman to Ixion in exchange for payment to Maxal of $9,850 per month.
Mr. Sturman is currently Chairman of the Board of Maxal. See "--Employment
Agreements" and "Certain Transactions." Mr. Sturman has resigned as
President and Chief Executive Officer of the Company.

(2) For service as President of MMS. See "--Employment Agreements."

48
<PAGE> 51

OPTION GRANTS IN LAST FISCAL YEAR

The Company was incorporated in April 1996 and accordingly no options were
granted during fiscal 1995. In addition, neither Ixion nor MMS ever granted
options to the Named Executive Officers. However, each of the Named Executive
Officers has received the stock option grants during fiscal year 1996 (through
November 20, 1996), as reflected in the following table:

OPTION/SAR GRANTS DURING FISCAL YEAR 1996

THROUGH OCTOBER 31, 1996

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ---------------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OR OPTION TERM
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1)(2) FISCAL YEAR(3) ($/SH)(4) DATE 5% ($)(5) 10% ($)(5)
- ---------------------------- ------------- --------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bruce D. Sturman(6)......... 75,000 24.6% $6.30 3/27/06 $ 297,153 $753,043
Steven D. Pieper, Ph.D...... 20,000 6.6% $6.30 3/27/06 $ 79,241 $200,812
</TABLE>

- ---------------
(1) Options were granted under the Company's 1994 Stock Option Plan.

(2) Options were granted on May 27, 1996 and will vest over four years with 25%
vesting one year following the date of grant and the remainder of such
options vesting in 36 equal monthly installments upon completion of each
month of service beginning one year after date of grant.

(3) The Company granted options to acquire 195,000, 50,000 and 60,000 shares of
the Company's Common Stock to the Company's directors, officers and
employees on May 27, October 1 and October 25, 1996, respectively.

(4) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on May 27, 1996 as
determined by the Compensation Committee of the Board of Directors.

(5) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% or 10% levels or at any
other defined level. Unless the market price of the Common Stock does in
fact appreciate over the option term, no value will be realized from the
option grants made to the executive officers.

(6) In connection with the cessation of Mr. Sturman's service with the Company,
on November 18, 1996, the Company entered into a Severance and Release
Agreement with Mr. Sturman, pursuant to which the Company agreed to
accelerate the vesting of 56,750 of the 75,000 options to purchase Common
Stock held by Mr. Sturman and to allow Mr. Sturman to exercise such vested
options on or prior to May 18, 1997. The remainder of Mr. Sturman's options
have expired pursuant to their terms.

OPTION EXERCISES IN LAST FISCAL YEAR

There were no option exercises by the Named Executive Officers in fiscal
year 1995 and as of November 20, 1996, there have been no option exercises in
fiscal year 1996. Pursuant to Item 402(a)(6) of Regulation S-K promulgated under
the Securities Act, the table containing option exercise information has been
omitted.

EMPLOYMENT AGREEMENTS

Pursuant to an employment agreement between the Company and Donald L.
Johanson entered into in October 1996, Mr. Johanson receives an annual base
salary of $145,000, with a potential cash bonus of up to an additional 40% of
his base salary based on his performance and the achievement by the Company of
certain milestones. The term of the agreement is two years, with one year's
severance pay if Mr. Johanson is terminated without cause, as defined in the
agreement, as a result of certain performance related issues. The agreement

provides for standard life, health and disability insurance benefits.

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<PAGE> 52

Pursuant to an employment agreement between the Company and Thomas E.
Mignanelli entered into in July 1996, Mr. Mignanelli receives an annual base
salary of $125,000 that will be increased to $145,000 upon the effectiveness of
this Offering, with a potential cash bonus of up to an additional 40% of his
base salary based on his performance and the achievement by the Company of
certain milestones. The term of the agreement is two years, with one year's
severance pay if Mr. Mignanelli is terminated without cause, as defined in the
agreement, as a result of certain performance related issues. The agreement
provides for standard life, health and disability insurance benefits.

Pursuant to an employment agreement between the Company and Bruce D.
Sturman, the Company's former President, Chief Executive Officer and director,
entered into in June 1996, Mr. Sturman received an annual base salary of
$190,000, with a potential cash bonus of up to an additional 50% of his base
salary based on his performance and the achievement by the Company of certain
milestones. The term of the agreement was three years, with two years' severance
pay if Mr. Sturman was terminated without cause. The agreement provided for
standard life, health and disability insurance benefits. In connection with Mr.
Sturman's resignation and the cessation of his service with the Company as the
Company's President, Chief Executive Officer and director, in November 1996 the
Company entered into a Severance and Release Agreement with Mr. Sturman pursuant
to which Mr. Sturman's employment agreement was terminated and the Comany agreed
to: (i) pay to Mr. Sturman $190,000 promptly upon the earlier of the closing of
this Offering or upon the completion of a private placement in which the gross
proceeds to the Company exceed $2.0 million; (ii) accelerate the vesting of
56,750 of the 75,000 options to purchase Common Stock held by Mr. Sturman and to
allow Mr. Sturman to exercise such vested options on or prior to May 18, 1997;
(iii) to make payments of up to $1,750 per month for a one year period in order
to allow Mr. Sturman to continue to use his existing office; and (iv) to
reimburse Mr. Sturman for the monthly premiums under his current medical
insurance policy for a period of one year. Pursuant to the Severance and Release
Agreement, Mr. Sturman and the Company have also agreed to release each other
from all actual or potential claims arising out of actions occurring on or prior
to the date of such agreement.

Pursuant to an employment agreement between the Company and Steven D.
Pieper entered into in May 1996, Mr. Pieper receives an annual base salary of
$101,600, with a potential cash bonus of an additional $30,480 and a potential
one time stock bonus of 30,000 shares of Common Stock based on his performance.
The term of the agreement is two years and is automatically extended for one
additional year absent the Company's delivery of written notice to terminate at
least 60 days prior to the end of the initial two year period. If Mr. Pieper's
employment is terminated without cause as defined in the agreement, Mr. Pieper
is entitled to his then current compensation, including all deferred
compensation and applicable bonuses, through the end of the term of the
agreement, but in no event greater than one year. The agreement provides for
standard life, health and disability insurance benefits.

Pursuant to an employment agreement between Ixion and Greg Claypool entered
into in February 1995, the obligations under which were assumed by the Company
in May 1996, Mr. Claypool receives an annual base salary of $95,000, with a
potential cash bonus of an additional $38,000, a potential one time stock bonus
of 9,755 shares of Common Stock based on his performance and an additional
commission based performance incentive. The term of the agreement is two years.
If Mr. Claypool's employment is terminated without cause as defined in the
agreement, Mr. Claypool is entitled to his then current compensation, including
all deferred compensation and applicable bonuses, including commissions on sales
made but not paid in full, through the end of the term of the agreement. The
agreement provides for standard life, health and disability insurance benefits.

The Company has entered into or assumed consulting agreements with certain
of its officers and directors. See "Certain Transactions."

BENEFIT PLANS

1996 STOCK OPTION/STOCK ISSUANCE PLAN

The Company's 1996 Stock Option/Stock Issuance Plan (the "Plan") was
adopted by the Board of Directors on June 18, 1996 and was subsequently approved
by the Company's stockholders on June 18, 1996.

50
<PAGE> 53

The Plan will become effective on the effective date of a Registration Statement
on Form S-8 covering the shares of Common Stock issuable under the Plan (which
the Company intends to file on the effective date of this Offering) at the time
the Company's registration statement becomes effective. The Plan will serve as
the successor equity incentive program to Ixion's 1994 Incentive Stock Option
Plan, which has been assumed by the Company (the "Prior Plan"), and no further
option grants or stock issuances will be made under the Prior Plan following the
effective date of the Plan. All outstanding stock options and unvested share
issuances under the Prior Plan have been incorporated into the Plan but will
continue to be governed by the terms and conditions of the specific instruments
evidencing those options and issuances.

A total of 1,000,000 shares of Common Stock are authorized for issuance
under the Plan including 400,000 shares available under the Prior Plan and an
additional increase of 600,000 shares. Under the Prior Plan, 384,692 shares were
reserved for issuance under options outstanding on November 20, 1996, leaving
615,308 shares available for future option grants or share issuances on such
date. Shares reserved for issuance under granted options which are not actually
issued will again become available for option grants under the terms of the
Plan.

The total number of shares authorized, as well as shares subject to
outstanding options, will be appropriately adjusted in the event of certain
changes to the Company's capital structure, such as stock dividends, stock
splits or other recapitalizations. The weighted average exercise price of
outstanding options under the Prior Plan, as of November 20, 1996 was
approximately $5.41.

The Plan is divided into two separate programs: the option grant program
and the stock issuance program. The Plan will be administered by the Board or by
a committee of two or more Board members appointed by the Board (the "Plan
Administrator"). The Plan Administrator will have complete discretion under the
option grant program and the stock issuance program to determine which eligible
individuals are to receive option grants or stock issuances, the number of
shares subject to each such grant or issuance, the status of any granted option
as either an incentive option (which potentially qualify for certain favorable
treatment under federal tax law) or a non-statutory option, the vesting schedule
to be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. Participation in such
programs is limited to employees (including officers and directors) and
consultants of the Company.

The exercise price for each incentive stock option must be at least 100% of
the fair market value of the stock on the date of the option grant. The exercise
price for each non-statutory option or for any share issuance under the Plan
must be at least 85% of the fair market value of the shares on the date of the
option grant or stock issuance. The purchase price for any shares may be paid in
cash, by delivery of shares of Common Stock, or through a same-day sale program
pursuant to which the purchased shares will be sold immediately and a portion of
the sale proceeds applied to the payment of the purchase price. The Plan
Administrator may also permit a participant to deliver a promissory note in
payment of the purchase price and any tax liability incurred in connection with
the purchase.

Options granted under the option grant program may be immediately
exercisable for all the option shares, on either a vested or unvested basis, or
may become exercisable for shares in one or more installments vesting over the
participant's period of service. Shares issued under the stock issuance program
may either be fully-vested or subject to a vesting schedule tied to future
service. All unvested shares will be subject to repurchase by the Company, at
the original purchase price paid for such shares, upon the participant's
cessation of service prior to vesting in the shares. However, the Plan
Administrator will have full discretionary authority to accelerate the
exercisability of any outstanding option grant or the vesting of any issued
shares.

Each option granted under the Plan will have a maximum term of ten years
and will be subject to earlier termination in the event of the optionee's
cessation of service. Incentive stock options are not assignable or transferable
by the optionee except in connection with the participant's death. Other options
are not assignable or transferable without the consent of the Plan
Administrator. The participant will have no stockholder rights with respect to
the shares subject to his or her outstanding options until such options are
exercised and the purchase price is paid for the shares. The participant will,
however, have full stockholder rights with respect to any shares issued under
the Plan.

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<PAGE> 54

Participants subject to federal or state tax withholding in connection with
any issuance of shares under the Plan may be permitted to apply a portion of the
shares issuable upon the exercise of their outstanding options to the
satisfaction of the federal and state withholding taxes incurred in connection
with such exercise. Alternatively, such participants may be permitted to deliver
existing shares of Common Stock in satisfaction of such tax liability. In either
case, the Company will pay cash to the appropriate government authority equal to
the fair market value of the stock as a deposit of taxes withheld.

Officers and directors of the Company may also be granted special stock
appreciation rights in connection with their options under which the outstanding
options can be surrendered for cancellation upon a hostile take-over of the
Company in return for a cash distribution from the Company, based on the excess
of the price per share paid by the acquiring entity in effecting the take-over
above the option exercise price. The limited stock appreciation rights may be
given to officers and directors receiving option grants. The Plan Administrator
may grant other stock appreciation rights with respect to option grants. The
other stock appreciation rights would provide the holders with the right to
receive an appreciation distribution from the Company equal to the excess of (i)
the fair market value (on the date such right is exercised) of the shares of
Common Stock in which the optionee is at the time vested under the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution would be able to be made, at the Plan Administrator's
discretion, in shares of Common Stock valued at fair market value on the
exercise date, in cash or in a combination of cash and Common Stock.

In the event the Company is acquired, whether by merger or asset sale, each
outstanding option which is not to be assumed by the successor corporation or
replaced with a comparable option to purchase the capital stock of the successor
corporation will automatically accelerate in full, and all unvested shares will
automatically vest, except to the extent such accelerated vesting is precluded
by the terms of the agreements evidencing those unvested shares. The Plan
Administrator can apply this acceleration to options outstanding under the Prior
Plan.

The Plan provides for the automatic acceleration of outstanding options and
the vesting of unvested shares upon the following change in control events: (i)
the acquisition of more than 50% of the Company's voting stock by hostile tender
offer or (ii) a change in the composition of the Board effected through one or
more contested Board elections, except that the Plan Administrator may at the
time of a option grant or stock issuance, provide that no such acceleration
shall occur. However, no unvested options or stock issuances under the Prior
Plans will accelerate in connection with any such change in control unless the
Plan Administrator has determined to grant such acceleration.

To the extent outstanding options terminate prior to exercise, the shares
subject to those options will be available for subsequent grant. In addition,
the Plan Administrator may effect cancellation/regrant programs pursuant to
which outstanding options under the option grant program (including options
incorporated from the Prior Plans) are cancelled and new options are granted for
the same or different number of option shares at an exercise price per share not
less than 85% of the fair market value of the Common Stock on the new grant
date.

The Board may amend or modify the Plan at any time, and may make any such
amendment subject to stockholder approval. The Plan will terminate 10 years from
the date on which shares of the Company's Common Stock are first registered
under the Securities Exchange Act of 1934, as amended, unless sooner terminated
by the Board.

1996 EMPLOYEE STOCK PURCHASE PLAN

On June 18, 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of
Common Stock. The Purchase Plan was subsequently approved by the Company's
stockholders on June 18, 1996. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code of 1986, as amended. Under the Purchase Plan, eligible employees,
including officers, will be entitled to participate in periodic offerings
following the commencement of the Purchase Plan. The initial offering under the
Purchase Plan will commence on the effective date of a Registration Statement on
Form S-8 covering the shares of Common Stock issuable under the Purchase Plan
(which the Company intends to file on the

52
<PAGE> 55

effective date of this Offering), and will terminate in December 1997. Each
subsequent offering period will coincide with calendar years. The Purchase Plan
will terminate on the earlier of December 31, 2005 or the date on which all
shares available under the Purchase Plan have been purchased by the
participants.

Employees are eligible to participate if they are employed by the Company
for at least 20 hours per week and at least five months per year. All employees
of the Company on the commencement date of the initial offering period can join
that period. Thereafter, only employees who have been employed by the Company
for at least three months will be allowed to participate. Employees eligible to
participate in an offering can elect to have up to 15% of their base salary
withheld under the Purchase Plan and used to purchase shares of the Common Stock
at quarterly intervals. The price of Common Stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the Common
Stock on (i) the commencement date of the offering period or (ii) the purchase
date. Persons not eligible to participate at the commencement of an offering
period may join that offering period on the first day of any quarter in which
they meet the eligibility requirements. Employees may end their participation in
the offering at any time during the offering period, except the last five days
of that period, and participation ends automatically on termination of
employment with the Company. Employees who do not join an offering period when
first permitted to do so, or who end their participation in any offering period,
may not participate again until the next offering period. Employees may alter
their level of participation on a limited basis.

No participant may accrue rights to purchase more than $25,000 of stock in
any calendar year. Upon an acquisition of the Company, the outstanding payroll
deductions will be immediately applied to the purchase of Common Stock.

The Purchase Plan may be terminated at any time by the Board. Unless sooner
terminated the Purchase Plan will terminate on the earlier of December 31, 2005
or the date on which all shares available under the Purchase Plan have been
issued. The Purchase Plan may be amended by the Board at any time, provided that
the Board may make any amendment of the Purchase Plan conditional on obtaining
stockholder approval.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and executive
officers.

In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company or its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company or its stockholders, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
any transaction from which the director derived an improper personal benefit and
for improper distributions to stockholders. This provision also does not affect
a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.

There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.

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<PAGE> 56

CERTAIN TRANSACTIONS

IXION

In May 1996, the Company and the following employees and consultants of
Ixion agreed to convert earned, but unpaid compensation ("Accrued Compensation")
owed to the following employees and consultants of Ixion, in the following
amounts, into Common Stock at a rate of one share for each $7.50 of Accrued
Compensation (less the requisite withholding obligations), a price determined by
the Company's Board of Directors not to be less than the estimated fair market
value of such shares at the agreement date. Bruce D. Sturman, former President,
Chief Executive Officer and director of the Company, $201,000; Valentino V.
Montegrande, Vice President, Marketing of the Company, $38,000; David C. Hon, a
director of the Company, $17,000; Xinetix (Harold J. Walbrink, Vice President,
Manufacturing of the Company is President), $82,000.

In April 1996, Ixion entered into an Asset Purchase Agreement ("Asset
Purchase Agreement") with David C. Hon, a director of the Company. Under such
Asset Purchase Agreement, Ixion purchased U.S. Patent No. 4,907,973, entitled
"Expert system simulator for modelling realistic internal environments and
performance" and all corresponding foreign patents and patent applications
(collectively, the "Patent") from Mr. Hon and agreed to pay Mr. Hon $25,000 on
or before August 1, 1996 and an additional $25,000 on or before August 1 of each
succeeding year for nine additional years. Pursuant to that certain Agreement
and Plan of Reorganization by and between Ixion and the Company dated May 24,
1996, the Company acquired all of Ixion's rights in the Patent. See
"Business--Patents and Proprietary Rights."

Ixion entered into a consulting agreement with Xinetix in August 1995 which
expired on March 31, 1996. Harold J. Walbrink, Vice President, Manufacturing of
the Company, is President of Xinetix. Pursuant to the consulting agreement,
Xinetix agreed to provide Mr. Walbrink's consulting services to the Company in
exchange for a monthly retainer of $7,500 for April and May 1995, $12,500 for
June through September 1995 and $7,500 for October 1995 through March 1996. In
addition to the above retainer, the Company granted Xinetix with options to
purchase 48,774 shares of the Company's Common Stock to vest in accordance with
the milestone schedule set forth in the agreement. Xinetix has three years from
January 1, 1996 to exercise the vested options. As of October 31, 1996, options
having an exercise price of $0.02 for the purchase of 9,755 shares were fully
vested. The agreement has expired and no further options will vest.

Pursuant to a consulting agreement between Ixion and Valentino V.
Montegrande, Vice President, Marketing of the Company, entered into in April
1995, the obligations under which were assumed by the Company in May 1996, Mr.
Montegrande's compensation includes a commission of 2% of the Company's revenue
derived from those sales of platforms, pavilions and procedures for the
Company's IVR simulators in which Mr. Montegrande's efforts produce sales and a
one time stock bonus of 14,633 shares of Common Stock based on his performance.
The term of the agreement is two years. If Mr. Montegrande's consulting services
are terminated without cause as defined in the agreement, Mr. Montegrande is
entitled to his then current compensation, including all deferred compensation
and applicable bonuses, through the end of the term of the agreement. Mr.
Montegrande has received the stock bonus contemplated by the agreement.

In May 1994, Ixion entered into a consulting agreement with Maxal. Bruce D.
Sturman, former President, Chief Executive Officer and director of the Company
is chairman of the Board of Maxal. Pursuant to the agreement, Maxal agreed to
provide Mr. Sturman's services as Chief Executive Officer and Chairman of the
Board of Ixion in exchange for $9,850 per month. The agreement was terminated on
May 1, 1996.

In each of October 1994 and October 1995, in order to fund ongoing
operations Ixion issued two year 8% promissory notes to Bruce D. Sturman, the
Company's former President and Chief Executive Officer. The aggregate principal
amount of these two notes is $60,000. In May 1996, the Company assumed the
obligations of Ixion under these promissory notes.

MMS

In May 1996, the Company and Steven D. Pieper agreed to convert $20,117 of
Accrued Compensation owed to Dr. Pieper, as an employee of MMS at a rate of one
share of Common Stock for each $7.50 of Accrued Compensation (less the requisite
withholding obligations), a price determined by the Company's

54
<PAGE> 57

Board of Directors not to be less than the estimated fair value of such shares
at the agreement date. Dr. Pieper is a Vice President, Chief Technical Officer
and a director of the Company.

In April 1996, in order to fund ongoing operations MMS entered into a
credit agreement with Baxter, a wholly-owned subsidiary of which is a principal
stockholder of the Company, pursuant to which MMS issued a 6% promissory note in
the principal amount of $550,000 to Baxter payable on demand. This note was
cancelled in May 1996.

In October 1994, MMS entered into a regulatory services agreement with
Baxter, a wholly-owned subsidiary of which is a principal stockholder of the
Company. Under the agreement, Baxter agreed to provide regulatory professional
services to MMS for two years in exchange for $60,000 per year. MMS also agreed
to fund travel and other miscellaneous expenses pursuant to such agreement. This
agreement has since been terminated by Baxter and the Company.

INTERACT

In October 1996, the Company entered into a consulting agreement with Larry
J. Wells, the Chairman of the Board of Directors of the Company, pursuant to
which Mr. Wells is entitled to receive immediately upon the closing of this
Offering, a number of shares of Common Stock calculated by dividing the product
of 1.05 and amounts loaned to the Company between the date of the consulting
agreement and the closing of this Offering by the initial public offering price
for the sale of the Shares offered hereby.

In October 1996, the Company granted options to purchase Common Stock at
$6.30 per share to Valentino V. Montegrande, Vice President, Marketing of the
Company and Donald L. Johanson, President and Chief Executive Officer of the
Company, in the amount of 50,000 shares and 60,000 shares, respectively. These
options vest in equal monthly installments over 36 months of service with the
Company. Each option has a term of 10 years and Mr. Montegrande's and Mr.
Johanson's option grants have vesting commencement dates of October 1 and
October 25, 1996, respectively. The agreements pursuant to which the options
were granted provide that the options' vesting schedules accelerate if the
option holder is terminated without cause.

In October 1996, the Company issued two prime plus 1% promissory notes in
the principal amounts of $100,000 and $130,000, and in November 1996 the Company
issued two prime plus 1% promissory notes in the principal amounts of $50,000
each to DayStar, of which Larry Wells Co. is a general partner, in order to fund
ongoing operations. The notes are due on April 1, April 16, May 18, and May 20,
1997, respectively. Larry J. Wells, the Chairman of the Company's Board of
Directors is the President of Larry Wells Co.

In September 1996, the Company issued 2,439 shares of Common Stock to Larry
J. Wells, the Chairman of the Company's Board of Directors and 17,073 shares to
DayStar, of which Larry Wells Co., is a general partner, pursuant to the terms
of the Bridge Notes and 248,778 shares of Common Stock to Baxter, a wholly-owned
subsidiary of which is a principal stockholder of the Company, pursuant to the
terms of the Baxter Letter and the Baxter Notes. Mr. Wells is the President of
Larry Wells Co.

In May 1996, the Company issued the $350,000 Note to Baxter, a wholly-owned
subsidiary of which is a greater than 5% stockholder of the Company and entered
into the Baxter Letter in order to cancel a portion of a $550,000 note issued by
Baxter to MMS, the obligations under which were assumed by the Company as part
of the business combination in which the Company was formed. The $350,000 Note
is due on September 1, 1997. Pursuant to the terms of the Baxter Letter, in
addition to repayment of the principal amount of the $350,000 Note plus accrued
interest, immediately following the closing of this Offering, Baxter is entitled
to receive a number of shares of Common Stock equal to $350,000 divided by the
initial public offering price of the Common Stock sold hereunder.

In May 1996, the Company issued another 8% promissory note in the principal
amount of $200,000 (the "$200,000 Note") to Baxter, a wholly-owned subsidiary of
which is a greater than 5% stockholder of the Company in order to cancel the
remaining outstanding balance of a $550,000 note issued by Baxter to MMS, the
obligations under which were assumed by the Company as part of the business
combination in which the Company was formed. The $200,000 Note is due on
September 1, 1997.

In order to fund ongoing operations, the Company entered into a Credit
Agreement in May 1996 with Baxter, a wholly-owned subsidiary of which is a
greater than 5% stockholder of the Company, pursuant to

55
<PAGE> 58

which the Company issued the $2,000,000 Note. The $2,000,000 Note will become
due on September 1, 1997. Immediately following the closing of this Offering,
assuming this Offering closes on or before February 28, 1997, the principal
amount together with all accrued but unpaid interest under the $2,000,000 Note
will be automatically converted into Common Stock at the initial public offering
price of the Common Stock offered hereby.

The Company entered into a Distribution Agreement in May 1996 (the
"Distribution Agreement") with Baxter, a wholly-owned subsidiary of which is a
greater than 5% stockholder of the Company, pursuant to which Baxter guaranteed
it would provide orders for at least $350,000 of the Company's Preview models
during the initial 12 month period as specified in the Distribution Agreement.
In the event the total sales by Baxter do not equal or exceed $350,000, Baxter
is obligated to pay the Company 70% of the difference between $350,000 and the
total sales for the initial 12 month period. Baxter will receive off-set credit
for such payment against future orders. For each of the subsequent 12 month
periods during the initial five-year term of the Distribution Agreement, Baxter
guaranteed its sales would equal or exceed the product of 1,000 multiplied by
the average sales price of a Preview model during the last year. In the event
total sales do not equal or exceed that amount, Baxter is obligated to pay the
Company 70% of the shortfall. Baxter will receive off-set credit for such
payment against future orders and the Company may terminate the Distribution
Agreement. See "Business--Baxter Distribution Agreement".

The Company entered into a Manufacturing License Agreement in May 1996 (the
"Manufacturing Agreement") with Baxter, a wholly-owned subsidiary of which is a
greater than 5% stockholder of the Company, effective during the term of the
Distribution Agreement. Pursuant to the Manufacturing Agreement, the Company
granted Baxter an exclusive license to use the Company's technology, if the
Company fails to fill the minimum delivery requirements under the Distribution
Agreement, solely to make or have made Preview models in connection with
treating aortic and iliac aneurysms. Baxter has agreed to pay royalties to the
Company based on revenues generated from sales of the product in the amount of
10% with the exception of the 200 clinical training models to be provided
pursuant to the Distribution Agreement for which Baxter agreed to pay a royalty
of $50 each. See "Business--Baxter Distribution Agreement."

In May 1996, the Company granted options to purchase Common Stock at $6.30
per share (the "Options") to the following individuals in the following amounts:
Bruce D. Sturman (former President, Chief Executive Officer and Director of the
Company) 75,000 shares; Thomas E. Mignanelli (Vice President, Finance, Chief
Financial Officer and Secretary of the Company) 50,000 shares; Steven D. Pieper
(Vice President, Chief Technical Officer and Director of the Company) 20,000
shares; David C. Hon (Director of the Company) 20,000 shares; Charles E.
Hutchinson (Director of the Company) 15,000 shares; James C. Caillouette
(Director of the Company) 15,000 shares and John R. Lyon (Director of the
Company) 15,000 shares. With the exception of the Options granted to Messrs.
Hutchinson, Caillouette and Lyon, whose Options vest in equal monthly
installments over 48 months of service with the Company from the grant date,
these options vest 25% upon the completion of one year of service with the
Company from the grant date and thereafter in equal monthly installments over
the next 36 months of service with the Company. Each option has a term of 10
years and a vesting commencement date of May 27, 1996.

The Company has entered into certain additional transactions with its
directors and officers (or with corporations affiliated with them), as described
under the captions, "Management--Executive Compensation" and
"Management--Employment Agreements."

The Company has entered into a registration rights agreement granting
registration rights to certain individuals and entities, including Baxter, a
wholly-owned subsidiary of which is a greater than 5% stockholder of the
Company. See "Description of Capital Stock--Registration Rights."

The Company believes that the foregoing transactions were in its best
interests. As a matter of policy, all future transactions between the Company
and any of its officers, directors or principal stockholders will be approved by
a majority of the independent and disinterested members of the Board of
Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties, and will be in connection with bona
fide business purposes of the Company.

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<PAGE> 59

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 20, 1996, and as adjusted
to reflect the sale of the shares of the Common Stock offered hereby (assuming
no exercise of the Underwriter's over-allotment option) by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
-------------------
NUMBER OF SHARES BEFORE AFTER
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Baxter Medical Media Holdings, Inc.(2)(3).................. 1,310,044 38.1% 22.8%
17221 Red Hill Avenue
Irvine, CA 92714
Bruce D. Sturman(4)(5)..................................... 778,610 24.5% 13.4%
654 Madison Avenue
Suite 1606
New York, NY 10021
Maxal Trust(3)(6).......................................... 695,030 22.2% 12.1%
1202 Lexington Avenue
Suite 295
New York, NY 10028
David C. Hon(7)............................................ 391,197 12.5% 6.8%
1335 N. Northlake Way, Suite 102
Seattle, WA 98104
Steven D. Pieper(8)........................................ 106,717 3.4% 1.9%
79 East Wilder Road
West Lebanon, NH 03784-310746
Larry J. Wells(9).......................................... 87,825 2.8% 1.5%
10600 N. DeAnza Boulevard
Suite 215
Cupertino, CA 95870
Charles E. Hutchinson(10).................................. 39,788 1.3% *
8000 Cummings Hall
Hanover, NH 03755
John R. Lyon(11)........................................... 5,847 * *
540 Idaho Avenue
Escondido, CA 92025
James C. Caillouette, M.D(12).............................. 5,847 * *
50 Bellafontaine Street
Pasadena, CA 91105
Donald L. Johanson......................................... 0 0 0
1335 N. Northlake Way, Suite 102
Seattle, Washington 98103
All directors and officers as a group (11 persons)(13)..... 682,487 20.9% 11.7%
</TABLE>

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

*Less than one percent.

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<PAGE> 60

(1) Unless otherwise indicated in the footnotes to this table and subject to
the community property laws where applicable, each of the stockholders
named in this table has sole voting and investment power with respect to
the shares shown as beneficially owned by them. Share ownership in each
case includes shares issuable on exercise of certain outstanding options,
warrants and other similar rights to purchase shares held by the particular
beneficial owners as described in the footnotes below. See "Certain
Transactions."

(2) Includes 248,778 shares issued to Baxter in September 1996 pursuant to the
terms of the Baxter Notes and 265,516 shares issuable to Baxter pursuant to
the conversion of the $2,000,000 Note upon the closing of this Offering
(assuming that this Offering closes on December 31, 1996). Baxter Medical
Media Holdings, Inc. is a wholly-owned subsidiary of Baxter. Such number of
shares is calculated by dividing the $2,000,000 principal amount of the
$2,000,000 Note, plus accrued interest (assuming that the closing of this
Offering occurs on December 31, 1996), by the initial public offering price
(assuming an initial public offering price of $8.00 per Share (the midpoint
of the range set forth on the cover page of this Prospectus)). Also
includes 43,750 shares to be issued to Baxter immediately following the
closing of this Offering pursuant to the Baxter Letter. Such number of
shares is calculated by dividing $350,000 by the initial public offering
price assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus).

(3) 695,030 shares of Common Stock held by the Maxal Trust are subject to that
certain Voting Agreement and Irrevocable Proxy dated May 24, 1996 (the
"Voting Agreement") that requires the Maxal Trust to vote all of such
shares to elect one director nominated by Baxter at any meeting of the
Company's stockholders or in any action by written consent of the Company's
stockholders. The Voting Agreement will terminate upon the closing of this
Offering provided that the gross proceeds to the Company exceed $10.0
million.

(4) Includes 695,030 shares held by the Maxal Trust over which Michael D.
Muffoletto, the trustee, has the sole voting and dispositive power. The
Maxal Trust is an irrevocable trust established for the benefit of Mr.
Sturman's wife. Mr. Sturman, the former President, Chief Executive Officer
and director of the Company, disclaims beneficial ownership of these
shares.

(5) Includes 56,780 shares subject to options exercisable within 60 days of
November 20, 1996.

(6) The Maxal Trust is a trust established for the benefit of Mr. Sturman's
wife. Michael D. Muffoletto, the trustee of the Maxal Trust, has the sole
voting and dispositive power with respect to these shares. Mr. Sturman, the
former President, Chief Executive Officer and director of the Company,
disclaims beneficial ownership of these shares.

(7) Includes 3,610 shares subject to options exercisable within 60 days of
November 20, 1996, held by Mr. Hon's wife. Mr. Hon disclaims beneficial
ownership of these shares.

(8) Includes 30,000 shares potentially issuable pursuant to a certain
employment agreement within 60 days of November 20, 1996. See "Employment
Agreements."

(9) Includes (i) 17,073 shares currently held by DayStar, (ii) 3,125 shares to
be issued to Mr. Wells and 21,875 shares to be issued to DayStar upon the
closing of this Offering pursuant to the terms of the Bridge Financing and
(iii) 43,313 shares to be issued to Mr. Wells pursuant to the terms of the
Wells Consulting Agreement. Mr. Wells is the President of Larry Wells Co.,
the general partner of DayStar, a venture capital limited partnership.

(10) Includes 2,188 shares subject to options exercisable within 60 days of
November 20, 1996.

(11) Includes 2,188 shares subject to options exercisable within 60 days of
November 20, 1996.

(12) Includes 2,188 shares subject to options exercisable within 60 days of
November 20, 1996.

(13) Includes 53,068 shares potentially issuable pursuant to certain consulting
agreements within 60 days of November 20, 1996, 30,000 shares potentially
issuable pursuant to a certain employment agreement within 60 days of
November 20, 1996, 25,000 shares issuable upon the closing of this
Offering, pursuant to the terms of the Bridge Financing, 29,684 shares
issuable upon exercise of stock options that are exercisable within 60 days
of November 20, 1996 and 10,934 shares held by Xinetix. Harold J. Walbrink,
the Company's Vice President, Manufacturing, is the President of Xinetix.

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<PAGE> 61

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 10,000,000 shares of Common Stock, $0.01 par value
("Common Stock"), and 5,000,000 shares of Preferred Stock, $0.01 par value
("Preferred Stock").

COMMON STOCK

At November 20, 1996, there were 3,127,708 shares of Common Stock
outstanding and held of record by approximately 56 stockholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, except upon the closing of this
Offering the holders of Common Stock will be entitled to cumulative voting
rights with respect to the election of directors and as a consequence, certain
minority stockholders will be able to elect directors on the basis of their
votes alone. Subject to preferences that may be applicable to any shares of
Preferred Stock issued in the future, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available for such purpose. See "Dividend Policy." In the event
of a liquidation, dissolution or winding up of the Company, holders of the
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and shares of Common Stock to be outstanding upon completion of this
Offering will be, fully paid and nonassessable.

PREFERRED STOCK

Effective upon the closing of this Offering, the Board of Directors has the
authority to issue up to 5,000,000 shares of the Preferred Stock in one or more
series and to fix the rights, priorities, preferences, qualifications,
limitations and restrictions, including the dividend rights, conversion rights,
voting rights, terms of redemption, terms of sinking funds, liquidation
preferences and the number of shares constituting any series and the designation
of such series, without any further vote or action by the stockholders, which
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of the Common Stock. Because the terms of the
Preferred Stock may be fixed by the Board of Directors of the Company without
stockholder action, the Preferred Stock could be issued quickly with terms
calculated to defer or delay a proposed takeover of the Company, or to make the
removal of the management of the Company more difficult.

Effective upon the closing of this Offering, there will be no shares of
Preferred Stock outstanding. The Company has no present intention of issuing any
shares of Preferred Stock.

WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, the
Representative, and Continental Stock Transfer & Trust Company (the "Warrant
Agent"). A copy of the Warrant Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."

Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time over a four year period commencing one year
after the date of this Prospectus, one share of Common Stock at a price per
share of 160% of the price per share of the Shares sold in this Offering subject
to adjustment in accordance with the anti-dilution and other provisions referred
to below. The holder of any Warrant may exercise such Warrant by surrendering
the certificate representing the Warrant to the Warrant Agent, with the
subscription form thereon properly completed and executed, together with payment
of the exercise price. The Warrants may be exercised at any time in whole or in
part at the applicable exercise price until expiration of the Warrants. No
fractional shares will be issued upon the exercise of the Warrants.

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<PAGE> 62

The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.

Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock at
a price below the then-applicable exercise price of the Warrants. Additionally,
an adjustment would be made in the case of a reclassification or exchange of
Common Stock, consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all of the assets of the
Company in order to enable warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Common Stock that might otherwise have been
purchased upon the exercise of the Warrant.

Redemption Provisions. Commencing one year after the date of this
Prospectus, the Warrants are subject to redemption at $0.05 per Warrant on 30
days' prior written notice to the warrantholders if the average closing bid
price of the Common Stock as reported on the Nasdaq National Market equals or
exceeds 300% of the initial public offering price per Share of Common Stock for
any 20 trading days ending on the fifth trading day prior to the date of the
notice of redemption. In the event the Company exercises the right to redeem the
Warrants, such Warrants will be exercisable until the close of business on the
business day immediately preceding the date for redemption fixed in such notice.
If any Warrant called for redemption is not exercised by such time, it will
cease to be exercisable and the holder will be entitled only to the redemption
price.

Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.

Warrantholder Not a Stockholder. The Warrants do not confer upon holders
any voting, dividend or other rights as stockholders of the Company.

Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the
warrantholders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrantholders. No other modifications may be made to the Warrants
without the consent of two-thirds of the warrantholders.

A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such Securities through or with the
Representative. Although it has no obligation to do so, the Representative
currently intends to make a market in the Company's Securities and may otherwise
effect transactions in such Securities. If it participates in the market, the
Representative may exert a dominating influence on the market, if one develops,
for the securities described in this Prospectus. Such market-making activity may
be discontinued at any time. The price and liquidity of the Common Stock and the
Warrants may be significantly affected by the degree, if any, of the
Representative's participation in such market. See "Underwriting."

The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date

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<PAGE> 63

and to maintain a current prospectus relating thereto until the expiration of
the Warrants, there can be no assurance that it will be able to do so.

The Warrants are separately transferable immediately upon issuance.
Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desirable to
exercise their Warrants, and holders of Warrants would have no choice but to
attempt to sell the Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised.

WARRANTS TO PURCHASE COMMON STOCK

At November 20, 1996, there were outstanding warrants to purchase 48,774
shares of Common Stock at the initial public offering price, warrants to
purchase 12,194 shares of Common Stock at 150% of the initial public offering
price and warrants to purchase 12,194 shares of Common Stock at 160% of the
initial public offering price.

For a description of warrants to be sold to the Representative of the
Underwriters in connection with this Offering, see "Underwriting."

REGISTRATION RIGHTS

Pursuant to a Registration Rights Agreement dated May 24, 1996 (the
"Registration Rights Agreement"), the holders of approximately 614,266 shares of
Common Stock or their permitted transferees (the "Holders") are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of the Registration Rights Agreement, if the
Company proposes to register any of its securities under the Securities Act for
its own account, such Holders are entitled to include shares of such Common
Stock therein, provided, among other conditions, that the underwriters of any
such offering have the right to limit the number of shares included in such
registration. In addition, Holders of at least 40% (or a lesser percent if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $5,000,000) of the then outstanding registrable
securities under the Registration Rights Agreement may, one year after this
Offering, require the Company to prepare and file a registration statement under
the Securities Act with respect to the shares entitled to demand registration
rights, and the Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. The Company is not
obligated to effect more than one of these stockholder-initiated registrations,
or to effect such a registration 30 days prior to the Company's good faith
estimate of the date of a filing of or 180 days after the effective date of a
registration statement for an offering of the Company's securities, including
this Offering, nor if the shares requested to be registered may be immediately
registered on Form S-3. Holders of at least 20% of the outstanding registrable
securities under the Registration Rights Agreement may request the Company to
register such shares on Form S-3 provided the shares registered have an
aggregate market value of at least $500,000. The Company is not obligated to
effect more than two of these Form S-3 registrations in any 12 month period.
Generally, the Company is required to bear the expense of all such
registrations. The registration rights of the Holders expire: (i) three years
following the sale of securities pursuant to a registration statement filed by
the Company or (ii) when the registrable securities under the Registration
Rights Agreement may be sold in compliance with Rule 144 of the Securities Act.
The Registration Rights Agreement also provides Baxter with a one-time priority
over all other parties to such agreement to register a number of shares of the
Company's Common Stock which will result in gross proceeds of up $2,000,000 (but
not less than $1,000,000). Baxter's right to exercise such right commences six
months after this Offering and expires three years after this Offering.

The Company has granted rights to register shares in certain Company
initiated registrations to the Representative of the Underwriters and to the
holders of warrants to purchase approximately 24,388 shares of the Company's
Common Stock. See "Underwriting."

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DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.

The holders of Common Stock are currently entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders
other than the election of directors, in which event any holder may demand
cumulative voting. Under cumulative voting, the holders of Common Stock are
entitled to cast for each share held the number of votes equal to the number of
directors to be elected. A holder may cast all of his or her votes for one
nominee or distribute them among any number of nominees for election.

An Amended and Restated Certificate of Incorporation has been approved by
the Company's Board of Directors and stockholders, effective immediately prior
to the closing of this Offering, which, among other things, requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by a consent in writing. The Company's Certificate of Incorporation,
as amended, will also require special meetings of the stockholders of the
Company be called only by the Board of Directors, the Chairman of the Board or
the Chief Executive Officer or the holders of at least 10% of the outstanding
shares of Common Stock. In addition, the Certificate of Incorporation and Bylaws
of the Company, as amended, will require that stockholders give advance notice
to the Company's secretary of any directorship nominations or other business to
be brought by stockholders at any stockholders' meeting. The Company's
Certificate of Incorporation, as amended, will also divide the Board of
Directors into two classes of directors serving staggered two-year terms, with
one class of directors to be elected at each annual meeting of stockholders. The
classification of directors has the effect of making it more difficult to change
the composition of the Board. See "--Common Stock," "--Preferred Stock" and
"Risk Factors--Antitakeover Provisions." These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of the
Company.

TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT

The Transfer Agent and Registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company.

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<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices. Upon completion
of this Offering, the Company will have approximately 5,755,287 shares of Common
Stock outstanding, assuming no exercise of the Representative's Warrants and no
exercise of warrants and options to purchase approximately 477,364 shares of
Common Stock outstanding as of the date of this Prospectus. Of these shares, the
2,000,000 Shares and the Warrants to purchase 2,000,000 shares of Common Stock
sold in this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless they are purchased by an
"affiliate" of the Company as that term is defined in Rule 144 under the
Securities Act (which sales would be subject to certain limitations and
restrictions described below).

The remaining 3,755,287 shares of Common Stock may be sold in the public
market only if registered or pursuant to an exemption from registration such as
Rules 144 or 144(k) promulgated under the Securities Act. Except for those
shares sold in this Offering, approximately shares of the Company's
Common Stock outstanding after this Offering will be subject to contractual
lock-up agreements with the Company or the Underwriters. Specifically, each of
the Company's executive officers, directors and certain stockholders who
together hold an aggregate of shares of the Company's Common Stock
have executed lock-up agreements providing that they will not offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or agree
to dispose of any shares of Common Stock (other than as permitted in this
Offering) until 365 days (180 days in the case of shares acquired pursuant to
the Purchase Plan) after the date of this Prospectus.

Taking into account these lock-up agreements and provisions, unless
registered by the Company, none of the shares outstanding prior to this Offering
will be eligible for sale prior to April 15, 1998.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "brokers' transactions" or to market makers, within any
three-month period a number of shares that does not exceed the greater of (a)
one percent of the number of shares of Common Stock then outstanding
(approximately 57,553 shares immediately after this Offering) or (b) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice filing provisions of
Rule 144. In addition, Rule 144A would permit the resale of restricted
securities to qualified institutional buyers, subject to compliance with
conditions of the Rule.

The Company is unable to estimate the number of shares that may be sold
under Rule 144 or otherwise because this will depend on the market price for the
Common Stock of the Company, the individual circumstances of the sellers and
other factors. Future sales of shares of Common Stock, or the availability for
sale of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock and could impair the Company's future ability to raise capital through an
offering of its equity securities.

Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions.

As of November 20, 1996, (i) 384,692 shares of Common Stock are subject to
outstanding options issued pursuant to the Prior Plan, (ii) 19,510 shares of
Common Stock are subject to outstanding non-qualified stock

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options, (iii) 73,162 shares of Common Stock are subject to outstanding warrants
and 615,308 additional shares are reserved for issuance under the Plan. See
"Management--Benefit Plans." The Company intends to file a registration
statement under the Securities Act on Form S-8 covering an aggregate of
approximately 1,200,000 shares of Common Stock reserved for issuance under its
Plan and the Purchase Plan. Such registration statement is expected to be filed
as soon as practicable after the effectiveness of this Offering and will
automatically become effective upon filing. Accordingly, shares registered under
such registration statement will be available for resale by nonaffiliates in the
public market, subject to any vesting restrictions with the Company or any
contractual restrictions.

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UNDERWRITING

The Underwriters named below, for whom National Securities Corporation is
acting as the Representative have agreed, subject to the terms and conditions of
the Underwriting Agreement between the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of Shares of Common Stock and Warrants set forth opposite their
respective names.

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NUMBER OF
UNDERWRITER COMMON STOCK WARRANTS
------------------------------------------------------------ ------------ ----------
<S> <C> <C>
National Securities Corporation.............................
Total.............................................
</TABLE>

The Underwriters are committed to purchase all the Shares of Common Stock
and the Warrants offered hereby, if any of such shares are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.

The Underwriters have advised the Company that they propose to offer to the
public at the offering prices set forth on the cover page of this Prospectus and
to certain dealers at such prices less concessions of not in excess of $____ per
Share and $____per Warrant. Such dealers may re-allow a concession not in excess
of $____ per Share and $____per Warrant to certain other dealers. After the
commencement of this Offering, the public offering price, concession and
reallowance may be changed by the Representative. The Representative has
informed the Company that it does not expect sales to discretionary accounts by
the Underwriters to exceed five percent of the shares offered by the Company
hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative an expense allowance on a nonaccountable
basis equal to two percent of the gross proceeds derived from the sale of the
Securities underwritten.

The Company has granted to the Underwriters an over-allotment option
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to an additional 300,000 Shares of Common Stock and/or 300,000
Warrants at the public offering price per Share and Warrant, respectively,
offered hereby, less underwriting discounts and the expense allowance. Such
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the Securities offered hereby. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase a number of the
additional shares proportionate to its initial commitment.

In connection with this Offering the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 200,000 Shares of Common Stock and/or 200,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price equal to 140% of the price per Share and price per
Warrant, respectively, sold pursuant this Offering for a three year period
commencing at the beginning of the first year after their issuance and sale and
are restricted from sale, transfer, assignment or hypothecation for a period of
one year from the date hereof, except to officers of the Representative and
Underwriters. The Representative's Warrants provide for adjustments in the
exercise price of the Representative's Warrants upon the occurrence of certain
events, including the subdivision or combination by the Company of outstanding
shares of Common Stock and the payment by the Company of a stock dividend.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation) or sale

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of all or substantially all of the assets of the Company in order to enable
warrantholders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might otherwise have been purchased upon the
exercise of the Representative's Warrants. The Representative's Warrants grant
to the holders thereof certain rights of registration for the securities
issuable upon exercise of the Representative's Warrants.

The Company, all of the Company's officers, directors and all beneficial
holders of more than 5% of the issued and outstanding capital stock of the
Company, as well as all holders of all options, warrants or outstanding
securities exchangeable for or convertible into more than 5% of the issued and
outstanding capital stock of the Company, have agreed not to, directly or
indirectly, offer, offer to sell, sell, grant an option for the purchase or sale
of, transfer, pledge, assign, or hypothecate any securities of the Company or
otherwise dispose of any beneficial interest in such securities for a period of
365 days following the date of this Prospectus, without the prior written
consent of the Representative.

For five years following the effective date of this Offering, the
Representative shall have the right to designate for election one person to the
Board of Directors of the Company. In the event the Representative does not
designate such person, it has the right to designate one person to attend
meetings of the Board of Directors. Such person shall be entitled to attend all
such meetings and to receive all notices and other correspondence and
communications sent by the Company to members of its Board of Directors. The
Company has agreed to reimburse the designee of the Representative for such
designee's out-of-pocket expenses incurred in connection with his attendance of
meetings of the Company's Board of Directors.

Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. Consequently, the initial public offering price of the
Securities has been determined by negotiation between the Company and the
Representative and does not necessarily bear any relationship to the Company's
asset value, net worth, and other established criteria of value. Factors
considered in such negotiations, in addition to prevailing market conditions,
include the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and certain other factors as were deemed
relevant.

Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the NASD and the Rules and
Regulations of the Commission, the Company has agreed to pay the Representative
a commission which shall not exceed five percent of the aggregate exercise price
of such Warrants in connection with bona fide services provided by the
Representative relating to any warrant soliciation undertaken by the
Representative. In addition, the individual must designate the firm entitled to
payment of such warrant soliciation fee. However, no compensation will be paid
to the Representative in connection with the exercise of the Warrants if (a) the
market price of the Common Stock is lower than the exercise price, (b) the
Warrants were held in a discretionary account, or (c) the exercise of the
Warrants is not solicited by the Representative. Unless granted an exemption by
the Commission from its Rule 10b-6 under the Exchange Act the Representative
will be prohibited from engaging in any market-making activities with regard to
the Company's securities for the period from nine business days (or other such
applicable periods as Rule 10b-6 may provide) prior to any solicitation of the
exercise of the Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Representative may have to receive a fee. As a result, the Representative may be
unable to continue to provide a market for the Common Stock or Warrants during
certain periods while the Warrants are exercisable. If the Representative has
engaged in any of the activities prohibited by Rule 10b-6 during the periods
described above, the Representative undertakes to waive unconditionally its
rights to receive a commission on the exercise of such Warrants.

The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement, which is filed as an exhibit to the Registration
Statement. See "Additional Information."

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LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Camhy Karlinsky & Stein LLP, New York, New York.

Various portions of the statements in this Prospectus under the captions
"Risk Factors--Patents and Proprietary Technology," and "Business--Patents and
Proprietary Rights" and other references to intellectual property have been
reviewed and approved by various firms. These include Crutsinger & Booth of
Dallas, Texas, Pandisico & Pandisico of Waltham, Massachusetts and Finnegan,
Henderson, Farabow, Garrett & Dunner, L.L.P. of Washington, D.C.

EXPERTS

The financial statements of Interact Medical Technologies Corporation
included in this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein, which report contains an explanatory
paragraph regarding uncertainties as to the ability of the Company to continue
as a going concern, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.

The financial statements of Medical Media Systems included in this
Prospectus have been audited by Robert E. Moses, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock,
reference is hereby made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office in Washington, D.C. 20549, and copies of all or any part
thereof may be obtained at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of fees prescribed by
the Commission. Also, the Commission maintains a World Wide WebSite on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERACT MEDICAL TECHNOLOGIES CORPORATION
Pro Forma Condensed Financial Information............................................. F-2
Unaudited Pro Forma Statements of Operations.......................................... F-3
Report of Independent Certified Public Accountants.................................... F-4
Balance Sheets........................................................................ F-5
Statements of Operations.............................................................. F-6
Statements of Stockholders' Equity (Deficit).......................................... F-7
Statements of Cash Flows.............................................................. F-8
Notes to Financial Statements......................................................... F-9
MEDICAL MEDIA SYSTEMS
Report of Independent Certified Public Accountants.................................... F-20
Balance Sheets........................................................................ F-21
Statements of Operations.............................................................. F-22
Statement of Changes in Partners' Equity.............................................. F-23
Statements of Cash Flows.............................................................. F-24
Notes to Financial Statements......................................................... F-26
</TABLE>

F-1
<PAGE> 71

INTERACT MEDICAL TECHNOLOGIES CORPORATION

PRO FORMA CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma condensed information has been prepared
in accordance with guidelines established by regulations promulgated by the
Securities and Exchange Commission. The unaudited pro forma statements of
operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 include the results of operations of Ixion and MMS for the
respective periods presented and give effect to the pro forma adjustments as if
all such transactions had occurred at the beginning of the respective periods.

The mid-point of the projected $7.00 to $9.00 initial public offering price
range has been utilized as a factor in the determination of the MMS purchase
price. To the extent that the offering price is higher or lower than that
utilized in purchase accounting, the purchase price to allocate could increase
or decrease. Further, the fair values at acquisition of identifiable intangible
assets have been determined based upon estimates prepared by Company management
utilizing, among other considerations, discounted cash flow projections. To the
extent that these estimates are updated or supplemented by independent
appraisal, amounts allocated to intangible assets could increase or decrease.

The following pro forma adjustments have been determined on the basis as
described below:

1. The business combination involving MMS and Ixion is accounted for
utilizing the purchase method of accounting. Inasmuch as the former Ixion
stockholders own a majority of Interact Stock after the merger, Ixion is
considered to be the acquiring corporation for purposes of purchase accounting,
and the predecessor entity to Interact for purposes of financial reporting. The
estimated fair value attributed to Interact Stock issued to former MMS
stockholders was $5,150,000.

2. Fees paid in the estimated amount of $235,000 that were directly
attributable to the May 1996 business combination have been included in the
purchase price allocated to the MMS acquisition.

3. The total purchase price, including assumed liabilities at their
estimated fair values (which approximates book value), is allocated to assets
acquired based upon preliminary estimates of fair values. Assets acquired
include tangible assets (which fair values are estimated to approximate book
value) and identifiable intangible assets, such as products in varying stages of
development, including those at or near commercial availability, and those
having and/or not having reached a stage of technological feasibility. The
estimated value of products in development which are considered to have attained
technological feasibility, as such term is defined and interpreted in accordance
with generally accepted accounting principles, are capitalized at their
estimated fair value of approximately $2.3 million and are amortized over lives
of five years. The estimated value of products in development which are not
deemed to have attained technological feasibility, as defined, are capitalized
in purchase accounting at their estimated fair values of approximately $2.2
million and immediately expensed subsequent to recording the business
combination. If the estimated fair value of the investment in products not
having attained technological feasibility were to increase, the amount
immediately expensed would increase. The estimated fair value of approximately
$1.1 million relating to identifiable intangible assets attributable to
contracts and agreements are capitalized and amortized over five years. The
total of estimated fair values of assets acquired reasonably approximated the
total purchase price and accordingly, no goodwill was recorded. If the estimated
fair value of identifiable intangible assets were to decrease by approximately
$500,000 or more, goodwill would be recorded.

4. Increased amortization expense results from the purchase price
allocation to the assets acquired in accordance with APB Opinion No. 16 based on
preliminary estimates of fair value.

5. Conversion of approximately $503,000 of accrued payables to certain
employees and consultants for approximately 62,000 shares of Interact Stock and
payment of payroll related withholdings.

6. Receipt of $2 million cash pursuant to issuance of a convertible
promissory note bearing interest at prime plus 2%, and increased related
interest expense.

These pro forma condensed financial statements are not necessarily
indicative of future financial positions or results of operations of the Company
and should be read in conjunction with the financial statements of Ixion and MMS
included elsewhere in this prospectus.

F-2
<PAGE> 72

INTERACT MEDICAL TECHNOLOGIES CORPORATION

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
PRO FORMA INTERACT
IXION MMS ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................................... $ 266 $ -- $ -- $ 266
------- ------- ------- -------
Expenses:
Research and development....................... 1,332 1,540 676(a) 3,548
Selling, general and administrative............ 1,124 394 -- 1,518
------- ------- ------- -------
2,456 1,934 676 5,066
------- ------- ------- -------
Loss before interest............................. (2,190) (1,934 ) (676) (4,800)
Interest expense (income)........................ 132 (13 ) 205(b) 324
------- ------- ------- -------
Net loss(d)...................................... $ (2,322) $(1,921) $ (881) $(5,124)
======= ======= ======= =======
Pro forma net loss per share(d).................. $ (1.82)(c)(f)
=======
</TABLE>

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
PRO FORMA INTERACT
INTERACT MMS(E) ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................................... $ 59 $ -- $ -- $ 59
------- ------- ------- -------
Expenses:
Research and development....................... 1,501 434 98(a) 2,033
Selling, general and administrative............ 1,758 113 -- 1,871
Writeoff of certain intangible assets recorded
in purchase accounting...................... 2,251 -- (2,251)(d) --
------- ------- ------- -------
5,510 547 (2,153) 3,904
------- ------- ------- -------
Loss before interest............................. (5,451) (547 ) 2,153 (3,845)
Interest expense (income)........................ 1,017 (13 ) 31(b) 1,035
------- ------- ------- -------
Net loss(d)...................................... $ (6,468) $ (534 ) $(2,184) $(4,880)
======= ======= ======= =======
Pro forma net loss per share(d).................. $ (1,62)(c)(f)
=======
</TABLE>

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

(a) To reflect pro forma increased amortization charges resulting from the
allocation of the purchase price paid for MMS. Such amortization was based
upon estimated remaining useful lives of five years for intangible assets.

(b) To record pro forma interest expense on convertible promissory note.

(c) Calculated on the basis of approximately 2,814,000 and 3,015,000 weighted
average shares of Interact Stock, for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively. Stock options were
not included in such computations as the effects were antidilutive.

(d) In accordance with guidelines established by the SEC, pro forma net loss
does not include approximately $2.2 million of expense recorded immediately
subsequent to recording the business combination relating to the estimated
fair value of intangible assets acquired associated with products in
development which have not been determined to have yet attained
technological feasibility.

(e) MMS results of operations for 1996 are for the period January 1 through May
24, 1996, the date of the business combination. MMS results of operation
for May 25 through September 30, 1996 are included in Interact results of
operations.

(f) Pro forma net loss per share as calculated above does not give effect to
the conversion of a $2 million promissory note and related issuance of
approximately 250,000 shares, which is to occur in the event that the
Company's initial public offering occurs prior to February 28, 1997. The
Company's supplemental pro forma loss per share calculated by adding back
related interest expense and increasing average shares outstanding would be
$(1.61) for the year ended December 31, 1995 and $(1.46) for the nine
months ended September 30, 1996.

F-3
<PAGE> 73

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Interact Medical Technologies Corporation

We have audited the accompanying balance sheets of Interact Medical
Technologies Corporation, effective May 24, 1996 the successor entity to Ixion,
Inc., (the "Company"), as of December 31, 1994 and 1995 and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements present fairly, in all material
respects, the financial position of Interact Medical Technologies Corporation as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years then ended in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses and has
stockholders' and working capital deficiencies that raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

BDO SEIDMAN, LLP

Seattle, Washington
April 25, 1996, except as to
Notes 1 and 10, which are as of
June 26, 1996

F-4
<PAGE> 74

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30, 1996
1994 1995 ------------------
----- ------- (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 207 $ -- $ 88
Other current assets................................... 28 1 35
----- ------- ------
Total Current Assets........................... 235 1 123
EQUIPMENT AND SOFTWARE, net of accumulated depreciation
and amortization....................................... 254 237 870
INVESTMENT IN PRODUCT DEVELOPMENT AND DISTRIBUTION
AGREEMENT, net of accumulated amortization (Note 10)... -- -- 3,189
Deferred Debt Issue Costs, net of accumulated
amortization (Note 11)................................. -- -- 2,564
Deferred Stock Issue Costs............................... -- -- 233
----- ------- ------
Total Assets................................... $ 489 $ 238 $6,979
===== ======= ======
CURRENT LIABILITIES
Accounts payable and accrued liabilities............... $ 128 $ 478 $1,174
Accrued payroll and related............................ -- 71 67
Advances due to stockholders (Note 6).................. 45 95 95
Accrued payables due to stockholders (Note 6).......... 88 342 47
Notes payable and accrued interest (Note 4)............ 192 1,014 2,136
Notes payable due to stockholder (Note 10)............. -- -- 2,621
----- ------- ------
Total Current Liabilities...................... 453 2,000 6,140
----- ------- ------
NONCURRENT PORTION OF PATENT RIGHTS OBLIGATION DUE TO
STOCKHOLDER(NOTE 6).................................... -- -- 124
----- ------- ------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, no par value, 1 million shares
authorized, none issued............................. -- -- --
Common Stock and additional paid in capital, $0.01 par
value, 10 million shares authorized, 1,199,036,
1,332,447 and 3,115,514 shares issued and
issuable............................................ 646 1,170 10,115
Accumulated Deficit.................................... (610) (2,932) (9,400)
----- ------- ------
Total Stockholders' Equity (Deficit)........... 36 (1,762) 715
----- ------- ------
Total Liabilities and Stockholders' Equity
(Deficit).................................... $ 489 $ 238 $6,979
===== ======= ======
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 75

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30
----------------------------- ---------------------------
1993 1994 1995 1995 1996
------ ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUES................................ $1,359 $1,237 $ 266 $ 266 $ 59
------ ------ ------- ------ -------
EXPENSES
Research and development.............. 951 1,189 1,332 1,044 1,501
Sales and marketing................... 46 109 244 201 93
General and administrative............ 217 191 226 145 643
Financing, legal and other
consulting......................... 153 288 654 596 1,022
Write-off of intangible assets
recorded in purchase accounting for
certain products in development
(Note 10).......................... -- -- -- -- 2,251
------ ------ ------- ------ -------
Total Expenses................ 1,367 1,777 2,456 1,986 5,510
------ ------ ------- ------ -------
Loss Before Interest Expense............ (8) (540) (2,190) (1,720) (5,451)
Interest Expense........................ -- 9 132 73 1,017
------ ------ ------- ------ -------
Net Loss................................ $ (8) $ (549) $(2,322) $(1,793) $(6,468)
====== ====== ======= ====== =======
Net Loss Per Share...................... $(0.01) $(0.45) $ (1.67) $ (1.32) $ (2.81)
====== ====== ======= ====== =======
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 76

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------- ----------- -------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993........................... 366 $ 617 $ (53) $ 564
Shares issued for other than cash.................. 817 2 -- 2
Net Loss........................................... -- -- (8) (8)
----- ------ ------- -------
BALANCE, December 31, 1993......................... 1,183 619 (61) 558
Shares issued for other than cash.................. 16 27 -- 27
Net loss........................................... -- -- (549) (549)
----- ------ ------- -------
BALANCE, December 31, 1994......................... 1,199 646 (610) 36
Shares issued for other than cash.................. 131 501 -- 501
Issuance of compensatory options................... -- 22 -- 22
Shares issued for exercise of options.............. 3 1 -- 1
Net loss........................................... -- -- (2,322) (2,322)
----- ------ ------- -------
BALANCE, December 31, 1995......................... 1,333 1,170 (2,932) (1,762)
Shares issued for other than cash (unaudited)...... 20 524 -- 524
Shares issued in connection with acquisition of MMS
(unaudited)...................................... 1,257 5,157 -- 5,157
Shares issued upon conversion of accrued payables
to stockholders (unaudited)...................... 62 467 -- 467
Shares issued upon extension of debt maturity date
(unaudited)...................................... 444 2,797 -- 2,797
Net loss (unaudited)............................... -- -- (6,468) (6,468)
----- ------ ------- -------
BALANCE, September 30, 1996 (unaudited)............ 3,116 $10,115 $(9,400) $ 715
===== ====== ======= =======
</TABLE>

See accompanying notes to financial statements.

F-7
<PAGE> 77

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994 1995
---- ----- ------- NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.......................................... $ (8) $(549) $(2,322) $(1,793) $(6,468)
Adjustments to reconcile net loss to net cash used
by operating activities
Write off of intangible assets.................... -- -- -- -- 2,251
Depreciation...................................... 67 81 95 69 208
Amortization...................................... -- 3 78 40 964
Other non-cash consulting expense................. 2 14 321 321 505
Increase (decrease) in accounts payable and
accrued liabilities............................. (56) 66 350 290 354
Increase (decrease) in accrued payroll and
related......................................... -- -- 71 41 (4)
Increase in accrued payables to stockholders...... -- 88 254 162 (297)
Other............................................. (82) 41 74 55 (2)
---- ------ -------- ------ --------
Net Cash Used by Operating Activities........ (77) (256) (1,079) (815) (2,489)
---- ------ -------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment............................ (91) (61) (78) (43) (323)
---- ------ -------- ------ --------
Net Cash Used by Investing Activities........ (91) (61) (78) (43) (323)
---- ------ -------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable........... -- 200 1,000 700 1,100
Proceeds from issuance of convertible notes
payable to stockholder.......................... -- -- -- -- 2,000
Advances from stockholders, net of repayments..... -- 45 50 -- --
Repayment of notes payable........................ -- -- (100) -- (200)
---- ------ -------- ------ --------
Net Cash Provided by Financing Activities.... -- 245 950 700 2,900
---- ------ -------- ------ --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ (168) (72) (207) (158) 88
CASH AND CASH EQUIVALENTS
Beginning of period............................... 447 279 207 207 --
---- ------ -------- ------ --------
End of period..................................... $279 $ 207 $ -- $ 49 $ 88
==== ====== ======== ====== ========
</TABLE>

See accompanying notes to financial statements.

F-8
<PAGE> 78

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS, MERGER, AND LIQUIDITY AND CAPITAL RESOURCES

MERGER -- As more fully described in Note 10 -- Subsequent Events, Ixion,
Inc. ("Ixion") entered into a Merger Agreement pursuant to which, among other
things, effective May 24, 1996, Ixion merged with and into a recently
incorporated entity, Interact Medical Technologies Corporation ("Interact") (the
"Merger"), which immediately preceding such merger had acquired the partnership
interests of Medical Media Systems, a development stage partnership ("MMS").
Immediately prior to the Merger, former MMS partners (the "MMS Partners") owned
all outstanding shares of Interact common stock ("Interact Stock"). Effective
upon the Merger, Ixion common stock converted into .48774 shares of Interact
Stock, and Interact received $2 million cash from Baxter Medical Media Holdings,
Inc. ("Baxter"), one of the MMS Partners, in exchange for a short-term
promissory note, which is convertible, under certain circumstances, into
Interact Stock. Other outstanding warrants, options or other commitments to
issue Ixion common stock also were provided with similar rights to acquire
Interact Stock. This business combination has been accounted for utilizing
purchase accounting. Inasmuch as former Ixion stockholders own the majority of
Interact Stock after the merger, Ixion is considered to be the acquiring
corporation for purposes of purchase accounting and the predecessor entity to
Interact for purposes of financial reporting. Accordingly, the former
shareholder interests of Ixion carryover to Interact.

FINANCIAL STATEMENT PRESENTATION -- These financial statements represent
those of Interact Medical Technologies Corporation which, subsequent to May 24,
1996, includes what were formerly the separate businesses of Ixion and MMS, both
of which were combined with and into Interact, the sole remaining corporate
entity. References in these financial statements to the "Company" as of or for
periods subsequent to May 24, 1996 shall refer to Interact, and as of or for
periods prior to May 24, 1996 shall refer to Ixion, the predecessor entity to
Interact for purposes of financial reporting.

DESCRIPTION OF BUSINESS -- The Company, through the division of what was
previously Ixion, is engaged in designing and developing patented medical
procedures training simulators for the medical community and creating
interactive, virtual reality ("IVR") medical software. Ixion has developed IVR
medical software and multi-media procedures simulators, which offer a unique and
proprietary system dedicated to minimally invasive medical training and
quantitative performance evaluation primarily for physicians. The IVR simulator
consists of interrelated computer systems and components, a lifelike mannequin
or body part section, and mathematical and multi-media, interactive, virtual
reality capabilities, techniques and formulas, which are incorporated into each
software program for a particular medical procedure. The Company, through the
division of what was previously MMS, is engaged in research, development and
commercialization of virtual reality and other advanced visualization as it
pertains to an operating room in a medical environment.

OPERATIONS -- Ixion started designing and constructing medical procedures
simulators in 1987, specifically focused on diagnostic and therapeutic
procedures. In 1992 and 1993, laparoscopic simulators were developed pursuant to
a contract with a large pharmaceutical corporation and continued to provide
research and development services through 1994. Since 1995, Ixion has been
engaged in product and business development activities, and its resources have
been dedicated to the research and development of products based upon expertise
in digital medical imaging and interactive software programming. The Company
does not believe that certain of its proposed products will be commercially
viable absent significant further development and certain technological
advances, and there can be no assurance that development will be completed or
advances will be achieved.

LIQUIDITY AND CAPITAL RESOURCES -- Since 1994, the Company has incurred
operating losses which have been funded primarily by contract revenues during
1994 and early 1995, and bridge debt financing since that time. The Company has
had, and continues to have, a net working capital deficit and net stockholders'
deficit that raise substantial doubt about the Company's ability to continue as
a going concern. Subsequent to

F-9
<PAGE> 79

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. DESCRIPTION OF BUSINESS, MERGER, AND LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
December 31, 1995 and prior to the Merger, Ixion raised additional bridge debt
funds of $900,000, and otherwise financed its operations through the continued
forbearance of its creditors, many of whom are Company stockholders.

In connection with the Merger, Interact received $2 million cash pursuant
to a short-term, convertible promissory note payable to Baxter. Interact
continues to be in the process of fund raising, including a common stock public
offering to raise up to an additional $15 million. The Company intends to use a
portion of the net proceeds of such offering to repay approximately $3 million
of existing indebtedness, representing the outstanding balance on certain
promissory notes issued to stockholders. The Company also expects to use the net
proceeds for commercialization of products, research and development, capital
expenditures, working capital and general corporate purposes. The amounts
actually expended for each purpose may vary significantly depending upon
numerous factors, including future revenue growth, the amount of cash generated
by the Company's operations, the progress of the Company's development projects,
availability of sufficient funding for such expenditures, the timing of
regulatory approvals, technological advances and the status of competitive
products.

The Company expects to continue to incur substantial losses over at least
the next several years as the Company's development, testing, marketing and
manufacturing scale-up efforts expand. To achieve profitability and increased
sales levels, the Company must, among other things, establish and increase
market acceptance of its products, respond effectively to competitive pressures,
offer high quality customer service and support, introduce on a timely basis
products incorporating its technologies and advanced versions and enhancements
to its products, and successfully market and support advanced versions and
enhancements. There can be no assurance that the Company will complete the
development of any product, or that products developed will achieve market
acceptance, or that the Company will ever produce significant levels of revenue
or achieve sustainable profitability.

The Company's ability to meets its anticipated future obligations and
continue as a going concern depends upon raising sufficient capital to fund its
operations and finance its contemplated business expansion, and achieving
profitable operations. The development and commercialization of the Company's
products will require substantial funds. The Company's future capital
requirements will depend on many factors, including the time and costs involved
in obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up and
effective commercialization activities and arrangements, continued progress in
its development programs and the magnitude of those programs. The Company
intends to seek additional funding through public or private financings. There
can be no assurance that additional financing will be available on acceptable
terms or at all. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish certain rights to certain of
its technologies or products that the Company would not otherwise relinquish.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL STATEMENTS -- The interim financial data as of and for
the nine months ended September 30, 1995 and 1996 is unaudited; however, in the
opinion of Company management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of results for the interim periods. The 1996 interim period results of
operations are not necessarily indicative of results for the entire year.

F-10
<PAGE> 80

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES -- The Company's financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from the
estimates.

CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are comprised
primarily of funds on deposit with banks.

REVENUE RECOGNITION -- The Company records revenue as contract services or
deliverables are provided and records fees for royalty payments, which, to date
represent minimum royalties, as revenue upon receipt.

EQUIPMENT AND SOFTWARE -- Equipment and software is recorded at cost less
accumulated depreciation based on assets' estimated useful lives of five years.
Depreciation is computed using primarily straight-line methods. Maintenance and
repairs are expensed while major improvements are capitalized.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- Accrued payables and advances due to
stockholders are due on demand. Due to the related party nature and uncertainty
of the timing of actual repayment, the Company cannot estimate the fair value of
such financial instruments. The carrying value of notes payable represents the
face value of such notes less unamortized original issue discount. The recording
of original issue discount for the estimated fair value of the Company's stock
issued together with the notes payable results in an approximation of fair value
of such notes.

INCOME TAXES -- Income taxes are accounted for utilizing the liability
method. Deferred income taxes are provided to represent the tax consequence on
future years for temporary differences between tax and financial reporting basis
of assets and liabilities. A valuation allowance has been provided for the total
amount of deferred tax assets which would otherwise be recorded for income tax
benefits, primarily relating to operating loss carryforwards, as realization is
not more likely than not.

SOFTWARE -- Costs related to conceptual formulation and design of software
programs utilized in Company products are expensed as research and development.
Costs incurred subsequent to establishment of technological feasibility, but
prior to the product being available for sale, would be capitalized and
amortized over estimated productive lives, expected to range from three to five
years.

COMMON STOCK AND STOCK SPLIT -- The Company records issuances of its common
stock and grants or issuances of options or warrants to acquire such stock at
the amount of cash received or, if issued for other than cash consideration, at
the estimated fair value of such security at the date of issuance or grant. To
the extent that options are issued or granted with an exercise price less than
the estimated fair value of common stock at the date of grant ("compensatory"
options), the Company records an increase in amounts ascribed to common stock
and expense for such difference.

On May 24, 1996, Ixion shares converted into .48774 Interact shares. The
effect is equivalent to having effected a .48774 for 1 reverse stock split. All
share and per share information presented in these financial statements give
effect to this reverse stock split.

NET LOSS PER SHARE -- Net loss per share is computed by dividing net loss
by the weighted average number of shares outstanding. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common stock issued for
consideration below the expected offering price during the twelve-month period
preceding an initial public offering, together with common stock options and
warrants issued during such period with exercise prices below the expected
offering price, have been included in the calculation of

F-11
<PAGE> 81

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

common shares utilizing the treasury stock method as if they were outstanding
for all periods presented. The weighted average number of shares of common stock
outstanding for the calculation of net loss per share approximated 537,000,
1,232,000 and 1,393,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and (unaudited) 1,359,000 and 2,302,000 for the nine months ended
September 30, 1995 and 1996, respectively.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- Recently issued
accounting standards having relevant applicability to the Company consist
primarily of Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
which establishes accounting standards for, among other things, the impairment
of long-lived assets and certain identifiable intangibles, and SFAS No. 123
("SFAS No. 123"), which establishes standards for accounting for stock-based
compensation. SFAS No. 121 and SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. SFAS No. 121 is not expected to have a
significant effect, if any, in the Company's financial condition or results of
operations. It is not expected that the Company will adopt the "fair value based
method" of accounting for stock options, which is encouraged by SFAS No. 123,
but rather will continue to account for such, utilizing the "intrinsic value
based method" as is allowed by that statement.

NOTE 3. MAJOR CUSTOMER AND CONTRACT REVENUES

During 1993, 1994 and 1995, all of the Company's revenues were received
from a single customer pursuant to terms of research and license agreements.
During 1995 revenues included a minimum royalty payment for one of the Company's
products. Under certain circumstances, the licensee could obtain exclusive
rights for the sale and distribution of this specific product, during which
period the Company could receive additional future royalty payments.

NOTE 4. NOTES PAYABLE

Notes payable and accrued interest are comprised of the following
(thousands of dollars):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1994 1995 1996
----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Promissory notes 8%, due September 1996.............. $ 200 $1,100 $ 2,000
Original issue discount, net of accumulated
amortization of $3, $81 and $657................... (12) (136) --
----- ------ ------
188 964 2,000
Accrued interest..................................... 4 50 136
----- ------ ------
Notes payable and accrued interest................... $ 192 $1,014 $ 2,136
===== ====== ======
</TABLE>

The promissory notes (the "Notes") are unsecured and bear interest at an
annual rate of 8%. In connection with Note borrowings, holders of such Notes are
entitled to receive that number of shares of the Company's common stock ("Common
Stock") which have a value equal to the face amount of the Notes. As set forth
in the offering memorandum pursuant to which the Notes were issued, for each
$25,000 of Notes, the holder is entitled to receive 2,500 shares, subject to
adjustment, of Common Stock upon the Company's initial public offering, on the
basis of such offering price at $10 per share. In the event the initial offering
price is more than $10 per share, the Note holder would receive fewer shares,
and conversely, if the price is less than $10 per share, the Note holder would
receive more shares. The Company has recorded the estimated fair value

F-12
<PAGE> 82

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. NOTES PAYABLE (CONTINUED)
of shares issuable as an increase in common stock and as original issue
discount. Original issue discount is amortized on a straight line basis over the
life of related debt.

The Notes may be extended, at the Company's option until September 1, 1997,
in such event the Company shall issue to the holder of such Notes shares of the
Company's common stock at the rate of 2,439 shares for each $25,000 principal
amount of Notes extended. See Note 11 -- Events (Unaudited) Subsequent to Date
of Report of Independent Certified Public Accountants regarding issuance of
common stock upon note extension.

Additionally, during 1995, the Company borrowed and repaid $100,000 under
terms of a 90-day unsecured 8% promissory note.

Average borrowings outstanding during 1994 and 1995 approximated $67,000
and $578,000, respectively.

NOTE 5. COMMON STOCK AND STOCK OPTIONS

During 1994 and 1995, the Company issued common stock to certain
consultants in consideration for, among other things, marketing, strategic
planning, legal and other financial related services. During 1994 and 1995, the
Company recorded expense of approximately $14,000 and $321,000, respectively,
relating to such issuances of stock, which are recorded at the approximate fair
value of securities issued.

Some of the Company's consulting agreements provide for future issuances
and vesting of Company common stock and options to acquire Company common stock
under certain circumstances. Approximately 21,948 shares in 1996 and 15,242
shares in 1997 are issuable and vest dependent upon continued service, and
14,632 shares are issuable and vest in each of the Company's first 2 years of
systems sales dependent upon the consultant and the Company attaining certain
revenue levels. Stock options for approximately 48,774 shares, which are to be
exercisable for three years at per share prices to be determined by the
Company's Board of Directors, are issuable and vest dependent upon the
consultant and the Company attaining certain milestones; during 1995, 9,755 of
such options were granted with an exercise price of $0.02 per share.

The Company has an Incentive Stock Option Plan (the "Plan") which permits
grants to Company employees of options to acquire shares of Common Stock.
Pursuant to Plan terms, the exercise price of stock options shall not be less
than the fair market value of Common Stock at the date of grant. The duration
and terms of options shall be established by the Board of Directors. The Company
has reserved 195,096 shares of Common Stock for Plan grants. During 1993 and
1994, the Company granted approximately 95,000 and 20,000 Plan options,
respectively. During 1995, approximately 51,000 Plan options were cancelled and
approximately 3,000 Plan options were exercised. All granted Plan options have a
10 year term and vest over three years on a straight-line, monthly basis
commencing six months after certain conditions have been met. All such
conditions have been met for options granted. Plan options are canceled at the
time grantees leave the Company's employ, except to the extent that 5% of
originally granted options may be exercised by such grantees for a certain
period.

In addition, subsequent to December 31, 1995, in connection with certain
financing transactions, the Company issued options and warrants to acquire
Common Stock. In January 1996, the Company issued 48,774 warrants having an
exercise price at the Company's initial public offering price ("$IPO")
exercisable for five years. In April 1996, the Company issued 9,755 options
having an exercise price of $15.38 per share exercisable for 18 months, and
24,387 warrants having exercise prices of 150% to 160% of the $IPO exercisable
for three years following the Company's initial public offering. As more fully
described in Note 10, in May 1996, the Company granted options to purchase
255,000 shares of Company common stock at $6.30

F-13
<PAGE> 83

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
per share. Also see Note 11 -- Events (Unaudited) Subsequent to Date of
Independent Certified Public Accountants Report regarding additional grants of
stock options.

The following summarizes stock options and warrants transactions through
September 30, 1996 (thousands of shares):

<TABLE>
<CAPTION>
PRICE
SHARES PER SHARE
------ -------------------
<S> <C> <C>
Outstanding at January 1, 1993.......................... --
Granted............................................... 95 $0.23
---
Outstanding at December 31, 1993........................ 95
Granted............................................... 20 $0.23 to $1.44
---
Outstanding at December 31, 1994........................ 115
Granted............................................... 10 $0.02
Canceled.............................................. (51) $0.23 to $1.44
Exercised............................................. (3) $0.23
---
Outstanding at December 31, 1995........................ 71 $0.02 to $1.44
Granted (Unaudited)................................... 338 $6.30 to 160% $IPO
Canceled (Unaudited).................................. (2) $0.23 to $1.44
---
Outstanding at September 30, 1996 (unaudited)........... 407 $0.02 to 160% $IPO
===
</TABLE>

The average remaining lives of outstanding stock options summarized by
exercise price are as follows (thousands of shares):

<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED
PER SHARE SHARES AVERAGE LIFE
- ----------------- ------ ------------
<S> <C> <C>
$ 0.02 10 3 years
$ 0.23 54 7 years
$ 1.44 5 8 years
$ 6.30 255 10 years
$15.38 10 1 year
$IPO 49 5 years
150-160% of $IPO 24 3 years
</TABLE>

NOTE 6. RELATED PARTY TRANSACTIONS

The Company has received cash advances from its principal stockholders.
Borrowings are unsecured, have no stated due date and bear interest at an annual
rate of 8%. At December 31, 1994 and 1995, advances payable approximate $45,000
and $95,000, respectively. Average borrowings were $15,000 and $53,000 during
1994 and 1995, respectively.

The Company has accrued payables due to its principal stockholders and
other Company officers and directors, which primarily represent amounts due
pursuant to terms of consulting agreements. These payables are due on demand and
do not bear interest. See Note 10 -- Subsequent Events regarding conversion of
certain accrued payables to common stock.

F-14
<PAGE> 84

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)

Prior to 1996, the Company annually acquired from a principal stockholder,
exclusive license rights for certain patents. Included in research and
development expense is $50,000 in each of 1993, 1994 and 1995, representing cash
payments made during each such year and including approximately $29,000 which
was accrued at December 31, 1995 relating to that year. In April 1996, the
Company acquired these patent rights pursuant to terms of an agreement in
exchange for, among other things, $25,000 annual payments to be made by the
Company to such stockholder during 1996 through 2005. The discounted present
value of payments, net of accrued liabilities which were canceled, approximates
$130,000, and has been recorded in research and development expense during 1996.
These rights are limited as to transferability and assignability and are subject
to reversion under certain conditions.

NOTE 7. INCOME TAXES

For income tax purposes, at December 31, 1995, the Company has net
operating loss carryforwards approximating $2 million, which begin to expire in
2006. As a result of changes in the Company's stock ownership, utilization of
net operating loss carryforwards could be subject to annual limitations. The
annual amount that could be utilized is limited to the value of the Company as
of the date of the change in ownership multiplied by the interest rate on
federal long-term exempt securities at that date.

NOTE 8. FACILITIES, EQUIPMENT AND SOFTWARE

Equipment and software consists primarily of computer hardware and software
and, to a lesser extent, production and tooling equipment utilized in research
and development and is comprised of the following (thousands of dollars):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
----- ----- -------------
(UNAUDITED)
<S> <C> <C> <C>
Research and development equipment.................... $ 436 $ 514 $ 1,337
Office equipment and other............................ 37 37 55
----- ----- ------
473 551 1,392
Accumulated depreciation.............................. (219) (314) (522)
----- ----- ------
Equipment, net........................................ $ 254 $ 237 $ 870
===== ===== ======
</TABLE>

The Company leases its office and development facilities and certain office
equipment under short-term operating leases. Rent expense approximated $87,000,
$94,000 and $127,000 during 1993, 1994 and 1995, respectively.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Pursuant to terms of a June 1995 agreement, the Company may, under certain
events and circumstances and subject to such consummation of such a defined
event, be obligated to pay a fee to a financial consultant.

F-15
<PAGE> 85

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Such events, as more specifically defined in the agreement, generally would
include certain business combinations or alliances. The fee is variable in
amount and is payable in cash and in warrants to purchase Company common stock.
See Note 10 -- Subsequent Events regarding final settlement of obligations
pursuant to this agreement.

The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business, including those relating primarily to
payment or non-payment of amounts payable or alleged by third party suppliers.
Company management currently believes that resolving these matters, some of
which have already been settled, will not have a material adverse impact on the
Company's financial position or results of operation.

NOTE 10. SUBSEQUENT EVENTS

Effective May 24, 1996, the Company entered into a Merger Agreement
pursuant to which, among other things, Ixion merged with and into Interact which
had acquired MMS. As a result of the Merger, former Ixion stockholders own the
majority of Interact Stock.

The business combination involving MMS and Ixion is accounted for utilizing
the purchase method of accounting. Inasmuch as the former Ixion stockholders own
a majority of Interact stock after the merger, Ixion is considered the acquiring
corporation for purposes of purchase accounting. The purchase price of
approximately $5.4 million attributed to the MMS acquisition represents the
estimated fair value of the approximately 1.3 million shares of Interact Stock
issued to former MMS stockholders and includes certain costs and fees incurred
directly in connection with the merger. In accordance with purchase accounting,
the total purchase price, including assumed liabilities at their estimated fair
values is allocated to assets acquired based upon estimates of fair values.
Assets acquired include tangible assets (which fair values approximate book
value) and identifiable intangible assets, such as products in varying stages of
development, including those at or near commercial availability, and those
having and/or not having reached a stage of technological feasibility. The
estimated value of products in development which are considered to have attained
technological feasibility, as such term is defined and interpreted in accordance
with generally accepted accounting principles, are capitalized and amortized
over lives of five years. The estimated value of products in development which
are not deemed to have attained technological feasibility, as defined, are
capitalized in purchase accounting and immediately expensed subsequent to
recording the business combination. The estimated value of identifiable
intangible assets attributable to contracts and agreements is capitalized and
amortized over five years. The mid-point of the projected $7.00 to $9.00 initial
public offering price range has been utilized as a factor in the determination
of the MMS purchase price. To the extent that the offering price is higher or
lower than that utilized in purchase accounting, the purchase price allocated
could increase or decrease. The fair values of identifiable intangible assets
have been determined based upon estimates prepared by Company management
utilizing, among other considerations, discounted cash flow projections. To the
extent that these estimates are updated or supplemented by independent
appraisal, amounts allocated to

F-16
<PAGE> 86

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. SUBSEQUENT EVENTS (CONTINUED)

intangible assets could increase or decrease. Amounts recorded in the unaudited
1996 financial statements for the business combination are summarized as follows
(thousands of dollars):

<TABLE>
<S> <C>
Current assets.............................................................. $ 16
Property and equipment...................................................... 532
Investment in Product Development........................................... 4,501
Investment in Distribution Agreement........................................ 1,131
------
Assets acquired........................................................... 6,180
------
Current liabilities......................................................... 238
Notes payable to stockholder................................................ 550
------
Liabilities assumed....................................................... 788
------
Purchase price............................................................ $5,392
======
</TABLE>

The Company's policy is to evaluate, at each balance sheet date, the
appropriateness of the carrying values of the unamortized balances of intangible
assets on the basis of estimated future cash flows (undiscounted) and other
factors. If such evaluation were to indicate a material impairment of these
intangible assets, such impairment would be recognized by a writedown of the
applicable asset.

The amount of intangible assets relating to products in development which
are not deemed to have attained technological feasibility approximated $2.2
million and was immediately expensed subsequent to recording the business
combination and is included in the Company's net loss for the nine months ended
September 30, 1996. The Company's unaudited pro forma results of operations for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
presented on the basis that the business combination had occurred at the
beginning of the respective periods, are as follows (thousands of dollars,
except per share information):

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- -------------
<S> <C> <C>
Revenues............................................... $ 266 $ 59
======= =======
Net loss............................................... $(5,124) $(7,131)
======= =======
Net loss per share..................................... $ (1.82) $ (2.37)
======= =======
</TABLE>

Contemporaneous with the Merger, Interact received $2 million cash from
Baxter Healthcare Corporation ("Baxter"), the former majority owner of MMS,
pursuant to terms of a promissory note, bearing interest at prime plus 2%, due
the earlier of the closing date of Interact's initial public offering or
September 1, 1996 (or such later date under certain circumstances). In the event
the initial public offering does not occur on or prior to September 1, 1996,
Interact may extend the due date to September 1, 1997 in exchange for
approximately 195,000 shares of Interact Stock. In the event the initial public
offering occurs before September 1, 1996, then immediately following such
closing the principal amount plus owed interest (the "Amount Owed") shall be
converted into Interact Stock by issuing such number of shares as determined by
dividing the Amount Owed by the public offering price. The promissory note is
subject to terms and conditions of a Credit Agreement, which prohibits or
limits, among other things, dividends or other capital distributions, issuances
of Interact common stock or options or warrants to acquire such stock,
incurrence of additional

F-17
<PAGE> 87

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. SUBSEQUENT EVENTS (CONTINUED)
indebtedness, sales of assets, repayment of existing indebtedness, and
transactions with shareholders or affiliates. Additionally, on May 24, 1996, in
exchange for existing MMS promissory notes payable to Baxter having a combined
total principal amount of $550,000, Interact issued 8% promissory notes to
Baxter in the amounts of $350,000 and $200,000 having the same maturity date as
the $2 million convertible note and agreed to issue immediately following the
closing of the initial public offering such number of shares of Interact Stock
as determined by dividing $350,000 by the public offering price. The $350,000
note may be extended to September 1997 at Interact's option in exchange for
approximately 34,000 shares of Interact Stock. See Note 11 -- Events (Unaudited)
Subsequent to Date of Report of Independent Certified Public Accountants for
subsequent share issuances and extension of maturity and conversion dates.

In May and June 1996, the Company entered into employment contracts with
certain of its executive officers covering two and three-year periods and
providing for base compensation, potential bonuses, severance pay under certain
circumstances, and other standard and customary employment-related benefits.

In connection with the Merger, certain employees and consultants of Ixion
and MMS converted approximately $503,000 of accrued compensation in exchange for
approximately 62,000 shares of Interact Stock and payment of payroll related
withholdings. Accrued compensation was converted at a rate of one share for each
$7.50 of accrued payables, a price determined by the Company's Board of
Directors not to be less than the estimated fair market value of such shares at
the agreement date.

As a result of the Merger, the Company paid fees to a financial consultant
in the amount of approximately $132,000 in full settlement of amounts due
pursuant to terms of a consulting agreement.

In May 1996, Interact entered into a distribution agreement with Baxter,
pursuant to which Baxter has obtained a co-exclusive right to distribute one of
the Company's products for use in connection with certain specific applications.
Under terms of the distribution agreement, Baxter has been granted an exclusive
right to provide healthcare providers and their affiliates with certain product
software. The Company has retained all other rights, except as otherwise set
forth below, with respect to the sales and distribution of products based upon
this technology. Baxter has provided the Company with certain minimum order
guarantees and has agreed not to promote, purchase, sell or distribute any
products that are directly competitive with the products distributed on behalf
of the Company pursuant to the distribution agreement. Baxter also has a right
to negotiate distribution agreements for any future products the Company
develops in certain specific other fields. The term of the agreement is five
years, and may be extended for an additional five years at Baxter's discretion.
The parties can each terminate the distribution agreement under certain
circumstances. Further, pursuant to an agreement between Baxter and the Company,
Baxter is entitled to obtain the right to produce or cause third parties to
produce its product requirements in the event that the Company is unable to
supply its requirements in a timely manner.

In May 1996, the Company granted to certain Company officers, directors and
employees options to purchase 255,000 shares of Interact Stock at $6.30 per
share, such exercise price being the estimated fair market value as of the date
of grant as determined by the Compensation Committee of the Company's Board of
Directors. Options have a term of ten years and generally vest 25% after one
year of continued service and ratably thereafter over the remaining three years
of a four-year vesting period.

In June 1996, the Company adopted a 1996 Stock Option Plan (the "1996
Plan"), such plan to become effective when the Company's initial public offering
registration statement becomes effective. The 1996 Plan will serve as the
successor equity incentive program to Ixion's Stock Option Plan, which has been
assumed by Interact. A total of one million shares have been authorized for
issue under the 1996 Plan, including

F-18
<PAGE> 88

INTERACT MEDICAL TECHNOLOGIES CORPORATION
(FORMERLY IXION, INC. -- NOTES 1 AND 10)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. SUBSEQUENT EVENTS (CONTINUED)

approximately 380,000 shares reserved for issuance under options outstanding. In
addition, the Company adopted an Employee Stock Purchase Plan covering an
aggregate of 200,000 shares of Interact Stock.

NOTE 11. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

The Company has incurred costs in connection with its initial public
offering and has recorded such costs as a deferred asset to be recorded as a
decrease in common stock upon closing of the offering.

On September 1, 1996, pursuant to terms of existing notes payable comprised
of $2 million of 8% promissory notes, as described in Note 4, and $2 million and
$550,000 promissory notes due to Baxter, as described in Note 10, the Company
issued approximately 444,000 shares of its common stock as consideration for
extending the maturity dates of such notes one year to September 1, 1997. The
approximately $2.8 million estimated fair value of shares issued has been
recorded as an increase in common stock and as a deferred asset to be amortized
over the remaining life of the notes. Amortization expense of $233,000 has been
recorded and included in interest expense during the nine months ended September
30, 1996.

In October 1996, the Company entered into employment contracts with certain
of its executive officers covering two-year periods and providing for base
compensation, potential bonuses, severance pay under certain circumstances and
other standard and customary employment-related benefits, and in connection
therewith granted 110,000 options having an exercise price of $6.30 per share, a
price determined by the Company's Board of Directors not to be less than the
estimated fair market value of such shares at the date of grant.

In October 1996, the Company entered into a consulting agreement with one
of its directors, pursuant to which the Company will issue to such director
approximately 43,000 shares of Company common stock upon closing of the
Company's initial public offering.

During October and November 1996, the Company borrowed approximately
$300,000 from a fund for which one of its directors is a general partner, and
which such director is an existing stockholder and bridge noteholder, pursuant
to terms of unsecured six-month promissory notes bearing interest at prime plus
1%.

During October and November 1996, the Company entered into an agreement for
the extension of the date for automatic conversion of the $2 million promissory
note payable to Baxter and related accrued interest into Common Stock in the
event the Company's initial public offering occurs before February 28, 1997.

In November 1996, the Company entered into a Severance and Release
Agreement with the Company's former President, pursuant to which the
then-existing employment agreement with such former employee was terminated and
the Company agreed to make a severance payment of $190,000, plus certain other
benefits.

F-19
<PAGE> 89

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Partners of Medical Media Systems:

We have audited the accompanying balance sheets of Medical Media Systems (a
New Hampshire development stage partnership) as of December 31, 1995 and 1994,
and the related statements of operations, changes in partners' equity and cash
flows for each of the three years then ended and for the period from November
25, 1992 (date of inception) to December 31, 1995. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Media Systems as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years then ended and from November 25, 1992 (date of
inception) to December 31, 1995, in conformity with generally accepted
accounting principles.

Robert E. Moses
Certified Public Accountants

Lebanon, New Hampshire
February 16, 1996, except as to
Note 7, which is as of June 13, 1996

F-20
<PAGE> 90

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MAY 24, 1996
1994 1995 ------------
------ ------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash....................................................... $ 599 $ 302 $ 5
Other current assets....................................... -- 11 11
------ ------ ------
Total current assets............................... 599 313 16
------ ------ ------
PROPERTY AND EQUIPMENT, at cost (Note 1):
Leasehold improvements..................................... 9 9 9
Research and development equipment......................... 1,942 2,016 2,047
Furniture.................................................. 15 16 16
------ ------ ------
1,966 2,041 2,072
Less Accumulated depreciation.............................. 1,045 1,424 1,540
------ ------ ------
921 617 532
------ ------ ------
OTHER ASSETS:
Organization expense, net of accumulated amortization of
$20, $29 and $48........................................ 28 18 --
Patents (Note 1)........................................... 21 111 135
------ ------ ------
49 129 135
------ ------ ------
$1,569 $1,059 $ 683
====== ====== ======
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Note payable to General Partner (Note 5)................... $ -- $ 400 $ 550
Accounts payable........................................... 75 112 109
Accrued wages and expenses................................. 54 118 129
------ ------ ------
Total current liabilities.......................... 129 630 788
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 2)
PARTNERS' EQUITY (DEFICIT) including deficit accumulated
during the development stage of $4,698, $6,619 and
$7,153..................................................... 1,440 429 (105)
------ ------ ------
$1,569 $1,059 $ 683
====== ====== ======
</TABLE>

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

F-21
<PAGE> 91

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
YEARS ENDED DECEMBER 31, DATE OF INCEPTION
------------------------------- TO DECEMBER 31,
1993 1994 1995 1995
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES
Research and development.................... $ 2,346 $ 1,693 $ 1,540 $ 5,920
General and administrative.................. 170 168 394 737
------- ------- ------- -------
2,516 1,861 1,934 6,657
------- ------- ------- -------
OTHER INCOME
Interest income............................. (13) (10) (13) (37)
Miscellaneous............................... -- (1) -- (1)
------- ------- ------- -------
(13) (11) (13) (38)
------- ------- ------- -------
NET LOSS...................................... $(2,503) $(1,850) $(1,921) $(6,619)
======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
THREE MONTHS FIVE MONTHS DATE OF INCEPTION
ENDED MARCH 31, ENDED MAY 24, TO MAY 24,
1995 1996 1996
--------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)

<S> <C> <C> <C>
OPERATING EXPENSES
Research and development..................... $ 360 $ 434 $ 6,354
General and administrative................... 56 113 850
----- ----- -------
416 547 7,204
----- ----- -------
OTHER INCOME
Interest income.............................. (4) (3) (40)
Miscellaneous................................ -- (10) (11)
----- ----- -------
(4) (13) (51)
----- ----- -------
NET LOSS....................................... $(412) $(534) $(7,153)
===== ===== =======
</TABLE>

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

F-22
<PAGE> 92

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

STATEMENT OF CHANGES IN PARTNERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BAXTER MMS FOUNDERS
MEDICAL MEDIA GROUP
HOLDINGS, LIMITED
INC. PARTNERSHIP TOTAL
------------- ------------ -------
<S> <C> <C> <C>
BALANCE, November 25, 1992............................ $ -- $ -- $ --
(date of inception)...................................
Capital contributions............................... 1,378 -- 1,378
Net loss............................................ (345) -- (345)
------- ------- -------
BALANCE, December 31, 1992............................ 1,033 -- 1,033
Capital contributions............................... 2,810 -- 2,810
Net loss............................................ (2,503) -- (2,503)
------- ------- -------
BALANCE, December 31, 1993............................ 1,340 -- 1,340
Capital contributions............................... 1,950 -- 1,950
Net loss............................................ (1,850) -- (1,850)
------- ------- -------
BALANCE, December 31, 1994............................ 1,440 -- 1,440
Capital contributions............................... 910 -- 910
Net loss............................................ (1,921) -- (1,921)
------- ------- -------
BALANCE, December 31, 1995............................ 429 -- 429
Net loss (Unaudited)................................ (534) -- (534)
------- ------- -------
BALANCE, May 24, 1996 (Unaudited)..................... $ (105) $ -- $ (105)
======= ======= =======
</TABLE>

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

F-23
<PAGE> 93

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
YEARS ENDED DECEMBER 31, DATE OF INCEPTION
------------------------------- TO DECEMBER 31,
1993 1994 1995 1995
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(2,503) $(1,850) $(1,921) $(6,619)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation........................... 490 508 377 1,424
Amortization........................... 10 9 10 29
Increase in other current assets....... -- -- (11) (11)
Increase (decrease) in accounts
payable............................. (52) (92) (22) 52
Increase in accrued wages and
expenses............................ -- 54 64 118
------- ------- ------- -------
Net cash flows used by operating
activities............................... (2,055) (1,371) (1,503) (5,007)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment......... (698) (302) (75) (2,041)
Payments for organization expenses.......... (48) -- -- (48)
Cash paid to acquire patents................ (10) (12) (29) (50)
------- ------- ------- -------
Net cash flows used by investing
activities............................... (756) (314) (104) (2,139)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term financing.......... -- -- 400 400
Cash received as capital contributions...... 2,810 1,950 910 7,048
------- ------- ------- -------
Net cash flows provided by financing
activities............................... 2,810 1,950 1,310 7,448
------- ------- ------- -------
Net increase (decrease) in cash............... (1) 265 (297) 302
CASH, beginning of year....................... 335 334 599 --
------- ------- ------- -------
CASH, end of year............................. $ 334 $ 599 $ 302 $ 302
======= ======= ======= =======
</TABLE>

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

F-24
<PAGE> 94

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CUMULATIVE
THREE MONTHS FIVE MONTHS AMOUNTS FROM
ENDED ENDED DATE OF INCEPTION
MARCH 31, MAY 24, TO MAY 24,
1995 1996 1996
------------ ----------- -----------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (412) $(534) $(7,153)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation.................................. 91 116 1,540
Amortization.................................. 3 18 48
Decrease (increase) in other current assets... (1) -- (11)
Increase (decrease) in accounts payable....... (5) (22) 30
Increase in accrued wages and expenses........ 11 11 129
----- ----- -------
Net cash flows used by operating activities...... (313) (411) (5,417)
----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment.............. (24) (31) (2,072)
Payments for organization expenses............... -- -- (48)
Cash paid to acquire patents..................... (19) (5) (56)
----- ----- -------
Net cash flows used by investing activities...... (43) (36) (2,176)
----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term financing............... -- 150 550
Cash received as capital contributions........... -- -- 7,048
----- ----- -------
Net cash flows provided by financing
activities.................................... -- 150 7,598
----- ----- -------
NET INCREASE (DECREASE) IN CASH.................... (356) (297) 5
CASH, beginning of period.......................... 599 302 --
----- ----- -------
CASH, end of period................................ $ 243 $ 5 $ 5
===== ===== =======
</TABLE>

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

F-25
<PAGE> 95

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization -- Medical Media Systems ("MMS" or "the Partnership"), a New
Hampshire general partnership in the development stage, was organized on
November 25, 1992 for the purpose of engaging in research, development and
commercialization of virtual reality and other advanced visualization as it
pertains to an operating room in a medical environment.

Depreciation -- Research and development equipment is carried at cost, less
accumulated depreciation. The Partnership follows the policy of charging to
operating expenses annual amounts of depreciation which allocates the cost of
property and equipment over their estimated useful lives. The Partnership
estimates that research and development equipment has a useful life of five
years, furniture has a useful life of seven years and leasehold improvements
have a useful life of 39 years. Expenditures for repairs and maintenance are
expensed when incurred and betterments are capitalized.

Organization expense -- Organization expense includes legal expenses
relating to the organization of the Partnership and will be amortized over five
years.

Patents -- The Partnership capitalizes legal fees incurred to obtain
patents, none of which have yet been issued. Patents will be amortized over
estimated productive lives, expected to average approximately five years.

Cash and cash equivalents -- For purposes of the statement of cash flows,
the partnership considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents. The majority
of the Partnership's cash is held in one Hanover, New Hampshire based commercial
bank. At times, the FDIC insurance limit may be exceeded.

Income taxes -- These statements do not include provisions for federal
income taxes, since any income or loss is reported on the applicable federal
returns of the respective general partners.

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

Interim Financial Statements -- The interim financial data as of and for
the three months ended March 31, 1995 and 1996 is unaudited; however, in the
opinion of Partnership management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of results for the interim periods. The 1996 interim period results of
operations are not necessarily indicative of results for the entire year.

Effect of Recently Issued Accounting Standards -- Recently issued
accounting standards having relevant applicability to the Partnership consists
primarily of Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
which establishes accounting standards for, among other things, the impairment
of long-lived assets and certain identifiable intangibles. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995 and is not expected
to have a significant effect, if any, in the Company's financial condition or
results of operations.

2. COMMITMENTS AND CONTINGENCIES:

License agreement -- The Partnership has entered into a licensing agreement
with a related party of Baxter Medical Media Holdings, Inc. ("Baxter"). Under
the license agreement, MMS has granted the licensee exclusive rights to make,
have made, use and sell any product in the field of knee arthroscopic training

F-26
<PAGE> 96

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and surgery developed by MMS. In consideration of the licenses granted, the
Partnership will receive royalties on net sales of all patented products or
copyrighted software sold by the licensee. See Note 7 -- Subsequent Events
regarding the termination of this license agreement.

Consulting agreements -- The Partnership has entered into consulting
agreements with five individuals to perform research services. Under these
agreements, MMS has agreed to pay, under certain circumstances, up to an
aggregate annual amount of $375,000 to these individuals. MMS may terminate or
amend these agreements at its discretion. Payments under these agreements
amounted to $209,219, $276,816 and $126,680, respectively, for the years ended
December 31, 1993, 1994 and 1995 and $639,752 since the date of inception and
(unaudited) $150,371 for the period ended May 24, 1996. See Note 7 -- Subsequent
Events regarding the termination of these consulting agreements.

Research agreement -- On January 2, 1995, the Partnership entered into a
research agreement with The Trustees of Dartmouth College (the "College")
through the New Hampshire Industrial Research Center for a project to develop
additional clinical products. The New Hampshire Industrial Research Center has
committed $50,000 to this project. Pursuant to terms of the research agreement,
MMS has committed to make contributions of $200,000 to the project, such
contributions to be made either through MMS purchases for cash of services or
materials from the College or its affiliates, or through delivery of services or
materials by MMS to the College or its affiliates. Costs incurred in connection
with this project are included in research and development expense. As of May
24, 1996, the Partnership's remaining commitment under this contract
approximated $50,000 (unaudited).

Lease commitments -- The Partnership leases its facilities and equipment
under noncancelable lease arrangements. On August 1, 1994, the Partnership
entered into a three-year agreement to lease office space in West Lebanon, New
Hampshire. The Partnership also obtained one three-year renewal option. Minimum
annual lease payments will amount to $32,278 for the lease term. In addition,
MMS will be required to pay its proportionate share of building expenses.
Building rent expense amounted to $15,934 and $39,799, respectively, for the
years ended December 31, 1994 and 1995. Rent expense under equipment leases
amounted to $12,285 for the year ended December 31, 1995. Future minimum lease
payments under equipment leases were as follows: 1996 -- $14,275;
1997 -- $13,305; 1998 -- $1,991.

3. RETIREMENT PLAN:

The Partnership adopted a defined contribution, salary reduction plan
during 1994 which covers all employees aged 21 or over. Each employee may elect
to defer a percentage of their salary into the plan, subject to annual maximums
as prescribed by the Internal Revenue Service. The Partnership contributions are
discretionary.

4. PARTNERSHIP CAPITAL STRUCTURE:

The partnership is organized as a New Hampshire general partnership under
the New Hampshire Uniform Partnership Act. MMS Founders Group Limited
Partnership ("MMS, L.P.") and Baxter Medical Media Holdings, Inc. ("Baxter") are
the sole general partners. MMS, L.P. has been designated the managing general
partner.

MMS, L.P., in exchange for a 49% general partnership interest in Medical
Media Systems, contributed all of its proprietary rights, both tangible and
intangible, in regard to its research and development of virtual reality and
other advanced visualization.

F-27
<PAGE> 97

MEDICAL MEDIA SYSTEMS
(A DEVELOPMENT STAGE PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PARTNERSHIP CAPITAL STRUCTURE (CONTINUED)
Baxter, in exchange for a 51% general partnership interest in Medical Media
Systems, agreed to contribute $5,100,000 of capital subject to the achievement
of certain milestones agreed upon by Baxter and MMS. As of December 31, 1995 the
partnership had received $4,887,991. Prior to the organization of MMS, Baxter
contributed $212,009 to a predecessor corporation. In addition, Baxter has
options to contribute additional capital subject to the achievement of
additional milestones agreed upon by Baxter and MMS. If the options to
contribute additional capital are exercised, Baxter's partnership interest would
increase.

During 1995 and 1994, Baxter contributed $2,160,000 of capital in exchange
for an additional 9% partnership interest.

5. RELATED PARTY TRANSACTIONS:

During 1995, the Partnership received $400,000 from a related party of
Baxter as a 6% demand note payable. There are no fixed repayment terms. See Note
7 Subsequent -- Events regarding changes in terms of this borrowing.

During 1995, the Partnership contracted with a related party of Baxter to
provide regulatory support for its products under development. As of December
31, 1995, the Partnership had incurred $75,000 of expense, of which $45,000 was
included in accounts payable at the end of the year.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS:

In accordance with FASB Statement 107, Disclosures about Fair Values of
Financial Instruments, which is effective for the year ended December 31, 1995,
the Partnership estimates that the carrying amounts of all financial
instruments, such as cash and accounts payable approximated their fair values
due to the short-term maturity of these instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could affect estimates. It is not practicable to estimate the fair
value of the related party note payable.

7. SUBSEQUENT EVENTS:

Note payable -- In April 1996, pursuant to terms of a credit agreement with
Baxter, the Partnership received an additional advance of $150,000 and issued a
6% promissory note to Baxter payable on demand. The promissory note was in the
amount of $550,000 as it included $400,000 of prior borrowings, for which the
previously existing promissory note was cancelled.

Reorganization and merger -- In accordance with terms of a merger
agreement, in May 1996, the Partnership reorganized as a corporation and changed
its name to Interact Medical Technologies Corporation ("Interact"). Subsequent
to the reorganization, Interact merged its operations with Ixion, Inc.
("Ixion"). Ixion stockholders received shares of Interact common stock
("Interact Stock") in such amount that the former Ixion stockholders own a
majority of Interact Stock after the merger, and Interact received $2 million in
cash from Baxter in exchange for a short-term promissory note, which is
convertible, under certain circumstances, at Interact's option into Interact
Stock. This business combination will be accounted for utilizing purchase
accounting. Inasmuch as former Ixion stockholders own a majority of Interact
Stock after the merger, Ixion is considered to be the acquiring corporation for
purposes of purchase accounting. In connection with the merger, the license
agreement with Baxter and the consulting agreements as described in Note 2 were
terminated.

F-28
<PAGE> 98

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 9
Risk Factors.......................... 11
Use of Proceeds....................... 21
Dividend Policy....................... 22
Capitalization........................ 23
Dilution.............................. 24
Selected Financial Data............... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 31
Management............................ 46
Certain Transactions.................. 54
Principal Stockholders................ 57
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 63
Underwriting.......................... 65
Legal Matters......................... 67
Experts............................... 67
Additional Information................ 67
Index to Financial Statements......... F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

======================================================

2,000,000 SHARES

OF COMMON STOCK

AND

2,000,000 REDEEMABLE

COMMON STOCK

PURCHASE WARRANTS

(AS UNITS EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE
WARRANT)

LOGO

-------------------------
PROSPECTUS
-------------------------

, 1996

NATIONAL SECURITIES CORPORATION

======================================================

<PAGE> 99

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee, the Nasdaq National Market filing fee and the
NASD fee.

<TABLE>
<S> <C>
Registration fee.................................................. $ 18,027
Nasdaq National Market fee........................................ 16,500
NASD fee.......................................................... 2,800
Blue Sky fees and expenses........................................ 15,000
Printing and engraving expenses................................... 150,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 75,000
Transfer Agent and Registrar fees................................. 10,000
Miscellaneous expenses............................................ 87,673
--------
TOTAL................................................... $675,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act. The Registrant's Bylaws also provide that the Registrant will indemnify its
directors and executive officers and may indemnify its other officers, employees
and other agents to the fullest extent not prohibited by Delaware law.

The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

Pursuant to authorization provided under the Certificate of Incorporation,
the Registrant has entered into indemnification agreements with each of its
directors and officers. Generally, the indemnification agreements attempt to
provide the maximum protection permitted by Delaware law as it may be amended
from time to time. Moreover, the indemnification agreements provide for certain
additional indemnification. Under such additional indemnification provisions,
however, an individual will not receive indemnification for judgments,
settlements or expenses if he or she is found liable to the Registrant (except
to the extent the court determines he or she is fairly and reasonably entitled
to indemnity for expenses), for settlements not approved by the Registrant or
for settlements and expenses if the settlement is not approved by the court. The
indemnification agreements provide for the Registrant to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. In
order to receive an advance of expenses, the individual must submit to the
Registrant copies of invoices presented to him or her for such expenses. Also,
the individual must repay such advances upon a final judicial decision that he
or she is not entitled to indemnification.

II-1
<PAGE> 100

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since May 31, 1993, the Registrant has sold and issued the following
unregistered securities:

1. On May 24, 1996, the Registrant issued an aggregate of 1,253,333 shares
of Common Stock to Baxter Medical Media Holdings, Inc. ("Baxter Holdings") and
MMS Founders Group Limited Partnership ("MMSLP") in consideration of Baxter
Holdings and MMSLP transferring their general partnership interests in Medical
Media Systems ("MMS"), to the Registrant.

2. On May 24, 1996, the Registrant issued an aggregate of 1,352,252 shares
of Common Stock to the stockholders of Ixion, Inc. ("Ixion") pursuant to that
certain Agreement and Plan of Reorganization by and among MMS and Ixion dated
May 24, 1996 (the "Merger Agreement"), in consideration of such stockholders
cancelling their shares of Ixion.

3. On May 24, 1996, the Registrant issued an aggregate of 62,372 shares of
Common Stock to certain Ixion and MMS employees and consultants in consideration
of the cancellation of accrued but unpaid compensation owed to them by Ixion and
MMS.

4. On May 24, 1996, pursuant to the terms of the Merger Agreement, the
Registrant assumed Ixion's obligations under letter agreements (the "Letter
Agreements") executed in favor of certain investors in Ixion's 1995 bridge
financing, pursuant to which a number of shares of Common Stock equal to
$2,200,000 divided by the initial public offering price for the sale of Common
Stock offered hereby will be issued immediately following the closing of this
Offering. Assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus), an
aggregate of 275,000 shares will be issued pursuant to the Letter Agreements.

5. On May 24, 1996, pursuant to the terms of the Merger Agreement, the
Registrant assumed Ixion's obligations under certain promissory notes accruing
interest at the rate of 8% per annum in the aggregate principal amount of
$2,000,000 issued in connection with Ixion's 1995 bridge financing (the "Bridge
Notes").

6. On May 24, 1996, the Registrant issued a promissory note to Baxter
Healthcare Corporation ("Baxter") accruing interest at the rate of 8% per annum
in the aggregate principal amount of $350,000 (the "$350,000 Note"). The
Registrant also entered into an agreement with Baxter (the "Baxter Letter")
pursuant to which a number of shares of Common Stock equal to $350,000 divided
by the initial public offering price for the shares of Common Stock offered
hereby will be issued to Baxter immediately following the closing of this
Offering. Assuming an initial public offering price of $8.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus), an
aggregate of 43,750 shares will be issued to Baxter pursuant to the Baxter
Letter.

7. On May 24, 1996, the Registrant issued a promissory note to Baxter
accruing interest at the rate of 8% per annum in the aggregate principal amount
of $200,000 (the "$200,000 Note").

8. On May 24, 1996, the Registrant issued a convertible promissory note
bearing interest at a rate of 200 basis points above the prime rate to Baxter in
the aggregate principal amount of $2,000,000 (the "$2,000,000 Note"). The
$2,000,000 Note will automatically convert, provided that the closing of this
Offering occurs on or before February 28, 1997, into a number of shares of
Common Stock equal to $2,000,000 plus accrued interest divided by the initial
public offering price for the shares of Common Stock offered hereby. Assuming
the closing of this Offering occurs on December 31, 1996 and an initial public
offering price of $8.00 per Share (the midpoint of the range set forth on the
cover page of this Prospectus), an aggregate of 265,516 Shares will be issued to
Baxter pursuant to the $2,000,000 Note.

9. On May 24, 1996, pursuant to the terms of the Merger Agreement, the
Registrant assumed the stock options Ixion had granted to certain Ixion
employees, officers, directors and consultants to purchase an aggregate of
119,702 shares of Common Stock at a weighted average exercise price of $4.77.

II-2
<PAGE> 101

10. On May 24, 1996, pursuant to the Merger Agreement, the Registrant
assumed warrants Ixion had granted to purchase an aggregate of 73,162 shares of
Common Stock to certain warrantholders at a weighted average exercise price of
1.18 times the initial public offering price of the Shares of Common Stock
offered hereby.

11. On various dates since May 24, 1996, the Registrant has granted options
to purchase 365,000 shares of its Common Stock to employees, directors and
consultants at a weighted average exercise price of $6.30 per share.

12. On September 1, 1996, the Registrant issued 12,194 shares of Common
Stock to East-West Capital Associates ("East-West") pursuant to a certain
Consulting Agreement dated August 31, 1995 between Ixion and East-West, the
obligations of which the Registrant assumed pursuant to the Merger Agreement.

13. On September 1, 1996, the Registrant issued an aggregate of 443,898
shares of Common Stock as consideration for extending the term of various
outstanding promissory notes. Of such 443,898 shares of Common Stock, 248,778
shares of Common Stock were issued to Baxter and 195,120 shares of Common Stock
were issued to investors in Ixion's 1995 bridge financing.

14. On October 4, 1996, the Registrant entered into a consulting agreement
with Larry J. Wells, the Chairman of the Board of Directors of the Company,
pursuant to which Mr. Wells is entitled to receive immediately upon the closing
of this Offering, a number of shares of Common Stock calculated by dividing the
product of 1.05 and amounts loaned to the Company between the date of the
consulting agreement and the closing of this Offering by the initial public
offering price for the sale of Shares offered hereby. The Registrant is
obligated to issue 43,313 shares of Common Stock to Mr. Wells immediately upon
the closing of this Offering, assuming an initial public offering price of $8.00
per Share (the midpoint of the range set forth on the cover page of this
Prospectus.

The sales and issuances of securities in the above transactions were deemed
to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D
and Rule 701 promulgated thereunder as transactions not involving any public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Similar representations of investment intent were obtained and
similar legends imposed in connection with any subsequent transfers of any such
securities. The Registrant believes that all recipients had adequate access,
through employment or other relationships, to information about the Registrant
to make an informed investment decision.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<C> <S>
+1.1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Reorganization dated May 24, 1996 between Medical Media
Systems, Inc. ("MMS, Inc.") and Ixion, Inc. ("Ixion").
*3.1 Registrant's Certificate of Incorporation.
*3.2 Registrant's Certificate of Merger.
3.3 Form of Registrant's Amended and Restated Certificate of Incorporation to be
effective immediately prior to this Offering.
*3.4 Registrant's Bylaws, as amended.
3.5 Registrant's Amended and Restated Bylaws to be effective upon completion of this
Offering.
+4.1 Specimen Stock Certificate.
+4.2 Specimen Warrant.
</TABLE>

II-3
<PAGE> 102

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
+4.3 Form of Warrant Agreement.
+5.1 Opinion of Brobeck, Phleger & Harrison LLP.
*10.1 Voting Agreement and Irrevocable Proxy dated May 24, 1996 between Baxter and Maxal
Capital Corporation.
*10.2 Distribution Agreement dated May 24, 1996 between the Registrant and Baxter.
*10.3 Credit Agreement dated May 24, 1996 between the Registrant and Baxter.
*10.4 $2,000,000 Promissory Note dated May 24, 1996 executed by the Registrant in favor of
Baxter.
*10.5 $350,000 Promissory Note dated May 24, 1996 executed by the Registrant in favor of
Baxter.
*10.6 $200,000 Promissory Note dated May 24, 1996 executed by the Registrant in favor of
Baxter.
*10.7 Registration Rights Agreement dated May 24, 1996 among the Registrant, Baxter and
certain stockholders.
*10.8 Stock Agreement dated May 24, 1996 among MMSLP, Baxter Holdings, and the Registrant.
*10.9 Agreement dated May 24, 1996 regarding issuance of Common Stock between the
Registrant and Baxter.
*10.10 Letter Agreement regarding corporate conversion of MMSLP dated May 17, 1996.
*10.11 Manufacturing License Agreement dated May 24, 1996 between the Registrant and
Baxter.
*10.12 Standard Form Office Lease for the Registrant's facilities located at 400 Mercer
Street, Suite 400, Seattle, WA 98109 dated January 29, 1996 between CVK Partnership
and Ixion.
*10.13 Standard Form of Office Lease for the Registrant's facilities located at 654 Madison
Avenue, Suite 1606, New York, NY 10021 dated March 15, 1994 between the Rolfe Group,
Inc. and Hydration Technology Corporation including Agreement Extending lease dated
October 31, 1994.
*10.14 Assignment and Assumption of Lease for the Registrant's facilities located at 654
Madison Avenue, Suite 1606, New York, NY 10021 dated April 24, 1996 between
Hydration Technology Corporation and Ixion.
*10.15 Commercial Lease for the Registrant's facilities located at 1335 North Northlake
Way, Seattle, WA 98103 dated September 1, 1984 between Nelson Northwest, Inc. and
Ixion.
*10.16 Addendum to Lease for the Registrant's facilities located at 1335 North Northlake
Way, Seattle, WA 98103 dated November 1, 1995 between Nelson Northwest, Inc. and
Ixion.
*10.17 Lease Agreement for the Registrant's facilities located at 79 East Wilder Road, West
Lebanon, NH 03784 dated July 8, 1994 between RSR Robson Resources, Inc. and Medical
Media Systems, including First and Second Amendments.
*10.18 Consulting Agreement dated April 25, 1995 between Ixion and Valentino Montegrande.
*10.19 Consulting Agreement dated January 1, 1996 between Ixion and James Caillouette.
+10.20 Consulting Agreement dated January 1, 1996 between Ixion and John Lyon.
*10.21 Employment Agreement dated February 21, 1995 between Ixion and Greg Claypool.
*10.22 Employment Agreement dated May 24, 1996 between the Registrant and Steven Pieper.
10.23 Employment Agreement dated May 24, 1996 between the Registrant and Bruce Sturman.
*10.24 Form of Promissory Note executed by Ixion in favor of various parties.
*10.25 Form of Letter Agreement dated February 22, 1996 regarding the issuance of Common
Stock between Ixion and various parties.
*10.26 Form of Subscription Agreement regarding the issuance of Common Stock between Ixion
and various parties.
*10.27 Promissory Note dated October 4, 1994 executed by Ixion in favor of Bruce Sturman.
*10.28 Promissory Note dated October 31, 1995 executed by Ixion in favor of Bruce Sturman.
</TABLE>

II-4
<PAGE> 103

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
*10.29 Promissory Note dated September 9, 1994 executed by Ixion in favor of David Hon.
*10.30 Promissory Note dated September 12, 1995 executed by Ixion in favor of David Hon.
*10.31 Research, Option and License Agreement dated April 8, 1992 between Ixion and Ethicon
Endo-Surgery.
*10.32 Development and License Agreement dated January 13, 1993 between MMS and
MusculoGraphics, Inc.
*10.33 Cooperative Agreement dated January 2, 1995 between MMS and the Trustees of
Dartmouth College.
*10.34 Form of Letter Agreement dated May 17, 1996 between the Registrant and certain
employees and consultants of Ixion and MMS relating to the conversion of accrued
salaries into shares of Common Stock.
*10.35 General Release Agreement dated May 28, 1996 among the Kriegsman Group, Steven
Kriegsman, MMS, Inc., and Ixion.
*10.36 Settlement Agreement and Release of All Claims dated April 16, 1996 among Ixion,
Inc., Cyndel & Co., Inc., Patrick Kolenik and Steven Bayern.
*10.37 Asset Purchase Agreement dated April 22, 1996 between Ixion and David Hon.
*10.38 Registrant's 1994 Incentive Stock Option Plan (the "Prior Plan").
*10.39 Form of Incentive Stock Option Rights Agreement under the Prior Plan.
*10.40 Form of Grant of Incentive Stock Option under the Prior Plan.
*10.41 Patent Filing of Patent No. 4,907,973 dated May 20, 1996.
*10.42 1996 Stock Option/Stock Issuance Plan (the "Plan").
*10.43 Form of Notice of Grant under the Plan.
*10.44 Form of Stock Option Agreement under the Plan.
*10.45 1996 Employee Stock Purchase Plan (the "Purchase Plan").
*10.46 Form of Stock Purchase Agreement under the Purchase Plan.
*10.47 Form of Ixion Employee Non-Disclosure and Non-Compete Agreement.
*10.48 Form of MMS Invention and Non-Disclosure Agreement.
*10.49 Form of Indemnification Agreements entered into between the Registrant and its
directors.
*10.50 Form of Indemnification Agreement entered into between the Registrant and its
officers.
+10.51 Common Stock Purchase Warrant dated January 1, 1996 executed by Ixion in favor of
Richard Friedman.
+10.52 Common Stock Purchase Warrant dated January 1, 1996 executed by Ixion in favor of
Jeff Markowitz.
*10.53 Letter Agreement regarding regulatory affairs dated October 17, 1994 between MMS and
Baxter.
*10.54 Credit Agreement dated April 10, 1996 between MMS and Baxter.
*10.55 Demand Promissory Note dated April 10, 1996 executed by MMS in favor of Baxter.
10.56 Employment Agreement dated July 8, 1996 between the Registrant and Thomas E.
Mignanelli.
10.57 Employment Agreement dated October 25, 1996 between the Registrant and Donald L.
Johanson.
10.58 First Amendment to Promissory Note dated October 29, 1996 between the Registrant and
Baxter.
10.59 Second Amendment to Promissory Note dated October 29, 1996 between the Registrant
and Baxter.
</TABLE>

II-5
<PAGE> 104

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<C> <S>
+10.60 First Amendment to 8% Promissory Note dated November 19, 1996 between the Registrant
and Baxter.
+10.61 Severance Agreement and Release dated November 18, 1996 between the Registrant and
Bruce D. Sturman.
+10.62 Consulting Agreement dated October 4, 1996 between the Registrant and Larry J.
Wells.
+10.63 Form of Promissory Note between the Registrant and DayStar Partners, L.P.
11.1 Statement Regarding Computation of Per Share Earnings.
+23.1 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit 5.1.
23.2 Consent of Independent Certified Public Accountants -- BDO Seidman, LLP.
23.3 Consent of Independent Certified Public Accountants -- Robert E. Moses.
24.1 Power of Attorney. Reference is made to page II-7.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
+ To be filed by amendment.

* Previously filed.

(b) Financial Statement Schedules included separately in the Registration
Statement.

All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.

ITEM 17. UNDERTAKINGS.

The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE> 105

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 22nd day of November, 1996.

INTERACT MEDICAL
TECHNOLOGIES CORPORATION

By: /s/ DONALD L. JOHANSON

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

Donald L. Johanson

President and Chief Executive
Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald L. Johanson and Thomas E. Mignanelli, or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------- ------------------
<S> <C> <C>
/s/ DONALD L. JOHANSON President, Chief Executive Officer November 22, 1996
- ------------------------------------- and
(Donald L. Johanson) Director
(Principal Executive Officer)
/s/ THOMAS E. MIGNANELLI Vice President, Finance and Chief November 22, 1996
- ------------------------------------- Financial Officer
(Thomas E. Mignanelli) (Principal Financial and Accounting
Officer)
/s/ STEVEN D. PIEPER Vice President, Chief Technical November 22, 1996
- ------------------------------------- Officer
(Steven D. Pieper, Ph.D.) and Director
/s/ JAMES C. CAILLOUETTE Director November 22, 1996
- -------------------------------------
(James C. Caillouette, M.D.)
/s/ DAVID C. HON Director November 22, 1996
- -------------------------------------
(David C. Hon)
/s/ CHARLES E. HUTCHINSON Director November 22, 1996
- -------------------------------------
(Charles E. Hutchinson, Ph.D.)
</TABLE>

II-7
<PAGE> 106

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------- ------------------
<S> <C> <C>
/s/ JOHN R. LYON Director November 22, 1996
- -------------------------------------
(John R. Lyon)
/s/ LARRY J. WELLS Director November 22, 1996
- -------------------------------------
(Larry J. Wells)
</TABLE>

II-8
<PAGE> 107

APPENDIX TO ELECTRONIC DOCUMENT FORMAT
DESCRIPTION OF GRAPHICS

Pursuant to Paragraph 625 of the EDGAR User Manual, the following is an
explanation of the differences between the foregoing document in electronic
format and the corresponding printed document on

1. Location: Outside Front Cover Page of Prospectus.

Description: Interact Medical Technologies Corporation logo, below which
is printed "INTERACT MEDICAL TECHNOLOGIES."

2. Location: Inside Front Cover Page of Prospectus.

Description: A graphic with the Company's logo described in Paragraph 1
above. Below the logo is the caption, "CLOSED-LOOP MARKETING STRATEGY."
Below this caption is a graphic of a closed loop labeled with the
captions "GastroSim(TM)," "Preview(TM)," "DataFusion(TM)" and "Vascular
Surgeons, Family Practitioners, Gastroenterologists, others." In the
middle of the closed loop is the caption "Encompassing the Clinical
Experience in Education, Training and MIS Procedures." In three circles
intersecting the closed loop there are the captions "Interactive Virtual
Reality Simulators," "Interactive 3D Modeling Services" and "Interactive
Multimedia titles." Placed around the closed loop are the captions
"Training Room," "Operating Room" and "Medical School Classroom." Placed
to the left and right of the closed loop are three pictures. The first
picture depicts an individual operating GastroSim. The next picture
depicts an individual observing a Preview model on a computer screen.
The final picture depicts one screen from an interactive multimedia
product under development. The caption at the bottom left states
"Preview(TM) and Interact's products under development are being
designed to provide a comprehensive suite of interactive information
tools that are designated to enhance clinical performance from the
operating room to the medical school classroom."

3. Location: Inside Front Cover Page of Prospectus -- Foldout.

Description: A graphic with the Company's logo described in Paragraph 1
above. Above the logo is the caption "MISSION STATEMENT." Below the logo
is the caption "Interact Medical Technologies Corporation develops,
markets and manufactures products designed to facilitate the effective
use of minimally invasive surgical (MIS) procedures and enhance clinical
performance." Below this caption is the caption "Interactive 3D Modeling
Services." Below this caption is the caption "The Company's initial
product, Preview(TM), allows the clinician to visualize and plan
surgical procedures by interacting with the three dimensional model of
the patient-specific anatomy." Below this caption are nine pictures of
images of patient-specific anatomy generated using Preview. Below these
pictures are the following captions: (i) "Each Preview(TM) model
provides thousands of preoperative images and a detailed
three-dimensional model of patient-specific anatomy" and "Preview(TM)
allows the clinician to address clinical planning needs without making a
sizeable investment in hardware, software and training."

4. Location: Inside Front Cover Page of Prospectus -- Foldout.

Description: At the top of the page is the caption "INTERACTIVE VIRTUAL
REALITY SIMULATORS." Below this caption is the caption "Interact's
initial IVR simulator, GastroSim(TM) (which is currently in the
pre-production prototype stage), consists of a pavilion depicting two
anatomical regions, the upper gastrointestinal ("UGI") and lower
gastrointestinal ("LGI") tracts. GastroSim incorporates procedures
designed for training medical personnel to conduct diagnostic tests and
perform therapies on ulcers, polyps, cancers, bile stone removals and
other UGI procedures, such as bronchoscopy, endotracheal tube placement
and ultrasound echocardial procedures; teaching clinicians to manipulate
sophisticated MIS medical devices and instruments; and evaluating the
clinician's ability to accomplish these diagnostic and therapeutic
maneuvers." Beneath this caption on the left is a picture of GastroSim.
Below this picture is the caption "Interact is developing IVR simulators
that consist of a platform which is a computer system that is capable of
being reconfigured to control various pavilions, each consisting of a
specific robotic mannequin depicting one of various
<PAGE> 108

anatomical regions of the body in which diagnostic and therapeutic
procedures are performed." On the right of the picture of the GastroSim
is a picture of two of the introductory screens depicted on the
GastroSim computer monitor as a simulation is begun. Below this picture
is the caption "With its ability to provide in-depth evaluation of the
clinician's performance, GastroSim can be used for accrediting,
credentialling and privileging clinicians. Below this caption is a
picture of GastroSim in operation with the term "GastroSim(TM)"
superimposed next to a picture of a transverse colon generated by
GastroSim labeled "Trans-verse Colon." Below these pictures is the
caption "While performing procedures on a "virtual patient",
GastroSim(TM) replicates the look, feel and sound of performing an
actual procedure. Below this caption is the caption "INTERACTIVE
MULTIMEDIA TITLES." Below this caption is the caption "Interact is
developing a new series of educational interactive multimedia products
for multimedia personal computers. These products are being designed to
integrate aspects of the Company's simulation technology to create
interactive illustrations of the best-demonstrated clinical practice."
Beneath this caption are four pictures of screens from an interactive
multimedia product under development.

5. Location: Outside Back Cover Page of Prospectus.

Description: Interact Medical Technologies Corporation logo, described
in paragraph 1 above.
<PAGE> 109

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
+1.1 Form of Underwriting Agreement. .........................................
*2.1 Agreement and Plan of Reorganization dated May 24, 1996 between Medical
Media Systems, Inc. ("MMS, Inc.") and Ixion, Inc. ("Ixion"). ............
*3.1 Registrant's Certificate of Incorporation. ..............................
*3.2 Registrant's Certificate of Merger. .....................................
*3.3 Form of Registrant's Amended and Restated Certificate of Incorporation to
be effective immediately prior to this Offering. ........................
*3.4 Registrant's Bylaws, as amended. ........................................
*3.5 Registrant's Amended and Restated Bylaws to be effective upon completion
of this Offering. .......................................................
+4.1 Specimen Stock Certificate. .............................................
+5.1 Opinion of Brobeck, Phleger & Harrison LLP. .............................
*10.1 Voting Agreement and Irrevocable Proxy dated May 24, 1996 between Baxter
and Maxal Capital Corporation. ..........................................
*10.2 Distribution Agreement dated May 24, 1996 between the Registrant and
Baxter. .................................................................
*10.3 Credit Agreement dated May 24, 1996 between the Registrant and
Baxter. .................................................................
*10.4 $2,000,000 Promissory Note dated May 24, 1996 executed by the Registrant
in favor of Baxter. .....................................................
*10.5 $350,000 Promissory Note dated May 24, 1996 executed by the Registrant in
favor of Baxter. ........................................................
*10.6 $200,000 Promissory Note dated May 24, 1996 executed by the Registrant in
favor of Baxter. ........................................................
*10.7 Registration Rights Agreement dated May 24, 1996 among the Registrant,
Baxter and certain stockholders. ........................................
*10.8 Stock Agreement dated May 24, 1996 among MMSLP, Baxter Holdings, and the
Registrant. .............................................................
*10.9 Agreement dated May 24, 1996 regarding issuance of Common Stock between
the Registrant and Baxter. ..............................................
*10.10 Letter Agreement regarding corporate conversion of MMSLP dated May 17,
1996. ...................................................................
*10.11 Manufacturing License Agreement dated May 24, 1996 between the Registrant
and Baxter. .............................................................
*10.12 Standard Form Office Lease for the Registrant's facilities located at 400
Mercer Street, Suite 400, Seattle, WA 98109 dated January 29, 1996
between CVK Partnership and Ixion. ......................................
*10.13 Standard Form of Office Lease for the Registrant's facilities located at
654 Madison Avenue, Suite 1606, New York, NY 10021 dated March 15, 1994
between the Rolfe Group, Inc. and Hydration Technology Corporation
including Agreement Extending lease dated October 31, 1994. .............
*10.14 Assignment and Assumption of Lease for the Registrant's facilities
located at 654 Madison Avenue, Suite 1606, New York, NY 10021 dated April
24, 1996 between Hydration Technology Corporation and Ixion. ............
*10.15 Commercial Lease for the Registrant's facilities located at 1335 North
Northlake Way, Seattle, WA 98103 dated September 1, 1984 between Nelson
Northwest, Inc. and Ixion. ..............................................
</TABLE>

<PAGE> 110

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
*10.16 Addendum to Lease for the Registrant's facilities located at 1335 North
Northlake Way, Seattle, WA 98103 dated November 1, 1995 between Nelson
Northwest, Inc. and Ixion. ..............................................
*10.17 Lease Agreement for the Registrant's facilities located at 79 East Wilder
Road, West Lebanon, NH 03784 dated July 8, 1994 between RSR Robson
Resources, Inc. and Medical Media Systems, including First and Second
Amendments. .............................................................
*10.18 Consulting Agreement dated April 25, 1995 between Ixion and Valentino
Montegrande. ............................................................
*10.19 Consulting Agreement dated January 1, 1996 between Ixion and James
Caillouette. ............................................................
+10.20 Consulting Agreement dated January 1, 1996 between Ixion and John
Lyon. ...................................................................
*10.21 Employment Agreement dated February 21, 1995 between Ixion and Greg
Claypool. ...............................................................
*10.22 Employment Agreement dated May 24, 1996 between the Registrant and Steven
Pieper. .................................................................
10.23 Employment Agreement dated May 24, 1996 between the Registrant and Bruce
Sturman. ................................................................
*10.24 Form of Promissory Note executed by Ixion in favor of various
parties. ................................................................
*10.25 Form of Letter Agreement dated February 22, 1996 regarding the issuance
of Common Stock between Ixion and various parties. ......................
*10.26 Form of Subscription Agreement regarding the issuance of Common Stock
between Ixion and various parties. ......................................
*10.27 Promissory Note dated October 4, 1994 executed by Ixion in favor of Bruce
Sturman. ................................................................
*10.28 Promissory Note dated October 31, 1995 executed by Ixion in favor of
Bruce Sturman. ..........................................................
*10.29 Promissory Note dated September 9, 1994 executed by Ixion in favor of
David Hon. ..............................................................
*10.30 Promissory Note dated September 12, 1995 executed by Ixion in favor of
David Hon. ..............................................................
*10.31 Research, Option and License Agreement dated April 8, 1992 between Ixion
and Ethicon Endo-Surgery. ...............................................
*10.32 Development and License Agreement dated January 13, 1993 between MMS and
MusculoGraphics, Inc.
*10.33 Cooperative Agreement dated January 2, 1995 between MMS and the Trustees
of Dartmouth College. ...................................................
*10.34 Form of Letter Agreement dated May 17, 1996 between the Registrant and
certain employees and consultants of Ixion and MMS relating to the
conversion of accrued salaries into shares of Common Stock. .............
*10.35 General Release Agreement dated May 28, 1996 among the Kriegsman Group,
Steven Kriegsman, MMS, Inc., and Ixion. .................................
*10.36 Settlement Agreement and Release of All Claims dated April 16, 1996 among
Ixion, Inc., Cyndel & Co., Inc., Patrick Kolenik and Steven Bayern. .....
*10.37 Asset Purchase Agreement dated April 22, 1996 between Ixion and David
Hon. ....................................................................
*10.38 Registrant's 1994 Incentive Stock Option Plan (the "Prior Plan"). .......
*10.39 Form of Incentive Stock Option Rights Agreement under the Prior Plan. ...
*10.40 Form of Grant of Incentive Stock Option under the Prior Plan. ...........
*10.41 Patent Filing of Patent No. 4,907,973 dated May 20, 1996. ...............
</TABLE>

<PAGE> 111

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
*10.42 1996 Stock Option/Stock Issuance Plan (the "Plan"). .....................
*10.43 Form of Notice of Grant under the Plan. .................................
*10.44 Form of Stock Option Agreement under the Plan. ..........................
*10.45 1996 Employee Stock Purchase Plan (the "Purchase Plan"). ................
*10.46 Form of Stock Purchase Agreement under the Purchase Plan. ...............
*10.47 Form of Ixion Employee Non-Disclosure and Non-Compete Agreement. ........
*10.48 Form of MMS Invention and Non-Disclosure Agreement. .....................
*10.49 Form of Indemnification Agreements entered into between the Registrant
and its directors. ......................................................
*10.50 Form of Indemnification Agreement entered into between the Registrant and
its officers. ...........................................................
+10.51 Common Stock Purchase Warrant dated January 1, 1996 executed by Ixion in
favor of Richard Friedman. ..............................................
+10.52 Common Stock Purchase Warrant dated January 1, 1996 executed by Ixion in
favor of Jeff Markowitz. ................................................
*10.53 Letter Agreement regarding regulatory affairs dated October 17, 1994
between MMS and Baxter. .................................................
*10.54 Credit Agreement dated April 10, 1996 between MMS and Baxter. ...........
*10.55 Demand Promissory Note dated April 10, 1996 executed by MMS in favor of
Baxter. .................................................................
10.56 Employment Agreement dated July 8, 1996 between the Registrant and Thomas
E. Mignanelli. ..........................................................
10.57 Employment Agreement dated October 25, 1996 between the Registrant and
Donald L. Johanson. .....................................................
10.58 First Amendment to Promissory Note dated October 29, 1996 between the
Registrant and Baxter. ..................................................
+10.59 Second Amendment to Promissory Note dated October 29, 1996 between the
Registrant and Baxter. ..................................................
+10.60 First Amendment to 8% Promissory Note dated October 29, 1996 between the
Registrant and Baxter....................................................
+10.61 Severance Agreement and Release dated November 18, 1996 between the
Registrant and Bruce D. Sturman..........................................
+10.62 Consulting Agreement dated October 4, 1996 between the Registrant and
Larry J. Wells...........................................................
+10.63 Form of Promissory Note between the Registrant and DayStar Partners
11.1 Statement Regarding Computation of Per Share Earnings....................
+23.1 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit
5.1. ....................................................................
23.2 Consent of Independent Certified Public Accountants -- BDO Seidman,
LLP. ....................................................................
23.3 Consent of Independent Certified Public Accountants -- Robert E.
Moses. ..................................................................
24.1 Power of Attorney. Reference is made to page II-7. ......................
27.1 Financial Data Schedule..................................................
</TABLE>

- ---------------
+ To be filed by amendment.

* Previously filed.

<PAGE> 1
EXHIBIT 10.23

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT made as of this 1st day of June 1996 by and
between Interact Medical Technologies Corporation (the "Company"), and Bruce D.
Sturman ("Executive").

WHEREAS, the Company and Executive desire to enter into an employment
contract that will govern the terms and conditions of Executive's employment
with the Company and will provide certain severance benefits to Executive upon
his termination of employment.

NOW, THEREFORE, the parties hereto agree as follows:

1. TITLE. Executive shall serve as President and Chief Executive
Officer of the Company and shall in such capacity report directly to the Board
of Directors of the Company ("Board").

2. DUTIES AND RESPONSIBILITIES. Executive hereby agrees to remain as
President and Chief Executive Officer of the Company during the Employment
Period and to perform in good faith and to the best of his ability all services
which may be required of Executive in such position and to be available to
render such services at all reasonable times and places in accordance with such
reasonable directions and requests as the Board may from time to time reasonably
specify. Executive shall, during the Employment Period, devote substantially all
of his time, ability, energy and skill to the performance of his duties and
responsibilities hereunder.

3. PERIOD OF EMPLOYMENT. The period of Executive's employment with
the Company pursuant to the provisions of this Agreement shall commence as of
June 1, 1996 and shall, unless sooner terminated in accordance with Paragraph 10
hereof, continue through June 1, 1999 ("Employment Period").

4. COMPENSATION.

A. During the Employment Period, Executive shall receive an
annualized base salary of $190,000, less all applicable withholdings and
deductions, which salary shall be reviewed by the Compensation Committee of the
Board, and subject to upward adjustment only, no less frequently than annually,
with the first such review to occur on or prior to January 15, 1997.

B. Executive shall be eligible to earn a bonus during each year
of service during the Employment Period and said annual bonus may amount to up
to half of Executive's then current salary, less all applicable withholdings and
deductions. Said annual bonus shall be based on Executive's job performance and
the Company's achievement of certain financial and performance objectives. The
specific terms and conditions of the

<PAGE> 2
annual bonus plan for Executive shall be determined solely by the Compensation
Committee of the Board. The objectives contained in such bonus plan shall be
established by mutual agreement of Executive and the Compensation Committee of
the Board, and such objectives shall include such key initiatives as the parties
deem important and reasonably achievable, which may include, without limitation,
profit objectives, earnings goals and market share performance. Bonus payments
under such bonus plan shall be payable only if such objectives are achieved.

C. Executive's base salary shall be paid at semimonthly
intervals over the Employment Period, in accordance with the Company's standard
payroll practices. The Company shall deduct and withhold from Executive's
compensation payable hereunder any and all applicable federal, state and local
income and employment withholding taxes (if any) and any other amounts required
to be deducted or withheld by the Company under applicable statutes,
regulations, ordinances or orders governing or requiring the withholding or
deduction of amounts otherwise payable as compensation or wages to employees.

5. BUSINESS EXPENSE REIMBURSEMENT. Executive shall be entitled, in
accordance with the reimbursement policies in effect from time to time, to
receive reimbursement from the Company for all travel, entertainment and other
business expenses incurred by Executive in the performance of his duties
hereunder, provided Executive furnishes the Company with vouchers, receipts and
other details in accordance with the Company's policies applicable to other
senior management executives.

6. BENEFITS. The Company shall provide Executive and his dependents
with coverage under all medical, dental and/or vision plans and other welfare or
retirement benefit programs available to the Company executives and their
dependents, to the extent Executive and his dependents satisfy the applicable
eligibility requirements.

7. RESTRICTIVE COVENANT. During the Employment Period:

A. Executive shall devote substantially all of his time and
energy to the performance of Executive's duties described herein, except during
periods of illness or vacation.

B. Except for Maxal Capital Corporation ("Maxal"), Executive
shall not directly or indirectly provide services to or through any person, firm
or other entity except the Company, unless otherwise authorized by the Company
in writing.

C. Except for Maxal, Executive shall not render any services of
any kind or character for Executive's own account or for any other person, firm
or entity without first obtaining the Company's written consent.

-2-
<PAGE> 3
performed by him hereunder, (ii) his charitable or community activities or (iii)
participation in trade or professional organizations, but only if such
incidental services do not significantly interfere with the performance of
Executive's services hereunder.

8. NON-COMPETITION. During the Employment Period, Executive shall
not directly or indirectly:

A. actively own, manage, operate, join, control or participate
in the ownership, management, operation or control of, or be employed by or
connected in any manner with, any enterprise which is engaged in any business
competitive with that which the Company is at the time conducting or proposing
to conduct; provided, however, that such restriction shall not apply to any
passive investment representing an interest of less than two percent (2%) of an
outstanding class of publicly traded securities of any corporation or other
enterprise which is not, at the time of such investment, engaged in a business
geographically competitive with the Company's business;

B. encourage or solicit any Company employee to leave the
Company's employ for any reason or interfere in any material manner with
employment relationships at the time existing between the Company and its
current employees; or

C. solicit any customer of Company, induce any the Company
customer to terminate its existing business relationship with the Company or
interfere in any material manner with any existing business relationship between
the Company and any customer or other third party.

9. PROPRIETARY INFORMATION. Concurrent with execution of this
Agreement, Executive shall execute the Company's standard form of employee
proprietary information and inventions agreement attached hereto as Exhibit A.

10. TERMINATION OF EMPLOYMENT.

A. The Company may terminate Executive's employment under this
Agreement at any time for any reason, with or without Cause, by giving at least
ninety (90) days prior written notice of such termination to Executive. However,
such ninety (90)-day notice requirement shall not apply to the termination of
Executive's employment for Non-Performance or for Cause under Paragraphs 10.B or
10.C hereof, respectively. Executive may terminate Executive's employment under
this Agreement at any time for any reason by giving at least thirty (30) days
prior written notice of such termination to the Company.

B. The Company may terminate Executive's employment during the
Employment Period for Non-Performance pursuant to a vote of the supermajority of
the Board. For purposes of this Agreement, "Non-Performance" shall mean
Executive's intentional and willful refusal to perform significant or
substantial duties that have a material adverse effect on the Company after
receipt of a written warning regarding his performance and a refusal to conform
to the Company's request as provided in the warning. If Executive's employment
with the Company is terminated because of Non-Performance

-3-
<PAGE> 4
(regardless of whether before, on or after the last day of the Employment
Period), then Executive shall be entitled to receive a lump sum severance
payment equal to twelve (12) months of his base salary then in effect (and
continuation of all benefits then in effect for the twelve (12) months following
such termination), less all applicable withholdings.

C. The Company may at any time, upon written notice, terminate
Executive's employment with the Company hereunder for Cause. Such termination
shall be effective immediately upon such notice. For the purposes of this
Agreement, "Cause" shall mean: (i) intentional dishonesty resulting, or
intending to result, directly or indirectly, in gain or personal enrichment at
the expense of the Company; (ii) intentional and continuous gross misconduct,
including without limitation, fraud, sexual harassment or misappropriation of
Company property or confidential information; (iii) Executive's conviction of a
felony under the laws of the United States or any state thereof involving moral
turpitude; or (iv) an intentional and substantial breach by Executive of
material provisions of this Agreement, which breach continues for a period of
thirty (30) days after written notice of such breach. Upon such termination for
Cause, the Company shall only be required to pay Executive any unpaid
compensation earned by him pursuant to Paragraph 4 hereof for services rendered
through the date of such termination, and reimbursements unpaid to date under
Paragraphs 7 or 8 hereof, and Executive shall not be entitled to receive any
severance benefits or payments.

D. In the event Executive's employment with the Company should
terminate by reason of his death or disability during the Employment Period,
severance benefits shall be payable to Executive's estate.

E. If the Company terminates Executive and such termination is
not for Non-Performance or Cause (regardless of whether before, on or after the
last day of the Employment Period), then, as of the date of such termination,
all of the outstanding unvested options to purchase shares of the Company's
capital stock then held by Executive shall vest and Executive shall be entitled
to receive a lump sum severance payment equal to twenty-four (24) months of his
base salary then in effect not discounted to present value (and continuation of
all benefits then in effect for the shorter of (i) twenty-four (24) months
following such termination or (ii) until June 1, 1999), less all applicable
withholdings.

11. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and shall be binding upon, the Company, its successors
and assigns, and Executive, the personal representative of his estate and his
heirs and legatees.

12. GOVERNING DOCUMENT. This Agreement constitutes the entire
agreement and understanding of the Company and Executive with respect to the
terms and conditions of Executive's employment with the Company and the payment
of severance and disability benefits and supersedes all prior and
contemporaneous written or verbal agreements and understandings between
Executive and the Company relating to such subject matter, other than as
provided herein. This Agreement may only be amended by written instrument signed
by Executive and a representative of the Compensation Committee of the Board.
Any and all prior agreements, understandings or representations relating to
Executive's

-4-
<PAGE> 5
employment with the Company are hereby terminated and cancelled in their
entirety and are of no further force or effect.

13. APPLICABLE LAW AND SEVERABILITY. This Agreement shall, in all
respects, be governed by the laws of the State of California applicable to
agreements executed and to be wholly performed within the State of California.
If any provision of this Agreement becomes or is deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision shall be deemed amended to the extent
necessary to conform to applicable law so as to be valid and enforceable or, if
such provision cannot be so amended without materially altering the intention of
the parties, then such provision shall be stricken and the remainder of this
Agreement shall continue in full force and effect. Should there ever occur any
conflict between any provision contained in this Agreement and any present or
future statute, law, ordinance or regulation contrary to which the parties have
no legal right to contract, the latter shall prevail, but the provision of this
Agreement affected thereby shall be curtailed and limited only to the extent
necessary to bring it into compliance with the law. All the other terms and
provisions of this Agreement shall continue in full force and effect without
impairment or limitation. Any dispute arising out of this Agreement shall be
decided by a court located in the State of California applying California law.
In the event of any lawsuit arising out of this Agreement, the prevailing party
shall be entitled to all costs and reasonable attorneys' fees.

14. COUNTERPARTS. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.

INTERACT MEDICAL TECHNOLOGIES
CORPORATION

By: /s/ T. E. Mignanelli
-------------------------------

Title: V.P. of Finance
----------------------------

/s/ Bruce D. Sturman
-----------------------------------
Bruce D. Sturman

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

<PAGE> 1
EXHIBIT 10.56

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT made as of this 8th day of July 1996 (the
"Commencement Date") by and between Interact Medical Technologies Corporation
(the "Company"), and Thomas E. Mignanelli ("Executive").

WHEREAS, the Company and Executive desire to enter into an employment
contract that shall govern the terms and conditions of Executive's employment
with the Company and shall provide certain severance benefits to Executive upon
his termination of employment.

NOW, THEREFORE, the parties hereto agree as follows:

1. TITLE. Executive shall serve as Vice President, Finance and Chief
Financial Officer of the Company and shall in such capacity report directly to
the Chief Executive Officer of the Company (the "Chief Executive Officer").

2. DUTIES AND RESPONSIBILITIES. Executive hereby agrees to remain as
Vice President, Finance and Chief Financial Officer of the Company during the
Employment Period and to perform in good faith and to the best of his ability
all services which may be required of Executive in such position and to be
available to render such services at all reasonable times and places in
accordance with such reasonable directions and requests as the Chief Executive
Officer may from time to time reasonably specify. Executive shall, during the
Employment Period, devote substantially all of his time, ability, energy and
skill to the performance of his duties and responsibilities hereunder.

3. PERIOD OF EMPLOYMENT. The period of Executive's employment with
the Company pursuant to the provisions of this Agreement shall commence as of
the Commencement Date and shall, unless sooner terminated in accordance with
Paragraph 10 hereof, continue through June 8, 1998 ("Employment Period").

4. COMPENSATION.

A. During the Employment Period, Executive shall receive an
annualized base salary of $125,000, which shall be increased to $145,000 upon
the effective date of the Company's initial public offering, less all applicable
withholdings and deductions (the "Base Salary"). The Base Salary shall be
reviewed by the Compensation Committee of the Company's Board of Directors (the
"Board") and shall be subject to upward adjustment only, no less frequently than
annually, with the first such review to occur on or prior to August 1, 1997.

<PAGE> 2
achievement of certain financial and performance objectives. The specific terms
and conditions of the annual bonus plan for Executive shall be determined solely
by the Compensation Committee of the Board (the "Bonus Plan"). The objectives
contained in the Bonus Plan shall be established by mutual agreement of
Executive and the Compensation Committee of the Board, and such objectives shall
include such key initiatives as the parties deem important and reasonably
achievable, which may include, without limitation, profit objectives, earnings
goals and market share performance. Bonus payments under the Bonus Plan shall be
payable only if such objectives are achieved.

C. The Base Salary shall be paid at semimonthly intervals over
the Employment Period, in accordance with the Company's standard payroll
practices. The Company shall deduct and withhold from Executive's compensation
payable hereunder any and all applicable federal, state and local income and
employment withholding taxes (if any) and any other amounts required to be
deducted or withheld by the Company under applicable statutes, regulations,
ordinances or orders governing or requiring the withholding or deduction of
amounts otherwise payable as compensation or wages to employees.

D. Upon Executive's execution of this Agreement, the Company
shall grant Executive an option to purchase 50,000 shares of the Company's
Common Stock ("Common Stock") at a per share purchase price of $6.30 (the
"Option"). The Option shall qualify as an incentive stock option (as defined
under Section 422 of the Internal Revenue Code of 1986) and shall be subject to
the customary three year vesting and the other limitations imposed by the
Company's 1994 Incentive Stock Option Plan.

6. BENEFITS. During the Employment Period:

A. The Company shall provide Executive with three weeks paid
vacation for each year of service during the Employment Period.

B. The Company shall provide Executive a transportation
allowance of $700 per month payable pro rata with each semimonthly disbursement
described in Paragraph 4.C hereof.

C. The Company shall provide Executive and his dependents with
coverage under all medical, dental and/or vision plans and other welfare or
retirement benefit programs available to the Company's executives and their
dependents, to the extent Executive and his dependents satisfy the applicable
eligibility requirements.

-2-
<PAGE> 3
7. RESTRICTIVE COVENANT. During the Employment Period:

A. Executive shall devote substantially all of his time and
energy to the performance of Executive's duties described herein, except during
periods of illness or vacation.

B. Executive shall not directly or indirectly provide services
to or through any person, firm or other entity except the Company, unless
otherwise authorized by the Company in writing.

C. Executive shall not render any services of any kind or
character for Executive's own account or for any other person, firm or entity
without first obtaining the Company's written consent.

D. Notwithstanding the foregoing, Executive shall have the right
to perform such incidental services as are necessary in connection with (i) his
private passive investments, but only if Executive is not obligated or required
to (and shall not in fact) devote any managerial efforts which significantly
interfere with the services required to be performed by him hereunder, (ii) his
charitable or community activities or (iii) participation in trade or
professional organizations, but only if such incidental services do not
significantly interfere with the performance of Executive's services hereunder.

8. NON-COMPETITION. During the Employment Period, Executive shall not
directly or indirectly:

-3-
<PAGE> 4
10. TERMINATION OF EMPLOYMENT.

A. The Company may terminate Executive's employment under this
Agreement at any time for any reason, with or without Cause, by giving at least
ninety (90) days prior written notice of such termination to Executive. However,
such ninety (90)-day notice requirement shall not apply to the termination of
Executive's employment (i) for Non-Performance or (ii) for Cause under
Paragraphs 10.B or 10.C hereof, respectively. Executive may terminate
Executive's employment under this Agreement at any time for any reason by giving
at least thirty (30) days prior written notice of such termination to the
Company.

B. The Company may terminate Executive's employment during the
Employment Period for Non-Performance. For purposes of this Agreement,
"NonPerformance" shall mean Executive's refusal to perform duties after receipt
of a written warning regarding his performance of such duties. Upon termination
for Non-Performance, the Company shall only be required to pay Executive any
unpaid compensation earned by him pursuant to Paragraph 4 hereof for services
rendered through the date of such termination and reimbursements unpaid to date
under Paragraphs 7 or 8 hereof, and Executive shall not be entitled to receive
any of the Severance Benefits set forth in Paragraph 10.E hereof.

C. The Company may at any time, upon written notice, terminate
Executive's employment with the Company hereunder for Cause. Such termination
shall be effective immediately upon such notice. For the purposes of this
Agreement, "Cause" shall mean: (i) dishonesty resulting, or intending to result,
directly or indirectly, in gain or personal enrichment at the expense of the
Company; (ii) gross misconduct, including without limitation, fraud, sexual
harassment or misappropriation of Company property or confidential information;
(iii) Executive's conviction of a felony under the laws of the United States or
any state thereof involving moral turpitude; or (iv) a breach by Executive of
material provisions of this Agreement, which breach continues for a period of
thirty (30) days after written notice of such breach. Upon such termination for
Cause, the Company shall only be required to pay Executive any unpaid
compensation earned by him pursuant to Paragraph 4 hereof for services rendered
through the date of such termination, and reimbursements unpaid to date under
Paragraphs 7 or 8 hereof, and Executive shall not be entitled to receive any of
the Severance Benefits set forth in Paragraph 10.E hereof.

D. In the event Executive's employment with the Company should
terminate by reason of his death or disability during the Employment Period,
Severance Benefits shall be payable to Executive's estate pursuant to Paragraph
10.E hereof.

E. If the Company terminates Executive (regardless of whether
before, on or after the last day of the Employment Period) and such termination
is not (i) for NonPerformance or (ii) for Cause pursuant to Paragraphs 10.B and
10.C hereof, respectively, then Executive shall be entitled to receive, as of
such termination date, (x) a lump sum severance payment equal to the entire Base
Salary then in effect not discounted to present

-4-
<PAGE> 5
value, (y) full vesting of the Option and (z) continuation of all benefits then
in effect for a full year, less all applicable withholdings (the "Severance
Benefits").

14. COUNTERPARTS. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.

INTERACT MEDICAL TECHNOLOGIES
CORPORATION

By: /s/ BRUCE D. STURMAN
--------------------------------

Title: CHIEF EXECUTIVE OFFICER
-----------------------------

/s/ T.E. MIGNANELLI
-----------------------------------
Thomas E. Mignanelli

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

<PAGE> 1
EXHIBIT 10.57

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT made as of this 24 day of October 1996 (the
"Commencement Date") by and between Interact Medical Technologies Corporation
(the "Company"), and Donald L. Johanson ("Executive").

NOW, THEREFORE, the parties hereto agree as follows:

1. TITLE. Executive shall serve as Senior Vice President and Chief
Operating Officer of the Company and shall in such capacity report directly to
the Chief Executive Officer of the Company (the "Chief Executive Officer").

2. DUTIES AND RESPONSIBILITIES. Executive hereby agrees to remain as
Senior Vice President and Chief Operating Officer of the Company during the
Employment Period and to perform in good faith and to the best of his ability
all services which may be required of Executive in such position and to be
available to render such services at all reasonable times and places in
accordance with such reasonable directions and requests as the Chief Executive
Officer may from time to time reasonably specify. Executive shall, during the
Employment Period, devote substantially all of his time, ability, energy and
skill to the performance of his duties and responsibilities hereunder.

4. COMPENSATION.

A. During the Employment Period, Executive shall receive an
annualized base salary of $145,000, less all applicable withholdings and
deductions (the "Base Salary"). The Base Salary shall be reviewed by the
Compensation Committee of the Company's Board of Directors (the "Board") and
shall be subject to upward adjustment only, no less frequently than annually,
with the first such review to occur on or prior to October 31, 1997.

B. Executive shall be eligible to earn a bonus during each year of
service during the Employment Period in an amount up to forty percent (40%) of
the Base Salary in such year, less all applicable withholdings and deductions
(the "Annual Bonus"). The Annual Bonus shall be based on Executive's job
performance and the Company's achievement of certain financial and performance
objectives. The specific terms and conditions of the annual bonus plan for
Executive shall be determined solely by the

<PAGE> 2
Compensation Committee of the Board (the "Bonus Plan"). The objectives contained
in the Bonus Plan shall be established by mutual agreement of Executive and the
Compensation Committee of the Board, and such objectives shall include such key
initiatives as the parties deem important and reasonably achievable, which may
include, without limitation, profit objectives, earnings goals and market share
performance. Bonus payments under the Bonus Plan shall be payable only if such
objectives are achieved.

C. The Base Salary shall be paid at semimonthly intervals over the
Employment Period, in accordance with the Company's standard payroll practices.
The Company shall deduct and withhold from Executive's compensation payable
hereunder any and all applicable federal, state and local income and employment
withholding taxes (if any) and any other amounts required to be deducted or
withheld by the Company under applicable statutes, regulations, ordinances or
orders governing or requiring the withholding or deduction of amounts otherwise
payable as compensation or wages to employees.

D. Upon Executive's execution of this Agreement, the Company shall
grant Executive an option to purchase 60,000 shares of the Company's Common
Stock ("Common Stock") at a per share purchase price of $6.30 (the "Option").
The Option shall qualify as an incentive stock option (as defined under Section
422 of the Internal Revenue Code of 1986) and shall be subject to the customary
three year vesting and the other limitations imposed by the Company's 1994
Incentive Stock Option Plan.

6. BENEFITS. During the Employment Period:

A. The Company shall provide Executive with four weeks paid
vacation for each year of service during the Employment Period.

B. The Company shall provide Executive an automobile allowance of
$450 per month payable pro rata with each semimonthly disbursement described in
Paragraph 4.C hereof.

-2-
<PAGE> 3
7. RESTRICTIVE COVENANT. During the Employment Period:

A. Executive shall devote substantially all of his time and energy
to the performance of Executive's duties described herein, except during periods
of illness or vacation.

B. Executive shall not directly or indirectly provide services to
or through any person, firm or other entity except the Company, unless otherwise
authorized by the Company in writing.

C. Executive shall not render any services of any kind or
character for Executive's own account or for any other person, firm or entity
without first obtaining the Company's written consent.

8. NON-COMPETITION. During the Employment Period, Executive shall not
directly or indirectly:

A. actively own, manage, operate, join, control or participate in
the ownership, management, operation or control of, or be employed by or
connected in any manner with, any enterprise which is engaged in any business
competitive with that which the Company is at the time conducting or proposing
to conduct; provided, however, that such restriction shall not apply to any
passive investment representing an interest of less than two percent (2%) of an
outstanding class of publicly traded securities of any corporation or other
enterprise which is not, at the time of such investment, engaged in a business
geographically competitive with the Company's business;

-3-
<PAGE> 4
10. TERMINATION OF EMPLOYMENT.

A. The Company may terminate Executive's employment under this
Agreement at any time for any reason, with or without Cause, by giving at least
ninety (90) days prior written notice of such termination to Executive. However,
such ninety (90)-day notice requirement shall not apply to the termination of
Executive's employment (i) for Non-Performance or (ii) for Cause under
Paragraphs 10.B or 10.C hereof, respectively. Executive may terminate
Executive's employment under this Agreement at any time for any reason by giving
at least thirty (30) days prior written notice of such termination to the
Company.

C. The Company may at any time, upon written notice, terminate
Executive's employment with the Company hereunder for Cause. Such termination
shall be effective immediately upon such notice. For the purposes of this
Agreement, "Cause" shall mean: (i) dishonesty resulting, or intending to result,
directly or indirectly, in gain or personal enrichment at the expense of the
Company; (ii) gross misconduct, including without limitation, fraud, sexual
harassment or misappropriation of Company property or confidential information;
(iii) Executive's conviction of a felony under the laws of the United States or
any state thereof involving moral turpitude; or (iv) a breach by Executive of
material provisions of this Agreement, which breach continues for a period of
thirty (30) days after written notice of such breach. Upon such termination for
Cause, the Company shall only be required to pay Executive any unpaid
compensation earned by him pursuant to Paragraph 4 hereof for services rendered
through the date of such termination, and reimbursements unpaid to date under
Paragraphs 7 or 8 hereof, and Executive shall not be entitled to receive any of
the Severance Benefits set forth in Paragraph 10.E hereof.

-4-
<PAGE> 5
value, (y) full vesting of the Option and (z) continuation of all benefits then
in effect for a full year, less all applicable withholdings (the "Severance
Benefits").

12. GOVERNING DOCUMENT. This Agreement constitutes the entire agreement
and understanding of the Company and Executive with respect to the terms and
conditions of Executive's employment with the Company and the payment of
severance and disability benefits and supersedes all prior and contemporaneous
written or verbal agreements and understandings between Executive and the
Company relating to such subject matter, other than as provided herein. This
Agreement may only be amended by written instrument signed by Executive and a
representative of the Compensation Committee of the Board. Any and all prior
agreements, understandings or representations relating to Executive's employment
with the Company are hereby terminated and cancelled in their entirety and are
of no further force or effect.

14. COUNTERPARTS. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.

INTERACT MEDICAL TECHNOLOGIES
CORPORATION

By: /s/ BRUCE D. STURMAN
--------------------------------

Title: C.E.O.
-----------------------------

/s/ DONALD L. JOHANSON
------------------------------------
Donald L. Johanson

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

<PAGE> 1
EXHIBIT 10.58

FIRST AMENDMENT TO PROMISSORY NOTE

This First Amendment to Promissory Note (the "Amendment") is made as of
October 29, 1996, and amends and restates certain portions of that certain
Promissory Note dated as of May 24, 1996 with a principal amount of $2,000,000
(the "2,000,000 Note"), issued pursuant to that certain Credit Agreement dated
May 24, 1996 (the "Credit Agreement") between Interact Medical Technologies
Corporation, a Delaware corporation ("Borrower") and Baxter Healthcare
Corporation, a Delaware corporation ("Lender"). Capitalized terms not otherwise
defined herein shall have the meanings ascribed to them in the $2,000,000 Note.

RECITALS

A. Lender and Borrower desire to restate certain terms of the
$2,000,000 Note;

B. This Amendment is executed pursuant to Section 6.04 of the Credit
Agreement, which permits the amendment of any of the notes issued pursuant to
the Credit Agreement with the signatures of both Lender and Borrower.

AMENDMENT

NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:

1. Amendment to the $2,000,000 Note. The second sentence of the second
paragraph of the $2,000,000 Note is hereby amended and restated in its entirety
as follows:

"If the closing date for the Borrower's IPO occurs before December 31,
1996, then immediately following such closing the principal amount,
together with all accrued interest, shall be converted into Common
Stock at the price to the public for shares of Common Stock issued in
the IPO as stated in the Registration Statement (the "IPO Price")."

2. Effect of Amendment; Conflicts. Except as amended and set forth
above, the $2,000,000 Note shall continue in full force and effect. In the event
of any conflict between the terms of the $2,000,000 Note and the terms of this
Amendment, the terms of this Amendment shall govern and control.

3. Further Assurances. The parties agree to execute such further
instruments, agreements and documents and to take such further action as may
reasonably be necessary to carry out the intent of this Amendment.
<PAGE> 2
4. Counterparts. This Amendment may be executed in any number of
counterparts, each which shall be deemed an original, and all of which together
shall constitute one instrument.

5. Severability. If one or more provisions of this Amendment are held
to be unenforceable under applicable law, such provision(s) shall be excluded
from this Amendment and the balance of the Amendment shall be interpreted as if
such provision(s) were so excluded and shall be enforceable in accordance with
its terms.

6. Entire Agreement. This Amendment, together with the $2,000,000 Note,
constitute the full and entire understanding and agreement among the parties
with regard to the subjects hereof and thereof.

7. Governing Law. This Amendment shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.

8. Binding Effect. This Amendment shall be binding upon Lender and
Borrower pursuant to Section 6.04 of the Credit Agreement.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

-2-
<PAGE> 3
IN WITNESS WHEREOF, this Amendment is hereby executed as of the date
first above written.

BORROWER:

INTERACT MEDICAL TECHNOLOGIES
CORPORATION, a Delaware corporation

By:_________________________________
Thomas Mignanelli,
Chief Financial Officer

LENDER:

BAXTER HEALTHCARE CORPORATION, a
Delaware corporation

By:_________________________________
Jay Wertheim,
Vice President

[SIGNATURE PAGE TO FIRST AMENDMENT TO
PROMISSORY NOTE]

<PAGE> 1

EXHIBIT 11.1

INTERACT MEDICAL TECHNOLOGIES CORPORATION

STATEMENT OF COMPUTATION OF PER SHARE EARNINGS

(IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Historical weighted average shares
outstanding.................................. 500 1,188 1,283 1,269 2,043
Effect of applying SAB topic 4D(1)............. 37 37 37 37 10
Shares issuable to 8% Promissory Note
Holders...................................... -- 7 73 53 249
------ ------ ------- ------ -------
Shares used in computing net loss per
share..................................... 537 1,232 1,393 1,359 2,302
====== ====== ======= ====== =======
Net loss....................................... $ (8) $ (549) $(2,322) $(1,793) $(6,468)
====== ====== ======= ====== =======
Net loss per share............................. $(0.01) $(0.45) $ (1.67) $ (1.32) $ (2.81)
====== ====== ======= ====== =======
</TABLE>

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

(1) Effect of including all common stock issued at prices below the expected
public offering price during the twelve month period preceding the planned
offering, together with common stock options and warrants issued during such
period with exercise prices below the expected offering price, as if such
shares were outstanding for all periods presented.

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Interact Medical Technologies Corporation

We hereby consent to the use in the Prospectus constituting a part of
Amendment No. 1 to this Registration Statement on Form S-1 of our report dated
April 25, 1996, except as to Notes 1 and 10, which are as of June 27, 1996,
relating to the financial statements of Interact Medical Technologies
Corporation, which is contained in that Prospectus. Our report contains an
explanatory paragraph regarding uncertainties as to the ability of the Company
to continue as a going concern.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

/s/ BDO SEIDMAN, LLP

BDO SEIDMAN, LLP

SEATTLE, WASHINGTON

NOVEMBER 21, 1996

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Medical Media Systems

We hereby consent to the use in the Prospectus constituting a part of
Amendment No. 1 to this Registration Statement of our report dated February 16,
1996, except as to Note 7 which is as of June 13, 1996, relating to the
financial statements of Medical Media Systems which is contained in that
Prospectus.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

/s/ ROBERT E. MOSES

--------------------------------------
ROBERT E. MOSES
Certified Public Accountants

Lebanon, New Hampshire

November 21, 1996

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERACT MEDICAL TECHNOLOGIES CORPORATION FINANCIAL STATEMENTS AT DECEMBER 31,
1995 AND FOR THE YEAR THEN ENDED AND AT JUNE 30, 1996 AND FOR THE 6 MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS INCLUDED IN THE INTERACT MEDICAL TECHNOLOGIES CORPORATION
REGISTRATION STATEMENT ON FORM S-1
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 0 1201
<SECURITIES> 0 0
<RECEIVABLES> 1 18
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1 1219
<PP&E> 551 1376
<DEPRECIATION> (314) (409)
<TOTAL-ASSETS> 238 5714
<CURRENT-LIABILITIES> 2000 5682
<BONDS> 0 0
0 0
0 0
<COMMON> 1170 7661
<OTHER-SE> (2932) (7753)
<TOTAL-LIABILITY-AND-EQUITY> 238 5714
<SALES> 266 11
<TOTAL-REVENUES> 266 11
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2456 1948
<LOSS-PROVISION> 0 2391
<INTEREST-EXPENSE> 132 493
<INCOME-PRETAX> (2322) (4821)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2322) (4821)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2322) (4821)
<EPS-PRIMARY> (0.81) (2.58)
<EPS-DILUTED> (0.81) (2.58)

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