<PAGE>   1


                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

   
                                   FORM 10-K/A

                                 Amendment No. 2

    (Amending Part II - Item 7, Part IV - Item 14 and Financial Statements)
    


 [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

              For the Fiscal Year ended:  June 30, 1997

              OR

 [ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

              For the transition period from:
                                             ----------

                           Commission File No. 0-26288

                              CONTOUR MEDICAL, INC.
              -----------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

            NEVADA                                        77-0163521
-------------------------------                    ------------------------
(State or Other Jurisdiction of                    (I.R.S. Employer Identi-
Incorporation or Organization)                         fication Number)

                   6025 Shiloh Road, Alpharetta, Georgia 30005
           -----------------------------------------------------------
          (Address of Principal Executive Offices, Including Zip Code)

Registrant's telephone number, including area code:  (770) 886-2600

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:  Common Stock,
                                                            $.001 Par Value

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 [ ]

As of October 3, 1997, 8,215,543 shares of common stock were outstanding. The
aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $20,245,000.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of 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. [ ]



<PAGE>   2
   
                                    PART II
    

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

RESULTS OF OPERATIONS

     The following table sets forth certain operating data as a percentage of
sales for the periods indicated:

   
<TABLE>
<CAPTION>
                                    SIX MONTHS ENDED
                     YEARS ENDED              DECEM-    YEARS ENDED
                      JUNE 30,      JUNE 30,  BER 31,   DECEMBER 31,
                   ---------------   ------   ------   ---------------
                    1997     1996     1995     1994     1994     1993
                   ------   ------   ------   ------   ------   ------
<S>                <C>      <C>      <C>      <C>      <C>      <C>
Sales              100.0%   100.0%   100.0%   100.0%   100.0%   100.0%
Cost of Sales       74.4%    72.1%    72.0%    64.5%    64.5%    57.0%
Gross Profit        25.6%    27.9%    28.0%    35.5%    35.5%    43.0%
Operating Expenses  24.3%    23.1%    20.7%    39.2%    40.1%    44.9%
Other Income
  (Expense)         (2.0%)
Net Income (Loss)
 Before Income
  Taxes (Benefit)   (0.7%)    5.8%     7.3%    (6.0%)  (13.4%)   (3.5%)
Income Taxes
 (Benefit)          (0.2%)    2.1%     2.5%       --       --    (1.4%)
Net Income (Loss)   (0.5%)    3.6%     4.8%    (6.0%)  (13.4%)   (2.0%)
</TABLE>
    

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

     As a result of the factors discussed below, for the year ended June 30,
1997, the Company had a net loss of $259,644 compared to a net profit of
$527,034 for the year ended June 30, 1996.

     Sales increased by $38,900,848 for the year ended June 30, 1997 as compared
to the year ended June 30, 1996. Approximately $8,848,000 of the increase
resulted from sales of bulk medical supplies by AmeriDyne and approximately
$26,757,000 from sales of bulk medical supplies by Atlantic. Approximately
$2,392,000 of the increase resulted from the sales of bulk medical supplies to
the Company's majority shareholder. The balance of the increase, or
approximately $903,000, resulted from sales of the Company's manufactured
products.

     Gross profit for the year ended June 30, 1997, was $13,667,978 or 25.6% of
sales, as compared to $4,051,318 or 27.9% of sales, for the year ended June 30,
1996. The decrease in gross profit as a percentage of sales is primarily the
result of lower gross profit margins typically earned on the distribution of
bulk medical supplies as compared to the gross profit margins historically
earned by the Company's manufacturing enterprise.

     Operating expenses for the year ended June 30, 1997, were $12,973,675 as
compared to $3,185,620 for the year ended June 30, 1996. The operating expenses
increased approximately 407% as the result of the acquisitions, although as a
percent of sales the increase represented a 2.4% increase. The increase of
$9,788,056 in operating expenses is directly related to the increase of
$38,901,000 in revenues. The largest components of operating expenses are
indirect labor (including sales salaries and commissions), occupancy expense,
depreciation and amortization, and insurance. In particular, prior to the
acquisitions of AmeriDyne and Atlantic, the Company did not have a direct sales
force and therefore incurred minimal selling expenses as a percentage of sales.
Selling expenses as a percentage of sales now represents approximately 5% of
total sales.

     Indirect labor, including sales salaries and commissions increased by
$4,541,291 compared to the same period last year, to approximately $5,792,383.
Occupancy expense, depreciation and amortization and insurance costs increased
by $2,009,873 compared to the same period last year, to approximately
$3,071,917.

                                      -2-



<PAGE>   3
    
     Other income and expenses are made up of interest expense, debts recovered
that were previously written off, service charge income, and gains and losses on
the disposition of assets. Interest expense for the year ended June 30, 1997 was
$1,295,557 compared to $170,951 for the same period last year. Interest expense
has increased primarily as a result of (1) the $5,000,000 convertible debentures
issued on July 12, 1997, bearing interest at 9% per annum; (2) the Atlantic and
Facility Notes issued for the purchase of Atlantic and Facility Supply, Inc.;
and (3) the increased usage of the Company's line of credit supporting sales
growth throughout the year. Other income includes $90,672 of service charge
income, $18,879 of debts recovered that were previously written off, and the
remaining amount relates to miscellaneous revenues received during the year.
Other expense includes approximately $35,000 of losses associated with the
disposition of assets and the remaining amount relates to miscellaneous
expenses incurred during the fiscal year.
    

     Gains from the sale of assets for the year ended June 30, 1997 were
approximately $600,000 compared to no such gains for the prior year. These gains
resulted from the sale of the Company's manufacturing assets.

     The Company also incurred an expense of $500,000 in financing costs
associated with the guarantee fee paid to the Company's Parent for its guarantee
of the Atlantic and Facility Notes.

   
     As a result of the acquisition of Atlantic, Contour acquired Medicare and
trade receivables totaling more than $1.8 million that were deemed to be
uncollectible.  The entire amount of these receivables was reserved at the date
of the acquisition.  The remaining reserve for uncollectible accounts represents
approximately 16% of trade receivables.
    

YEAR ENDED JUNE 30, 1996 COMPARED TO THE TWELVE MONTHS ENDED JUNE 30, 1995

     As a result of the factors discussed below, the Company had net income of
$527,034 for the year ended June 30, 1996, as compared to a net loss of $9,997
for the twelve months ended June 30, 1995.

     Sales for the year ended June 30, 1996 increased to $14,542,421 as compared
to $5,585,004 for the twelve months ended June 30, 1995, due to growth in sales
volume of the existing product lines and the addition of the Company's new
product line, bulk medical supplies. Approximately $4,844,000 of the sales
increase is attributable to sales of bulk medical supplies and prepacked kits to
nursing homes managed or operated by the Company's majority shareholder; the
AmeriDyne acquisition on March 1, 1996, resulted in additional sales of bulk
medical supplies of approximately $3,617,000. The balance of the sales increase,
or approximately $496,000, resulted from increased sales of manufactured foam
products and polyethylene bags.

     Gross profit for the year ended June 30, 1996, was $4,051,318 or 27.8% of
sales as compared to $1,739,553 or 31.1% of sales for the twelve months ended
June 30, 1995. The gross profit percentage decreased in 1996 as compared to the
comparable period in 1995 because the sales mix for 1996 was substantially
higher in bulk medical supplies, which have a lower gross profit than the
manufactured products. Approximately $980,000 of the increase in gross profit
for the period ended June 30, 1996, was the result of the additional sales
generated from the AmeriDyne acquisition.

     Operating expenses for the year ended June 30, 1996, increased to
$3,185,620 as compared to $1,632,015 for the same period in 1995. Total
operating expenses increased approximately $1,553,000 as a result of the
increased volumes, but as a percentage of sales they decreased to approximately
23% of sales in 1996 versus 29% of sales in the same period in 1995. The
AmeriDyne acquisition increased operating expenses by $635,000 for the year
ended June 30, 1996. The largest components of operating expenses are indirect
labor (including sales salaries and commissions), occupancy expense,
depreciation and amortization, and insurance. Operating expenses decreased as a
percentage of sales due to the Company's addition of bulk medical supplies to
its product line. While the distribution of these products produces lower gross
margins, this enterprise requires lower operating expenses to support revenues
than the Company's manufacturing business. As revenues from the sales of bulk
medical supplies have increased at a significantly faster rate than
manufacturing (593% growth in distribution revenues during the twelve months
ended June 30, 1996

                                      -3-
<PAGE>   4




compared to the twelve months ended June 30, 1995 versus 12% growth in
manufacturing revenues during the same period), operating expenses as a
percentage of total revenues consequently has declined.

   
     Other income and expenses are made up of interest expense, debts recovered
that were previously written off, service charge income, and gains and losses on
the disposition of assets. Interest expense for the year ended June 30, 1996 was
approximately $171,000 compared to $39,000 for the same period in the previous
year. Interest expense increased primarily as a result of the AmeriDyne
acquisition and an increase in the Company's line of credit during the year from
$250,000 to $500,000. Service charge income totaling $117,201 and recoveries of
bad debts totaling $11,580 in the year ended June 30, 1996 compared to $22,000 
for both in the same period the previous year. The increase in service charge 
income was primarily due to the acquisition of AmeriDyne.
    

     For fiscal year ended June 30, 1996, the Company recorded an allowance for
bad debts of $410,000 when there had been no such allowance recorded in prior
periods primarily as a result of the AmeriDyne acquisition on March 1, 1996.
AmeriDyne maintained an allowance for bad debts of $400,000 at the time
AmeriDyne was acquired by the Company.

     Net income before taxes for the year ended June 30, 1996, was $839,200 as
compared to $44,721 for the twelve months ended June 30, 1995. The AmeriDyne
acquisition contributed approximately $295,000 to net income before taxes for
the year ended June 30, 1996.

SIX MONTHS ENDED JUNE 30, 1995, COMPARED TO SIX MONTHS ENDED JUNE 30, 1994

     As a result of the factors discussed below, the Company had net income of
$111,373 for the six months ended June 30, 1995, as compared to a net loss of
$478,798 for the six months ended June 30, 1994.

     Sales for the six months ended June 30, 1995, increased to $3,568,459 as
compared to $1,929,200 during the same period in 1994, due to growth in sales
volume of the existing product lines and the addition of bulk medical supply
sales. Approximately $1,426,000 of the sales increase was attributable to sales
of bulk medical supplies and pre-packaged kits to nursing homes managed or
operated by the Company's parent. These sales, which started during April 1995
represent a new market for the Company. Approximately $175,000 of these nursing
home sales represents sales of the Company's prepackaged kits and the remainder
of the nursing home sales represents sales of bulk medical supplies. The
remaining $213,000 of the overall sales increase was due to an increased demand
for the Company's existing product line.

     Gross profit for the six months ended June 30, 1995, was $1,024,083 or
28.7% of sales as compared to $505,500 or 26.2% of sales for the six months
ended June 30, 1994. The gross profit percentage remained relatively constant in
1995 as compared to the comparable period in 1994 because the product mix in
both periods included about the same percentage of REDI NURSE kits which have a
lower gross profit than the manufactured products. The 1995 period included
approximately $1,251,000 in sales of bulk medical supplies which also have a
lower gross profit, and the 1994 period margin was reduced due to the costs of
developing and shipping numerous prototype kits for customer evaluation and
introduction prior to FDA approvals. In prior years, the Company had higher
gross profit margins because most of the Company's sales were of products
manufactured by the Company.

     Operating expenses for the six months ended June 30, 1995, increased to
$841,275 as compared to $657,199 for the same period in 1994. Total operating
expenses increased approximately $184,000 as a result of the increased staffing


                                      -4-
<PAGE>   5




necessary to service the increased volumes, but as a percentage of sales they
decreased to approximately 24% of sales in 1995 versus 34% of sales in the same
period in 1994.

     Net income before taxes for the six months ended June 30, 1995, was
$166,091 as compared to a net loss before income taxes for the six months ended
June 30, 1994, of $478,798, after deducting offering costs of $305,731.

LIQUIDITY AND CAPITAL RESOURCES

   
     At June 30, 1997, the Company had $9,524,930 of working capital as compared
to working capital of $3,931,948 at June 30, 1996. The increase in working
capital was primarily due to the acquisition of Atlantic, which was completed
during August 1996.
    

   
     Operating activities for the year ended June 30, 1997 utilized cash of
$4,407,477 as compared to operating activities during the year ended June 30,
1996, which utilized cash of $124,047. Inventories increased by approximately
$2,602,000 from June 30, 1996 as a result of increased inventory levels needed
to serve the growing nursing home market, and approximately $2,280,000 of the
increase resulted from the Atlantic acquisition. Cash utilized by the increase
in accounts receivable was approximately $5,343,000, primarily related to the
acquisition of Atlantic, as well as growth in sales generally.
    

   
     Cash flows from investing activities used cash of $69,183 for the year
ended June 30, 1997 as a result of a loan of $354,267 from the Company's parent,
$1,415,744 used for the acquisition of or deposits on additional equipment and
$1,452,597 used for the Atlantic acquisition. These amounts were offset by
$3,350,000 in proceeds from the sale of the Company's manufacturing business.
    

     Cash flow of $4,642,098 was provided from financing activities for the year
ended June 30, 1997 versus $695,487 for the year ended June 30, 1996. For the
year ended June 30, 1997, $3,909,307 was provided from net bank borrowings,
$211,846 was provided by the exercise of stock options and $609,465 was provided
by the exercise of various classes of the Company's common stock warrants.

     Operating activities for the year ended June 30, 1996 utilized cash of
$124,047 as compared to operating activities during the six months ended June
30, 1995, which utilized cash of $1,030,398.

     Inventories increased by approximately $1,579,000 from June 30, 1995 as a
result of increased inventory levels needed to serve the growing nursing home
market, and approximately $1,240,000 of the increase resulted form the AmeriDyne
acquisition. Accounts receivable and accounts payable have increased due to the
increased level of sales and inventories.

     Cash flows from investing activities used cash of $521,456 for the year
ended June 30, 1996 as a result of the repayment of $550,004 from the Company's
parent which was offset by the use of $749,163 for the acquisition of additional
equipment and $322,297 for the AmeriDyne acquisition.

     Operating activities for the six month period ended June 30, 1995, utilized
cash of $1,030,398 as compared to $120,699 for the same period in 1994. The
increased utilization of cash resulted primarily from higher receivable and
inventory levels, net of increased accounts payable, necessary to support the
increase in sales. Operating activities for the years ended December 31, 1994,
and 1993 utilized cash of $28,133 and $209,284, respectively.


                                      -5-
<PAGE>   6




     Investing activities for the six months ended June 30, 1995, utilized
$1,701,945 of cash, of which $533,054 was for the acquisition of equipment and
$1,168,901 was advanced to the Company's majority shareholder as compared to
$6,597 of cash used during the six months ended June 30, 1994, which was
expended for equipment. The cash flows for the years ended December 31, 1994 and
1993, were used substantially for the acquisition of additional equipment as
needed.

     Cash flow of $2,689,372 was provided from financing activities for the six
months ended June 30, 1995, as compared to cash utilized during the six months
ended June 30, 1994, of $17,468. During the six months ended June 30, 1995, cash
of $2,216,447 was provided from the issuance of preferred stock and exercise of
stock options, and $482,622 was provided from equipment financing at favorable
long-term rates, utilization of credit line funds of $189,671, all of which was
reduced by repayments on bank loans and advances to the Company's majority
shareholder totaling of $199,328. For the year ended December 31, 1994, cash
flow of $62,833 was provided from financing activities, whereas in 1993 cash
flow of $448,944 was provided due to the sale of preferred stock of $430,500.

     At September 30, 1996, the Company replaced all of its existing lines of
credit with a $7,000,000 revolving line of credit with Barnett Bank, secured by
inventory and accounts receivable and bearing interest at the 30-day LIBOR rate
plus 2%. In May 1997 this revolving line of credit was increased to $10,000,000.
As of June 30, 1997, $5,886,545 had been borrowed against this line of credit.
Management believes that the Company's working capital, together with
anticipated net income from operations and unused lines of credit, will be
adequate to meet the Company's needs for liquidity for at least the next twelve
months. If additional short-term capital is needed, management believes that
Retirement Care, the Company's majority shareholder, would pay down the amount
it owes to the Company.

     The Company completed a $5 million debenture placement on July 12, 1996.
These debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1, 2003.
The debentures are convertible into shares of the Company's Common Stock. The
two debentures, each in the amount of $2.5 million, were purchased by
Renaissance U.S. Growth and Income Trust, PLC, a fund listed on the London Stock
Exchange, and by Renaissance Capital Growth & Income Fund III, Inc., a
closed-end, publicly traded fund that invests in emerging growth companies.
Renaissance Capital Group, Inc. of Dallas, Texas manages both of these
investment funds.

     The Company plans to open four additional distribution centers around the
United States during the next six months. Total capital expenditures anticipated
to fund this expansion will approximate $1,250,000. The Company has received
commitments from leasing and finance organizations in amounts sufficient to meet
these anticipated needs.

     The Company presently does not anticipate any commitments for any other
material capital expenditures.

SEASONALITY AND INFLATION

     The Company's business is relatively consistent and stable on a monthly
basis, and has not indicated any seasonality over the past three years.

     In addition, the Company does not believe that inflation has had a material
effect on its results from operations during the past three years. There can be
no assurance, however, that the Company's business will not be affected by
inflation in the future.


                                      -6-
<PAGE>   7




                                     PART IV

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

     (a)  1.  FINANCIAL STATEMENTS.  The following financial statements are
filed as part of this report:

<TABLE>
<CAPTION>
                                                                       PAGE(S)
<S>                                                              <C>
Reports of Independent Certified Public Accountants............. F-1 to F-2

Consolidated Balance Sheets as of June 30, 1997, and
June 30, 1996....................................................... F-3

Consolidated Statements of Income for the years ended
June 30, 1997 and 1996; the six months ended June 30, 1996,
and for the year ended December 31, 1994............................ F-4

Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1997 and 1996, the six months ended
June 30, 1996, and for the year ended December 31,
1994............................................................ F-5 to F-8

Consolidated Statements of Cash Flows for the years ended
June 30, 1997 and 1996, the six months ended June 30, 1996,
and for the year ended December 31,
1994............................................................ F-9 to F-10

Notes to Financial Statements................................... F-11 to F-25
</TABLE>

     (a)  2.  FINANCIAL STATEMENT SCHEDULES.  All schedules have been omitted,
as the required information is inapplicable or the information is presented in
the financial statements or the notes thereto.

     (a)  3.  EXHIBITS:

   
<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION                           LOCATION
<S>      <C>                                   <C>
  2.1    Agreement and Plan of Merger and      Incorporated by reference to
         Reorganization, dated as of           Exhibit 2.1 to the Company's
         February 17, 1997, among Sun          Current Report on Form 8-K 
         Healthcare Group, Inc., Nectarine     dated February 17, 1997 
         Acquisition Corporation and 
         Contour Medical, Inc.

  2.2    Amendment No. 1 to the Agreement      Incorporated by reference to 
         and Plan of Merger and Reorgani-      Exhibit 2.1 to the Company's 
         zation dated as of February 17,       Current Report on Form 8-K 
         1997 among Sun Healthcare Group,      dated August 21, 1997 
         Inc., Nectarine Acquisition 
         Corporation and Contour Medical, 
         Inc.

  2.3    Asset Purchase Agreement with                       *              
         RawCar Group, L.L.C.
</TABLE>
    

                                      -7-



<PAGE>   8



<TABLE>
  <S>    <C>                                <C>
  3.1    Restated Articles of Incorpora-    Incorporated by reference to
         tion of Associated Health Care     Exhibit 3.1 to the Company's
         Industries, Inc.                   Form S-1 Registration State-
                                            ment (File No. 33-66024)

  3.2    Amendment to the Restated          Incorporated by reference to
         Articles of Incorporation          Exhibit 3.2 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-66024)

  3.3    Bylaws of the Registrant           Incorporated by reference to
                                            Exhibit 3.3 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-66024)

  3.4    Second Amendment to the Restated   Incorporated by reference to
         Articles of Incorporation of       Exhibit 3.4 to the Company's
         Contour Medical, Inc., dated       Form S-1 Registration State-
         July 26, 1993                      ment (File No. 33-66024)

  3.5    Third Amendment to the Restated    Incorporated by reference to
         Articles of Incorporation of       Exhibit 3.5 to the Company's
         Contour Medical, Inc., dated       Form S-1 Registration State-
         August 27, 1993                    ment (File No. 33-66024)

  3.6    Fourth Amendment to the Restated   Incorporated by reference to
         Articles of Incorporation of       Exhibit 3.6 to the Company's
         Contour Medical, Inc., dated       Form S-1 Registration State-
         November 10, 1993                  ment (File No. 33-66024)

  3.7    Amended Bylaws                     Incorporated by reference to
                                            Exhibit 3.7 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-66024)

  3.8    Sixth Amendment to Articles of     Incorporated by reference to
         Incorporation, dated November 9,   Exhibit 3.8 to the Company's
         1993 (there is no "Fifth" Amend-   Form S-1 Registration State-
         ment)                              ment (File No. 33-66024)

  3.9    Amendment Number Five to           Incorporated by reference to
         Articles of Incorporation,         Exhibit 3.9 to the Company's
         dated April 25, 1994               Form S-1 Registration State-
                                            ment (File No. 33-66024)

  3.10   Amendment Number Six to            Incorporated by reference to
         Articles of Incorporation,         Exhibit 3.10 to the Company's
         dated May 13, 1994                 Form S-1 Registration State-
                                            ment (File No. 33-66024)

  10.1   Non-Qualified Employee Stock       Incorporated by reference to
         Bonus Plan                         Exhibit 10.6 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-66024)
</TABLE>


                                      -8-



<PAGE>   9



   
<TABLE>
  <S>    <C>                                <C>
  10.2   Employment Agreement by and be-    Incorporated by reference to
         tween Contour Medical Fabricaors   Exhibit 10.8 to the Company's
         of Florida, Inc., Associated       Form S-1 Registration State-
         Healthcare Industries, Inc. and    ment (File No. 33-66024)
         Gerald J. Flanagan, dated
         July 1, 1993

  10.3   1996 Stock Option Plan             Incorporated by reference to
                                            Exhibit 10.9 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-64977)

  10.4   Agreement and Plan of Merger by    Incorporated by reference to
         and among Contour Medical, Inc.    Exhibit 10 to the Company's
         Contour Merger Sub, Inc., Scott    Current Report on Form 8-K
         F. Lochridge and AmeriDyne         Dated March 1, 1996
         Corporation

  10.5   Employment Agreement with          Incorporated by reference to
         Scott F. Lochridge                 Exhibit 10.11 to the Company's
                                            Form S-1 Registration State-
                                            ment (File No. 33-64977)

  10.6   Promissory Note from AmeriDyne     Incorporated by reference to
         Corporation from Scott F.          Exhibit 10.13 to the Company's
         Lochridge                          Form S-1 Registration State-
                                            ment (File No. 33-64977)

  10.7   Share Purchase Agreement for       Incorporated by reference to
         the acquisition of Atlantic        Exhibit 10.1 to the Company's
         Medical Supply Company, Inc.       Report on Form 8-K dated
                                            August 6, 1996

  10.8   Lease Agreement with William A.    Incorporated by reference to
         and Gerald Gehrand dated           Exhibit 10.8 to the Company's
         February 1, 1995, relating to      Transition Report on Form
         Registrant's warehouse space in    10-K for the period ended
         St. Petersburg, Florida            June 30, 1995

  10.9   Convertible Debenture Loan         Incorporated by reference to 
         Agreement with Renaissance         Exhibit 10.1 to the Company's 
         Capital Growth & Income Fund       Annual Report on Form 10-K for 
         III, Inc., and Renaissance US      the year ended June 30, 1996 
         Growth and Income Trust PLC

  10.10  Letter Agreement dated August      Incorporated by reference to
         22, 1996 with Retirement Care      Exhibit 10.25 to the Company's
         Associates, Inc.                   Annual Report on Form 10-K for
                                            the year ended June 30, 1996

  10.11  Lease Agreement with Meadows                    *
         I/II,LLC for Alpharetta, Georgia
         Facility

  10.12  Sublease Agreement with Sunscript               *
         Pharmacy Corporation on Alpha-
         retta, Georgia Facility
</TABLE>
    

                                      -9-



<PAGE>   10

   
<TABLE>
  <S>    <C>                                <C>
  10.13  Lease Agreement with Spieker                  *
         Properties, L.P. for Portland,
         Oregon Facility

  10.14  Sublease Agreement with RawCar                *    
         Group, L.L.C.

  10.15  Lease Agreement with Westport                 *
         Business Park Associates for
         Ft. Lauderdale facility

  21     Subsidiaries of the Registrant                *

  23.1   Consent of Cherry, Bekaert &                  *
         Holland, L.L.P.

  23.2   Consent of BDO Seidman, LLP                   *

  27     Financial Data Schedule                       *
------------------
</TABLE>
* Previously Filed
    

All financial statement schedules have been omitted, as the required information
is inapplicable or the information is presented in the financial statements or
the notes thereto.

    (b) The Company did not file any Reports on Form 8-K during the quarter
ended June 30, 1997.


                                      -10-



<PAGE>   11




                        REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Contour Medical, Inc.
Alpharetta, Georgia

We have audited the accompanying consolidated balance sheets of Contour Medical,
Inc. (a subsidiary of Retirement Care Associates, Inc.) and Subsidiaries (the
Company) as of June 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Contour Medical,
Inc. and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.

/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Greensboro, North Carolina

October 9, 1997


                                       F-1



<PAGE>   12




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Contour, Medical, Inc.
St. Petersburg, Florida

We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Contour Medical, Inc. (a subsidiary of
Retirement Care Associates, Inc.) and Subsidiaries for the six months ended June
30, 1995 and the year ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Contour Medical, Inc. and Subsidiaries for the six months ended June 30, 1995
and the year ended December 31, 1994, in conformity with generally accepted
accounting principles.

/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP

Orlando, Florida
August 18, 1995, except for the stock split 
  discussed in Note 9 which is as of March 15, 1996


                                       F-2



<PAGE>   13




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             June 30, 1997 and 1996

   
<TABLE>
<CAPTION>
                                                    1997             1996
ASSETS                                          -----------     -----------
<S>                                             <C>             <C>        
Cash                                            $   311,657     $   146,219
Accounts receivable:
     Related parties                              5,135,189       1,918,000
     Trade, net of allowance for bad debts
       of approximately $2,805,000 in 1997
          and $410,000 in 1996                    7,811,635       2,527,676
Inventories                                       5,130,142       2,876,792
Refundable income taxes                                   -          21,406
Deferred income taxes                               572,875         164,048
Prepaid expenses and other                          237,687          51,519
Due from parent                                     973,164         618,897
          Total current assets                   20,172,349       8,324,557

Property and equipment, net                       1,492,918       1,223,195

Other assets:
     Deposit on equipment                           311,453         416,184
     Other                                          434,529           8,167
     Goodwill, net of accumulated amortization
      of approximately $251,000 in 1997 and
       $11,000 in 1996                           10,109,927       1,286,165
                                                 10,855,909       1,710,516

                                                $32,521,176     $11,258,268

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of long-term debt         6,079,086       1,825,193
     Accounts payable                             3,839,548       2,036,652
     Accrued expenses                               728,784         366,716
          Total current liabilities              10,647,418       4,228,561

Long-term debt, less current maturities           5,473,841       1,352,937
                                                 16,121,259       5,581,498
Stockholders' equity:
  Preferred stock - Series A convertible;
    $.001 par value, shares authorized -
    1,265,000; issued and outstanding -
    135,000 and 600,000, respectively,
    at aggregate liquidation preference             623,414       2,528,000
  Common stock; $.001 par value, shares
    authorized - 76,000,000; issued and
    outstanding - 8,127,376 and 5,214,223,
    respectively (net of $765 discount)               7,334           4,449
  Additional paid-in capital                     15,796,188       2,911,696
  Retained earnings (deficit)                       (27,019)        232,625
          Total stockholders' equity             16,399,917       5,676,770

                                                $32,521,176     $11,258,268
</TABLE>
    

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


                                       F-3



<PAGE>   14




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations

   
<TABLE>
<CAPTION>
                                                               Six Months
                             Year Ended        Year Ended        Ended           Year Ended
                              June 30,          June 30,        June 30,        December 31,
                                1997              1996            1995             1994
                             -----------      -----------      -----------      -----------
<S>                          <C>              <C>              <C>              <C>        
Sales                        $53,349,137      $14,542,421      $ 3,568,459      $ 3,945,745

Cost of sales                 39,681,159       10,491,103        2,544,376        2,545,925

  Gross profit                13,667,978        4,051,318        1,024,083        1,399,820

Selling, general and
  administrative expenses     12,973,675        3,185,620          841,275        1,550,385
Litigation settlements                --               --               --           30,000

Income (loss) from
  operations                     694,303          865,698          182,808         (180,565)

Other income (expenses):
  Offering costs                      --               --               --         (305,731)
  Interest                    (1,295,556)        (170,951)         (39,098)         (53,627)
  Guarantee fee                 (500,000)              --               --               --
  Gain on sale of
    manufacturing assets         608,423               --               --               --
  Interest income                 46,362           11,637               --               --
  Other income                   146,179          128,781           22,381           10,741
  Other expense                  (74,562)              --               --               --

                              (1,069,204)         (26,498)         (16,717)        (348,617)

Income (loss) before
  income taxes                  (374,901)         839,200          166,091         (529,182)

Income tax (expense)
  benefit                        115,257         (312,166)         (54,718)              --

Net income (loss)            $  (259,644)     $   527,034      $   111,373      $  (529,182)

Earnings (loss) per share    $     (0.05)     $      0.09      $      0.02      $     (0.20)

Weighted average common
  shares and share
  equivalents outstanding      6,115,127        4,804,292        4,786,126        2,688,927
</TABLE>
    

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

                                       F-4

<PAGE>   15

                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                   Additional       Retained
                                            Common Stock             Paid-In        Earnings
                                        Shares         Amount        Capital        (Deficit)
                                      ---------     -----------    -----------     -----------
<S>                                   <C>           <C>            <C>             <C>        
Balance, December 31, 1993            2,308,239     $     1,129    $   140,923     $   185,971
  Conversion of preferred
   stock and warrants:
     Class A                            219,182             220         39,557         (14,777)
     Class B                             33,333              33            (33)             --
     Class D                            238,450             238         75,212         (47,794)
     Class E                            172,986             173        295,569              --
     Class One                        2,000,000           2,000        370,844              --
  Net loss                                   --              --             --        (529,182)

Balance, December 31, 1994            4,972,190           3,793        922,072        (405,782)
  Issuance of Series A
   preferred stock                           --              --       (214,997)             --
  Exercise of common stock
   options                               15,385              15         19,985              --
  Correction of Class A
   preferred stock Conversion               255              --             --              --
  Redemption of Class A
   warrants                                  --              --            (40)             --
  Tax benefit from utilization
   of net operating loss
   carryforward                              --              --         54,718              --
  Retirement of treasury stock         (414,230)             --             --              --
  Net loss                                   --              --             --         111,373

Balance June 30, 1995                 4,573,600           3,808        781,738        (294,409)
  Issuance of stock                     352,018             353      2,045,753              --
  Exercise of common stock               25,000              25         49,975              --
  1.05-for-1 forward stock split        247,601             247           (247)             --
  Correction for preferred stock         16,004              16            (16)             --
  Short-swing liability from a
   shareholder                               --              --         36,531              --
  Preferred dividends in arrears             --              --       (128,000)
  Tax benefit from utilization
   of net operating loss carry-
   forward                                   --              --        125,962              --
  Net income                                 --              --             --         527,034

Balance, June 30, 1996                5,214,223     $     4,449    $ 2,911,696     $   232,625
</TABLE>

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

                                       F-5



<PAGE>   16




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
           Consolidated Statements of Stockholders' Equity (continued)


<TABLE>
<CAPTION>
                                                             Additional      Retained
                                         Common Stock          Paid-In       Earnings
                                       Shares     Amount       Capital       (Deficit)
                                     ---------    ------    ------------     ---------
<S>                                  <C>          <C>       <C>              <C>      
Balance, June 30, 1996               5,214,223    $4,449    $  2,911,696     $ 232,625
  Convertible debt from
   Atlantic acquisition con-
   verted to common stock            1,950,000     1,950       9,748,050            --
  Common stock issued for RCA's
   guarantee of Contour's debt
   for Atlantic                        100,000       100         499,900            --
  Series A converted to common
   stock                               488,250       488       1,859,512            --
  Series A cumulative dividend
   accrual                                  --        --         (43,934)           --
  Series A dividends paid
  Non-qualified options exercised
   for common stock                     68,083        40         154,306            --
  1996 plan options exercised for
   common stock                         10,000        10          57,490            --
  Class B warrants exercised for
   common stock                         42,285        42         181,182            --
  Class C warrants exercised for
   common stock                         26,250        27         112,473            --
  Consultant's warrants exercised
   for common stock                    228,285       228         315,513            --
  Net income                                --        --              --      (259,644)

Balance, June 30, 1997               8,127,376    $7,334    $ 15,796,188     $ (27,019)
</TABLE>

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


                                       F-6



<PAGE>   17




             CONTOUR MEDICAL, INC.  AND SUBSIDIARIES
   Consolidated Statements of Stockholders' Equity (continued)


<TABLE>
<CAPTION>
                                                    Convertible Preferred
                                 Treasury Stock       Stock - Series A
                               Shares     Amount    Shares        Amount
                              --------    ------   --------     -----------
<S>                           <C>         <C>      <C>          <C>        
Balance, December 31, 1993     414,230     $ --          --     $        --

Balance, December 31, 1994     414,230       --          --              --
  Issuance of Series A
   preferred stock                  --       --     600,000       2,400,000
  Retirement of treasury
   stock                      (414,230)      --          --              --

Balance June 30, 1995               --       --     600,000       2,400,000

  Preferred dividends in
   arrears                          --       --          --         128,000

Balance, June 30, 1996              --       --     600,000       2,528,000

  Series A converted to
   common                           --       --    (465,000)     (1,860,000)
  Series A cumulative
   dividend accrual                 --       --          --          43,934
  Series A dividends paid           --       --          --         (88,520)

Balance June 30, 1997               --     $ --     135,000     $   623,414
</TABLE>


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

                                       F-7



<PAGE>   18




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
           Consolidated Statements of Stockholders' Equity (continued)

<TABLE>
<CAPTION>
                              Convertible Preferred   Convertible Preferred
                                Stock - Class A        Stock - Series B
                               Shares      Amount      Shares     Amount
                              -------     --------    --------    ------
<S>                           <C>         <C>         <C>         <C>
Balance, December 31, 1993     99,525     $ 25,000         2        --
  Conversion of preferred
   stock and warrants:
    Class A                   (99,525)     (25,000)       --        --
    Class B                        --           --        (2)       --

Balance, December 31, 1994         --     $     --        --     $  --
</TABLE>


<TABLE>
<CAPTION>
                               Redeemable Cumulative         Convertible Preferred
                              Preferred Stock Class D          Stock - Class One
                                Shares         Amount        Shares         Amount
                              ----------     ---------     ----------     ---------
<S>                           <C>            <C>           <C>            <C>      
Balance, December 31, 1993     1,074,176     $ 400,500             --     $      --
 Conversion of preferred
  stock and warrants:
    Class D                   (1,074,176)     (400,500)     2,000,000       372,844
    Class One                         --            --     (2,000,000)     (372,844)

Balance, December 31, 1994            --     $      --             --     $      --
</TABLE>

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

                                       F-8



<PAGE>   19




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                         Six Months
                                         Year Ended      Year Ended        Ended         Year Ended
                                          June 30,        June 30,        June 30,      December 31,
                                            1997            1996            1995            1994
                                         -----------     -----------     -----------    ----------- 
<S>                                      <C>             <C>             <C>            <C>       
Cash flows from operating
activities:
  Net income (loss)                      $  (259,644)    $   527,034     $   111,373     $(529,182)
  Adjustments to reconcile
  net income (loss)to net
  cash used in operating
  activities:
    Gain on sale of assets                  (608,423)             --              --            --
    Depreciation and
     amortization                            861,241         255,757          51,670        98,684
    Guaranty fee                             500,000              --              --            --
    Offering costs                                --              --              --       305,731
    Provision for doubtful
     accounts                                382,188              --              --            --
    Tax benefit from util-
     ization of net operat-
     ing loss carryforward                        --         207,990          54,718            --
Cash provided by (used in):
     Accounts receivable                  (5,343,342)     (1,364,353)     (1,123,856)      (34,558)
     Inventories                              42,501        (318,832)       (908,317)       33,978
     Refundable income taxes                (150,865)        (10,726)         (2,500)       90,941
     Prepaid expenses and
      other                                 (121,788)         32,059         (61,325)       (6,189)
     Accounts payable                        (71,414)        402,534         767,004        23,263
     Accrued expenses                        362,069         144,490          80,835       (10,801)
Net cash provided by (used in)
operating activities                      (4,407,477)       (124,047)     (1,030,398)      (28,133)

Cash flows from investing activities:
  Purchases of property and
   equipment                                (969,486)       (749,163)       (304,762)      (46,181)
  Decrease (increase) in due
   from parent                              (354,267)        550,004      (1,168,901)           --
  Deposit on equipment                      (446,258)             --        (228,282)           --
  Decrease (increase) in
   other assets                             (196,575)             --              --           555
  Acquisition of AmeriDyne,
   net of cash acquired                           --        (322,297)             --            --
  Acquisition of Americare
   Group and remaining interest
   In Facility Supply                     (1,452,597)             --              --            --
  Proceeds on sale of Contour
   Fabricators                             3,350,000              --              --            --
Net cash provided by (used in)
  investing activities                   $   (69,183)    $  (521,456)    $(1,701,945)    $ (45,626)
</TABLE>

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

                                       F-9



<PAGE>   20




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                  Six Months
                                  Year Ended       Year Ended        Ended        Year Ended
                                   June 30,         June 30,        June 30,     December 31,
                                     1997             1996            1995          1994
                                 ------------     -----------     -----------    ------------
<S>                              <C>              <C>             <C>            <C>       
Cash flows from financing
activities:
   Deferred offering costs       $         --     $        --     $        --     $ (59,990)
   Proceeds from issuance
    of notes payable to
    bank                                   --       1,295,635         189,671            --
   Repayment on notes
    payable to bank                        --        (686,679)             --       (42,177)
   Proceeds from issuance
    of notes payable and
    long-term debt                 12,750,473              --         482,622            --
   Payments of notes payable
    and long-term debt             (8,841,166)             --         (34,328)           --
   Exercise of stock options          211,846          50,000          20,000            --
   Increase (decrease) in
    due to parent                          --              --        (165,000)      165,000
   Proceeds from issuance of
    preferred stock, net of
    issuance costs                         --              --       2,196,447            --
   Redemption of Class A
    warrants                               --              --             (40)           --
   Payment of Series A stock
    dividend                          (88,520)             --              --            --

   Class B warrants exercised
    for common                        181,224              --              --            --

   Class C warrants exercised
    for common                        112,500              --              --            --

   Consultants' warrant
    exercised for common              315,741              --              --            --

   Payment of short-swing
    liability by a share-
    holder                                 --          36,531              --            --

Net cash provided by
financing activities                4,642,098         695,487       2,689,372        62,833

Net increase (decrease)
in cash                               165,438          49,984         (42,971)      (10,926)

Cash, beginning of period             146,219          96,235         139,206       150,132

Cash, end of period              $    311,657     $   146,219     $    96,235     $ 139,206
</TABLE>

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

                                      F-10



<PAGE>   21




                     CONTOUR MEDICAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

Contour Medical, Inc. ("Contour Medical" or the "Company") was incorporated in
Nevada in April 1987 and in 1989 conducted an initial public offering. The
Company's common stock is traded in the over-the-counter market, and since
September 21, 1995, has been traded on the Nasdaq Small-Cap-Market under the
symbol "CTMI." Approximately 62% of the Company's common stock is owned by
Retirement Care Associates, Inc. ("Retirement Care"), a publicly-held company
engaged in the management and operation of retirement care and long-term nursing
home facilities in the Southeastern United States. The Company's corporate
offices are located in Alpharetta, Georgia.

Prior to 1996, the Company's revenues were derived predominantly through its
manufacturing facilities, Contour Fabricators, Inc. ("CFI") and Contour
Fabricators of Florida, Inc. ("CFFI"), located in Grand Blanc, Michigan and St.
Petersburg, Florida, respectively. These companies manufactured disposable
surgical procedure products and custom packaged procedural trays for use in
specialized medical applications. During 1997, the assets related to these
businesses were sold to an unrelated party.

In 1996, the Company acquired AmeriDyne Corporation ("AmeriDyne"), a Jackson,
Tennessee-based distributor of bulk medical supplies primarily to home health
agencies and hospitals. Sales from AmeriDyne included in the consolidated
statements of operations amounted to approximately $14,464,000 and $3,616,000
for 1997 and 1996, respectively. (See Note 13).

In 1997, the Company acquired Atlantic Medical Supply Company, Inc. ("Atlantic
Medical"), an Augusta, Georgia-based distributor of medical supplies and
ancillary products to long-term care providers. Sales from Atlantic Medical's
facilities in Georgia, North Carolina and Florida amounted to approximately
$26,757,000 in 1997. (See Note 12).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Contour Medical, Inc. and its wholly-owned subsidiaries, Atlantic
Medical Supply Company, Inc., AmeriDyne Corporation, Contour Fabricators, Inc.,
and Contour Fabricators of Florida, Inc., collectively referred to as "the
Company." All material intercompany accounts and transactions have been
eliminated in the consolidation.

MANAGEMENT ESTIMATES - 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
consolidated assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Estimates also
affect the reported amounts of consolidated revenues and expenses during the
reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION - Sales are recognized upon shipment of products to
customers.

TRADE RECEIVABLES - The Company uses the allowance method to provide for
uncollectible accounts. Allowance for doubtful accounts approximated $2,805,000
and $410,000 as of June 30, 1997 and 1996, respectively.


                                      F-11



<PAGE>   22

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

INVENTORIES - Inventories are valued at lower of cost (first-in, first-out) or
market. AmeriDyne inventories are valued at the lower of average cost or market.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the assets by accelerated methods
for financial reporting and income tax purposes.

FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments held by the Company
at June 30, 1997 include cash, deposits and long-term debt. Management believes
that, considering current terms of similar financial instruments, the carrying
value of the Company's financial instruments approximated their fair values at
June 30, 1997.

   
GOODWILL - The Company has classified as goodwill the cost in excess of fair
value of the net assets of Atlantic Medical and AmeriDyne acquired in purchase
transactions. Goodwill is being amortized on the straight-line method over 40
years. Amortization charged to continuing operations amounted to approximately
$240,000 and $11,000 for the years ended June 30, 1997 and 1996, respectively.
The Company periodically reviews goodwill to assess recoverability, and any
impairment would be recognized in operating results if anticipated undiscounted
future cash flows of the underlying assets do not exceed the book value of the
goodwill and the underlying assets.
    

OFFERING COSTS - Fees, costs and expenses related to offerings of securities are
deferred and charged against the proceeds therefrom or, if the offering is
unsuccessful, charged to operations. Costs of $257,000 related to a proposed
public offering were deferred at December 31, 1993 and charged to operations in
the second quarter of 1994, when the offering was abandoned. Deferred costs at
December 31, 1994, related to the private placement discussed in Note 9, were
charged against the proceeds therefrom in 1995.

DEFERRED LOAN COSTS - Fees, costs and expenses related to the issuance of
long-term debt are deferred and amortized over the term of the related debt
using the straight-line method. Amortization of deferred loan costs charged to
operations in 1997 approximated $46,000.

INCOME TAXES - Income taxes are accounted for using the asset and liability
method for financial accounting and reporting purposes. Accordingly, deferred
tax assets and liabilities are recognized for temporary differences between the
financial reporting basis of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets when management considers it more likely than not that some
portion or all of the asset will not be realized.

EARNINGS (LOSS) PER SHARE - Earnings (loss) per common share are based on the
weighted average number of common shares outstanding and dilutive common stock
equivalent shares outstanding during each period, after giving effect to the
1.05-for-1 forward stock split which occurred in 1996. Common stock equivalents
for 1996, 1995 and 1994 have not been included, since the effect would be
antidilutive. Annual accruals of cumulative dividends in arrears of
approximately $44,000, $96,000 and $32,000 related to the Company's Class A
preferred stock (see Note 9) have been deducted from 1997, 1996 and 1995 net
income and for the calculation of earnings (loss) per common share,
respectively.

                               F-12



<PAGE>   23
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

CHANGE IN YEAR-END - The Company changed its fiscal year-end from December 31 to
June 30 during 1995. Accordingly, the June 30, 1995 statements of operations,
stockholders' equity and cash flows are for the six months then ended.

RECLASSIFICATIONS - Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation. These reclassifications had no effect on
operations.

   
     Impact of Recently Issued Accounting Standars-In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is
required to be adopted for the fiscal years ending after December 15, 1997.
SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and specifies
the computation, presentation and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock.  SFAS 128 essentially replaces the primary EPS and fully diluted EPS
presentations under APB Opinion No. 15 with a basic EPS and a diluted EPS
calculation.  The Company will comply with the disclosure requirements of SFAS
No. 128 commencing with its September 30, 1997 Form 10-Q.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements.  There currently are no additional
disclosures in the financial statements of the Company that are expected to be
required by the provisions of this statement.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which changes the way public companies report information about
segments of their business in annual financial statements and requires segment
information in quarterly reports to shareholders.  SFAS 131 also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate and their major customers.  SFAS 131
is effective for fiscal years beginning after December 15, 1997.  The Company
has not determined what additional disclosures may be required by the provisions
of SFAS 131.
    

3.  RELATED PARTY TRANSACTIONS

During 1995, the Company began distributing medical supplies to health care
facilities owned, leased, or managed by Retirement Care. Sales to these
facilities approximated $7,848,000, $5,456,000 and $1,426,000 for the years
ended June 30, 1997, 1996 and the six-month period ended June 30, 1995,
respectively. Trade accounts receivable of approximately $5,135,000 and
$1,918,000 related to these health care facility sales are outstanding as of
June 30, 1997 and 1996, respectively. Additionally, the Company had an
outstanding loan receivable due from Retirement Care of approximately $973,000
as of June 30, 1997 with interest at prime and $619,000 as of June 30, 1996
which is due on demand with no stated interest rate.

4.  INVENTORIES

Inventories at June 30, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                      1997                 1996
                                  -----------          -----------
     <S>                          <C>                  <C>        
     Raw materials                $         -          $   330,699
     Work in process                        -               96,647
     Finished goods                 5,130,142            2,449,446
                                  -----------          -----------
                                  $ 5,130,142          $ 2,876,792
</TABLE>

5.  PROPERTY AND EQUIPMENT

Property and equipment at June 30, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                                   1997           1996
                                                ----------     ----------
<S>                               <C>           <C>            <C>    
Land and land improvements                      $    9,841     $   50,000
Building                          5-45 yrs.          6,159        596,247
Machinery and equipment            3-7 yrs.      1,442,614      1,798,520
Furniture and fixtures             5-7 yrs.        498,876        146,536
Leasehold improvements               5 yrs.         74,717        251,352
Vehicles                           3-5 yrs.         84,853         72,245
                                                ----------     ----------
                                                 2,117,060      2,914,900
Less accumulated depreciation                      624,142      1,691,705
                                                ----------     ----------
                                                $1,492,918     $1,223,195
</TABLE>
                                      F-13
<PAGE>   24




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.  PROPERTY AND EQUIPMENT (continued)

All property and equipment are pledged as collateral (see Note 6).

6.  NOTES PAYABLE

Notes payable at June 30, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                                       1997          1996
                                                    ----------    ----------
<S>                                                <C>            <C>       
Borrowings under $10,000,000 revolving line of 
credit, interest based on 30 day LIBOR plus 
2.00% (7.68% at June 30, 1997), payable monthly, 
principal due October 31, 1997, collateralized by 
accounts receivable, inventory, and guarantees 
of Retirement Care Associates, Inc.                $ 5,886,545    $        -

Convertible debentures, interest at 9.00% payable
monthly, principal due July 1, 2003, convertible
into shares of common stock                          5,000,000             -

Borrowings under $750,000 non-revolving line of 
credit, interest at prime (8.50% at June 30, 
1997), principal of $20,833 plus interest due 
monthly, collateralized by accounts receivable, 
inventory, furniture, fixtures, equipment, 
machinery, bank accounts and guarantees of
Retirement Care Associates, Inc.                       548,491             -

Note payable to stockholder, interest at 10.00%,
principal and interest of $5,693, due monthly
through March 1999                                     109,252       163,646

Note payable to equipment company, interest at 
14.00%, monthly installments of $405 including 
interest, matures August 1998, collateralized by
equipment                                                5,546             -

Note payable to equipment company, interest at 
11.00%, monthly installments of $533 including 
interest, matures December 1997, collateralized
by equipment                                             3,093         8,805

Note payable to bank, interest at prime plus 1.00% 
(9.25% at June 30, 1996), principal of $5,000 plus 
interest due monthly through June 2000, 
collateralized by equipment                                  -       217,559

Note payable to bank, interest at prime plus .75% 
(9.00% at June 30, 1996), principal of $7,605 plus 
interest due monthly through May 2000, 
collateralized by accounts receivable, inventory,
equipment and real property                                  -       496,171
</TABLE>


                                      F-14



<PAGE>   25




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
6.  NOTES PAYABLE (continued)                           1997         1996
                                                       -------    ----------
<S>                                                    <C>        <C>
Mortgage payable to bank, bearing interest at 8.58%, 
principal and interest of $6,793 due monthly 
through December 2003, collateralized by accounts
receivable, inventory, equipment and real property           -       456,233

Mortgage payable to bank, interest at prime plus 
 .75% (9.00% at June 30, 1996), principal of $1,190 
plus interest due monthly through December 2000,
collateralized by accounts receivable, inventory,
equipment and real property                                  -        64,284

Borrowings under $100,000 line of credit, interest 
at prime plus .75% (9.00% at June 30, 1996), 
payable monthly, collateralized by accounts
receivable, inventory, equipment and real property           -        65,000

Note payable to bank, interest at 8.75%, principal
and interest of $1,282 due monthly through April
2001, collateralized by equipment                            -        60,436

Borrowings under $500,000 line of credit, interest 
at prime plus .25% (8.50% at June 30, 1996), payable 
monthly, collateralized by accounts receivable,
inventory and equipment, and guarantees by
Retirement Care Associates, Inc.                             -       433,535

Note payable to leasing institution, interest at 
14.60%, monthly installments of $309 plus sales 
tax, matures June 1997, collateralized by
computer equipment                                           -         2,924

Note payable to bank, interest at 9.00%, principal 
and interest of $3,600 due monthly through May 
1997, collateralized by accounts receivable, 
inventory, furniture, fixtures, equipment, 
machinery, bank accounts, and guarantees of
Retirement Care Associates, Inc.                             -        38,924

Note payable to bank, interest at 9.00%, principal 
and interest of $5,266 due monthly through 
October 1997, collateralized by accounts 
receivable, inventory, furniture, fixtures, 
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc.               -       212,613

Borrowings under $975,000 line of credit, 
interest at prime plus 1.25% (9.50% at June 30, 
1996), principal is due on demand but no later 
than May 15, 1997, collateralized by accounts 
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees by Retirement Care Associates, Inc.               -       958,000
                                                    11,552,927     3,178,130
Less current maturities                             (6,079,086)   (1,825,193)
                                                   $ 5,473,841    $1,352,937
</TABLE>

                                      F-15



<PAGE>   26




      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.  NOTES PAYABLE (continued)

The aggregate maturities of long-term debt are as follows as of June 30, 1997:

<TABLE>
               <S>                <C>       
               1998               $6,079,086
               1999                  300,350
               2000                  744,567
               2001                  503,534
               2002                  446,325
               Thereafter          3,479,065
</TABLE>

   
The Company's revolving line of credit and the provisions of the indenture 
relating to its 9% convertible debentures, which together total $18,294,091 of
indebtedness, contain certain restrictive financial covenants.  Under the terms
of the line of credit, the Company is required to maintain a debt to net worth
(or equity) ratio of no more than 2.5, a current ratio of no less than 1.50, an
EBIT coverage ratio of no less than 2.0 and an interest coverage ratio of no
less than 4.0.  Under the indenture underlying the 9% convertible debentures,
the Company is also required to maintain specific current, debt to equity and
interest coverage ratios.  At June 30, 1997, the Company was out of compliance
with the interest coverage ratio, the total debt to equity ratio, the EBIT
coverage ratio and the current ratio requirements of the line of credit and the 
current ratio, debt to equity ratio and interest coverage ratio requirements of 
the indenture.  Barnett Bank and the holder of the 9% convertible debentures 
have waived such defaults as of June 30, 1997 and for the year then ended.
    

At June 30, 1997, the Company had approximately $4,113,000 and $202,000 of
unused credit under its revolving line of credit and its non-revolving equipment
line of credit, respectively. Outstanding draws against the revolving and
non-revolving lines of credit bear interest at the prime rate of interest and
LIBOR plus 2%, respectively.

   
     The Company's 9% convertible debentures are convertible into shares of the
Company's common stock from the date of issuance until the date that any
adjustment may occur at a conversion price of $5.00 per share of common stock.
The conversion price may be adjusted one time to seventy-five percent (75%) of
the average closing bid price of the common stock for the 21 consecutive
trading days following the Company's public press release of the 1997 fiscal
year end financial results if (y) the Company has failed to earn before taxes,
a minimum of $3,372,000, and (z) the average closing bid price of the common
stock for the 21 consecutive trading days following the Company's public press
release of the 1997 fiscal year end financial results is less than the
then-existing conversion price.  If an adjustment is required, then the Company
must furnish to the holders of the debentures a statement, signed by the Chief
Executive Officer of the Company, of the facts creating such adjustment and
specifying the resultant adjusted conversion price then if effect.  The
adjustment will only be made to adjust the conversion price to a price that is
less than the then-existing conversion price.
    

7.  LEASE COMMITMENTS

The Company is obligated under various noncancelable leases for equipment and
office space. Future minimum lease commitments under operating leases were as
follows as of June 30, 1997.

<TABLE>
               <S>               <C>
               1998              $  603,073
               1999                 538,680
               2000                 544,975
               2001                 406,644
               2002                 320,190
               Thereafter                --
</TABLE>

Total rental expense was approximately $935,834, $349,600, $145,500 and $203,000
for the years ended June 30, 1997 and 1996, the six-month period ended June 30,
1995, and the year ended June 30, 1994, respectively.

8.  INCOME TAXES

Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Income tax expense (benefit) includes the following amounts:

                               F-16
<PAGE>   27
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.  INCOME TAXES (continued)

<TABLE>
<CAPTION>
                                                Six Months
                             Years Ended          Ended      Year Ended
                               June 30,          June 30,   December 31,
                           1997        1996        1995        1994
                        ----------------------  ----------  ------------
<S>                     <C>           <C>       <C>         <C>
Current:
     Federal            $      --     $161,951        --        --
     State                     --       28,101        --        --
     Deferred            (115,257)     122,114    54,718        --

Total income tax
   expense (benefit)    $(115,257)    $312,166    54,718        --
</TABLE>

The components of deferred tax assets derived from temporary deductible
differences are as follows:

<TABLE>
<CAPTION>
                                                           Six Months
                                        Years Ended          Ended        Year Ended
                                          June 30,          June 30,     December 31,
                                    1997          1996        1995           1994
                               -------------------------   ----------    ------------
<S>                            <C>             <C>         <C>           <C>
Allowance for uncollectible
 accounts                      $   556,875     $ 164,048           --           --
Allowance for inventory
 valuation                          16,000            --           --           --
Non-deductible accruals                 --            --        7,524           --
Net operating loss                 444,546       355,108      459,568      485,519

                                 1,017,421       519,156      467,092      485,519
Less valuation allowance          (444,546)     (355,108)    (467,092)    (485,519)

Net deferred tax asset
 - current                     $   572,875     $ 164,048           --           --
</TABLE>

The following summary reconciles differences from income taxes at the federal
statutory rate with the effective tax rate:

<TABLE>
<CAPTION>
                                                          Six Months
                                         Years Ended        Ended     Year Ended
                                           June 30,        June 30,  December 31,
                                        1997      1996       1995        1994
                                      -----------------     ------     --------
<S>                                   <C>        <C>        <C>        <C>
Income taxes (benefits) at federal
 statutory rate                       (34.00)%   34.00%     34.00%     (34.00)%
State income taxes, net of
  federal tax benefit                     --      3.60%      3.10%         --
Carryforward of net operating loss        --        --      (9.90)%        --
Losses not available for carryback     34.00%       --         --       34.00%
Other, net                                --     (0.04)%     5.00%         --
Income taxes at effective rate            --     37.56 %    32.20%         --
</TABLE>

As of June 30, 1997, the Company had net operating loss carryforwards for tax
purposes, expiring at various dates ending July 30, 2012, of approximately $1.1
million which includes approximately $516,000 attributable to Contour Medical,
Inc. for the period prior to January 1, 1993. Due to certain change of ownership

                                      F-17
<PAGE>   28




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.  INCOME TAXES (continued)

requirements of Section 382 of the Internal Revenue Code, utilization of the
Company's operating losses is expected to be limited to approximately $414,000
per year. The deferred tax asset related to the tax benefit of these losses has
been offset by a valuation allowance due to uncertainty of realization. The
valuation allowance increased approximately $89,000 during 1997 and decreased
approximately $112,000 during 1996.

The income tax benefit arising from any utilization of the net operating losses
attributable to CMI will be credited to additional paid-in capital when
recognized. During 1996, the income tax benefit of utilization of net operating
losses attributable to CMI of approximately $126,000 was credited to paid-in
capital.

9.  CAPITAL STOCK

STOCK BONUS PLAN - The Company has a non-qualified employee stock bonus plan.
The Plan provides for the granting of up to 1,000,000 options for the purchase
of the Company's common stock to eligible employees at purchase prices of at
least $.01 per share. Options awarded under the Plan vest over a three-year
period from the date of grant and are exercisable over a five-year period from
the date of grant.

Changes in options outstanding are summarized as follows:

<TABLE>
<CAPTION>
                                   Option           Price
                                   Shares         Per Share
                                   -------      -------------
     <S>                           <C>         <C>     
     Balance December 31, 1993     265,386     $1.30 - $2.00
          Granted                  100,000     $2.25

     Balance, December 31, 1994    365,386     $1.30 - $2.25
          Granted                   50,000     $3.90
          Exercised                (15,385)    $1.30
          Canceled                      (1)    $1.30

     Balance, June 30, 1995        400,000     $2.00 - $3,90
          Granted                   45,000     $4.11
          Exercised                (25,000)    $2.00
          Stock split               21,000

     Balance, June 30, 1996        441,000     $1.88 - $4.11
          Exercised                (68,083)    $3.71 - $4.11
          Canceled                 (40,500)

     Balance, June 30, 1997        332,417
</TABLE>

All of the above options were granted with an exercise price above fair market
value at the date of grant. In addition, 325,423 stock options related to the
non-qualified employee stock bonus plan were exercisable at June 30, 1996.
Common shares for future issuance under this plan totaled 919,532 at June 30,
1997.


                                      F-18



<PAGE>   29




      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.  CAPITAL STOCK (continued)

STOCK OPTION PLAN - In February 1996, the Company adopted the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan allows the Board of Directors to grant
stock options from time to time to employees, officers and directors of the
Company and consultants to the Company. The Board of Directors has the right to
determine, at the time of option, whether the option will be an Incentive Stock
Option or an option which is not an Incentive Stock Option. Vesting provisions
are determined by the Board of Directors at the time the options are granted.
The 1996 Plan provides for the granting of up to 815,000 options for the
purchase of the Company's common stock.

Changes in options outstanding are summarized as follows:

<TABLE>
<CAPTION>
                                     Shares       Option Price per Share
                                    --------      ----------------------
     <S>                            <C>           <C>
     Balance, June 30, 1995                -                -
          Granted                    160,000          $4.64 - $5.75
          Stock split                  4,250

     Balance, June 30, 1996          164,250          $4.64 - $5.75
          Granted                    207,500          $5.50 - $5.75
          Canceled                   (10,000)         $5.75
          Exercised                  (65,000)         $5.75

     Balance, June 30, 1997          296,750
</TABLE>

All of the above options were granted with an exercise price above fair market
value at the time of grant. In addition, all of the stock options related to the
1996 plan were exercisable at June 30, 1997, and 518,250 common shares are
reserved for future issuance under this plan.

STOCK SPLIT - In February 1996, the Board of Directors authorized a 1.05-for-1
forward stock split of its common stock effective March 1996. All common shares
and per share amounts have been retroactively adjusted to give effect to the
forward stock split.

STOCK WARRANTS - At June 30, 1997, the Company had 757,584 stock warrants
outstanding. Information relating to these warrants is summarized as follows:

<TABLE>
<CAPTION>
                                                 Number of
                                                  Common      Exercise
                        Expiration   Number of   Shares Per   Price Per
       Type                Date      Warrants     Warrant      Warrant
  ---------------       ----------   ---------   ----------   --------
  <S>                   <C>          <C>         <C>          <C>   
  Class C               Feb. 1999     275,000       1.05       $ 4.50
  Consultant            Oct. 1997      86,334       1.05       $ 1.50
  Consultant            Oct. 1999     200,000       1.05       $ 3.00
  Consultant            Oct. 1997      46,250       1.05       $ 3.00
  Consultant            Sep. 1999      50,000       1.00       $ 5.50
  Retirement Care
    Associates          Aug. 1999     100,000       1.00       $ 5.00
</TABLE>


                                      F-19



<PAGE>   30




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.  CAPITAL STOCK (continued)

During fiscal year 1997, 40,272 of the Class B warrants were converted into
42,285 shares of common stock. The remaining class B warrants expired in July
1996.

CHANGE OF CONTROL - On September 30, 1994, Retirement Care acquired 889,002
shares of the Company's outstanding common stock and 2,000,000 shares of the
Company's Class One Convertible Preferred Stock from three persons who were
officers and directors of the Company. Subsequently, Retirement Care converted
the Class One Convertible Preferred Stock into 2,100,000 shares of common stock.
During the year ended June 30, 1997, Retirement Care Associates, Inc. converted
a note payable due from Contour Medical, Inc. into 1,950,000 shares of CMI's
common stock. RCA also received 100,000 shares of CMI's common stock as
compensation for a loan guarantee.

CLASS ONE CONVERTIBLE PREFERRED STOCK - During 1994, the holders of 1,000,000
shares of Class D Redeemable Cumulative Preferred Stock exchanged their shares
for 2,000,000 shares of newly created no par Class One Convertible Preferred
Stock. The Class One Preferred Stock had a liquidation preference of $3.00 per
share. Each Class One Preferred Share was convertible into 1.05 shares of the
Company's common stock. All 2,000,000 shares of Class One Preferred Stock were
converted into 2,100,000 shares of common stock in November 1994.

CLASS A CONVERTIBLE PREFERRED STOCK - During 1994, 99,525 shares of Class A
Convertible Preferred Stock were converted into 230,141 shares of common stock.
The conversion included a stock dividend of $14,777 for dividends in arrears
through the date of conversion.

CLASS B CONVERTIBLE PREFERRED STOCK - During 1994, two shares of Class B
Convertible Preferred Stock were converted into 35,000 shares of common stock.

CLASS D REDEEMABLE CUMULATIVE PREFERRED STOCK - In April 1994, 74,176 shares of
Class D Redeemable Cumulative Preferred Stock and 148,345 Class D warrants were
converted into 250,354 shares of common stock and 119,225 Class B warrants. In
addition, 1,000,000 shares of Class D Redeemable Cumulative Preferred Stock and
846,667 Class D warrants were converted into 2,000,000 shares of new Class One
Convertible Preferred Stock. In November 1994, the Class One shares were
converted into 2,100,000 shares of common stock. These conversions included a
stock dividend of $47,794 for dividends in arrears through the date of
conversion.

CLASS E CONVERTIBLE PREFERRED STOCK - In April 1994, 172,986 shares of Class E
Convertible Preferred Stock were converted into 181,635 shares of common stock.

SERIES A CONVERTIBLE PREFERRED STOCK AND CLASS C WARRANTS - During 1995, the
Company completed a private placement of its securities consisting of 60 units
sold at a price of $40,000 per unit. Each unit sold in the private placement
consisted of 10,000 shares of the Company's Series A Convertible Preferred Stock
and 5,000 Class C Redeemable Common Stock Purchase Warrants. Each share of
Series A Preferred Stock has a $4 liquidation preference and is convertible into
1.05 shares of the Company's common stock beginning in May 1996. Additionally,
the holders of the Series A Preferred Stock are entitled to receive annual cash
dividends (payable semiannually) of 4% of the liquidation preference of the


                                      F-20



<PAGE>   31
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.  CAPITAL STOCK (continued)

stock, or $.16 per share, on a cumulative basis from the date of issuance.
During the year ended June 30, 1997, the Company paid $88,520 in Series A
Preferred Stock dividends. Cumulative dividends in arrears related to the Series
A Preferred Stock amounted to approximately $83,000 ($.61 per share) and
$128,000 ($.21 per share) for the years ended June 30, 1997 and 1996,
respectively. The Series A Preferred Stock may be redeemed by the Company at $4
per share plus dividends in arrears beginning in May 1999. During the year ended
June 30, 1997, 465,000 shares of Series A Preferred Stock was converted into
488,250 shares of common stock. In addition, 840,000 shares of common shares are
reserved for future issuance upon conversion of the total authorized Series A
Preferred Stock.

PREFERRED STOCK CANCELLATION - Subsequent to the conversion of the preferred
stock classes, the Company canceled the Class A, Class B, Class C, Class E and
Class One Convertible Preferred Stock and the Class D Redeemable Convertible
Preferred Stock.

ISSUANCE OF STOCK IN SATISFACTION OF LOANS - During the year ended June 30,
1997, the Company issued 1,950,000 shares of common stock in satisfaction of a
$9,750,000 note payable to Retirement Care.

SHARES RESERVED - At June 30, 1997, the Company has reserved common stock for
future issuance under all of the above arrangements amounting to 2,367,720.

   
ISSUANCE OF STOCK IN SATISFACTION OF A LOAN GUARANTEE FEE - In consideration of
the Parent's agreement to guarantee the Company's obligations with respect to
the Atlantic Medical Notes, the Company agreed to pay the Parent $500,000, which
obligation was satisfied by the issuance of 100,000 shares of the Company's
common stock valued at $5.00 per share on the date of issuance. The loan from
the Parent to the Company was evidenced by a convertible promissory note bearing
interest at a rate of 9% per annum and payable on demand. This note was
converted into 1,950,000 shares of the common stock of the Company on January
10, 1997.
    

10.  MAJOR CUSTOMERS

Sales to significant customers were as follows:

<TABLE>
<CAPTION>
     Year ending June 30,      Number of Customers      Sales Volumes
     --------------------      -------------------      -------------
     <S>                       <C>                      <C>
            1994                        1               $   531,000
            1995                        -                      -
            1996                        -                      -
            1997                        -                      -
</TABLE>

As a result of the increased sales volume due to sales to related parties of
approximate $7,848,000 (see Note 3), there were no sales to significant other
customers during the years ended June 30, 1997 and 1996 and the six-month period
ended June 30, 1995, respectively.


                                      F-21




<PAGE>   32




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.  SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                              Six Months
                                         Years Ended            Ended     Year Ended
                                           June 30,            June 30,  December 31,
                                      1997          1996         1995        1994
                                  -------------------------   ---------- ------------
<S>                               <C>            <C>          <C>        <C>     
Cash paid for interest            $ 1,008,735    $  170,951    $ 39,065    $ 53,627

Cash paid for income taxes        $        --    $      930    $  2,500    $  5,000

Noncash financing and
 investing activities:

   Acquisition of Atlantic
   Medical Supply Company,
   Inc. and 20% of
   Facility Supply, Inc.          $10,500,000    $       --    $     --    $     --

   Convertible note payable
   issued to Retirement
   Care Associates, Inc. 
   used to satisfy notes
   payable issued in
   connection with Atlantic
   Medical Supply Company,
   Inc. acquisition               $ 9,750,000    $       --    $     --    $     --

   Issuance of 100,000 shares
   of common stock to
   Retirement Care Associates,
   Inc. as compensation for
   guarantee of notes issued
   in Atlantic Medical Supply
   Company, Inc. acquisition      $   500,000    $       --    $     --    $     --

   Issuance of 369,618 shares
   of common stock for
   purchase of AmeriDyne
   Corporation                    $        --    $2,100,000    $     --    $     --

   Deferred offering costs
   charged to additional
   paid-in-capital as an
   offset to private placement
   offering proceeds              $        --    $       --    $ 11,444    $     --

   Conversion of 1,074,176
   shares of Class D Preferred
   Stock and 995,012 Class D
   Warrants into 250,372
   shares of common stock and
   2,000,000 shares of Class
   One Preferred Stock            $        --    $       --    $     --    $400,500

                                  $20,750,000    $2,100,000    $ 11,444    $400,500
</TABLE>


                                      F-22



<PAGE>   33




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.  ATLANTIC MEDICAL ACQUISITION

Effective July 1, 1996, the Company acquired all of the outstanding stock of
Atlantic Medical Supply Company, Inc. for approximately $11.9 million in a
transaction accounted for as a purchase. The purchase price exceeded the fair
value of the net assets acquired by approximately $8.6 million. The resulting
goodwill is being amortized on the straight-line basis over 40 years. The
consolidated financial statements include the results of operations of Atlantic
Medical subsequent to June 30, 1996.

The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the year
ended June 30, 1996. The pro forma information is presented for information
purposes only. Although it is based on historical information, it is unaudited
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the combined
enterprise.

<TABLE>
<CAPTION>
                                      Unaudited Year Ended
                                         June 30, 1996
                                      --------------------
            <S>                       <C>         
            Sales                        $ 34,333,727
            Net income                   $    585,784
            Per share                    $        .10
</TABLE>

13.  AMERIDYNE ACQUISITION

Effective March 1, 1996, the Company acquired all of the outstanding common
stock of AmeriDyne Corporation (AmeriDyne) for approximately $2.475 million in
cash and stock in a transaction accounted for as a purchase. The purchase price
exceeded fair value of the net assets acquired by approximately $1.3 million.
The resulting goodwill is being amortized on the straight-line basis over 40
years. The consolidated financial statements include the results of operations
of AmeriDyne subsequent to February 29, 1996.

The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the fiscal
year. The pro forma information is provided for information purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the combined enterprise.

<TABLE>
<CAPTION>
                                 Unaudited Year Ended
                                    June 30, 1996
                                 --------------------
          <S>                    <C>           
          Sales                     $   21,406,882
          Net income                $      348,880
          Per share                 $          .05
</TABLE>

14.  PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS

In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation." This new standard defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting the
new


                                      F-23



<PAGE>   34




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.  PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS (continued)

fair value method or to continue to measure compensation using the intrinsic
value approach under Accounting Principles Board (APB) Opinion No.25, the former
standard. If the former standard for measurement is elected, SFAS No. 123
requires supplemental disclosure to show the effects of using the new
measurement criteria. This statement is effective for the Company's 1997 fiscal
year. The Company intends to continue using the measurement prescribefd by APB
Opinion No. 25, and accordingly, this pronouncement will not affect the
Company's financial position or results of operations.

The following is a summary of stock option activity and related information for
the years ended June 30:

<TABLE>
<CAPTION>
NON-QUALIFIED STOCK OPTION PLAN:           1997                1996
                                   ------------------  -------------------
                                             Weighted             Weighted
                                             Average              Average
                                             Exercise             Exercise
                                   Options    Price     Options    Price
                                   -------   --------   -------   --------
<S>                                <C>       <C>        <C>       <C> 
Outstanding - Beginning of year    441,000     2.16     400,000     1.97
     Granted                             0               45,000     4.11
     Exercised                     (68,083)    3.05     (25,000)    4.11
     Stock split                                         21,000     4.11
     Forfeited                     (40,500)    3.85
                                   -------              -------
Outstanding - Ending of year       332,417     1.78     441,000     2.16
                                   -------              -------

Exercisable - End of year          325,423              367,439
Weighted average fair value
  of options granted during
  the year                               0                 2.38
</TABLE>

Exercise prices for options outstanding as of June 30, 1997 ranged from $2 to
$4. The weighted average remaining contractual life of those options is 1.46
years.

<TABLE>
<CAPTION>
STOCK OPTION PLAN:                         1997                1996
                                    ------------------  -------------------
                                             Weighted             Weighted
                                             Average              Average
                                             Exercise             Exercise
                                   Options    Price     Options    Price
                                   -------   --------   -------   --------
<S>                                <C>         <C>      <C>       <C> 
Outstanding - Beginning of year    164,250     4.97
     Granted                       207,500     5.30     164,250      4.97
     Exercised                     (10,000)    5.75
     Forfeited                     (65,000)    5.65
                                   -------              -------
Outstanding - Ending of year       296,750     5.03     164,250      4.97
                                   -------              -------

Exercisable - End of year          296,750              164,250
Weighted average fair value
  of options granted during
  the year                            3.27                 3.07
</TABLE>


                                      F-24



<PAGE>   35




             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.  PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS (continued)

Exercise prices for options outstanding as of June 30, 1997 ranged from $5 to
$6. The weighted average remaining contractual life of those options is 3.74
years.

Because the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date of the awards consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and per share data would have been
stated as follows:

<TABLE>
<CAPTION>
                                                1997          1996
                                             ----------     --------
<S>                                          <C>            <C>     
Net income (loss) - as reported              $(259,644)     $527,034
Net income (loss) - pro forma                $(667,110)     $194,040
Earnings (loss) per share - as reported      $    (.05)     $   0.09
Earnings (loss) per share - pro forma        $   (0.12)     $   0.02
</TABLE>

The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumption used for grants in 1997 and 1996; expected volatility of 68%,
risk-free interest rate of 6.0%, and expected lives ranging from 3 to 5 years.


                                      F-25



<PAGE>   36




                                   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.

                                  CONTOUR MEDICAL, INC.
   
Dated:  April 8, 1998              By: /s/ Donald F. Fox
    
                                       -------------------------------------
                                       Donald F. Fox, President