UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934
                  For the fiscal year ended December 31, 2001
                                       or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
                  For the transition period from ____ to ____.

                         Commission file number 33-80127

                                  Dynacare Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         Ontario, Canada                           98-0337653
--------------------------------------------------------------------------------
(State or other jurisdiction of         (I.R.S Employer Identification No.)
 incorporation or organization)

        14900 Landmark Boulevard
              Dallas, Texas                              75254
(Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code  (972) 387-3200
                                                    --------------

Securities registered pursuant to section 12(b) of the Act:

    Title of each class              Name of each exchange on which registered:
                                          The Nasdaq National Market and
       Common Shares                        The Toronto Stock Exchange
--------------------------------------------------------------------------------

Securities registered pursuant to section 12(g) of the Act:             None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.

The aggregate market value of the voting common stock held by non-affiliates of
the registrant as of March 11, 2002 was $322.5 million (computed by reference to
the last sale price of common stock as reported on the NASDAQ on such date). As
of March 11, 2002, there were 19,311,421 shares of Dynacare Inc.'s common stock
outstanding.

Certain portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection
with the 2002 annual meeting of shareholders of the registrant are incorporated
by reference into Part III of this Report.

<PAGE>

                                  DYNACARE INC.
                           ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS
<TABLE>
                                                                                                               PAGE

PART I
------

ITEM 1                        BUSINESS
<S>                                                                                                             <C>
                              Overview...........................................................................1
                              The Clinical Laboratory Testing Industry...........................................2
                              Dynacare's Strategy................................................................4
                              Laboratory Testing Operations and Services ........................................5
                              Acquisitions and Partnerships......................................................6
                              Sales and Marketing...............................................................10
                              Customers and Payors..............................................................10
                              Billing...........................................................................11
                              Information Technology............................................................13
                              Compliance Program................................................................14
                              Quality Assurance.................................................................15
                              Competition.......................................................................15
                              Insurance.........................................................................16
                              Employees.........................................................................17
                              Regulations.......................................................................17
                              Details of Incorporation..........................................................21

ITEM 2                        PROPERTIES........................................................................22

ITEM 3                        LEGAL PROCEEDINGS.................................................................24

ITEM 4                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................24

PART II
-------

ITEM 5                        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............24

ITEM 6                        SELECTED FINANCIAL DATA...........................................................25

ITEM 7                        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS.............................................................28

ITEM 7A                       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................38


                                       2
<PAGE>

ITEM 8                        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................39

ITEM 9                        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                              FINANCIAL DISCLOSURE..............................................................39

PART III
--------

ITEM 10                       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................39

ITEM 11                       EXECUTIVE COMPENSATION............................................................40

ITEM 12                       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................40

ITEM 13                       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................40


PART IV
-------

ITEM 14                       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................43

                              1.    Index to Financial Statements Filed as Part of this Report:.................43

                                     Report of Independent Auditors............................................F-1
                                     Consolidated Statements of Financial Position.............................F-2
                                     Consolidated Statements of Operations.....................................F-3
                                     Consolidated Statements of Deficit........................................F-3
                                     Consolidated Statements of Cash Flows.....................................F-4
                                     Notes to Consolidated Financial Statements................................F-5

                              2.     Financial Statement Schedule

                                     Schedule II - Valuation Accounts and Reserves.............................S-1

                              3.     Exhibits Index............................................................E-1

                                     i)    Exhibit 21 - List of Subsidiaries ..................................E-2
                                     ii)   Exhibit 23 - Independent Auditors...................................E-3
</TABLE>


                                       3
<PAGE>

                                     PART I
                                     ------

    Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the
                Private Securities Litigation Reform Act of 1995

         This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, from time to time,
Dynacare or its representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but are not limited to, various filings made by Dynacare with the
Securities and Exchange Commission, press releases or oral statements made by or
with the approval of authorized executive officers of Dynacare. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements so long as cautionary statements identifying
important factors that could cause actual results to differ materially from
those projected in the statement are provided. These statements relate to future
events or future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause Dynacare or Dynacare's industry's
actual results, levels of activity, performance or achievements to be materially
different from those expressed or implied by any of Dynacare's forward-looking
statements. In some cases, forward-looking statements may be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"intends," "believes," "estimates," "predicts," "potential" or "continue" or the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide variety of
factors, conditions, risks and uncertainties which include, but are not limited
to: (i) significant government regulation; (ii) efforts by various third-party
payors (including governmental agencies and insurers) to reduce reimbursements
and utilization and otherwise modify the delivery of healthcare services; (iii)
the inability to fully realize cost savings from the consolidation of certain
operations and other cost management initiatives; (iv) changes in interest rates
causing an increase in Dynacare's effective borrowing rates; (v) intensified
competition; and (vi) changes in market conditions. Dynacare undertakes no
obligation to update any forward-looking statements.


ITEM 1.  -  BUSINESS

OVERVIEW

         Dynacare Inc. (Dynacare) is the third largest independent provider of
clinical laboratory testing services in North America as measured by revenues.
Dynacare provides clinical laboratory testing services in 21 states in the
United States and two provinces in Canada. Dynacare believes it offers a
comprehensive menu of tests, comprised of more than 1,000 different tests.
Dynacare provides clinical laboratory testing, which is performed on body fluids
such as blood and urine and on tissues and other specimens, including human
cells. Through Dynagene, Dynacare's center for esoteric testing, Dynacare also
provides a growing number of more complex esoteric tests, including molecular
diagnostic services. Dynacare's customers include physicians, hospitals and
other healthcare providers who utilize clinical laboratory testing in
diagnosing, evaluating, monitoring and treating diseases and other medical
conditions. Dynacare provides clinical laboratory testing services either
directly through its wholly-owned laboratories or through partnerships which
Dynacare forms with major local hospitals and academic medical centers.

         Since entering the clinical laboratory testing market in the United
States in 1993, Dynacare has grown to become a significant provider of clinical
laboratory testing services in a number of regions. Dynacare's U.S. revenues
grew at a compound annual growth rate of 39% for the five-year period ended

<PAGE>

December 31, 2001 as a result of strong internal growth, combined with growth
generated by 21 acquisitions and the commencement of five joint ventures or
partnerships with hospitals. In the United States, Dynacare currently operates
22 central laboratories, 84 rapid response laboratories and 172 patient service
centers, which Dynacare owns directly or through its partnerships. Dynacare is
positioned as a multi-regional provider with a major presence in four integrated
regions in the United States: the Southeast, which is comprised of Alabama,
Mississippi and Northern Florida; the Southwest, which is comprised of
Louisiana, Arkansas, Texas, Oklahoma and Missouri; the Northwest, which is
comprised of Oregon, Utah, Alaska, Wyoming, Colorado, Idaho, Montana and the
state of Washington; and the Midwest, which is comprised of Wisconsin and
Illinois. Additionally, Dynacare has operations in New York, Pennsylvania and
Tennessee.

         In Canada, Dynacare operates in the provinces of Ontario and Alberta
through two partnerships. Dynacare's operations in these provinces include four
central laboratories, 31 rapid response laboratories and 130 patient service
centers. Through Dynacare's partnership in Ontario, Dynacare has an estimated
31% share of the Ontario independent clinical laboratory testing market. Through
Dynacare's partnership in Alberta, Dynacare has an estimated 60% share of the
Northern Alberta market.

         Dynacare processed approximately 14 million requisitions during the
year ended December 31, 2001. For the year ended December 31, 2001, Dynacare had
net revenues of $402.4 million and net earnings of $11.7 million.


THE CLINICAL LABORATORY TESTING INDUSTRY

Overview

         Clinical laboratory testing is critical to the delivery of quality
healthcare to patients. Clinical laboratory tests are used generally by
physicians to assist in the detection, diagnosis, evaluation, monitoring and
treatment of diseases and other medical conditions through the measurement and
analysis of chemical and cellular components in blood, other body fluids and
tissues. Clinical laboratory tests are frequently ordered as part of physician
office visits and hospital admissions. According to Washington G-2 Reports, a
clinical laboratory industry periodical, approximately 94% of all clinical
laboratory tests ordered are considered routine and can be performed by most
clinical laboratories. More specialized tests, commonly known as esoteric tests,
generally require more sophisticated instruments and/or highly skilled
personnel, and are typically outsourced to independent clinical laboratories
that specialize in such tests.

         Dynacare expects the demand for clinical laboratory testing services in
both the United States and Canada to increase in the future as a result of
several factors, including:

         o        the general aging of the North American population;

         o        advances in specialized equipment and cost efficiencies, which
                  have made clinical laboratory testing available to a broader
                  market;

         o        an expanded base of scientific knowledge, which has led to the
                  development of more sophisticated tests;

         o        greater awareness by physicians and patients of the value of
                  clinical laboratory testing as a cost effective means of
                  disease detection and treatment monitoring;

         o        increased testing for high risk diseases, such as HIV/AIDS and
                  hepatitis; and

         o        advances in genomics facilitating the development of new and
                  more specialized testing.


                                       2
<PAGE>

         The impact of these factors is expected to be partially offset by
declines in volume as a result of increased controls over the utilization of
laboratory services by Medicare and other third-party payors.

United States

         Dynacare believes that the total U.S. laboratory market in 2001 was
approximately $32.0 billion, which includes an estimated $2.0 billion derived
from esoteric testing.

         The industry can be categorized into three broad types of laboratory
providers:

         o        hospital-based laboratories;

         o        independent clinical laboratories; and

         o        physician office laboratories.

         Dynacare believes that in 2001 approximately 63% of the clinical
testing revenues in the United States was derived by hospital-based
laboratories, approximately 26% was derived by independent clinical laboratories
and approximately 11% was derived by physicians in their offices.

         The clinical laboratory testing business in the United States is highly
fragmented. Consolidation in the industry has occurred, and Dynacare believes
consolidation will continue due to the following factors:

         o        pressure on pricing and test utilization from payors;

         o        over-capacity in certain markets;

         o        cost of compliance with increasingly stringent regulatory
                  requirements;

         o        cost burdens on smaller laboratories as they strive to obtain
                  operating efficiencies;

         o        legislative initiatives, such as restrictions on physician
                  referrals to physician-owned laboratories; and

         o        the growth of managed healthcare, which requires efficient,
                  low cost testing services.



Canada

         Dynacare estimates that the Canadian clinical laboratory testing market
was approximately $1.6 billion in 2001, with hospital laboratories performing
approximately two-thirds of total clinical laboratory testing and the balance
performed by independent clinical laboratories. Dynacare operates in the
provinces of Ontario and Alberta, which account for approximately 51% of
Canada's clinical laboratory testing revenues.

         The Canadian clinical laboratory testing market consists of two primary
segments:

         o        public hospital-based laboratories; and

         o        independent clinical laboratories.



                                       3
<PAGE>

         The Canadian clinical laboratory testing industry operates in an
environment characterized by significant government regulation and reimbursement
control, as a substantial majority of clinical laboratory testing procedures are
covered by government healthcare plans. Fees paid to independent clinical
laboratory testing service providers in Canada are administered by the
respective provincial governments and are effectively controlled through a
variety of mechanisms.

         Through its partnership in Ontario (Ontario Partnership), Dynacare
provides clinical laboratory testing services to physicians in an environment
where reimbursement is largely fixed on an annual basis. In addition,
competition in Ontario is limited as clinical laboratories must be licensed by
the Ontario Ministry of Health and Long-Term Care.

         Through its partnership in Alberta (Alberta Partnership), Dynacare
provides clinical laboratory testing services to physicians, clinics and
hospitals in Alberta pursuant to contracts with regional health authorities.
Competition is also limited, as the Alberta Partnership is the only independent
provider of clinical laboratory testing services in Northern Alberta.


DYNACARE'S STRATEGY

         Dynacare's objective is to be a leading provider of clinical laboratory
testing services in selected regional markets by focusing on the following key
strategic elements:

Enhance Dynacare's Market Position in Existing Regions

         Dynacare intends to further develop its position in the regional
markets in which it currently operates in three ways.

         o        Increased sales efforts - Dynacare believes it has established
                  a strong and identifiable brand in each region, where it
                  offers state-of-the-art diagnostic services, supported by
                  cutting-edge information technology. This allows Dynacare to
                  promptly report results with minimum reliance on air
                  transport. With Dynacare's local presence in the markets it
                  services, Dynacare is able to provide prompt support and
                  information to physicians. Dynacare employs experienced sales
                  and marketing personnel who emphasize these attributes in
                  marketing Dynacare's services. Without giving effect to any
                  revenue growth attributable to acquisitions and new
                  partnerships and excluding revenues from long-term hospital
                  contracts, Dynacare's revenues in the United States have grown
                  approximately 7.1% for the year ended December 31, 2001,
                  primarily through the addition of new customers and increased
                  testing volumes.

         o        Pursue fold-in acquisitions - Dynacare expects to continue to
                  make selective acquisitions of smaller laboratories and to
                  improve laboratory efficiency and profitability by combining
                  the acquired operations with its existing laboratory
                  operations. This enables Dynacare to expand within existing
                  regions and to strengthen its position in the local markets
                  that it serves. During the five year period ended December 31,
                  2001, Dynacare made 17 fold-in acquisitions.

         o        Realize operating efficiencies - As Dynacare grows and
                  establishes its regional operations, it seeks to continue to
                  realize operating efficiencies by consolidating certain of its
                  regional operations and by other cost management initiatives.
                  For example, Dynacare is currently in the process of
                  consolidating laboratory operations in its Southwest Region
                  and has undertaken materials management initiatives on a
                  company-wide basis with a view to decrease its materials cost
                  per requisition.


                                       4
<PAGE>

Expand into New Attractive Regional Markets

         Dynacare targets expansion opportunities in new regions where it
believes that market size, demographics, payor mix, competition and other
factors will allow Dynacare to become a significant and profitable regional
provider of laboratory services. Dynacare enters into selected new regional
markets through either strategic acquisitions or partnerships. Dynacare prefers
to enter markets adjacent to its existing regions as this allows Dynacare to
leverage its existing infrastructure. Due to the fragmented nature of the
clinical laboratory testing industry, Dynacare believes opportunities exist to
selectively acquire additional clinical laboratories and enter into partnerships
on terms favorable to Dynacare.

Pursue the Hospital Market

         The hospital market constitutes approximately 63% of the $32.0 billion
U.S. clinical laboratory business. Dynacare intends to continue to pursue this
segment of the market by establishing relationships with leading hospitals as
follows:

         o        Form partnerships with hospitals - Dynacare believes that its
                  partnership model is a cost-effective means of expanding into
                  new markets. Dynacare gains access to an existing, fully
                  equipped and staffed clinical laboratory within its partner
                  hospital for a small initial investment. By marketing its
                  services in the local community, Dynacare expands the volume
                  of testing performed in the hospital laboratory and leverages
                  its fixed costs, thereby maximizing profit on incremental
                  testing volume.

                  Dynacare is able to compete effectively for community based
                  testing business by marketing clinical laboratory testing
                  services to physicians, clinics and other healthcare providers
                  in the community, capitalizing on the hospital's reputation
                  and relationships with its network of affiliated physicians.
                  Dynacare believes the desire of hospitals to control costs and
                  participate in the revenue and profitability of
                  community-based business will lead other hospitals to consider
                  its partnership model.

         o        Obtain long-term exclusive laboratory services contracts with
                  hospitals - An integral component of Dynacare's growth
                  strategy is to secure, through its partnerships and
                  wholly-owned operations, long-term exclusive contracts to
                  provide all of a hospital's clinical laboratory testing
                  requirements. These contracts provide Dynacare with a stable
                  base of revenues and cash flows upon which Dynacare builds its
                  regional operations. For the year ended December 31, 2001,
                  long-term hospital contracts accounted for approximately 19%
                  of Dynacare's total revenues in the United States.

Grow Esoteric Testing Capability

         Dynacare believes that esoteric testing is the fastest growing segment
of the clinical laboratory testing market. In November 2000, Dynacare launched
Dynagene, its center for genetic and esoteric testing and counseling. Dynacare
will continue to expand its esoteric testing capabilities to enhance its
services to its existing clients, to attract new clients and to internalize and
reduce testing currently out-sourced to other esoteric laboratories.


LABORATORY TESTING OPERATIONS AND SERVICES

         Dynacare currently operates 26 central laboratories, 115 rapid response
laboratories, and 302 patient service centers. Central laboratories are
Dynacare's major laboratories, which have a full complement of testing
capability. Rapid response laboratories are smaller laboratories which have the
ability to perform a limited number of routine tests that must be processed and


                                       5
<PAGE>

reported to a physician immediately. A patient service center is a facility in a
medical building or other appropriate location to collect specimens from
patients.

         Specimens are collected from physicians' offices, hospitals, clinics
and Dynacare's patient service centers by its own courier system (or, in some
cases, independent couriers) and delivered to Dynacare's central laboratories or
rapid response laboratories, as appropriate. Dynacare processed approximately 14
million requisitions during the year ended December 31, 2001. Patient specimens
are accompanied by a requisition or test request which can be in paper or
electronic form. The information on the requisition, which is provided by the
physician and patient, includes the tests to be performed and provide all of the
information necessary for billing purposes.

         When the specimens arrive at one of Dynacare's laboratories, the
information from the requisition form is entered into Dynacare's laboratory
system, the testing is completed and results of the tests are produced. All
routine testing can be completed generally within 24 hours. The test results are
available for distribution to the physician or customer within this timeframe.
Most of Dynacare's testing equipment is interfaced with its information systems.
Test results can be provided to Dynacare's customers in any method selected by
the customer, including hard copy, electronic transmission to the physician or
customer's office, printing on a remote printer or through the internet.

         Dynacare currently offers more than 1,000 different clinical laboratory
tests or procedures. In the clinical laboratory testing industry, tests are
generally categorized as routine or esoteric. A routine test is generally a
higher volume test that is usually capable of being performed and reported
within 24 hours and is typically performed by automated testing equipment.
Routine tests generally provide information to physicians to assist them in
determining the existence or absence of diseases or abnormalities.

         Esoteric tests are generally more complex tests that are performed less
frequently than routine tests and require more sophisticated technology and/or
more highly skilled personnel. Esoteric tests are generally ordered when a
physician requires additional information to confirm a diagnosis, establish a
prognosis or develop a plan of therapy or treatment. Esoteric tests often become
routine as volumes increase and new technology and/or instruments make the
testing cost-effective and less complex. Through Dynagene, Dynacare has the
capability to perform, and does perform, many esoteric tests. Dynacare
continually reviews the volumes of esoteric tests referred out and new testing
technologies with a view to performing the test in-house if it becomes
cost-effective. Dynacare will continue to refer low volume or extremely
specialized tests to outside esoteric clinical testing laboratories, as it is
not cost-effective for Dynacare to perform the testing in-house.


ACQUISITIONS AND PARTNERSHIPS

         Dynacare has developed its network of regional laboratories primarily
through acquisitions and partnerships. Dynacare pursues opportunities in markets
where it believes it can establish a significant regional presence, with a
reputation for trusted, quality service, and compete effectively with both
national and local laboratory service providers. Dynacare generally acquires the
laboratory assets (usually excluding receivables) and operations and leases the
facilities.


                                       6
<PAGE>

United States

         Dynacare has completed the following acquisitions and partnerships
since entering the U.S. market in October 1993:
<TABLE>
<CAPTION>
                        Date of                                                           Acquisition or
Location                Transaction         Entity                                         Partnerships
----------------------  ------------------  --------------------------------------------  ----------------------------
<S>                     <C>                 <C>                                           <C>
Alabama
-------
  Muscle Shoals         December 2000       Shoals Laboratory                             Acquisition
  Birmingham/           March 2000          LabSouth                                      Acquisition
   Montgomery

Arkansas
--------
  El Dorado             December 2000       Accu-Path Laboratory                          Acquisition

Illinois
--------
  Chicago               June 2001           IMMC Laboratories                             Acquisition
  Chicago               July 2001           Almar Molay                                   Acquisition

Louisiana
---------
  Monroe                July 1999           Bayou Laboratory                              Acquisition
  Baton Rouge           December 1997       Louisiana Reference Laboratory                Acquisition (1)

Mississippi
-----------
  Gulfport              July 1999           SouthCoast Pathology Services                 Acquisition
  Meridian              June 1999           Medical Pathology Laboratory                  Acquisition
  Jackson               February 1999       Clinical Pathology Laboratory                 Acquisition

New York
--------
  Schenectady           August 1996         Ellis Hospital                                Partnership (1)(2)

Oklahoma
--------
  Oklahoma City         March 2001          Medical Arts Laboratory                       Acquisition

Pennsylvania
------------
  Pittsburgh            December 2000       Allegheny Hospital                            Partnership (1)(2)

Tennessee
---------
  Knoxville             August 1999         University Health Systems                     Partnership (1)(2)

Texas
-----
  Beaumont              June 2001          MEDSTAT Laboratories                           Acquisition
  San Antonio           May 2000           CHRISTUS Santa Rosa HealthCare                 Acquisition
  Midland               April 2000         West Texas Pathology Laboratory                Acquisition
  Houston               December 1999      Laboratories for Genetic Services              Acquisition
  Texarkana             July 1999          Doctors Diagnostic Laboratory                  Acquisition
  Brownsville           April 1999         Central Diagnostic Management                  Acquisition
  San Antonio           February 1999      Accufast Diagnostic Laboratory                 Acquisition
  Houston               March 1996         Kelsey-Seybold Clinic                          Acquisition
  Houston               September 1995     Memorial Hermann Hospital                      Partnership/Acquisition (3)

Washington
----------
  Bremerton             December 2000      Olympic Laboratory                             Acquisition (1)
                                           Pacific Hospital Preservation & Development
  Seattle               November 1997      Authority                                      Acquisition
  Seattle               February 1995      Laboratory of Pathology                        Acquisition (1)


                                       7
<PAGE>

                        Date of
Location                Transaction        Entity                                         Acquisition or Partnerships
----------------------  -----------------  ---------------------------------------------  ----------------------------
  Mt. Vernon            March 1994         Skagit Valley Laboratories                     Acquisition (1)

Wisconsin
---------
  Milwaukee             August 1997        Froedtert Health Systems                       Partnership (1)(2)

Wyoming
-------
  Casper                April 1999         Central Wyoming Medical Laboratory             Acquisition
  Cheyenne              October 1993       Clinical Laboratories Cheyenne                 Acquisition  (1)
</TABLE>

-----------
(1)      Laboratory testing services include services provided under long-term
         contract with a hospital.
(2)      50/50 partnership
(3)      Dynacare commenced a partnership with Hermann Hospital (subsequently
         merged with Memorial) in September 1995 and entered into a contract to
         provide all laboratory services to Hermann Hospital. The contract with
         Hermann Hospital, which expired on September 30, 2000, was not renewed
         as described elsewhere. In addition, on October 31, 2001, Dynacare
         acquired the remaining 50% partnership interest in the Memorial Hermann
         partnership (Texas Partnership) from Memorial Hermann.

Acquisitions

         Dynacare pursues strategic acquisition opportunities in new markets
that allows it to:

         o        acquire operations with full service capabilities and the
                  capacity to accommodate additional test volumes;

         o        enter laboratory markets which are large enough to support a
                  fully functioning laboratory and do not have entrenched
                  competition or a high degree of managed care;

         o        enter into long-term contracts to provide laboratory services
                  to hospitals; and

         o        focus on markets adjacent to Dynacare's existing regions in
                  order to leverage its existing infrastructure.

         Dynacare also pursues smaller "fold-in" acquisition opportunities in
existing markets that allow Dynacare to:

         o        improve laboratory efficiency and profitability by combining
                  the acquired operations with its existing operations; and

         o        strengthen its market penetration in that region.

         Dynacare proactively identifies acquisition targets as well as responds
to proposals to sell laboratory operations. It has generally taken 6 to 12
months between initial contact with an acquisition candidate and the
consummation of a transaction. After a potential acquisition has been
identified, Dynacare undertakes a due diligence review of the candidate's
operations and the region within which it is located. Dynacare's personnel
conduct a formalized review of all aspects of the candidate's operations,
including an assessment of the local market and the candidate's competition,
payor billing mix, compliance, litigation and capital requirements. During the
course of Dynacare's due diligence review, Dynacare prepares an operating plan,
identifies opportunities for increased operating efficiencies and assesses
overall productivity and management information systems. Following consummation
of an acquisition, in appropriate circumstances, Dynacare endeavors to retain
key personnel from the acquired entity to ensure its continued effective


                                       8
<PAGE>

operation. Dynacare typically obtains non-competition covenants from the
sellers.

Partnerships

         Dynacare had established five partnerships in the U.S. With the
acquisition of the remaining 50% partnership interest in the Texas Partnership,
only four of these continue to operate as partnerships. Dynacare's partnership
model is based on the establishment of a new 50/50 partnership with a hospital.
The partnership purchases the hospital's laboratory assets and any existing
community-based business, and enters into a long-term contract to be the
hospital's exclusive provider of all clinical laboratory testing services for
the hospital's inpatients and registered outpatients. The partnership also
contracts with the hospital's pathology group to provide medical oversight to
the partnership. Dynacare receives a management fee for managing the
partnership. The partnership then seeks to increase its revenues and
profitability by marketing laboratory services to physicians, clinics and other
healthcare providers in the community. Through the partnership, Dynacare gains
access to an existing, fully equipped and staffed clinical laboratory and to an
established physician and payor network associated with the hospital partner.

         Dynacare's partnership business model allows it to enter a new region
with a smaller capital investment than an acquisition might otherwise require.
Dynacare competes for community-based testing business and generates a
management fee for managing the partnership. Dynacare's hospital partner
benefits from this arrangement by reducing and controlling the costs of
laboratory testing for inpatients and registered outpatients through its
long-term contract with the partnership and by sharing in the profits generated
by the partnership.

         The Texas Partnership, which commenced operations in 1995 and reflected
Dynacare's partnership model and strategy, successfully grew from a hospital
based laboratory in 1995 to a laboratory with a significant community outreach
business. In 2000, this partnership completed a transition which included the
following elements:

         o        as a result of the merger of the Hermann Hospital with
                  Memorial System, the Texas Partnership's laboratory services
                  agreement with Hermann Hospital was not renewed upon its
                  expiration in September 2000. The contract accounted for
                  approximately $9.0 million of Dynacare's revenues on an
                  annualized basis;

         o        the Texas Partnership relocated its laboratory operations from
                  the Hermann Hospital to a new 66,800 square foot facility in
                  Houston, Texas; and

         o        the geographic market of the Texas Partnership was expanded
                  and accordingly on October 1, 2000, Dynacare sold several
                  wholly-owned smaller laboratory operations in Texas to the
                  partnership for the value of Dynacare's original investment in
                  these operations.


         On October 31, 2001, Dynacare acquired Memorial Hermann's remaining 50%
partnership interest in the Texas Partnership. The consideration for the
acquisition was a cash payment of $2.0 million on closing, with payments of $0.5
million to be made on each of the first and second anniversaries of the closing
and an assumption of net short-term liabilities of $4.2 million. This
acquisition facilitates Dynacare's strategy of consolidating its Southwest
region, which consists of Louisiana, Arkansas, Oklahoma and Texas, to better
leverage its infrastructure and maximize operating efficiencies. Dynacare's
relationship with Memorial Hermann will continue as it extends clinical
laboratory testing to certain medical and physician facilities affiliated with
Memorial Hermann.


                                       9
<PAGE>

Canada

Acquisitions

         Between 1988 and 1992, Dynacare's Canadian laboratory operations grew
rapidly as a result of the acquisition of 12 laboratories. These 12 laboratories
were consolidated into Dynacare's three laboratory operations in Ontario and its
laboratory in Alberta.

Partnerships

         In 1995, Dynacare formed a partnership with two of its major
competitors in Northern Alberta, creating a single clinical laboratory testing
business with one central laboratory. This partnership, in which Dynacare holds
a 43% interest, was formed in response to the Alberta government's reduction of
healthcare funding and changes in healthcare delivery. Through the consolidation
of operations into one central laboratory and the implementation of other
changes, the partnership has been able to mitigate the impact of the funding
reductions.

         In 1997, Dynacare formed a partnership in Ontario with two other
independent clinical laboratory testing providers. Dynacare's interest in the
partnership is approximately 73%. Dynacare's objective in entering into the
partnership was to generate cost savings, primarily from the consolidation of
the operations of one of the other providers into Dynacare's Toronto laboratory
operations and consolidating the respective specimen collection networks.


SALES AND MARKETING

         Dynacare's sales and marketing efforts in the United States are
coordinated through over 70 regional marketing representatives and over 60
customer service representatives. Dynacare focuses on attracting and retaining
high quality sales and marketing staff through attractive compensation incentive
programs.

         The stability of the Ontario and Alberta markets allows Dynacare to
focus its sales, marketing and customer service efforts in Canada on servicing
its existing physician base and pursuing non-government work, including
substance abuse testing and clinical trials.

         Dynacare seeks to educate its customers through its sales, marketing
and customer service efforts. Comprehensive service manuals are supplied to its
customers, and local customer service representatives monitor customer
satisfaction and service, answer questions and help resolve problems.


CUSTOMERS AND PAYORS

United States

         In many instances in the United States, testing services are billed to
a payor other than the customer who ordered the test, depending upon a patient's
medical benefits and insurance coverage. Dynacare's principal payors include
hospitals, the individual physicians and clinics, Medicare and Medicaid,
patients and third party insurance companies. Dynacare's customers include the
following:

Hospitals

         Dynacare provides laboratory testing services to hospitals on an
exclusive basis through nine long-term contracts. Six of these contracts are
capitated contracts where Dynacare's fees are typically based on the number of
adjusted hospital admissions. These contracts also provide for certain
adjustments to mitigate the risks of changes in test utilization and complexity.
The other three contracts are on a fee-for-service basis. In addition, Dynacare


                                       10
<PAGE>

provides reference testing services to hospitals on a fee-for-service basis. Of
the long-term contracts, Dynacare's contract with Swedish Medical in Seattle
generates the highest revenues, accounting for approximately 6% of Dynacare's
U.S. (4% of its overall) revenues for the year ended December 31, 2001.

Physicians and clinics

         Physicians requiring testing for patients who are not covered by a
managed care contract generate a significant portion of Dynacare's clinical
laboratory testing business. Dynacare bills the appropriate party who may be (i)
the physician who requested the testing, (ii) the patient or (iii) a third party
who pays on behalf of the patient, such as an insurance company, Medicare or
Medicaid. Dynacare bills the majority of its customers on a fee-for-service
basis. Dynacare's fees to physicians are based on a negotiated customer fee
schedule. Fees billed to patients are based on a separate patient fee schedule,
which may be subject to limits imposed by the physicians themselves or by
third-party payors. Medicare and Medicaid billings are based on fee schedules
authorized by government agencies.

Employers and other institutions

         Dynacare provides testing services to government agencies and to large
employers, including testing for substance abuse, occupational exposures and
comprehensive wellness programs. Dynacare also performs a variety of reference
tests for other clinical laboratories, including hospital laboratories that do
not have a full range of testing capabilities.

Third party insurance companies

         Certain of these organizations may contract with a limited number of
clinical laboratories for their members and instruct participating physicians to
use these laboratories for their testing.

         The following table provides an estimate, on a percentage basis, of
Dynacare's clinical laboratory testing revenues for its U.S. laboratory
operations for the year ended December 31, 2001 applicable to each payor group,
and the estimated volume of requisitions associated with each group:

                                     Requisition
                                     volume as a             Revenues as a %
Payor                             % of total volume         of total revenues
-------------------------------------------------------------------------------

Physicians and clinics                30%-- 35%                 20%-- 25%
Medicare and Medicaid                 20%-- 25%                 15%-- 20%
Patients                              5%-- 10%                  10%-- 15%
Third party insurance companies       15%-- 20%                 20%-- 25%
Hospitals                             15%-- 20%                 15%-- 20%
-------------------------------------------------------------------------------


Canada

         In the provinces of Ontario and Alberta, tests are ordered by
physicians, while approximately 90% of testing performed by Dynacare is paid for
by government agencies. The remaining approximate 10% of testing is performed on
a fee-for-service basis for a variety of private payors for the purposes of: (i)
substance abuse testing, (ii) clinical trials and (iii) various non-government
funded tests.


BILLING

         Due to the significantly different make-up of payors in the United
States and Canada, the nature of the billing processes is also very different.



                                       11
<PAGE>

United States

Billing of laboratory services in the United States is complicated by the
following factors:

         o        many different payors (including patients, insurance
                  companies, Medicare, Medicaid and physicians);

         o        many different fee schedules for the different payors;

         o        the reliance on the physician to provide complete and correct
                  information necessary for billing purposes;

         o        uncertainty at times as to the party responsible for payment;

         o        complex compliance requirements such as medical necessity
                  documentation; and

         o        the existence of co-pays and deductibles.

         Approximately 81% of Dynacare's U.S. revenues for the year ended
December 31, 2001 was billed to various payors and, like other laboratories in
the industry, Dynacare is impacted by these factors. The balance of Dynacare's
revenues was billed on a monthly basis to hospital's pursuant to long-term
contracts. The hospitals in turn bill their various payors for the laboratory
services. Because Dynacare's payment from the hospital's is not dependent on the
hospital's billing and collection process, Dynacare receives regular monthly
payments from the hospitals and experiences virtually no bad debts from its
hospital customers.

         A significant portion of Dynacare's bad debt expense with respect to
the non-hospital revenues is the result of issues that are not credit related,
primarily missing or incorrect billing information on requisitions. Dynacare
performs the requested tests and reports test results regardless of missing or
incorrect billing information. Subsequent to performing the test, Dynacare
attempts to obtain the required information. This missing or incorrect
information slows the billing process, creates backlogs of unbilled requisitions
and increases the aging of Dynacare's accounts receivable.

         During 1999, Dynacare installed three new billing systems and upgraded
three existing billing systems. As a result, Dynacare's billing workflow was
interrupted. This, in turn, resulted in an increase in Dynacare's days sales
outstanding, or DSOs.

         Dynacare continues to focus on the billing area, with an objective of
reducing DSOs. Steps taken in this regard include:

         o        strengthening Dynacare's billing management and staff by
                  recruiting experienced billing personnel;

         o        continued training of Dynacare's staff and customers to
                  provide complete and accurate billing information on the
                  ordering of a test;

         o        installing and increasing the number of electronic billing
                  interfaces with Dynacare's payors; and

         o        creating an incentive program for both management and staff.


                                       12
<PAGE>

         These steps have resulted in a reduction of Dynacare's DSOs in the
United States from 93 days at December 31, 1999 to 72 days as at December 31,
2001.

Canada

         Dynacare bills government agencies in Ontario and Alberta for
approximately 90% of its Canadian revenues. DSOs tend to be in the 40-46 day
range, and bad debts are immaterial.


INFORMATION TECHNOLOGY

         Dynacare believes that its information systems play an integral role in
managing its operations and controlling its costs. Dynacare's information
systems perform a variety of functions in areas such as order entry and delivery
of test results, accounts receivable, billing, finance, human resources and
other administrative areas.

United States

         The significant growth that Dynacare has experienced in the United
States through its acquisitions and partnerships has necessitated continued
expansion and upgrading of Dynacare's information technology infrastructure. To
manage this growth, to achieve greater consistency across operations and to
recognize economies of scale, Dynacare has embarked on a number of strategic
initiatives over the past three years.

         The first initiative was to centralize Dynacare's information
technology management, development and support in Dallas, Texas, which is under
the control of Dynacare's Chief Information Officer. Dynacare expanded the
number of specialized information technology professionals, which decreased
Dynacare's reliance on external resources to enhance and support its key
systems.

         Dynacare standardized its billing and accounts receivable functions.
Currently all of Dynacare's operations utilize the Antrim billing application
system. The system is implemented at multiple sites which provide for back-up
and disaster recovery and is fully supported by Dynacare's own in-house
resources. Dynacare believes this standardization has several benefits
including:

         o        enhanced billing accuracy and consistency;

         o        efficient use of Dynacare's resources to increase
                  functionality and flexibility;

         o        efficient electronic submissions of claims;

         o        improved customer service; and

         o        enhanced management oversight of regulatory and compliance
                  requirements.

         Dynacare integrated a series of stand-alone laboratory information
systems into a network of systems which enables it to communicate test orders
and results among Dynacare's various laboratories in the United States and
between Dynacare's laboratories and many of Dynacare's customers and payors.
Additionally, Dynacare's laboratories are capable of transferring testing
between Dynacare's various facilities in order to maximize efficiency.

         Dynacare developed and installed in all of its regions a web-based,
secure, diagnostic reporting capability that allows authorized clients to view
their patient results "any time" and "anywhere" and also provides them with the
ability to exchange the information instantly and electronically with other
physicians for consultation.



                                       13
<PAGE>

Currently Dynacare is:

         o        developing Web-based ordering and enhancing result delivery
                  capabilities;

         o        deploying centralized and standardized electronic data
                  interchange between Dynacare's operations and various
                  customers' and payors, to enable it to transfer laboratory
                  test data as well as financial data from their respective
                  information systems to its own;

         o        rolling out centralized electronic claims processing with
                  Dynacare's clearing house partner; and

         o        implementing a highly specialized esoteric laboratory
                  information system to integrate Dynagene into Dynacare's
                  existing corporate network.

         Dynacare expects to continue to implement advanced information
technologies and extend its local and wide area networks and integrate these
systems into its existing corporate network. This enables Dynacare to respond to
its customers' needs more rapidly and efficiently. Finally, Dynacare is
developing systems solutions to rapidly and effectively integrate new operations
within its network.

Canada

         Many of the laboratory information, accounting and other support
systems requirements in the Canadian clinical laboratory testing industry are
similar to those in the United States. However, billing system requirements in
Canada are less complex than those in the United States because the government
is responsible for approximately 90% of Dynacare's Canadian revenues.

         Dynacare's management information systems in Ontario operate on a
common platform and continue to meet the laboratory information, test result
reporting and billing requirements in the Ontario laboratory industry
environment.

         In Alberta, Dynacare utilizes the Sunquest laboratory information
system, which is a subsystem of an overall healthcare information system
operated by the Capital Health Authority and is made available to Dynacare under
a long-term laboratory service agreement.


COMPLIANCE PROGRAM

         In 1997, Dynacare adopted and implemented a comprehensive, company-wide
corporate compliance program in the United States. Its objective was to educate
and train employees to ensure the observance of all applicable laws, regulations
and general corporate policies. Dynacare's program was structured following the
guidance of the Office of the Inspector General of the U.S. Department of Health
and Human Services and includes a full-time compliance officer, an ethics and
business code of conduct, employee education and training programs and an
internal system for auditing and monitoring programs. Dynacare believes that it
is in compliance in all material respects with all statutes, regulations and
other requirements applicable to its clinical laboratory testing operations. The
clinical laboratory testing industry, however, is subject to extensive and
continuously evolving regulation, and many of these statutes and regulations
have not been interpreted by the courts. Consequently, Dynacare cannot provide
assurance that it is and will continue to be in material compliance with these
requirements. Failure to comply with these requirements could have a material
adverse effect on Dynacare's business.


                                       14
<PAGE>

QUALITY ASSURANCE

         Dynacare considers the quality of its testing services to be of
critical importance and has comprehensive quality assurance programs in all of
its laboratories and specimen collection centers.

United States

         In addition to external inspections and proficiency programs mandated
by the Centers for Medicare and Medicaid Services (CMS), formerly the Health
Care Financing Administration (HCFA), under the Clinical Laboratory Improvement
Amendments, each testing laboratory has additional systems and procedures in
place to measure and monitor quality assurance.

         Dynacare's quality control program is designed to assure the day-to-day
validity of its laboratory results. Known control material is run with each
group of patient samples, and the control values must fall within Dynacare's
acceptable range for the release of patient samples included in this testing
group. Whenever possible, at least two levels of controls are run with each
test, covering both the normal and abnormal ranges for the test. These controls
also serve as internal markers to monitor day-to-day testing reproducibility.

         Dynacare's major U.S. laboratories are accredited by the College of
American Pathologists, or CAP, for clinical and anatomic pathology services, and
two facilities are certified by the Substance Abuse and Mental Health Services
Administration to perform forensic drug testing. Accreditation is achieved by
passing internal or external inspections that assess all aspects of laboratory
testing.

         Dynacare's U.S. laboratories also participate in one or more federal,
state or independent proficiency-testing programs, such as that administered by
the CAP. With these programs, Dynacare analyzes "blind samples", reports back to
the agency and is graded against strict federal standards during which
Dynacare's results are evaluated against the results of other laboratories in
these nationwide peer group comparisons. Dynacare continuously reviews its
proficiency test performance results.


Canada

         All of Dynacare's major Canadian laboratories are inspected and
accredited by the CAP for clinical and anatomical pathology services. In
addition, Dynacare's laboratories in the Province of Ontario are licensed,
inspected and accredited in accordance with Provincial Legislation by a branch
of the Ministry of Health and Long-Term Care. A requirement of this legislation
is participation in the Laboratory Proficiency Testing Program, administered by
the Ontario Medical Association. In Alberta, the College of Physicians and
Surgeons administers both the laboratory licensing function and laboratory
accreditation functions. It also administers an inspection program which is
similar to that of the CAP.

         Dynacare's drug testing laboratories in Ontario and Alberta are also
accredited by the Substance Abuse and Mental Health Services Administration for
performing forensic drug testing. Only one other such accredited laboratory
exists in Canada.

COMPETITION

         Dynacare believes that, in selecting a clinical laboratory, healthcare
providers, in the United States and Canada often consider a number of factors,
including the following:

         o        reputation in the medical community;

         o        service capability and quality;



                                       15
<PAGE>

         o        accuracy, timeliness and consistency in reporting test
                  results;

         o        number and type of tests performed by the laboratory;

         o        number, convenience and geographic coverage of patient service
                  centers; and

         o        pricing.

         Dynacare believes that it competes favorably in each of these areas. In
addition, Dynacare believes it is well-positioned in each of its targeted
markets due to its existing laboratory operations, partnership model and its
exclusive, long-term hospital contracts which enhance Dynacare's market
penetration and overall regional presence in these markets.

United States

         The clinical laboratory testing business in the United States is highly
competitive and fragmented and has undergone significant consolidation. Dynacare
competes on a regional and local basis with several independent clinical
laboratories as well as with laboratories owned by physicians and hospitals.
According to CMS, there are approximately 4,900 independent clinical
laboratories in the United States, which generally fall into two categories. The
first category is comprised of smaller, local laboratories that generally offer
fewer tests and have limited financial resources. The second category, which
includes Dynacare's laboratories, is comprised of larger regional or national
laboratories that provide a broader range of tests and services. There are
currently two large national independent clinical laboratories: Quest
Diagnostics Incorporated, which during 1999 purchased SmithKline Beecham's
clinical laboratory testing business, and Laboratory Corporation of America
Holdings.

         Some of Dynacare's competitors have substantially greater financial and
other resources and larger, more established marketing, sales and laboratory
organizations than Dynacare. Dynacare may not be able to continue to compete
successfully with these larger competitors in the regional markets that it
serves. Furthermore, Dynacare may not be able to continue to compete effectively
with these organizations for acquisitions. If Dynacare is unable to continue to
make acquisitions, its ability to continue to grow would be significantly
reduced.


Canada

         The Canadian laboratory services industry operates in an environment
where competition is limited due to the nature of the governmental regulation
and reimbursement systems. In the markets Dynacare serves, the other major
providers of laboratory services are independent clinical laboratories with MDS
Inc. and Canadian Medical Laboratories Limited being the most significant and
hospital based laboratories.


INSURANCE

         Dynacare maintains liability insurance (subject to maximum limits) for
claims, which may be substantial, that could result from providing or failing to
provide clinical laboratory testing services, including inaccurate testing
results. Although coverage may not be adequate to cover all future exposure,
Dynacare believes that the present levels of coverage are adequate to cover
currently estimated exposures. Dynacare believes that it will be able to obtain
adequate insurance coverage in the future, but it may not be able to obtain such
coverage at an acceptable cost or avoid incurring significant liabilities in
excess of policy limits.


                                       16
<PAGE>

EMPLOYEES

         As of December 31, 2001, Dynacare's U.S. clinical laboratory testing
operations employed approximately 4,200 full-time equivalent personnel, and
Dynacare's Canadian laboratory operations employed approximately 2,200 full-time
equivalent personnel. Approximately 1,050 of Dynacare's personnel are currently
represented by collective bargaining units. Dynacare considers its relations
with its employees to be good.


REGULATIONS


United States

         The U.S. clinical laboratory testing industry is subject to significant
governmental regulation at the federal, state and local levels. Virtually all
clinical laboratories, including those that Dynacare operates, are required to
be certified or licensed under the Clinical Laboratory Improvement Amendments of
1988, the Medicare and Medicaid programs, and various state and local laws, and
may be subject to periodic inspections by regulatory agencies. Dynacare is also
subject to licensing and regulation under federal, state and local laws relating
to the handling and disposal of medical specimens and infectious and hazardous
materials as well as the safety and health of laboratory employees. Potential
sanctions for failure to comply with these regulations include the denial of the
right to conduct business, significant fines and criminal penalties. As part of
an effort to contain the growth of federal costs for clinical laboratory testing
services, several federal agencies including the Federal Bureau of
Investigation, the Office of the Inspector General of the U.S. Department of
Health and Human Services, the Center for Medicare and Medicaid Services (CMS)
and the Department of Justice have devoted increased governmental resources to
investigations aimed at the appropriateness of testing as well as fraudulent and
abusive conduct by service providers. Criminal conviction or successful
prosecution of a civil fraud or false claims action can result in substantial
fines and penalties as well as exclusion from the Medicare and Medicaid
programs.

         Over the past several years, CMS has taken several measures to reduce
utilization of clinical laboratory testing and to ensure that, with certain
limited exceptions, Medicare does not pay for tests that are ordered for
screening purposes only. Since 1995, all Medicare carriers have begun to require
clinical laboratories to submit documentation supporting the medical necessity
for many commonly ordered tests, as judged by ordering physicians.

         Further, federal legislation has reduced ceilings on Medicare
reimbursement to clinical laboratories to 74% of the 1984 national median
effective January 1, 1998 (84% on January 1, 1994; 80% on January 1, 1995; and
76% on January 1, 1996) and consumer price index adjustments have been
eliminated until at least 2002.

         CMS previously had permitted payment for all tests contained in a
chemistry panel when at least one of the tests in the panel was "medically
necessary". However, since 2000, CMS recognizes only the American Medical
Association approved panels requiring specific diagnoses to justify medical
necessity on individual tests ordered within these specific panels. Patients may
be billed for laboratory tests that are deemed as not "medically necessary"
(e.g., limited coverage tests for which an approved diagnosis code is not
provided by the ordering physician) if the patient signs an advance beneficiary
notice. However, since the majority of Dynacare's requisitions are filled out by
physician customers, Dynacare cannot mandate the proper use of the advance
beneficiary notice.

         Certifications or licenses are required by various state and local
laws. An important accreditation for any U.S. clinical laboratory is by the
College of American Pathologists. All of Dynacare's major laboratories in the
United States are accredited by CAP and have Clinical Laboratory Improvement


                                       17
<PAGE>

Amendments certification except its laboratory in New York State, which is
licensed by the state. While neither CAP nor Clinical Laboratory Improvement
Amendments accreditation is required in Canada, Dynacare's Ontario (Toronto,
Ottawa and London) and Alberta (Edmonton) laboratories are both CAP and Clinical
Laboratory Improvement Amendments accredited.

         Specific federal legislation has been enacted to address fraud and
abuse in the healthcare industry. The anti-kickback statutes prohibit any offer,
payment, solicitation or receipt of any form of remuneration to induce, or in
return for, the referral of certain federal or state health program patients or
patient care opportunities, or in return for the purchase, lease or order of
items or services that are covered by certain federal or state health programs.
Violations of the statute can result in the imposition of substantial civil and
criminal penalties. In addition, federal law prohibits a physician from
referring a patient to an entity with which the physician, or an immediate
family member of the physician, has a financial relationship for the provision
of eleven designated health services, including clinical laboratory testing
services (the "Stark Law"). Although CMS issued regulations in 1995 regarding
certain aspects of the Stark Law, on January 4, 2001, CMS issued additional
final regulations on the Stark Law, which were subject to a comment period.
These regulations are the first phase of a two phase process with remaining
regulations to be issued some time in the future.

         Many states have enacted anti-kickback, anti-rebate, anti-fee splitting
and other laws, which also govern Dynacare's relationships with customers. For
example, Dynacare's laboratory in New York State is subject to certain
provisions that are significantly more stringent than federal law on the same
matters.

         Federal and state governments are considering additional healthcare
legislation and regulation that could result in decreased revenues to clinical
laboratories. Over the past few years, CMS has considered whether to seek
approval for a demonstration project to determine whether competitive bidding
can be used to provide quality laboratory and other medical services at prices
below current Medicare reimbursement rates.

         Dynacare is subject to licensing and regulation under federal, state
and local laws and regulations relating to the protection of the environment and
human health and safety, including laws and regulations relating to the
handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials as well as to the safety and health of
laboratory employees. In addition, the Federal Occupational Safety and Health
Administration (OSHA) has established extensive requirements relating to
workplace safety for healthcare employers, including clinical laboratories,
whose workers may be exposed to blood-borne pathogens, such as HIV and the
hepatitis B and C viruses. These regulations, among other things, require work
practice controls, protective clothing and equipment, training, medical
follow-up, vaccinations and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens. As a result of the Needlestick Safety
and Prevention Act, which was enacted in 2000, in January 2001, OSHA promulgated
final regulations that revise the blood-borne pathogens standard. In addition, a
number of states in which Dynacare conducts business have also recently adopted
similar statutes and regulations related to injuries that employees may sustain
from contaminated needles and other sharp instruments. Although Dynacare is not
aware of any current material non-compliance with such federal, state and local
laws and regulations, failure to comply could subject Dynacare to denial of the
right to conduct business, fines, criminal penalties and/or other enforcement
actions.

         The transportation of infectious substances such as clinical laboratory
specimens is subject to regulation by the Department of Transportation, the
Public Health Service, the U.S. Postal Service, the Federal Aviation
Association, the International Civil Aviation Organization and the International
Air Transportation Association. All of Dynacare's laboratories are subject to
applicable federal and state laws and regulations relating to the biohazard
disposal of laboratory specimens, and Dynacare utilizes outside vendors for the
disposal of such specimens.



                                       18
<PAGE>

         Drug testing for public sector employees is regulated by the Substance
Abuse and Mental Health Services Administration (SAMHSA), which has established
detailed performance and quality standards that laboratories must meet in order
to be approved to perform drug testing on employees of Federal government
contractors and certain other entities. To the extent that Dynacare's
laboratories perform this testing, they must be certified as meeting SAMHSA
standards. The Drug Enforcement Administration regulates access to controlled
substances in drug abuse testing.

         The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, governs the portability, privacy and security of electronically
transmitted patient data. HIPAA also mandates, among other things, the adoption
of standards for the exchange of electronic health information in an effort to
encourage overall administrative simplification and enhance the effectiveness
and efficiency of the healthcare industry. Among the standards that the
Department of Health and Human Services has adopted (or will adopt in the
future) pursuant to HIPAA are standards for the following: electronic
transactions and code sets; unique identifiers for providers, employers, health
plans and individuals; security and electronic signatures; privacy; and
enforcement.

         The Department of Health and Human Services has released two rules to
date mandating the use of new standards with respect to certain healthcare
transactions and health information. The first rule requires the use of uniform
standards for common healthcare transactions, including healthcare claims
information, plan eligibility, referral certification and authorization, claims
status, plan enrollment and disenrollment, payment and remittance advice, plan
premium payments and coordination of benefits, and it establishes standards for
the use of electronic signatures. Secondly, the Department of Health and Human
Services has released new standards relating to the privacy of individually
identifiable health information. These standards not only require Dynacare's
compliance with rules governing the use and disclosure of protected health
information, but they also require Dynacare to impose those rules, by contract,
on any business associate to whom such information is disclosed. Rules governing
the security of health information have been proposed but have not yet been
issued in final form.

         The Department of Health and Human Services finalized the new
transaction standards on August 17, 2000, with compliance required by October 6,
2002. The date for compliance can be delayed until October 16, 2003 if the
healthcare entity submits an appropriate HIPAA compliance plan and requests a
postponement. Dynacare expects to submit a compliance plan and request the
postponement to October 16, 2003. The privacy standards were issued on December
28, 2000, and became effective in mid-April 2001, with a compliance date of
April 14, 2003. With respect to the security regulations, once they are issued
in final form, Dynacare expects affected parties will have approximately two
years to be fully compliant. Sanctions for failing to comply with the HIPAA
health information practices provisions include criminal penalties and civil
sanctions.

         Dynacare expects to conduct its business in substantial compliance with
all applicable federal, state and local laws and regulations governing its
computer-based operations. However, the impact of regulatory developments
affecting the use of electronically transmitted data is complex and difficult to
predict, and Dynacare's business could be adversely affected by existing or new
regulatory requirements or interpretations.

         Although Dynacare believes that its service offerings address
healthcare privacy concerns by providing personalized healthcare information in
a secure, private manner, Dynacare cannot provide assurance that it will be able
to achieve and maintain compliance with all applicable rules and regulations.
Failure to comply could have a material adverse impact on Dynacare's business.


                                       19
<PAGE>

Canada

         The clinical laboratory testing industry is also subject to significant
governmental regulation primarily at the provincial level in Canada. In general,
laboratory licenses authorize clinical diagnostic laboratories to perform
specific tests. The licensing and regulatory requirements relate to, among other
matters, the conduct of testing and reporting of results, the handling and
disposal of medical specimens and infectious and hazardous waste and other
materials, the safety and health of laboratory employees and the proficiency of
staff. The clinical laboratory testing industry in Canada is subject to periodic
inspections by regulatory agencies. The sanction for failure to comply with
licensing requirements and other regulations, including environmental and
employee occupational health and safety regulations, may include the revocation
of licenses, the denial of the right to conduct business, significant fines and
quasi- criminal penalties. The revocation or loss of any of Dynacare's
laboratory licenses in Canada would have a material adverse effect on Dynacare.

         Environmental matters including use, storage, handling, discharge,
transportation and disposal of hazardous materials (including biomedical and
pathological waste, infectious products, chemicals and radioactive materials)
are strictly regulated. The provinces have the key role in regulating and
issuing licenses and registrations for operations within the province (such as
air and water effluent discharges and waste management), and federal regulators
also have jurisdiction over, particularly in regard to the transportation of
dangerous goods (chemicals or infectious materials, for example), certain
defined toxic substances and radioactive substances. Penalties for infractions
of environmental regulations have been steadily increasing in Canada in recent
years, and emission, discharge and licensing standards have become increasingly
stringent.

Ontario

         In Ontario, clinical laboratories must be licensed by the Ontario
Ministry of Health and Long-Term Care. There are presently two forms of licenses
under which Dynacare operates: laboratory licenses and specimen collection
center licenses. Laboratory licenses authorize clinical laboratories to perform
specific tests, which vary from license to license. The licenses are issued for
one-year terms and are routinely renewed. Certain laboratory tests can only be
carried out in hospital laboratories. Specimen collection licenses authorize the
collection of specimens, which are then sent to a clinical diagnostic laboratory
for analysis. Specimen collection centers are typically located in medical
buildings, clinics and other similar facilities. Physicians are entitled to
collect specimens without being specifically licensed, but will typically have
the specimen tested by a licensed laboratory.

         Dynacare's Ontario laboratories are subject to provincial regulation in
respect of occupational health and safety. Laboratory workers are subject to the
Healthcare and Residential Facilities Regulation made under the Occupational
Health and Safety Act (Ontario), which provides for extensive requirements
relating to workplace safety for healthcare employers, including clinical
laboratories, whose workers may be exposed to blood-borne pathogens, such as HIV
and the hepatitis B virus. This regulation, among other things, requires work
practice controls, protective clothing and equipment, training, voluntary
medical surveillance and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens.

         Dynacare's laboratory operations in Ontario are subject to an agreement
with the Ontario government pursuant to which each laboratory service provider
has been allocated a fixed share (referred to as a corporate funding cap) of an
overall industry funding cap for government reimbursed services. For the year
ended December 31, 2001, approximately 72% of Dynacare's Canadian revenues (19%
of Dynacare's total revenues) were for services that are subject to the
corporate funding cap. Under the agreement, Dynacare does not receive government
payments in excess of its annual corporate funding cap, even when Dynacare is
required to provide testing services that would otherwise have a value in excess
of the cap. Having to provide testing services in excess of Dynacare's annual
corporate funding cap could have a material adverse impact on Dynacare's


                                       20
<PAGE>

revenues, profitability and financial condition. Should a laboratory service
provider perform testing valued below its corporate funding cap in any year, its
funding would be reduced to the value of testing actually completed, and the
amount of the shortfall would be permanently reallocated to other laboratory
service providers as an increase to their share of the corporate funding cap.
Although Dynacare has continued to provide testing services in excess of its
annual corporate funding cap, Dynacare cannot provide assurance that it will
continue to process adequate test volumes to maintain its existing corporate
funding cap in the future.

         The Ontario government continues to examine the future of the funding
method and the laboratory delivery system in the province, with a longer term
view to improving the efficiency and cost effectiveness of laboratory services
provided by both the independent and hospital sectors. Dynacare, independently
and also through the Ontario Association of Medical Laboratories, is an active
participant in addressing these areas and providing input to the Ministry of
Health and Long-Term Care.

         The government also has initiated a process in consultation with The
Ontario Medical Association, Ontario Hospital Association and the Ontario
Association of Medical Laboratories with a view to improve the quality of and
access to affordable laboratory service through better coordination of
laboratory services provided in each region of Ontario. Currently, the process
has commenced in six of nine regions.

Alberta

         In Alberta, clinical laboratory testing services form a part of the
practice of medicine and, as such, are regulated by the College of Physicians
and Surgeons of Alberta.

         Effective July 1995, the Alberta government implemented a reduction in
funding for healthcare services and changed the method of delivery of healthcare
services by establishing regional health authorities to receive bloc provincial
grants and to be responsible for all healthcare requirements within their
regions. In response to these changes, Dynacare formed a partnership with its
two major competitors in Northern Alberta to create a single clinical laboratory
testing business with one central clinical laboratory. The Alberta Partnership
provides clinical testing services to the private sector's traditional physician
base and certain of the hospitals, which have traditionally operated their own
in-hospital clinical laboratories.

         Dynacare holds a 43% interest in the Alberta Partnership, which has
entered into a long-term agreement with the Capital Health Authority in Alberta
(encompassing Edmonton) to provide services to the region. In addition, the
Alberta Partnership has entered into agreements with several other regional
health authorities in northern Alberta. In the aggregate, these agreements
provide the Alberta Partnership with a market share of approximately 60% of the
clinical laboratory testing market in Northern Alberta. The Alberta Partnership
on an annual basis has negotiated reimbursement increases with each of the
regional health authorities to reflect cost increases, additional services and
increased volumes.

         The Alberta Partnership is subject to provincial legislation and
regulation of general application in respect of the environment, privacy of
information, healthcare and occupational health and safety. In addition, the
Alberta Partnership and its laboratory personnel are subject to requirements
under the Occupational Health and Safety Act (Alberta) relating to workplace
safety.


DETAILS OF INCORPORATION

         Dynacare was incorporated under the Business Corporations Act (Ontario)
in September 1981. In 1992, it acquired all of the shares of its major operating
subsidiary, The Dynacare Health Group Inc., and changed its name to Dynacare


                                       21
<PAGE>

Inc. In May 1997, its shareholders approved a plan of arrangement whereby it was
taken private. On November 22, 2000, Dynacare completed an initial public
offering of its common shares in the United States and began trading on the
Nasdaq National Market and the Toronto Stock Exchange.


ITEM 2.  -  PROPERTIES


         Dynacare's principal U.S. properties, which are comprised of its
corporate offices and central laboratory facilities, are the following:
<TABLE>
<CAPTION>
                                                      Approximate area       Nature of
Location                                              (in square feet)       Occupancy       Expiration of Lease
---------------------------------------------------   ---------------------  --------------  ----------------------
<S>                                                   <C>                    <C>             <C>
Houston, Texas
(Texas Partnership)                                   66,800                 Leased          September 30, 2010

Milwaukee, Wisconsin
   (United Partnership)                               59,219                 Partnership (1) August 1, 2030

Montgomery, Alabama (LabSouth)                        54,150                 Owned

Knoxville, Tennessee (Tennessee Partnership)          48,628                 Partnership (1) July 31, 2009

Dallas, Texas (Dynacare Laboratories Inc.)            39,621                 Leased (2)      October 31, 2003

Oklahoma City, Oklahoma (Medical Arts Laboratory)     38,147                 Leased          May 14, 2007

Pittsburgh, Pennsylvania (Allegheny Partnership)      34,177                 Partnership (1) December 31, 2016

Seattle, Washington (Laboratory of Pathology)         33,215                 Leased          January 1, 2004

Meridian, Mississippi (Medical Pathology Laboratory)  29,232                 Leased          May 31, 2002

Birmingham, Alabama (LabSouth)                        29,140                 Leased          October 31, 2010

Baton Rouge, Louisiana (Louisiana Reference
  Laboratory)                                         27,500                 Leased          November 30, 2002

Schenectady, New York (Ellis Partnership)             16,324                 Partnership (1) September 2, 2004

Cheyenne, Wyoming (Clinical Laboratories Cheyenne)    10,618                 Leased          September 15, 2006

Midland, Texas (West Texas Pathology Laboratory)      10,309                 Leased          October 31, 2005

Houston, Texas
  (Laboratories for Genetic Services)                 10,009                 Leased          May 31, 2003

Mt. Vernon, Washington (Skagit Valley Laboratory)     9,430                  Leased          February 1, 2007

Jackson, Mississippi (Clinical Pathology Laboratory)  8,744                  Leased          January 31, 2004


                                       22
<PAGE>

                                                      Approximate area       Nature of
Location                                              (in square feet)       Occupancy       Expiration of Lease
---------------------------------------------------   ---------------------  --------------  ----------------------

Monroe, Louisiana (Bayou Laboratory)                  7,608                  Leased          July 31, 2004

San Antonio, Texas (Accufast Diagnostic Laboratory)   5,084                  Leased          August 31, 2002

El Dorado, Arkansas (Accu-Path Laboratory)            4,000                  Leased          November 30, 2002

Texarkana, Texas (Doctors Diagnostic Laboratory)      3,850                  Leased          April 30, 2002

Bremerton, Washington (Olympic Laboratory)            1,659                  Leased          June 30, 2015
</TABLE>

----------
(1)      Dynacare is a partner in a 50/50 partnership which operates the
         clinical laboratory and leases the property.

(2)      Dynacare's principal corporate offices in Dallas, Texas.

         Dynacare's principal Canadian properties include:

<TABLE>
<CAPTION>
                                             Approximate area
Location                                     (in square feet)            Nature of occupancy     Expiration of Lease
-------------------------------------------  --------------------------  --------------------  ------------------------
<S>                                          <C>                         <C>                   <C>
Toronto, Ontario                             69,000                      Owned

Edmonton, Alberta                            54,138                      Leased(1)             March 31, 2007

London, Ontario                              39,544(2)                   Owned

Toronto, Ontario                             14,780(3)                   Leased                October 31, 2002

Ottawa, Ontario                              12,353                      Leased                Month to Month
-----------
</TABLE>

(1)      Leased through the Alberta Partnership in which Dynacare has an
         approximate 43% interest.

(2)      This property totals 43,604 square feet, 39,544 of which are occupied
         by the laboratory and the remainder of which is leased to other
         parties.

(3)      Dynacare's former corporate offices.

         All of Dynacare's central laboratory facilities have been built for the
sole purpose of providing clinical laboratory testing services. Dynacare
believes that these facilities have sufficient capacity for any foreseeable
increase in volumes. Dynacare believes that if it was to lose any of its
leaseholds, it could find alternate space at competitive market rates and
relocate the affected operations without material disruption to Dynacare's
operations.


                                       23
<PAGE>

ITEM 3.  -  LEGAL PROCEEDINGS


         Dynacare is involved in various legal proceedings arising in the
ordinary course of business. Although it is not feasible to predict the outcome
of such proceedings or any claims made against Dynacare, it is not anticipated
that the ultimate liability of such proceedings or claims will have a materially
adverse effect on Dynacare's financial position or results of operations as they
primarily relate to professional liability for which Dynacare believes it
maintains adequate insurance coverage.


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


         No matter was submitted to a vote of security holders during the fourth
quarter of 2001.



                                     PART II
                                     -------


ITEM 5.   -     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS


         On November 22, 2000, Dynacare completed an initial public offering of
its common shares in the United States and Canada. Dynacare sold 5,003,000
common shares primarily in the United States for proceeds of $50.0 million
(before after tax costs of $3.6 million) and began trading on the Nasdaq
National Market and the Toronto Stock Exchange under the symbols "DNCR" and
"DNA", respectively.

         On November 16, 2001, Dynacare completed a public offering of its
common shares. Dynacare issued 2,300,000 common shares for total proceeds of
$25.3 million (before after tax costs of $1.4 million). In addition, as part of
the equity offering, principal shareholders of Dynacare sold 2,300,000 common
shares for gross proceeds of $25.3 million.

         The following table sets forth for the periods indicated the high and
low sales prices for Dynacare's common shares reported on The Nasdaq National
Market composite tape.

2000                                            High                   Low
----                                            ----                   ---
Fourth Quarter                               $11.000                $8.375

2001                                            High                   Low
----                                            ----                   ---

First Quarter                                $10.625                $4.000

Second Quarter                               $11.250                $4.000

Third Quarter                                $13.850                $9.300

Fourth Quarter                               $17.300               $10.750

2002
----

First Quarter (through March 11, 2002)       $18.240               $14.000



                                       24
<PAGE>

         As of March 11, 2002, there were 19,311,421 of Dynacare's common shares
outstanding. As of March 11, 2002, there are 24 registered holders of Dynacare's
common shares.

         Since 1993, Dynacare has not paid any cash dividends on its equity
securities. Dynacare currently anticipates retaining all of its future earnings,
if any, to support operations and to finance the growth and development of its
business. Consequently, Dynacare does not anticipate paying any dividends for
the foreseeable future. Any future determination relating to Dynacare's dividend
policy will be made at the discretion of Dynacare's board of directors and will
depend on a number of factors, including future earnings, capital requirements,
financial conditions and future prospects and other factors the board of
directors may deem relevant. The indenture governing Dynacare's 10.75% senior
unsecured notes contains covenants that among other things limits Dynacare's
ability and the ability of its subsidiaries to pay dividends and incurrence of
additional indebtedness.

         Any dividends paid by Dynacare to non-resident shareholders are
generally subject to a 25% withholding tax pursuant to the Income Tax Act
(Canada). However, dividends paid by Dynacare to residents of the United States
are subject to a 15% withholding tax pursuant to the Income Tax Treaty between
Canada and the United States.


ITEM 6.   -     SELECTED FINANCIAL DATA

         The following tables set forth Dynacare's selected consolidated
financial information for the years indicated and should be read in conjunction
with Dynacare's audited consolidated financial statements for the years ended
December 31, 2001, 2000 and 1999 and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," included elsewhere in this Form 10-K. Dynacare prepared its
consolidated financial statements in accordance with Canadian GAAP. These
principles conform in all material respects with U.S. GAAP except as described
in Note 21 of Dynacare's consolidated financial statements, included elsewhere
in this Form 10-K.
<TABLE>
<CAPTION>
                                                                   Years ended December 31
                                                                   -----------------------
                                             2001           2000             1999           1998            1997
Income statement information:               (in thousands of U.S. dollars, except for share and per share amounts)
----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>              <C>           <C>               <C>
Revenues:
  U.S. operations......................   $   297,334    $   250,747      $   173,566   $   133,552       $ 80,365
  Canadian operations..................       105,025        102,172           99,111        91,359         95,450
                                         -------------  -------------    -------------  -------------   --------------
  Total revenues.......................       402,359        352,919          272,677       224,911        175,815
General and operating expenses.........       349,474        304,809          229,633       188,392        151,279
Depreciation...........................        12,072         11,368            8,351         6,433          4,819
Amortization of licenses and goodwill..         5,788          5,279            4,707         4,112          5,650
Severance, relocation and other charges         --             6,750            --             --              --
Non-recurring charges..................         --              --              --             --           82,554
                                         -------------  -------------    -------------  -------------   --------------

Operating earnings (loss)..............        35,025         24,713           29,986        25,974        (68,487)
Interest expense.......................        20,431         22,477           19,457        15,486         13,713
Gain on sale of home healthcare                    --           --              --             --             (720)
 operation ............................
                                         -------------  -------------    -------------  -------------   --------------

Earnings (loss) before income taxes....        14,594          2,236           10,529        10,488        (81,480)
Income tax expense (benefit)...........         2,877         (3,789)           4,888         4,299        (26,343)
                                         -------------  -------------    -------------  -------------   --------------

Net earnings (loss)....................   $    11,717    $     6,025      $     5,641    $    6,189       $(55,137)
                                         =============  ==============   =============  =============   ==============

Earnings (loss) per share-basic........  $       0.68   $       0.48     $       0.47    $     0.52       $(5.19)
Earnings (loss) per share-diluted......  $       0.66   $       0.46     $       0.45    $     0.52       $(5.19)
 Weighted average number of shares
   outstanding-basic...................   17,211,138       12,482,368    11,880,914      11,880,914      10,631,650
 Weighted average number of shares
  outstanding-diluted..................   17,885,180       13,143,971    12,464,105      11,880,914      10,631,650


                                       25
<PAGE>

                                                                      As of December 31
                                                                      -----------------
                                                 2001           2000             1999           1998            1997
 Balance sheet information:                                     (in thousands of U.S. dollars)
----------------------------------------------------------------------------------------------------------------------

 Total assets...........................  $   384,325    $   348,976      $   288,519    $  231,130       $  211,165
 Long-term debt (excludes current
   portion of long-term debt)........... $    201,811   $    202,287     $    198,788    $  152,731       $  143,689
 Shareholders' equity (deficiency)...... $     92,285   $     55,251     $      1,646    $   (3,968)      $  (9,931)


----------
(1)      For the years ended December 31, 2001 and 2000, Dynacare recognized tax
         benefits of $3.0 million and $6.1 million, respectively, due to tax
         rate reductions legislated by the Canadian federal and provincial
         governments.

U.S. GAAP

                                                                   Years ended December 31
                                                                   -----------------------
                                                 2001            2000            1999           1998            1997
Income statement information:              (in thousands of U.S. dollars, except for share and per share amounts)
---------------------------------------------------------------------------------------------------------------------

Revenues...............................  $  268,605       $   233,487     $   164,945    $  125,310       $ 112,574
Net earnings (loss)....................  $   17,254(1)    $     (794)     $     5,390    $    5,943       $ (48,515)
Earnings (loss) per share--basic........ $     1.00       $    (0.06)     $      0.45    $     0.50       $   (4.56)


----------
(1)      For the year ended December 31, 2001, Dynacare recognized a tax benefit
         of $9.1 million due to tax rate reductions legislated by the Canadian
         federal and provincial governments.


                                                                      As of December 31
                                                                      -----------------
                                             2001            2000            1999           1998            1997
Balance sheet information:                                     (in thousands of U.S. dollars)
---------------------------------------------------------------------------------------------------------------------

Total assets...........................  $  378,183       $   339,975    $    285,856   $   210,662     $ 207,429
Long-term debt (excludes current
   portion of long-term debt)..........  $  205,532       $   199,716    $    202,296   $   144,647     $ 145,381
Shareholders' equity (deficiency)......  $  100,367       $    56,571    $      8,755   $     3,038     $ (2,664)
</TABLE>












                                       26
<PAGE>

         The following tables set forth Dynacare's quarterly financial data for
each quarter for the years ended December 31, 2001 and 2000. Dynacare's interim
consolidated financial statements are prepared in accordance with Canadian GAAP.
<TABLE>
<CAPTION>
                                                                       Three Months
                                                                       ------------
                                                                           Ended
                                                                           -----
                                             March 31,           June 30,        September 30,      December 31,
                                            (unaudited)        (unaudited)        (unaudited)        (unaudited)
                                         --------------------------------------------------------------------------
                                                                           2001
Income statement information:            (in thousands of U.S. dollars, except for share and per share amounts)
-------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>                <C>               <C>
Revenues:
   U.S. operations....................      $    70,021         $    74,893        $    76,430       $    75,990
   Canadian operations................           25,787              26,980             25,548            26,710
                                         ------------------   ---------------    ---------------   ----------------
   Total revenues.....................      $    95,808         $   101,873        $   101,978       $   102,700
                                         ------------------   ---------------    ---------------   ----------------
General and operating
    expenses..........................      $    82,739         $    87,407        $    89,094       $    90,234
                                         ------------------   ---------------    ---------------   ----------------
Net earnings (1)......................      $     2,089         $     5,865        $     2,013       $     1,750
                                         ------------------   ---------------    ---------------   ----------------

Earnings per share - basic............      $      0.12         $      0.35        $      0.12       $      0.10
Earnings per share - diluted..........      $      0.12         $      0.34        $      0.11       $      0.09
Weighted average number of shares
   outstanding - basic................       16,883,914          16,898,922         16,940,020        18,111,368
Weighted average number of shares
   outstanding - diluted..............       17,126,409          17,165,944         17,865,676        19,187,065

                                                                       Three Months
                                                                       ------------
                                                                           Ended
                                                                           -----
                                             March 31,           June 30,        September 30,      December 31,
                                            (unaudited)        (unaudited)        (unaudited)        (unaudited)
                                         --------------------------------------------------------------------------
                                                                           2000
Income statement information:            (in thousands of U.S. dollars, except for share and per share amounts)
-------------------------------------------------------------------------------------------------------------------

Revenues:
   U.S. operations....................      $    54,772         $    65,858        $    68,353       $    61,757
   Canadian operations................           25,163              26,040             25,553            25,423
                                         ------------------   ---------------    ---------------   ----------------
   Total revenues.....................      $    79,935         $    91,898        $    93,906       $    87,180
                                         ------------------   ---------------    ---------------   ----------------
General and operating
    expenses..........................      $    67,688         $    78,416        $    82,251       $    76,453
                                         ------------------   ---------------    ---------------   ----------------
Net earnings (1)......................      $     2,619         $     1,885        $       962            $
                                                                                                       559(2)
                                         ------------------   ---------------    ---------------   ----------------

Earnings per share - basic............      $      0.22         $      0.16        $      0.08       $      0.04
Earnings per share - diluted..........      $      0.21         $      0.15        $      0.08       $      0.04
Weighted average number of shares
   outstanding - basic................       11,880,914          11,880,914         11,880,914        14,273,653
Weighted average number of shares
   outstanding - diluted..............       12,433,865          12,443,119         12,540,235        14,964,343
</TABLE>

----------
(1)      Net earnings for the three months ended March 31, June 30, September 30
         and December 31, 2001 and the three months ended March 31, June 30,
         September 30 and December 31, 2000, include tax benefits of $Nil, $3.0
         million, $Nil and $Nil and $0.9 million, $1.1 million, $Nil and $4.1
         million, respectively, due to tax rate reductions enacted by the
         Canadian federal and provincial governments.

(2)      Net earnings for the three months ended December 31, 2000 include an
         after tax charge of $4.1 million related to severance, relocation and
         other charges which arose upon the completion of Dynacare's initial
         public offering of its common shares.

                                       27
<PAGE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview

         Dynacare Inc. (Dynacare) is one of the leading providers of clinical
laboratory testing services in North America, providing laboratory services in
21 states in the United States and two Canadian provinces.

         Dynacare's revenues for the year ended December 31, 2001 were $402.4
million compared to $352.9 million, an increase of $49.5 million, or 14.0%, from
the prior year. Approximately $297.4 million, or 73.9%, of Dynacare's revenues
for the year ended December 31, 2001 were generated by its U.S. operations, and
$105.0 million, or 26.1%, by its Canadian operations. Of the total revenues
generated by the U.S. operations, approximately 19.2% of the revenues were from
long-term hospital contracts, 18.9% from Medicare and Medicaid and 61.9% from
other payors (including third-party insurance, physicians and clinics and
patients). Dynacare's community or non-hospital revenues in the U.S. grew by
approximately 7.1% during the year ended December 31, 2001, on a "same store"
basis.

         In March 2001, Dynacare continued its expansion in the United States
with the purchase of the laboratory assets and operations of Medical Arts
Laboratory for a purchase price of $7.7 million. Medical Arts, located in
Oklahoma, is one of the oldest independent clinical laboratory companies in the
United States. At the time of the purchase, Medical Arts, which was providing
testing services to clinics, physicians and nursing care facilities in Oklahoma,
Missouri, Alabama, Arkansas, Louisiana, Mississippi and Texas, was generating
approximately $18.0 million in annual revenues.

         In June 2001, Dynacare, through two of its partnerships in the United
States, purchased the laboratory assets and operations of two laboratories in
Texas and Illinois for purchase prices of $0.8 million and $1.5 million,
respectively. Additionally, in July 2001, Dynacare, through a partnership in the
United States, purchased the laboratory assets and operations of another
laboratory in Illinois for a purchase price of $0.4 million. Dynacare's
acquisition of these three laboratories in existing market areas is consistent
with its "fold-in" acquisition strategy.

         On October 31, 2001, Dynacare acquired the remaining 50% partnership
interest in the Memorial Hermann partnership (Texas Partnership) for a cash
payment of $2.0 million on closing and payments of $0.5 million on each of the
first and second anniversaries of the closing and an assumption of net
short-term liabilities of $4.2 million. Dynacare believes that the acquisition
of the partnership interest from Memorial Hermann will add approximately $17.0
million to Dynacare's annual revenues based on the partnership's current
operations.

         The acquisition of the partnership interest facilitates Dynacare's
strategy of consolidating its laboratory operations in the Southwest region,
which consists of Louisiana, Arkansas, Oklahoma and Texas. Dynacare's
relationship with Memorial Hermann will continue as it extends clinical
laboratory testing services to certain medical and physician facilities
affiliated with Memorial Hermann.

         On November 16, 2001, Dynacare completed a public offering of its
common shares. Dynacare issued 2,300,000 common shares for total proceeds of
$25.3 million (before after tax costs of $1.4 million). In addition, as part of
the equity offering, principal shareholders of Dynacare sold 2,300,000 common
shares for gross proceeds of $25.3 million.



                                       28
<PAGE>

         Net earnings for the year ended December 31, 2001 increased to $11.7
million, or $0.66 per diluted share, compared to $6.0 million, or $0.46 per
diluted share, in the prior year on 4.7 million additional weighted average
number of shares outstanding in 2001. Net earnings for the year ended December
31, 2001 were impacted by a tax benefit of $3.0 million due to tax rate
reductions in Canada. Net earnings for the year ended December 31, 2000 were
impacted by an after-tax charge of $4.1 million for severance, relocation and
other charges, offset by a $6.1 million tax benefit due to tax rate reductions
in Canada. Excluding the impact of these non recurring items, net earnings more
than doubled to $8.7 million, or $0.49 per diluted share, from $4.0 million, or
$0.31 per diluted share.

Critical Accounting Policies

         Revenue Recognition. Dynacare recognizes revenues on the accrual basis
at the time it provides services, which approximates the time test results are
reported. Dynacare's revenues are stated net of all contractual adjustments and
discounts.

         In the United States, payments for laboratory services performed for
certain payors are subject to contractual adjustments, which are price discounts
negotiated with the various payors. Changes in contracts and government fee
schedules impact the contractual adjustments and discounts. Except for certain
revenues from long-term hospital contracts, the majority of Dynacare's revenues
are billed on a fee-for-service basis.

         In calculating net revenues in Canada, Dynacare recognizes revenues on
the accrual basis based upon its pro rata share of the industry funding cap in
Ontario and its contracts with regional health authorities in Alberta. Since
1997, the laboratory industry in Ontario has been subject to an agreement with
the Ontario provincial government pursuant to which each laboratory is allocated
a fixed share of the overall industry funding cap each year. Factors can arise
which can cause an individual laboratory to receive more than its pro rata share
of the cap, obligating it to reimburse the Ontario government for such excess.
An estimate of any excess payments may be made and withheld by the Ontario
government from the monthly payment to a laboratory, with any residual amounts
payable being settled subsequent to year end. In addition should an individual
laboratory perform testing valued below its pro rata share of the cap in a year,
its funding would be reduced to the value of testing actually completed and the
amount of the shortfall would be permanently reallocated to other laboratory
providers. Dynacare monitors the value of testing on an ongoing basis to ensure
it does not fall below its funding cap.

         Valuation of Accounts Receivable. Dynacare's calculation of allowances
and discounts and the resultant reserve on the statement of financial position
requires estimates and assumptions based on a number of different factors,
including Dynacare's past experiences. Despite the use of Dynacare's best
estimates, it is possible that these amounts could change as billing for
laboratory services in the United States is a complex process.

         Billing for laboratory services and collection of amounts billed in the
United States is complicated by the following factors:

         o        many different payors (including patients, insurance
                  companies, Medicare, Medicaid and physicians);

         o        many different fee schedules for the different payors;

         o        the reliance on the physician to provide complete and correct
                  information necessary for billing purposes;

         o        uncertainty at times as to the party responsible for payment;


                                       29
<PAGE>

         o        complex compliance requirements such as medical necessity
                  documentation; and

         o        the existence of co-pays and deductibles.

         A significant portion of Dynacare's bad debt expense with respect to
non-hospital revenues is the result of issues that are not credit related, but
is primarily due to missing or incorrect billing information on requisitions.
Dynacare performs the requested tests and reports test results regardless of
missing or incorrect billing information. Subsequent to performing the test,
Dynacare attempts to obtain the required information. This missing or incorrect
information slows the billing process, creates backlogs of unbilled requisitions
and increases the aging of Dynacare's accounts receivable.


Differences between Canadian and U.S. Generally Accepted Accounting Principles

         Dynacare reports its consolidated financial statements using Canadian
GAAP with a reconciliation to U.S. GAAP included in the notes to Dynacare's
audited financial statements. Dynacare's significant U.S. - Canadian GAAP
differences are noted below:

         Accounting for Joint Ventures or Partnerships. Under Canadian GAAP,
Dynacare includes in its financial statements the pro rata share of revenues and
expenses, as well as assets and liabilities, of its partnerships. Under U.S.
GAAP, Dynacare would be required to account for these partnerships by the equity
method, with the earnings or losses of partnerships included as earnings or
losses from equity investments and the assets and liabilities of the
partnerships included in equity investments in the statement of financial
position. Although the use of the proportionate consolidation method as compared
to the equity method of accounting from a financial presentation perspective
impacts almost all areas of Dynacare's consolidated balance sheets, statements
of operations and cash flow statements, it does not impact Dynacare's
consolidated shareholders' equity or net earnings.

         Accounting for Income Taxes. Under Canadian GAAP, the impact of changes
in income tax rates is recorded when the changes in tax rates have been
substantively enacted. Under U.S. GAAP, changes in income tax rates are recorded
when the change in rates has been legislated. As of December 31, 2001, all of
the changes in the Canadian income tax rates, including those previously
described in Dynacare's quarterly and annual filings with the Securities and
Exchange Commission in the United States and the Ontario Securities Commission
in Canada, have been legislated. Accordingly as of December 31, 2001, no
differences exist between U.S. and Canadian GAAP related to the tax benefits
reflected in these financial statements.

         Accounting for Financial Instruments. Financial Accounting Standards
Board Statement No. 133 - Accounting for Derivative Instruments and Hedging
Activities (FASB 133) requires companies to recognize all of its derivative
instruments as either assets or liabilities in the statement of financial
position at fair value. FASB 133 is effective for Dynacare on January 1, 2001.
The accounting for changes in fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.

         Under U.S. GAAP Dynacare's cross currency and interest rate swap
agreements are considered to be fair value hedges, which are reflected in the
statement of financial position at fair value. Under Canadian GAAP fair value
hedge accounting is not required.


                                       30
<PAGE>

Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 - Business Combinations
(FASB 141) and No. 142 - Goodwill and Other Intangible Assets (FASB 142),
effective for fiscal years beginning after December 15, 2001. Similarly, in
August 2001, the Canadian Institute of Chartered Accountants issued handbook
sections 1581 - Business Combinations and 3062 - Goodwill and Other Intangible
Assets effective for fiscal years beginning January 1, 2002. Under the new U.S.
and Canadian accounting rules, goodwill and intangible assets deemed to have an
indefinite life will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful life.

         It is estimated that Dynacare's net earnings for the year ended
December 31, 2001 would have increased by approximately $4.0 million, or $0.22
per diluted share, if goodwill and intangible assets deemed to have an
indefinite life were not amortized during the year ended December 31, 2001.

         Dynacare will perform the required impairment tests of goodwill and
intangible assets with an indefinite life effective as of January 1, 2002, and
has not yet determined the impact, if any, that the results of the review may
have on its net earnings and financial position. Dynacare may incur impairment
charges for licenses and goodwill in the future, which would adversely impact
its profitability and financial position.

         In August 2001, the Financial Accounting Standards Board issued
Statement No. 144 - Accounting for the Impairment or Disposal of Long-Lived
Assets (FASB 144) effective for fiscal years beginning after December 15, 2001.
This statement supersedes Statement No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of (FASB 121). FASB
144 retains the fundamental provision of FASB 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. Dynacare has not yet
determined what the effect, if any, of FASB 144 will be on its net earnings and
financial position.

Seasonality

         Dynacare's results of operations have been and can be expected to be
subject to quarterly fluctuations. Dynacare experiences lower testing volumes
during the holiday and vacation seasons and, to a lesser extent, during
inclement weather. As a result, because a significant portion of Dynacare's
expenses is relatively fixed over the short-term, Dynacare's operating income as
a percentage of revenue tends to decrease during the third quarter due to the
summer vacation period and during the fourth quarter due to the various
holidays, in that quarter. Dynacare's quarterly results can also fluctuate as a
result of a number of other factors, including the timing and transition of new
acquisitions or partnerships and completion, non-renewal or commencement of
significant hospital contracts.

         The discussion that follows should be read in conjunction with
Dynacare's Consolidated Financial Statements for the years ended December 31,
2001, 2000 and 1999 included elsewhere in this Form 10-K.


YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000


         Revenues. Revenues for the year ended December 31, 2001 were $402.4
million, an increase of $49.5 million, or 14.0%, from $352.9 million in the
prior year. This increase in revenues for the year ended December 31, 2001
resulted primarily from the continuing growth in Dynacare's U.S. operations,
where revenues increased by $46.7 million to $297.4 million.



                                       31
<PAGE>

The increase in revenues for the year ended December 31, 2001 from Dynacare's
U.S. operations was due to:

         o        growth of approximately 7.1% in community or non-hospital
                  revenues in Dynacare's existing operations;

         o        additional revenues generated by Dynacare's 2001 acquisitions
                  of Medical Arts Laboratory, the assets and operations of the
                  laboratories acquired in Illinois and Texas, the acquisition
                  of Memorial Hermann's remaining 50% partnership interest in
                  the Texas Partnership as previously described, and Dynacare's
                  2000 acquisitions which included LabSouth, West Texas
                  Pathology Laboratory, CHRISTUS Santa Rosa HealthCare, Olympic
                  Laboratory, Shoals Laboratory, Accu-Path Laboratory and
                  Dynacare's partnership with the Allegheny Hospital in
                  Pittsburgh, Pennsylvania (Allegheny Partnership).

         The increase in revenues was offset in part by the non-renewal of the
Hermann Hospital contract in October 2000 and a reduction in revenues recognized
by Dynacare related to several smaller laboratories in Texas (Laboratories for
Genetic Services, Accufast Diagnostic Laboratory, Central Diagnostic Management,
West Texas Pathology Laboratory and CHRISTUS Santa Rosa HealthCare) whose assets
and operations were owned by Dynacare until October 1, 2000 when they were sold
to the Texas Partnership. During the period from October 1, 2000 until October
31, 2001, when Dynacare acquired the remaining 50% partnership interest in the
Texas Partnership, Dynacare only included 50% of the revenues of these smaller
laboratories which represented its proportionate share of the revenues of these
operations.

         Canadian revenues increased by $2.8 million to $105.0 million in the
year ended December 31, 2001, reflecting reimbursement increases from government
agencies coupled with increases in non-government revenues. Dynacare's increase
in Canadian revenues was negatively impacted by the increase in the U.S. to
Canadian dollar exchange rate. The average U.S. to Canadian dollar exchange rate
in 2001 was $1.55 compared to $1.50 in 2000.

         General and operating expenses. General and operating expenses for the
year ended December 31, 2001 were $349.5 million, an increase of $44.7 million,
or 14.7%, from $304.8 million in the prior year. This increase in general and
operating expenses resulted from costs associated with processing additional
volume generated by internal growth and the additional operating expenses and
costs associated with the new operations acquired during 2001 and 2000, the
acquisition of Memorial Hermann's remaining 50% partnership interest during 2001
and the formation of the Allegheny Partnership in 2000.

         General and operating expenses as a percentage of revenues were 86.9%
for the year ended December 31, 2001, compared to 86.4% in the prior year,
resulting in margins of 13.1% and 13.6%, respectively. The decrease in margins
in 2001 occurred primarily as a result of the factors noted above, the
continuing growth of lower margin business in the United States and a reduction
in margins for the Texas Partnership due to the non-renewal of the Hermann
Hospital contract and the cost of operating a new and significantly expanded
facility.

         For the years ended December 31, 2001 and 2000, certain taxes of $1.6
million and $1.3 million, respectively, have been reclassified from general and
operating expenses and reflected as part of income tax expense, as these taxes
are based on earnings.

         Depreciation and Amortization. Depreciation and amortization expense
for the year ended December 31, 2001 was $17.9 million, an increase of $1.2
million, or 7.2%, from $16.7 million in the prior year. The increase in
depreciation and amortization expense arises from the amortization of the
goodwill added as a result of Dynacare's acquisitions and new partnership, and
additional depreciation due to the capital expenditures made during 2000 and
2001.



                                       32
<PAGE>

         Interest. Interest expense for the year ended December 31, 2001 was
$20.4 million, a decrease of $2.1 million, or 9.3%, from $22.5 million in the
prior year. The decrease in interest expense is primarily due to lower levels of
bank indebtedness and a lower effective interest rate in 2001 relative to 2000.
Dynacare's average effective interest rate was 9.8% for the year ended December
31, 2001 compared to 10.3% for 2000.

         Income taxes. An income tax expense of $2.9 million was recorded for
the year ended December 31, 2001 compared to an income tax benefit of $3.8
million for the prior year. Dynacare recorded tax benefits of $3.0 million and
$6.1 million for the years ended December 31, 2001 and 2000, respectively, as a
result of a series of income tax rate reductions in Canada. The tax benefit in
2001 was due to a tax rate reduction announced by the Ontario government of 6%
which will be phased in over the period 2002 to 2005.

         The 2001 and 2000 income tax expense (benefit) reflects a $1.2 million
and $2.5 million, respectively, reduction in Dynacare's valuation allowance
thereby recognizing the benefit of certain deferred tax assets. It is Dynacare's
expectation that under its current business strategy it will generate sufficient
taxable income to fully realize these tax benefits.

         As previously described, certain taxes of $1.6 million and $1.3 million
for the years ended December 31, 2001 and 2000, respectively, were reclassified
from general and operating expenses to income taxes.

         Net earnings. Net earnings for the year ended December 31, 2001 were
$11.7 million, compared to $6.0 million in the prior year. Excluding the impact
of the tax benefits noted above and the after-tax impact of the severance,
relocation and other charges in the prior year, net earnings for the year ended
December 31, 2001 were $8.7 million compared to $4.0 million in the prior year.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         Revenues. Revenues for the year ended December 31, 2000 were $352.9
million, an increase of $80.2 million, or 29.4%, from $272.7 million in 1999.
This increase in revenues resulted primarily from the continuing growth of
Dynacare's U.S. operations, the revenues from which increased by $77.2 million
to $250.7 million.

The increase in revenues from Dynacare's U.S. operations was due to:

         o        growth of 10.4% in community or non-hospital revenues in
                  Dynacare's existing operations; and

         o        additional revenues generated by: (i) Dynacare's 1999
                  acquisitions and partnership with University Health Systems in
                  Knoxville, Tennessee (Tennessee Partnership), which commenced
                  operations on August 1, 1999; and (ii) Dynacare's 2000
                  acquisitions, which included LabSouth, West Texas Pathology
                  Laboratory, CHRISTUS Santa Rosa HealthCare, Olympic
                  Laboratory, Shoals Laboratory, Accu-Path Laboratory and
                  Dynacare's partnership in Pittsburgh, Pennsylvania (Allegheny
                  Partnership).

         The increase in revenues was partially offset by the loss of the
Hermann Hospital contract in October 2000 and a reduction in revenues recorded
by Dynacare related to several smaller laboratories in Texas, which, as
previously noted, were wholly owned by Dynacare, and which were sold to the
Texas Partnership on October 1, 2000. Subsequent to the sale, Dynacare only
included 50% of the revenues, which represents its proportionate share of these
operations.



                                       33
<PAGE>

         Canadian revenues increased by $3.0 million to $102.2 million for the
year ended December 31, 2000, reflecting reimbursement increases from government
agencies coupled with increases in non-government revenues.

         General and operating expenses. General and operating expenses for the
year ended December 31, 2000 were $304.8 million, an increase of $75.2 million,
or 32.8%, from $229.6 million in 1999. This increase resulted from a $75.3
million increase in general operating expenses in the United States due to:

         o        costs associated with processing additional volumes generated
                  by internal growth;

         o        the additional operating expenses and costs associated with
                  the new operations acquired during 1999 and 2000;

         o        the transitional expenses related to the Texas Partnership,
                  including the costs of recruiting and training new employees,
                  relocation costs related to the move of the laboratory to a
                  new facility in Houston, Texas, the costs associated with
                  operating a significantly expanded facility and the costs
                  associated with integrating the operations, which the Texas
                  Partnership acquired from Dynacare on October 1, 2000; and

         o        increased corporate costs associated with expanding the
                  infrastructure required to support Dynacare's U.S. growth.

         In Canada, general and operating expenses decreased by $0.1 million.
Increases in salary, benefits and materials expenses, primarily as a result of
increased testing volume in Dynacare's partnerships in Ontario and Alberta, were
offset by a reduction of certain expenses in Dynacare's Ontario operations as
well as a reduction in administrative costs.

         General and operating expenses as a percentage of revenues were 86.4%
for the year ended December 31, 2000, compared to 84.2% in 1999, resulting in
margins of 13.6% and 15.8%, respectively. The decrease in margins occurred as a
result of the factors noted above as well as continuing growth of lower margin
business, primarily in the United States.

         For the years ended December 31, 2000 and 1999, certain taxes of $1.3
million and $1.2 million, respectively, have been reclassified from general and
operating expenses and reflected as part of income tax expense, as these taxes
are based on earnings.

         Severance, Relocation and Other Charges. Upon the completion of
Dynacare's initial public offering in 2000, Dynacare incurred severance,
relocation and other charges of approximately $6.7 million in connection with:

         o        severance, lease termination and other costs related to the
                  relocation of Dynacare's corporate offices from Toronto,
                  Ontario to Dallas, Texas;

         o        termination costs associated with an employment contract with
                  a senior executive;

         o        amounts paid to certain of Dynacare's officers to enable them
                  to repay in full outstanding loans made by Dynacare to them
                  and associated taxes which were due as a result; and

         o        other non-cash restructuring charges, including termination of
                  a services contract.

         Depreciation and Amortization. Depreciation and amortization expense
for the year ended December 31, 2000 was $16.7 million, an increase of $3.6
million, or 27.5%, from $13.1 million in 1999. The increase in depreciation and
amortization expense arises from the additional amortization of deferred


                                       34
<PAGE>

financing costs incurred on the issuance of $70.0 million, 10.75% Senior Notes
in February 1999 (the 1999 Senior Notes) and on the long-term debt related to
the West Texas acquisition, additional amortization of the goodwill added as a
result of Dynacare's acquisitions and additional depreciation due to the capital
expenditures made during 1999 and 2000.

         Interest. Interest expense for year ended December 31, 2000 was $22.5
million, an increase of $3.0 million, or 15.4%, from $19.5 million in 1999. The
increase in interest expense was primarily due to the additional debt incurred
on the issuance of the 1999 Senior Notes and the increased bank indebtedness of
which $23.8 million was paid down in November 2000 with a portion of the net
proceeds Dynacare received from its initial public offering. Dynacare's average
effective interest rate was 10.3% for the year ended December 31, 2000 compared
to 10.4% for the prior year.

         Income taxes. Effective January 1, 2000, Dynacare adopted the Canadian
Institute of Chartered Accountants Handbook Section, Accounting for Income
Taxes-3465 (CICA-3465). Similar to the Statement of Financial Accounting
Standards No. 109-Accounting for Income Taxes in the United States, CICA-3465
requires the liability method of tax allocation for accounting for income taxes.
Under the liability method of tax allocation, deferred tax assets and
liabilities are recognized based on the temporary differences between the
accounting and tax bases of assets and liabilities. The calculation of deferred
tax assets and liabilities is based on the substantively enacted tax rates and
laws that will be in effect when the temporary differences are expected to
reverse. Dynacare adopted CICA-3465 on a retroactive basis with the previous
comparable years restated.

         Dynacare recorded an income tax benefit of $3.8 million for the year
ended December 31, 2000 compared to an income tax expense of $4.9 million in
1999. The income tax benefit is primarily due to the recognition of a $6.1
million tax benefit as a result of Canadian federal and provincial tax rate
reductions that were substantively enacted and recorded by Dynacare during 2000
as noted below:
                                                           Tax Benefit
      Quarter Ended                                         (millions)
     --------------------------------------------------------------------
        March 31....................................             $ 0.9
        June 30.....................................               1.1
        September 30................................                 -
        December 31.................................               4.1
                                                           --------------
                                                                 $ 6.1
                                                           ==============


         The cumulative reductions in the Canadian federal statutory tax rate
are 1.0%, 3.0%, 5.0% and 7.0% for 2001, 2002, 2003 and 2004 (and thereafter),
respectively. A 1.0% pro rata reduction in the Ontario provincial statutory tax
rate was effective May 2, 2000 and was followed by a further 0.5% tax rate
reduction effective January 1, 2001.

         In addition, the 2000 and 1999 income tax expense (benefit) reflects a
$2.5 million and $0.9 million, respectively, reduction in Dynacare's valuation
allowance thereby recognizing the benefit of certain deferred tax assets. It is
Dynacare's expectation that under its current business strategy it will generate
sufficient taxable income to fully realize these tax benefits.

         As previously described, certain taxes of $1.3 million and $1.2 million
for the years ended December 31, 2000 and 1999, respectively, were reclassified
from general and operating expenses to income taxes.



                                       35
<PAGE>

         Net earnings. Net earnings for the year ended December 31, 2000 were
$6.0 million, compared to $5.6 million in 1999. Excluding the after tax impact
of the severance, relocation and other charges and the tax benefit resulting
from future tax rate reductions in Canada, net earnings were $4.0 million in
2000.

LIQUIDITY AND CAPITAL RESOURCES

         Dynacare's principal sources of liquidity are cash provided by
operating activities and borrowings under debt agreements, including Dynacare's
approximately $35.0 million and $15 million working capital facilities in the
United States and Canada, respectively. Because approximately 89.8% of
Dynacare's Canadian revenues are received from government agencies, Dynacare's
Canadian operations receive prompt payment for their services on a monthly basis
and have no significant bad debt expense. In the United States, Dynacare
receives monthly payments for the provision of laboratory services under
Dynacare's present long-term contracts with hospitals. These long-term contracts
represented approximately 19.2% of total U.S. revenues for the year ended
December 31, 2001. The Canadian revenues from governmental agencies, together
with U.S. revenues from hospitals, provide a relatively reliable monthly cash
flow and reduce the amount of Dynacare's working capital which is required to
finance these aspects of Dynacare's business. However, collecting accounts
receivable from the balance of Dynacare's business is a complex and
time-consuming process which Dynacare must finance.

         In November 2001, Dynacare completed a public offering of common shares
for total proceeds to Dynacare of approximately $25.3 million (before after tax
costs of $1.4 million). Approximately $9.2 million of these proceeds was used to
temporarily pay down Dynacare's outstanding U.S. working capital facilities.
Dynacare expects to use the remaining proceeds from this offering for working
capital and general corporate purposes, and to fund potential acquisitions and
partnerships.

         If additional capital is required for acquisitions, partnerships or
other expenditures or if Dynacare's operating results and cash flow are
significantly below expectations, Dynacare may require additional debt or equity
financing.

         Operating activities. Cash provided by operating activities was $22.8
million, $23.9 million and $4.8 million for the years ended December 31, 2001,
2000 and 1999, respectively. The cash provided by (used in) non-cash working
capital items was $(6.5) million, $5.2 million and $(16.1) million. The $6.5
million of cash used in non-cash working capital items for the year ended
December 31, 2001 primarily reflects an increase in working capital requirements
resulting from the growth of Dynacare's U.S. operations. The $5.2 million of
cash provided by non-cash working capital items for the year ended December 31,
2000 reflects an improvement by Dynacare in its accounts receivable days sales
outstanding, commonly referred to as DSOs, to 65 days at December 31, 2000 from
75 days as of December 31, 1999. The $16.1 million of cash used in non-cash
working capital items for the year ended December 31, 1999 reflects an increase
in DSOs to 75 days primarily due to the implementation of new billing systems
and upgrades of other billing systems which resulted in a disruption to the
billing process.

         For the year ended December 31, 2001, Dynacare's DSOs were impacted by
approximately four days as a result of its acquisition of Memorial Hermann's
remaining 50% partnership interest in the Texas Partnership on October 31, 2001.
Excluding the impact of Dynacare's acquisition of Memorial Hermann's partnership
interest, DSOs for the year ended December 31, 2001 improved to 61 days as
compared to 65 days in the prior year.

         Dynacare's available cash position, which originates both from its U.S.
and Canadian operations, was $30.0 million as of December 31, 2001, (2000 -
$18.1 million, 1999 - $16.3 million). At December 31, 2001, Dynacare had
revolving credit facilities of approximately $50.0 million, with availability of
approximately $38.0 million. Of the latter, $3.9 million was drawn. At December
31, 2001, accounts receivable were $72.9 million (2000 - $62.1 million, 1999 -
$59.6 million) of which $11.7 million (2000 - $10.8 million, 1999 - $11.3


                                       36
<PAGE>

million) was derived from Canadian government agencies, $3.9 million (2000 -
$4.5 million, 1999 - 4.9 million) from U.S. long-term hospital contracts, $15.4
million (2000 - $11.3 million, 1999 - $9.8 million) from the Medicare/Medicaid
programs, and $41.9 million (2000 - $35.5 million, 1999 - $33.6 million) from
other payors. Cash, unused revolving credit facilities and accounts receivable
outstanding as of December 31, 2001 are anticipated to be sufficient to meet
short-term liabilities.

         Investing activities. The net cash used in investing activities was
$33.5 million, $61.7 million, and $37.5 million for the years ended December 31,
2001, 2000, and 1999, respectively. The major components of the investing
activities are outlined below.

         Acquisitions and Partnerships. During the first quarter of 2001,
Dynacare acquired the laboratory assets and operations of Medical Arts for a
purchase price of $7.7 million. During the comparable period in 2000, Dynacare
acquired LabSouth for a purchase price of $23.8 million, which consisted of cash
payments of $22.0 million, the assumption of long-term debt of $1.2 million and
short-term liabilities of $0.6 million.

         During the second quarter of 2001, Dynacare acquired, through two of
its partnerships in the United States, the laboratory assets and operations of
two laboratories in Texas and Illinois for purchase prices of $0.8 million and
$1.5 million, respectively. During the comparable period in 2000, Dynacare
acquired the laboratory assets and operations of West Texas and Santa Rosa for
purchase prices of $4.7 million and $1.1 million, respectively. The purchase
price consisted of cash payments of $5.4 million, the assumption of long-term
debt of $0.1 million and short-term liabilities of $0.3 million.

         During the third quarter of 2001, Dynacare, through a partnership in
the United States, purchased the laboratory assets and operations of a
laboratory located in Illinois for a purchase price of $0.4 million.

         During the fourth quarter of 2001, Dynacare acquired Memorial Hermann's
remaining 50% partnership interest in the Texas Partnership for a cash payment
of $2.0 million on closing, payments of $0.5 million on each of the first and
second anniversaries of the closing and an assumption of net short-term
liabilities of $4.2 million. In the fourth quarter of 2000, Dynacare formed the
Allegheny Partnership in which it made an initial capital contribution of cash
of $2.4 million. Additionally, Dynacare acquired the laboratory assets and
operations of Olympic, Shoals and Accu-Path for a total cost of $8.9 million,
which consisted of cash payments of $8.7 million and short-term liabilities of
$0.2 million.

         In 1999, Dynacare made nine acquisitions and entered into a partnership
for a total investment of $27.3 million, which consisted of cash payments of
$20.8 million, promissory notes of $6.2 million and short-term liabilities of
$0.3 million.

         Capital Expenditures. Dynacare's capital expenditures were $12.4
million, $14.8 million and $11.0 million for the years ended December 31, 2001,
2000 and 1999, respectively.

         Dynacare's capital expenditures for the year ending December 31, 2002
are anticipated to remain at approximately the same levels as in 2001 and are
expected to be financed from cash flows from operations and/or utilization of
credit facilities.

         Other Assets. Dynacare's investment in other assets amounted to $4.0
million, $8.4 million and $5.5 million for the years ended December 31, 2001,
2000 and 1999, respectively. The increase in other assets for the years ended
December 31, 2001 and 2000 is primarily due to working capital advances to the
Texas Partnership as a result of the relocation of the partnership's operations
to a new laboratory facility and the change in the scope of its operations. The
increase in other assets in 1999 arises primarily as a result of deferred
financing costs incurred in relation to the issuance of the 1999 Senior Notes.



                                       37
<PAGE>

         Financing Activities. The net cash provided by financing activities was
$23.9 million, $38.8 million and $46.1 million for the years ended December 31,
2001, 2000 and 1999, respectively.

         The net cash provided by financing activities during the year ended
December 31, 2001 reflects net proceeds of $23.9 million received by Dynacare
from its public offering, proceeds of $0.6 million from the exercise of employee
stock options, and an increase in bank indebtedness of $3.9 million. In
addition, Dynacare made net long-term debt repayments totaling $4.5 million,
which included a $3.9 million repayment pertaining to debt used to finance the
acquisition of Medical Pathology Laboratory. The repayment of debt related to
the acquisition of Medical Pathology Laboratory is net of a reduction to the
purchase price.

         The cash provided by financing activities during the year ended
December 31, 2000 reflects net proceeds of $46.4 million received by Dynacare
from its initial public offering, a decrease in bank indebtedness of $5.8
million and long-term debt proceeds of $4.5 million, which were used to finance
the West Texas acquisition. In addition, Dynacare made long-term debt repayments
totaling $6.3 million, which included a $4.5 million repayment pertaining to the
debt used to finance the West Texas acquisition.

         The cash provided by financing activities during the year ended
December 31, 1999 reflects the net proceeds of $69.2 million that Dynacare
received from the issuance of its 1999 Senior Notes, of which $15.3 million was
used to repay an interim loan and $6.9 million was used to pay down working
capital facilities. In addition, Dynacare repaid other long-term debt of $2.8
million during the year.

         As part of Dynacare's 1999 financing activities, Dynacare issued $5.0
million and $0.3 million of long-term debt related to the Medical Pathology and
Central Wyoming Medical Laboratory acquisitions, respectively. Upon the
formation of the Tennessee Partnership, Dynacare entered into a capital lease
obligation of $0.9 million.

         Dynacare's interest expense on outstanding long-term debt for the year
ended December 31, 2001 was $20.1 million. Based on the long-term debt
outstanding as of December 31, 2001, Dynacare's interest expense for the year
ending December 31, 2002 is expected to decrease from the 2001 amounts due to a
lower effective rate of interest.

         As of December 31, 2001, the total scheduled repayments of long-term
debt due in each of 2002 to 2006 and thereafter are as follows:

                           2002            $    2.3 million
                           2003            $    2.7 million
                           2004            $    1.8 million
                           2005            $    0.4 million
                           2006            $  195.2 million
                           Thereafter      $    1.7 million

         Dynacare's scheduled debt repayments and estimated interest obligations
due in each of 2002 to 2005 are anticipated to be funded by cash flows from
operations and/or utilization of credit facilities. Dynacare expects to
refinance the Senior Notes of $195.0 million, which are scheduled to be repaid
in 2006.


ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Dynacare does not hold or issue financial instruments for trading
purposes. A limited number of financial instruments are used to manage
well-defined risks associated with fluctuations in the Canadian to U.S. dollar
exchange rates and to manage interest costs.


                                       38
<PAGE>

Foreign currency risk

         Dynacare has cross currency swap agreements which effectively convert a
portion of Dynacare's U.S. dollar denominated borrowings into Canadian dollar
obligations, to match Dynacare's Canadian dollar-denominated assets and cash
flows. These swap agreements limit Dynacare's exposure to both favorable and
unfavorable currency fluctuations. As of December 31, 2001 a sensitivity
analysis to changes in the U.S. dollar on Dynacare's main currency swap
agreement indicates that if the U.S. dollar weakened by 10% against the Canadian
dollar, the fair value of this instrument would decrease by Cdn$15.6 million
($9.8 million). Conversely, if the U.S. dollar strengthened by 10% against the
Canadian dollar, the fair value of this instrument would increase by Cdn$17.2
million ($10.8 million). Any resulting changes in fair value would be offset by
changes in the underlying hedged long-term debt position. Pursuant to the terms
of the currency swap agreement, Dynacare pledged shares of certain of its
subsidiaries and partnership interests to the counterparties to those
agreements.


Interest rate risk

         Dynacare has entered into a number of interest rate swap agreements,
the net effect of which is to convert fixed rate senior notes due in 2006 to
fixed rate obligations with shorter maturity terms and variable rate
liabilities.

         Based on Dynacare's interest rate swap agreements outstanding at
December 31, 2001, a 100 basis point increase in interest rates would result in
a decrease in the net aggregate market value of these instruments of Cdn$6.9
million ($4.3 million). Conversely, a 100 basis point decrease in interest rates
would result in a Cdn$7.1 million ($4.5 million) net increase in the net
aggregate market value of these instruments.



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Dynacare's audited financial statements begin on page F-1.



ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.


                                    PART III
                                    --------

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this item is incorporated by reference from the
information in Dynacare's Management Information Circular and Proxy Statement
(the "Proxy Statement") to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the 1934 Act in connection with the annual meeting
of the shareholders of Dynacare.


                                       39
<PAGE>


ITEM 11. - EXECUTIVE COMPENSATION

         The information required by this Item is incorporated by reference from
the information under the caption "Executive Compensation" to appear in the
Proxy Statement.



ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference from
the information under the caption "Principal Holders of Shares" to appear in the
Proxy Statement.



ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated by reference from
the information under the caption "Interest of Insiders in Material
Transactions" to appear in the Proxy Statement.











                                       40
<PAGE>

                                   Signatures

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

                             Dynacare Inc.


Date:  March 19, 2002        By:
                                   /s/ Harvey A. Shapiro
                                   -----------------------------------------
                                   Harvey A. Shapiro
                                   Chairman, President, Chief Executive Officer
                                   and Director


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 19, 2002 on
behalf of the registrant and in the capacities indicated.



Signature                             Title



/s/ Harvey A. Shapiro
-----------------------------
Harvey A. Shapiro                     Chairman, President, Chief Executive
                                      Officer and Director
                                      (Principal Executive Officer)


/s/ Zbig S. Biskup
-----------------------------
Zbig S. Biskup                        Executive Vice President,
                                      Chief Financial Officer and Secretary
                                      (Principal Financial Officer and
                                      Principal Accounting Officer)

/s/ Donald J. Edwards
-----------------------------
Donald J. Edwards                     Director




/s/ Bruce V. Rauner
-----------------------------
Bruce V. Rauner                       Director




/s/ Albert J. Latner
-----------------------------
Albert J. Latner                      Director


                                       41
<PAGE>


/s/ Dino Chiesa
-----------------------------
Dino Chiesa                           Director



/s/ William T. Brock
-----------------------------
William T. Brock                      Director



/s/ Thomas Edward Long
-----------------------------
Thomas Edward Long                    Director



/s/ Paul Bellamy
-----------------------------
Paul Bellamy                          Director



/s/ Robert J. Lipsig
-----------------------------
Robert J. Lipsig                      Director




                                       42
<PAGE>

                                     PART IV
                                     -------


ITEM 14. - Exhibits, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

1.       Index to consolidated financial statements as of December 31, 2001 and
         2000 and for the years ended December 31, 2001, 2000 and 1999 filed as
         part of this report:

        Report of Independent Auditors...................................  F-1

        Consolidated Statements of Financial Position....................  F-2

        Consolidated Statements of Operations............................  F-3

        Consolidated Statements of Deficit...............................  F-3

        Consolidated Statements of Cash Flows............................  F-4

        Notes to Consolidated Financial Statements.......................  F-5

2.      Financial Statement Schedule

        Schedule II - Valuation and Qualifying Accounts..................  S-1


3.      Exhibit Index ...................................................  E-1

        Exhibit 21 - List of Subsidiaries................................  E-2

        Exhibit 23 - Consent of Chartered Accountants....................  E-3







                                       43
<PAGE>

REPORT OF INDEPENDENT AUDITORS


To the Shareholders of Dynacare Inc.

We have audited the consolidated statements of financial position of Dynacare
Inc. as at December 31, 2001 and 2000, and the consolidated statements of
operations, deficit and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance 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.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2001, in accordance with
Canadian generally accepted accounting principles.


                                                           /s/ Ernst & Young LLP

Dallas, Texas
March 20, 2002


<PAGE>

DYNACARE INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                          2001                2000
-----------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 17)                                            $      30,002       $      18,099
Accounts receivable (Note 19)                                                         72,895              62,065
Prepaid expenses                                                                       3,074               2,654
Inventory                                                                             11,314               7,692
Deferred income taxes (Note 11)                                                        5,059               5,956
-----------------------------------------------------------------------------------------------------------------
Total current assets                                                                 122,344              96,466
-----------------------------------------------------------------------------------------------------------------

Capital assets (Note 3)                                                               51,722              45,907
Licenses and goodwill (Note 4)                                                       181,231             166,691
Other assets (Note 5)                                                                 29,028              39,912
-----------------------------------------------------------------------------------------------------------------
                                                                                     261,981             252,510
-----------------------------------------------------------------------------------------------------------------
                                                                               $     384,325       $     348,976
=================================================================================================================
LIABILITIES
Current liabilities:
Bank indebtedness (Note 6)                                                     $       3,890       $           -
Accounts payable and accrued liabilities                                              48,701              44,995
Current portion of deferred income taxes (Note 11)                                    12,799              10,961
Current portion of long-term debt (Note 7)                                             2,265               5,913
-----------------------------------------------------------------------------------------------------------------
Total current liabilities                                                             67,655              61,869
Long-term debt (Notes 7 and 8)                                                       201,811             202,287
Deferred income taxes (Note 11)                                                       22,574              29,569
-----------------------------------------------------------------------------------------------------------------
                                                                                     292,040             293,725
-----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 9)                                                               122,855              98,357
Deficit                                                                              (32,368)            (44,085)
-----------------------------------------------------------------------------------------------------------------
                                                                                      90,487              54,272
Foreign currency translation adjustment                                                1,798                 979
-----------------------------------------------------------------------------------------------------------------
                                                                                      92,285              55,251
-----------------------------------------------------------------------------------------------------------------
                                                                               $     384,325       $     348,976
=================================================================================================================
Commitments and contingencies (Notes 14 and 15)

See accompanying notes to consolidated financial statements
Approved on behalf of the Board
(signed) Harvey A. Shapiro                                                  (signed) William T. Brock
Director                                                                    Director


</TABLE>


                                      F-2
<PAGE>

DYNACARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars,
except for share and per share amounts)                                   2001             2000              1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>               <C>
Revenues (Note 19)                                               $     402,359    $     352,919     $     272,677
--------------------------------------------------------------------------------------------------------------------

General and operating expenses                                         349,474          304,809           229,633
Depreciation                                                            12,072           11,368             8,351
Amortization of licenses and goodwill                                    5,788            5,279             4,707
Severance, relocation and other charges                                      -            6,750                 -
--------------------------------------------------------------------------------------------------------------------
                                                                       367,334          328,206           242,691
--------------------------------------------------------------------------------------------------------------------
Operating earnings                                                      35,025           24,713            29,986
Interest expense (Notes 6 and 7)                                        20,431           22,477            19,457
--------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                            14,594            2,236            10,529
Income tax expense (benefit) (Note 11)
  Current                                                                3,138            3,044             2,706
  Deferred                                                                (261)          (6,833)            2,182
--------------------------------------------------------------------------------------------------------------------
                                                                         2,877           (3,789)            4,888
--------------------------------------------------------------------------------------------------------------------
Net earnings                                                     $      11,717    $       6,025     $       5,641
====================================================================================================================

Earnings Per Share (Note 18)
--------------------------------------------------------------------------------------------------------------------
  Basic                                                          $        0.68    $        0.48     $        0.47
====================================================================================================================
  Diluted                                                        $        0.66    $        0.46     $        0.45
====================================================================================================================
Weighted average number of
  common shares outstanding-Basic                                   17,211,138       12,482,368        11,880,914
====================================================================================================================
Weighted average number of
  common shares outstanding-Diluted                                 17,885,180       13,143,971        12,464,105
====================================================================================================================
See accompanying notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF DEFICIT

Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                            2001             2000              1999
--------------------------------------------------------------------------------------------------------------------
Deficit, beginning of year                                       $     (44,085)   $     (49,343)    $     (54,984)
Net earnings                                                            11,717            6,025             5,641
Increase in stated capital (Note 9)                                          -             (767)                -
--------------------------------------------------------------------------------------------------------------------
Deficit, end of year                                             $     (32,368)   $     (44,085)    $     (49,343)
====================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>

                                      F-3
<PAGE>

DYNACARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                    2001           2000          1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>           <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings                                                             $      11,717  $       6,025 $       5,641
Adjustments to reconcile net earnings
  to net cash provided by operations:
    Depreciation                                                                12,072         11,368         8,351
    Amortization of licenses and goodwill                                        5,788          5,279         4,707
    Deferred income taxes                                                         (261)        (6,833)        2,182
    Gain on sale of capital assets                                                   -           (110)          (11)
    Severance, relocation and other charges                                          -          3,021             -
    Change in non-cash working capital,
      net of effect of acquisitions (Note 17)                                   (6,512)         5,168       (16,106)
---------------------------------------------------------------------------------------------------------------------
                                                                                22,804         23,918         4,764
---------------------------------------------------------------------------------------------------------------------
CASH FLOW USED IN INVESTING ACTIVITIES
  Acquisition of businesses (Notes 2 and 17)                                   (17,670)       (39,551)      (21,086)
  Purchase of capital assets (Note 17)                                         (11,804)       (13,852)      (10,990)
  Proceeds from sale of capital assets                                               -            132            68
  Increase in other assets                                                      (4,037)        (8,436)       (5,528)
---------------------------------------------------------------------------------------------------------------------
                                                                               (33,511)       (61,707       (37,536)
---------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness                                         3,890         (5,812)       (6,855)
Proceeds from long-term debt                                                     1,577          4,525        71,078
Repayment of long-term debt                                                     (6,054)        (6,354)      (18,090)
Issue of capital stock-net proceeds (Note 9)                                    24,498         46,433             -
---------------------------------------------------------------------------------------------------------------------
                                                                                23,911         38,792        46,133
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
Foreign exchange translation adjustments                                        (1,301)           769        (1,735)
---------------------------------------------------------------------------------------------------------------------

Increase in cash and cash equivalents
  during the year                                                               11,903          1,772        11,626
Cash and cash equivalents, beginning of year                                    18,099         16,327         4,701
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                   $      30,002  $      18,099 $      16,327
=====================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>


                                      F-4
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, except for share and per share amounts)

1. Summary of significant policies

These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP), which are in all
material respects in accordance with United States generally accepted accounting
principles and practices prescribed by the United States and Securities Exchange
Commission (U.S. GAAP), except as outlined in Note 21.

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

The significant accounting policies are as follows:

Nature of business

Dynacare Inc. and its subsidiary companies (the Company) provide clinical
laboratory services in the United States and Canada.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries. The consolidated financial statements also
include the Company's proportionate share of the assets, liabilities, revenues
and expenses in the following clinical laboratory partnerships in which it is a
participant:

                  HH/DL, L.P. (Texas Partnership)

                  DL/ELLIS, L.L.C. (Ellis Partnership)

                  United/Dynacare L.L.C. (United Partnership)

                  DL/UHS Inc. (Tennessee Partnership)

                  Dynacare/WPAHS L.L.C. (Allegheny Partnership)

                  Dynacare-Gamma Laboratory Partnership (Ontario Partnership)

                  Dynacare Kasper Medical Laboratories (Alberta Partnership)



The proportionate consolidation method of accounting is used when contractual
arrangements exist which allow for joint control over the strategic operating,
investing and financing activities of the entity.

On October 31, 2001, the Company purchased the remaining 50% partnership
interest in the Texas Partnership from its partner Memorial Health Ventures.
Accordingly, subsequent to October 31, 2001, the Company consolidated 100% of
the assets, liabilities, revenues and expenses of the Texas Partnership.


                                      F-5
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash equivalents

Cash equivalents consist of short-term investments, which have remaining
maturities of three months or less from the date of purchase, and are carried at
cost which approximates market.

Revenue recognition

Revenues are recognized on the accrual basis at the time services are provided,
which for clinical laboratories approximate the time test results are reported.
Revenues are stated net of all contractual allowances and discounts.

Depreciation

Capital assets are stated at cost. Depreciation is provided on the
declining-balance basis at the annual rates set out below:
         Buildings............................................5%
         Medical equipment...................................20%
         Furniture and fixtures..............................20%
         Computer equipment..................................30%
         Motor vehicles......................................30%

Leasehold improvements are amortized on the straight-line basis over the term of
the lease, plus one renewal option.

Inventory

Inventory is stated at the lower of cost determined on a first-in, first-out
basis, and replacement cost.

Licenses and goodwill

Licenses and goodwill, which arise on acquisitions, are recorded at cost and are
amortized on the straight-line basis primarily over 40 years. The amortization
policy has been adopted after consideration of various factors including the
essential nature and continuing demand for laboratory services, barriers to
entry, the perpetual nature of licenses, and a significant market share created
in a number of the markets in which the Company operates. Laboratory licenses
are required to operate clinical laboratories and to receive reimbursement in
Ontario. Although new licenses are rarely issued, existing licenses of the
Company and its competitors have been routinely renewed on an annual basis,
provided the laboratory adheres to certain regulations. The Company complies
with the applicable regulations, has never had a license renewal denied and as
such believes it is unlikely that these licenses will be revoked. The Company
reviews the valuation and amortization of licenses and goodwill on a regular
basis, taking into consideration any events or circumstances that might have
impaired the carrying value. The amount of impairment, if any, is measured based
on undiscounted projected cash flow compared to the carrying value.


                                      F-6
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign currency translation

a) Reporting Currency

Effective July 1, 2000, the Company adopted the U.S. dollar as its reporting
currency as more than 50% of the Company's revenues are generated in the United
States, coupled with the Company's continued growth in the United States. Prior
to July 1, 2000, the Company's consolidated financial statements were presented
in Canadian dollars. The consolidated financial statements and notes for all
periods prior to June 30, 2000, have been restated in U.S. dollars in accordance
with Canadian generally accepted accounting principles using the July 1, 2000,
exchange rate of Cdn$1.48 per U.S.$1.00. The functional currencies of each of
the Company's operations in the United States and Canada are unchanged.

The assets and liabilities of the Company's operations having a functional
currency other than the U.S. dollar are translated into U.S. dollars using the
exchange rate in effect at the year-end, and revenues and expenses are
translated at the average rate during the year. The average and year-end U.S. to
Canadian dollar exchange rate was $1.55 and $1.59 (2000 - $1.50 and $1.50),
respectively. Exchange gains or losses on translation of the Company's net
investment in these operations are included in the foreign currency translation
adjustment component of shareholders' equity.

The exchange gains or losses accumulated in the foreign currency translation
adjustment component of shareholders' equity are not included in operations
until realized through a reduction in the Company's net investment in such
operations.

b) Foreign Exchange Transactions

Foreign exchange translation adjustments arising from long-term debt repayable
in a currency different than an operation's functional currency are deferred
over the remaining term of the debt or, if the long-term debt is designated as a
hedge of the net investment in self-sustaining foreign operations, exchange
translation adjustments are included in the foreign currency translation
adjustment component of shareholders' equity.

Income taxes

The Company follows the liability method of tax allocation. Under this method,
deferred tax assets and liabilities are recognized based on the temporary
differences between the accounting and tax bases of assets and liabilities. The
calculation of deferred tax assets and liabilities is based on substantially
enacted tax rates and laws that will be in effect when the temporary differences
are expected to reverse (Note 11).

Financial instruments

The Company does not hold or issue financial instruments for trading purposes.
Amounts receivable or payable under currency swaps, utilized as hedges, are
included in the statement of financial position as either long-term assets or
long-term liabilities. Foreign exchange gains or losses on the related hedged
assets or liabilities are included in the carrying amount of such assets and
liabilities, and are matched against the related gains and losses on the
currency swaps.

Costs for purchased interest rate swap agreements are amortized to interest
expense over the term of the swaps. Unamortized costs are included in other
assets in the statement of financial position. Payments and receipts under
interest rate swap contracts are recognized as adjustments to interest expense.



                                      F-7
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings per share

Earnings per share are calculated on net earnings using the weighted average
number of shares outstanding. Fully diluted earnings per share are calculated on
the weighted average number of shares outstanding during the year assuming all
the dilutive stock options had been exercised into common shares of the Company
at the beginning of the year, or date of issuance, if later.

The treasury stock method is used in recognizing the use of proceeds that could
be obtained upon exercise of stock options in computing fully diluted earnings
per share. The treasury stock method assumes that the proceeds received by the
Company upon the exercise of stock options would be used to purchase common
shares outstanding at the average market price during the year.

Stock-based compensation plans

The Company has two stock-based compensation plans, which are described in Note
9. No compensation expense is recognized for these plans when stock options are
issued to employees or directors. Any consideration paid by employees on
exercise of stock options is credited to share capital.

2. Acquisitions

The Company has acquired clinical laboratories and has accounted for these
acquisitions using the purchase method.

The purchase price has been allocated as follows:

December 31,
--------------------------------------------------------------------------------
(in thousands of U.S. dollars)                          2001              2000
--------------------------------------------------------------------------------
Capital and other assets                      $          300    $        4,705
Goodwill                                              17,870            36,172
--------------------------------------------------------------------------------
Net assets                                    $       18,170    $       40,877
================================================================================
Purchase consideration:
Cash                                          $       11,580    $       38,497
Promissory notes payable                               2,077             1,326
Short-term liabilities                                 4,513             1,054
--------------------------------------------------------------------------------
                                              $       18,170    $       40,877
================================================================================

On October 31, 2001, the Company purchased the remaining 50% partnership
interest in the Texas Partnership from its partner Memorial Health Ventures for
a purchase price of $7.2 million. The purchase price consideration included cash
of $2.0 million, promissory notes payable of $1.0 million and an assumption of
net short-term liabilities of $4.2 million. The goodwill arising on the
acquisition of $7.2 million is not subject to amortization. This accounting
treatment is in accordance with the Canadian Institute of Chartered Accountants
Handbook Section, Goodwill and other Intangible Assets - 3062 (CICA - 3062),
which states that acquisitions of goodwill and intangible assets made after June
30, 2001 and deemed to have an indefinite life, will no longer be amortized but
will be subject to annual impairment tests. All other goodwill and other
intangible assets acquired prior to or as of June 30, 2001, continued to be
amortized during the year ended December 31, 2001. Beginning on January 1, 2002,
all goodwill and other intangible assets deemed to have an indefinite life will
no longer be amortized but will be subject to annual impairment tests.



                                      F-8
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2001, the Company through two of its partnerships in the United States,
purchased the laboratory assets and operations of two laboratories located in
Texas and Illinois for a purchase price of $2.3 million. The purchase price
consideration included cash of $1.2 million, short-term liabilities of $0.1
million and a promissory note payable of $1.0 million. The goodwill arising on
these acquisitions of $2.3 million is being amortized over terms ranging from 3
to 30 years. Additionally, in July 2001, the Company through a joint venture in
the United States purchased the laboratory assets and operations of another
laboratory in Illinois. The purchase price consideration was cash of $0.4
million. The goodwill arising on the acquisition of $0.4 million is being
amortized over 15 years.

On March 1, 2001, the Company purchased the laboratory assets and operations of
Medical Arts Laboratory located in Oklahoma for a purchase price of $7.7
million. The purchase price consideration included cash of $7.5 million and
short-term liabilities of $0.2 million. The goodwill arising on the acquisition
of $7.5 million is being amortized over 40 years.

In March 2000, the Company acquired the outstanding common shares of a clinical
laboratory located in Alabama for a purchase price of $23.8 million. The
purchase price consideration included cash of $22.0 million, long-term debt of
$1.2 million and short-term liabilities of $0.6 million. The goodwill arising on
the acquisition of $20.9 million is being amortized over 40 years.

In addition, during 2000 the Company purchased the assets and operations of five
clinical laboratory operations located in the United States for a purchase price
of $14.7 million. The purchase price consideration included cash of $14.1
million, promissory notes payable of $0.1 million and short-term liabilities of
$0.5 million. The goodwill arising on these acquisitions of $14.3 million is
being amortized over periods ranging from 15 to 40 years. Also during 2000, the
Company entered into a partnership with a hospital located in Pennsylvania. The
Company's capital contribution to the partnership was cash of $2.4 million. The
goodwill arising on the partnership formation of $1.0 million is being amortized
over 30 years.

Results of operations of the above acquisitions have been included in the
statement of operations from the respective dates of acquisition.

On October 1, 2000, the Company sold its direct ownership interests of certain
of its operations located in Texas to the Texas Partnership for proceeds of
$17.6 million which represented the value of the Company's investment in these
operations. The purchase price for these acquisitions was financed by the
Company and in return the Company received preferred partnership units on which
it was entitled to earn a 20% return. The preferential partnership units had
proposed terms of repayment of three years or more subject to certain provisions
in the capital contribution agreement. Immediately following the Company's
purchase of the remaining 50% partnership interest in the Texas Partnership, the
Company's preferred partnership units, including the accrued investment income
on these units, were converted into capital units of the partnership.


                                      F-9
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. CAPITAL ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                2001               2000
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>
Land                                                                                $        3,493     $        3,665
Buildings                                                                                    8,783              9,123
Medical equipment                                                                           19,867             15,491
Leasehold improvements                                                                      14,206             10,964
Furniture and fixtures                                                                       5,038              4,046
Computer equipment                                                                          38,053             30,102
Vehicles                                                                                     1,098                692
----------------------------------------------------------------------------------------------------------------------
                                                                                            90,538             74,083
Accumulated depreciation                                                                 (38,816)             (28,176)
----------------------------------------------------------------------------------------------------------------------
                                                                                    $       51,722      $      45,907
======================================================================================================================
4. LICENSES AND GOODWILL

December 31,
----------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                2001               2000
----------------------------------------------------------------------------------------------------------------------
Licenses                                                                            $      149,038     $      157,820
Goodwill                                                                                   156,915            133,794
----------------------------------------------------------------------------------------------------------------------
                                                                                           305,953            291,614
Accumulated amortization and impairment (1)                                               (124,722)          (124,923)
----------------------------------------------------------------------------------------------------------------------
                                                                                    $      181,231     $      166,691
======================================================================================================================

(1)      During 1997, the Company completed a major review of its laboratory
         operations and as a result of certain adverse changes in the clinical
         laboratory industry and its businesses, an impairment charge of $79.4
         million was recorded.

5. Other assets

December 31,
----------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                2001               2000
----------------------------------------------------------------------------------------------------------------------
Investments and property held for sale                                              $        6,773     $       19,305
Currency swap receivable                                                                    12,373              7,312
Amounts receivable                                                                           3,374              4,422
Deferred financing costs (1)                                                                 6,508              8,873
----------------------------------------------------------------------------------------------------------------------
                                                                                    $       29,028     $       39,912
======================================================================================================================
</TABLE>


(1)      Net of accumulated amortization of $7.5 million at December 31, 2001
         (2000 - $6.0 million).


                                      F-10
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. BANK INDEBTEDNESS

The Company has a $35.0 million revolving credit facility for working capital
purposes in the United States which can be drawn to a maximum amount of the
lesser of i) $35.0 million or ii) 80% of all eligible receivables plus 50% of
eligible inventory. The Company has pledged the accounts receivable and
inventory of the Company's U.S. wholly owned subsidiaries as collateral for this
facility. This facility matures on September 12, 2002, and bears interest at a
fluctuating rate per annum as follows: i) prime rate loans, at U.S. prime plus
the applicable margin in effect and ii) Euro loans, at adjusted Euro rate plus
the applicable Euro margin.

In Canada, the Company has revolving credit facilities for working capital
purposes totaling approximately Cdn$23.3 million ($14.6 million). Collateral for
these operating facilities consists of an assignment of certain accounts
receivable and inventory. Interest on these credit facilities varies between
Canadian prime rate and prime plus 2%.

For the year ended December 31, 2001, interest on the Company's operating loans
amounted to $0.3 million (2000 - $1.6 million, 1999 - $0.6 million).

7. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                   2001          2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>            <C>
$195 million (2000--$195 million) senior unsecured notes payable, interest at
  10.75% maturing in 2006 and other long-term debt with interest ranging from
  0% to 10.1% maturing through 2006                                                    $      204,076 $     208,200
Less: current portion                                                                          (2,265)       (5,913)
--------------------------------------------------------------------------------------------------------------------
                                                                                       $      201,811 $     202,287
====================================================================================================================
</TABLE>

The senior unsecured notes are redeemable in whole or in part at the option of
the Company on or after January 15, 2001, at a premium redemption price of
105.375% decreasing to par on January 15, 2004 and thereafter. The indenture
governing the senior unsecured notes contains certain restrictions including
restrictions on the payment of dividends and the incurrence of additional
indebtedness.

At December 31, 2001, long-term debt includes Canadian denominated debt totaling
Cdn$6.0 million ($3.7 million) (2000 - Cdn$6.8 million ($4.5 million)).

For the year ended December 31, 2001, interest on long-term debt amounted to
$20.1 million (2000 - $21.2 million, 1999 - $20.2 million). For the year ended
December 31, 2001, the average interest rate on bank indebtedness and long-term
debt including the effect of the interest rate swaps was 9.8% (2000 - 10.3%,
1999 - 10.4%).


                                      F-11
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The long-term debt at December 31, 2001, is repayable as follows:

(in thousands of U.S. dollars)
-------------------------------------------------------------------------------
2002                                                                 $  2,265
2003                                                                    2,723
2004                                                                    1,819
2005                                                                      425
2006                                                                  195,160
Thereafter                                                              1,684
-------------------------------------------------------------------------------
                                                                     $204,076
===============================================================================

8. FINANCIAL INSTRUMENTS

The Company does not hold or issue financial instruments for trading purposes. A
limited number of financial instruments are used to manage well-defined risks
associated with fluctuations in foreign currencies and to manage interest costs.
The Company's currency swap agreement effectively converts a portion of its U.S.
dollar denominated borrowings to Canadian dollars to match the Company's
Canadian dollar denominated assets and cash flows.

Under interest rate swaps, the Company agrees with its counterparty to exchange,
at specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed upon notional principal
amount. The amounts exchanged are based on the notional amounts, however, the
notional amounts do not represent the Company's exposure to credit or market
loss. The net effect of the swaps is to convert certain fixed rate liabilities
which mature in 2006 to fixed and variable rate liabilities.

The counterparty to the financial instruments is an international financial
institution. The Company has not obtained collateral or other security to
support the financial instruments. Although the Company is potentially exposed
to credit loss, it does not anticipate nonperformance by the counterparty given
its high credit rating.

On January 24, 1996, the Company entered into a currency and interest rate swap
agreement, with a ten-year term to January 15, 2006, whereby $85.0 million of
long-term debt was swapped into $116.5 million Canadian dollar denominated debt.

On February 29, 2000, Dynacare Inc. entered into cross currency and interest
rate swap agreements due January 15, 2006, whereby Dynacare Inc. has swapped
$85.5 million Canadian dollar denominated receivables due from certain of its
subsidiaries for $58.9 million. These same subsidiaries have swapped in
aggregate $85.5 million Canadian dollar denominated debt due to Dynacare Inc.
into $58.9 million.

As at December 31, 2001, the Company has entered into a number of interest rate
swaps. The net effect is to convert fixed rate debt, which mature in 2006 to
fixed and variable rate debt with maturity terms ranging from three months to
four years with a weighted average interest rate of 9.8% (2000 - 11.0%). At
maturity, both fixed and variable rate swaps are automatically renewable at the
option of the Company.


                                      F-12
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The only financial instrument that potentially subjects the Company to
concentrations of credit risk is accounts receivable. However, this credit risk
is reduced as a significant amount of accounts receivable are from hospitals
under long-term contracts in the United States and government agencies in
Canada. The Company does not foresee a credit risk associated with receivables
from hospitals in the United States and government agencies in Canada. The
Company believes that the allowance for doubtful accounts is adequate to provide
for normal credit losses with respect to its remaining accounts receivable.

The carrying amount of cash and cash equivalents, accounts receivable, other
amounts receivable, bank indebtedness, and accounts payable and accrued
liabilities are considered to be representative of their respective fair values.

The fair value of the borrowed funds is determined by recent market quotations
and by discounting the future contractual cash flows under current financing
arrangements, at discount rates which represent borrowing rates presently
available to the Company for loans with similar terms and remaining maturity,
less costs of settlement.

The fair value of interest rate and currency swaps is based on quoted market
prices from financial institutions for similar financial instruments.

At December 31, 2001, the estimated fair value for the long-term debt is $211.3
million (2000 - $197.1 million). The estimated fair value of favorable currency
and interest rate swaps at December 31, 2001, is $27.5 million (2000 - $12.6
million) and the estimated fair value of unfavorable currency and interest rate
swaps is $9.3 million (2000 - $5.3 million).

9. CAPITAL STOCK
<TABLE>
<CAPTION>
The Company's share capital is comprised as follows:
December 31,
------------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                    2001            2000
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>              <C>
Authorized
Unlimited number of common shares Issued and outstanding common shares:
  Common shares (2001- 19,278,977; 2000 - 16,883,914)                                          $122,855         $ 98,357
------------------------------------------------------------------------------------------------------------------------
                                                                                               $122,855         $ 98,357
========================================================================================================================
</TABLE>

On November 16, 2001, the Company completed a public offering of its common
shares. The Company issued 2,300,000 common shares for total proceeds of $25.3
million (before after tax costs of $1.4 million). In addition, as part of the
equity offering principal shareholders of the Company sold 2,300,000 common
shares for gross proceeds of $25.3 million.

On November 22, 2000, the Company completed an initial public offering of its
common shares. The Company issued 5,003,000 of common shares for total proceeds
of $50.0 million (before after tax costs of $3.6 million).


                                      F-13
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon the closing of the Company's initial public offering of its common shares,
the Company converted all of its outstanding classes of common shares (including
common shares issuable upon exercise of the Company's stock options) into a
single class of common shares on a one-for-one basis and completed a
0.6927-for-1 reverse stock split of all its outstanding common shares (including
common shares issuable upon exercise of the Company's stock options). As a
result of the conversion and reverse stock split, 8,636,790 Class B common
shares and 8,514,811 Class C common shares were exchanged into 11,880,914 common
shares of the Company. All prior years capital stock and stock option
information presented has been adjusted for the Company's special and common
share conversion and reverse stock split.

On September 28, 2000, all of the Company's outstanding special shares were
converted into Class B common shares and Class C common shares at a rate of
1.5504 Class B or C common shares for each special share. Additionally, on
September 28, 2000, the Company by the way of a Board of Directors resolution
increased its stated capital by $0.8 million on 666,720 Class B common shares.

Under executive and employee stock option plans, the Company may grant stock
options to its executives and employees for up to 2,909,340 common shares.

A summary of the status of the Company's stock option plans for common shares is
presented below:
<TABLE>
<CAPTION>
(i) Stock options for common shares - Executive Stock Option Plan
December 31,
------------------------------------------------------------------------------------------------------------------------
                                                      2001                     2000                     1999
------------------------------------------------------------------------------------------------------------------------
                                                          Weighted-               Weighted-                 Weighted-
                                                           average                 average                   average
                                               Stock       exercise     Stock      exercise     Stock       exercise
                                              options       price      options      price      options        price
------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>      <C>            <C>      <C>             <C>
Outstanding at
  beginning of year                            1,454,669 Cdn  $  9.38  1,454,669 Cdn  $  9.38  1,420,034  Cdn  $   9.31
Granted                                                -            -          -            -     34,635  Cdn  $  12.27
Exercised                                              -            -          -            -          -              -
Cancelled                                              -            -          -            -          -              -
------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                     1,454,669 Cdn  $  9.38  1,454,669 Cdn  $  9.38  1,454,699  Cdn  $   9.38
========================================================================================================================


------------------------------------------------------------------------------------------------------------------------
Stock options exercisable at year-end          1,454,699 Cdn  $  9.38  1,454,669 Cdn  $  9.38    581,868  Cdn  $   9.38
------------------------------------------------------------------------------------------------------------------------

Weighted-average fair value of stock
  options granted during the year                             $   Nil                 $   Nil             Cdn  $   2.01
------------------------------------------------------------------------------------------------------------------------
</TABLE>


The contractual remaining life of the stock options outstanding at December 31,
2001, is approximately five years.


                                      F-14
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(ii) Stock options for common shares - Employee Stock Option Plan
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------------------------
                                                2001                         2000                         1999
---------------------------------------------------------------------------------------------------------------------------
                                                     Weighted-                    Weighted-                    Weighted-
                                                      average                      average                      average
                                        Stock        exercise        Stock        exercise        Stock        exercise
                                       options         price        options         price        options         price
---------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>           <C>            <C>           <C>
Outstanding at
   beginning of year                     306,507   Cdn  $  11.02      393,107   Cdn $   10.91      304,788   Cdn $    9.31
Granted                                  631,400        $   9.89           -                -      102,173   Cdn $   15.49
Exercised                                (95,063)  Cdn  $   9.48           -                -           -                -
Cancelled                                (90,325)  Cdn  $  13.92      (86,600)  Cdn $   10.55      (13,854)  Cdn $    9.31
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year               752,519         (1)          306,507   Cdn $   11.02      393,107   Cdn $   10.91
===========================================================================================================================

---------------------------------------------------------------------------------------------------------------------------
Stock options exercisable at
year-end                                  89,880         (1)          145,114   Cdn $   10.18       81,739   Cdn $    9.31
---------------------------------------------------------------------------------------------------------------------------

Weighted-average fair value of stock
  options granted during the year                       $   9.89                    $     Nil                Cdn $    2.53
===========================================================================================================================
</TABLE>
(1)      Employee stock options outstanding and stock options exercisable as of
         December 31, 2001 have a weighted average exercise price of $9.34
         (Cdn$14.47) and $7.14 (Cdn$11.06), respectively.

The contractual remaining life of the stock options outstanding at December 31,
2001 is approximately four years for 118,973 stock options and approximately six
years for the balance of 633,546 stock options. The stock options vest as to 20%
each year on the anniversary date of the stock option grant.

10.  SEVERANCE, RELOCATION AND OTHER CHARGES

Upon the completion of the Company's initial public offering of its common
shares in November 2000, the Company recorded severance, relocation and other
charges of $6.7 million. These charges are as follows:

         Severance, lease termination and other costs of $1.9 million related to
         the relocation of the Company's corporate offices from Toronto, Canada
         to Dallas, Texas. As at December 31, 2001, and December 31, 2000, $1.4
         million and $0.3 million, respectively, of these costs were paid;

         Termination costs of $0.8 million to terminate an employment contract
         with a senior executive officer. As at December 31, 2000, $0.8 million
         of these costs were paid;

         Amounts paid of approximately $2.1 million to certain of the Company's
         senior executives to enable them to repay in full outstanding loans
         made to them by the Company and associated taxes which became due as a
         result. As at December 31, 2000, $2.1 million of these costs were paid;
         and

         Other non-cash restructuring charges of $1.9 million, which primarily
         includes termination of a services contract.


                                      F-15
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Severance, relocation and other charges of $0.2 million no longer considered
payable have been reflected in the Company's statement of operations for the
year ended December 31, 2001.

11.  INCOME TAXES

a) Deferred income tax expense for the year ended December 31, 2001 was reduced
by $3.0 million due to enacted tax rate reductions of 6% announced by the
Ontario provincial government on May 9, 2001. The tax rate reduction will be
phased in over the period of 2002 to 2005.

Deferred income tax expense for the year ended December 31, 2000 was reduced by
$6.1 million due to enacted tax rate reductions announced by the Canadian
federal and provincial governments in 2000. These tax rate reductions are being
phased in over the period of 2001 to 2005.

The income tax expense (benefit) for the years ended December 31, 2001, 2000 and
1999 reflect a $1.2 million, $2.5 million and $0.9 million, respectively,
reduction in the Company's valuation allowance thereby recognizing the benefit
of certain deferred tax assets. It is the Company's expectation that under its
current business strategy it will generate sufficient taxable income to fully
realize these tax benefits.

b) The provision for income taxes differs from the amount computed by applying
the Canadian corporate tax rates to income before income taxes. The reason for
this difference is as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)                                                      2001             2000           1999
--------------------------------------------------------------------------------------------------------------------------
Canadian corporate income tax rate                                               42.12%           43.95%           44.62%
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>             <C>             <C>
Provision for income taxes based on corporate income tax rate            $         6.2   $         1.0   $         4.7
Increase (decrease) in taxes resulting from:
Non-deductible licenses and goodwill amortization                                  0.2             0.2               -
Non-deductible expenses                                                            0.2             0.5             0.2
Loss (income) from U.S. sources taxed at lower tax rates                          (1.6)            0.7            (0.2)
Minimum corporate tax (not calculated on the basis of income)                      0.6             0.5             0.4
Reduction in valuation allowance                                                  (1.2)           (2.5)           (0.9)
Substantively enacted tax rate reductions                                         (3.0)           (6.1)              -
U.S. state income taxes, net of  U.S. federal benefit                              1.3             1.5             0.7
Other income tax items                                                             0.2             0.4               -
--------------------------------------------------------------------------------------------------------------------------
Provision for income tax expense (benefit) as recorded                   $         2.9   $       (3.8)   $         4.9
==========================================================================================================================
</TABLE>


                                      F-16
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

c) The principal items giving rise to the deferred portion of income tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                    2001           2000           1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>             <C>
Net operating loss carryforwards                                         $       1,057 $       (4,016  $      (5,472)
Deferred deductions                                                              2,103         (3,146)        (2,179)
Deferred financing and restricted interest
  carryforwards                                                                    452          2,725            741
Deferred earnings                                                               (1,835)         2,144          9,175
Licenses and goodwill                                                              328          1,058            134
Capital and other assets                                                         1,812          2,955            698
Substantively enacted tax rate reductions                                       (3,000)        (6,089)             -
---------------------------------------------------------------------------------------------------------------------
                                                                                   917         (4,369)         3,097
Reduction in valuation allowance                                                (1,178)        (2,464)          (915)
---------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit)                                             $        (261)$       (6,833) $       2,182
=====================================================================================================================

d) The geographical components of earnings (loss) before income taxes are
summarized below:

Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                    2001           2000          1999
--------------------------------------------------------------------------------------------------------------------

United States                                                            $      (1,052)$       (5,851)$       3,718
Canada                                                                          15,646          8,087         6,811
--------------------------------------------------------------------------------------------------------------------
                                                                         $      14,594 $        2,236 $      10,529
====================================================================================================================


e) The provision for income tax expense (benefit) is summarized as follows:

Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                    2001          2000           1999
--------------------------------------------------------------------------------------------------------------------
Current:
United States                                                            $       2,648 $       2,658  $       1,497
Canada                                                                             490           386          1,209
--------------------------------------------------------------------------------------------------------------------
                                                                                 3,138         3,044          2,706
--------------------------------------------------------------------------------------------------------------------
Deferred:
United States                                                                   (1,236)       (4,890)          (299)
Canada                                                                             975        (1,943)         2,481
--------------------------------------------------------------------------------------------------------------------
                                                                                  (261        (6,833)         2,182
--------------------------------------------------------------------------------------------------------------------
                                                                         $       2,877 $      (3,789) $       4,888
====================================================================================================================
</TABLE>


                                      F-17
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


f) The Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                     2001          2000         1999
--------------------------------------------------------------------------------------------------------------------
Current deferred tax assets:
<S>                                                                       <C>           <C>           <C>
Net operating loss carryforwards                                          $       7,931 $      11,427 $     13,417
Deferred deductions                                                               5,507         7,913        4,035
--------------------------------------------------------------------------------------------------------------------
                                                                                 13,438        19,340       17,452
--------------------------------------------------------------------------------------------------------------------
Non-current deferred tax assets:
Net operating loss carryforwards                                                  9,481         7,678        1,852
Unrealized foreign exchange losses                                                1,053           496            -
Deferred financing and restricted interest
  carryforwards                                                                   1,358         1,555        1,989
--------------------------------------------------------------------------------------------------------------------
                                                                                 11,892         9,729        3,841
--------------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                        25,330        29,069       21,293

Valuation allowance for deferred tax assets                                           -        (1,178      (3,642)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax assets                                                   $      25,330 $      27,891 $     17,651
====================================================================================================================

Current deferred tax liability:
Deferred earnings                                                         $      21,178 $      24,345 $     22,480
--------------------------------------------------------------------------------------------------------------------

Non-current deferred tax liabilities:
Licenses and goodwill                                                            25,487        29,691       35,120
Capital and other assets                                                          8,979         8,429        5,300
--------------------------------------------------------------------------------------------------------------------
                                                                                 34,466        38,120       40,420
--------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                            $      55,644 $      62,465 $     62,900
====================================================================================================================

Net current deferred tax liabilities                                      $       7,740 $       5,005 $      5,028
Net non-current deferred tax liabilities                                         22,574        29,569       40,221
--------------------------------------------------------------------------------------------------------------------
Total net deferred tax liabilities                                        $      30,314 $      34,574 $     45,249
====================================================================================================================
</TABLE>

g) At December 31, 2001, the Company had net operating losses available for
carryforward in the amount of $20.8 million and $27.0 million in the United
States and Canada, respectively (2000 - $9.1 million and $35.6 million) to
offset against taxable income in future years. These losses expire periodically
to 2008 and 2021 for Canada and the United States, respectively.

12. PENSION PLAN

The Company participates in a defined contribution 401(k) plan, which covers all
United States employees meeting certain eligibility requirements. The Company
matches employee contributions to the 401(k) plan at a rate of up to a 100% of
the first 2% of the employee's salary, subject to the Internal Revenue Service
annual contribution limits. In addition, the Company contributes an employer
profit sharing amount of 1% of the employee's salary as defined by the plan. For
the years ended December 31, 2001, 2000 and 1999, the Company's expense related
to the 401(k) plan totaled $2.2 million, $1.8 million and $1.2 million,
respectively.



                                      F-18
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, the Company participates in various group retirement savings plans
in Canada. Generally, the Company matches employee contributions to these plans
at a rate of up to 3% of the employee's salary. The Company's expense related to
these plans for the years ended December 31, 2001, 2000 and 1999 totaled $0.6
million, $0.5 million and $0.3 million, respectively.

13. RELATED PARTY TRANSACTIONS

For the years ended December 31, 2001, 2000 and 1999 consulting fees charged to
the Company by shareholders were $Nil, $0.6 million and $0.7 million,
respectively. These arrangements were terminated upon completion of the
Company's initial public offering in 2000.

14. COMMITMENTS

The Company is committed under existing operating leases at December 31, 2001,
to the following payments:

(in thousands of U.S. dollars)
---------------------------------------------------------------------------
2002                                                        $       14,329
2003                                                        $       11,436
2004                                                        $        8,899
2005                                                        $        7,415
2006                                                        $        5,721
Thereafter                                                  $       35,052

15. CONTINGENCIES

In January 2002, one of the Company's partnerships entered into a new lease,
which may result in the early termination of its existing lease. An estimate of
the lease termination cost, if any, is not currently determinable.

In 1995, the Company sold its retirement homes division. On the sale of one of
the retirement homes, the purchaser assumed two mortgages with a total balance
of $11.7 million at December 31, 2001, (2000 - $12.3 million). The Company has
not been formally discharged from the mortgages, however, the Company has been
indemnified by the purchaser and does not expect non-performance. The mortgages
bear interest at 10.0% per annum and are repayable in 2003 and 2004.

The Company is contingently liable with respect to litigation and claims which
arise from time to time. Litigation is subject to many uncertainties, and the
outcome of individual matters is not predictable. It is reasonably possible that
the final resolution of some of these matters may require the Company to make
expenditures in excess of estimates, over an extended period of time and in a
range of amounts that cannot be reasonably estimated at this time. However, in
the opinion of management, any liabilities that may arise from these
contingencies would not have a material adverse affect on the financial position
and results of operations of the Company.


                                      F-19
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. SEGMENTED INFORMATION

Management has determined that the Company operates in two geographic segments,
the provision of clinical laboratory services in the United States and Canada.
<TABLE>
<CAPTION>
As at and for the year ended December 31,
---------------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                                     2001
---------------------------------------------------------------------------------------------------------------------------
                                                                                          U.S.        Canada         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>           <C>
Revenues                                                                        $      297,334 $     105,025 $     402,359
Net earnings (loss)                                                             $       (2,464 $      14,181 $      11,717
---------------------------------------------------------------------------------------------------------------------------
Total assets                                                                    $      230,162 $     154,163 $     384,325
Capital assets and licenses and goodwill                                        $      145,332 $      87,621 $     232,953
Purchase of capital assets - net                                                $       10,255 $       2,118 $      12,373
---------------------------------------------------------------------------------------------------------------------------
Laboratory revenue by payor type:
  Canadian government agencies                                                  $            - $      94,293 $      94,293
  Long-term hospital contracts                                                  $       57,180 $           - $      57,180
  Community (non-hospital) and other                                            $      240,154 $      10,732 $     250,886
---------------------------------------------------------------------------------------------------------------------------


As at and for the years ended December 31,
---------------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                              2000                                     1999
---------------------------------------------------------------------------------------------------------------------------
                                                U.S.          Canada        Total         U.S.        Canada        Total
---------------------------------------------------------------------------------------------------------------------------
Revenues                                 $     250,747 $     102,172 $     352,919$     173,566 $      99,111 $    272,677
Net earnings (loss)                      $      (3,619 $       9,644 $       6,025$       2,519 $       3,122 $      5,641
---------------------------------------------------------------------------------------------------------------------------
Total assets                             $     214,476 $     134,500 $     348,976$     133,287 $     155,232 $    288,519
Capital assets and licenses and goodwill $     117,541 $      95,057 $     212,598$      75,448 $      98,522 $    173,970
Purchase of capital assets - net         $      12,302 $       2,463 $      14,765$       8,667 $       2,323 $     10,990
---------------------------------------------------------------------------------------------------------------------------
Laboratory revenue by payor type:
  Canadian government agencies           $           - $      90,405 $      90,405$           - $      87,645 $     87,645
  Long-term hospital contracts           $      52,232 $       1,863 $      54,095$      49,056 $       2,129 $     51,185
  Community (non-hospital) and
    other                                $     198,515 $       9,904 $     208,419$     124,510 $       9,337 $    133,847
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

17. Consolidated statements of cash flows

Supplementary disclosure required for the Company's consolidated statements of
cash flows is as follows:

Income taxes paid

For the year ended December 31, 2001, income taxes paid by the Company were $4.8
million (2000 - $4.2 million, 1999 - $3.2 million).

Interest payments

For the year ended December 31, 2001, interest paid by the Company was $21.9
million (2000 - $18.8 million, 1999 - $18.5 million).


                                      F-20
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations

The Company's total purchase price consideration for acquisitions made in 2001,
2000, and 1999 was $18.2 million, $40.9 million and $27.3 million, respectively.
The Company did not acquire cash in any of its acquisitions. The total purchase
price consideration was comprised of cash paid of $11.6 million (2000 - $38.5
million, 1999 - $20.8 million), promissory notes payable of $2.1 million (2000 -
$1.3 million, 1999 - $6.2 million), and the assumption of short-term liabilities
of $4.5 million (2000 - $1.1 million, 1999 - $0.3 million).

Capital assets

For the year ended December 31, 2001, capital assets were acquired at an
aggregate cost of $12.4 million (2000 - $14.8 million, 1999 - $11.0 million) of
which $0.6 million (2000 - $0.9 million, 1999 - $Nil) were financed by means of
capital leases.

Cash and cash equivalents
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                             2001             2000             1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>             <C>              <C>
Cash                                                              $      13,146   $        7,850   $        2,057
Short-term investments with initial maturities of three
  months or less at acquisition                                          16,856           10,249           14,270
--------------------------------------------------------------------------------------------------------------------
                                                                  $      30,002   $       18,099   $       16,327
====================================================================================================================


Change in non-cash working capital

Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                             2001             2000             1999
--------------------------------------------------------------------------------------------------------------------
Accounts receivable                                               $      (4,178)  $       (1,395)  $      (21,876)
Prepaid expenses                                                           (339)           2,897              (21)
Inventory                                                                (2,729)             273           (2,042)
Accounts payable and accrued liabilities                                    734            3,393            7,833
--------------------------------------------------------------------------------------------------------------------
                                                                  $      (6,512)  $        5,168   $      (16,106)
====================================================================================================================
</TABLE>


                                      F-21
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. Earnings per share

Earnings per share data was computed as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars,
except for share and per share amounts)                                          2001           2000           1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
Basic earnings per share
Net earnings                                                           $       11,717 $        6,025 $        5,641
--------------------------------------------------------------------------------------------------------------------
  Weighted average number of common shares outstanding
    during the year                                                        17,211,138     12,482,368     11,880,914
--------------------------------------------------------------------------------------------------------------------

Basic earnings per share                                               $         0.68 $         0.48 $         0.47
====================================================================================================================
Diluted earnings per share
Net earnings                                                           $       11,717 $        6,025 $        5,641
--------------------------------------------------------------------------------------------------------------------
  Weighted average number of common shares outstanding
    during the year                                                        17,211,138     12,482,368     11,880,914
  Stock options                                                               674,042        661,603        583,191
--------------------------------------------------------------------------------------------------------------------
                                                                           17,885,180     13,143,971     12,464,105
--------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                             $         0.66 $         0.46  $        0.45
====================================================================================================================
</TABLE>

19. MAJOR CUSTOMERS

The Company's laboratories in Canada are subject to certain regulatory controls
issued by the Ontario Ministry of Health and Long-Term Care and the Ministry of
Health and Wellness, Province of Alberta. Revenues received from government
agencies approximates 23% of total revenues for the year ended December 31, 2001
(26% in 2000). As at December 31, 2001 and 2000 approximately 16% and 17%,
respectively, of accounts receivable were due from these government agencies.

In the United States, the Company earns a portion of its revenues from U.S.
government agencies (Medicare/Medicaid). These revenues constituted
approximately 14% of total revenues for the year ended December 31, 2001 (13% in
2000). As at December 31, 2001 and 2000 approximately 21% and 18%, respectively,
of accounts receivable were due from the Medicare/Medicaid programs.

In arriving at net revenues, certain allowances and discounts are deducted
relating to the Company's reimbursement agreement with the Ontario government in
Canada and contractual allowances for certain payors in the United States. The
laboratory industry in Ontario is subject to an agreement with the provincial
government wherein each laboratory is allocated a fixed share of the overall
industry reimbursement each year. Factors can arise to cause an individual
laboratory to receive more than its pro rata share of reimbursement obligating
it to repay the Ontario government for such excess. An estimate of the excess is
withheld by the Ontario government from monthly payments made to the Company
with any residual amounts payable being settled subsequent to year end. In the
United States, payment arrangements for laboratory services performed for
certain payors include prospectively determined rates for service, discounted
charges, capitation and other arrangements.


                                      F-22
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The calculation of these allowances and discounts and the resultant reserve on
the balance sheet requires estimates and assumptions based on a number of
different factors including the Company's past experiences. Despite the use of
the Company's best estimates, it is reasonably possible that these amounts could
change based on experience and other factors. Allowances and discounts of $181.2
million, $138.1 million and $71.9 million for the years ended December 31, 2001,
2000 and 1999, respectively, have been deducted in arriving at net revenues.
Included in accounts receivable as at December 31, 2001, 2000 and 1999, are
allowances and discounts of $56.9 million, $50.2 million, and $26.6 million,
respectively.

The laws and regulations governing these programs are extremely complex and
subject to interpretation. As a result, there is at least a reasonable
possibility that recorded estimates could change by a material amount in the
near term.

20. JOINT VENTURES AND PARTNERSHIPS

The Company conducts certain of its businesses through incorporated and
unincorporated partnerships in which the Company has a 73% or less interest.
Condensed combined statements of financial position, statements of operations
and statements of cash flows based on the Company's proportionate interests in
these partnerships are presented below. Certain costs recorded at the corporate
level, have not been allocated to the operating results of the partnerships.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                           2001          2000          1999
-------------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>
Current assets                                 $       21,174 $      27,088 $      28,293
Other assets                                           99,082       116,229       106,916
-------------------------------------------------------------------------------------------
                                                      120,256       143,317       135,209
-------------------------------------------------------------------------------------------
Current liabilities                                    13,689        13,712        12,855
Long-term debt                                          2,384         2,883         2,939
-------------------------------------------------------------------------------------------
                                                       16,073        16,595        15,794
-------------------------------------------------------------------------------------------
Net investment in partnerships                 $      104,183 $     126,722 $     119,415
===========================================================================================


Years Ended December 31,
-------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                           2001          2000          1999
-------------------------------------------------------------------------------------------
Revenues                                       $      164,429 $     149,412 $     137,633
General and operating expenses                        127,416       113,660       100,833
Depreciation                                            3,894         3,262         3,108
Amortization of licenses and goodwill                   2,469         2,210         2,265
-------------------------------------------------------------------------------------------
Earnings before income taxes                   $       30,650 $      30,280 $      31,427
===========================================================================================

Cash provided by operating activities          $       30,962 $      35,689 $      33,678
-------------------------------------------------------------------------------------------
Cash used in investing activities              $       (2,482 $     (14,788 $      (2,858)
-------------------------------------------------------------------------------------------
Cash used in financing activities              $      (29,292 $     (23,944 $     (31,136)
-------------------------------------------------------------------------------------------
</TABLE>


                                      F-23
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21. DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

The effects on the Company's consolidated financial statements resulting from
the differences between Canadian and U.S. generally accepted accounting
principles ("GAAP") as described in 21(a) to 21(j) are presented in the
consolidated financial information that follows:

CONSOLIDATED BALANCE SHEETS (A) - U.S. GAAP

December 31,
------------------------------------------------------------------------------
(in thousands of U.S. dollars)                            2001           2000
------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents                     $         26,831 $       17,856
Accounts receivable                                     54,626         39,225
Prepaid expenses                                         2,294          1,844
Inventory                                                8,380          4,797
Deferred income taxes                                    5,059          5,956
------------------------------------------------------------------------------
Total current assets                                    97,190         69,678
------------------------------------------------------------------------------
Capital assets                                          41,641         30,899
Goodwill                                               103,521         76,989
Other assets                                            31,648         37,268
Equity investments                                     104,183        125,141
------------------------------------------------------------------------------
                                                       280,993        270,297
------------------------------------------------------------------------------
                                              $         378,183 $     339,975
==============================================================================
LIABILITIES
Current liabilities:
Accounts payable                              $          9,133  $       4,323
Accrued liabilities                                     26,995         28,346
Current portion of deferred income taxes                12,799         10,961
Current portion of long-term debt                        1,872          5,524
------------------------------------------------------------------------------
Total current liabilities                               50,799         49,154
Long-term debt                                         205,532        199,716
Deferred income taxes                                   21,485         34,534
------------------------------------------------------------------------------
                                                       277,816        283,404
------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock                                          126,173        101,514
Deficit                                                (30,531)       (47,785)
------------------------------------------------------------------------------
                                                        95,642         53,729
Accumulated other comprehensive earnings                 4,725          2,842
------------------------------------------------------------------------------
                                                       100,367         56,571
------------------------------------------------------------------------------
                                              $        378,183 $      339,975
==============================================================================


                                      F-24
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (A) - U.S. GAAP
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars, except for share and per share                2001            2000           1999
amounts)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>            <C>
Revenues                                                            $      237,929 $      203,922 $      134,581
Earnings from equity investments                                            30,676         29,565         30,364
-------------------------------------------------------------------------------------------------------------------
                                                                           268,605        233,487        164,945
-------------------------------------------------------------------------------------------------------------------
General and operating expenses                                             223,662        192,811        128,793
Depreciation                                                                 8,179          8,095          5,225
Amortization of goodwill                                                     2,645          2,337          1,728
Severance, relocation and other charges                                         -           6,750              -
-------------------------------------------------------------------------------------------------------------------
                                                                           234,486        209,993        135,746
-------------------------------------------------------------------------------------------------------------------
Operating earnings                                                          34,119         23,494         29,199
Interest expense                                                            19,920         22,124         18,949
-------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                                                14,199          1,370         10,250
-------------------------------------------------------------------------------------------------------------------
Income taxes expense (benefit):
  Current                                                                    3,138          3,030          2,701
  Deferred                                                                  (6,193)          (866)         2,159
-------------------------------------------------------------------------------------------------------------------
                                                                            (3,055          2,164          4,860
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                         17,254           (794)         5,390
Other comprehensive earnings, net of tax                                     1,883          1,516            327
-------------------------------------------------------------------------------------------------------------------
Comprehensive earnings                                              $       19,137 $          722 $        5,717
===================================================================================================================

Earnings (Loss) Per Share
-------------------------------------------------------------------------------------------------------------------
  Basic                                                             $         1.00  $      (0.06) $         0.45
===================================================================================================================
  Diluted                                                           $            0  $      (0.06) $         0.43
===================================================================================================================

Weighted average number of
  common shares outstanding-Basic                                      17,211,138      12,482,368     11,880,914
===================================================================================================================
Weighted average number of
  common shares outstanding-Diluted                                     17,885,180     13,143,971     12,464,105
===================================================================================================================
</TABLE>


                                      F-25
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows(a) - U.S. GAAP
<TABLE>
<CAPTION>
 Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                  2001           2000            1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings (loss)                                                   $       17,254  $        (794) $        5,390
Adjustments to reconcile net earnings (loss) to
  net cash provided by (used in) operating activities:
      Depreciation                                                             8,179          8,095           5,225
      Amortization of goodwill                                                 2,645          2,337           1,728
      Deferred income taxes                                                   (6,193)          (866)          2,159
      Severance, relocation and other charges                                     -           3,021               -
      Equity earnings (net of distributions to
        partners)                                                             (2,021)         4,418          (6,150)
      Gain on sale of capital assets                                               -           (110)            (11)
      Stock compensation                                                         161            660               -
      Change in assets and liabilities, net of effects of
acquisitions:
        Accounts receivable                                                   (1,385)        (3,037)        (18,129)
        Prepaid expenses                                                        (239)         2,700            (216)
        Inventory                                                             (2,119)           225          (1,198)
       Accounts payable and accrued liabilities                               (2,371)         3,324           4,756
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                           13,911         19,973          (6,446)
---------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Decrease (increase) in equity investments                                      3,450         (3,901)            135
Acquisition of businesses                                                    (14,486)       (37,681)        (20,005)
Purchase of capital assets                                                    (7,158)        (7,745)         (8,234)
Proceeds from sale of capital assets                                               -            132              38
Increase in other assets                                                      (4,175)        (7,670)         (6,420)
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                        (22,369)       (56,865)        (34,486)
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-26
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                               2001              2000              1999
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Cash flow from financing activities
Decrease in bank indebtedness                                                   -            (6,679)           (1,768)
Proceeds from long-term debt                                                  778             4,738            69,156
Repayment of long-term debt                                                (4,792)           (5,806)          (16,841)
Issue of capital stock - net proceeds                                      24,498            46,433                 -
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                  20,484            38,686            50,547
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
Foreign exchange translation adjustments                                   (3,051)            2,435             2,716
-----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash
  equivalents during the year                                               8,975             4,229            12,331
Cash and cash equivalents, beginning of year                               17,856            13,627             1,296
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                              $      26,831     $      17,856    $       13,627
=======================================================================================================================


SUPPLEMENTAL DISCLOSURE REQUIRED UNDER U.S. GAAP:
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                               2001              2000              1999
-----------------------------------------------------------------------------------------------------------------------
Rental expense                                                      $       6,273     $       5,044    $        3,172
=======================================================================================================================

The effects on the Company's consolidated earnings (loss) from operations
resulting from the differences between Canadian and U.S. GAAP are as follows:

Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                               2001              2000               1999
-------------------------------------------------------------------------------------------------------------------------
Net earnings based on Canadian GAAP                                $       11,717    $        6,025     $        5,641
  Earnings from equity investments (c)                                       (234)             (250)              (250)
  Stock compensation (f)                                                     (161)             (660)                 -
  Change in reporting currency (g)                                              -                60                (17)
  Income taxes (i)                                                          5,932            (5,969)                16
-------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) based on U.S. GAAP                                     17,254              (794)             5,390
Adjustment to reconcile to comprehensive earnings:
Foreign currency translation adjustment                                     1,883             1,516                327
-------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings based on U.S. GAAP                          $       19,137    $          722      $       5,717
=========================================================================================================================
</TABLE>


                                      F-27
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's cumulative effect of these adjustments on the consolidated
shareholders' equity of the Company is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars)                                                    2001          2000           1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>           <C>
Shareholders' equity based on Canadian GAAP                             $       92,285 $      55,251 $        1,646
Amortization of licenses and goodwill (b)                                       (6,980)       (6,980)        (6,980)
Earnings from equity investments (c)                                            (2,832)       (2,592)        (2,342)
Write-down in equity investments (d)                                            (4,357)       (4,357)        (4,357)
Stock compensation (f)                                                            (821)         (660)             -
Start-up costs and capitalized interest (h)                                     (1,661)       (1,661)        (1,661)
Foreign currency translation                                                     2,582         1,357            267
Income taxes (i)                                                                22,151        16,213         22,182
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity based on U.S. GAAP                                 $      100,367 $      56,571  $       8,755
====================================================================================================================
</TABLE>

The significant differences between Canadian GAAP and the principles prescribed
by U.S. GAAP and U.S. securities regulations and the impact on the consolidated
financial statements are described as follows:

(a) Equity method of accounting for joint ventures and partnerships

APB Opinion 18 and Statement of Position 78-9 generally require that investments
in corporate and unincorporated joint ventures and partnerships are to be
accounted for by the equity method. Under Canadian GAAP, investments in joint
ventures and partnerships are accounted for by the proportionate consolidation
method, as the use of the equity method is not permitted. The use of the
proportionate consolidation method as compared to the equity method of
accounting from a financial presentation perspective impacts almost all areas of
the Company's consolidated balance sheets, statements of the operations and
comprehensive earnings, and cash flow statements and as a result this financial
information has been presented in its entirety. The proportionate consolidation
and equity method of accounting do not impact the Company's consolidated
shareholders' equity or net earnings (loss) for the years presented.

(b) Amortization of licenses and goodwill

Prior to December 31, 1990, the Company did not amortize certain components of
licenses and goodwill on the basis that they were considered to have an
indefinite life. Commencing January 1, 1991, the Company began amortizing the
cost of licenses and goodwill on a straight-line basis primarily over 40 years
to comply with the pronouncement of the Canadian Institute of Chartered
Accountants requiring the amortization of intangible assets. Licenses in Ontario
are required to perform specific tests and receive reimbursement for these
tests. U.S. GAAP requires the cost of intangible assets to be amortized from the
date of acquisition over a period not exceeding 40 years.

(c) Earnings from equity investments

Under the equity method of accounting, the Company's ownership interest in
certain licenses and goodwill has been reclassified and appropriately accounted
for in the equity investments account. The additional amortization of these
licenses and goodwill has been reflected in the earnings from equity
investments.


                                      F-28
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The differences in the book value and amortization of licenses and goodwill
arose from the 1997 licenses and goodwill impairment charge, which under
Canadian and U.S. GAAP totaled $79.4 million and $69.1 million, respectively. In
addition, under U.S. GAAP, licenses and goodwill accounted for through the
equity investments have been amortized since the date of acquisition, whereas
under Canadian GAAP there was no amortization prior to 1991.

(d) Write-down in equity investments

The write-down in equity investments for U.S. GAAP purposes arises as the
write-down in certain of the Company's licenses and goodwill are accounted for
through the equity investments account, whereas for Canadian GAAP purposes they
have been proportionately consolidated.

U.S. to Canadian GAAP differences in the write-down of equity investments of
$4.4 million arose due to the following: (i) under U.S. GAAP, licenses and
goodwill accounted for through the equity investments account have been
amortized since the date of acquisition, whereas under Canadian GAAP there was
no amortization prior to 1990; and (ii) different methods were used in the
calculation of the cash flows to determine the fair value of the licenses and
goodwill held through equity investments. The calculation of the licenses and
goodwill impairment under U.S. GAAP does not include an allocation of interest
expense but is based upon a discounted cash flow. Under Canadian GAAP, the cash
flow is undiscounted and includes an allocation of interest.

(e) Business Acquisitions (unaudited)

For U.S. GAAP purposes, "APB Opinion 16 - Business Combinations" requires
supplemental pro forma information on business acquisitions made during the
years ended December 31, 2001 and 2000 to be disclosed as part of the notes to
the acquiror's consolidated financial statements. The pro forma information
shown below includes revenues and net earnings prepared both on a U.S. and
Canadian GAAP basis.

The unaudited pro forma results of operations of the Company for the years ended
December 31, 2001 and 2000 assuming that the Company's acquisitions made during
2001, had been consummated as of January 1, 2000 is as follows:

CANADIAN GAAP
Years Ended December 31,
---------------------------------------------------------------------------
(in thousands of U.S. dollars)                    2001               2000
---------------------------------------------------------------------------
Revenues                                $      424,429    $       394,839
---------------------------------------------------------------------------
Net earnings                            $        7,689    $         5,952
---------------------------------------------------------------------------

U.S. GAAP
Years Ended December 31,
---------------------------------------------------------------------------
(in thousands of U.S. dollars)                    2001               2000
---------------------------------------------------------------------------
Revenues                                $      314,209    $       297,122
---------------------------------------------------------------------------
Net earnings                            $       13,226    $          (867)
---------------------------------------------------------------------------


                                      F-29
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Results of operations of the Company's acquisitions for 2001 and 2000 have been
included in the statement of operations and comprehensive earnings from the
respective dates of acquisition.

(f) Stock compensation

At December 31, 2001, the Company had two stock option plans, which are
described below and in Note 9. For U.S. GAAP requirements, the Company applies
APB Opinion 25 and related Interpretations, Accounting for Stock Issued to
Employees, in accounting for its plans and follows the disclosure requirements
as set out by Statement of Financial Accounting Standards - No. 123, Accounting
for Stock-Based Compensation (FASB 123). For the year ended December 31, 2001,
under APB Opinion 25, the compensation cost charged to earnings was $0.2 million
(2000 - $0.7 million, 1999 - $Nil).

If the compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the dates the awards were granted
under those plans consistent with the method of FASB 123, the pro forma net
earnings (loss) under U.S. GAAP would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars, except per share amounts)                               2001        2000        1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>
Pro forma net earnings (loss)                                                 $      15,815 $     (461)  $    5,054
--------------------------------------------------------------------------------------------------------------------
Pro forma earnings (loss) per share                                           $        0.92 $    (0.04)  $     0.43
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Beginning on November 22, 2000, which is the date the Company completed an
initial public offering of its common shares, the fair value of each option
grant of common shares for all options is estimated using an option-pricing
model for public companies with the following assumptions for the period
November 17, 2000 (initial market trade date) to December 31, 2000; dividend
yield of Nil%, risk-free interest rate range of 4.73% to 5.93% and expected life
of five years. Using the same stock option pricing model, the following
assumptions were used by the Company for the year ended December 31, 2001:
dividend yield of Nil%, risk-free interest rate range of 1.73% to 5.02% and
expected life of five years and volatility factor of 0.90. Prior to the
Company's initial public offering of its common shares the fair value of each
option grant of common shares for all options was estimated on the date of the
option grant using an option-pricing model for non-public companies with the
following assumptions: dividend yield of Nil%, risk-free interest rate range of
4.76% to 5.07% and expected life of five years.

(g) Foreign Currency Translation

Effective July 1, 2000, the Company adopted the U.S. dollar as its reporting
currency. Prior to this change the Canadian dollar had been used as the
Company's reporting currency. Under Canadian GAAP, the Company's financial
statements for all periods presented through June 30, 2000, have been translated
from Canadian dollars to U.S. dollars using the exchange rate in effect at July
1, 2000. Under U.S GAAP, the financial statements for periods prior to the
change in reporting currency must be translated to U.S. dollars using the
current rate method, which uses year end or annual average exchange rates as
appropriate.


                                      F-30
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(h) Start-up Costs and Capitalized Interest

The Company's policy has been to capitalize certain carrying costs, including
interest, on real estate properties under development until the property became
operational, which was deemed to be the earlier of when break-even cash flow was
achieved and a reasonable time period after substantial completion, not to
exceed 30 months. U.S. GAAP requires that interest costs incurred on real estate
properties be capitalized, but only during the year in which the asset is being
readied for its intended use. The Company's real estate retirement properties
were disposed in 1995.

(i) Income taxes

Effective January 1, 2000, the Company adopted CICA - 3465, which is
substantially similar with the Statement of Financial Accounting Standards - No.
109, Accounting for Income Taxes in the United States. CICA - 3465 and FASB 109
require the liability method of tax allocation for accounting for income taxes.
Under the liability method of tax allocation, deferred tax assets and
liabilities are recognized based on the temporary differences between the
accounting and tax bases of assets and liabilities. Changes in income tax rates
under CICA - 3465 are recorded when the tax rates have been substantially
enacted. Under U.S. GAAP, changes in income tax rates are recorded when the
change in income tax rates have been legislated. As of December 31, 2001, all of
the tax rate reductions previously announced by the federal and provincial
governments have been legislated.

(j) Accounting Pronouncements

(i) Financial Instruments

Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (FASB 133), requires companies to
recognize all of its derivative instruments as either assets or liabilities in
the statement of financial position at fair value. FASB 133 is effective for the
Company on January 1, 2001. The accounting for changes in fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and further, on the
type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
The Company's cross currency and interest rate swap derivative instruments are
designated as fair value hedges. The fair value of the Company's cross currency
and interest rate swap derivative instruments under U.S. GAAP has resulted in an
increase in the Company's hedge asset and a corresponding increase in its $195
million senior notes of $6.1 million (2000 - $0.3 million).

Under U.S. GAAP, for derivative instruments that are designated and qualify as a
fair value hedge (i.e., hedging the exposure to changes in the fair value of an
asset or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the year of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk),


                                      F-31
<PAGE>

DYNACARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified into
earnings in the same year or years during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess of
the cumulative change in the present value of future cash flows of the hedged
item, if any, is recognized in current earnings during the year of change. For
derivative instruments that are designated and qualify as a hedge of a net
investment in a foreign currency, the gain or loss is reported in other
comprehensive income as part of the cumulative translation adjustment to the
extent it is effective. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the year
of change. Canadian GAAP does not provide for other comprehensive income.

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 - Business Combinations (FASB 141), and
No. 142 - Goodwill and Other Intangible Assets (FASB 142), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have an indefinite life will no longer be amortized
but will be subject to annual impairment tests in accordance with FASB 141 and
FASB 142. Other intangible assets will continue to be amortized over their
useful life. FASB 141 and FASB 142 are consistent with the new accounting
pronouncements introduced under Canadian generally accepted accounting
principles.

It is estimated that the Company's net earnings for the year ended December 31,
2001 would have increased by approximately $4.0 million, or $0.22 per diluted
share, if goodwill and intangible assets deemed to have an indefinite life were
not amortized during the year ended December 31, 2001.

The Company will perform the required impairment tests of goodwill and
intangible assets with an indefinite life effective as of January 1, 2002, and
has not yet determined what the impact that the results of the review may have
on its net earnings and financial position.

(ii) Impairment or Disposal of Long-Lived Assets

In August 2001, the Financial Accounting Standards Board issued Standard No. 144
- Accounting for the Impairment or Disposal of Long-Lived Assets (FASB 144)
effective for fiscal years beginning after December 15, 2001. FASB 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement supersedes FASB
121-Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. FASB 144 retains the fundamental provisions of FASB 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. The Company has not yet determined what the effect of FASB 144 will be on
its net earnings and financial position.

(iii) Stock Compensation

The Canadian Institute of Chartered Accountants has recently released CICA -
3870 - Stock-Based Compensation and Other Stock-Based Payments. This standard is
effective for the fiscal year beginning January 1, 2002 and is similar to U.S.
accounting requirements, APB Opinion 25 and FASB 123. Following the adoption by
the Company of CICA 3870, the Company does not expect any U.S. to Canadian GAAP
differences related to stock compensation.

22. COMPARATIVE FIGURES.

For the years ended December 31, 2001, 2000 and 1999, certain taxes of $1.6
million, $1.3 million and $1.2 million have been reclassified from general and
operating expenses and reflected as part of income tax expense as these taxes
are based on earnings.


                                      F-32
<PAGE>

                                  DYNACARE INC.

                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                            Balance at        Charged to costs                         Balance at
Description                              beginning of year      and expenses         Credits          end of year
---------------------------------------  ------------------   -----------------  -----------------  -----------------
<S>                                      <C>                  <C>                <C>                <C>
Year ended December 31, 1999:
Fee reduction reserve and allowance
   for doubtful accounts............     $    (5,201,037)     $   (17,241,132)   $    14,856,378    $    (7,585,791)

Deferred income tax asset valuation
   allowance........................     $    (4,556,984)     $             -    $       914,848    $    (3,642,136)

Year ended December 31, 2000:
Fee reduction reserve and allowance
   for doubtful accounts............     $    (7,585,791)     $   (30,529,832)   $    21,349,431    $   (16,766,192)

Deferred income tax asset valuation
   allowance........................     $    (3,642,136)     $             -    $     2,463,710    $    (1,178,426)

Year ended December 31, 2001:
Fee reduction reserve and allowance
   for doubtful accounts............     $   (16,766,192)     $   (34,237,423)   $    36,626,269    $   (14,377,346)

Deferred income tax asset valuation
   allowance........................     $    (1,178,426)     $             -    $     1,178,426    $            -
</TABLE>


                                      F-33
<PAGE>

                                  DYNACARE INC.
                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No                         Description                                   Page
----------                         -----------                                   ----
<S>      <C>
3.1(a)   Articles of Incorporation of the Registrant as amended, filed as
         Exhibit 3.1(a) to the Registrant's Registration Statement on Form F-1
         (Registration No. 333-12650), and incorporated herein by reference.

3.1(b)   Articles of Amalgamation, filed as Exhibit 3.1(b) to the Registrant's
         Registration Statement on Form S-1 (Registration No. 333-72338), and
         incorporated herein by reference.

3.2(a)   By-laws No. 1 and 2 of the Registrant dated January 30, 1998, filed as
         Exhibit 3.2(a) to the Registrant's Registration Statement on Form F-1
         (Registration No. 333-12650), and incorporated herein by reference.

3.2(b)   By-law No. 3 of the Registrant dated November 22, 2000, filed as
         Exhibit 3.2(b) to the Registrant's Annual Report on Form 10-K (File No.
         33-80127), and incorporated herein by reference.

4.1      Indenture, dated as of January 24, 1996, between the Registrant and The
         Chase Manhattan Bank, as Trustee, filed as Exhibit 4.1 to the
         Registrant's Registration Statement on Form F-1 (Registration No.
         333-12650), and incorporated herein by reference.

4.2      First Supplemental Indenture, dated as of February 3, 1999, between the
         Registrant and The Chase Manhattan Bank, as Trustee, filed as Exhibit
         4.2 to the Registrant's Registration Statement on Form F-1
         (Registration No. 333-12650), and incorporated herein by reference.

4.3      Form of Common Share Certificate, filed as Exhibit 4.3 to the
         Registrant's Registration Statement on Form F-1 (Registration No.
         333-12650), and incorporated herein by reference.

4.4      Registration Rights Agreement dated March 4, 1997, by and among
         Dynacare Inc., Golder, Thoma, Cressey, Rauner Fund V LP, Albert J.
         Latner, MELCO Holdings Corp., SDLCO Holdings Ltd., EPLCO Holdings Ltd.,
         EPLCO Realty Group Ltd., JILCO Holdings Ltd. and AJLCO Realty Limited,
         filed as Exhibit 4.4 to the Registrant's Registration Statement on Form
         F-1 (Registration No. 333-12650), and incorporated herein by reference.

4.5      Amendment No. 1 to the Registration Rights Agreement referred to in
         Exhibit 4.4 above, filed as Exhibit 4.5 to the Registrant's Annual
         Report on Form 10-K (File No. 33-80127), and incorporated herein by
         reference.

4.6      Registration Rights Amending Agreement dated December 23, 2000 by and
         among Golder, Thoma, Cressey, Rauner V, L.P. and GTCR Associates V,
         Albert J. Latner, AJLCO Realty Limited, Ditlent Holdings SPRL, SDLCO
         Holdings Ltd., Arfall Holdings SPRL, SPLCO Holdings Ltd., Asteroid
         Holdings SPRL, EPLCO Realty Group Ltd., MELCO Holdings Corp., Mooster
         Holdings SPRL, JILCO Holdings Ltd., Kakao Holdings SPRL and Joshua
         Latner, filed as Exhibit 4.6 to the Registrant's Registration Statement
         on Form S-1 (Registration No. 333-72338), and incorporated herein by
         reference.

10.1     Amended and Restated Employee Stock Option Plan, filed as Exhibit 4.5
         to the Registrant's Registration Statement on Form S-8 (Registration
         No. 333-61834), and incorporated herein by reference.

10.2     Amended and Restated Stock Option Incentive Plan, filed as Exhibit 4.4
         to the Registrant's Registration Statement on Form S-8 (Registration
         No. 333-61834), and incorporated herein by reference.


<PAGE>
Exhibit No                         Description                                   Page
----------                         -----------                                   ----

10.3     Amended and Restated Agreement between Dynacare Inc. and Albert J.
         Latner, filed as Exhibit 10.3 to the Registrant's Registration
         Statement on Form S-1 (Registration No. 333-72338), and incorporated
         herein by reference.

10.4     Amended and Restated Employment Agreement of Harvey A. Shapiro, filed
         as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K (File
         No. 33-80127), and incorporated herein by reference.

10.5     Amended and Restated Employment Agreement of Osama I. Sherif, filed as
         Exhibit 10.5 to the Registrant's Annual Report on Form 10-K (File No.
         33-80127), and incorporated herein by reference.

10.6     Amended and Restated Employment Agreement of Zbig S. Biskup, filed as
         Exhibit 10.6 to the Registrant's Annual Report on Form 10-K (File No.
         33-80127), and incorporated herein by reference.

10.7     Termination Agreement of Michael Latner, filed as Exhibit 10.7 to the
         Registrant's Annual Report on Form 10-K (File No. 33-80127), and
         incorporated herein by reference.

10.8     Lease Agreement between AEW/Midway Industrial, L.P. and J.J./DL, L.P.,
         a Texas limited partnership dated March 14, 2000, filed as Exhibit 10.8
         to the Registrant's Registration Statement on Form F-1 (Registration
         No. 333-12650), and incorporated herein by reference.

10.9     Lease Agreement between FH Healthcare Development, Inc. and
         United/Dynacare LLC dated July 22, 1999, filed as Exhibit 10.9 to the
         Registrant's Registration Statement on Form F-1 (Registration No.
         333-12650), and incorporated herein by reference.

10.10    Lease Agreement between Wright Runstad Properties L.P., and Dynacare
         Inc. dated January 11, 1995, filed as Exhibit 10.10 to the Registrant's
         Registration Statement on Form F-1 (Registration No. 333-12650), and
         incorporated herein by reference.

10.11    ISDA Master Agreement between Citibank Canada, Dynacare Inc. and
         Dynacare Northwest Inc. dated February 29, 2000, filed as Exhibit 10.11
         to the Registrant's Registration Statement on Form S-1 (Registration
         No. 333-72338), and incorporated herein by reference.

10.12    Canadian Revolving Working Capital Facility, Letter Agreement between
         The Toronto-Dominion Bank and The Dynacare Health Group Inc. dated
         September 26, 2001 and Letter Agreement between The Toronto-Dominion
         Bank and Dynacare Gamma Laboratory Partnership dated September 26,
         2001, filed as Exhibit 10.12 to the Registrant's Registration Statement
         on Form S-1 (Registration No. 333-72338), and incorporated herein by
         reference.

10.13    Credit Agreement dated as of September 12, 2000 among Dynacare
         Laboratories Inc., the lending institutions party thereto and Keybank
         National Association, filed as Exhibit 10.13 to the Registrant's
         Registration Statement on Form F-1 (Registration No. 333-12650), and
         incorporated herein by reference.

10.14    Amalgamation Agreement among Sdlcodyn Inc., Eplcodyn Holdings Inc.,
         Eplcodyn Realty Inc., Melcodyn Inc. and Jilcodyn Holdings Inc. and
         Dynacare Inc., filed as Exhibit 10.14 to the Registrant's Annual Report
         on Form 10-K (File No. 33-80127), and incorporated herein by reference.

10.15    Indemnity Agreement among Albert J. Latner, certain parties related to
         him, Dynacare Inc., Golder, Thoma, Cressey, Rauner Fund V L.P. and
         Golder, Thoma, Cressey, Rauner V, filed as Exhibit 10.15 to the
         Registrant's Annual Report on Form 10-K (File No. 33-80127), and
         incorporated herein by reference.

21.1     List of Subsidiaries..................................................         E-2

23       Consent of Independent Public Accountants.............................         E-3
</TABLE>


                                      E-1