INTERACTIVE MEDICAL TECHNOLOGIES LTD
10-Q, 1996-06-11
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES
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<PAGE>


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

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

                For the quarterly period ended March 31, 1996
                                               ------------------


                                       OR

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

           For the transition period from              to
                                          -------------   ------------

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


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

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

2139 Pontius Avenue, Los Angeles, California   90025      (Address of principal
- ----------------------------------------------------------
executive offices)                           (Zip Code)

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


                                 not applicable
  ----------------------------------------------------------------------------
  (former, name, address and former fiscal year, if changed since last report)

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

State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

                                               Outstanding at
          Class of Common Stock               May 31, 1996
          ---------------------              ----------------
             $.001 par value                 35,722,351 shares

Transitional Small Business Disclosure Format     Yes       No  X
                                                      ---      ---

Number of sequentially numbered pages in the document:   42
                                                       -------


                                       -1-

<PAGE>


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

                      INTERACTIVE MEDICAL TECHNOLOGIES LTD.

                                      Index

PART I - FINANCIAL INFORMATION                                              Page
                                                                            ----

     Item 1.  Consolidated Financial Statements

              Condensed Consolidated Balance Sheets at
              December 31, 1995 and March 31, 1996 (unaudited)                3

              Condensed Consolidated Statements of Operations
              for the three months  ended March 31, 1995 (unaudited)
              and 1996 (unaudited)                                            5

              Condensed Consolidated Statements of Cash Flows
              for the three months ended March 31, 1995 (unaudited)
              and 1996 (unaudited)                                            6

              Notes to Condensed Consolidated Financial Statements            7

     Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.                                     25

     Item 3.  Legal Proceedings                                              33


PART II. - OTHER INFORMATION

     Item 4.  Submission of Matters of a Vote to Security Holders            41

     Item 5.  Other Information                                              41

     Item 6.  Exhibits and Reports on Form 8-K                               41

Signatures                                                                   42


                                       -2-

<PAGE>


                         PART I.  FINANCIAL INFORMATION


              INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      DECEMBER 31, 1995 AND MARCH 31, 1996

                                     ASSETS

<TABLE>
<CAPTION>

                                                           December 31,     March 31,
                                                               1995           1996
                                                            ----------     ----------
                                                                           (unaudited)
<S>                                                        <C>            <C>
CURRENT ASSETS:
 Cash                                                       $  374,128     $  170,552
 Accounts Receivable, net of allowance for doubtful
  accounts of $20,516 in 1995 and $180,516 in 1996              65,377         27,635
 Interest receivable, net of allowance for doubtful
  accounts of $59,615 in 1995 and $55,615 in 1996                --             --
 Notes receivable from shareholder, net of allowance
  for doubtful accounts of $16,548 in 1995 and $141,548          --             --
  in 1996
 Leases receivable                                              79,241         97,134
 Due from related parties, net of allowance for
  doubtful accounts of 109,593 in 1995 and
  $32,937 in 1996                                                1,725          1,725
                                                            ----------     ----------
Total current assets                                           520,471        297,046
                                                            ----------     ----------
PROPERTY, EQUIPMENT AND LEASEHOLD
 IMPROVEMENTS, at cost, net of
 accumulated depreciation and amortization of
 $1,303,661 in 1995 and $1,418,768 in 1996
 Office equipment                                              110,974         95,626
 Leasehold improvement                                         145,860        118,898
 Magnetic resonance imaging systems                          1,298,247      1,226,121
                                                            ----------     ----------
 Property, equipment and leasehold
  improvements, net                                          1,555,081      1,440,645
                                                            ----------     ----------
OTHER ASSETS:
 Patents, net of accumulated amortization
  of $107,466 in 1995 and $113,488 in 1996                     289,486        283,465
 Deposits and other assets                                      74,568         74,568
                                                            ----------     ----------
Total other assets                                             364,054        358,033
                                                            ----------     ----------

        TOTAL ASSETS                                        $2,439,606     $2,095,724
                                                            ----------     ----------
                                                            ----------     ----------
</TABLE>


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


                                       -3-

<PAGE>


              INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      DECEMBER 31, 1995 AND MARCH 31, 1996

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                           December 31,     March 31,
                                                               1995           1996
                                                           -----------    -----------
                                                                          (unaudited)
<S>                                                        <C>           <C>
CURRENT LIABILITIES
 Loans Payable                                              $   88,500    $    88,330
 Convertible notes                                              75,000        185,500
 Current portion long term note payable                        318,171        348,436
 Accrued compensation and payroll taxes                        206,106        153,912
 Professional services payable                                 413,135        413,482
 Trade payables and other accrued expenses                      75,500         57,073
 Royalties payable                                             535,518        414,053
 Income taxes payable                                            3,946          7,146
 Deferred rent                                                   8,460          7,050
 Interest payable - long term note                              21,609         30,988
 Interest payable - convertible notes                           16,542         16,542
                                                           -----------    -----------

         Total current liabilities                           1,762,487      1,722,512
                                                           -----------    -----------

LONG TERM NOTE PAYABLE,
 net of current portion                                        959,538        871,567
                                                           -----------    -----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)

SHAREHOLDERS' DEFICIT:
 Common stock, authorized 50,000,000 shares
 of $.001 par value; issued and outstanding
 32,282,082 in 1995 and 32,832,082 in 1996                      32,282         32,832
 Additional paid-in capital                                 15,083,445     15,153,464
 Accumulated deficit                                       (15,398,146)   (15,684,651)
                                                           -----------    -----------

         Total shareholders' deficit                          (282,419)      (498,355)
                                                           -----------    -----------

TOTAL LIABILITIES AND
 SHAREHOLDERS' DEFICIT                                     $ 2,439,606    $ 2,095,724
                                                           -----------    -----------
                                                           -----------    -----------
</TABLE>



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


                                       -4-

<PAGE>


              INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    For the
                                                               Three Months Ended
                                                                    March 31
                                                           --------------------------
                                                               1995           1996
<S>                                                       <C>            <C>
REVENUES
 Products and services                                     $   284,599    $   161,823
 Lease rentals                                                 113,779         97,081
                                                           -----------    -----------

                                                               398,378        258,904
                                                           -----------    -----------
COST AND EXPENSES
 Cost of revenues
  Products and services                                         47,521         37,845
  Lease operations                                             120,339         72,126
                                                           -----------    -----------
                                                               167,860        109,971
  Research and development                                     104,445         55,564
  Selling, general and administrative expenses                 708,039        346,548
                                                           -----------    -----------
                                                               980,344        512,083
                                                           -----------    -----------
  Loss from operations                                        (581,966)      (253,179)
                                                           -----------    -----------
INTEREST EXPENSE AND OTHER:
 Interest expense - other                                      123,874          2,268
 Interest expense - lease obligations                           35,384         30,988
 Interest income                                               (20,394)        (3,130)
                                                           -----------    -----------

       Total interest expense and other                        138,864         30,988
                                                           -----------    -----------

       Loss before provision for state income taxes           (720,830)      (283,305)

PROVISION FOR STATE INCOME TAXES (Note 6)                         (800)         3,200
                                                           -----------    -----------

NET LOSS                                                   $  (721,630)   $  (286,505)
                                                           -----------    -----------
                                                           -----------    -----------
WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING                                  17,263,121     32,378,785
                                                           -----------    -----------
                                                           -----------    -----------

NET LOSS PER SHARE                                         $      (.04)   $      (.01)
                                                           -----------    -----------
                                                           -----------    -----------
</TABLE>



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


                                       -5-

<PAGE>


                      INTERACTIVE MEDICAL TECHNOLOGIES LTD
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    For The
                                                               Three Months Ended
                                                                    March 31,
                                                           ---------------------------
                                                               1995           1996
<S>                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Loss                                                  $  (721,630)   $  (286,505)
Adjustments to reconcile net loss to
  net cash (used in) operating activities:
   Research and development efforts contributed as capital      30,000             --
   Depreciation and amortization                               324,595        121,128
   Decrease (increase) in:
     Accounts receivable                                        80,081         37,742
     Interest receivable                                           648             --
     Lease receivable                                               --        (17,893)
 Increase (decrease) in:
     Due to related parties and former shareholders             36,419             --
     Accrued compensation                                      110,502        (52,194)
     Professional fees and other payables                      139,729       (139,545)
     Income taxes payable                                          800          3,200
     Deferred rent                                                (510)        (1,410)
     Interest payable                                           17,320          9,379
                                                            ----------     ----------
NET CASH USED IN OPERATING ACTIVITIES                           17,954       (326,098)
                                                            ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Expenditures for property, equipment and
   leasehold improvements                                       (8,400)          (671)
  Expenditures for patents                                      (1,870)            --
                                                            ----------     ----------
         NET CASH USED IN INVESTING ACTIVITIES:                (10,270)          (671)
                                                            ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Issuance of common stock                                          --         70,569
  Payments on long-term note                                   (77,715)       (57,706)
  Proceeds from exercise of warrants, net                        1,000             --
  Proceeds from loans payable                                   50,000        110,000
  Payments on loans payable                                         --           (170)
                                                            ----------     ----------
         NET CASH PROVIDED BY (USED FOR)
          FINANCING ACTIVITIES:                                (26,715)       123,193
                                                            ----------     ----------

NET INCREASE (DECREASE) IN CASH                                (19,031)      (203,576)
CASH, beginning of period                                       25,215        374,128
                                                            ----------     ----------

CASH, end of period                                         $    6,184     $  170,552
                                                            ----------     ----------
                                                            ----------     ----------
</TABLE>



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



                                       -6-

<PAGE>


             INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)
                                 March 31, 1996

1.        SIGNIFICANT RISKS

     During 1995 consolidated revenues of Interactive Medical Technologies Ltd.
(Interactive) and subsidiaries (the Company) were generated from royalties from
the sale of fat sequestrant, the sale of colored microspheres and automated
counting machines and lease revenues from magnetic resonance imaging systems.
With the exception of royalties form the sale of fat sequestrant, revenues for
the first quarter of 1996 were provided by the same sources.  The licensing
agreement for the fat sequestrants, which accounted for 49% of revenues in 1995,
was terminated during the first quarter of 1996.

     The Company has incurred net losses since its inception in 1986.  This
includes losses of $3,084,495 and $3,978,579 for the years ended December 31,
1994 and 1995 and $286,505 for the three months ended March 31, 1996.
Continuing losses have adversely affected the liquidity of the Company, as well
as the Company's ability to raise necessary additional capital.  As of March 31,
1996, the Company had an accumulated deficit of $15,684,651 and negative working
capital of $1,425,466.  In addition, the Company is subject to various business
risks, including but not limited to its ability to maintain vendor and supplier
relationships by paying bills when due, and overcoming future and ongoing
product development and distribution issues.  The Company and its former
management have been named in certain litigation. The Company is subject to
various claims, lawsuits, lawsuit settlements and judgements.  The Company's
legal costs have been paid from available funds and unpaid amounts have been
accrued.  There is no assurance such funds will continue to be available, and
the inability to pay judgements when due or fees of defense counsel may result
in settlement of the actions on unfavorable terms to the Company.

     The Company has shifted the allocation of its resources to the development
of new weight control products, the acquisition of a personal care products
manufacturer, and to product development work on the human imaging contrast
microspheres, the expected primary product line of the Company in the future.
The Company has entered into a broad based, long term agreement with E-Z-EM,
Inc. for clinical testing of the contrast microspheres.  Under the terms of the
agreement, E-Z-EM will commence clinical testing and provide funding for phase
one animal studies.  During phase two, E-Z-EM  will analyze the impact of
regulatory costs and expenses in preparation for capital funding to conduct FDA
approved clinical trials (IND).  The agreement establishes the Company as the
product manufacturer, which E-Z-EM has an option for an exclusive license
(including the right to sub-license) to all products developed under the patent
and the rights to global sales and marketing of the products and related
services for the life of the patent or 10 years, whichever is longer.


                                       -7-

<PAGE>


     Should required funding for operating needs or research and development
programs not be available to the Company through the sale of securities, the
Company anticipates that it would accelerate its efforts to secure additional
strategic corporate partners for its contrast microspheres.  Should the
Company's operations require funding that is not available to the Company at
that time, the Company could be required to curtail or eliminate certain of its
current operations or research and development activities for the contrast
microspheres.

     In March 1994, the Company entered into a license agreement for the fat
sequestrant product technology in the United States and Canada with KCD.    KCD
is a recently formed organization having access to the major domestic retail
pharmacy and health food chains.  KCD has limited management and financial
resources, and there can be no assurance that it will be successful in marketing
its fat sequestrant product or that it will be able to pay all of the required
minimum royalty payments to the Company under the license agreement.  KCD has
advised the Company that during the period of April 1994 through March 1995, KCD
sales of the product covered under the license have approximated $3,860,000 at
wholesale value.  Through March 31, 1995, the Company has received from KCD
licensing fees and royalties of $350,437 and has earned additional past due
royalties of $362,750.  A provision of $363,000 for possible uncollectible
amounts has been recorded as of March 31, 1995.

     Management anticipates 1996 revenues from microspheres, laboratory service,
and MRI leasing operations will be adequate to provide only the cash needed for
direct commercial operations.  There are no assurances that revenue goals for
microspheres, laboratory services, and MRI leasing operations will be achieved.
A substantial amount of the revenues from MRI leasing operations have been
accrued but have not yet been received.

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

     The Company's revised financial plan is being implemented.  During 1995,
and the first three months of 1996, management's efforts were focused on
settling old debts, settlements of lawsuits, raising working capital, and new
product development.  These efforts will continue during the second quarter.
Management believes that the Company will be in a position to move forward
during the second half of 1996 and is in the process of developing plans to
resume distribution of the Company's existing dietary products and plans on
launching several new products during the second half of 1996.  The Company is
also focusing on expanding its microsphere and laboratory services business and
is in the initial phase of a licensing agreement for clinical evaluation of its
contrast microspheres for human development.


                                       -8-

<PAGE>


     The Company estimates that to initiate and complete the clinical
development program for the first diagnostic indication for its contrast
microspheres will require the expenditure by the Company or a strategic partner
of between $3,000,000 and $10,000,000 over the next 33 months.  Operating
revenues are not expected to be sufficient to fund this development program,
which will need to be financed out of the proceeds, if any, from exercise of the
Company's outstanding warrants, through the sale of additional securities by the
Company or by any license fee or advance marketing payments that the Company is
able to obtain in connection with the future licensing of its contrast
microsphere or other products.

     The Company carries no direct product liability insurance, relying instead
on the coverage afforded by its distributors and the manufacturers from whom it
obtains products.  These coverages directly protect the insured who pay the
premiums and only secondarily the Company.  There is no assurance that such
coverages will adequately cover any claims which may be brought against the
Company.  In addition, the Company does not have any general liability coverage.

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

2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          BASIS OF PRESENTATION

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

     As more fully discussed in Note 4, the Company is subject to various
claims, lawsuits, lawsuit settlements and judgements.

     In the opinion of the management of the Company, the accompanying condensed
unaudited financial statements contain all adjustments, consisting of only
normal recurring accruals, necessary to present fairly the financial position at
March 31, 1996, the results of its operations for the three months ended March
31, 1996 and 1995 and the cash flows for the three months ended March 31, 1996
and 1995.  Certain information and footnote disclosures normally included in
financial statements that would have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the


                                       -9-

<PAGE>


Securities and Exchange Commission, although managment of the Company believes
that the disclosures in these financial statements are adequate to make the
information presented therein not misleading.  It is suggested that these
condensed financial statements and notes thereto be read in conjunction with the
financial statements and the notes thereto included in the Company's December
31, 1995 Form 10-KSB.

     The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1996.

          INCOME TAXES

     Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the adjusted bases of fixed assets and
patents for financial and income tax reporting.  The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable  or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.

          LOSS PER SHARE

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

3.        CAPITAL TRANSACTIONS AND LONG TERM DEBT

     The Company currently has public warrants outstanding as follows:  242,050
"B" warrants at $0.30 per share, 508,950 "C" warrants at $0.40 per share, and
710,000 "D" warrants at $0.50 per share.  From January 1, 1993 through March 31,
1996, 2,095,100 public warrants were exercised at $2,210,965 less transfer agent
fees of $24,800.  As of March 31, 1996, 1,461,000 publicly traded warrants may
potentially be exercised, which would generate approximately $631,195 additional
gross proceeds if all of such warrants are exercised. These warrants are
scheduled to expire June 30, 1996.  Exercise of the extended warrants is subject
to an effective registration statement with the Securities and Exchange
Commission.  Each class of the extended warrants also will be redeemable at any
time by  the Company (either separately or collectively) upon 30 days prior
notice to the warrant holders by the Company at $0.01 for each unexercised
warrant.  Each warrant entitles the holder thereof the right to purchase one
share of the Company's common stock.  In addition, there were other privately
held warrants outstanding as of March 31, 1996, to purchase a total of
14,151,889 shares of the Company's common stock at purchase prices per share
ranging from $0.10 to $4.00.


                                      -10-

<PAGE>


     In May 1993, Dr. Shell applied $44,064 of consulting fees due him from the
Company and executed a $60,186 promissory note to the Company representing the
value of 150,000 restricted  shares of the Company's common stock issued to the
Kavanagh estate on his behalf in connection with the settlement of certain
litigation in which he was a defendant.  The terms of the note provided for
interest at the rate of 6% per annum, or the maximum rate permitted by law,
whichever is lower, on the unpaid principal balance of such note, with all
unpaid principal and interest due and payable on May 24, 1994.  As of December
31, 1995, the balance of principal and interest of this note was $20,478 and the
Company has recorded a provision of doubtful accounts for that amount.  The
Company and Dr. Shell currently are negotiating the terms of her termination and
repayment of the balance of this note.

     In November 1994, the Company completed a private placement to foreign
investors in an offering under Regulation S of $900,000 one-year convertible
promissory notes in which it raised net proceeds of approximately $714,770.  The
notes are convertible, commencing four months from issue date, into Company
common stock at $1.20 per share plus 90-day warrants to acquire additional
shares at $0.01 per share in an amount equal to 40% of the shares issued upon
conversion.  The convertible promissory notes accrue interest at 8% per annum
which is payable quarterly.  The placement agent received warrants to purchase
157,500 shares of Company common stock at $2.00 per share over a three year
period valued at $7,875 which was recorded as deferred financing costs.

     In November 1995, $775,000 of these notes were converted into 6,328,000
shares of common stock, $50,000 of these notes were repaid and the balance of
$75,000 of these notes were extended to April 1996 under the original terms and
conditions.

     In November 1994, the Company concluded agreements under which Raifinanz
AG, Zurich, Switzerland ("RAI"), will assist the Company in securing strategic
partnering agreements for its products and technologies and will provide
financial advisory services to the Company.  This agreement was terminated in
November 1995.  In connection with these agreements, the Company issued 500,000
warrants to purchase shares issued under Regulation S over a three-year period
as follows:

Number of Warrants       Exercise Price      Vesting Date             Value
- ------------------       --------------      ------------             -----
     100,000                    $ .01        November 1994         $ 90,000
     100,000                      .86        November 1994            5,000
     150,000                     2.00        November 1994            7,500
     150,000             Market price        25,000 per month         7,500
                      on vesting date        for six months
                                             beginning in
                                             November 1994
     -------                                                       --------
     500,000                                                       $110,000
     -------                                                       --------


                                      -11-

<PAGE>


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

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


Number of Warrants       Exercise Price      Vesting Date             Value
- ------------------       --------------      ------------             -----
       50,000                 $  .01         December 1994         $ 45,000
      150,000                   1.00         December 1994            7,500
       50,000                   1.50             June 1995            2,500
       50,000                   2.00         December 1995            2,500

      -------                                                      --------
      300,000                                                      $ 57,500
      -------                                                      --------

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


Number of Warrants       Exercise Price      Vesting Date             Value
- ------------------       --------------      ------------             -----
      150,000                  $ .01         February 1995         $118,500
       50,000                    .75         February 1995            2,500
       50,000                   1.00           August 1995            2,500
       50,000                   1.50         February 1996            2,500


      -------                                                      --------
      300,000                                                      $126,000
      -------                                                      --------

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

     In May 1995, the Company issued 555,555 shares of restricted stock and
400,000 warrants to purchase restricted shares at $0.10 per share in exchange
for $100,000 to a current shareholder.  These warrants contain certain
registration rights.  During November 1995, 200,000 of these warrants were
exercised.

     In May 1995, the Company issued 200,000 warrants to purchase restricted
shares at $0.16 per share in lieu of compensation, to a current employee.  These
warrants contain certain registration rights.


                                      -12-

<PAGE>


     In May 1995, The Company authorized issuance of 5,200,000 warrants (of
which 1,560,000 immediately vested) to purchase restricted shares at prices
ranging from $0.30 to $0.50 per share, vesting over a 24-month  period, to
current officers and directors.  In January 1996, 3,950,000 of these warrants
were canceled and an additional 8,000,000 warrants were issued at $0.15 per
share which vest in June 1996 and contain registration rights.

     In June 1995, the Company issued 500,000 warrants to purchase restricted
shares at $0.50 in connection with private placements of Company securities.

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

     In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount of
$300,000 which were due to mature on December 31, 1995.  In order to fulfill the
Company's obligation to deliver shares of the Company's  common stock upon
conversion of the notes, an aggregate of 2,000,000 shares were issued under
Regulation S and were being held in escrow.  During September 1995, $100,000 of
these notes were converted into 549,448 shares of Company common stock.  In
October 1995, an additional $200,000 of these notes were converted into
1,716,736 shares of Company common stock.

     In October 1995, the Company entered into a third party advisory and
consulting agreement, effective as of May 1995.  In consideration of the
consulting services to be provided by a consultant to the Company under this
agreement, and for services previously rendered to the Company, the Company
issued to the consultant an aggregate of 1,000,000 warrants, which shall become
exercisable as follows:  600,000 warrants shall be immediately exercisable; an
additional 50,000 warrants shall become exercisable every three months from the
date of this agreement until the second anniversary of the date of this
agreement.  Each warrant shall be exercisable to purchase one share of common
stock of the Company at a purchase price of $0.35 per share.  Each warrant shall
be exercisable for a period of two years from the date of issue.  These warrants
contain demand registration rights.  In January 1996, the exercisable price of
these warrants was modified to $0.15.

     In October and November 1995, the Company issued 328,886 restricted shares
in exchange for settlement of $64,458 of accrued payables and professional fees.

     In November 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which it
raised proceeds of approximately $525,000 and issued 4,200,000 shares of
restricted stock.


                                      -13-

<PAGE>


     In November 1995, the Company issued 50,000 warrants to purchase restricted
shares of $0.30 per share in lieu of compensation, to a consultant.  These
warrants contain registration rights.

     In connection with a $150,000 debt offering in 1991 (which was re-paid in
March 1993), the Company had outstanding 150,000 basic warrants and 150,000
incentive warrants all exercisable at $1.00 per share.  The lenders subsequently
extended the original repayment schedule to March 1993 at the request of the
Company, in exchange for which exercise prices were modified to range from $0.30
to $1.00 per share and each of the outstanding basic and incentive warrant
agreements were increased to 225,000 warrants.  The basic warrants were to
expire on the later of December 31, 1995 or 12 months after the effective date
of the registration of stock underlying the warrants.  The incentive warrants
expire  90 days after the effective date of the registration of stock underlying
the warrants.  If all such underlying stock is registered and the warrants
subsequently exercised, additional gross proceeds of approximately $310,000
would be available to the Company.  Exercise of the basic and incentive warrants
is subject to an effective registration statement with the Securities and
Exchange Commission.  The basic and incentive warrants contain certain anti-
dilutive provisions.

     Pursuant to an Exchange of Stock Agreement and Plan of Reorganization dated
as of May 6, 1993, effective on June 30, 1993, the Company acquired all of the
outstanding capital stock of Venus Management, Inc. ("VMI") from Associated
Funding, Inc. and Diagnostics Resource Funding, Inc. (the then sole stockholders
of VMI) for an aggregate consideration of 1,000,000 restricted Company shares.
The assets of VMI consisted of two magnetic resonance imaging (MRI) systems (the
"Units").

     One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") currently is installed in a mobile van at an operating site in
Jefferson Valley, New York and has been in use since September 1992 and is
leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner is
Diagnostics Resource Funding.  This lease provides for monthly payments of
$37,926 to Venus Management, Inc. ("VMI") through August 1999 and $68,589 in
September 1999 (with such payments being guaranteed by Medical Funding of
America, Inc., "MFA"), and VMI is required to make monthly installment payments
(which includes interest at 10.5% per annum on the unpaid principal balance) for
the first Unit to a third party finance company of $32,360 through August 1999
and $68,589 in September 1999.  As of March 31, 1996, the balance of this debt
aggregated 1,250,991 (including interest currently due of $30,988) of which
$339,780 is due within the next twelve months.  This lease provides for a
purchase option at the expiration of the initial term of such lease equal to the
then fair market value of the first Unit.

     Tri-County was delinquent in making certain of its lease payments to VMI
under the terms of the lease agreement concerning the first Unit, and MFA failed
to make these payments to VMI under its guarantee of Tri-County's payments to
VMI.  Accordingly, VMI had not made certain payments due to the third party
finance company for the first Unit.  As a result, the third party finance
company commenced a lawsuit against MFA and the Company in which it sought
repayment in full of MFA's note to that company (the debt service on which was
to be serviced by


                                      -14-

<PAGE>


VMI) and return of the first Unit to that company.  The finance company
subsequently dismissed its lawsuit without prejudice.  Should Tri-County fail to
make its future lease payments to VMI and should VMI be unable to make its
future required payments to the finance company (i) VMI could lose ownership and
possession of the first Unit and (ii) the entire remaining balance of the MFA
note would become immediately payable, with VMI and the Company being liable,
together with MFA, for any deficiency in repayment of the note.

     As of March 31, 1996, Tri-County was delinquent in making the January,
February and March 1996 lease payments and MFA and VMI failed to make these
payments under their guarantee to the finance company which has issued a notice
of default.  In April, 1996 Tri-County negotiated a payment agreement with the
finance company to bring payments current by June 1996.

     The second of the two Units was never placed in service.  MFA had leased
the second Unit from VMI under a five-year lease.  The payments under this lease
were to commence as of January 27, 1994.  No payments were ever made under this
lease.  The lease provided for monthly payments of $30,030.

     Although VMI has commenced litigation against MFA for payment of delinquent
lease payments, there can be no assurance that MFA will be able to make any of
those required lease payments to VMI.  Receivables of $270,270 related to a
portion of these lease payments were written off during 1994 and none were
accrued for 1995 (note 4).  Depreciation on the second Unit commenced during the
first quarter of 1994.  This lease provides for a purchase option at the
expiration of the initial term of such lease equal to the then fair market value
of the second Unit, but not to exceed fifteen percent (15%) of the original
capitalized cost ($1,350,000), payable during the year following the expiration
of the initial term of such lease in twelve equal monthly payments.  This second
machine was abandoned in December 1995.  See also (Note 4) regarding litigation
with Johnson & Johnson Finance Corp.

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

4.        CONTINGENCIES

          LITIGATION

     The Securities and Exchange Commission's New York Regional and Enforcement
staff commenced an inquiry in December 1990 concerning possible securities
violations of the registration, anti-fraud, notice and reporting provisions
under various provisions of the federal securities laws that may have occurred
between July 1989 through January 1990 resulting from the actions of the Company
and certain members of its management during that period.  As part of a


                                      -15-

<PAGE>


settlement agreement, the Company, Dr. William Shell, and Philip Dascher, the
Company's former President, without admitting or denying any violations, and
without any finding of fact, consented in August 1992 to the entry of a
judgement for a permanent injunction enjoining them from further violations of
various provisions of the federal securities laws.  The settlement included a
rescission offer that was made by the Company to 17 individuals who had
previously exercised warrants to purchase the Company's common stock at a time
when a current registration statement was not in effect.  None of the
individuals, however, elected to exercise this right of rescission.

     In September 1993 Dr. Shell commenced an action against Dynamic Products,
Inc. ("Dynamic"), D & F Industries ("D&F") in his capacity as a 25% shareholder
of FATCO in the Orange County Superior Court of the State of California seeking
damages from these parties for their alleged breach of contract and
misappropriation of certain trade secrets of FATCO and the Company relating to
the first generation fat sequestrant product.  Dr. Shell has asserted in this
action that Dynamic has sold the first generation fat sequestrant product to
Herbalife for resale in the United States without the required payment of
royalties to FATCO (which is obligated to pay Dr. Shell 25% of its royalty
income, which Dr. Shell then contributes to the Company) based on those sales.
Dr. Shell and the Company have agreed to share the damages, if any, recovered by
Dr. Shell in this lawsuit on a basis to be negotiated by the Company and Dr.
Shell.  There can be no assurance that the defendants in this litigation in
response to Dr. Shell's action will not commence litigation against the Company
that will result in the Company incurring legal fees to defend such litigation.

     In October 1994, Dr. Shell filed a related lawsuit against FATCO in the
same court seeking the termination of a 1987 agreement between FATCO and Dr.
Shell licensing certain fat sequestrant technology of Dr. Shell to FATCO based
upon failure of FATCO to fully exploit the transferred technology for the
benefit of Shell, failure to fully exploit the products, knowingly permitting
sales of products made utilizing the technology transferred to continue even
though no royalties were being paid on those sales, refusing to pursue legal
action to collect the unpaid royalties and stopping the unauthorized sales, and
by entering into a renewal of an agreement with a distributor on the same
unfavorable terms which previously existed and which diverted monies which
should have been paid to FATCO to other entities owned and controlled by some of
the shareholders and members of the Board of Directors of FATCO.  FATCO has
filed a cross-complaint in this action against Dr. Shell alleging breach of the
licensing agreement between Shell  and FATCO.  The basis of this cross-complaint
appears to pertain to the license agreement between EHI and KCD, Inc.

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


                                      -16-

<PAGE>


     In December 1995, the Company elected to write-off the remaining net book
value of $964,282 for this MRI unit.

     In January 1996, FATCO filed a first amended cross-complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for breach of
contract, breach of fiduciary duty, interference with prospective economic
advantage, misappropriation of trade secrets, conversion, constructive trust,
accounting and permanent injunction.  Each of these causes of action relate to
the action of the Company is entering into the license agreement with KCD and
were in response to an action by Dr. Shell against FATCO.  The Company has filed
an answer denying all of the allegations contained in he cross-complaint and
intend to fully defend this matter.

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

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

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

     In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc. in Santa
Monica, California.  As part of the proposed settlement agreements the Company
agreed:  1) to pay Dr. See and Mr. Pizzulli starting in July 1995 a total of 3%
of the Company's net sales of products, and 30% of the Company's receipt of
royalties from the Company's licensees under certain patents owned by the
Company covering colored microspheres, contrast microspheres and fat sequestrant
product; 2) to pay to Dr. See and Mr.


                                      -17-

<PAGE>


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

     In addition, Mr. Pizzulli's claim for damages he alleged he suffered as a
result of the Company's timing to permit him to publicly resell up to 283,000
shares of the Company's common stock under Rule 144 is still being negotiated.

     In April 1995, Richard Willman and Nancy Holling sued Clark Holcomb, KCD
Incorporated, Dr. Shell and the Company in Superior Court for the County of
Ventura for rescission, breach of contract, breach of fiduciary duty, fraud,
negligent misrepresentation, constructive trust and negligence all regarding the
sales in July 1993  and September 1993 by Holcomb to Holling and Willman of
Company stock.  Willman and Holling allege general damages of $107,250 and
$4,275 respectively plus interest, as well as punitive damages in an amount to
be proven at time of trial.  In July 1995, the Company executed a Settlement
Agreement with Nancy Holling.

     There was no money demanded and none paid in connection with this
settlement.  The Company believes it has no obligation to Willman or Holling in
connection with this matter.  A trial date has currently been scheduled for
April 1996 with respect to Willman.   In April 1996, the Company agreed to pay
$5,000 in full settlement of the claim rather than go through the expense and
time required to defend the action in trial.

     In April 1995, David Eastman filed a complaint in the Superior Court of the
County of Orange, California against Clark Holcomb, Anita Kavanagh, Dr. Shell
and the Company.  This action alleges fraud, negligent misrepresentation,
rescission and restitution, securities fraud and conspiracy to defraud.  The
complaint seeks damages in the amount of $200,000 and punitive damages in an
unspecified amount.  Holcomb is alleged to have been acting as an agent of the
other defendants.  It is alleged that Holcomb represented that although the
shares purchased by the plaintiff contained a legend, they would be free trading
in sixty to ninety days.  It is also alleged that Holcomb misrepresented the
financial condition of the Company.  The complaint seeks damages in the amount
of $200,000 as well as unspecified punitive damages.  The Company and Dr. Shell
deny that Holcomb was their agent.  A trial date has currently been scheduled
for May 1996.

     In March 1995, Donald Seidel sued Clark Holcomb, Dr. Shell, George Berger
and the Company in the Superior Court for the County of Los Angeles, which was
served on the Company in May 1995.  This action alleges breach of contract,
fraud, non-payment for services, conspiracy to defraud, unjust enrichment and
conversion.  Plaintiff is seeking general and compensatory


                                      -18-

<PAGE>


damages of at least $692,000 and special and consequential damages of not less
than $170,000, together with exemplary and punitive damages.  It is alleged that
the Company conspired to defraud plaintiff of his shares of Company stock and
deprive him of payment for services.  The Company has denied these allegations.

     In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the Unites States District Court for the Central District of California
against Clark Holcomb, Lawrence Gibson, Murray Bettingen, Inc. and the Company.
This action alleges civil RICO, violation of the Securities Act of 1933,
violation of California Corporation Code, fraud, deceit and intentional
misrepresentation, negligent misrepresentation, conversion, constructive trust
and breach of contract.  The complaint seeks damages of $201,333, rescission,
punitive and exemplary damages.  The Company believes it has no obligation to
the Rudolf Steiner Research Foundation in connection with the matter.

     In March 1996, the Company, on behalf of its subsidiary EHI, filed an
action against KCD in Los Angeles County Superior Court.  This action alleges
causes of action against KCD for breach of the amended license, declaratory
relief and permanent injunction.  The action is based upon the failure of KCD to
pay the royalties due pursuant to the contract and their use of advertising
claims in connection with the sale of the licensed products which were in excess
of those which the Company authorized KCD to make.  On April 8, 1996, KCD filed
a cross-complaint against EHI, the Company, William Pelzer and William Shell.
This cross-complaint alleges causes of action against all of the named cross-
defendants for breach of written contract, negligence, intentional
misrepresentation, negligent misrepresentation, conversion, securities fraud,
rescission and constructive trust.  The Company denies all the allegations and
intends to vigorously defend this action.

     The Seattle Regional Office of the Federal Trade Commission has advised the
Company that the staff believes that the Company's sequestration product, which
was licensed to KCD, Incorporated under the brand name SeQuester-TM-, has been
improperly represented in advertising claims, and the same sequestrant product
previously marketed by the Company under the Lipitrol brand was also improperly
represented in advertising claims.  The staff indicated that it is prepared to
recommend that a complaint be filed against the licensee, the Company and
certain individuals in connection with the foregoing.  The Company and the FTC
staff have agreed upon the terms of a proposed settlement in this matter,
pursuant to which the Company would consent to a permanent injunction
prohibiting it from misrepresentations relating to weight loss or weight
reduction products or services, or with respect to tests or studies relating to
such programs or services.  In addition, the Company would pay consumer redress
to the FTC in an aggregate amount of $35,000 over a period of twelve months.
The proposed settlement must be approved by the Federal Trade Commission.

     Except as otherwise specifically indicated above, management believes that
the Company does not have any material liability for any lawsuits, settlements,
judgements or fees of defense


                                      -19-

<PAGE>


counsel which have not been paid or accrued as of March 31, 1996 and intends to
vigorously defend against these actions.

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

          TRANSACTIONS IN COMPANY SECURITIES

     In certain private placements of the Company's shares, a majority of which
were shares issued to a former Company director that subsequently became subject
to a possible court-ordered sale, a total of approximately 2,506,982 shares of
the Company's Common Stock were issued to a small number of individuals.  These
issuances were structured by the Company in reliance upon the advice of its then
securities counsel, and the Company believes that these issuances, standing
alone, would have qualified for exemptions from registration under federal and
state securities laws.  However, certain subsequent resales of these shares,
commencing in June 1992, by the original purchasers or their transferees to a
total of approximately 330 investors have raised an issue as to whether a
technical distribution occurred that might have required either the original
issuances or the resales to have been registered.  All of the foregoing resales
were either directly effected or arranged for by Clark Holcomb.

     The shares involved in the foregoing transactions have been included in a
registration statement filed with the Securities and Exchange Commission ("SEC")
in October 1993 so as to enable the holders of these shares to publicly resell.
The Company continued through 1994 to pursue having that filing become
effective, without success.  The holders of the shares involved in the
transactions described above, however, could have a right of rescission against
the persons from whom they acquired the shares or, under certain circumstances,
against the Company, if any of those transactions constituted a distribution
requiring registration.  The Company believes that such holders do not have a
valid and enforceable right to such rescission.  (The Company's belief is based
upon the opinion of its current special securities counsel, who has advised the
Company that, based on the facts known to such counsel and its analysis of the
applicable laws, such applicable statutes of limitation that might bar such
further claims, these shareholders could assert such claims, and the Company has
not set aside any reserves to fund any potential liabilities that it might incur
in connection with any such future potential claims, which could be material.
Should the Company incur any such liabilities, it might seek indemnification or
contribution for such liabilities from Mr. Holcomb or other third parties.
There can be no assurance, however, that the Company would be successful in
asserting any claim for indemnification or contribution or that Mr. Holcomb or
any other party required to provide such indemnification or contribution would
have adequate financial resources to do so.  Any attempt by the Company to
obtain indemnification or contribution from Mr. Holcomb could have a material
adverse effect upon the Company's relationship with KCD (which is an affiliate
of Mr. Holcomb) under its license agreement with


                                      -20-

<PAGE>


KCD, which might elect to terminate, or improperly withhold payments, under the
license agreement under these circumstances.

     In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action against the
Company and Dr. William Shell for alleged violations of the registration
provisions of the federal securities laws.  The alleged violations appear to
relate to the sale of the Company of unregistered shares of its common stock
which involved a series of resales of these shares that were either directly
effected or were arranged for by Clark Holcomb.  These transactions have been
the subject of an SEC investigation previously disclosed by the Company.

     The Company is seeking to dissuade the SEC from taking formal action
against the Company but believes that it is likely that the SEC will seek
permanent injunctive relief.  In that event, the Company would attempt to enter
into a consent decree with the SEC in which the Company, without admitting or
denying any wrongdoing, would be enjoined from violating the registration
provisions of the federal securities laws in the future.  However,  it also is
possible that the SEC could seek to impose significant monetary penalties on the
he Company or to require the Company to offer recission to the purchasers of
some or all of the shares involved in he unregistered transactions.  Although
the Company believes it is not likely that these additional forms of relief
would be imposed upon the Company, any such additional relief imposed could have
a materially adverse effect upon the Company.  The Company also is not in a
position to predict what, if any, additional remedies the SEC might seek against
Dr. Shell.  The Company and Dr. Shell are subject to a 1992 permanent injunction
enjoining them from violating the federal securities laws.

     While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice of
legal counsel believes, on the basis of the facts currently known, that it is
not probable that the Company would have any material liability.

5.        COMMITMENTS

          EMPLOYMENT CONTRACTS

     On May 11, 1995, the Board of Directors approved terms of employment for
the following individuals:

STEVEN WESTLUND - PRESIDENT AND CHIEF EXECUTIVE OFFICER

     Mr. Westlund received a two-year employment contract.  As soon as the
     Company has sufficient cash flow he will receive $6,000 per month.  This
     amount will be increased up to a maximum of $15,000 per month as cash flow
     allows.  Mr. Westlund will also acquire warrants for one million shares of
     Company stock vesting over a five year period.


                                      -21-

<PAGE>


WILLIAM E. SHELL, M.D. - CHIEF SCIENTIFIC OFFICER

     Dr. Shell received a two-year employment contract and receives a salary of
     $6,000 per month.  As soon as the Company has sufficient cash flow, this
     amount will be increased up to a maximum of $15,000 per month.  Dr. Shell
     will also acquire warrants for one million five hundred thousand shares of
     Company stock vesting over a five year period.  In February 1996, Dr.
     Shell's employment with the Company was terminated by the Company.

RICHARD N. SHELL - VICE PRESIDENT AND GENERAL COUNSEL

     Mr. Shell received a two-year employment contract and receives a salary of
     $6,000 per month.  As soon as the Company has sufficient cash flow, this
     amount will be increased up to a maximum of $10,000 per month.  Mr. Shell
     will also acquire warrants for one million shares of Company stock vesting
     over a five year period.  Effective January 1, 1996, Mr. Shell resigned
     from the Company.

PETER BENZ - FINANCIAL CONSULTANT/CHIEF FINANCIAL OFFICER

     Mr. Benz received a two-year employment contract.  As soon as the Company
     has  sufficient cash flow, he will receive $4,000 per month.  Mr. Benz will
     also acquire warrants for seven hundred thousand shares of Company stock
     vesting over five years.  In October 1995, Mr. Benz was named President of
     the Company.

          RESEARCH AND LICENSE AGREEMENTS

     In January 1996, the Company entered into a broad based, long-term
agreement with E-Z-EM, Inc. ("E-Z-EM") for clinical testing of the Company's
contrast microspheres.  Under the terms of the agreement, E-Z-EM will commence
clinical testing and provide funding for phase one animal studies.  During phase
two, E-Z-EM will analyze the impact of regulatory costs and expenses in
preparation for capital funding to conduct FDA approved clinical trial (IND).
The agreement establishes the Company as the product manufacturer, which E-Z-EM
has an option for an exclusive license (including the right to sub-license) to
al products developed under the patent and the rights to global sales and
marketing of the products and related services for the life of the patent or 10
years, whichever is longer.

6.        INCOME TAXES

     The components of the income tax provision charged to operations were:



                                      -22-

<PAGE>


<TABLE>
<CAPTION>
 <S>                                                           <C>
  Current:
    Federal                                                     $    0
    State                                                        3,200
                                                                ------
                                                                $3,200

  Deferred:
    Net change in deferred tax asset                            $    0
    Net change in deferred tax liability                             0
                                                                ------
                                                                $3,200
</TABLE>

     The following reconciles the federal statutory income tax rate to the
effective rate of the provision for income taxes:

<TABLE>
<CAPTION>
 <S>                                                            <C>
  Federal statutory rate                                         34.0%
  Increases (decreases):
  State tax, net of
  Federal income tax benefit                                     (0.1%)
  Increase in valuation allowance                                34.0%
                                                                 -----
                                                                 (0.1%)
                                                                 -----
                                                                 -----

The principal components of deferred tax assets were:

  Inventory capitalization                                 $   216,136
  Net operating loss carryforwards                           5,181,123
  Less: Valuation allowance                                 (5,183,990)
                                                           -----------
                                                           $         0
                                                           -----------
                                                           -----------
</TABLE>

     At December 31, 1995, the Company has available to offset future federal
and state income taxes, net operating loss carryforwards of $13,196,622 and
$6,426,349, respectively.  These loss carryforwards expire as follows:

<TABLE>
<CAPTION>

  Years Ending December 31                      Federal          State
  ------------------------                      -------          -----
         <S>                                 <C>                <C>
          1996                                                   $  223,185
          1997                                                    1,811,522
          1998                                                    1,607,410
          1999                                                      876,570
          2000                                                    1,907,662
          2001
          2002                                   16,140
          2003                                  327,786
          2004                                  446,370
</TABLE>


                                      -23-

<PAGE>


<TABLE>
<CAPTION>

         <S>                                 <C>                <C>
          2005                                1,877,693
          2006                                  777,716
          2007                                  967,634
          2008                                3,214,821
          2009                                1,753,139
          2010                                3,815,323
          2011                                  249,991             124,996
                                            -----------          ----------
                        TOTAL               $13,446,613          $6,551,345
                                            -----------          ----------
                                            -----------          ----------
</TABLE>

     U.S. tax rules impose limitations on the use of net operating losses
following certain changes in ownership.  If such a change were to occur, the
limitation could reduce the amount of these benefits that would be available to
offset future taxable income each year, starting with the year of ownership
change.


                                      -24-

<PAGE>


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

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

RESULTS OF OPERATIONS

 QUARTER ENDED MARCH 31, 1995 COMPARED TO MARCH 31, 1996

<TABLE>
<CAPTION>
                                                                     For the Three Months Ended
                                                                              March 31
                                                                              --------
                                                                1995                         1996
                                                                ----                         ----
                                                                       % of                         % of
                                                            $        revenues             $       revenues
                                                           ---       --------            ---      --------

<S>                                                     <C>           <C>             <C>           <C>
Revenues - Products and Services
  Microspheres and laboratory services . . . . . .       $ 65,593       23%            $ 71,823       45%
  Fat sequestrant -  . . . . . . . . . . . . . . .        219,006       77%              90,000       55%
                                                         --------      ----            --------      ----

                                                         $284,599      100%            $161,823      100%
                                                         --------      ----            --------      ----

Cost of Revenues - Products and Services
  Microspheres and laboratory services . . . . . .       $ 34,980       53%            $ 37,845       53%
  Fat sequestrant - Products . . . . . . . . . . .         12,541        6%                -           -
                                                         --------                      --------
                                                         $ 47,521       17%            $ 37,845       23%
                                                         --------                      --------
Gross Margin - Products and Services . . . . . . .       $237,078       83%            $123,978       77%
                                                         --------      ----            --------      ----
                                                         --------      ----            --------      ----

Revenues - Lease Rentals . . . . . . . . . . . . .       $113,779      100%            $ 97,081      100%
Cost of Revenues - Lease Operations. . . . . . . .        120,339      106%             120,339      124%
                                                         --------      ----            --------      ----
Gross Margin - Lease Operations. . . . . . . . . .       $ (6,560)      (6)%           $(23,258)     (24)%
                                                         --------      ----            --------      ----
                                                         --------      ----            --------      ----
</TABLE>

     For the three months ended March 31, 1996, revenues from products and
services were $161,823, a  decrease of $122,776 (or 56%) over the three months
ended March 31, 1995.  The decrease in 1996 over 1995 was primarily due to a
decrease in royalties for the fat sequestrant technology which were earned
during the first quarter of 1996.


                                      -25-

<PAGE>


     In March 1994, the Company entered into a license agreement, which was
amended in May 1995, for the fat sequestrant product technology in the United
States and Canada with KCD Incorporated ("KCD"), a company which has access to
the major domestic retail pharmacy  and health food chains.  Through March 31,
1996, the Company had received from KCD licensing fees and royalties of
$841,068, 100,000 KCD restricted common shares ($217,243) and had earned
additional royalties of $138,620.  KCD advised the Company that during the
period April 1994 through December 1995, net sales of the product covered under
the license have approximated $8,500,000 at wholesale value.  In March 1996, the
Company terminated the license agreement with KCD and reserved all receivables
from KCD as uncollectible.  The Company is currently developing an advanced fat
sequestrant product and is seeking new distributors for that product.

     Revenues from microspheres and related laboratory services increased $6,230
(or 9.5%) for the quarter ended March 31, 1996 over 1995.  The increase is due
to completion of an entirely new, more cost effective automated color
microsphere counting system employing flow cytometry technology through an OEM
relationship.

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

     MRI lease operations resulted in a net loss of $304,290 and a net loss of
$620,123 for the years ended December 31, 1995 and 1994, respectively.  Lease
revenues of $687,459 for 1994  which included two MRI units, (the Company
believed the second had no associated debt obligations) were offset by interest
on lease obligations of $143,750 and depreciation on the two units of $481,356.
Cash flows from lease revenues for one of the two units owned by VMI are offset
in full by required payments of interest and principal to a third party finance
company.  Lease revenues do not contribute any cash to Company operations.
Lease revenues for 1994 include $270,270 of delinquent payments with respect to
the second unit owned by VMI, for which none of the scheduled lease payments
have been received by VMI.   Receivables related to these lease payments were
written off during 1994. In August 1994, VMI commenced litigation to collect
delinquent lease payments with respect to this unit. Lease revenues for  1995
were $319,072  which includes only one unit, were offset by interest on lease
obligations of $142,005 and depreciation on the two units of $481,357.

     Of the Company's two magnetic resonance imaging (MRI) systems (the "Units")
one is currently installed and operating as a mobile unit in Jefferson Valley,
New York and has been in continual use since September 1992 and is leased to
Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner is Diagnostics
Resource Funding.  This lease provides for monthly payments of $37,926 to Venus
Management, Inc. ("VMI") through August 1999 and $68,589 in September 1999 (with
such payments being guaranteed by Medical Funding of America, Inc. "MFA"), and
VMI is required to make monthly installment payments (which includes interest at
10.5% per annum on the unpaid principal balance) for the first Unit to a third
party finance company of $32,360 through August 1999 and $68,589 in September
1999.


                                      -26-

<PAGE>


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

     The Company's position is MFA had no authority to secure the foregoing loan
with VMI's MRI unit since the loan was made solely for the benefit of MFA, the
lien was placed on the he MRI unit without VMI's knowledge or consent, and none
of the loan proceeds were received by VMI or the Company.  VMI and the Company
are in settlement discussions with J&J that would require the Company and VMI to
forfeit their interest in the MRI unit in exchange for J&J releasing VMI and the
Company from any damages.  Although the Company believes VMI is entitled to
recover the MRI unit from J&J Finance and that VMI should prevail in its claims
against MFA should J&J Finance be permitted to retain the MRI unit, there can be
no assurance that VMI will prevail against either party or that VMI will be able
to collect any judgement that it may obtain against MFA.  As a result of the
foregoing, the Company has written off the net book value of the second unit of
$964,286 as of December 31, 1995.  VMI has commenced litigation against MFA for
payment of delinquent lease payments, there can be no assurance that MFA will be
able to make any of those required lease payments to VMI.  Receivables of
$270,270 related to a portion of these lease payments were written off during
1994 and none were accrued for 1995.

     For the quarter  ended March 31, 1996, total operating expenses were
$512,083 compared to $980,344 for 1995.  Total expenses for the quarter ended
March 31, 1996, included selling, general and administrative (SG&A) of $346,548,
cost of revenues for products and services of $37,845, cost of revenues for
lease operations of $72,126 and research and development of $55,564,  compared
to $708,039 (SG&A), cost of revenues for products and services of $47,521, cost
of revenues for lease operations of $120,339 and research and development of
$104,445, in 1995.

     The overall cost of revenues for products and services as a percentage of
sales increased for the first quarter of 1996 to 23% from 17% for 1995.
Increases in cost of revenues for the first quarter of 1996 resulted primarily
from decrease in royalties from KCD.

     Research and development expense decreased to $55,564 from $104,445 for the
quarter ended March 31, 1996 from 1995 due to a planned decrease in Dr. Shell's
research support services.

     During 1994, the Company enhanced its production capability for contrast
microspheres for clinical trial purposes.  The Company has identified four
specific imaging applications for its technology and initiated development on
two of them.  These products include a contrast
microsphere to CAT scan and detect lung blood clots (pulmonary emboli), an
ultrasound contrast microsphere for detection of heart perfusion (myocardial
perfusion), an MRI contrast microsphere for abdominal visualization and a
contrast microsphere to compete with liquid x-ray contrast media.  The Company
anticipates that any increases in research and development resources during 1996
will be devoted primarily to these projects.


                                      -27-

<PAGE>


     SG&A expense decreased to $346,548 from $708,039 for the first quarter of
1996, from 1995 amounting in a reduction of approximately $361,491 or 51%.
Results were from restructuring and down sizing of operations which includes
significant reductions in accounting fees, salaries, wages, selling and
marketing expenses, and shareholder expenses all of which were phased in
beginning in June 1995.  Included in 1995 are non-cash expenditures for
amortization of prepaid consulting fees of $371,375 for shareholder services.
In addition, the Company incurred officers' and directors' fees of $92,000
during 1995.  The Company experienced increases in legal fees of $160,917 during
1995 due primarily from matters related to the SEC investigation of Clark M.
Holcomb's activities.  Included in 1994 are $220,420 of non-recurring financial
consulting and legal fees.  These fees were paid to unaffiliated third parties
for (i) services in the areas of shareholder and financial public relations paid
in the form of 55,000 shares of the Company's common stock and warrants to
purchase an additional 107,500 shares of such stock, (ii) legal services
rendered paid in the form of 36,000 shares of the Company's common stock and
warrants to purchase an additional 36,000 shares of such stock, and (iii)
services in connection with a private placement of Company common stock paid in
the form of warrants to purchase an additional 305,00 shares of such stock.
Also included in 1994 is a provision for non-collectible lease revenues
receivable of $270,270.

     Interest expense for operations for the first quarter of 1996 was $2,268
compared to $123,874 for 1995, a decrease of $121,606. The first quarter of 1996
included non-cash expenditures for amortization of deferred financing costs of
$103,278 incurred in connection with financial advisory services and a private
placement of convertible notes in November 1994 as well as accrued interest on
such notes of $18,000.

     Interest income decreased to $3,130 for the first quarter of 1996 compared
to $20,394 for 1995 due to interest earned on an outstanding note receivable
from a shareholder, an outstanding note receivable from the sale of stock and
delinquent royalties receivable.

     No provision was made for Federal income tax since the Company has incurred
significant net operating losses from inception. Through December 31, 1994, the
Company incurred net operating losses for tax purposes of approximately
$9,700,000 and approximately $11,420,000 for accounting purposes. Differences
between accounting and tax losses consist primarily of differences in the
accounting and tax treatment of depreciation, allowance for doubtful accounts
and research and development expenses. The net operating loss carry forward may
be used to reduce taxable income through the year 2008. The Company's tax
returns have not been audited by the Internal Revenue Service. The carry forward
amounts may therefore be subject to audit and adjustment. As a result of the Tax
Reform Act, the availability of net operating loss carry forwards can be
deferred, reduced or eliminated under certain circumstances. Net operating
losses in the State of California were not available for use during 1992 and the
carry forward period has generally been reduced from fifteen years to five years
beginning in 1993.


                                      -28-

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     Since the inception of S/S, the Company has received capital for operations
and research from private investors, issuance of private party debt, bank
financing, and from licensing and product sales.  Revenues have been
insufficient to cover operating expenses, research and development, costs of
litigation, construction costs, and patent development, which costs have been
unnecessarily well above the revenues from licensing and product sales.  The
Company, therefore, has been dependent on private placements of securities, bank
debt, loans from private investors and the exercise of warrants in order to
sustain operations.  To correct this imbalance management made significant cuts
and changes in the Company's operations resulting in reduced 1995 operating
expenses approximately $1,066,359 (or 34%) compared to 1994.  However, until
such time as the Company can increase revenues the Company will continue to be
dependent on private or institutional investment capital to support a percentage
of the planned 1996 operations.  Historically, the Company has been able to
generate private placement funds to provide capital for operations and growth.
During 1995, new management was responsible for approximately $965,348 received
by the Company from August through the balance of the year from private
placements, and the conversion of approximately $839,458 of Company debt from a
previous private placement.  However, there can be no assurances that private or
other capital will continue to be available, or that revenues will increase to
meet the Company's cash needs, and there can be no assurance that a sufficient
amount of the Company's securities can or will be sold or that any warrants will
be exercised to fund any operating needs of the Company or its research and
development programs.  (Even assuming all of the warrants outstanding as of
December 31, 1995 with exercise prices at or below the current market price of
the common stock were to be exercised, the total gross proceeds to the Company
from such exercise would be insignificant).

     The Company's consolidated financial statements have been prepared on the
assumption the Company will continue as a going concern.  The Company has
suffered recurring losses from operations, has an accumulated deficit and has
negative working capital, and faces significant product development and
distribution issues that raise substantial doubt about its ability to continue
as a going concern.  Management's plans in regard to these matters are described
below.  The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount of
liabilities that might result should the Company be unable to continued as a
going concern.

     In April 1994, the Company completed a private placement of its securities
to foreign investors in an offering under Regulation S in which it raised net
proceeds of approximately $640,000.  In November 1994, the Company completed a
private placement to foreign investors in an offering under Regulation S of
$900,000 one year convertible promissory notes in which it raised net proceeds
of approximately $715,000.  In November 1995 the Company (i) $775,000 of these
notes were converted into 6,328,000 shares of Company common stock (ii) $50,000
of these notes were repaid.  The remaining $75,000 of these notes were extended
for an additional six month period.


                                      -29-

<PAGE>


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

     In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount of
$300,000 which mature on December 31, 1995.  In order to fulfill the Company's
obligation to deliver shares of the Company's common stock upon conversion of
the notes, an aggregate of 200,000 shares have been issued under Regulation S
and are being held in escrow.  During September 1995, $100,000 these notes were
converted into 549,448 shares of Company common stock.  In October 1995, an
additional $200,000 of these notes were converted into 1716,736 shares of
Company common stock.

     In October and November 1995, the Company issued 328,886 restricted shares
in exchange for settlement of $64,458 of accrued payables and professional fees.

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

MANAGEMENT'S 1996 PLAN OF OPERATIONS

     THE NEED FOR A PLAN

     The Company has lost money since its formation.  As of December 31, 1995,
the Company had an accumulated deficit of $15,398,146 and negative working
capital of $1,256,610.  To survive, the Company has depended on capital from
private investors, issuance of private party debt, and bank financing to fund
operations.  Historically, the Company has been able to generate funds from
private placements to provide capital to help sustain operations and for growth,
including approximately $965,348 received by the Company from August 1995 to
December 1995.  However, the accumulative effect of the continuing losses became
evident in April 1995 when investors withdrew a private placement commitment.
In the future raising investment capital to fund losses will become impossible
unless the Company can reduce expenses and increase revenues.

     OBJECTIVES OF THE PLAN

     Beginning in May 1995, the Company's newly installed management began
developing a plan intended to move the Company away from its dependence on
investment capital and toward profitability.  Management began by making
significant cuts in the Company's operational expense, the effect of which began
in June 1995, and resulted in an overall decrease of 1995 operating


                                      -30-

<PAGE>


expenses of approximately $1,066,359, or 34% as compared to 1994. However, that
in itself is only a bandaid.  What is needed is an overhaul.  Management
developed the operational plan described below:

     1.   make significant and lasting reductions in general and administrative
          costs while centralizing administrative operations, temporarily reduce
          spending on all research and development programs not directed at
          producing immediate revenues; and,
     2.   reorganize all Company subsidiaries to operate as profit centers by
          cost cutting, elimination of duplicate general and administrative
          costs; and,
     3.   secure existing revenue base by eliminating licensees default; and
     4.   increase revenues from existing products; and,
     5.   develop new markets for existing products; and,
     6.   develop new products for existing and new markets; and,
     7.   develop strategic partners for distribution, sales and marketing,
          research and development, commercialization of products; and develop
          alternative research and development financing sources such as U.S.
          government sponsored research grants; and,
     8.   develop investment banking and public relation alliances; and
     9.   make strategic acquisitions of consumer products companies.

     RESULTS OF THE PLAN (As of April 10, 1996)

     The plan described above was phased in beginning in June 1995.  The Company
accomplished the majority of the goals set out in the plan including (1) the
Company made significant and lasting reductions in G&A, temporarily halted all
research and development, which it later resumed in order to manufacture
contrast microspheres for pre-clinical testing required as a result of a
strategic agreement signed with E-Z-EM; and, (2) reorganizing the E-Z Trac
subdivision to operate as a profit center; and (3) secured sequetrant licensing
revenues (temporarily, KCD defaulted again and was terminated); and, (4)
increased E-Z Trac revenues (KCD was terminated); and, (5) began studying the
feasibility of adapting the colored microsphere products for commercial
pathology applications; and (6) began development on a series of new products in
October 1995, which the Company announced completion of first stage development
of those products in March 1996; and (7) signed a strategic agreement with E-Z-
EM to develop contrast microspheres for commercial applications; and, (8)
applied for and received a research grant from the National Institute of Health
("NIH"); and (9) began developing investment banking relationships, however, no
such relationship has been established to date; and (10) developed two
potential consumer product companies as acquisition candidates.  Additionally,
the Company raised approximately $965,348 from private placements from August
1995 to December 1995.  From January 1, 1996 to April 10, 1996, the Company has
raised $200,000 in one private placement, $150,000 of a $500,000 commitment of a
second private placement with the balance to fund in May, and received a
commitment for a third private placement of $500,000 to close on April 28, 1996
with an option of a second $500,00 to fund prior to December 31, 1996.  The
Company also


                                      -31-

<PAGE>


expects $100,000 to be funded from the National Institute of Health grant, with
$750,000 more conditioned on the success of phase one.

     As of March 31, 1996, the Company's working capital position decreased by
$183,450 from a negative $1,242,016 at December 31, 1995 to a negative
$1,425,466, primarily as a result of increases in accrued compensation and
payroll taxes, professional services payable, trade payables and other accrued
expenses as well as increases in the allowance for doubtful accounts.  At March
31, 1996, the Company's cash position had decreased to $170,552 from $374,128
December 31, 1995.

     Negative cash flow from operations for the quarter ended March 31, 1996 of
$286,505 was reduced by non-cash charges of $121,128 for depreciation and
amortization.   Negative cash flow from operations for the quarter ended March
31, 1995 of $721,630 was reduced by non-cash charges of $324,595 for
depreciation and amortization, and $30,000 for research and development.
Negative cash flow from operations after reduction for non-cash charges was
$165,377 and $367,035 for the quarters ended March 31, 1996 and 1995.

     At March 31, 1996, the Company had assets of $2,095,724 compared to
$2,439,606 on December 31, 1995.  In addition, the Company had a total
shareholders' equity of $(498,355) on March 31, 1996 compared to $(282,419) on
December 31, 1995, a decrease of $215,936.  The decrease was the result of a net
loss from operations of $286,505 offset by the issuance of common stock valued
at $70,569.    Payments on a long term note with a balance of $1,220,003
(including interest currently due of $30,988) as of March 31, 1996 of which
$348,436 is due within the next twelve months had been assumed by the Company as
part of its acquisition of VMI;  this note is secured by guaranteed lease
payments of an equivalent amount.


                                      -32-

<PAGE>


ITEM 3.   LEGAL PROCEEDINGS

     SEC PROCEEDINGS

     In 1990, the Securities and Exchange Commission's New York Regional and
Enforcement staff commenced an inquiry into possible securities violations of
the registration, anti-fraud, notice and reporting provisions under various
provisions of the federal securities laws that may have occurred between July
1989 through January 1990 resulting from the actions of the Company and certain
members of its management during that period.   As part of a settlement
agreement, the Company, Dr. Shell, and Philip Dascher, the Company's former
President, neither admitted nor denied any violations, and without any findings
of fact consented in August 1992 to the entry of a judgement for a permanent
injunction enjoining them from violations of various provisions of the federal
securities laws.  The settlement included a rescission offer that was made by
the Company to 17 individuals who had previously exercised warrants to purchase
the Company's common stock at a time when a current registration statement was 
not in effect.  None of the individuals, however, elected to exercise this right
of rescission.

SEC AND SHAREHOLDER PROCEEDINGS RELATING TO MATTERS DIRECTLY BY EFFECTED BY OR
ARRANGED BY CLARK M. HOLCOMB

     In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors who's purpose was to determine whether
certain prior private placements of the Company's securities complied with all
of the registration requirements of federal and state securities laws.  In
certain prior private placements of the Company's shares, a total of
approximately 2,506,982 shares of the Company's common stock was issued to a
smaller number of individuals.  Those issuances were structured in reliance upon
the advice of the Company's then securities counsel, and the Company believes
that these issuances, standing alone, would have qualified for exemptions from
registration under federal and state securities laws.  However, certain
subsequent resale's of these shares, commencing in June 1992, by the original
purchasers or their transferees to a total of approximately 330 investors raised
an issue as to whether a technical distribution occurred that might have
required either the original issuances or the resales to have been registered.
All of the foregoing resales were either directly effected or arranged for by
Clark M. Holcomb.

     In October 1993, the Company filed a registration statement with the SEC to
register all of the foregoing 2,506,982 shares with the SEC.  However, even if
the registration statement becomes effective so as to permit public resales by
the holders of the shares involved in the transactions described above, these
holders could have a right of rescission to recover the purchase price they paid
for their shares plus interest from the date of purchase against the persons
from whom they acquired the shares.


                                      -33-

<PAGE>


     The Company believes (based in part upon the opinion of its current special
securities counsel) that these holders do not have a valid and enforceable right
to such rescission. However, subject to any applicable statutes of limitation
that might bar such future claims, these shareholders could assert such claims,
and the Company has not set aside any reserves to fund any potential liabilities
that it might incur in connection with any such future potential claims, which
could be material.  Should the Company incur any such liabilities, it might seek
indemnification or contribution for such liabilities from Mr. Holcomb or other
third parties.

     In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action against the
Company and Dr. William Shell for alleged violations of the registration
provisions of the federal securities laws. The alleged violations appear to
relate to the sale by the Company of unregistered shares of its common stock
which involved a series of resales of these shares that were either directly
effected or were arranged for by Clark Holcomb. These transactions have been the
subject of an SEC investigation previously disclosed by the Company.

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

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

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


                                      -34-

<PAGE>


Company denies the allegations and intends to contest the matter.  A trial date
was scheduled  for April 1996 with respect to Willman, however, in a mandatory
settlement conference in March 1996, Clark M. Holcomb and the Company entered
into a settlement with Willman in which Holcomb agreed to pay Willman $100,000
in cash and to deliver to Willman 50,000 shares of restricted KCD common stock.
In addition, Holcomb had previously delivered to Willman 40,000 shares of the
Company's common stock which Willman will be permitted to retain as part of the
settlement.  The Company agreed to pay $5,000 in full settlement of this claim
rather than go through the expense and time required to defend the action in
trial.  In July, 1995, the Company executed a Settlement Agreement with Nancy
Holling.  There was no money demanded and none paid in connection with this
settlement. The Company believes it has no obligation to Willman or Holling in
connection with this matter.

     In April 1995, David Eastman filed a complaint in the Superior Court of the
County of Orange, California against Clark Holcomb, Anita Kavanagh, Dr. Shell
and the Company. This action alleges fraud, negligent misrepresentation,
rescission and restitution, securities fraud and conspiracy to defraud. This
action was served on Dr. Shell and the Company in July 1995. The only
allegations of wrong doing are directed at Holcomb and Holcomb is alleged to
have been acting as an agent of the other defendants. It is alleged that Holcomb
represented that although the shares purchased by the plaintiff contained a
legend, they would be free trading in sixty to ninety days. It is also alleged
that Holcomb misrepresented the financial condition of the Company.  The
complaint seeks damages in the amount of $200,000 as well as unspecified
punitive damages.  The Company and Dr. Shell deny that Holcomb was their agent.
A trial date has currently been scheduled for May 1996.  The Company denies the
allegations and intends to vigorously contest the matter.  In February 1996,
Eastman obtained a default judgement against Holcomb in the amount of $200,000
in compensatory damages and $50,000 in punitive damages.

     In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the United States District Court for the Central District of California
against Clark M. Holcolm, Lawrence Gibson, Murray Bettingen, Bettingen, Inc.,
and the Company.  This action alleges civil RICO, violation of the Securities
Act of 1933, violation of California Corporation Code, fraud, deceit and
intentional misrepresentation, negligent misrepresentation, conversion,
constructive trust and breach of contract.  The complaint seeks damages of
$201,333, rescission punitive and exemplary damages.  The Company believes it
has no obligation to the Rudolf Steiner Research Foundation in connection with
the matter.  The Company denies the allegations and intends to vigorously
contest the matter.

     The Company is negotiating with the SEC regarding a potential settlement of
any SEC claims against the Company with respect to the above transactions.  The
Company anticipates that the settlement would require the Company to consent to
a permanent injunction, without admitting or denying any liability, that would
bar the Company from any future violations of the registration requirements of
the federal securities laws.  The Company believes that such a settlement would
not have a materially adverse effect on the Company or its operations.  However,
there can be no assurance that a settlement as described above (or a settlement
with any other terms) will ultimately


                                      -35-

<PAGE>


be reached with the SEC. The Company and Dr. Shell are subject to a 1992
permanent injunction enjoining them from violating the federal securities laws.

PROCEEDING RELATED TO LICENSING AGREEMENTS, MANUFACTURING AGREEMENTS, ROYALTY
AGREEMENTS, AND PATENT INFRINGEMENTS

     In September 1993, Dr. Shell commenced an action against Dynamic Products,
Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25% shareholder of
FATCO in the Orange County Superior Court of the State of California seeking
damages from these parties for their alleged breach of contract and
misappropriation of certain trade secrets of FATCO and the Company relating to
the first generation fat sequestrant product. Dr. Shell has asserted in this
action that Dynamic has sold the first generation fat sequestrant product to
Herbalife for resale in the United States without the required payment of
royalties to FATCO (which is obligated to pay Dr. Shell 25% of its royalty
income, which Dr. Shell then contributes to the Company) based on those sales.

      In October 1994, Dr. Shell filed a related lawsuit against FATCO in the
same court seeking the termination of a 1987 agreement between FATCO and Shell
licensing certain fat sequestrant technology of Dr. Shell to FATCO based upon
failure of FATCO to fully exploit the transferred technology for the benefit of
Shell, failure to fully exploit the products, knowingly permitting sales of
products made utilizing the technology transferred to continue even though no
royalties were being paid on those sales, refusing to pursue legal action to
collect the unpaid royalties and stopping the unauthorized sales, and by
entering into a renewal of an agreement with a distributor on the same
unfavorable terms which previously existed and which diverted monies which
should have been paid to FATCO to other entities owned and controlled by some of
the shareholders and members of the Board of Directors of FATCO. FATCO has filed
a cross-complaint in this action against Shell alleging breach of the licensing
agreement between Shell and FATCO.

     In January 1996, FATCO filed a First Amended Cross-Complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for breach of
contract, breach of fiduciary duty, interference with prospective economic
advantage, misappropriation of trade secrets, conversion, constructive trust,
accounting and permanent injunction.  Each of these causes of action relate to
the action of the Company in entering into the License Agreement with KCD.  The
Company has filed an answer denying all of the allegations contained in the
Cross-Complaint and intend to fully defend this matter.  The basis of this cross
complaint appears to pertain to the license agreement between EHI and KCD, Inc. 
which as of March 1, 1996 was canceled as a result of KCD's failure to make 
royalty payments to the Company.

     In March 1994, the Company and S/S sued Herbalife (settled with respect to
Herbalife) and D&F in Superior Court for the County of Orange, California for
fraud, breach of contract and conspiracy to misappropriate trade secrets. The
Company alleges in this lawsuit that S/S provided certain confidential
information and trade secrets to D&F, which misappropriated this information to
manufacture an advanced fat sequestrant product. The Company is seeking in this
lawsuit


                                      -36-

<PAGE>


injunctive relief and damages in an unspecified amount from defendants. This
matter has been consolidated for trial with the action against Dynamic Products,
Inc. and the action against the officers and Directors of Dynamic Products, Inc.
and D&F Industries, Inc..

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

     In March 1996, the Company, on behalf of its subsidiary EHI, filed an
action against KCD in Los Angeles County Superior Court.  This action alleges
causes of action against KCD for breach of the amended license, declatory relief
and permanent injunction.  The action is abased upon the failure of KCD to pay
the royalties due pursuant to the contract and their use of advertising claims
in connection with the sale of the licensed products which were in excess of
those which the Company authorized KCD to make.  On April 8, 1996, KCD filed a
cross complaint against the Company, Effective Health, Dr. Shell and William
Pelzer alleging causes of action for breach of contract, breach of implied
conversion, rescission, good faith and fair dealing, negligence, intentional
misrepresentation, account and constructive.  The Company denies all of the
claims and intends to fully defend this cross complaint.

     In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc. in Santa
Monica, California.   Subsequently, the Company, Dr. Jackie See and Francis
Pizzulli entered into a formal settlement agreement relating to the above
arbitration proceeding relating to the payment of royalty's pursuant to the
existing Royalty Agreements between the Company and See.  See had previously
transferred a 50% interest in his Royalty Agreements with the Company to
Pizzulli.

     With respect to the formal settlement of the Royalty issues with See, the
Company has agreed to: 1) pay See, beginning in July 1995 a total of 1-1/2% of
the Company's net sales of products and 10% of the Company's receipt of
royalties from the Company's licensees under certain patents owned by the
Company covering colored microspheres, contrast microspheres and fat
sequestration products, 2) pay See, over time, the sum of $32,417 which
represents past due royalties for the period up to June 30, 1995, 3) pay See,
over time, the sum of $33,062 which represents the award of attorney fees and
costs to See in connection with the arbitration, 4) pay See, over time, the sum
of $65,731 of which $35,227 is subject to adjustment based upon an accounting
and $30,504 of which was conditioned upon receipt of royalties from the
Company's sequesterant licensee, and 5) transfer 10,000 restricted shares of KCD
common stock to See.


                                      -37-

<PAGE>


     With respect to the formal settlement of the Royalty issues executed in
January 1996 with Pizzulli, the Company has agreed to 1) pay Pizzulli, starting
July 1995 a total of 1-1/2% of the net sales of the Company's products and 20%
job the Company's receipt of royalties from the Company's licensees under
certain patents owned by the Company covering colored microspheres, contrast
microspheres and fat sequestration products, and 2) pay Pizzulli, over time, the
sum of $93,542 which represents the award of attorneys fees and costs to
Pizzulli in connection with the arbitration, 3) pay Pizzulli, over time, the sum
of $13,787 which represents past due royalties for the period up to June 30,
1995, 4) pay Pizzulli, over time, the sum of $72,244 of which $37,177 is subject
to adjustment based upon an accounting and $35,067 of which was conditioned upon
receipt of royalties from the Company's licensee, and 5) transfer 15,000
restricted shares of KCD common stock to Pizzulli.

     Pizzulli, in addition to the arbitration pertaining to arbitration
pertaining to royalty issues initiated an arbitration proceeding pertaining to
the timing of the sale of his restricted shares of the Company's stock.  A
formal settlement of the claim was entered into in January 1996.  With respect
to the formal settlement the Company agreed to 1) pay Pizzulli the sum of
$25,000 on the execution of the agreement, 2) pay Pizzulli the additional sum of
$75,000 on or before March 1, 1996, 3) pay Pizzulli, subject to certain
adjustments, the additional sum of $100,000 on or before March 1, 1997, 4)
assign to Pizzulli all of the Company's interest in and to the Promissory Note
dated May 13, 1993 in the face amount of $265,000 payable to the Company by
Clark M. Holcomb, 5) transfer to Pizzulli 75,000 restricted shares of KCD common
stock, 6) transfer to Pizzulli 300,000 shares of the Company's restricted common
stock.  In addition the Company has agreed to file FORM S-3, or other forms as
maybe appropriate to register the shares of the Company's common stock being
transferred to Pizzulli.  There are also provisions in the settlement which
would require the Company to issue additional shares of its restricted common
stock to Pizzulli in the event that either the registration of the 300,000
restricted shares is unreasonably delayed and/or the price of the Company's
common stock does not reach a specified price within an eight month period of
filing the FORM S-3.

PROCEEDINGS RELATED TO MRI LEASE OPERATIONS

     In August 1994, VMI sued MFA in Supreme Court for the County of New York,
New York, for breach of contract and accounts due. VMI alleges in this lawsuit
that MFA breached an equipment lease agreement for VMI's second MRI unit, the
Resonex Machine, by failure to make lease payments due January 27, 1994, and
thereafter in the sum of $210,210 as well as interest thereon. VMI is seeking in
this lawsuit a judgement against MFA in the sum of $210,210 plus interest
thereon with costs, attorney's fees and disbursements and other relief. VMI will
also seek a judgement for all unpaid lease payments subsequent to August 1994
which total an additional
$510,510 through December 31, 1995.  However, the Company has not been
successful in serving the notice on MFA principles including Jerald Brauzer, nor
has a trial date been set.

     In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought an
action against MFA and VMI in connection with a loan made by J&J Finance to MFA
that was secured by a lien


                                      -38-

<PAGE>


granted by MFA on the Resonex MRI unit owned by VMI. After MFA defaulted on the
foregoing loan, J&J Finance, in June 1995, obtained a writ of attachment on the
Resonex MRI unit and has taken physical possession of that unit.  The Company's
position is  MFA had no authority to secure the foregoing loan with VMI's MRI
unit, since the loan was made solely for the benefit of MFA, the lien was placed
on the MRI unit without VMI's knowledge or consent, and none of the loan
proceeds were received by VMI or the Company.   VMI and the Company are in
settlement discussions with J&J that would require the Company and VMI to
forfeit their interest in the MRI unit in exchange for J&J releasing VMI and the
Company from any damages.    Although the Company believes VMI is entitled to
recover the MRI unit from J&J Finance and that VMI should prevail in its claims
against MFA should J&J Finance be permitted to retain the MRI unit, there can be
no assurance that VMI will prevail against either party or that VMI will be able
to collect any judgement that it may obtain against MFA.  The Company also
recently learned that the current fair market value of the Resonex MRI unit is
substantially below previous estimates and as such may not be worth the cost of
continuing litigation.  As a result of all the foregoing the Company has written
off the net book value of the second unit of $964,286 as of December 31, 1995.

FEDERAL TRADE COMMISSION PROCEEDINGS

     The Seattle Regional Office of the Federal Trade Commission has advised the
Company that the staff believes that the Company's fat sequestrant product,
which currently is marketed by a licensee under the name "SeQuester," has been
improperly represented in advertising claims, and that the sequestrant product,
when previously marketed by the Company under the name "Lipitrol", also was
improperly represented in advertising claims. The staff has indicated that it is
prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing. The Company
presently is discussing this matter with the FTC staff with the objective of
settling the matter. There is no assurance that a settlement will be reached or
as to the impact on the Company of any settlement, although it is presently
believed that any settlement may impact the claims utilized in the marketing of
the sequestrant product and is likely to involve the payment of a fine or other
financial penalty by the Company.  The Company and the FTC staff have agreed
upon the terms of a proposed settlement in this matter, pursuant to which the
Company would consent to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction products or
services, or with respect to tests or studies relating to such programs or
services.  In addition, the Company would pay consumer redress to the FTC in an
aggregate amounts of $35,000 over a period of twelve months.  The Company's
Board of Directors voted to accept the proposal in March 1996, which now must be
formally approved by the FTC.

     Except as otherwise specifically indicated above, management believes that
the Company doesn't have any material liability for any lawsuits, settlements,
judgements or fees of defense counsel which have not been paid or accrued as of
December 31, 1995.

     While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice of
legal counsel believes, on the


                                      -39-

<PAGE>


basis of the facts currently known, that it is not probable that the Company
would have any material liability.  However, there can be no assurance that the
Company will prevail in any of the above proceedings.  Also the Company may be
required to continue to defend itself resulting in substantial additional
expense.  In the event the Company is unable to pay the defense costs associated
with the foregoing an unfavorable settlement or judgement could be awarded
against the Company which could have a material adverse effect upon the Company.
Additionally, starting in June 1995, the Company began taking the steps it
considered necessary to insure that the Company, its subsidiaries, employees,
consultants and affiliated companies and individuals are not involved in any
activities, operations, or relationships which are not solely for benefit of the
Company.

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

     In August 1992, the Company initiated a construction program, which was
completed during 1993, for its laboratory and office facility to augment and
improve product development and production capability.  In December 1992, the
Company issued 500,000 restricted shares of the Company's Common Stock to Clark
Holcomb in exchange for his offer to fund $350,000 of the construction costs.
Costs of approximately $431,000 were expended by the Company, of which Mr.
Holcomb has reimbursed $225,000.  As of March 31, 1996, the unpaid portion of
$265,000 has been assigned to Pizzulli as part of the settlement.

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

EFFECT OF INFLATION

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


                                      -40-

<PAGE>


                           PART II.  OTHER INFORMATION


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

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

     On October 26, 1995, the shareholders of the Company approved amendments to
the Company's certificate of Incorporation to provide for:  (i) a reverse stock
split of not less than one share for every four old shares nor more than one
share for every eight old shares, with the specific exchange ratio to be
determined by the Board of Directors; (ii) an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.


ITEM 5.   OTHER INFORMATION

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


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

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

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

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

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

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


                                      -41-

<PAGE>


                                   SIGNATURES

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

                         INTERACTIVE MEDICAL TECHNOLOGIES LTD.
                              (Registrant)



Date:     5-31-96             By:  /s/ STEVEN  R.WESTLUND
     --------------------          ----------------------------------------
                                   Steven Westlund
                                   (Chief Executive Officer)


Date:     5-31-96             By:  /s/ PETER T. BENZ
     --------------------          ----------------------------------------
                                   Peter T. Benz
                                   (President, Chief Financial Officer)


Date:     5-31-96             By:  /s/ MICHAEL GRECHKO
     --------------------          ----------------------------------------
                                   Michael Grechko
                                   (Chief Accounting Officer and Secretary)


Date:     5-31-96             By:  /s/ JOHN C. OSBORNE
     --------------------          ----------------------------------------
                                   John C. Osborne
                                   (Director)


                                      -42-

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               MAR-31-1996
<CASH>                                         170,552
<SECURITIES>                                         0
<RECEIVABLES>                                   27,635
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                               297,046
<PP&E>                                       2,859,413
<DEPRECIATION>                               1,418,768
<TOTAL-ASSETS>                               2,095,724
<CURRENT-LIABILITIES>                        1,722,512
<BONDS>                                        871,567
                                0
                                          0
<COMMON>                                        32,832
<OTHER-SE>                                   (531,187)
<TOTAL-LIABILITY-AND-EQUITY>                 2,095,724
<SALES>                                        161,823
<TOTAL-REVENUES>                               258,904
<CGS>                                           37,845
<TOTAL-COSTS>                                  109,971
<OTHER-EXPENSES>                               402,112
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              30,126
<INCOME-PRETAX>                              (283,305)
<INCOME-TAX>                                     3,200
<INCOME-CONTINUING>                          (286,505)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 (286,505)
<EPS-PRIMARY>                                    (.01)
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</TABLE>


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