SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

(Mark  One) 
  X  Annual Report under Section 13 or 15(d) of the  Securities  Exchange Act of
 --- 1934

For the fiscal year ended May 31, 1997 or

 --- Transition report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934

For the transition period from___________________to__________________

Commission File Number: 0-15304

                               AVESIS INCORPORATED
               ---------------------------------------------------
                 (Name of small business issuer in its charter)
           
          Delaware                                        86-0349350
-------------------------------                     ------------------------
(State or other jurisdiction of                     (IRS Employer Identification
incorporation or organization)                       No.)

100 West Clarendon, Suite 2300
Phoenix, Arizona                                           850l3
--------------------------                          ----------------
(Address of principal executive                         (Zip Code)
offices)

Issuer's telephone number: (602) 241-3400
                          ---------------

Securities registered under Section 12(g) of the Exchange Act:

                                 Common Stock &
     $l0 Class A Nonvoting Cumulative Convertible Preferred Stock, Series 2
     ----------------------------------------------------------------------
                                (Title of Class)

          Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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
                                                     -----            -----
<PAGE>
          Check if there is no disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

          State issuer's revenues for its most recent fiscal year: $5,645,276.

          The  aggregate  market  value  of the  voting  common  stock  held  by
non-affiliates  of the  registrant,  based upon the  average of the last bid and
asked prices of the  registrant's  Common Stock in the  over-the-counter  market
reported  by the  Electronic  Bulletin  Board  of the  National  Association  of
Securities  Dealers,  Inc.  ("NASD") on August 25, 1997 was $552,648.  Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be  deemed to be  affiliates.  This  determination  of  affiliate  status is not
necessarily conclusive.

          The number of outstanding  shares of the registrant's  Common Stock on
August 25, 1997 was 4,100,420.

          Transitional Small Business Disclosure Format (check one):

                                                  Yes                No  X
                                                     -----             -----
<PAGE>
                               AVESIS INCORPORATED
                            FORM l0-KSB ANNUAL REPORT
                             YEAR ENDED MAY 31, 1997

                                TABLE OF CONTENTS

                                     PART I
                                     ------
                                                                            Page

ITEM l.      Description of Business ..........................................1
ITEM 2.      Description of Properties ........................................6
ITEM 3.      Legal Proceedings ................................................7
ITEM 4.      Submission of Matters to a Vote of
             Security Holders .................................................7


                                     PART II
                                     -------

ITEM 5.      Market for Common Equity and
             Related Stockholder Matters ......................................7
ITEM 6.      Management's Discussion and Analysis or Plan
             of Operation.....................................................10
ITEM 7.      Financial Statements ............................................14
ITEM 8.      Changes In and Disagreements with Accountants
             on Accounting and Financial Disclosure ..........................15


                                    PART III
                                    --------

ITEM 9.      Directors, Executive Officers, Promoters,
              and Control Persons; Compliance with Section 16(a)
              of the Exchange Act ............................................15
ITEM 10.     Executive Compensation ..........................................18
ITEM 11.     Security Ownership of Certain Beneficial                 
             Owners and Management ...........................................20
ITEM 12.     Certain Relationships and Related Transactions...................23
ITEM 13.     Exhibits and Reports on Form 8-K ................................27
SIGNATURES ...................................................................28
<PAGE>
                                     PART I
                                     ------

Item l.  Description of Business

General

          Avesis  Incorporated,   a  Delaware  corporation  (together  with  its
subsidiary,  the "Company"),  incorporated in June 1978, markets and administers
dental,  chiropractic,  vision and hearing  managed care and  discount  programs
("Programs")  nationally which are designed to enable participants  ("Members"),
who are enrolled  through  various  Sponsoring  organizations  such as insurance
carriers,  Blue Cross and Blue Shield  organizations,  corporations,  unions and
various associations  ("Sponsors"),  to realize savings on purchases of products
and  services  through  networks of providers  such as dentists,  chiropractors,
opticians, optometrists, ophthalmologists and hearing specialists ("Providers").
The Company formerly operated a pharmaceutical  discount program, which was sold
in December 1992.

     Administration  fee and  provider  fee  revenue has been  derived  from the
     product lines in the following proportions:

                                                   Fiscal Years Ended May 31,
                                                   --------------------------
                                                     1997              1996
                                                     ----              ----

Vision and Hearing Programs                           69%               68%
Dental Program                                        31%               31%
Chiropractic Program                                   0%                0%
Pharmaceutical Program(1)                              0%                1%

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

(1)       The  pharmaceutical  line  was  sold in  December  1992.  The  Company
          provided services related to the  pharmaceutical  program through July
          1995.

Vision Program

                  The  Company  offers  provider  networks  and   administrative
services for group vision  programs.  Its Vision  Program is designed to provide
savings by reducing the cost of eye examinations and materials (frames, eyeglass
lenses and contact lenses).

                  Under the Company's  Vision  Program,  a Member is entitled to
discounted pricing that Providers offer for eye examinations and the purchase of
eyewear at network  Provider  locations.  The  Member is fully  responsible  for
paying the Provider unless the Sponsor (a  self-funding  employer or insurer) is
obligated to pay the  Provider,  or  reimburse  the Member.  In some cases,  the
Company  may act as a third  party  administrator  for the  Sponsor and pay such
claims from funds provided by the Sponsor for that purpose.
                                       1
<PAGE>
          Under some Programs,  each Member pays an annual enrollment fee to the
Company for the right to utilize  network  Providers and receive  discounts.  In
other cases,  typically involving Sponsors who pay benefits, the Sponsors pay an
enrollment fee for each Member.

          If the  Program  has  insured or  self-funded  benefits,  the  Sponsor
determines the products and services  which will be covered,  how frequently the
benefit  is  available  and,  subject to local law,  whether  reimbursement  for
non-network Provider purchases will be made.

          The  Company  principally  derives  revenues  from  fees paid by or on
behalf of Members for enrollment,  plan administration and services,  and claims
administration,  and in certain  cases also derives  revenues  from fees paid by
Providers when Members purchase eyewear and services.

          The table below sets forth the  approximate  numbers of Providers  and
Members enrolled in the Vision Program at the dates indicated:

              Date           Number of        Number of      Number of 
              ----           ---------        ---------      ---------
                             Providers          States        Members
                             ---------          ------        -------

          May 31, 1997         3,220             48           385,000
          May 31, 1996         3,332             48           396,000

Substantially all of the Providers indicated above are optometrists. The numbers
of  Members  indicated  in the above  table are as  reported  to the  Company by
Sponsors and generally do not include eligible spouses and children of Members.

          The  Company  has  entered  into   arrangements   with  certain  frame
manufacturers which enable Providers to obtain frames at prices below wholesale.
The  Company  has formed a formal  buying  group for  Providers  to seek  larger
discounts on frames.  The Company is billed directly by the frame  manufacturers
and is  responsible  for the  billing  and  collection  of amounts  due from the
Providers.  The  Company  receives a  discount,  above the  amount  given to the
Providers,  by the frame  manufacturers to pay for the cost of administering the
buying group  program.  Providers are not obligated to purchase from  designated
suppliers.

Hearing Program

                  The Company's hearing program (the "Hearing Program") has been
marketed  principally  as an adjunct to the Vision  Program.  Revenues  from the
Hearing Program have not been significant. A Hearing Program Member may obtain a
hearing evaluation by a Provider for a reduced fee. In addition,  the Member may
purchase a hearing aid from a Provider at wholesale cost plus a professional fee
or at a discount  from 
                                       2
<PAGE>
the  Provider's  usual  charge,  depending  on the options  selected by the Plan
Sponsor.  Such  benefits are also  available to the Member's  spouse,  children,
parents and grandparents.

Dental Program

          The Company  establishes and maintains dental Provider  networks which
it also makes  available to Sponsors.  Fees charged to Members by Providers  are
based upon panel fee schedules  which the Providers have agreed to accept.  Like
the Vision  Program,  the  Company's  dental  program (the "Dental  Program") is
offered both for Members who are themselves  responsible  for paying 100% of the
costs of their care to their Providers, and for Programs under which the Sponsor
assumes the  obligation  of paying  Providers (or  reimbursing  Members) for the
agreed-upon   costs  of  specified  care.   Revenues  from  the  Dental  Program
principally are derived in the same manner as in the case of the Vision Program.

          The table below sets forth the  approximate  number of  Providers  and
Members  enrolled in the Dental Program at the dates  indicated,  as reported to
the Company by Sponsors:

               
              Date           Number of        Number of      Number of
              ----           Providers          States        Members
                             ---------          ------        -------
          May 31, 1997        11,082              43          118,000
          May 31, 1996         3,776              41           95,000

Included  in the number of  providers  in the table above as of May 31, 1997 are
6,180 providers who participate in a third party's Provider network. The Company
has a network rental  agreement  which allows Members to utilize the services of
the third party's Provider network.

See Item 6 - "Management's Discussion and Analysis or Plan of Operation."

Chiropractic Program

          The Company has developed a program for  cost-effective and budgetable
delivery of chiropractic services.  Members pay reduced fees to the Provider for
history and physical examinations,  spinal manipulation,  non-manual procedures,
physiotherapy,  acupuncture  and additional  care. The Company derived its first
revenues  from the  chiropractic  program in the first  quarter of fiscal  1997.
Although  the  Company  has  not   generated   significant   revenues  from  the
Chiropractic  Program,  the  Program is  important  as it enables the Company to
offer to Sponsors a complete line of ancillary benefits. 
                                       3
<PAGE>
Provider Networks

          The Company  usually  contracts  with  Providers  to provide  services
simultaneously  with the plan Sponsor's  development  of a membership  base in a
geographic area;  however,  some Providers are enlisted in expansion areas where
there is little or no membership base. The Programs  supplement the practices of
Providers by enabling them to obtain  additional  patients who are Members while
allowing  Providers  to  retain  their  existing  practices.   Although  Members
generally  pay fees and  charges  less than those of  non-Member  patients,  the
incremental  revenues from Member patients can be an important source of revenue
to  Providers.  There  can be no  assurance  that  Providers  will  continue  to
participate  in the  Programs  even if their  participation  results  in such an
increase  in  revenues  since the portion of their  practices  derived  from the
Programs may become less profitable than other aspects of their practices.

          The  Company  periodically  reviews a portion of the  Providers.  This
review  includes a patient survey form which is distributed on a random basis by
the  Company to Members,  the  investigation  of any  complaints  received  from
Members and a desk or field audit by a Company  auditor to confirm  that Members
were not charged more than the contracted prices for services and products.

Program Administration and Administration of Claims

          The Company  receives  fees from  Sponsors for program  administration
services.  These  fees vary  depending  upon the type of program  involved,  the
number of card-holding  Members in a Sponsor's program, and the extent of claims
administration and other administrative services involved.

          When the Company  acts as a third  party  administrator  for  Programs
under which the Sponsor pays for Provider  services,  Members obtaining services
from  Providers  present  their  cards to the  Providers,  who in certain  cases
contact the Company to confirm  eligibility  and, upon  performance of services,
submit claim forms to the Company.  The Company  processes the claims,  requests
funds from the  appropriate  Sponsors,  and forwards  payments to the  Providers
and/or Members from the funds received from Sponsors.  Monthly information about
the use of the  Programs  by Members  and cost  savings is  reported  to certain
Sponsors.

          Although the Company does not believe it would have any  liability due
to any  malpractice  on the part of any  Provider,  the usual  form of  Provider
Agreement  requires  each  Provider to indemnify  the Company  against any claim
based on the  negligence  of the  Provider in the  performance  of services  for
Members. In addition, Providers are required to carry malpractice insurance with
limits equal to or greater than their state required minimums. 
                                       4
<PAGE>
Marketing

          The Company  markets  nationally to potential  Sponsors  which have or
have access to a large  number of potential  Members.  Marketing is done through
the efforts of the Company's sales personnel and unaffiliated insurance brokers,
general  agents and employee  benefit  consultants  compensated  on a commission
basis.  Substantial marketing services are also provided through National Health
Enterprises,  Inc.  ("NHE").  See Item 12 - "Certain  Relationships  and Related
Transactions - Agreements with National Health Enterprises, Inc."

          The Company's sales and marketing  personnel  market the full range of
the Company's products and services.  The Company believes that offering a range
of products and services in multiple  product lines  differentiates  it from its
competitors  and  enables  it to  offer  a more  comprehensive  solution  to its
customers' benefits needs.

          The following  customers  accounted for more than 10% of the Company's
revenues during the periods indicated.

                                                  Year ended      Year ended
                                                 May 31, 1997    May 31, 1996
                                                 ------------    ------------

         National Insurance Services, Inc.             6%             27%
         Fraternal Order of Police/
           Department of Corrections
           (Washington, D.C.)                         15%             13%
         Blue Cross Blue Shield of Arizona            17%             12%
         HealthPartners HealthPlan                    14%              0%

          The  Company  is  substantially  dependent  on  a  limited  number  of
customers  and will be  materially  adversely  affected  by  termination  of its
agreements with such customers.  For information  regarding a termination notice
received from National  Insurance  Services,  Inc.,  see Item 6 -  "Management's
Discussions and Analysis or Plan of Operation."

Competition

          The Company  competes for potential  Sponsors,  Members and Providers,
depending on the geographic area or market, with various provider organizations,
health maintenance  organizations and health care membership  programs.  Most of
these  competitors  have   significantly   greater   financial,   marketing  and
administrative  resources  than  the  Company.  The  Company  has a  competitive
advantage  over its  competition as it is able to offer a full line of ancillary
benefits while  substantially all of its competitors  concentrate on one benefit
line. 
                                       5
<PAGE>
Regulation

          Certain  registration  and licensing laws and  regulations  (including
those   applicable   to   third   party   administrators,   preferred   provider
organizations,  franchises and business  opportunities)  in many states in which
the Company operates may have application to various of the Company's  programs.
In addition,  statutes and  regulations  applicable  to insurers and  providers,
including those relating to fee splitting,  referral fees, advertising,  patient
freedom of choice,  provider  rights to participate  and  antidiscrimination  in
reimbursement,  may impact the Company.  The Company believes that the extent of
its compliance with such laws and regulations as they are currently enforced and
applicable  to the Company is  consistent  with current  industry  standards and
practices.  However,  there can be no assurance that changes in enforcement  and
compliance  practices  will not occur in the future,  or that  existing laws and
regulations  will not be  broadened.  In any such event,  the  Company  could be
required  to effect  registration  in  various  additional  states  and/or  post
substantial fidelity or surety bonds in connection therewith. Alternatively, the
Company may be  required  to alter  substantially  the  services  offered by it,
modify its contractual  arrangements  with Sponsors,  Providers and Members,  be
precluded  from  providing  some or all of its  services in some  states,  or be
subject  to  substantial  fines  or  penalties.  Any or  all  of  the  foregoing
consequences could materially adversely affect the Company.

Employees

          As of August 20, 1997,  the Company had 33  full-time  and 5 part-time
employees,  compared to 33 total  employees as of August 15,  1996.  The Company
believes that its relationship with its employees is good.

Item 2.   Description of Properties

          The Company  maintains  its executive  offices at 100 West  Clarendon,
Suite 2300,  Phoenix,  Arizona 85013, in space leased from an independent party.
The lease agreement covers  approximately 13,300 usable square feet of space and
expires on September 30, 2000.  On October 29, 1996 the Company  entered into an
agreement to sublease  approximately  9,090 usable  square feet of space through
October  1,  1997 and all  13,300  usable  square  feet  thereafter,  until  the
expiration of the Company's  lease  agreement on August 31, 2000.  Subsequent to
year end, the Company  entered into a lease  agreement for  approximately  6,700
usable square feet of office space in Phoenix, Arizona that expires on September
30,  2002.  The  Company  owns  and  leases  various  computer  equipment,  data
processing and other office equipment. The Company has also leased approximately
200 square  feet in  Washington,  D.C.  as  required  by a contract  with a D.C.
Sponsor.  The Company  believes that its facilities and equipment are maintained
in  good  operating  condition  and  are  adequate  for  the  present  level  of
operations.
                                       6
<PAGE>
Item 3.   Legal Proceedings

          Not applicable.


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

          Not applicable.

                                     PART II
                                     -------

Item 5.   Market for Common Stock and Related Stockholder Matters

          Market  Information.  The  Company's  Common  Stock  and  $10  Class A
Nonvoting   Cumulative   Convertible   Preferred  Stock,  Series  2  ("Series  2
Preferred")  are  traded  in the  over-the-counter  market  and  quotations  are
reported in the "pink sheets" published by the National  Quotation Bureau,  Inc.
and via the NASD's Electronic Bulletin Board. The following table sets forth the
high  and low bid  price  for the  Company's  Common  Stock as  reported  by the
National Quotation Bureau, Inc. for each quarterly period during fiscal 1997 and
fiscal 1996. Such market quotations reflect inter-dealer prices,  without retail
mark-up, mark-down or commission and may not represent actual transactions.


                                                 Bid Quotation Range
                                                 -------------------
           Fiscal Year 1997                    High               Low
           ----------------                    ----               ---
           First Quarter                     $0.6875            $0.375
           Second Quarter                     0.4375             0.125
           Third Quarter                      0.2188             0.125
           Fourth Quarter                     0.25               0.1875

           Fiscal Year 1996
           ----------------
           First Quarter                     $1.375             $0.9375
           Second Quarter                     1.01               0.5625
           Third Quarter                      1.00               0.75
           Fourth Quarter                     0.875              0.6875

          As of August 25, 1997, there were 4,100,420 shares  outstanding of the
Common Stock of the Company held by  approximately  166  stockholders of record.
Trading  activity  with  respect to the Common  Stock has been  limited  and the
volume  of  transactions  should  not of  itself  be  deemed  to  constitute  an
"established  public  trading  market."  A  public  trading  market  having  the
characteristics of depth,  liquidity and orderliness  depends upon the existence
of market  makers as well as the presence of willing  buyers and sellers,  which
are circumstances over which the Company does not have control.
                                       7
<PAGE>
          Dividends.  The Company has not paid any dividends on its Common Stock
since its  inception and does not expect to pay dividends on its Common Stock at
any  time in the  foreseeable  future.  Moreover,  the  terms  of the  Series  2
Preferred  provide  that as long as any shares of the Series 2 Preferred  remain
outstanding, the Company may not declare or pay any dividend, whether in cash or
property,  on the Common Stock of the Company  unless the full  dividends on the
Series 2 Preferred for all past dividend  periods and the then current  dividend
period shall have been paid or declared and a sum set aside for payment thereof.
As of  August  19,  1997,  there  were  388,180  shares  of  Series 2  Preferred
outstanding,  with each share  entitled to receive a  cumulative  dividend at an
annual rate of 9% ($.90 per share), payable when and if declared by the Board of
Directors.  Dividend  arrearages  as of July 31, 1997  totaled  $1,689,124.  The
Company's  Indenture related to its 9 1/2% Convertible  Subordinated  Debentures
due December 1, 1997 also restricts its ability to pay dividends.

          Recent Sales of  Unregistered  Securities.  On January 20,  1997,  the
Company granted 10,000  nontransferable  options,  for services  rendered,  to a
consultant familiar with the Company's business.  The options were granted under
the Company's  1993 Stock Option Plan,  pursuant to Section 4(2) of the Act. The
options are currently  exercisable  for an equal number of the Company's  Common
Stock at an exercise  price of $1.00 per share and  terminate ten years from the
option grant date.

Selected Financial Data

          The  following  table  sets  forth  selected   financial   information
regarding the Company.  This information  should be read in conjunction with the
Company's Financial Statements and related notes and Management's Discussion and
Analysis or Plan of Operation included elsewhere in this Form l0-KSB.
                                       8
<PAGE>
          The selected  financial  data for each of the five years in the period
ended May 31,  1997 have  been  derived  from the  Company's  audited  financial
statements.  The selected  financial  data is not required by Form 10-KSB and is
included herein as an unnumbered item.

<TABLE>
<CAPTION>
                                                                 Years Ended May 31,
                                      -----------------------------------------------------------------------
Selected Operating Data:                  1997           1996           1995          1994(1)        1993(1)
------------------------              ------------   ------------   ------------  ------------   ------------
<S>                                   <C>            <C>            <C>           <C>            <C>        
Operating revenues                    $ 5,645,276    $ 6,019,896    $ 6,351,106   $ 4,418,512    $ 4,762,632
Operating expenses                      5,739,503      6,106,694      5,986,897     4,620,972      5,699,019
Net income (loss)                        (190,265)      (124,859)       505,411      (134,550)      (676,231)
Net income (loss) per                 
common share (2)                             (.13)          (.12)           .02          (.12)          (.29)
                                      
                                                                  Years Ended May 31,
                                       ----------------------------------------------------------------------
Selected Balance Sheet Data:              1997           1996           1995          1994(1)        1993(1)
----------------------------           -----------    -----------    -----------   -----------    -----------
                                   
Working capital                        $  293,595     $  422,922     $  747,566    $  229,740     $  388,863
Current assets                          1,271,505        864,566      1,242,534       647,522      1,025,394
Total assets                            1,639,389      1,650,527      1,839,377     1,195,831      1,649,797
                                   
Current liabilities                       977,910        441,644        494,968       417,782        636,545
Long term obligations                      92,044        449,183        484,850       423,901        524,554
Total liabilities                       1,069,954        890,827        979,818       841,683      1,161,099
Total stockholders' equity                569,435        759,700        859,559       354,148        488,698
</TABLE>

(1)  Reflects a  restatement  of  certain  amounts in the years 1993 and 1994 to
     conform to the 1995, 1996 and 1997 presentation.

(2)  After provision for preferred stock dividends as follows: $349,162 in 1997,
     1996 and 1995; $349,590 in 1994; and $349,812 in 1993.
                                       9
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations

Management's  Discussion  and Analysis and Results of Operations For the Fiscal
-------------------------------------------------------------------------------
Years Ended May 31, 1997 and 1996:
---------------------------------

          The statements  contained in this  discussion  and analysis  regarding
management's anticipation of adequacy of cash reserves for operations,  adequacy
of reserves for claims,  anticipated level of operating  expenses related to new
cardholders,  adequacy of capital allocation for debentures, sustained viability
of the Company, continued positive cash flows and increased marketability of the
Company  constitute  "forward-looking"  statements  within  the  meaning  of the
Private Securities  Litigation Reform Act of 1995. Such statements involve risks
and uncertainties which could cause actual results to differ materially from the
forward looking statements.  Management's anticipation is based upon assumptions
regarding the market in which the Company  operates,  the level of  competition,
the level of demand for  services,  the  stability  of costs,  the  retention of
Sponsors  and  cardholders  enrolled  in the  Company's  benefit  programs,  the
relevance of the  Company's  historical  performance,  and the  stability of the
regulatory  environment.  Any of these assumptions  could prove inaccurate,  and
therefore there can be no assurance that the  forward-looking  information  will
prove to be accurate.

          The Company derives its  administration fee revenue from Plan Sponsors
who customarily pay a set fee per member per month.  There are arrangements with
certain  Sponsors  to pay for  services  rendered  by the  Company  on a fee for
service  basis.  Based upon the type of program (e.g.,  managed care,  discount,
third party administration) the Provider's claim for service provided to Members
is paid either by the Company,  Sponsor,  Member or combination thereof.  Buying
Group  revenues  are  recorded  at the  total  amount  billed  to  participating
Providers.  Vision  Provider fee revenue is based upon a percentage of materials
sold by certain participating providers under certain plans.

Results of Operations:
---------------------

          The Company's total service  revenues in fiscal 1997 decreased 6% from
the prior fiscal year from $6,019,896 to $5,645,276.  The decrease was primarily
due to the loss of a major  Sponsor  that  accounted  for 27% of  total  service
revenues  in fiscal  1996.  The loss has been  replaced  by the  addition of one
significant Sponsor during January 1997, and a second significant Sponsor during
the first  quarter of fiscal  1998.  The Company was able to decrease  operating
expenses  in fiscal  1997 by 6%  compared to fiscal  1996,  from  $6,106,694  to
$5,739,503.   The  Company   anticipates  based  upon  historical  results  that
additional  operating expenses related to the above mentioned new customers will
be less than the additional revenue earned.

          The Company's  vision and hearing  programs  accounted for  $2,607,152
(46%) of total service  revenues during fiscal 1997 compared to $2,553,275 (42%)
in fiscal 1996. The increase in vision and hearing revenues from the addition of
the new  significant  Sponsor,  with  approximately  42,000 vision  cardholders,
helped to offset the loss of revenues from the major Sponsor lost in the current
fiscal  year,  with   approximately   47,000  vision  cardholders  (as  well  as
approximately 50,000 dental cardholders), 
                                       10
<PAGE>
as mentioned  above.  The revenues derived from the new Sponsor are related to a
managed  care  program,  which has a higher  cost of service  than the  discount
program  that  was  lost.  Based  upon  information  provided  by a  second  new
significant  Sponsor,  added after  fiscal  year end and  mentioned  above,  the
Company  anticipates  that it will  add  approximately  150,000  cardholders  by
January  1998.  There  were  approximately  385,000  vision  and  9,000  hearing
cardholders  as of May 31, 1997,  compared to  approximately  396,000 vision and
82,000 hearing cardholders as of May 31, 1996.

          Vision  provider fee revenue  declined by $62,763  (32%) during fiscal
1997 compared to the same period in fiscal 1996 due in part to a modification of
the Company's  agreements with its providers that for certain new Sponsors,  the
providers  are not required to pay a fee based on gross sales to that  Sponsor's
members.  The Company  expects this trend of  decreased  provider fee revenue to
continue.

          The Company's  dental program  accounted for $1,253,014 (22%) of total
service  revenues during the current fiscal year compared to $1,833,583 (30%) in
fiscal  1996.  The decline in this line of business  during the current year was
primarily  due to the loss of  approximately  50,000  cardholders  as  discussed
above.  The decline in cardholders  was offset by the addition of  approximately
54,000  cardholders  from three  Sponsors who increased  their  marketing of the
dental  discount  program in the current fiscal year. The revenues  derived from
the new cardholders  are  significantly  lower than the revenues  related to the
lost  cardholders  discussed  above.  There were  approximately  118,000  dental
cardholders as of May 31, 1997, compared to approximately  114,000 as of May 31,
1996.

          On December 30, 1992,  the Company  completed the sale of its pharmacy
line of  business  to Med Net,  Inc.  (formerly  Medi-Mail,  Inc.),  for 298,333
unregistered and 35,000  registered  shares of Med Net Common Stock. The Company
contracted  to  provide  certain  administrative  services  with  respect to the
pharmacy  line of business  until  December  31,  1993.  However,  due to delays
encountered  by Med Net during the  conversion  of the  claims  processing,  the
Company  entered  into a  month  to  month  agreement  to  continue  to  provide
administrative  services to Med Net. Med Net  terminated the agreement in August
1995.  Pharmaceutical  revenues  constituted  $0 (0%) and $78,281  (1%) of total
service revenues for fiscal 1997 and 1996,  respectively.  The Company no longer
offers a pharmaceutical program.

          The Company  makes  available  to its vision  providers a buying group
program that enables the provider to purchase frames from the  manufacturers  at
discounts from wholesale costs. These discounted prices are generally lower than
a provider could negotiate individually, due to the large volume of purchases of
the buying group. Buying group revenues were $1,582,899 (28%) during fiscal 1997
compared to $1,554,757 (26%) in fiscal 1996.

          Past and future revenues in all lines of business are directly related
to the  number  of  cardholders  enrolled  in the  Company's  benefit  programs.
However,  there may be significant  pricing differences to Sponsors depending on
whether  the  benefit  is  funded  
                                       11
<PAGE>
in part or whole by the plan Sponsor.  The  Company's  current  cardholder  base
principally is derived from a limited number of Sponsors.

          The cost of services increased by $290,660 (7%) from $3,916,304 during
fiscal  1996 to  $4,206,964  in fiscal  1997.  These costs  primarily  relate to
servicing  cardholders,  provider  network  development,  and Sponsors under the
Company's vision,  hearing,  dental and chiropractic benefit programs as well as
the cost of frames that are sold through the  Company's  buying group program as
discussed above. The increase in cost of services during the current fiscal year
was due to the  increased  cost  associated  with paying claims as the number of
managed care (versus discount plan) cardholders increased throughout the current
period.  The  Company  expects  the cost of  services  to remain  constant  as a
percentage of total service revenues for the foreseeable future,  based upon the
anticipation  that the current mix of managed  care and discount  programs  will
continue.

          General and administrative expenses were $1,027,054 during the current
fiscal year,  which  represents a decrease of $248,483  (19%) compared to fiscal
1996.  The decrease in the current year was primarily due to the sublease of the
overcapacity  of office space,  thereby  reducing  rent expense;  the absence of
significant  legal fees in the current  year,  in contrast to  significant  fees
which occurred in connection with litigation which concluded in the prior fiscal
year,  and  the  reduction  of  payroll  related  to the  reorganization  of the
Company's management.

          Selling and  marketing  expenses  were  $505,485  during  fiscal 1997,
representing  a  decrease  of  $409,368  (45%) from  fiscal  1996.  Selling  and
marketing expenses include marketing fees, broker commissions,  inside sales and
marketing  salaries and related expenses,  travel related to the Company's sales
activities  and  an  allocation  of  other  overhead  expenses  relating  to the
Company's sales and marketing functions. The decrease is due to the reduction in
broker commissions directly related to the reduction in revenue, the outsourcing
of a portion of the  activities  previously  performed  by the inside  sales and
marketing   department,   and  the   reduction   of  travel  and   entertainment
expenditures.  A significant  amount of the Company's  marketing  activities has
been outsourced to management  consultants,  National Health Enterprises,  for a
cost lower than the Company  incurred when performing the functions  internally.
See Item 12 - "Certain Relationships and Related Transactions."

          Non-operating   expense  was  $96,038  in  fiscal  1997,  compared  to
non-operating  expense of  $38,061 in fiscal  1996.  Included  in  non-operating
expense are a loss related to the disposal of software and a gain resulting from
a review of the assumptions  related to the  discontinued  activity of providing
claims  processing  services  for a  pharmaceutical  benefit  plan.  The Company
determined  during fiscal 1997 to integrate the three separate  computer systems
(Data General, AS400 and PC) currently being run, onto a single platform. Due to
the recent  increases in the capabilities of the PC platform and the flexibility
for growth that this platform  affords,  it was deemed the logical choice.  As a
result of this  decision,  the Company has  discontinued  the AS400  development
project  (See  Item 12 -  "Certain  Relationships  and  Related  Transactions  -
Software Development Services"),  and has expensed the capitalized costs related
to software not placed in service.  Also, an  
                                       12
<PAGE>
outstanding  liability related to programming fees of $67,971 was forgiven as of
fiscal year end.  Subsequent to year end, management has contracted with a third
party  vendor to develop new systems to support the  Company's  claims  payment,
customer  and  provider  service,  quality  assurance  and  network  development
functions.  The estimated  completion  date for the new system is February 1998,
with penalties for late delivery and bonuses for early delivery.

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

          The  Company had cash and cash  equivalents  of $817,535 as of May 31,
1997,  compared  to  $436,083 as of May 31,  1996.  The  increase of $381,452 is
primarily due to the timing of vendor and claim  payments and the gain resulting
from a  review  of the  assumptions  related  to the  discontinued  activity  of
providing  claims  processing  services for a  pharmaceutical  benefit  plan, as
previously discussed. The Company is maintaining its policy of paying vendors on
a net 45 day basis and  continues  to be  current  on all of its trade  accounts
payable.  Current cash on hand and cash provided from  operations is expected to
allow the Company to sustain operations for at least the next twelve months.

          Subsequent to year end, the Company  entered into an agreement  with a
third party to develop new software systems, as previously  mentioned.  The cost
of the project,  including necessary hardware, of approximately $250,000 will be
financed through cash from operations.

          As of May 31,  1997,  the  Company had  $464,377 of Accounts  Payable,
compared to $223,914 in the prior fiscal year. The increase is predominately due
to  reserves  for claims of  $291,533  in the  current  year for a new  Sponsor,
included  in  Accounts  Payable,  for  claim  reimbursements  to  Providers  who
participate in certain managed care programs.  The Company believes this reserve
is conservative and adequate.

          As  of  May  31,  1997,   the  Company  had  $189,000  of  Convertible
Subordinated  Debentures,  less $1,112 of unamortized discount,  due December 1,
1997 and $160,000 of subordinated  notes payable to  stockholders  due March 18,
1998.  The Company has  allocated  the required  capital to repay the  debenture
holders upon  maturity and has reported the amount on the Balance  Sheet in cash
and cash equivalents.

          The Company's management implemented the following steps in the middle
of fiscal  1997,  in order to sustain the  viability of the Company and continue
positive cash flows: the sublease of unused office space; the maintenance of the
appropriate level of staff, reducing monthly salary expense and consulting fees;
and the  addition of two new  significant  Sponsors,  as  previously  discussed,
replacing  the  reduced  number  of  cardholders  caused  by the loss of a major
Sponsor  earlier in the fiscal year.  The Company's  new office lease  agreement
will reduce  monthly  rent  expense by  approximately  $6,000 as compared to the
monthly rent expense from the subleased office. The Company has also established
a  chiropractic  benefit and has  expanded  its dental  network of  providers to
increase its marketability. 
                                       13
<PAGE>
Item 7. Financial Statements

          Financial   Statements  appear  commencing  at  page  F-1  immediately
hereafter.
<PAGE>

                    AVESIS INCORPORATED AND SUBSIDIARY

                    Consolidated Financial Statements

                    May 31, 1997

                    (With Independent Auditors' Report Thereon)



<PAGE>
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Avesis Incorporated:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Avesis
Incorporated  and  subsidiary as of May 31, 1997,  and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
years in the two-year period ended May 31, 1997.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Avesis Incorporated
and subsidiary as of May 31, 1997, and the results of their operations and their
cash flows for each of the years in the two-year  period ended May 31, 1997,  in
conformity with generally accepted accounting principles.





                                        /s/ KPMG Peat Marwick LLP


Phoenix, Arizona
July 17, 1997
                                      F-1
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                           Consolidated Balance Sheet

                                  May 31, 1997
<TABLE>
<S>                                                                                       <C>    
                                     Assets

Current assets:
    Cash and cash equivalents                                                                817,535
    Receivables, net (note 2)                                                                340,356
    Prepaid expenses and other                                                               113,614
                                                                                          ----------
      Total current assets                                                                 1,271,505

Property and equipment, net (note 3)                                                         181,795
Deferred debenture issuance costs, less accumulated amortization of $19,327                    1,049
Deposits                                                                                     185,040
                                                                                          ----------

                                                                                          $1,639,389
                                                                                          ==========
                      Liabilities and Stockholders' Equity

Current liabilities:
    Accounts payable                                                                         464,377
    Accrued expenses:
      Compensation                                                                            47,264
      Other                                                                                   95,149
    Convertible subordinated debentures, net of unamortized discount of $1,112 (note 4)      187,888
    Notes payable to stockholders (note 12)                                                  160,000
    Deferred income                                                                           23,232
                                                                                          ----------
              Total current liabilities
                                                                                             977,910

    Accrued rent (note 5)                                                                     92,044
                                                                                          ----------
              Total liabilities
                                                                                           1,069,954
                                                                                          ----------
Stockholders' equity (notes 4, 8, 9 and 12):

   Preferred stock, $.01 par value, authorized 12,000,000 shares:                                      
    $100 Class A, nonvoting  cumulative  convertible  preferred stock, Series 1,
      $.01 par value;  authorized  1,000,000 shares; none issued and outstanding
      (liquidation preference of $100 per share) --
    $10 Class A, nonvoting  cumulative  convertible  preferred stock,  Series 2,
      $.01 par value;  authorized  1,000,000  shares;  388,180 shares issued and
      outstanding  (liquidation  preference of $10 per share) and  $1,630,890 of
      dividends in arrears at $.90 per share per year                                           3,882
    Class A, voting cumulative  convertible  preferred stock, Series 3, $.01 par
      value; authorized 100,000 shares; none issued and outstanding (liquidation
      preference of $100 per share)                                                                --
    Common  stock of $.01 par  value, authorized  20,000,000  shares;  4,100,420
      shares issued and outstanding                                                            41,004

   Additional paid-in capital                                                               9,949,159  

   Accumulated deficit                                                                     (9,424,610)
                                                                                          ----------- 
              Total stockholders' equity                                                      569,435
                                                                                                        
Commitments and contingencies (notes 5, 10, 11, 13 and 15)
                                                                                          -----------  
                           
                                                                                          $ 1,639,389
                                                                                          ===========
</TABLE>
          See accompanying notes to consolidated financial statements.
                                      F-2
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                      Consolidated Statements of Operations

                        Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                               1997          1996
                                                            ----------    ----------
<S>                                                         <C>           <C>          
Service revenues (note 10):
    Administration fees                                     $3,865,732    4,170,599    
    Buying group                                             1,582,899    1,554,757
    Provider fees                                              136,132      198,895
    Other                                                       60,513       95,645
                                                            ----------    ---------
           Total service revenues
                                                             5,645,276    6,019,896

Cost of services                                             4,206,964    3,916,304
                                                            ----------    ---------

           Income from services
                                                             1,438,312    2,103,592

General and administrative expenses                          1,027,054    1,275,537

Selling and marketing expenses (note 11)                       505,485      914,853
                                                            ----------    ---------

           Loss from operations
                                                               (94,227)     (86,798)
                                                            ----------    ---------

Non-operating income (expense):
    Interest income                                             25,337       26,546
    Interest expense (notes 4 and 12)                          (29,461)     (29,786)
    Other expense (notes 12 and 16)                            (91,914)     (34,821)
                                                            ----------    ---------
           Total non-operating expense
                                                               (96,038)     (38,061)
                                                            ----------    ---------

           Net loss
                                                              (190,265)    (124,859)

Preferred stock dividends                                     (349,162)    (349,162)
                                                            ----------    ---------

           Net loss available to common stockholders                  
                                                            $ (539,427)    (474,021)
                                                            ==========    =========

Net loss per common and equivalent share                    $     (.13)        (.12)
                                                            ==========    =========

Weighted average common and equivalent shares outstanding    4,100,420    4,079,530
                                                            ==========    =========
</TABLE>
See accompanying notes to consolidated financial statements.
                                      F-3
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity

                        Years ended May 31, 1997 and 1996

<TABLE>
<CAPTION>
                                        Preferred stock                             Additional                    Total
                           -----------------------------------------      Common      paid-in    Accumulated   stockholders'
                              Series 1      Series 2      Series 3        stock       capital      deficit        equity
                           -------------   ----------   ------------   ----------   ----------   -----------   ------------     
<S>                        <C>             <C>          <C>            <C>          <C>          <C>            <C>              
Balance, May 31, 1995      $        --          3,882           --         40,754    9,924,409   (9,109,486)      859,559
                                                                    
Net loss                            --           --             --           --           --       (124,859)     (124,859)
                                                                    
Issuance of common stock            --           --             --            250       24,750         --          25,000
                           -------------   ----------   ------------   ----------   ----------   ----------    ----------
                                                                    
Balance, May 31, 1996               --          3,882           --         41,004    9,949,159   (9,234,345)      759,700
                                                                    
Net loss                            --           --             --           --           --       (190,265)     (190,265)
                           -------------   ----------   ------------   ----------   ----------   ----------    ----------
                                                                    
Balance, May 31, 1997      $        --          3,882           --         41,004    9,949,159   (9,424,610)      569,435
                           =============   ==========   ============   ==========   ==========   ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.
                                      F-4
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                        Years ended May 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                               1997        1996
                                                                             ---------   ---------
<S>                                                                        <C>           <C>         
Cash flows from operating activities:                                        
    Net loss                                                               $ (190,265)   (124,859)   
    Adjustments to reconcile net loss to net cash provided by operating      
      activities:                                                            
      Depreciation and amortization                                           178,647     143,001
      Write-off of software costs                                             354,040        --
      Provision for losses/(write-off) of accounts receivable                    (149)     17,090
      Gain on sale of fixed assets                                               --        (8,006)
      Gain on repurchase of debentures                                           --       (10,257)
      Common stock issued for professional services                              --        25,000
      Changes in assets and liabilities:                                     
        (Increase) decrease in receivables                                    (24,800)      7,130
        Increase in prepaid expenses and other                                   (538)    (25,736)
        (Increase) decrease in deposits                                        (1,225)     51,053
        Increase (decrease) in accounts payable                               240,463     (77,883)
        Decrease in deferred income                                            (8,133)    (20,352)
        Increase in accrued rent                                                6,468      16,710
        (Decrease) increase in other accrued expenses                         (61,577)     58,805
                                                                             ---------   --------- 
           Net cash provided by operating activities                          492,931      51,696
                                                                             ---------   ---------
                                                                             
Cash flows from investing activities:                                        
    Purchases of property and equipment                                      (111,479)   (379,687)
    Proceeds from dispositions of property and equipment                         --         8,250
                                                                             ---------   ---------
           Net cash used in investing activities                             (111,479)   (371,437)
                                                                             ---------   ---------
                                                                             
                                                                             
Cash flows from financing activities:                                        
    Repurchase of convertible subordinated debentures                            --       (59,743)
                                                                             ---------   ---------
           Net cash used in financing activities                                 --       (59,743)
                                                                             ---------   ---------
                                                                             
                                                                             
           Net increase (decrease) in cash and cash equivalents               381,452    (379,484)
                                                                             
                                                                             
Cash and cash equivalents, beginning of year                                  436,083     815,567
                                                                             ---------   ---------
                                                                             
Cash and cash equivalents, end of year                                        817,535     436,083
                                                                             =========   =========
                                                                             
Supplemental information:                                                    
                                                                             
Cash paid for interest                                                         28,344      30,602
</TABLE>
                                                                             
See accompanying notes to consolidated financial statements.
                                      F-5
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                              May 31, 1997 and 1996

(1)    Summary of Significant Accounting Policies

       Nature of Business and Consolidation Policy

       Avesis  Incorporated,   a  Delaware  Corporation,  and  its  wholly-owned
       subsidiary,   Avesis  of   Washington,   D.C.,  a  District  of  Columbia
       Corporation (collectively,  the Company), markets and administers vision,
       hearing,  dental and  chiropractic  programs which are designed to enable
       participants  (members),  who are  enrolled  through  various  sponsoring
       organizations  such as  insurance  carriers,  Blue Cross and Blue  Shield
       organizations,  corporations, unions, and various associations (sponsors)
       to  realize  savings  on  purchases  of  products  and  services  through
       Company-organized networks of providers, such as opticians, optometrists,
       ophthalmologists,   hearing   specialists,   dentists  and  chiropractors
       (providers).  The Company also makes available to its vision  providers a
       buying group  program  that enables the provider to purchase  frames from
       the  manufacturers  at discounts from wholesale  costs.  These discounted
       prices are generally lower than a provider could negotiate  individually,
       due to the large  volume of purchases  of the buying  group.  The Company
       receives a fee for its services  which varies  according to the volume of
       activity.  The consolidated  financial statements include the accounts of
       Avesis  Incorporated  and its  wholly-owned  subsidiary.  All significant
       intercompany   balances  and   transactions   have  been   eliminated  in
       consolidation.

       Cash Equivalents

       Cash and cash  equivalents  include cash on hand, money market funds, and
       short-term investments with original maturities of 90 days or less.

       Property and Equipment

       Property and equipment are stated at cost and are  depreciated  using the
       straight-line method over estimated useful lives which range from five to
       ten years.  Leasehold  improvements  are  amortized  over the  shorter of
       either the asset's  useful life or the  related  lease term.  Software is
       amortized  over the estimated  useful lives which range from 10 months to
       five years.

       Revenue Recognition

       Administrative  fee  revenue  is  recognized  on the  accrual  basis,  in
       accordance  with generally  accepted  accounting  principles,  during the
       month that the member is entitled to use the benefit.  Substantially  all
       administrative  fee  revenue  is  received  in the  month  the  member is
       entitled to use the benefit. Any amounts received in advance are recorded
       as deferred  income and recognized  ratably over the  membership  period.
       Buying  group  revenue  is  recognized  in the month the  merchandise  is
       shipped  to  the  provider.   Provider  fee  revenue,   based  on  member
       utilization, is recognized when the service is performed.

       Stock Options and Warrants

       All stock  options  and  warrants  are  granted at fair  market  value or
       greater on the date of grant.
                                      F-6
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

       Net Loss Per Common and Equivalent Share

       For fiscal years 1997 and 1996, net loss per common and equivalent  share
       is calculated by dividing net loss, after giving  appropriate  effect for
       preferred  stock  dividends,  by the  weighted  average  number of common
       shares outstanding during the year.

       Dilutive common  equivalent  shares consist of stock options and warrants
       (computed using the treasury stock method) and the assumed  conversion of
       subordinated  convertible debentures into common stock. Fully diluted net
       loss per common and equivalent share approximates net loss per common and
       equivalent share.

       Income Taxes

       The  Company  accounts  for income  taxes  under the asset and  liability
       method.  Under this  method,  deferred  tax assets  and  liabilities  are
       recognized  for the estimated  future tax  consequences  attributable  to
       differences  between the financial statement carrying amounts of existing
       assets and  liabilities  and their  respective  tax bases.  Deferred  tax
       assets and  liabilities  are measured using enacted tax rates expected to
       be in effect  during the year in which those  temporary  differences  are
       expected to be  recovered  or settled.  The effect on deferred tax assets
       and  liabilities  of a change in tax rates is recognized in income in the
       period that includes the enactment date.

       Stock Option Plan

       Prior to June 1, 1996, the Company accounted for its stock option plan in
       accordance  with the  provisions of Accounting  Principles  Board ("APB")
       Opinion No. 25,  Accounting  for Stock Issued to  Employees,  and related
       interpretations.  As such,  compensation expense was recorded on the date
       of  grant  only if the  current  market  price  of the  underlying  stock
       exceeded the exercise  price.  On June 1, 1996,  the Company  implemented
       SFAS No. 123,  Accounting  for  Stock-Based  Compensation,  which permits
       entities to recognize  as expense over the vesting  period the fair value
       of all stock-based awards on the date of grant.  Alternatively,  SFAS No.
       123 also  allows  entities to  continue  to apply the  provisions  of APB
       Opinion No. 25 and  provide  pro forma net income and pro forma  earnings
       per share  disclosures  for employee stock option grants made in 1996 and
       future years as if the  fair-value-based  method  defined in SFAS No. 123
       had been  applied.  The  Company  has  elected to  continue  to apply the
       provisions  of APB Opinion  No. 25 and  provide the pro forma  disclosure
       provisions  of SFAS No. 123 when  results are  material to the  financial
       statements.

       Convertible Debentures

       The Company  incurred  debenture  issuance costs which have been deferred
       and  are  being  amortized  over  the  term  of  the  debentures  on  the
       straight-line  basis.  Debenture  discount is being amortized as interest
       expense over the life of the debentures using the interest method.

       Use of Estimates

       Management  of the Company has made  certain  estimates  and  assumptions
       relating to the reporting of assets, liabilities,  revenues, and expenses
       to prepare the financial statements in conformity with generally accepted
       accounting principles. Actual results could differ from those estimates.
                                      F-7
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

(2)  Receivables

     As of May 31, 1997 receivables consists of:

       Trade accounts receivable                             $          360,207 
       Less allowance for doubtful accounts                             (19,851)
                                                             -------------------

                                                             $          340,356
                                                             ===================



(3)  Property and Equipment

     As of May 31, 1997 property and equipment consists of:

       Furniture and fixtures                                $          228,535
       Equipment                                                        823,160
       Leasehold improvements                                            73,729
       Software                                                          57,416
                                                             -------------------
                                                                      1,182,840
       Less accumulated depreciation and amortization                (1,001,045)
                                                             -------------------

                                                             $          181,795
                                                             ===================


(4)    Convertible Subordinated Debentures

       The Company's 9-1/2% convertible subordinated debentures are due December
       1, 1997 and require semi-annual  interest payments on June 1 and December
       1. The debentures  are  convertible  into shares of the Company's  common
       stock at any time prior to maturity,  unless  previously  redeemed,  at a
       conversion  price of $5 per share,  subject to  adjustment  under certain
       circumstances.

       The  debentures  are  redeemable at the Company's  option at any time, in
       whole or in part, at a redemption  price of 101% of the principal  amount
       and  declining  annually  to 100% of such  principal  amount  on or after
       December  1,  1996.  The  debentures  are   subordinated  to  all  senior
       indebtedness, as defined in the debenture agreement.


(5)    Operating Leases

       The  Company  leases  office  space  under  an  agreement  which  expires
       September  30, 2000.  The Company is  obligated to pay its  proportionate
       share of the building's operating costs not to exceed stated maximums. As
       of May 31, 1997,  the Company has signed a subleasing  agreement and must
       move out of the current space by October 1, 1997. The Company also leases
       equipment under long-term operating lease agreements. For the years ended
       May 31, 1997 and 1996, rent expense for all operating leases was $196,406
       and $244,130, respectively.
                                      F-8
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

       The  Company  records  rent  expense  using  the  straight-line   method.
       Accordingly, the difference between rent expense and actual rent paid has
       been recorded as accrued rent for  financial  reporting  purposes.  These
       balances are included in other  accrued  expenses and accrued rent in the
       accompanying balance sheet.

       Future minimum lease payments for operating leases are as follows:

                   Years ending May 31,

                           1998                               $     244,915
                           1999                                     207,192
                           2000                                     144,352
                           2001                                      15,114
                           2002                                      10,553
                        Thereafter                                   10,553
                                                              ------------------

              Total future minimum lease payments             $     632,679   
                                                              ==================

(6)    Fair Value of Financial Instruments

       SFAS No. 107,  "Disclosures  About Fair Value of Financial  Instruments,"
       requires the Company to disclose  estimated fair values for its financial
       instruments.  The  following  table  presents  the  carrying  amounts and
       estimated  fair values of the Company's  financial  instruments as of May
       31,  1997,   together  with  a  description  of  the   methodologies  and
       assumptions used to determine such amounts.

                                                        Carrying         Fair
                                                         Amount          Value
                                                       -----------     ---------
       
         Financial assets:
           Cash and cash equivalents                    $ 817,535       817,535
           Receivables (net)                              340,356       340,356
       
         Financial liabilities:
           Accounts payable and accrued expenses          606,790       606,790
           Convertible subordinated debentures (net)      187,888       187,888
           Notes payable to stockholders                  160,000       151,613
  

       The carrying amount of cash and cash equivalents  approximates fair value
       because their maturity is generally less than three months.  The carrying
       amount of receivables, accounts payable and accrued expenses approximates
       fair value since they are expected to be collected or paid within 90 days
       of  year-end.  The fair  values  of notes  payable  to  stockholders  are
       estimated by discounting the future cash flows at rates currently offered
       to the Company for similar debt instruments.
                                      F-9
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

(7)    Income Taxes

       No income tax benefit was recorded in 1997 due to the  establishment of a
       100%  valuation  allowance  against  the  Company's  deferred  tax assets
       because of the uncertainty  surrounding the Company's  ability to realize
       its net operating loss carryforwards.

       The tax effects of temporary  differences  that give rise to  significant
       portions of deferred tax assets and liabilities are as follows:

         Deferred tax assets:
            Net operating loss carryforwards (NOL)                    2,730,000
            Accrued expenses                                             19,000
            Property and equipment                                        3,100
            Valuation allowance                                      (2,752,100)
                                                                    ------------
                                                              
         Net deferred tax assets                                           --
                                                                    ============
                                                        

       Management  estimates  that it is more  likely  than not that it will not
       realize a substantial portion of the benefits of its deferred tax assets.
       Accordingly,  it has  established  a valuation  allowance to reflect this
       uncertainty. The net change in the valuation allowance for the year ended
       May 31,  1997 was an  increase  of  $65,100.  The net change for the year
       ended May 31, 1996 was an increase of $47,000.

       The Company's  federal NOLs of  approximately  $7,500,000  expire between
       1999 and 2010.


(8)    Stock Option Plans and Warrants

       In 1993 the Company  adopted a stock option plan (the "Plan").  The stock
       option plan sets aside 600,000 shares of common stock (includes incentive
       qualified and non-qualified  stock options) to be granted to employees at
       a price not less than the fair  market  value of the stock at the date of
       grant. The vesting provisions are determined by the Board of Directors at
       the dates of grant.  At May 31,  1997,  there were no  incentive  options
       outstanding under this plan and 310,000  nonqualified options exercisable
       at prices ranging from $.40 -$1.00 per share.

       In connection with the Long-Term Management Agreement (note 11), National
       Health Enterprises, Inc. of Owing Mills, Maryland (NHE) received ten-year
       options to purchase up to 4,400,000 shares of the Company's common stock.
       Options to purchase  1,400,000  shares at an  exercise  price of $.40 per
       share were vested at  inception,  and the  remaining  options to purchase
       shares at an exercise price of $.48 per share vested on December 5, 1994,
       in connection with a Board of Directors  resolution.  NHE transferred all
       of the options in March 1993 to certain individuals  affiliated with NHE.
       Effective December 5, 1994, these individuals collectively transferred an
       aggregate  of 125,000  of the  options  exercisable  at $.48 per share to
       Richter & Co., Inc.

       The Company  applies APB  Opinion No. 25 and related  interpretations  in
       accounting  for its  plan.  Accordingly,  no  compensation  cost has been
       recognized  for  the  Plan.  Had  compensation  cost  for  the  Company's
       stock-based  compensation  plan  been  determined  consistent  with  FASB
       Statement  No. 123, the Company's net income and earnings per share would
       not be materially different from those reported.
                                      F-10
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

       The following table summarizes stock option activity:

                                                          Common Stock
                                                --------------------------------
                                                                      Per Share
                                                                       Exercise 
                                                   Options              Price
                                                -------------       ------------

        Balance outstanding, May 31, 1995         4,906,325          $.40-1.00
        Options granted                               --
        Options exercised                             --
        Options canceled                             25,000
                                               -------------
      
        Balance outstanding, May 31, 1996         4,881,325
                                               =============
  

       As of May 31,  1996,  options  to  purchase  4,881,325  shares  at prices
       ranging from $.40 to $1.00 were exercisable.

                                                          Common Stock          
                                                --------------------------------
                                                                      Per Share 
                                                                       Exercise 
                                                   Options              Price   
                                                -------------       ------------
                                                
        Balance outstanding, May 31, 1996         4,881,325          $.40-1.00
        Options granted                              10,000            $1.00
        Options exercised                             --
        Options canceled                            181,325
                                                -------------
                                            
        Balance outstanding, May 31, 1997          4,710,000
                                                =============
                                            
                                           
       As of May 31,  1997,  options  to  purchase  4,710,000  shares  at prices
       ranging from $.40 to $1.00 were exercisable.

       A summary of stock options granted at May 31, 1997 follows:

<TABLE>
<CAPTION>
                               Options Outstanding                                             Options Exercisable
----------------------------------------------------------------------------------    --------------------------------------
                                                Weighted
                            Number              Average              Weighted              Number              Weighted
     Range of            Outstanding           Remaining             Average            Exercisable            Average
     Exercise             at May 31,        Contractual Life         Exercise            at May 31,            Exercise
      Price                  1997                                     Price                 1997                Price
-------------------    -----------------    -----------------    -----------------    -----------------    -----------------

<S> <C>                <C>                  <C>                  <C>                  <C>                  <C>                  
    $.40-$1.00                4,700,000        6.0 years               $.45                  4,700,000           $.45
      $1.00                      10,000        10.0 years             $1.00                     10,000          $1.00
                       -----------------                         -----------------    -----------------    -----------------

                              4,710,000                                $.45                  4,710,000           $.45
                       =================                         =================    =================    =================
</TABLE>
                                      F-11
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

       During  fiscal 1993, a former  employee was granted  warrants to purchase
       100,000 shares of common stock.  The purchase price is $.50 per share for
       50,000 shares and $1.00 per share for the remaining  50,000  shares.  The
       warrants expire on February 1, 1998.

       The management  agreement  discussed above and related  transactions with
       NHE and  certain  other  substantial  transactions  were  structured  and
       negotiated  for the  Company by  Richter & Co.,  Inc.  (RCI),  a New York
       investment banking firm, whose principal, William L. Richter, is a member
       of the Company's Board of Directors.  RCI received cash  consideration of
       $50,000 and ten-year warrants to purchase 400,000 shares of common stock.
       As of May 31, 1997,  127,273  warrants  were  exercisable  at an exercise
       price of $.40 per share  and  272,727  warrants  were  exercisable  at an
       exercise  price of $.48 per share.  As of May 31, 1997,  160,000 of these
       warrants had been assigned to William L. Richter.

(9)    Preferred Stock

       The Company has  authorized  1,000,000  shares of $10 Class A,  Nonvoting
       Cumulative Convertible Preferred Stock, Series 2 (the Series 2 Preferred)
       with a par value of $.01 per share and  quarterly  dividends at the fixed
       annual rate of $.90 per share.  In August 1993, the Board of Directors of
       the Company  resolved that no dividends would be declared or paid without
       its specific authorization.  The Series 2 Preferred is convertible at the
       option of the holder into common stock of the Company at $4.00 per share,
       subject to adjustment  under certain  conditions.  There is a liquidation
       preference  which entitles  holders to receive,  out of the assets of the
       Company,  $10.00 per share plus all accrued and unpaid dividends,  before
       any amounts are distributed to the holders of common stock.  The Series 2
       Preferred  may be  redeemed  at any  time,  in whole  or in part,  by the
       Company,  at its  option at $10.00  per share  plus all the  accrued  but
       unpaid dividends.

       No  dividends  may be paid on common  stock unless all accrued and unpaid
       dividends have been paid on the Series 2 Preferred.

(10)   Concentration of Credit Risk and Major Customers

       The  Company's  programs and services are offered  throughout  the United
       States.  Most of the Company's  customers are located in the southwestern
       states and the D.C.  metropolitan  area.  Three major customers  provided
       17%,  15% and 14% of  total  service  revenues  in 1997 and  three  major
       customers provided 27%, 13% and 12% in 1996.

(11)   Long-Term Management and Marketing Agreement

       In March 1993, the Company entered into a Long-Term  Management Agreement
       with NHE,  which  provides for NHE to manage all aspects of the Company's
       business.  The  initial  term  of the  agreement  is  five  years  and is
       renewable  for two  two-year  periods.  The Company  paid NHE $220,000 in
       fiscal 1994 and is obligated to pay $200,000  each year  thereafter.  NHE
       also received options to purchase up to 4,400,000 shares of the Company's
       common stock (note 8).

       Additionally,   the  Company  entered  into  a  Marketing  Representation
       Agreement  with NHE,  whereby NHE is entitled to receive a commission  of
       7.5% of enrollment fees from sponsor contracts  generated by NHE, or 2.5%
       of enrollment  fees where marketing  assistance is rendered.  The Company
       paid  approximately  $65,000  and  $85,000 to NHE under the terms of this
       agreement in fiscal 1997 and 1996, respectively.
                                      F-12
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

(12)   Related Party Transactions

       In March 1993,  the Company  obtained loans in the amount of $80,000 each
       from two  stockholders of the Company who are also affiliates of NHE. The
       entire principal of the notes is due March 18, 1998 and bears interest at
       the rate of 6% per annum.  Repayment on the notes may be  accelerated  by
       the  holders  if the  Company  terminates  the NHE  Management  Agreement
       without cause.  Interest is payable  semiannually,  in arrears. The notes
       are  unsecured  and  subordinated  to the  Company's  outstanding  9-1/2%
       debentures  and future  indebtedness  of the  Company.  The Company  paid
       $10,442 and $9,600 in  interest  under the terms of these notes in fiscal
       1997 and 1996, respectively.

       During fiscal 1997 and 1996, the Company purchased  approximately $76,000
       and $326,000,  respectively, in software and related programming services
       from  National  Computer  Services,  Inc.  (NCS),  a company owned by the
       President and two  stockholders of the Company who are also affiliates of
       NHE.  These  costs  have been  capitalized  as  property  and  equipment.
       Additionally,  the Company has contracted  with the same Company to lease
       its computer system for approximately  $2,500 per month. During 1997, the
       Company decided to discontinue the software  development project in favor
       of a new system on a PC platform.  Accordingly, a portion of the software
       development  costs previously  capitalized on the Company's balance sheet
       were expensed.  The charge of $286,069,  included in other expense in the
       consolidated statement of operations, is net of an outstanding amount due
       to the software vendor of $67,971,  originally  recorded as other accrued
       expense on the Company's balance sheet, which is no longer a liability to
       the Company  due to the  discontinuance  of the  project.  Subsequent  to
       year-end,  the Company  contracted  with a software vendor to develop new
       technology to integrate all of the Company's systems.

       The  Company   entered  into  a   Registration   Rights   Agreement  (the
       "Registration  Rights Agreement")  effective March 18, 1993 with NHE, and
       two shareholders.  The Registration  Rights Agreement provides two demand
       registrations with respect to 100,000 shares previously purchased and the
       shares  issuable  pursuant to the  ten-year  options  discussed in note 8
       ("Registrable Securities").  The first demand registration is exercisable
       at the  request  of holders of at least  900,000  Registrable  Securities
       after the  exercise  by NHE and/or its  transferees  of at least  900,000
       options.  The second demand registration is exercisable at the request of
       holders of at least 1,000,000  options after  completion of a fiscal year
       in which the Company has profits of at least $1,000,000. The Registration
       Rights Agreement also provides piggyback registration rights with respect
       to registrations in which other selling  stockholders are  participating.
       The  Company  is  obligated  to pay the  offering  expenses  of each such
       registration,  except for the selling  stockholders'  pro rata portion of
       underwriting discounts and commissions. No precise prediction can be made
       of the  effect,  if any,  that the  availability  of shares  pursuant  to
       registrations  under the  Registration  Rights Agreement will have on the
       market  price  prevailing  from  time to  time.  Nevertheless,  sales  of
       substantial  amounts of the common stock  pursuant to such  registrations
       could adversely affect prevailing marketing prices.

       Effective  January  18,  1995,  the  Company  retained  RCI as  exclusive
       financial advisor and placement agent.  RCI's fees under this arrangement
       are payable only upon  completion  of defined  transactions  and, in such
       event,  are calculated  upon the basis of a percentage of the transaction
       value.  The  agreement is  terminable by the Company upon 90 days notice,
       provided  that RCI is  entitled  to  receive  certain  fees for two years
       following  termination  in the event a transaction  is concluded  with an
       entity introduced to the Company by RCI.

       RCI provides  substantial ongoing financial management and other services
       to the Company at no charge.  In the opinion of management,  the terms of
       the Company's  arrangements with RCI, NHE and NCS taken as a whole are at
       least  as  favorable  to the  Company  as could be  obtained  from  third
       parties.
                                      F-13
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

(13)   Commitments and Contingencies

       In June 1992,  the  California  Department of  Corporations  notified the
       Company to cease and desist from operating in California as a health care
       service  plan  without  a  license  under  California's  Knox-Keene  Act.
       Approximately   2%   of   the   Company's   revenue   is   derived   from
       California-related  business.  Since that time,  the Company has sold its
       pharmacy line of business and taken  certain  other steps to  restructure
       portions of its business in  California  so as to be exempt from coverage
       under the  Knox-Keene  Act. The Department has taken no further action in
       this matter.  However, there can be no assurance that these steps will be
       considered  sufficient  by the  Department  in the  event  of any  future
       challenge by the  Department.  A material  interruption  of the Company's
       California  business  could  materially  adversely  affect the  Company's
       overall business.

(14)   Employee Benefit Plan

       The Company has a qualified 401(k) Plan (defined  contribution plan). The
       plan covers  substantially  all employees who have completed three months
       of service and  attained  age  twenty-one.  Subject to limits  imposed by
       Internal  Revenue Service  regulations and other options  retained by the
       Company affecting participant contribution,  participants may voluntarily
       contribute  a  percentage  of their  annual  wages not to  exceed  limits
       established by the Tax Reform Act of 1986.  Participants  are immediately
       vested in the amount of their direct contribution.

(15)   Liquidity

       The Company has suffered recurring losses from operations.  Management is
       currently  seeking  methods to  maximize  service  revenues  and  control
       operating  expenses.  If the  Company is  required  to obtain  additional
       financing,  there can be no assurances  that sources of financing will be
       available on terms favorable to the Company, if at all.

(16)   Other Expense

       As a result of a review of the assumptions  relating to the  discontinued
       activity of providing  claims  processing  services  for a Company  which
       operates a  pharmaceutical  benefits  plan,  it was  determined  that the
       aggregate  estimated  costs  associated  with the claims payments were in
       excess of the actual costs.  The Company recorded a gain in other expense
       of $192,234 related to this activity.
                                      F-14
<PAGE>
Item 8.   Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

          Not applicable.

                                    PART III
                                    --------

Item 9.   Directors,   Executive   Officers,   Promoters  and  Control  Persons;
          Compliance With Section 16(a) of the Exchange Act

          The  following  table  sets  forth  the  names  of the  directors  and
executive officers of the Company and certain biographical  information relating
to them.


Name                           Age            Position(s) with Company
----                           ---            ------------------------

William R. Cohen                66            Co-Chairman and Director

William L. Richter              54            Co-Chairman and Director

Kenneth L. Blum, Sr.            70            Director, Acting President and CEO

Gerald L. Cohen                 53            Director

Sam Oolie                       61            Director

Neal Kempler                    29            Corporate Secretary,
                                              Vice President of Operations

Shannon R. Barnett              29            Controller

Joel H. Alperstein              29            Director of Finance


          William  R.  Cohen,  66,  Co-Chairman  of the  Board,  has served as a
Director of the Company  since April 1986.  Mr.  Cohen is the  President of Star
Uniform  Rental  Company and Go Lightly Candy  Company.  Mr. Cohen has served as
Chairman of American Mobile  Communications,  a cellular  communications company
and has also held  various  positions  with CFC  Associates,  a venture  capital
partnership,  and its predecessor organizations.  Mr. Cohen serves as a lifetime
trustee of the Hospital Center,  Orange, New Jersey. Mr. Cohen is not related to
Gerald L. Cohen.

          William L. Richter,  54, Co-Chairman of the Board, has been a director
of the Company  since August  1993.  Mr.  Richter has been  President of Richter
Investment  Corp.
                                       15
<PAGE>
and  its   wholly-owned   subsidiary,   Richter  &  Co.,   Inc.,   a  registered
broker-dealer,  asset management and investment banking firm (or its predecessor
organization)   for  the  past  six  years.   Mr.  Richter  was  Co-Chairman  of
Rent-A-Wreck of America, Inc., a franchisor of automobile rental agencies,  from
November 1989 to June 1993 and has been Vice Chairman of that Company since June
1993.

          Kenneth L. Blum,  Sr.,  70,  has served as a Director  of the  Company
since  August  1993.  Mr. Blum has been  acting  President  and Chief  Executive
Officer of the Company since  September  1996. Mr. Blum has been Chairman of the
Board of Rent-A-Wreck of America,  Inc., an automobile rental franchisor,  since
June 1993 and  President  from June 1993 to October  1994,  and Chief  Executive
Officer  since January  1994.  Mr. Blum has been the  President of KAB,  Inc., a
management company,  since 1990. Mr. Blum co-founded United HealthCare,  Inc., a
Baltimore,  Maryland-based  healthcare  company,  in  1974  and  served  as  its
President and Chief Executive  Officer until 1990. Since 1990, Mr. Blum has been
a management  consultant to a variety of companies,  including National Computer
Services,  Inc.,  a  computer  service  bureau;  American  Business  Information
Systems,  Inc., a high-volume laser printing company;  and Mail-Rx, a mail-order
prescription  drug company.  Mr. Blum is the father of Kenneth L. Blum,  Jr. and
the father-in-law of Alan S. Cohn. See "Management Services Agreement."

          Gerald L. Cohen,  53, has served as a Director  of the  Company  since
March 1985.  Mr. Cohen is a managing  director of Greenley  Capital  Company,  a
limited partnership which is a New York-based investment banking firm. Mr. Cohen
is the sole  shareholder  of the general  partner  (Greenley  Corp.) of Greenley
Capital  Company.  From August 1982 through April 1989, Mr. Cohen was a managing
director of Richter,  Cohen & Co., a New York-based investment banking firm. Mr.
Cohen also serves as a Director of  Marketing  Systems of America.  Mr. Cohen is
not related to William R. Cohen.

          Sam Oolie,  61, has served as a Director  of the  Company  since March
1985. Mr. Oolie has been Chairman of NoFire  Technologies,  Inc., a manufacturer
of fire retardant coatings and textiles, since August 1995 and has been Chairman
of Oolie Enterprises, an investment company, since July 1985. Mr. Oolie has held
various positions with CFC Associates,  a venture capital  partnership,  and its
predecessor  companies  since  January  1984.  He was Vice  Chairman of American
Mobile  Communications,  Inc. a cellular telephone  company,  from February 1986
until  July  1989  and  Chairman  of the  Nostalgia  Network,  a  24-hour  cable
television  program service,  from April 1987 until January 1990. Mr. Oolie also
serves as a Director of Noise  Cancellation  Technologies,  Inc.,  and  Comverse
Technology, Inc.

          Neal  Kempler,  29, has been the  Corporate  Secretary  of the Company
since  June  1996.  Mr.  Kempler  has been the Vice  President  of  Marketing  &
Operations   of  the  Company  since  August  1996  and  was  Assistant  to  the
President/Director of Marketing from January 1993 until August 1996. Mr. Kempler
served as Account Executive of National Health  Enterprises,  Inc., a management
company, from June 1990 until January 1993.
                                       16
<PAGE>
          Shannon R. Barnett,  29, has been Controller of the Company (Principal
Accounting  Officer) since August 1996 and was Senior  Accountant of the Company
from November 1995 until August 1996.  Ms.  Barnett was Assistant  Controller of
Quality Hotel and Marlyn Nutraceuticals,  a vitamin manufacturer, from September
1994 until  November 1995 and Staff  Accountant of General  Atlantic  Resources,
Inc. an oil and gas company, from November 1992 until June 1994.

          Joel H.  Alperstein,  29, has been  Director of Finance of the Company
(Principal  Financial  Officer) since January 1997.  Mr.  Alperstein was a self-
employed  financial  consultant  from  September  1996 until  December 1996. Mr.
Alperstein was a Manager at Stout, Causey & Horning, P.A., a full service public
accounting firm, from September 1992 until August 1996, and a Senior  Accountant
at Arthur Andersen, LLP, from July 1990 until September 1992. Mr. Alperstein has
a Masters of Business  Administration  from Loyola  College of Maryland and is a
Certified Public Accountant.

          All  directors  will hold  office  until the next  annual  meeting  of
stockholders and the election and  qualification of their  successors.  Officers
are elected annually and serve at the pleasure of the Board of Directors.

Management Services Agreement

          Effective  March 18,  1993,  the  Company  entered  into a  Management
Agreement (the "Management Agreement") with National Health Enterprises, Inc., a
Maryland   corporation   ("NHE")   pursuant   to  which  NHE  agreed  to  manage
substantially  all  aspects  of  the  Company's  business,  subject  to  certain
limitations and the direction of the Company's Board of Directors. See Item 12 -
"Certain Relationships and Related Transactions."

          The following  individuals,  though not necessarily  deemed  executive
officers  of the  Company,  are  providing  significant  services to the Company
pursuant to the Management Services Agreement:

          Kenneth L. Blum, Jr., 33, is President and Chief Executive Officer and
the sole  stockholder  of NHE.  Mr.  Blum is also  President  and  Secretary  of
Rent-A-Wreck of America,  Inc., an automobile  rental  franchisor,  President of
National Computer  Services,  Inc., a computer service bureau,  and President of
American  Business  Information  Systems,  Inc., a  high-volume  laser  printing
company.  Alan S. Cohn, 42, is providing sales and marketing  services on behalf
of the Company through an arrangement with NHE for sales and marketing services.
Kenneth L. Blum,  Sr., the  Company's  acting  President,  CEO and member of the
Board of Directors,  is the father of Kenneth L. Blum, Jr. and the father-in-law
of Alan S. Cohn.
                                       17
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance

          Under  the  securities  laws  of  the  United  States,  the  Company's
directors, its executive officers, and any persons holding more than ten percent
of the Company's Common and Preferred Stock are required to report their initial
ownership of the Company's Common and Preferred Stock and any subsequent changes
in that ownership to the Securities and Exchange Commission.  Specific due dates
for these reports have been  established and the Company is required to disclose
any  failure to file by these  dates.  The  Company  believes  that all of these
filing  requirements  were satisfied during the year ended May 31, 1997,  except
(i) Kenneth L. Blum,  Jr.  reported four January 1997  transactions  on a Form 4
dated August 8, 1997;  (ii) William R. Cohen reported on a Form 4 dated February
18,  1997 the  purchase of  securities  on January 29,  1997;  (iii)  William L.
Richter  reported on a Form 4 dated February 12, 1997 the purchase of securities
on January 29, 1997; (iv) Sam Oolie reported on an amended Form 4 dated November
18,  1996 the sale of  securities  on May 1, 1996;  (v)  Benjamin  D. Ward,  Sr.
reported on a Form 4 dated  December 6, 1996 the sale of  securities  October 4,
1996; (vi) Benjamin D. Ward, Sr. reported on a Form 4 dated December 6, 1996 the
sale of securities August 21, 1995; (vii) Joel H. Alperstein  reported on a Form
3 dated January 27, 1997 holdings upon becoming the principal  financial officer
on January  13,  1997;  (viii)  Shannon R.  Barnett  reported  on a Form 3 dated
January 27, 1997  holdings upon  becoming the  principal  accounting  officer on
August 19, 1996; and (ix) Neal A. Kempler reported on a Form 3 dated November 5,
1996  holdings  upon  becoming  an officer  on June 20,  1996.  In making  these
disclosures,  the Company has relied  solely on  representations  obtained  from
certain of its former and current directors,  executive officers and ten percent
holders and/or copies of the reports that they have filed with the Commission.


Item 10.    Executive Compensation

                           SUMMARY COMPENSATION TABLE

         The following table and related notes set forth  information  regarding
         the compensation  awarded to, earned by or paid to both individuals who
         served as the Company's Chief  Executive  Officer during the year ended
         May 31,  1997.  No  executive  officer who was serving as an  executive
         officer during fiscal 1997 received  salary and bonus which  aggregated
         at least $100,000 for services  rendered to the Company during the year
         ended May 31, 1997.

<TABLE>
<CAPTION>
-------------------------------------- --------- ------------------------- ------------------------------------------
                                                   Annual Compensation              Long Term Compensation
                                                 ------------------------- ------------------------------------------
                                                                                            Awards
-------------------------------------- --------- ------------------------- ------------------------------------------
Name and Principal Position              Year           Salary ($)          Securities Underlying Options/SARs (#)
---------------------------              ----           ----------          --------------------------------------
<S>                                      <C>           <C>                                    <C>
Kenneth L. Blum, Sr., Acting CEO (3)     1997               $0                                 -
                                         1996               $0                                 -
                                         1995               $0                                 -

Frank Cappadora, Former CEO              1997           $6,000 (1)                            (2)
                                         1996          $24,000 (1)                            (2)
                                         1995          $12,000 (1)                            (2)
-------------------------------------- --------- ------------------------- ------------------------------------------
</TABLE>
                                       18
<PAGE>
(1) Mr.  Cappadora was the President and Chief Executive  Officer of the Company
    from September 1992 until September 1996 and was designated to such position
    by the  Board of  Directors  in  connection  with the  Management  Agreement
    between the Company and NHE.  NHE  received  cash  compensation  of $220,000
    under  the  Management  Agreement  for the year  ended  March  18,  1994 and
    $200,000 per year thereafter plus expense  reimbursements and is entitled to
    receive commissions pursuant to a Marketing Agreement.  Mr. Cappadora is not
    a  stockholder  of NHE,  and his  compensation  from NHE and its  affiliated
    entities is not tied directly to the services  performed by Mr. Cappadora on
    behalf of the Company.  During 1995, 1996 and 1997 Mr. Cappadora  received a
    portion of his compensation,  shown in the table, directly from the Company,
    while the remaining portion was paid to him by NHE.

(2) NHE received  options for the purchase of 4,400,000  shares of the Company's
    Common Stock in March 1993 in connection with the Management  Agreement.  As
    of August 19, 1997,  Mr.  Cappadora  holds  options for 85,500 shares of the
    Company's  Common Stock,  which options were transferred to Mr. Cappadora by
    NHE in March 1993.
    The options are exercisable at $.48 per share through March 18, 2003.

(3) Mr. Blum replaced Mr. Cappadora as CEO of the Company during September 1996.

    See also  Item 12 --  "Certain  Relationships  and  Related  Transactions  -
    Agreements with National Health Enterprises, Inc. -- Stock Option Grant."

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION VALUE TABLE

          The  following  table  sets  forth  information  with  respect  to the
executive officers named in the Summary Compensation Table concerning the number
and  value of  options  outstanding  at the end of the  last  fiscal  year.  The
executive officers named in the Summary  Compensation Table did not exercise any
options during the last fiscal year.

<TABLE>
<CAPTION>
-------------------------------- ----------------------------------------- -----------------------------------------
                                          Number of Unexercised                     Value of Unexercised
                                          Options at FY-End (#)                     in-the-Money Options
                                                                                        at FY-End ($)
                                 ---------------------- ------------------ ---------------------- ------------------
Name                                  Exercisable         Unexercisable         Exercisable         Unexercisable
----                                  -----------         -------------         -----------         -------------
<S>                                     <C>                    <C>                <C>                    <C>    
Kenneth L. Blum, Sr.                      ---                  ---                  ---                  ---
Frank Cappadora                         85,500                 ---                $0 (1)                 ---

-------------------------------- ---------------------- ------------------ ---------------------- ------------------
</TABLE>
(1) No value is reported because the average of the closing bid and asked prices
    on May 31, 1997 as reported by the National  Quotation Bureau,  Inc. ($0.25)
    is less than the exercise price of $.48 per share. See Note 2 to the Summary
    Compensation  Table  and  Item  12  -  "Certain  Relationships  and  Related
    Transactions - Agreements  with National Health  Enterprises,  Inc. -- Stock
    Option Grant."

Employment   Contracts,   Termination  of  Employment,   and   Change-in-Control
Arrangements

          In the  event of  termination  of the  Management  Agreement  with NHE
without  cause,  all options  granted to NHE in connection  with the  Management
Agreement remain  outstanding for the balance of their 10-year term. See Item 12
-- "Certain  Relationships and Related  Transactions -- Agreements with National
Health Enterprises, Inc. -- Stock Option Grant."
                                       19
<PAGE>
Director Compensation

          Directors  are  reimbursed  for  out-of-pocket  expenses  incurred  in
connection with each Board of Directors or committee meeting attended. Directors
who also are  employees  of the  Company  are  eligible  to  participate  in the
Company's  Incentive  Stock Option Plan and the Company's  401(k) Plan,  and all
directors are eligible to  participate  in the Company's  1993 Stock Option Plan
(the "1993 Plan").  Pursuant to the 1993 Plan, options for 100,000 shares of the
Company's  Common  Stock  were  granted  on April 8,  1993 to each of  directors
William R. Cohen,  Gerald L. Cohen,  and Sam Oolie.  The exercise  price of such
options  is $.40 per  share,  which  was at least the fair  market  value of the
Company's Common Stock on the date of grant. Options for 25,000 shares of Common
Stock were  exercisable  by each of the optionees as of the date of grant,  with
the  balance  vesting  in equal  parts at the end of each of the 10  three-month
periods  following  the date of grant.  As of May 31,  1997  options for 100,000
shares of Common Stock were exercisable by each of the optionees.

Item 11.    Security Ownership of Certain Beneficial Owners and Management

          As of August 19, 1997 there were 4,100,420  shares of Common Stock and
388,180 shares of Preferred Stock outstanding.  The table below sets forth as of
August 19,  1997,  certain  information  regarding  the  shares of Common  Stock
beneficially  owned by each  director of the  Company  and each named  executive
officer in the  Summary  Compensation  table set forth in Item 10, by all of the
Company's  executive  officers and  directors as a group,  and by those  persons
known by the Company to have owned  beneficially  5% or more of the  outstanding
shares of Common Stock,  which  information as to beneficial  ownership is based
upon statements furnished to the Company by such persons.
                                       20
<PAGE>
<TABLE>
<CAPTION>
                                                                      Common issuable upon conversion or
                                                                      ----------------------------------
                                                                                exercise of: (1)
                                                                                ----------------
                                                                                                  Total Common
                            Common         % of          Series 2        % of       Options       Beneficially     Percent of
                            ------         ----          --------        ----       -------       ------------     ----------
Name and Address             Stock        Common      Preferred Stock    Pref.    or Warrants      Owned (1)       Common (2)
----------------             -----        ------      ---------------    -----    -----------      ---------       ----------
                                                      (actual shares)
<S>                        <C>             <C>           <C>             <C>      <C>             <C>                 <C>
Gerald L. Cohen*            153,359         3.7           22,274          5.7       100,000         309,044            7.3

William R. Cohen*            51,117(5)      1.2           10,552          2.7       100,000         177,497            4.2

William L. Richter          422,120        10.3           50,099 (3)     12.9       521,000(3)    1,068,368(3)        22.5
c/o Richter & Co., Inc.
450 Park Ave., 28th
Floor
New York, NY 10022

Sam Oolie*                  220,021(7)      5.4           24,023          6.2       100,000         380,079            8.9

Kenneth L. Blum, Sr.        140,000(8)      3.4            5,000          1.3         ---           152,500            3.7
17133 Ericarose Street
W. Boca Raton, FL
33496

Kenneth L. Blum,             50,000         1.2             ---           ---     1,839,750       1,889,750           31.8
Jr.(4)   11460
Cronridge Drive
Suite 120
Owings Mills, MD 21117

Alan S. Cohn(4)              50,000         1.2             ---           ---     1,829,750       1,879,750           31.7
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117

Neal A. Kempler*              ---           ---             ---           ---       255,000         255,000            5.9

Frank C. Cappadora            ---           ---             ---           ---        85,500          85,500            2.0
3100 Warehime Road
Manchester, MD  21102

Benjamin D. Ward.,          931,888        22.7             ---           ---         ---           931,888           22.7
Sr.  4712 North 41st
Place
Phoenix, Arizona 85018

All directors and           986,617        24.1          111,948         28.8      1,076,000      2,342,487          42.9
executive officers as      (5)(6)(7)
a group (6
persons)(4)
</TABLE>
*   Address: 100 West Clarendon, Suite 2300, Phoenix, Arizona 85013.
                                       21
<PAGE>
(1)       Includes  shares of Common Stock with respect to which the  identified
          person had the right to acquire  beneficial  ownership on or within 60
          days of the date of the above table pursuant to the Series 2 Preferred
          or options or warrants, as indicated. Each share of Series 2 Preferred
          Stock  indicated  in the  table is  convertible  into 2 1/2  shares of
          Common Stock.

(2)       The  percentages  shown include  Common Stock actually owned as of the
          date of the above  table and Common  Stock of which the person had the
          right to  acquire  beneficial  ownership  within  60 days of such date
          pursuant to the Series 2 Preferred, options or warrants, as indicated.
          In calculating the percentage of ownership, all shares of Common Stock
          which the identified person had the right to acquire within 60 days of
          the  date  of the  above  table  are  deemed  to be  outstanding  when
          computing the  percentage of Common Stock owned by such person but are
          not deemed to be  outstanding  when computing the percentage of Common
          Stock owned by any other person.

(3)       Includes  common shares issuable upon conversion or exercise of 22,300
          shares of Series 2  Preferred,  240,000  warrants  and 71,000  options
          indirectly owned via a corporation, Richter & Co., Inc. ("RCI"), which
          thereby beneficially owns in its own name 8.2% of the Company's Common
          Stock.  Also includes  common shares issuable upon conversion of 3,883
          and  4,530   shares  of  Series  2   Preferred   held  via  two  other
          corporations.  Also includes common shares issuable upon conversion of
          2,500 shares of Series 2 Preferred  and 15,169  shares of Common Stock
          held by family members,  as to which Mr. Richter disclaims  beneficial
          ownership.

(4)       Mr.  Blum,  Jr. and Mr.  Cohn  perform  substantial  services  for the
          Company  pursuant to the Management  Agreement but are not necessarily
          deemed  executive  officers of the Company and are  excluded  from the
          executive officer group data.

(5)       Includes  6.67% of the 6,337 shares of common stock and 19,412  shares
          of  preferred  stock  held by CFC  Associates,  with  respect to which
          William R. Cohen owns 6.67% of the outstanding stock.

(6)       William  R.  Cohen and Sam Oolie own 6.67% and 20% of the  outstanding
          stock of CFC Associates, respectively.

(7)       Includes 20% of the 6,337 shares of common stock and 19,412  shares of
          preferred  stock  held by CFC  Associates,  with  respect to which Mr.
          Oolie owns 20% of the  outstanding  stock.  Also includes 8,679 shares
          owned by Mr. Oolie's wife, as to which Mr. Oolie disclaims  beneficial
          ownership.

(8)       The indicated shares are held by Mr. Blum's spouse.
                                       22
<PAGE>
Item l2.   Certain Relationships and Related Transactions

Agreements with National Health Enterprises, Inc.

          Management  Agreement.  Effective  March 18, 1993, the Company entered
into a Management  Agreement (the  "Management  Agreement") with NHE pursuant to
which NHE agreed to manage  substantially all aspects of the Company's business,
subject to certain  limitations  and the  direction  of the  Company's  Board of
Directors.  NHE is owned by  Kenneth  L.  Blum,  Jr.,  the son of the  Company's
President  and CEO. The  Management  Agreement  provided  cash  compensation  of
$220,000 in the first year and $200,000 per year thereafter,  as well as options
for the purchase of up to 4,400,000  shares of the Company's  Common  Stock,  as
described below. The Management Agreement has an initial term of five years, and
the  Company  has the  right  to  extend  it for up to two  additional  two-year
periods.  The  Management  Agreement is terminable by the Company for cause,  as
defined.  Pursuant to the Management  Agreement,  the Company has agreed that it
will not,  without NHE's consent,  issue (i) securities for  consideration  less
than the fair market value thereof; (ii) shares of Common Stock to any director,
officer,  employee,  or  affiliate  for  less  than  $.40  per  share;  or (iii)
securities to any director, officer, employee, or affiliate except to the extent
of  300,000  shares of  Common  Stock  plus  options  previously  issued to such
persons.

          The  Management   Agreement  includes  certain   representations   and
warranties and  limitations on solicitation by NHE of customers and employees of
the  Company  during  the term of the  Management  Agreement  and for two  years
thereafter.  The Management  Agreement also requires that NHE hold in confidence
the Company's confidential  information,  provides that confidential information
developed  by NHE shall  belong to NHE,  and further  provides  that the Company
shall have a  nonexclusive,  royalty-free,  perpetual  license  to  confidential
information developed by NHE.

          Stock  Option  Grant.  Effective  March 18, 1993,  the Company  issued
10-year  options  (the  "Options")  to NHE for the  purchase of up to  4,400,000
shares of the  Company's  Common  Stock,  of which  Options for the  purchase of
1,400,000  shares were  exercisable as of the date of grant at an exercise price
of $.40 per share.  The remaining  Options (an  aggregate of 3,000,000  Options)
could become  exercisable under their original terms at prices ranging from $.40
to $.80 contingent upon achievement of profitability  targets.  Pursuant to such
provisions,  Options for the purchase of 500,000  shares became  exercisable  at
$.432  based upon the  Company's  results for the  quarter  ended May 31,  1994.
Effective  December 5, 1994, the Board of Directors  approved the vesting of the
remaining 2,500,000 of these Options at an exercise price of $.48 per share, and
NHE and the Company agreed that the exercise price of the 500,000  Options which
had vested at $.432 per share would be increased to $.48 per share.  The actions
of the Board of Directors were predicated upon the Board's view of the Company's
performance  relative  to the  original  vesting  criteria  and  other  relevant
considerations.  Options remain  exercisable  
                                       23
<PAGE>
throughout  the 10-year term of the Options,  except that Options  terminate 120
days after termination of the Management Agreement by the Company for cause.

          The Options are  transferable  only to employees or  affiliates of NHE
performing  substantial services for or on behalf of the Company or to employees
of the Company,  subject to compliance  with applicable law. NHE transferred all
of the Options in March 1993, principally to Kenneth L. Blum, Jr., Alan S. Cohn,
an employee of NHE, and Frank Cappadora,  the Company's  President at that time.
Effective December 5, 1994, Messrs. Blum, Jr., Cohn and Cappadora transferred an
aggregate of 125,000 of the Options  exercisable  at $.48 per share to a company
controlled by William L. Richter, the Company's Co-Chairman, Richter & Co., Inc.
("RCI"),  in consideration  of services  performed and to be performed by RCI on
behalf of NHE in connection with NHE's  provision of management  services to the
Company.  RCI in turn  transferred  50,000 of such Options to William L. Richter
effective  December  5,  1994.  Transferred  Options  may  revert  to  NHE  if a
transferee  ceases  performing  substantial  services  for or on  behalf  of the
Company.  Effective  January 27, 1997, NHE transferred  200,000  options,  which
automatically reverted to NHE from Mr. Cappadora, to Neal A. Kempler.

          Stock  Purchase.  Kenneth L. Blum,  Jr. and Alan S. Cohn each acquired
50,000 shares (the "Shares") of the Company's Common Stock on March 18, 1993 for
consideration of $.40 per share.

          Subordinated Promissory Notes. On March 18, 1993, the Company obtained
loans in the amount of $80,000  from each of Mr.  Blum,  Jr. and Mr.  Cohn.  The
notes are due  March 18,  1998 and bear  interest  at the rate of 6% per  annum,
provided that the notes may be accelerated by the holders thereof if the Company
terminates  the  Management   Agreement  without  cause.   Interest  is  payable
semiannually in arrears,  commencing September 18, 1993. The notes are unsecured
and  subordinated  to the  Company's  outstanding 9 1/2%  Debentures  and future
indebtedness  of the Company for  borrowed  money.  The Company paid $10,442 and
$9,600  in  interest  under the  terms of these  notes in fiscal  1997 and 1996,
respectively.

          Registration Rights Agreement. The Company entered into a Registration
Rights Agreement (the "Registration Rights Agreement")  effective March 18, 1993
with NHE, Mr. Blum, and Mr. Cohn. The Registration Rights Agreement provides two
demand registrations with respect to the Shares and the shares issuable pursuant
to the Options  ("Registrable  Securities").  The first demand  registration  is
exercisable at the request of holders of at least 900,000 Registrable Securities
after the exercise by NHE and/or its  transferees  of at least 900,000  Options.
The second demand  registration  is  exercisable at the request of holders of at
least 1,000,000  Options after  completion of a fiscal year in which the Company
has Profits of at least  $1,000,000.  The  Registration  Rights  Agreement  also
provides  piggyback  registration  rights with respect to registrations in which
other selling  stockholders are  participating.  The Company is obligated to pay
the  offering  expenses  of each  such  registration,  except  for  the  selling
stockholders'  pro rata portion of underwriting  discounts and  commissions.  No
precise  prediction can be made of the effect,  
                                       24
<PAGE>
if any, that the  availability  of shares  pursuant to  registrations  under the
Registration Rights Agreement will have on the market price prevailing from time
to time. Nevertheless, sales of substantial amounts of the Common Stock pursuant
to such registrations could adversely affect prevailing market prices.

          Marketing  Agreement.  Effective  March 18, 1993,  the Company and NHE
entered into a Marketing  Representation  Agreement (the "Marketing  Agreement")
pursuant to which NHE is entitled to receive a commission equal to 7 1/2% of the
enrollment  fees (as  defined)  from  Sponsor  contracts  generated  by NHE. The
Company  also agreed to pay NHE  commissions  equal to 2 1/2% of the  enrollment
fees  from  Sponsor  contracts  with  respect  to which NHE  provides  marketing
assistance in procuring the contract,  but does not itself  generate the initial
Sponsor contact. The term of the Marketing Agreement is coextensive with that of
the   Management   Agreement.   In  fiscal  1997  and  1996,  the  Company  paid
approximately  $65,000 and  $85,000,  respectively,  to NHE under the  Marketing
Agreement.

          Litigation  Agreement.  The Company  entered  into an  agreement  with
Kenneth  L.  Blum,  Sr.,  a director  of the  Company;  Kenneth L. Blum,  Jr., a
principal of NHE;  and Alan S. Cohn,  who  provides  marketing  services for the
Company through an arrangement  with NHE, with respect to potential  liabilities
and expenses in  connection  with a suit  initiated by United  HealthCare,  Inc.
("United")  against  the  Company  and  these  individuals  in June  1994  and a
countersuit  filed  against  United in December 1994 by these  individuals.  The
agreement provided that the Company would indemnify the individuals in an amount
based upon the gross profit earned on the contract  which was the subject of the
action brought by United and overall Company pretax  profitability  and gave the
Company  an  interest  in any net  proceeds  received  in  connection  with  the
countersuit.  All litigation between the parties was dismissed with prejudice in
May 1995, pursuant to a settlement.  The Company paid approximately  $140,000 in
legal fees during  fiscal 1995 pursuant to the  agreement,  which did not exceed
the gross profit earned on the contract in question.

          Investment  Banking  Services.  The  Management  Agreement and related
transactions with NHE and certain other substantial transactions were structured
and  negotiated  for the Company by Richter & Co.,  Inc., a New York  investment
banking firm, which received cash  consideration of $50,000 and 10-year warrants
(the  "Warrants") to acquire  400,000 shares of the Company's  Common Stock,  of
which 127,273 were exercisable upon grant at $.40 per share.  Under the original
terms of the Warrants, the balance of the Warrants became exercisable contingent
upon achieving profitability targets in the same manner originally applicable to
the Options, as described above. The shares of Common Stock issuable pursuant to
the Warrants are entitled to piggyback  registration  rights with respect to any
registration  in which the shares of Common Stock sold to Mr. Blum,  Jr. and Mr.
Cohn or the Common  Stock  issuable  pursuant  to the Options  are  included.  A
principal of RCI,  William L.  Richter,  is a member of the  Company's  Board of
Directors.  RCI has assigned  Warrants for the purchase of 160,000 shares of the
Company's  Common Stock to Mr.  Richter.  Mr. Richter and his firm have provided
and expect to continue to provide  substantial  investment  services for Messrs.
Blum, Sr. and Jr., 
                                       25
<PAGE>
Mr. Cohn and various of their affiliated  entities.  To that extent,  RCI may be
deemed to have had a conflict of interest  with respect to its efforts on behalf
of the Company in effecting the Management Agreement and related agreements with
NHE. The Company's  Board of Directors took into account the potential  conflict
of  interest  issues  referred to above in  structuring  and  entering  into the
investment  banking  agreement  with RCI and  believes  that the  agreement  was
desirable  and  in  the  best  interests  of the  Company  notwithstanding  such
possibility.

          As a result of actions  taken by the Board of Directors on December 5,
1994 in connection  with the Options,  the 400,000  Warrants  referred to in the
preceding  paragraph  have the  following  terms:  50,909  Warrants  held by Mr.
Richter and 76,364 Warrants held by RCI are  exercisable at $.40 per share;  and
109,091  Warrants  held by Mr.  Richter  and  163,636  Warrants  held by RCI are
exercisable at $.48 per share.

Software Development Services

          During fiscal 1995,  the Company  contracted  with  National  Computer
Services,  Inc.  ("NCS") to develop  software  related to the Company's  vision,
dental and hearing programs. The Company paid approximately $76,000 and $326,000
to  NCS  for  such  services   during   fiscal  1997  and  1996,   respectively.
Additionally,  the Company has contracted  with NCS to lease its computer system
for  approximately  $2,500 per month.  The Company  paid  $15,502 and $33,012 of
computer lease charges in fiscal 1997 and 1996,  respectively.  Kenneth L. Blum,
Jr., a principal of NHE, is President  and a  stockholder  of NCS and the son of
Kenneth L. Blum, Sr., the Acting President, CEO and a director of the Company.

          During fiscal 1997, the Company decided to discontinue the programming
services  being  performed  related to portions of the  computer  system not yet
placed in service.  It was further  determined that all of the Company's current
systems, which to date have been running on three separate platforms,  should be
integrated through the use of the PC platform.  The Company will continue to use
the  completed  modules  developed by NCS until the new system is complete.  The
capitalized costs related to modules not yet placed in service,  $286,069,  have
been  expensed  in  fiscal  1997.  See Item 6 --  "Management's  Discussion  and
Analysis or Plan of Operation Liquidity and Capital Resources."

Financial Advisor Agreement

          Effective  January 18,  1995,  the Company  retained  RCI as exclusive
financial  advisor and placement  agent.  RCI's fees under this  arrangement are
payable only upon  completion of defined  transactions  and, in such event,  are
calculated  upon  the  basis  of a  percentage  of the  transaction  value.  The
agreement is terminable by the Company upon 90 days notice, provided that RCI is
entitled to receive  certain  fees for two years  following  termination  in the
event a  transaction  is concluded  with an entity  introduced to the Company by
RCI. No fees were paid by the Company to RCI during fiscal 1997 and 1996.
                                       26
<PAGE>
          RCI  provides  substantial  ongoing  financial  management  and  other
services to the Company at no charge. In the opinion of management, the terms of
the Company's  arrangements  with RCI, NHE and NCS taken as a whole are at least
as favorable to the Company as could be obtained from third parties.


Item 13.   Exhibits and Reports on Form 8-K

       (a)     See Exhibit Index  following the  Signatures  page which Index is
               incorporated herein by reference.

       (b)     Reports on Form 8-K.

               No reports on Form 8-K were filed  during the last quarter of the
               period covered by this report.
                                       27
<PAGE>
                                   SIGNATURES

          In  accordance  with  Section  13 or 15(d) of the  Exchange  Act,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                       AVESIS INCORPORATED

       Date 8/28/97                        By:  /s/ Kenneth L. Blum, Sr.
           ----------                          ---------------------------
                                           Kenneth L. Blum, Sr.
                                           President and Chief Executive Officer

          In accordance with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

Signature                     Title                              Date
---------                     -----                              ----

/s/ Kenneth L. Blum, Sr.      President and Chief                August 28, 1997
-----------------------       Executive Officer   
Kenneth L. Blum, Sr.          (Principal Execu-   
                              tive Officer), Director
                                                

/s/ Neal A. Kempler           Corporate Secretary                August 27, 1997
-----------------------       Vice President of Operations
Neal A. Kempler                                 

/s/ Joel H. Alperstein        Director of Finance                August 27, 1997
-----------------------       (Principal Financial Officer)
Joel H. Alperstein                     

 /s/ Shannon R. Barnett       Controller                         August 27, 1997
-----------------------       (Principal Accounting Officer)
Shannon R. Barnett                     

 /s/                          Co-Chairman of the                 August __, 1997
-----------------------       Board of Directors
William R. Cohen                       

 /s/ William L. Richter       Co-Chairman of the                 August 27, 1997
-----------------------       Board of Directors
William L. Richter                     

 /s/                          Director                           August __, 1997
-----------------------
Gerald L. Cohen

 /s/ Sam Oolie                Director                           August 28, 1997
-----------------------
Sam Oolie
                                       28
<PAGE>
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<CAPTION>
                               Avesis Incorporated
                                  Exhibit Index
                                   Form 10-KSB
                     For the Fiscal Year Ended May 31, 1997

  Exhibit No.     Exhibit                                              Incorporated by Reference from the:
  -----------     -------                                              -----------------------------------
<S>               <C>                                                  <C>
      3.1         Amended and Restated Certificate of  Company's       Registration  Statement  on Form S-1
                  Incorporation of the Company, as amended             (File No.  33-17217)  filed  January 12,  1988,
                                                                       and declared effective January 12, 1988.
                                                                       
      3.2         Bylaws of the Company                                Company's  Registration  Statement on Form S-18
                                                                       (File No.  33-6366-LA)  filed July 11, 1986 and
                                                                       declared effective July 14, 1986.
                                                                       
      3.3         Amendments to Bylaws adopted December 6, 1991        Company's  Annual  Report  on Form 10-K for the
                                                                       year ended May 31, 1992 (File No. 1-9758).
                                                                       
      4.1         Indenture  between the  Company  and  Continental    Company's  Registration  Statement  on Form S-1
                  Stock  Transfer  &  Trust  Company,  as  Trustee,    (File No.  33-17217)  filed  January 12,  1988,
                  including   form  of   Convertible   Subordinated    and declared effective January 12, 1988.
                  Debenture                                            
      4.2         Statement    of    Designations,     Preferences,    Company's  report  on Form  8-K  filed  July 9,
                  Privileges,    Voting    Powers,    Restrictions,    1988 (File No. l-9758).
                  Qualifications   and   Rights  of  the  Series  l    
                  Preferred                                            
      4.3         Statement    of    Designations,     Preferences,    Company's  Registration  Statement  on Form S-l
                  Privileges,    Voting    Powers,    Restrictions,    filed May 17, 1989 (File No. 33-28756).
                  Qualifications   and   Rights  of  the  Series  2    
                  Preferred                                            
                                                                       
      4.4         Specimen Certificate  representing $.0l par value    Company's  Registration  Statement on Form S-18
                  Common Stock                                         (File No.  33-6366-LA)  filed July 11, 1986 and
                                                                       declared effective July 14, 1986.
                                                                       
      4.5         Specimen  Certificate  representing  $10  Class A    Amendment No. l to the  Company's  Registration
                  Nonvoting   Cumulative    Convertible   Preferred    Statement  on Form  S-l  filed  June  29,  1989
                  Stock, Series 2                                      (File No. 33-28756).
                                                                       
     10.1 *       Incentive  Stock Option Plan of the  Company,  as    Company's  Registration  Statement  on Form S-1
                  amended                                              (File No.  33-17217)  filed  January 12,  1988,
                                                                       and declared effective January 12, 1988.
                                                                       
     10.2 *       401(k) Plan of the Company                           Company's  annual  report  on Form 10-K for the
                                                                       year ended May 31, 1989 (File No. 1-9758).
                                                                       
     10.3 *       Management   Agreement   dated   March  18,  1993    Company's  report on Form 8-K  dated  March 18,
                  between the Company and NHE                          1993 (File No. 1-9758).
</TABLE>                                                               
                                       29                              
<PAGE>                                                                 
<TABLE>                                                                
<S>               <C>                                                  <C>
     10.4 *       Stock  Option  Grant to NHE dated  March 18, 1993    Company's  report on Form 8-K  dated  March 18,
                  relating   to  options   for  the   purchase   of    1993 (File No. 1-9758).
                  4,400,000 shares of the Company's Common Stock       
                                                                       
     10.5         Subordinated  Promissory  Note  dated  March  18,    Company's  report on Form 8-K  dated  March 18,
                  1993 in the  amount  of  $80,000  payable  by the    1993 (File No. 1-9758).
                  Company to Mr. and Ms. Blum                          
                                                                       
     10.6         Subordinated  Promissory  Note  dated  March  18,    Company's  report on Form 8-K  dated  March 18,
                  1993 in the  amount  of  $80,000  payable  by the    1993 (File No. 1-9758).
                  Company to Mr. and Mrs. Cohn                         
                                                                       
     10.7         Registration  Rights  Agreement  dated  March 18,    Company's  report on Form 8-K  dated  March 18,
                  1993 among NHE, Mr. Blum, and Alan S. Cohn           1993 (File No. 1-9758).
                                                                       
     10.8 *       Marketing  Agreement dated March 18, 1993 between    Company's  report on Form 8-K  dated  March 18,
                  the Company and NHE                                  1993 (File No. 1-9758).
                                                                       
     10.9         Option Transfer Documents dated March 31, 1993       Company's  report on Form 8-K  dated  March 18,
                                                                       1993 (File No. 1-9758).
     10.10 *      Stock  Purchase  Warrant issued to Richter & Co.,    Company's  report on Form 8-K  dated  March 18,
                  Inc.  dated  March 18,  1993 for the  purchase of    1993 (File No. 1-9758).
                  240,000 shares of the Issuer's Common Stock          
                                                                       
     10.11 *      Stock  Purchase  Warrant  issued  to  William  L.    Company's  report on Form 8-K  dated  March 18,
                  Richter  dated March 18, 1993 for the purchase of    1993 (File No. 1-9758).
                  160,000 shares of the Issuer's Common Stock          
                                                                       
     10.12 *      1993 Stock Option Plan                               Company's  annual report on Form 10-KSB for the
                                                                       year ended May 31, 1993 (File No. 1-9758).
                                                                       
     10.13        Lease Agreement between the Company and Phoenix      Company's Report on Form 10-QSB for the
                  City Square                                          three months  ended February 28, 1995 (File 
                                                                       No. 1-9758).
                                                                       
                                                                       
     10.14        Fee  Agreement  between the Company and Richter &    Company's  Report on Form  10-QSB for the three
                  Co., Inc.                                            months  ended   February  28,  1995  (File  No.
                                                                       1-9758).
                                                                       
     10.15        Software   Development   Agreement   between  the    Company's  Report on Form  10-QSB for the three
                  Company and National Computer Services, Inc.         months ended August 31, 1995 (File No. 1-9758).
                                                                       
     10.16        Litigation  Agreement between the Company and Ken    filed herewith
                  Blum, Sr., Ken Blum, Jr., and Alan Cohn              
</TABLE>                                                               
                                       30
<PAGE>                                                                 
<TABLE>                                                                
<S>               <C>                                                  <C>
                                                                       
                                                                       
                                                                       
     10.17        Sublease   Agreement   between  the  Company  and    filed herewith
                  InfoImage, Inc.                                      
                                                                       
     10.18        Lease   Agreement   between   the   Company   and    filed herewith
                  Principal Mutual Life Insurance Company              
                                                                       
       11         Statement recomputation of per-share earnings        filed herewith
                                                                       
       21         Subsidiary of Registrant                             filed herewith
                                                                       
       27         Financial Data Schedule                              filed herewith
*      Identified as a compensatory arrangement as required by   Item 13(a) of Form 10-KSB.
</TABLE>                                       
                                       31