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, 1998 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.)

3724 North Third Street, Suite 300
Phoenix, Arizona                                                85012
-------------------------------                               ----------
(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:
$8,336,631.

                  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 24, 1998 was $400,990.  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 24, 1998 was 8,243,185.

                  Transitional Small Business Disclosure Format (check one):

                                                     Yes  [ ]   No  [X]   
<PAGE>
                               AVESIS INCORPORATED
                            FORM l0-KSB ANNUAL REPORT
                             YEAR ENDED MAY 31, 1998

                                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 .......................................8
ITEM 6.    Management's Discussion and Analysis or Plan
           of Operation......................................................12
ITEM 7.    Financial Statements .............................................16
ITEM 8.    Changes In and Disagreements with Accountants
           on Accounting and Financial Disclosure ...........................17

                                    PART III
                                    --------

ITEM 9.    Directors, Executive Officers, Promoters,
           and Control Persons; Compliance with Section 16(a)
           of the Exchange Act ..............................................17
ITEM 10.   Executive Compensation ...........................................21
ITEM 11.   Security Ownership of Certain Beneficial
           Owners and Management ............................................22
ITEM 12.   Certain Relationships and Related Transactions....................25
ITEM 13.   Exhibits and Reports on Form 8-K .................................27
SIGNATURES ..................................................................28
<PAGE>
                                     PART I
                                     ------

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

                  Avesis Incorporated, a Delaware corporation (together with its
subsidiary,  Avesis of Washington,  D.C., Inc., the "Company"),  incorporated in
June 1978,  markets and administers  vision,  dental,  chiropractic  and hearing
managed care and discount  programs  ("Programs")  nationally.  The Programs are
designed to enable  participants  ("Members"),  who are enrolled through various
Sponsoring  organizations such as insurance carriers,  HMOs, 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  opticians,  optometrists,   ophthalmologists,
dentists, chiropractors and hearing specialists ("Providers").

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

                                          Fiscal Years Ended May 31,
                                          --------------------------
                                             1998           1997
                                             ----           ----

Vision and Hearing Programs                   80%             69%
Dental Program                                20%             31%
Chiropractic Program                            0%             0%

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 vision products  (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.

                  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.

                                       1
<PAGE>
                  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, 1998       4,550          48             649,000
                  May 31, 1997       3,220          48             385,000

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 administers a buying group for vision Providers so
that they may take advantage of volume buying discounts for eyeglass frames. The
Company has entered into  arrangements  with certain  frame  manufacturers  that
enable  Providers  to obtain  frames at prices below  wholesale.  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 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.

                                       2
<PAGE>
DENTAL PROGRAM

                  The Company establishes and maintains dental Provider networks
that it also makes  available to Sponsors.  Fees charged to Members by Providers
are based upon panel fee  schedules  that the  Providers  have agreed to accept.
Similar to 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 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, 1998      10,683         43             123,000
                   May 31, 1997      11,082         43             118,000

Included  in the number of  providers  in the table above as of May 31, 1998 and
1997 are 5,553 and 6,180  providers,  respectively,  who  participate in a third
party's Provider network. The Company has a network rental agreement that allows
Members to utilize the services of the third party's Provider network.

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

CHIROPRACTiC PROGRAM

                   The  Company  has  developed  a program  for the  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 currently 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 that 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." See also Item
6 -  "Management's  Discussion  and Analysis or Plan of  Operations - Results of
Operations."

                  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.

                  Three major customers  accounted for 28%, 15% and 10% of total
service revenues in fiscal 1998 and three major customers accounted for 17%, 15%
and 14% in fiscal  1997.  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.

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 believes it
has a  competitive  advantage  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 it is in
compliance with such laws and regulations as they are currently  interpreted and
applicable to the Company.  However,  there can be no assurance  that changes in
interpretation  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  its  services,   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 10,  1998,  the  Company had 42  full-time  and 2
part-time  employees,  compared to 38 total employees as of August 20, 1997. The
Company believes that its relationship with its employees is good.

ITEM 2.  DESCRIPTION OF PROPERTIES

                  The  Company  maintains  its  executive  offices at 3724 North
Third  Street,  Suite 300,  Phoenix,  Arizona  85012,  in space  leased  from an
unaffiliated party. The lease covers  approximately 6,700 usable square feet and
expires on September 30, 2002.

                  Until  October  1997  the  Company  maintained  its  executive
offices at 100 West Clarendon,  Suite 2300,  Phoenix,  Arizona 85013.  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.  For the years  ended May 31,  1998 and 1997,  rent
expense   related  to  the   subleased   premises   was  $159,623  and  $25,688,
respectively, and sublease rental income was $161,720 and $27,692, respectively.

                                       6
<PAGE>
                  The  Company  maintains  sales and  administrative  offices at
11460 Cronridge Drive,  Suite 118,  Baltimore,  Maryland 21117 and at 5321 First
Place NE,  Washington,  D.C.  20011.  The  offices  are used  pursuant to verbal
agreements  with the lessees that are  terminable  at will and are at no cost to
the Company.  The Company owns and leases various computer , data processing and
other office  equipment.  The Company believes that its facilities and equipment
are  maintained  in good  operating  condition  and are adequate for the present
level of operations.

ITEM 3.  LEGAL PROCEEDINGS

         Not applicable.


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

         Not applicable.



                                       7
<PAGE>
                                     PART II
                                     -------

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

                  Market  Information.  The  Company's  Common Stock and its $10
Class A Nonvoting  Cumulative  Convertible  Preferred Stock, Series 2 ("Series 2
Shares")  Shares are quoted in the  over-the-counter  market and  quotations are
reported in the "pink sheets" published by the National  Quotation Bureau,  Inc.
and via the National Association of Securities Dealers' Inc. Electronic Bulletin
Board.  The  following  table  sets  forth  the high and low bid  price  for the
Company's Series 2 Shares and Common Stock as reported by the National Quotation
Bureau,  Inc. for each quarterly period during fiscal 1998 and 1997. Such market
quotations  reflect  inter-dealer  prices,  without retail  markup,  markdown or
commission and may not represent actual transactions.

                                        Series 2 Shares         Common Stock
                                      -------------------    -------------------
                                      Bid Quotation Range    Bid Quotation Range
                                      -------------------    -------------------

   Fiscal Year 1998                      High       Low         High         Low
   ----------------                      ----       ---         ----         ---
   First Quarter ended Aug. 31, 1997    $1.25     $1.25        $0.25     $0.1875
   Second Quarter ended Nov. 30, 1997    1.25      1.00      0.21875     0.15625
   Third Quarter ended Feb. 28, 1998    1.125    1.0625         0.27      0.1875
   Fourth Quarter ended May 31, 1998    1.125     1.125         0.27      0.1875

   Fiscal Year 1997
   ----------------
   First Quarter ended Aug. 31, 1996    $2.75     $2.50      $0.6875      $0.375
   Second Quarter ended Nov. 30, 1996    2.50      1.00       0.4375       0.125
   Third Quarter ended Feb. 28, 1997     1.00      1.00       0.2188       0.125
   Fourth Quarter ended May 31, 1997     1.25      1.00         0.25      0.1875

RECENT EXCHANGE OFFER

                  During  fiscal 1998 the Company  completed  an Exchange  Offer
which offered one share of its Class A, Senior Nonvoting Cumulative  Convertible
Preferred  Stock,  Series  A, par  value  $.01  ("Series  A  Shares"),  for each
outstanding  share of the Class A, Nonvoting  Cumulative  Convertible  Preferred
Stock, Series 2, par value $.01 ("Series 2 Shares"), of the Company. The purpose
of this offer was to  eliminate or  significantly  reduce the number of Series 2
Shares  outstanding  including the related dividend  arrearage and to adjust the
Company's capital structure.

                  The Exchange  Offer  expired on May 27, 1998,  and resulted in
the tendering of 317,880 (approximately 82%) of the 388,180 outstanding Series 2
Shares for the Series A Shares.

                                       8
<PAGE>
         As of August 24, 1998,  there were 6,500  Series 2 Shares  outstanding,
with each share  entitled to receive a cumulative  dividend at an annual rate of
9% of the face value of $10.00 ($0.90 per share).  Dividend  arrearages on those
Series 2 Shares as of July 31, 1998  totaled  $34,125 or $5.25 per share.  As of
August 24, 1998, there were 315,260 Series A Shares outstanding, with each share
entitled to receive a cumulative dividend at an annual rate of $0.3375 per share
paid  semi-annually.  The Series A Share dividends shall accrue through the last
day of each semi-annual  period and shall be payable to holders of record on the
last day of such semi-annual period, commencing June 1, 1998.

                  The  exchange of the Series 2 Shares  pursuant to the Exchange
Offer  significantly  reduced  the  number  of the  Series 2 Shares  that  trade
publicly and the number of holders of such shares and may  adversely  affect the
liquidity  and the "pink sheet"  market value of remaining  shares.  At the same
time, there is no assurance that any market will develop for the Series A Shares
issued  pursuant  to the  Exchange  Offer.  The Series A Shares  were not quoted
during  fiscal  1998 and quotes are  currently  not  available  pursuant  to the
National Quotation Bureau,  Inc. and via the National  Association of Securities
Dealers' Inc. Electronic Bulletin Board.

                  As of August 24, 1998, there were 8,243,185 shares outstanding
of the Common Stock of the Company held by  approximately  165  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.

                  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 for the  foreseeable  future.  The Series A Shares are
senior in rights to annual  dividends  and  redemptions  to the Series 2 Shares.
Under the Certificate of Designation  for the Series A Shares,  no dividends may
be paid on the  Series 2 Shares or the  Common  Stock  until the Series A Shares
have  received all current and  cumulative  dividends and the earliest of any of
the following  events occur (i) every  outstanding  share of Series A Shares has
been either  redeemed or  converted,  (ii) any time after May 31, 2005, or (iii)
the first day of any fiscal year following two consecutive fiscal years in which
the  Company  had net  income  and net cash  flow in each year in excess of $1.5
million and the  Company's  tangible net equity at the end of the second  fiscal
year is at least $5 million.  Moreover, the terms of the Series 2 Shares provide
that as long as any of the Series 2 Shares 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 Shares 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.

                  Recent Sales of Unregistered  Securities.  On May 27, 1998 the
Company's  Offer to Exchange one share of Class A, Senior  Nonvoting  Cumulative
Convertible 

                                       9
<PAGE>
Preferred Stock, Series A, par value $.01 for each outstanding share of Class A,
Nonvoting  Cumulative  Convertible  Preferred  Stock,  Series 2, par value  $.01
expired.  The Offer  resulted  in 317,880 of the  388,180  outstanding  Series 2
Shares being tendered for the Series A Shares.

                  The Exchange  Offer was made by the Company in reliance on the
exemption from the  registration  requirements of the Securities Act of 1933, as
amended (the  "Securities  Act"),  afforded by Section 3(a)(9) thereof and under
certain state law  exemptions.  The Company did not pay any  commission or other
remuneration  to any broker,  dealer,  salesman or other  person for  soliciting
tenders of the Series 2 Shares.

                  Each Series A Share is initially convertible into 10 shares of
Common  Stock.   This  conversion   ratio  is  subject  to  adjustment  for  any
subdivisions, combinations or any other adjustments made to the Company's Common
Stock.

                  Subsequent to year-end,  on July 30, 1998 the Company's  Board
of Directors approved a modification  providing all outstanding stock option and
warrant  holders the  opportunity to exercise any or all of their vested options
and warrants at a discounted  exercise price from their original  grant,  during
the period  from August 1, 1998 to August 31,  1998.  The  discounted  price was
calculated  by  discounting  the stated  exercise  price of each stock option or
warrant  by 10% per annum  from the  expiration  date back to August  1998,  and
rounding the calculated price to the nearest whole cent. The discounted price in
no case was allowed to be less than the prevailing market price of the Company's
common  stock at the time of  exercise of the  options,  defined as the high bid
price,  and  rounded to the nearest  whole  cent.  After  August 31,  1998,  the
modification  will  expire and all terms will  return to the  original  exercise
terms.

                  Pursuant  to the  revised  terms,  the  following  individuals
exercised  their  stock  options  or  warrants  as of August  24,  1998,  in the
following amounts at the following exercise prices per option or warrant:

                                       10
<PAGE>
                         Number of          Number of       Modified Exercise
                          Options           Warrants             Price
                          -------           --------             -----
Option/Warrant Holder
Alan S. Cohn             1,054,750                               $0.31
Alan S. Cohn               700,000                               $0.26
Kenneth L. Blum, Jr.     1,064,750                               $0.31
Kenneth L. Blum, Jr.       700,000                               $0.26
William L. Richter          50,000                               $0.31
William L. Richter                           109,091             $0.31
William L. Richter                            50,909             $0.26
Richter & Co., Inc.         72,500                               $0.31
Richter & Co., Inc.                          163,636             $0.31
Richter & Co., Inc.                           76,364             $0.26
William R. Cohen           100,000                               $0.26

                  The total cash  received by the Company  from the  exercise of
the above stock options and warrants was  $1,202,656.  Of the preceding  amount,
approximately  $400,000 is expected to be used to repurchase  all 931,888 shares
of the Company's common stock held by the founder of the Company,  at a price of
$0.43 per share. The excess funds received from these  transactions will be used
as working capital.  The option exercises  discussed above,  post year-end stock
repurchases  listed below and  repurchase of the 931,888  shares of common stock
will increase stockholders' equity by approximately $555,000.

                  Retirement  of Stock  Information.  Subsequent to year-end the
Company made the following stock repurchases:

                                     Series A  Series 2    Total Purchase Price 
                                     --------  --------    -------------------- 
       Date           Common Shares   Shares    Shares     including Commissions
       ----           -------------   ------    ------     ---------------------
   June 15, 1998          46,500                                  $ 10,950
   June 24, 1998         123,441       2,620                      $ 45,000
   July 22, 1998                                60,000            $180,000
   July 28, 1998                                 1,000            $  3,000
  August 20, 1998                                2,800            $  8,400

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 10-KSB.

                  The selected  financial data for each of the five years in the
period ended May 31, 1998 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 additional information.

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                      Years Ended May 31,
                              ---------------------------------------------------------------------
Selected Operating Data:          1998          1997           1996           1995         1994(1)
------------------------      -----------   -----------    -----------    -----------   -----------
<S>                           <C>           <C>            <C>            <C>           <C>        
Operating revenues            $ 8,336,631   $ 5,645,276    $ 6,019,896    $ 6,351,106   $ 4,418,512
Operating expenses              8,010,021     5,739,503      6,106,694      5,986,897     4,620,972
Net income (loss)                 313,875      (190,265)      (124,859)       505,411      (134,550)
Net income (loss) per
common share - Basic (2)(3)           .06          (.13)          (.12)           .02          (.12)

                                                        As of May 31,
                               --------------------------------------------------------------------
Selected Balance Sheet Data:      1998          1997            1996          1995         1994(1)
----------------------------   ----------    ----------     ----------     ----------    ----------

Working capital                $  350,418    $  293,595     $  422,922     $  747,566    $  229,740
Current assets                  1,588,969     1,271,505        864,566      1,242,534       647,522
Total assets                    2,241,705     1,639,389      1,650,527      1,839,377     1,195,831

Current liabilities             1,238,551       977,910        441,644        494,968       417,782
Long term obligations              90,475        92,044        449,183        484,850       423,901
Total liabilities               1,329,026     1,069,954        890,827        979,818       841,683
Total stockholders' equity        912,679       569,435        759,700        859,559       354,148
</TABLE>

(1)  Reflects a restatement of certain amounts for fiscal 1994 to conform to the
     1995, 1996, 1997 and 1998 presentation.

(2)  After provision for preferred  stock dividends as follows:  $63,270 in 1998
     (70,300  Series 2 Shares  outstanding  as of May 31,  1998 times  $0.90 per
     share); $349,162 in 1997, 1996 and 1995; and $349,590 in 1994.

(3)  The expected  preferred  stock  dividend  accrual for Series 2 and Series A
     Shares for fiscal  1999,  using  share  amounts  currently  outstanding  as
     disclosed previously, is $112,250.


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, 1998 and 1997:

                  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
 dividends,  viability  of the  Company,  cash  flows and  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

                                       12
<PAGE>
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. Administration fee
 revenue is  recognized on the accrual basis during the month that the Member is
 entitled to use the benefit.  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 and recognized
 in the month the  merchandise is shipped.  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 1998 increased
 48% from the prior fiscal year from $5,645,276 to $8,336,631.  The increase was
 primarily due to the growth of the Company's managed care vision products.  The
 Company  was able to  decrease  operating  expenses  as a  percentage  of total
 service  revenues in fiscal 1998 by 6% compared to fiscal 1997, from $5,739,503
 (102%) to $8,010,021 (96%). The Company anticipates that the trend of decreased
 operating  expenses as a percentage  of total  service  revenues  will continue
 during fiscal 1999, due to the operational  efficiencies achieved during fiscal
 1998 and the expected  efficiencies  to be achieved  related to the new systems
 currently under development.

                  The  Company's  vision  and  hearing  programs  accounted  for
 $5,258,750  (63%) of total  service  revenues  during  fiscal 1998  compared to
 $2,607,152  (46%) in fiscal 1997.  The increase in vision and hearing  revenues
 primarily   resulted  from  the  addition  of  a  significant   Sponsor,   with
 approximately  121,000  managed  care  vision  cardholders,  and the  growth in
 membership of two other significant  Sponsors,  with approximately  104,000 new
 managed care vision  cardholders.  Revenues derived from the Company's  managed
 care  programs  have a  significantly  higher cost of service than the revenues
 derived from the Company's discount programs.  There were approximately 649,000
 vision  and  6,000  hearing  cardholders  as  of  May  31,  1998,  compared  to
 approximately 385,000 vision and 9,000 hearing cardholders as of May 31, 1997.

                  Vision  provider  fee revenue  declined by $11,735 (9%) during
 fiscal  1998  compared  to  fiscal  1997 due in part to a  modification  of the
 Company's standard 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 vision provider
 fee revenue to continue.

                                       13
<PAGE>
                  The Company's dental program accounted for $1,266,548 (15%) of
 total service  revenues  during the current  fiscal year compared to $1,253,014
 (22%) in fiscal  1997.  Subsequent  to  year-end,  a review  of the  membership
 information   a  Sponsor  was   communicating   to  the  Company   resulted  in
 approximately  $78,000 of additional  revenue being  recognized  related to the
 entire fiscal year.  The  Sponsor's  membership is expected to continue for the
 foreseeable future.  There were approximately  123,000 dental cardholders as of
 May 31, 1998, compared to approximately 118,000 as of May 31, 1997.

                  The Company makes  available to its vision  providers a buying
 group  program that enables the provider to purchase  eyeglass  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 $1,655,298
 (20%) during fiscal 1998 compared to $1,582,899 (28%) in fiscal 1997.

                  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  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  approximately  45% in dollar
 amount but  decreased as a  percentage  of total  service  revenues by 2%, from
 $4,206,964  (75%) during fiscal 1997 to $6,120,416  (73%) in fiscal 1998. 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 Company expects the cost
 of services to remain  relatively  constant as a  percentage  of total  service
 revenues for the foreseeable future,  based upon the current  anticipation that
 the current mix of managed care and discount programs will continue.

                  General and administrative  expenses decreased as a percentage
 of total service  revenues by 5%, from  $1,027,054  (18%) during fiscal 1997 to
 $1,121,099  (13%)  during  fiscal  1998.  Included in current  year general and
 administrative  expense is $142,000  of legal and  professional  fees  directly
 related to the Company's Offer to Exchange Series 2 Preferred shares for Series
 A Preferred shares.

                  Selling and marketing  expenses held steady as a percentage of
 total  service  revenues at $505,485  (9%) and $768,506 (9%) during fiscal 1997
 and 1998, respectively.  Selling and marketing expenses include marketing fees,
 broker commissions, employee 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.  A
 significant amount of the Company's marketing activities has been outsourced to
 management  consultants,  

                                       14
<PAGE>
National Health  Enterprises.  See Item 12 - "Certain  Relationships and Related
Transactions."

                  Non-operating  expense  was $96,038 and $12,735 in fiscal 1997
 and 1998,  respectively.  Prior  year  non-operating  expense  included  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)  then  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 best choice. As a result of this
 decision, the Company discontinued the AS400 development project (See Item 12 -
 "Certain   Relationships  and  Related   Transactions  -  Software  Development
 Services"),  and expensed the capitalized  costs related to software not placed
 in service.  Also, an  outstanding  liability  related to  programming  fees of
 $67,971 was forgiven as of fiscal year end. Current year non-operating  expense
 includes  $25,373 for the write-off of unamortized  moving  expenses of $25,835
 related to the Company's previous relocation of the principal office.

 Liquidity and Capital Resources

                  The  Company had cash and cash  equivalents  of $993,610 as of
May 31, 1998,  compared to $817,535 as of May 31, 1997. The increase of $176,075
is  primarily  due to the timing of vendor and claim  payments.  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 the foreseeable future.

                  During  July 1997 the  Company  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. As of
August 20, 1998, the new system was in the beta-testing phase and is expected to
be fully  functional in early autumn 1998.  As of May 31, 1998,  the Company had
paid approximately  $258,000 for software development and related hardware.  The
Company  expects  to  incur   approximately   $50,000  of  additional   software
development and related hardware  expenses during the first six months of fiscal
1999.

                                       15
<PAGE>
                  The Company has  reviewed  all  internally  used  software and
believes that the new system and all other  critical  applications  will be Year
2000  compliant.   Based  upon  its  current  computer  operations  and  systems
development, the Company believes that its risks related to Year 2000 compliance
issues is low.  The  Company is in the  process of  contacting  all  vendors and
clients  who  forward  data  electronically  to  determine  the  extent of their
compliance and to plan accordingly.

                  As of May 31,  1998,  the Company had  $1,106,165  of Accounts
Payable,  compared  to  $464,377  in the prior  fiscal  year.  The  increase  is
predominately  due to claims  reserves of $786,052 in the current year  compared
with $291,533 in the prior year, included in Accounts Payable.  The reserves are
for incurred but not reported claim  reimbursements to Providers who participate
in certain managed care programs. As previously discussed,  the Company has seen
significant  growth during the current year of managed  vision care revenues and
the associated claims. The Company believes this reserve is adequate.

                  During fiscal 1998 the Company  retired the final  $189,000 of
 Convertible Subordinated Debentures,  due December 1, 1997, and all $160,000 of
 subordinated notes payable to certain affiliates due March 18, 1998, with funds
 provided by operations.

                  The Company expects to pay dividends of approximately  $53,200
 on the Series A Preferred on December 1, 1998.


 ITEM 7. FINANCIAL STATEMENTS

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

                                       16
<PAGE>













                   AVESIS INCORPORATED AND SUBSIDIARY

                   Consolidated Financial Statements

                   May 31, 1998 and 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, 1998,  and the related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
ended May 31, 1998 and 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, 1998, and the results of their operations and their
cash flows for each of the years in the two-year  period ended May 31, 1998,  in
conformity with generally accepted accounting principles.


                                      KPMG Peat Marwick LLP


Phoenix, Arizona
August 21, 1998

                                      F-1
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                           Consolidated Balance Sheet
                                  May 31, 1998

                                     ASSETS

Current assets:
    Cash and cash equivalents                                       $   993,610
    Receivables, net (note 2)                                           479,908
    Prepaid expenses and other                                          115,451
                                                                    -----------
      Total current assets                                            1,588,969

Property and equipment, net (notes 3 and 4)                             409,227
Deposits                                                                243,509
                                                                    -----------

                                                                    $ 2,241,705
                                                                    ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                $ 1,106,165
    Current installments of obligations
     under capital lease (note 4)                                        10,288
    Accrued expenses:
      Compensation                                                       36,529
      Other                                                              68,621
    Deferred income                                                      16,948
                                                                    -----------
              Total current liabilities                               1,238,551

    Accrued rent (note 4)                                                59,340
    Obligations under capital lease, excluding
      current installments (note 4)                                      31,135
                                                                    -----------
              Total liabilities                                       1,329,026
                                                                    -----------
Stockholders'  equity  (notes  7, 8, 9, 10 and 13):
 Preferred  stock,  $.01 par value, authorized
   12,000,000 shares: $3.75 Class A, senior nonvoting
   cumulative  convertible preferred stock,  Series A,
   $0.01 par value;  authorized  1,000,000 shares;
   317,880 issued and outstanding (liquidation preference
   of $3.75 per share)                                                    3,179
  $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; 70,300 shares issued and outstanding (liquidation
   preference of $10 per share) and $347,985 of dividends in
   arrears at $4.95 per share; dividends accrue at
   $.225 per share per calendar quarter                                     703

  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; 4,271,126 shares issued and outstanding                      42,711
    Additional paid-in capital                                        9,976,821
    Accumulated deficit                                              (9,110,735)
                                                                    -----------
              Total stockholders' equity                                912,679

Commitments and contingencies (notes 4, 10, 11, 12, 13, 14 and 16)
                                                                    -----------

                                                                    $ 2,241,705
                                                                    ===========
See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                      Consolidated Statements of Operations
                        Years ended May 31, 1998 and 1997


                                                         1998           1997
                                                     -----------     ----------
Service revenues (note 11):
    Administration fees                              $ 6,550,966      3,865,732
    Buying group                                       1,655,298      1,582,899
    Provider fees                                        124,397        136,132
    Other                                                  5,970         60,513
                                                     -----------     ----------
      Total service revenues                           8,336,631      5,645,276

Cost of services                                       6,120,416      4,206,964
                                                     -----------     ----------

      Income from services                             2,216,215      1,438,312

General and administrative expenses                    1,121,099      1,027,054

Selling and marketing expenses (note 12)                 768,506        505,485
                                                     -----------     ----------

      Net income/(loss) from operations                  326,610        (94,227)
                                                     -----------     ----------
Non-operating income (expense):
    Interest income                                       30,982         25,337
    Interest expense (notes 4 and 13)                    (19,305)       (29,461)
    Other expense (note 13)                              (24,412)       (91,914)
                                                     -----------     ----------
      Total non-operating expense                        (12,735)       (96,038)
                                                     -----------     ----------

      Net income/(loss)                                  313,875       (190,265)

Preferred stock dividends                                (63,270)      (349,162)
                                                     -----------     ----------
      Net income/(loss) available to common
        stockholders                                 $   250,605       (539,427)
                                                     ===========     ==========

Earnings per share - basic                           $      0.06           (.13)
                                                     ===========     ==========

Earnings per share - diluted                         $      0.06           (.13)
                                                     ===========     ==========
Weighted average common and equivalent
  shares outstanding - basic                           4,073,918      4,100,420
                                                     ===========     ==========
Weighted average common and equivalent
  shares outstanding - diluted                         5,089,657      4,100,420
                                                     ===========     ==========

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                        Years ended May 31, 1998 and 1997

                                                            1998        1997
                                                         ---------    --------
Cash flows from operating activities:
  Net income/(loss)                                      $ 313,875    (190,265)
  Adjustments to reconcile net income/(loss) to
    net cash provided by operating activities:
    Depreciation and amortization                          112,071     178,647
    Write-off of software costs                                 --     354,040
    Provision for losses/(write-off) of accounts 
      receivable                                             9,898        (149)
    Loss on sale of fixed assets                             2,124          --
    Common stock issued for professional services           50,000          --
    Changes in assets and liabilities:
      Increase in receivables                             (149,450)    (24,800)
      Increase in prepaid expenses and other                (1,837)       (538)
      Increase in deposits                                 (60,626)     (1,225)
      Increase in accounts payable                         641,788     240,463
      Decrease in deferred income                           (6,284)     (8,133)
      (Decrease)/increase  in accrued rent                 (16,842)      6,468
      Decrease  in other accrued expenses                  (53,125)    (61,577)
                                                         ---------    --------
         Net cash provided by operating activities         841,592     492,931
                                                         ---------    --------
Cash flows from investing activities:
  Purchases of property and equipment                     (294,307)   (111,479)
  Proceeds from dispositions of property and equipment       5,000          --
                                                         ---------    --------
         Net cash used in investing activities            (289,307)   (111,479)
                                                         ---------    --------
Cash flows from financing activities:
  Repayment of convertible subordinated debentures        (189,000)         --
  Payments for repurchase of common stock                  (20,631)         --
  Repayment of shareholder notes payable                  (160,000)         --
  Principal payments under capital lease obligations        (6,579)         --
                                                         ---------    --------
         Net cash used in financing activities            (376,210)         --
                                                         ---------    --------

         Net increase in cash and cash equivalents         176,075     381,452

Cash and cash equivalents, beginning of year               817,535     436,083
                                                         ---------    --------

Cash and cash equivalents, end of year                   $ 993,610     817,535
                                                         =========    ========
SUPPLEMENTAL INFORMATION:

Cash paid for interest                                   $  20,118      28,344
                                                         =========    ========

Equipment acquired under capital lease                   $  48,002          --
                                                         =========    ========

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity
                        Years ended May 31, 1998 and 1997

<TABLE>
<CAPTION>
                                              Preferred Stock                   Additional                  Total
                              ---------------------------------------  Common    paid-in     Accumulated  stockholders'
                              Series A  Series 1   Series 2  Series 3   stock    capital       deficit      equity
                              --------  --------   --------  --------   -----    -------       -------      ------
<S>                         <C>         <C>         <C>       <C>     <C>      <C>          <C>           <C>    
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

Repurchase of 79,294 shares
of common stock (note 7)            --        --         --      --       (793)    (19,838)           --    (20,631)

Exchange offer (Series 2
 for Series A preferred)            
 (note 10)                       3,179               (3,179)     --         --          --            --         --

Issuance  of 250,000 shares
  of common stock in
  connection with the
  Supplemental
  Investment Banking
  Agreement (note 13)               --        --         --      --      2,500      47,500            --     50,000

Net income                          --        --         --      --         --          --       313,875    313,875
                              --------   -------   --------   -----   --------  ----------    ----------   --------

Balance, May 31, 1998         $  3,179        --        703      --     42,711   9,976,821    (9,110,735)   912,679
                              ========   =======   ========   =====   ========  ==========    ==========   ========
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

                   Notes to Consolidated Financial Statements
                              May 31, 1998 and 1997


(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 life of 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


       EARNINGS PER SHARE

       The Company adopted  Statement of Accounting  Standards No. 128 "Earnings
       per Share"  (SFAS 128) during  1997.  The  Company's  Earnings per Common
       Share (EPS) figures for the prior period were not affected by adoption of
       SFAS 128. In accordance  with SFAS 128, basic EPS is computed by dividing
       net income,  after deducting  preferred stock dividends  requirement,  by
       weighted average number of shares of common stock outstanding.

       Diluted EPS reflects the maximum  dilution that would result after giving
       effect  to  dilutive  stock  options  and  warrants  and to  the  assumed
       conversion of all dilutive convertible securities and stock.

       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
       subsequent  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  (see  Note 9,  "Stock  Option  Plans  and
       Warrants").

       IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

       Long-lived assets and certain  identifiable  intangibles are reviewed for
       impairment whenever events or changes in circumstances  indicate that the
       carrying  amount of an asset may not be  recoverable.  Recoverability  of
       assets to be held and used is measured by a  comparison  of the  carrying
       amount of an asset to future net cash flows  expected to be  generated by
       the asset.  If such assets are considered to be impaired,  the impairment
       to be recognized  is measured by the amount by which the carrying  amount
       of the assets exceed the fair value of the assets.  Assets to be disposed
       of are  reported at the lower of the  carrying  amount or fair value less
       costs to sell.

       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, 1998 receivables consists of:

           Trade accounts receivable                           $  509,657
           Less allowance for doubtful accounts                    29,749
                                                               ----------

                                                               $  479,908
                                                               ==========



(3)    PROPERTY AND EQUIPMENT

       As of May 31, 1998 property and equipment consists of:

           Furniture and fixtures                              $  243,591
           Equipment                                              752,664
           Automobile                                              14,780
           Leasehold improvements                                  73,729
           Software                                               255,746
                                                               ----------
                                                                1,340,510
           Less accumulated depreciation and amortization         931,283
                                                               ----------

                                                               $  409,227
                                                               ==========
(4)    LEASES

       The Company leases office space under  agreements  which expire September
       30, 2000 and September 30, 2002. In May 1997, the Company  entered into a
       sublease for the office space lease  agreement which expires on September
       30, 2000. The Company is obligated to pay its proportionate  share of the
       building's  operating  costs not to exceed stated  maximums.  The Company
       also leases equipment under long-term operating lease agreements. For the
       years ended May 31, 1998 and 1997, rent expense for all operating  leases
       was $159,224 and $196,406, respectively. For the years ended May 31, 1998
       and 1997,  sublease rent expense was $159,623 and $25,688,  respectively,
       and sublease rental income was $161,720 and $27,692, respectively.

       The Company is obligated under one capital lease for telephone  equipment
       that  expires in October  2001.  As of May 31,  1998 the gross  amount of
       equipment and accumulated  depreciation recorded under this capital lease
       was $48,002 and $6,400, respectively.

       The  Company  records  rent  expense  using  the  straight-line   method.
       Accordingly,  the  difference  between rent expense and actual rent paid,
       for the lease  expiring  September 30, 2000, 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.  For the  lease  that  expires  September  30,  2002,  there is no
       difference between rent expense and actual rent paid.

                                      F-8
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       Future  minimum lease  payments for capital lease  payments and operating
leases are as follows:

                                                           Capital    Operating
                     Years Ending May 31,                   Lease      Leases
                                                           -------    ---------
                             1999                          $14,731    $325,718
                             2000                           14,731     232,625
                             2001                           14,731     105,498
                             2002                            4,911     101,174
                             2003                               --      38,903
                          Thereafter                            --          --
                                                           -------    --------

       Total future minimum lease payments                  49,104    $803,918
                                                                      ========

       Less amount representing interest (at 10.4%)          7,681
                                                           -------

       Present value of net minimum lease payments          41,423

       Less current installments of obligations under
         capital lease                                      10,288
                                                           -------

       Obligations under capital lease, excluding current
         installments                                      $31,135
                                                           =======

       Total future  minimum lease  payments for operating  leases have not been
       reduced by minimum  sublease  rentals of  $231,533  to be received in the
       future under the noncancelable sublease.

(5)    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 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.

(6)    INCOME TAXES

       No income tax benefit was recorded in 1998 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.


                                      F-9
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       The  provision  for income  taxes  differs  from the amount  computed  by
       applying the  statutory  federal  income tax rate to income before taxes.
       The sources and tax  effects of the  differences  for the years ended May
       31, 1998 and 1997 are as follows:

                                                            1998          1997
                                                         ---------      -------
       Computed "expected" federal income tax expense    $  80,325           --
       Change in valuation allowance                      (129,660)      22,134
       Other                                                49,335      (22,134)
                                                         ---------      -------

                                                         $      --           --
                                                         =========      =======

       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)                 $ 2,340,671
             Accrued expenses and other                                  23,155
             Property and equipment                                      26,329
             Valuation allowance                                     (2,390,155)
                                                                    -----------
           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,  1998 was a  decrease  of  $361,945.  The net change for the year
       ended May 31, 1997 was an increase of $65,100.

       The Company's  federal NOLs of  approximately  $7,000,000  expire between
       1999 and 2011.

(7)    COMMON STOCK

       During the year ended May 31, 1998, the Company repurchased 79,294 shares
       of common  stock  for  prices  ranging  from  $0.25 to $0.27  per  share.
       Subsequent to the repurchase, the Company retired these shares.

                                      F-10
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(8)    EARNINGS (LOSS) PER SHARE

       A summary of the  reconciliation  from basic earnings (loss) per share to
       diluted  earnings  (loss) per share for the years  ended May 31, 1998 and
       1997 follows:

                                                          1998          1997
                                                      -----------    ----------

Net earnings (loss)                                   $   313,875      (190,265)
Less:  preferred stock dividends                          (63,270)     (349,162)
                                                      -----------    ----------

Income (loss) available to common stock-holders
                                                      $   250,605      (539,427)
                                                      ===========    ==========

Basic EPS - weighted average shares outstanding
                                                        4,073,918     4,100,420
                                                      ===========    ==========

Basic earnings (loss) per share                              0.06         (0.13)
                                                      ===========    ==========

Basic EPS - weighted average shares outstanding
                                                        4,073,918     4,100,420

Effect of diluted securities:
  Convertible debentures                                   19,162            --
  Convertible preferred stock                             996,577            --
                                                      -----------    ----------

Dilutive EPS - weighted average shares out-standing
                                                        5,089,657     4,100,420

Net earnings (loss)                                       313,875      (539,427)
Interest expense on non-CSE debt                            8,978        17,955
                                                      -----------    ----------
                                                          322,853      (521,472)

Diluted earnings (loss) per share                            0.06         (0.13)
                                                      ===========    ==========

Convertible debentures not included in diluted EPS
  since antidilutive                                           --        37,800
                                                      ===========    ==========

Stock options not included in diluted EPS since
  antidilutive                                                 --       970,450
                                                      ===========    ==========

                                      F-11
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(9)    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, 1998, there were 180,000 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.

       A summary of stock  option  activity for the years ended May 31, 1998 and
       1997 follows:
                                                                      Price Per
                                                     Options           Option  
                                                    ---------         ---------
                                                                               
           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
           Options granted                            180,000              $.48
           Options exercised                               --
           Options canceled                                --
                                                    ---------
           Balance outstanding, May 31, 1998        4,890,000
                                                    =========

       As of May 31, 1998 and 1997,  options to purchase 4,770,000 and 4,710,000
       shares,  respectively,   at  prices  ranging  from  $.40  to  $1.00  were
       exercisable.

                                      F-12
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       A summary of stock options granted at May 31, 1998 follows:

                    Options Outstanding                     Options Exercisable
        ------------------------------------------------  ----------------------
                                   Weighted
                       Number      Average      Weighted     Number     Weighted
         Range of    Outstanding   Remaining    Average    Exercisable   Average
         Exercise     at May 31,  Contractual   Exercise   at May 31,   Exercise
          Price         1998         Life        Price        1998        Price
        ----------   -----------  -----------   --------   -----------  --------

        $.40-$1.00    4,700,000    5.0 years     $ .45     4,700,000    $  .45
              1.00       10,000    9.0 years      1.00        10,000      1.00
               .48      180,000    10.0 years      .48        60,000       .48
                      ---------                  -----     ---------     -----

                      4,890,000                    .45     4,770,000       .45
                      =========                  =====     =========     =====

       The per share weighted-average fair value of stock options granted during
       1998 and 1997 was $0.30 and $0.46, respectively, on the date of the grant
       using  the   Black-Scholes   option  pricing  model  with  the  following
       weighted-average  assumptions: 1998 expected dividend yield rate of 0.0%,
       risk-free  interest rate of 8.0%,  volatility of 57.98%,  and an expected
       life of six years; 1997 expected  dividend yield rate of 0.0%,  risk-free
       interest  rate of 8.0%,  volatility of 57.98% and an expected life of six
       years.

       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 would have been reduced to
       the pro forma amounts indicated below:

                                                   1998              1997
                                                 --------          --------
           Net income/(loss):
             As reported                         $250,605          (539,427)
             Pro forma                            242,363          (545,791)

           Earnings per share:
             Basic:
               As reported                            .06              (.13)
               Pro forma                              .06              (.13)

             Diluted:
               As reported                            .06              (.13)
               Pro forma                              .06              (.13)

       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 expired on February 1, 1998.

                                      F-13
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       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, 1998,  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, 1998,  160,000 of these
       warrants had been assigned to William L. Richter.

(10)   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.

       During fiscal 1998 the Company  completed an Exchange Offer which offered
       one  share  of its  Class  A,  Senior  Nonvoting  Cumulative  Convertible
       Preferred Stock,  Series A, par value $.01 ("Series A Shares"),  for each
       outstanding  share  of the  Class  A,  Nonvoting  Cumulative  Convertible
       Preferred  Stock,  Series 2, par value $.01  ("Series 2 Shares"),  of the
       Company.  The  purpose of this offer was to  eliminate  or  significantly
       reduce the number of Series 2 Shares  outstanding  including  the related
       dividend arrearage and to adjust the Company's capital structure.

       The Exchange Offer expired on May 27, 1998, and resulted in the tendering
       of 317,880 (approximately 82%) of the 388,180 outstanding Series 2 Shares
       for the Series A Shares.

(11)   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  midwest,
       Texas,  the  southwestern  states and the D.C.  metropolitan  area. Three
       major  customers  provided 28%, 15% and 10% of total service  revenues in
       1998 and three major customers provided 17%, 15% and 14% in 1997.

                                      F-14
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(12)   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  was five  years  and was
       renewable.  NHE also received  options to purchase up to 4,400,000 shares
       of the  Company's  common stock (note 7). In December  1997,  the Company
       renewed this agreement for a term of five years with payments of $250,000
       per year due to NHE.

       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  $211,000  and $65,000 to NHE under the terms of this
       agreement in fiscal 1998 and 1997, respectively.

(13)   RELATED PARTY TRANSACTIONS

       During fiscal 1998 and 1997, the Company  purchased  approximately $0 and
       $76,000,  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  $1,000 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. During fiscal 1998, the
       Company  contracted  with a  third-party  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 9
       ("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 market prices.

                                      F-15
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       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.

       On April 23, 1998,  the Company  entered into a  Supplemental  Investment
       Banking Agreement with RCI for investment banking services related to the
       Exchange Offer for the Company's Series 2 Preferred shares.  RCI received
       cash  consideration of $50,000 and 250,000 shares of the Company's common
       stock valued at $0.20 per share.

       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.

(14)   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   1%   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.

(15)   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.  For the years ended
       May 31, 1998 and 1997, the Company did not contribute to the plan.

(16)   YEAR 2000

       The Company has reviewed all  internally  used  software and believes the
       new system will be Year 2000 compliant.  Based upon its current  computer
       operations and systems  development,  the Company  believes that its risk
       related  to Year 2000  compliance  issues is low.  The  Company is in the
       process  of   contacting   all  vendors  and  clients  who  forward  data
       electronically  to determine the extent of their  compliance  and to plan
       accordingly.

                                      F-16
<PAGE>
                       AVESIS INCORPORATED AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(17)   SUBSEQUENT EVENT

       Subsequent to year-end, on July 30, 1998 the Company's Board of Directors
       approved  a  modification  providing  all  outstanding  stock  option and
       warrant  holders the  opportunity  to exercise any or all of their vested
       options and warrants at a discounted  exercise  price from their original
       grant,  during the period  from  August 1, 1998 to August 31,  1998.  The
       discounted  price was calculated by discounting the stated exercise price
       of each stock option or warrant at 10% per annum from the expiration date
       back to August 1998,  and rounding  the  calculated  price to the nearest
       whole cent. The  discounted  price in no case was allowed to be less than
       the prevailing  market price of the Company's common stock at the time of
       exercise of the  options,  defined as the high bid price,  and rounded to
       the nearest  whole cent.  After August 31, 1998,  the  modification  will
       expire and all terms will return to the original exercise terms.

       The total cash  received by the Company  from the  exercise of  3,742,000
       stock  options and 400,000  warrants  was  $1,202,656.  Of the  preceding
       amount,  approximately $400,000 was used to repurchase all 931,888 shares
       of the  Company's  common stock held by the founder of the  Company.  The
       excess funds  received  from these  transactions  will be used as working
       capital.


                                      F-17
<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        67         Co-Chairman and Director

 William L. Richter      55         Co-Chairman and Director

 Kenneth L. Blum, Sr.    71         Director, Former Acting President and CEO as
                                    of May 31, 1998

 Gerald L. Cohen         54         Director

 Sam Oolie               62         Director

 Alan S. Cohn            43         President, CEO and Director

 Kenneth L. Blum, Jr.    34         Director

 Neal A. Kempler         30         Corporate Secretary,
                                    Vice President of Operations

 Shannon R. Barnett      30         Controller

 Joel H. Alperstein      29         Treasurer, Director of Finance


                  Subsequent to year-end,  on July 30, 1998, the Company's Board
of  Directors  expanded  the Board of  Directors  from 5 members  to 7  members.
Consequently,  Alan S. Cohn and Kenneth L. Blum,  Jr. were named to the Board of
Directors to fill the two vacant seats until the next stockholder  meeting.  The
election to the Board of Messrs.  Cohn and Blum,  Jr. was  conditioned  upon the
early exercise of their stock options.

                                       17
<PAGE>
                  William R. Cohen, 67,  Co-Chairman of the Board, has served as
a Director of the Company  since April  1986.  Mr.  Cohen is the  Chairman of 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,  55,  Co-Chairman of the Board, has been a
director of the Company  since August 1993.  Mr.  Richter has been  President of
Richter Investment Corp. and its wholly-owned subsidiary, Richter & Co., Inc., a
registered  broker-dealer  and  investment  banking  firm  (or  its  predecessor
organization) for the past nine years and has been a Senior Managing Director of
Cerberus Capital Management, L.P. (or its predecessor organizations) since their
founding in late 1992. Mr. Richter was  Co-Chairman of  Rent-A-Wreck of America,
Inc., a franchiser 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.,  71,  has served as a Director  of the
Company since August 1993.  Mr. Blum was acting  President  and Chief  Executive
Officer  of the  Company  from  September  1996 to May 1998.  Mr.  Blum has been
Chairman of the Board of  Rent-A-Wreck  of America,  Inc., an automobile  rental
franchiser, since June 1993, 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,  54, 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,  62, 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

                                       18
<PAGE>
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.

                  Alan S. Cohn,  43, became the President and CEO of the Company
as of June 1998 and a Director  of the  Company as of August  1998.  Mr. Cohn is
providing  management  services on behalf of the Company  through an arrangement
with NHE. Mr. Cohn has been a management  consultant for NHE and KAB, Inc. since
1993 and 1990,  respectively.  Since  1990,  Mr.  Cohn has been a  principal  or
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;  Rent-A-Wreck of America,
Inc., an automobile franchiser;  Allscripts, Inc., formerly Physician Dispensing
Systems, Inc., a pharmaceutical  dispensing company,  Lawphone,  Inc., a prepaid
legal fee company;  Medi-mail,  Inc., a mail service  pharmacy;  and Mail-Rx,  a
mail-order  prescription drug company.  Mr. Cohn is the son-in-law of Kenneth L.
Blum,  Sr., the Company's  former acting  President and CEO, and a member of the
Board of Directors.

                  Kenneth L. Blum,  Jr., 34, became a Director of the Company as
of August 1998. Mr. Blum is the President,  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 franchiser,  President of National Computer
Services,  Inc., a computer service bureau,  and President of American  Business
Information  Systems,  Inc., a high-volume  laser printing  company.  Kenneth L.
Blum,  Sr., the Company's  former acting  President and CEO, and a member of the
Board of  Directors,  is the father of Kenneth  L. Blum,  Jr. See -  "Management
Services Agreement."

                  Neal  Kempler,  30, has been the  Corporate  Secretary  of the
Company  since June 1996,  the Vice  President of Marketing & Operations  of the
Company  since  August  1996  and the  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.

                  Shannon R. Barnett, 30, has been the Controller of the Company
(Principal  Accounting Officer) since August 1996 and was a 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 the Treasurer of the Company
since  December  1997 and the  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 

                                       19
<PAGE>
& 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 appointed 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."

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, 1998,  except
that Messrs.  Blum,  Sr., W. Cohen,  G. Cohen,  Oolie and Richter each  reported
transactions  from May 1998 on Forms 4 dated June 22, 1998, and that Mr. William
Cohen reported a transaction from December 1997 on a Form 4 dated March 4, 1998.
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.

                                       20
<PAGE>
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 the
     Company's Chief  Executive  Officer during the year ended May 31,
     1998.  No  executive  officer  who was  serving  as an  executive
     officer  during  fiscal  1998  received  salary  and bonus  which
     aggregated at least $100,000 for services rendered to the Company
     during the year ended May 31, 1998.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                     Annual Compensation           Long Term Compensation
                                   --------------------------------------------------------------
                                                                           Awards
-------------------------------------------------------------------------------------------------
Name and Principal Position   Year        Salary ($)       Securities Underlying Options/SARs (#)
---------------------------   ----        ----------       --------------------------------------
<S>                           <C>             <C>                            <C>
Kenneth L. Blum, Sr.,         1998            $0                             --
Acting CEO (1)                1997            $0                             --
                              1996            $0                             --
-------------------------------------------------------------------------------------------------
</TABLE>

(1) Mr. Blum became 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 FISCAL YEAR END OPTION VALUE TABLE

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

-------------------------------------------------------------------------------
                          Number of Unexercised         Value of Unexercised
                          Options at FY-End (#)         in-the-Money Options
                                                            at FY-End ($)
-------------------------------------------------------------------------------
Name                  Exercisable   Unexercisable   Exercisable   Unexercisable
----                  -----------   -------------   -----------   -------------

Kenneth L. Blum, Sr.      --             --             --              --

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

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."

                                       21
<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.  (See Item 5 - "Market for Common
Stock  and  Related   Stockholder   Matters  -  Recent  Sales  of   Unregistered
Securities")  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,  1998  options  for  100,000  shares of Common  Stock were
exercisable by each of the optionees.

                  Subsequent to year-end, William R. Cohen exercised his 100,000
stock  options  pursuant  to the  reduced  pricing as  approved  by the Board of
Directors. See Item 5 - "Market for Common Stock and Related Stockholder Matters
- Recent Sales of Unregistered Securities."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                  As of August 24,  1998 there were  8,243,185  shares of Common
Stock,  6,500  shares  of  Series 2  Preferred  and  315,260  shares of Series A
Preferred outstanding. The table below sets forth as of August 24, 1998, 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.

                                       22
<PAGE>
<TABLE>
<CAPTION>
                                                                  Common issuable upon conversion or
                                                                  ----------------------------------
                                                                           exercise of: (1)
                                                                           ----------------
                                                                                            Total 
                                                                                            ----- 
                                                                                            Common
                                                                                            ------
                            Common         % of       Series A      % 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          1.9       22,274(7)      7.1    100,000        476,099         5.6

William R. Cohen*           161,117(4)       2.0       10,552         3.3         --        266,637         3.2

William L. Richter        1,194,620(3)      14.5       50,099        15.9         --      1,695,610(3)     19.4
c/o Richter & Co., Inc.
450 Park Ave., 28th
Floor
New York, NY 10022

Sam Oolie*                  220,021(5)       2.7       24,023         7.6    100,000        560,251         6.5

Kenneth L. Blum, Sr         140,000(6)       1.7        2,000         0.6         --        160,000         1.9
17133 Ericarose Street
W. Boca Raton, FL 33496

Kenneth L. Blum, Jr       1,814,750         22.0           --        --           --      1,814,750        22.0
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117

Alan S. Cohn              1,804,750         21.9           --        --           --      1,804,750        21.9
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117

Neal A. Kempler*                 --         --             --        --      255,000        255,000         3.0

Benjamin D. Ward Sr         931,888         11.3           --        --           --        931,888        11.3
4712 North 41st Place
Phoenix, AZ 85018

All directors and         5,488,617(4)(5)   66.6      108,948        34.6    605,000      7,183,097        72.3
Executive officers as
a group (9 persons)
</TABLE>

*   Address: 3724 North Third Street, Suite 300, Phoenix, Arizona 85012.

                                       23
<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 A Preferred  or options or
     warrants, as indicated. Each share of Series A Preferred Stock indicated in
     the table is convertible  into 10 shares of Common Stock and such shares of
     Common Stock are included in the total Common beneficially owned.

(2)  The percentages shown include Common Stock actually owned as of the date of
     the above  table and  Common  Stock as to which the person had the right to
     acquire  beneficial  ownership  within 60 days of such date pursuant to the
     Series A 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 462,500 shares of Common Stock and shares of Common Stock issuable
     upon  conversion  of  22,300  shares of  Series A  indirectly  owned via an
     affiliated  corporation,   Richter  &  Co.,  Inc.  ("RCI"),  which  thereby
     beneficially  owns in its own name 685,500  shares or 8.1% of the Company's
     Common Stock. Also includes shares of Common Stock issuable upon conversion
     of 3,883  and  4,530  shares  of  Series  A  Preferred  held via two  other
     corporations. Also includes shares of Common Stock issuable upon conversion
     of 2,500  shares of Series A Preferred  and 15,169  shares of Common  Stock
     held by  family  members,  as to which  Mr.  Richter  disclaims  beneficial
     ownership.

(4)  Includes  6.67% of the 6,337  shares of common  stock and 19,412  shares of
     Series A Preferred stock held by an affiliated corporation, with respect to
     which William R. Cohen owns 6.67% of the outstanding stock.

(5)  Includes  20% of the  6,337  shares of common  stock and  19,412  shares of
     Series A Preferred stock held by an affiliated corporation, 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.

(6)  The indicated shares are held by Mr. Blum's spouse.

(7)  Includes  43.75% of the  4,530  shares  of  Series A  Preferred  held by an
     affiliated corporation.

                                       24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AGREEMENTS WITH NATIONAL HEALTH ENTERPRISES, INC.

                  Management Agreement. On December 12, 1997 the Company's Board
of Directors  agreed to extend the term of the  Company's  Management  Agreement
with NHE to March 18, 2003. Also,  effective March 18, 1998, the Company's Board
of  Directors  agreed to increase  the cash  compensation  paid to NHE under the
Management Agreement by $50,000 per year to $250,000 per year.

                  Stock Option Grant. Pursuant to the Management  Agreement,  on
March 18,  1993,  the Company  issued  options  (the  "Options")  to NHE for the
purchase of up to 4,400,000 shares of the Company's Common Stock.  Also pursuant
to the Management  Agreement,  the Company  entered into a  Registration  Rights
Agreement effective March 18, 1993 with NHE, Mr. Blum, Jr. and Mr. Cohn.

                  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.  Effective
January 27, 1997,  NHE  transferred  200,000  options,  which had  automatically
reverted to NHE from a former  officer,  to Neal A. Kempler.  Effective April 6,
1998, NHE transferred 100,000 options to Joel H. Alperstein.

                  During  August  1998,  Messrs.  Blum,  Jr.,  Cohn and  Richter
exercised all of their outstanding  options from the March 18, 1993 Stock Option
Grant. See Item 5 - "Market for Common Stock and Related  Stockholder  Matters -
Recent Sales of Unregistered Securities."

                  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 were due March 18,  1998 and  accrued  interest  at the rate of 6% per
annum,  provided  that the  holders  could  accelerate  the notes if the Company
terminated  the  Management  Agreement  without  cause.   Interest  was  payable
semiannually in arrears, commencing September 18, 1993. The notes were unsecured
and  subordinated  to the  Company's  outstanding 9 1/2%  Debentures  and future
indebtedness  of the Company for  borrowed  money.  The Company  paid $8,416 and
$10,442  in  interest  under the terms of these  notes in fiscal  1998 and 1997,
respectively.  On March 18, 1998 the Company paid Mr. Blum, Jr. and Mr. Cohn the
outstanding   principal  and  accrued   interest  amounts  on  the  subordinated
promissory notes.

                  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 

                                       25
<PAGE>
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 1998 and 1997,  the Company paid  approximately  $211,000 and $65,000,
respectively, to NHE under the Marketing Agreement. In fiscal 1998 and 1997, the
Company paid  approximately  $8,000 and $14,000,  respectively,  in reimbursable
marketing expenses to NHE under the Marketing Agreement.

                  Investment  Banking  Services.  On April 23, 1998, the Company
entered  into a  Supplemental  Agreement  with Richter & Co.,  Inc.  ("RCI") for
Investment  Banking  services  related to the Exchange  Offer for the  Company's
Series 2  Preferred  shares.  RCI  received  cash  consideration  of $50,000 and
250,000 shares of the Company's Common Stock. RCI assigned 100,000 shares of the
Company's Common Stock received under this agreement to William L. Richter.

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  $0 and
$76,000 to NCS for such  services  during  fiscal  1998 and 1997,  respectively.
Additionally,  the Company has contracted  with NCS to lease its computer system
for  approximately  $1,000 per month.  The Company  paid  $12,000 and $15,502 of
computer lease charges in fiscal 1998 and 1997,  respectively.  Kenneth L. Blum,
Jr., a Director, is President and a stockholder of NCS and the son of Kenneth L.
Blum, Sr., the former Acting President and 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  has
continued to use the completed  modules developed by NCS while the new system is
under  development.  The capitalized  costs related to modules not yet placed in
service,  $286,069,  were expensed in fiscal 1997.  See Item 6 --  "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."

                                       26
<PAGE>
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 August 24, 1998               By:  /s/ Alan S. Cohn          
         -----------------              -----------------------------------
                                        Alan S. Cohn
                                        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/ Alan S. Cohn              President, Chief                   August 24, 1998
------------------------      Executive Officer and Director
Alan S. Cohn                  

/s/ Neal A. Kempler           Corporate Secretary and            August 24, 1998
------------------------      Vice President of Operations
Neal A. Kempler                        

/s/ Joel H. Alperstein        Treasurer and                      August 24, 1998
------------------------      Director of Finance
Joel H. Alperstein            (Principal Financial Officer)

 /s/ Shannon R. Barnett       Controller                         August 24, 1998
------------------------      (Principal Accounting Officer)
Shannon R. Barnett            

 /s/ William R. Cohen         Co-Chairman of the                 August 24, 1998
------------------------      Board of Directors
William R. Cohen              

 /s/ William L. Richter       Co-Chairman of the                 August 24, 1998
------------------------      Board of Directors
William L. Richter            

/s/ Kenneth L. Blum, Sr.      Director                           August 24, 1998
------------------------
Kenneth L. Blum, Sr.

/s/ Kenneth L. Blum, Jr.      Director                           August 24, 1998
------------------------
Kenneth L. Blum, Jr.

 /s/ Gerald L. Cohen          Director                           August 24, 1998
------------------------
Gerald L. Cohen

 /s/ Sam Oolie                Director                           August 24, 1998
------------------------
Sam Oolie
                                       28
<PAGE>
                               AVESIS INCORPORATED
                                  EXHIBIT INDEX
                                   FORM 10-KSB
                     FOR THE FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
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 (File No. 33-28756).
       Stock, Series 2                                    

4.6    Statement of Designations, Preferences,                Company's Schedule 13E-4 filed April 27, 1998
       Privileges, Voting Powers, Restrictions and            (Annex A).
       Qualifications of the Series A Preferred

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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>    <C>                                                    <C>
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).

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 three 
       City Square                                            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       Company's Report on Form 10-KSB for the year 
       Blum, Sr., Ken Blum, Jr., and Alan Cohn                ended May 31, 1997 (File No. 0-15304).

10.17  Sublease Agreement between the Company and             Company's Report on Form 10-KSB for the year
       InfoImage, Inc.                                        ended May 31, 1997 (File No. 0-15304).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>    <C>                                                    <C>
10.18  Lease Agreement between the Company and                Company's Report on Form 10-KSB for the year 
       Principal Mutual Life Insurance Company                ended May 31, 1997 (File No. 0-15304).

10.19  Supplemental Agreement to the December 5, 1994         filed herewith
       Investment Banking Agreement

11     Statement recomputation of per-share earnings          Earnings (Loss) per Share Computation, see 
                                                              Note 8 to the Notes to Consolidated Financial 
                                                              Statements.

21 Subsidiary of Registrant                                   filed herewith

27 Financial Data Schedule                                    filed herewith
</TABLE>

*  Identified as a compensatory  arrangement as required by Item 13(a) of Form
   10-KSB.