<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934.

FOR THE TRANSITION PERIOD FROM ____________________TO__________________


                         COMMISSION FILE NUMBER: 1-3720

                      FRESENIUS MEDICAL CARE HOLDINGS, INC.
                      -------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                     <C>

                   New York                                   13-3461988
                   --------                                   ----------
(State or Other Jurisdiction of Incorporation)          (I.R.S. Employer ID No.)

Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA           02420
-----------------------------------------------------           -----
       (Address of Principal Executive Office)                (Zip Code)
</TABLE>


        Registrant's Telephone Number, Including Area Code: 781-402-9000
        ----------------------------------------------------------------

                             02173 (Former zip code)
                             -----------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

Indicated by check 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 
                                      ---    ---

                                       1

<PAGE>   2




                      APPLICABLE ONLY TO CORPORATE ISSUERS:

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: as of the date hereof,
90,000,000 shares of common stock, par value $1.00 per share, are outstanding,
all of which are held by Fresenius Medical Care AG.


                                       2

<PAGE>   3


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                                TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

      ITEM 1:     FINANCIAL STATEMENTS

                  Consolidated Statements of Earnings
                  Consolidated Statements of Comprehensive Income
                  Consolidated Balance Sheets
                  Consolidated Statements of Cash Flows
                  Notes to Consolidated Financial Statements

      ITEM 2:     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                  AND RESULTS OF OPERATION

PART II: OTHER INFORMATION

       ITEM 1:    Legal Proceedings
       ITEM 4:    Submission of Matters to a Vote of Security Holders
       ITEM 5:    Other Information
       ITEM 6:    Exhibits and Reports on Form 8-K


                                       3

<PAGE>   4



                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                 UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                               THREE MONTHS ENDED
                                                                                    JUNE 30,
                                                                       ------------------------------------
                                                                             1998                1997
                                                                       -----------------    ---------------
<S>                                                                   <C>                   <C>

                NET REVENUES
                     Health care services........................     $      521,209        $       418,525
                     Medical supplies............................            117,073                110,795
                                                                      --------------        ---------------
                                                                             638,282                529,320
                                                                      --------------        ---------------

                EXPENSES
                     Cost of health care services................            322,199                258,188
                     Cost of medical supplies....................             79,422                 61,621
                     General and administrative expenses.........             81,410                 79,983
                     Provision for doubtful accounts.............             15,291                 11,094
                     Depreciation and amortization...............             55,152                 48,433
                     Research and development....................              1,319                    737
                     Interest expense, net, and related                
                       financing costs...........................             53,080                 43,428
                                                                      --------------        ---------------
                                                                             607,873                503,484
                                                                      --------------        ---------------
                INCOME FROM CONTINUING OPERATIONS
                    BEFORE INCOME TAXES..........................             30,409                 25,836
                PROVISION FOR INCOME TAXES.......................             17,582                 14,940
                                                                      --------------        ---------------
                INCOME FROM CONTINUING OPERATIONS................     $       12,827        $        10,896
                                                                      --------------        ---------------

                DISCONTINUED OPERATIONS (NOTE 5)
                      Loss from discontinued operations, net of  
                       income taxes..............................             (4,240)                  (155)
               
                      Loss on disposal of discontinued operations, 
                       net of income tax benefit.................            (97,228)                     -
                                                                      --------------        ---------------
                      Loss from discontinued operations..........           (101,468)                  (155)
                                                                      --------------        ---------------

                NET INCOME (LOSS)................................     $      (88,641)       $        10,741
                                                                      ==============        ===============

                Basic and fully dilutive earnings per share
                   Continuing operations.........................     $         0.14        $         0.12
                   Discontinued operations.......................     $        (1.13)       $            - 
                   Net Income....................................     $        (0.99)       $         0.12
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements

                                       4
<PAGE>   5


                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                 UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                         SIX MONTHS ENDED
                                                                             JUNE 30,
                                                                ------------------------------------
                                                                      1998                1997
                                                                -----------------    ---------------
<S>                                                            <C>                   <C>

                NET REVENUES
                     Health care services..................... $    1,009,637        $       816,850
                     Medical supplies.........................        238,691                215,529
                                                               --------------        ---------------
                                                                    1,248,328              1,032,379
                                                               --------------        ---------------

                EXPENSES
                     Cost of health care services.............        623,399                498,165
                     Cost of medical supplies.................        162,359                145,158
                     General and administrative expenses......        167,163                139,209
                     Provision for doubtful accounts..........         33,879                 26,490
                     Depreciation and amortization............        109,447                 98,832
                     Research and development.................          1,808                  1,870
                     Interest expense, net, and related               
                      financing costs.........................        100,179                 82,186
                                                               --------------        ---------------
               
                                                                    1,198,234                991,910
                                                               --------------        ---------------
                INCOME FROM CONTINUING OPERATIONS
                    BEFORE INCOME TAXES.......................         50,094                 40,469
                PROVISION FOR INCOME TAXES....................         27,544                 22,689
                                                               --------------        ---------------
                INCOME FROM CONTINUING OPERATIONS............. $       22,550        $        17,780
                                                               --------------        ---------------

                DISCONTINUED OPERATIONS (NOTE X)
                     Income (loss) from discontinued
                      operations, net of income taxes.........         (8,669)                 1,539
                
                     Loss on disposal of discontinued
                      operations,, net of income tax benefit..        (97,228)                    -
                                                               --------------        --------------                       
                Income (loss) from discontinued operations....       (105,897)                 1,539
                                                               --------------        ---------------

                NET INCOME (LOSS)............................. $      (83,347)       $        19,319
                                                               ==============-       ===============

                Basic and fully dilutive earnings per share
                   Continuing operations...................... $         0.25        $          0.19
                   Discontunued operations.................... $        (1.18)       $          0.02
                   Net Income................................. $        (0.93)       $          0.21
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements

                                       5

<PAGE>   6


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

           UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                          THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                                JUNE 30,                               JUNE 30,
                                                    -------------------------------       --------------------------------
                                                        1998               1997              1998                1997
                                                    ------------       ------------       -----------        -------------
<S>                                                 <C>                <C>                <C>                <C>
NET INCOME (LOSS)..........................         $   (88,641)       $      10,741      $   (83,347)       $      19,319
Other comprehensive income.................
   Foreign currency translation 
    adjustments.............................                669               (6,054)           1,695               (6,270)
                                                    -----------        -------------      -----------        -------------
   Total other comprehensive income........                 669               (6,054)           1,695               (6,270)
                                                    -----------        -------------      -----------        -------------
COMPREHENSIVE INCOME.......................         $   (87,972)       $       4,687      $   (81,652)       $      13,049
                                                    ===========        =============      ===========        =============
</TABLE>


                                       6

<PAGE>   7


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                           JUNE 30,        DECEMBER 31,
                                                            1998               1997
                                                        ------------       ------------
                                                         (UNAUDITED)
<S>                                                      <C>               <C>
    ASSETS
    Current Assets:
         Cash and cash equivalents..................... $     10,066       $    12,437
         Accounts receivable, less allowances of
           $64,360 and $53,015.........................      182,698           251,779
         Inventories ..................................      165,309           137,784
         Deferred income taxes.........................      105,158            94,905
         Other current assets..........................       67,814            79,264
         Net accounts receivable from affiliates.......       25,087            20,961
         Income taxes receivable.......................       50,803             8,405
         Net assets of discontinued operations.........      257,653           370,676
                                                        ------------       -----------
              Total Current Assets.....................      864,588           976,211
                                                        ------------       -----------

    Properties and equipment, net......................      473,714           505,844
                                                        ------------       -----------
    Other Assets:
         Excess of cost over the fair value of net
          assets acquired and other intangible assets,
          net of accumulated amortization of $221,067
          and $152,411.................................    3,349,539         3,264,264
         Other assets and deferred charges.............       46,020            37,625
                                                        ------------       -----------
              Total Other Assets.......................    3,395,559         3,301,889
                                                        ------------       -----------
    Total Assets....................................... $  4,733,861       $ 4,783,944
                                                        ============       ===========

    LIABILITIES AND EQUITY

    Current Liabilities:
         Current portion of long-term debt and
          capitalized lease obligations................ $      9,381       $    18,599
            
         Accounts payable..............................      100,626           119,024
         Accrued liabilities...........................      333,566           332,908
                                                        ------------       -----------
              Total Current Liabilities................      443,573           470,531
    Long-term debt.....................................    1,137,262         1,613,657
    Non-current borrowings from affiliates.............    1,008,936           510,498
    Capitalized lease obligations......................        4,732             7,968
    Deferred income taxes..............................      128,863           129,941
    Other liabilities..................................       29,355            25,718
                                                        ------------       -----------
              Total Liabilities........................    2,752,721         2,758,313
                                                        ------------       -----------

    Equity:
       Preferred stocks, $100 par value................        7,412             7,412
       Preferred stocks, $.10 par value ...............        8,906             8,906
       Common stocks, $1 par value; 300,000,000
        shares authorized; outstanding 90,000,000......       90,000            90,000
       Paid in capital.................................    2,020,006         1,978,764
       Retained earnings (deficit).....................     (144,798)          (57,370)
       Accumulated comprehensive income................         (386)           (2,081)
                                                        ------------       -----------
            Total Equity...............................    1,981,140         2,025,631
                                                        ------------       -----------
    Total Liabilities and Equity....................... $  4,733,861       $ 4,783,944
                                                        ============       ===========
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements.

                                       7
<PAGE>   8



       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
                UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                      SIX MONTHS ENDED
                                                                           JUNE 30,
                                                            ------------------------------------
Cash Flows from Operating Activities:                            1998                 1997
                                                            ------------          --------------
<S>                                                         <C>                    <C>
     Net (loss) income..................................... $   (83,347)           $      19,319
     Adjustments to reconcile net earnings to net cash
      from Operating activities:
          Depreciation and amortization....................     109,447                   98,832
          Loss (income) from discontinued operations.......       8,669                   (1,539)
          Loss on disposition of businesses................      97,228                       --
          Provision for doubtful accounts..................      33,879                   26,490
          Benefit of deferred income taxes.................     (23,301)                  (3,632)
          (Loss)/gain on disposal of properties and                  
            equipment......................................          12                      455
     Changes in operating assets and liabilities, net of
      effects of purchase acquisitions and foreign exchange:
          (Increase) in accounts receivable................     (85,957)                 (39,068)
          (Increase) decrease in inventories...............     (26,377)                   1,802
          Decrease (increase) in other current assets......      13,652                   (5,761)
          (Increase) in other assets and deferred charges..     (10,615)                  (5,297)
          (Decrease) in accounts payable...................     (18,557)                  (8,503)
          Increase (decrease) in accrued income taxes......      61,976                   (5,728)
          (Decrease) in accrued liabilities................     (41,295)                 (12,985)
          Increase (decrease) in other long-term                  
           liabilities.....................................       3,637                   (8,643)
          Net changes due to/from affiliates...............      (4,129)                   7,148
          Other, net.......................................      20,860                       87
                                                            -----------            -------------
     Net cash provided by operating activities of  
      continued operations.................................      55,782                   62,977
                                                            -----------            -------------
     Net cash used in operating activities of   
      discontinued operations..............................       1,486                  (27,762)
                                                            -----------            -------------
     Net cash provided by operating activities.............      57,268                   35,215 
                                                            -----------            -------------

Cash Flows from Investing Activities:
          Capital expenditures.............................     (39,712)                 (66,404)
          Payments for acquisitions, net of cash acquired..    (126,913)                (231,475)
                                                            ------------           -------------         

     Net cash used in investing activities of continued   
       operations.........................................      (166,625)               (297,879)
                                                            ------------           -------------
     Net cash used in investing activities of               
        discontinued operations ...........................        (419)                  (9,711)
                                                            -----------            -------------
     Net cash used in investing activities.................    (167,044)                (307,590)
                                                            ------------           -------------

Cash Flows from Financing Activities:
     Increase in borrowings from affiliates................     472,868                   56,809
     Cash dividends paid...................................        (260)                    (260)
     Proceeds on issuance of debt..........................      17,091                  265,828
     Proceeds from receivable financing facility ..........     125,000                    7,500
     Payments on debt and capitalized leases...............    (505,937)                 (49,095)
     Transfer of International operations..................        (168)                      --
     Other net.............................................        (448)                   2,955
                                                            -----------            -------------
     Net cash provided by financing activities of       
       continued operations................................     108,146                  283,737
                                                            -----------            -------------
     Net cash used in financing activities of         
      discontinued operations..............................      (2,515)                  (2,238)
                                                            -----------            -------------
     Net cash provided by financing activities.............     105,631                  281,499
                                                            -----------            -------------
Effects of changes in foreign exchange rates...............       1,774                   (6,249)
                                                            -----------            -------------
Change in cash and cash equivalents........................      (2,371)                   2,875
Cash and cash equivalents at beginning of period...........      12,437                   20,266
                                                            -----------            -------------
Cash and cash equivalents at end of period................. $    10,066            $      23,141
                                                            ===========            =============

Supplemental disclosures of cash flow information: Cash
  paid during the period for:
     Interest.............................................. $    69,300            $      60,684
     Income taxes (received)/paid, net.....................     (12,141)                  31,704

Details for Acquisitions:
     Assets acquired.......................................     154,858                  283,648
     Liabilities assumed...................................       2,375                   17,426
     Advances from affiliates..............................      41,805                        0
     Contributed capital from FMC AG                                 --                   34,425
     Payments on prior year advances from affiliates             16,235                       --
                                                            -----------            -------------
     Cash paid.............................................     126,913                  231,797
     Less cash acquired....................................          --                      322
                                                            -----------            -------------
     Net cash paid for acquisitions........................ $   126,913            $     231,475
                                                            ===========            =============
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements

                                       8
<PAGE>   9


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATD SUBSIDIARIES

          NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                             (DOLLARS IN THOUSANDS)

NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION

THE COMPANY

     Fresenius Medical Care Holdings, Inc. a New York corporation ("FMCH or the
"Company"), is a subsidiary of Fresenius Medical Care AG, a German corporation.
("Fresenius Medical Care" or "FMC"). The Company conducts its operations through
three principal subsidiaries, National Medical Care, Inc., a Delaware
Corporation ("NMC") Fresenius USA, Inc., a Massachusetts corporation ("FUSA")
and SRC Holding Company, Inc., a Delaware corporation.

     The Company is primarily engaged in (i) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services and (ii) manufacturing
and distributing products and equipment for dialysis treatment.

BASIS OF PRESENTATION

     BASIS OF CONSOLIDATION

     The consolidated financial statements in this report at June 30, 1998 and
1997 and for the three month and six month interim periods then ended are
unaudited and should be read in conjunction with the consolidated financial
statements in the Company's 1997 report on Form 10-K. Such interim financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented. Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current periods' basis of
presentation.

     The results of operations for the three and six-month periods ended June
30, 1998 are not necessarily indicative of the results of operations for the
fiscal year ending December 31, 1998.

      NEW STANDARDS

      The Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, effective January 1, 1998. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
further requires that the Company classify items of other comprehensive income
by their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.

                                       9
<PAGE>   10
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
                                                      JUNE 30,      DECEMBER 31,
                                                        1998            1997
                                                      --------      ------------
<S>                                                   <C>           <C>
Inventories:
  Raw materials.....................................  $ 33,740        $ 37,782
  Manufactured goods in process.....................    21,627          14,074
  Manufactured and purchased inventory
   available for sale...............................    85,392          63,709
                                                      --------        --------
                                                       140,759         115,565
   Health care supplies.............................    24,550          22,219
                                                      --------        --------
       Total........................................  $165,309        $137,784
                                                      ========        ========
</TABLE>

NOTE 3. DEBT

    Long-term debt to outside parties consists of:

<TABLE>
<CAPTION>
                                                       JUNE 30,     DECEMBER 31,
                                                         1998           1997
                                                      ----------    ------------
<S>                                                   <C>           <C>
Credit Agreement...................................   $1,122,400      1,613,300
Third-party debt, primarily bank borrowings at
 various interest rates (3% - 14%) with various 
  maturities.......................................       17,810         12,476
                                                      ----------     ----------
                                                       1,140,210      1,625,776
Less amounts classified as current.................        2,948         12,119
                                                      ----------     ----------
                                                      $1,137,262     $1,613,657
                                                      ==========     ==========
</TABLE>

     On February 27, 1998, FMCH increased its existing receivable financing
facility with NationsBank to $331,000 from $204,000. As of June 30, 1998,
proceeds of $325,000 have been drawn down under the NationsBank financing
facility.

NOTE 4.  INTERNATIONAL OPERATIONS

     Effective January 1, 1998, FMCH transferred legal ownership of
substantially all of its international operations to FMC. This transfer was
accounted for on the cost basis since the international subsidiaries remain
under control of a common parent. The consolidated financial statements in this
report at June 30, 1998 and for the three month and six month interim periods
then ended do not include the operating results and cash flows of the
international operations which were transferred. The consolidated financial
statements at June 30, 1997 and for the three month and six month interim
periods then ended have been restated to exclude operating results and cash
flows of the international operations and to conform to the current period
presentation. Total international assets of $261,820 and liabilities of
$335,110, which included $261,991 of intercompany obligations were transferred
at December 31, 1997.

     The following table shows the restatement to net revenues and net earnings
for continuing operations for the prior periods:

<TABLE>
<CAPTION>
                                   SIX MONTHS      TWELVE MONTHS    THREE MONTHS
                                      ENDED            ENDED           ENDED
                                  JUNE 30, 1997  DECEMBER 31, 1997  DECEMBER 31,
                                  -------------  -----------------  ------------
<S>                               <C>            <C>                <C>
Net Revenues 
  Consolidated FMCH.............   $1,118,793       $2,621,300         $630,566
  Less International Transfer...       86,414          172,415           43,838
                                   ----------       ----------         --------
  Restated FMCH.................   $1,032,379       $2,448,885         $586,728
                                   ==========       ==========         ========
Net Earnings/(deficit)
  Consolidated FMCH.............   $   17,171       $   20,923         $  6,046
  Less International Transfer...       (2,148)             786              715
                                   -----------      ----------         --------
  Restated FMCH.................   $   19,319       $   20,137         $  5,331
                                   ==========       ==========         ========
Restated basic and fully 
  diluted earnings per share....   $     0.21       $     0.22         $   0.06
</TABLE>

   The following table shows the restatement to the previously reported
December 31, 1997 stockholders equity and earnings per share:
<TABLE>
<CAPTION>
                                                         LESS
                                   CONSOLIDATED     INTERNATIONAL      RESTATED
                                       FMCH            TRANSFER          FMCH 
                                   ------------     -------------     ----------
<S>                                <C>              <C>               <C>

Net Equity......................    $1,968,979        $(56,652)       $2,025,631

</TABLE>
 
                                       10
<PAGE>   11

                               
NOTE 5.  DISCONTINUED OPERATIONS

     Effective June 1, 1998, the Company classified its Homecare and Non Renal
Diagnostic Services divisions as discontinued operations. The Company disposed
of its Non Renal Diagnostic Services division and its Homecare division on
respectively, June 26, 1998 and July 29, 1998. The Company has recorded a net
after tax loss of $97 million on sale of these businesses. The net loss on the
disposal of these businesses and their results of operations have been accounted
for as discontinued operations, and accordingly, prior year results have been
restated. The remaining assets and liabilities of these discontinued operations
at the balance sheet date have been classified in the consolidated balance sheet
as Net Assets of Discontinued Operations. Included in net assets of
discontinued operations is approximately $150 million of IDPN receivables. These
assets have not been sold and will remain classified as discontinued operations
until they have been settled.

Operating results and net assets of discontinued operations are presented below:

     Discontinued Operations - Results of Operations

     The revenues and results of operations of the discontinued operations of
Homecare and Non Renal Diagnostics divisions were as follows:

<TABLE>
<CAPTION>

                                                      THREE MONTHS ENDED       SIX MONTHS ENDED
                                                           JUNE 30                 JUNE 30,
                                                    ---------------------   ---------------------
                                                       1998        1997        1998        1997
                                                    ----------   --------   ----------   --------
<S>                                                 <C>          <C>        <C>          <C>
 NET REVENUES...................................... $  59,022    $70,969    $ 120,940    $151,125
                                                    ---------    -------    ---------    --------

 Income (loss) from operations before income
  tax benefit......................................    (7,221)      (555)     (14,212)      2,225
 Income tax (benefit)/expense......................    (2,981)      (400)      (5,543)        686
                                                    ---------    -------    ---------    --------
 Income (loss) from operations.....................    (4,240)      (155)      (8,669)      1,539
                                                    ---------    -------    ---------    --------

 Loss on disposal before income tax benefit........  (140,000)        --     (140,000)         --
 Income tax benefit................................   (42,772)        --      (42,772)         --
                                                    ---------    -------    ---------    --------
 Loss on disposal..................................   (97,228)        --      (97,228)         --
                                                    ---------    -------    ---------    --------

 Total Income (loss) on discontinued operations....  (101,468)      (155)    (105,897)      1,539
                                                    =========    =======    =========    ========
</TABLE>



     Discontinued Operations - Consolidated Balance Sheet

     The net assets, excluding intercompany assets, of the discontinued
operations of the Homecare and Non Renal Diagnostic Services divisions, included
in the consolidated balance sheet at June 30,1998 are as follows:


                                              Total

Current assets...........................   $274,987
Properties & equipment, net..............     30,327
Other assets.............................        549
                                            --------
   Total Assets..........................   $305,863
                                            ========

Current liabilities......................     47,963
Other liabilities........................        247
                                            --------
   Total Liabilities.....................     48,210
                                            ========

   Net assets............................   $257,653(1)
                                            ========  
     

(1) Classified as noncurrent asset on consolidated balance sheet


                                       11

<PAGE>   12


NOTE 6.  COMMITMENTS AND CONTINGENCIES

     Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius
Medical Care Holdings, Inc.)

     The Company, formerly known as W. R. Grace & Co. ("Grace New York"),
together with its wholly owned subsidiaries, National Medical Care, Inc. and its
subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA"), was
formed as a result of a series of transactions pursuant to the Agreement and
Plan of Reorganization dated as of February 4, 1996 by and between Grace New
York and Fresenius AG (the "Merger"). In connection with the Merger, W. R. Grace
& Co. - Conn. ("Grace Chemicals") has agreed to indemnify the Company and NMC
against all liabilities of the Company and its successors, whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC operations. After the Merger the Company will remain
contingently liable for certain liabilities with respect to pre-Merger matters
that are not related to NMC operations. The Company believes that in view of the
nature of the non-NMC liabilities and the expected impact of the Merger on Grace
Chemicals' financial position, the risk of significant loss from non-NMC
liabilities is remote.

     Were events to violate the tax-free nature of the Merger, the resulting tax
liability would be the obligation of the Company. Subject to representations by
Grace Chemicals, the Company, and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. Were the Company not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.

LEGAL PROCEEDINGS

     Government Investigations

     OIG INVESTIGATIVE SUBPOENAS

     In October 1995, NMC received five investigative subpoenas from the Office
of the Inspector General ("OIG") of the Department of Health and Human Services.
The subpoenas were issued in connection with an investigation being conducted by
the OIG, the U.S. Attorney for the District of Massachusetts and others
concerning possible violations of federal laws, including the anti-kickback
statutes and the False Claims Act (the "OIG Investigation"). The subpoenas call
for extensive document production relating to various aspects of NMC's business.

    In connection with the OIG Investigation, the Company continues to receive
additional subpoenas directed to NMC or the Company to obtain supplemental
information and documents regarding the above-noted issues, or to clarify the
scope of the original subpoenas.

     The Company is cooperating with the OIG Investigation. The Company believes
that the government continues to review and evaluate the voluminous information
the Company has provided. As indicated above, the government continues, from
time to time, to seek supplementing and/or clarifying information from the
Company. The Company expects that this process will continue while the
government completes its evaluation of the issues.

     The OIG Investigation covers the following areas: (a) NMC's dialysis
services business ("DSD"), principally relating to its Medical Director
contracts and compensation; (b) NMC's treatment of credit balances resulting
from overpayments received under the Medicare ESRD program, its billing for home
dialysis services, and its payment of supplemental medical insurance premiums on
behalf of indigent patients; (c) NMC's LifeChem laboratory subsidiary's
("LifeChem") business, including documents relating to testing procedures,
marketing, customers, competition and certain overpayments totaling
approximately $4.9 million that were received by LifeChem from the Medicare
program with respect to laboratory services rendered between 1989 and 1993, and
a 1997 review of dialysis facilities' standing orders; and (d) NMC's homecare
division ("Homecare") and, in particular, information concerning intradialytic
parenteral nutrition ("IDPN") billing practices including various services,
equipment and supplies and payments made to third parties as compensation for
administering IDPN therapy.

     The government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. As noted, the penalties
applicable under the anti-kickback statutes, the U.S. Federal False Claims Act
(the "False Claims Act") and other federal and state statutes and regulations
applicable to NMC's business can be substantial. While NMC asserts that it is
able to offer legal and/or factual defenses with respect to many of the areas
the government has identified, there can be no assurance that the federal


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government and/or one or more state agencies will not claim that NMC has
violated statutory or regulatory provisions. Additionally, eight and possibly
other qui tam actions alleging that NMC submitted false claims to the government
have been filed under seal by former or current NMC employees or other
individuals who may have familiarity with one or more of the issues under
investigation. As noted, under the False Claims Act, any such private plaintiff
could pursue an action against NMC in the name of the U.S. at his or her own
expense if the government declines to do so.

     DIAGNOSTICS SUBPOENA

     In October 1996, Biotrax International, Inc. ("Biotrax") and NMC
Diagnostics, Inc., ("DSI") both of which are subsidiaries of NMC, received an
investigative subpoena from the OIG. The subpoena calls for the production of
extensive documents and was issued in connection with an investigation being
conducted by the OIG in conjunction with the U.S. Attorney for the Eastern
District of Pennsylvania concerning the possible submission of false or improper
claims to, and their payment by, the Medicare program. The subpoena calls for
the production of documents on corporate organization, business plans, document
retention, personnel files, sales and marketing and Medicare billing issues
relating to certain procedures offered by the prior owner of the Biotrax
business before its assets were acquired by NMC in March 1994 and by DSI
following the acquisition. The Company has reviewed the subpoena with its legal
counsel and is making extensive document production in response to the subpoena.
The outcome of this investigation, its duration, and its effect, if any, on NMC
or the Company cannot be predicted at this time. The Company recently divested
its Non Renal Diagnostic business. See "Management Discussion and Analysis of
Financial Condition and Results of Operations - Divestitures."

     MEDICAL DIRECTOR COMPENSATION

     The government is investigating whether DSD's compensation arrangements
with its Medical Directors constitute payments to induce referrals, which would
be illegal under the anti-kickback statutes, rather than payment for services
rendered. DSD compensated the substantial majority of its Medical Directors on
the basis of a percentage of the earnings of the dialysis center for which the
Medical Director was responsible from the inception of NMC's predecessor in 1972
until January 1, 1995, the effective date of Stark II. Under the arrangements in
effect prior to January 1, 1995, the compensation paid to Medical Directors was
adjusted to include "add backs," which represented a portion of the profit
earned by NMC's Medical Products Group ("MPG") on products purchased by the
Medical Director's facility from MPG and (until January 1, 1992) a portion of
the profit earned by LifeChem on laboratory services provided to patients at the
Medical Director's facility. These adjustments were designed to allocate a
profit factor to each dialysis center relating to the profits that could have
been realized by the center if it had provided the items and services directly
rather than through a subsidiary of NMC. The percentage of profits paid to any
specific Medical Director was reached through negotiation, and was typically a
provision of a multi-year consulting agreement.

     To comply with provisions of OBRA 93 (as hereafter defined) known as "Stark
II" if Designated Health Services (as defined in Stark II) are involved, Medical
Director compensation must not exceed fair market value and may not take into
account the volume or value of referrals or other business generated between the
parties. Since January 1, 1995, DSD has compensated its Medical Directors on a
fixed compensation arrangement intended to comply with the requirements of Stark
II. In renegotiating its Medical Director compensation arrangements in
connection with Stark II, DSD took and continues to take account of the
compensation levels paid to its Medical Directors in prior years.

     Certain government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. DSD
does not compensate its Medical Directors on an hourly basis and has asserted to
the government that hourly compensation is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between DSD and its Medical Directors prior to January 1, 1995, there
is a wide variation in the amounts that have been paid to Medical Directors.

     As a result, the compensation that DSD has paid and is continuing to pay to
a material number of its Medical Directors could be viewed by the government as
being in excess of "fair market value," both in absolute terms and in terms of
hourly compensation. NMC has asserted to the government that its compensation
arrangements do not constitute illegal payments to induce referrals. NMC 


                                       13

<PAGE>   14



has also asserted to the government that OIG auditors repeatedly reviewed NMC's
compensation arrangements with its Medical Directors in connection with their
audits of the costs claimed by DSD; that the OIG stated in its audit reports
that, with the exception of certain technical issues, NMC had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that NMC reasonably relied on these audit reports in concluding that its program
for compensating Medical Directors was lawful. There has been no indication that
the government will accept NMC's assertions concerning the legality of its
arrangements generally or NMC's assertion that it reasonably relied on OIG
audits, or that the government will not focus on specific arrangements that DSD
has made with one or more Medical Directors and claim that those specific
arrangements were or are unlawful.

     The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.

     CREDIT BALANCES

     In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, the Health
Care Financing Administration ("HCFA") adopted a regulation requiring certain
Medicare providers, including dialysis centers, to file a quarterly form listing
unrecouped overpayments with the Medicare intermediary responsible for
reimbursing the provider. The first such filing was required to be made as of
June 30, 1992 for the period beginning with the initial date that the provider
participated in the Medicare program and ending on June 30, 1992.

     The government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ending
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. DSD's policy was to notify Medicare intermediaries in writing of
overpayments upon receipt and to maintain unrecouped Medicare overpayments as
credit balances on the books and records of DSD for four years; overpayments not
recouped by Medicare within four years would be reversed from the credit balance
account and would be available to be taken into income. NMC asserts that
Medicare overpayments that have not been recouped by Medicare within four years
are not subject to recovery under applicable regulations and that its initial
filing with the intermediaries disclosed the credit balance on the books and
records of DSD as shown in accordance with its policy, but there can be no
assurance that the government will accept NMC's views. The government has
inquired whether other divisions including Homecare, LifeChem and DSI have
appropriately treated Medicare credit balances.

     The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's obligation to rebill commercial
payors for amounts originally billed to Medicare under HCFA's initial
implementation of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93")
amendments to the secondary payor provisions of the Medicare Act. DSD
experienced delays in reporting a material amount of overpayments after the
implementation of the OBRA 93 amendments. NMC asserts that most of these delays
were the result of the substantial administrative burdens placed on DSD as a
consequence of the changing and inconsistent instructions issued by HCFA with
respect to the OBRA 93 amendments and were not intentional. Substantially all
overpayments resulting from the rebilling effort associated with the OBRA 93
amendments have now been reported. Procedures are in place that are designed to
ensure that subsequent overpayments resulting from the OBRA 93 amendments will
be reported on a timely basis.

OVERPAYMENTS FOR HOME DIALYSIS SERVICES

     NMC acquired Home Intensive Care, Inc.("HIC"), an in-center and home
dialysis service provider, in 1993. At the time of the acquisition, HIC was the
subject of a claim by HCFA that HIC had received payments for home dialysis
services in excess of the Medicare reasonable charge for services rendered prior
to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The
government is investigating whether the settlement concerning the alleged
overpayments made to HIC resolved all issues relating to such alleged
overpayments. The government is also investigating whether an NMC subsidiary,
Home Dialysis Services, Inc. ("HDS"), received payments similar to the payments
that HIC received, and whether HDS improperly billed for home dialysis services
in excess of the monthly cost cap for services rendered on or after February 1,
1990. The government is investigating whether NMC was overpaid for services
rendered. NMC asserts that the billings by HDS were proper, but there can be no
assurance that the government will accept NMC's view.


                                       14

<PAGE>   15



     LIFECHEM

     Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain
billing problems to the government that had resulted in LifeChem's receipt of
approximately $4.9 million in overpayments from the Medicare program for
laboratory services rendered between 1989 and 1993. LifeChem asserts that most
of these overpayments relate to errors caused by a change in LifeChem's computer
systems and that the remainder of the overpayments were the result of the
incorrect practice of billing for a complete blood count with differential when
only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. LifeChem asserts that the overpayments it received
were not caused by fraudulent activity, but there can be no assurance that the
government will accept LifeChem's view.

     LifeChem made these disclosures to the government as part of an application
to be admitted to a voluntary disclosure program begun by the government in
mid-1995. At the time of the disclosures, LifeChem tendered repayment to the
government of the $4.9 million in overpayments. After the OIG Investigation was
announced, the government indicated that LifeChem had not been accepted into its
voluntary disclosure program. The government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in LifeChem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.

     On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggested instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem continued its effort to determine whether any
other overpayments occurred relating to the "billing rules" problem and, in
March 1997, advised the government that an additional overpayment of
approximately $260,000 was made by Medicare.

     Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
composite rate payment method (the "Composite Rate") at a price below fair
market value, coupled with an agreement by a dialysis center to refer all or
most of its non-Composite Rate tests to the laboratory, violates the
anti-kickback statutes. In response to this alert, LifeChem changed its
practices with respect to testing covered by the Composite Rate to increase the
amount charged to both DSD and third-party dialysis centers and reduce the
number of tests provided for the fixed rate. The government is investigating
LifeChem's practices with respect to these tests.

     Benefits provided to dialysis centers and persons associated with dialysis
centers. The government is investigating whether DSD or any third-party dialysis
center or any person associated with any such center was provided with benefits
in order to induce them to use LifeChem services. Such benefits could include,
for example, discounts on Renal Products Division ("RPD") supplies, the
provision of computer equipment, the provision of money for the purchase of
computer equipment, and the provision of research grants. NMC has identified
certain instances in which benefits were provided to MPG customers who purchased
medical products from RPD and used LifeChem's laboratory services. The
government may claim that the provision of such benefits violates, among other
things, the anti-kickback statutes.

     Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring
NMC to produce at this time. In addition to documents relating to the areas
discussed above, the government has also required LifeChem to produce documents
relating to the equipment and systems used by LifeChem in performing and
billing for clinical laboratory blood tests, the design of the test panels
offered and requisition forms used by LifeChem, the utilization rate for
certain tests performed by LifeChem, recommendations concerning diagnostic
codes to be used in ordering tests for patients with given illnesses or
conditions, internal and external audits and investigations relating to
LifeChem's billing and testing. Recently, the government served an
investigative subpoena for documents concerning the Company's 1997 review of
dialysis facilities' standing  orders, and responsive documents were provided.

                                       15

<PAGE>   16




     INTRADIALYTIC PARENTERAL NUTRITION

     Administration kits. One of the principal activities of Homecare is to
provide IDPN therapy to dialysis patients at both NMC-owned facilities and at
facilities owned by other providers. IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing Homecare's IDPN claims issued a Medicare advisory to all parenteral
and enteral nutrition suppliers announcing a coding change for reimbursement of
administration kits provided in connection with IDPN therapy for claims filed
for items provided on or after April 1, 1991. The Medicare allowance for
administration kits during this period was approximately $625 per month per
patient. The advisory stated that IDPN providers were to indicate the "total
number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, Homecare billed for administration kits on the basis of the number of
days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients
on service.

     In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "if overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." Homecare revised its billing practices in response to
this advisory for claims filed for items provided on or after July 1, 1992.
Homecare was not asked to refund any amounts relating to its billings for
administration kits following the issuance of the second advisory.

     The government is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing for administration
kits were proper, but there can be no assurance that the government will accept
NMC's view. The government may claim that Homecare's billing for administration
kits during this period violates, among other things, the False Claims Act.

     Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
the infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of Homecare's billings for infusion pumps and IV
poles.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company has not been able to bill for infusion pumps after
July 1, 1996. The government discontinued reimbursement for IV poles in 1992.

     "Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, Homecare followed the practice common
in the industry of paying a "hang fee" to the center. Dialysis centers are
responsible for reporting such fees to HCFA on their cost reports. For DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
cost calculations. For third-party dialysis centers, the fee was negotiated with
each center, typically pursuant to a written contract, and ranged from $15 to
$65 per administration. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers. NMC has stopped paying "hang fees" to both DSD and third-party
facilities.

     In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
government is investigating the


                                       16

<PAGE>   17



nature and extent of the "hang fees" and other payments made by Homecare as well
as payments by Homecare to physicians whose patients have received IDPN therapy.
The government may claim that the payments by Homecare to dialysis centers
violate, among other things, the anti-kickback statutes.

     Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to
end-stage renal disease ("ESRD") patients. It is the policy of Homecare to seek
Medicare reimbursement for IDPN therapy only when it is prescribed by a
patient's treating physician and when it believes that the circumstances satisfy
the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA
and its carriers approved for payment more than 90% of the IDPN claims submitted
by Homecare. After 1993, the rate of approval for Medicare reimbursement for
IDPN claims submitted by Homecare for new patients and by the infusion industry
in general, fell to approximately 9%. NMC contends that the reduction in rates
of approval occurred because HCFA and its carriers implemented an unauthorized
change in coverage policy without giving notice to providers. While NMC
continued to offer IDPN to patients pursuant to the prescription of the
patients' treating physicians and to submit claims for Medicare reimbursement
when it believed the requirements stated in HCFA's published regulations were
satisfied, other providers responded to the drop in the approval rate for new
Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on
the number of Medicare patients to whom they provide IDPN, or declining to add
new Medicare patients. The number of patients to whom NMC provided IDPN
increased as a result.

     The government is investigating the utilization rate of IDPN therapy among
NMC patients, whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage, and whether documentation of eligibility was
adequate. NMC asserts that the utilization rate of IDPN therapy among its
dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the
factors discussed above and that it is the policy of Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.

     In addition, the government is investigating whether, in certain
circumstances, documentation of eligibility was false or inaccurate. With
respect to some claims, the Company has determined that false or inaccurate
documentation was submitted, deliberately or otherwise. The Company understands
that the government recently has utilized a grand jury to investigate this
matter.

     QUI TAM ACTIONS

     The Company and NMC have become aware that eight qui tam actions have been
filed in various jurisdictions. Each of these actions is under seal and in each
action, pursuant to court order the seal has been modified to permit the
Company, NMC and other affiliated defendants to disclose the complaint to any
relevant investors, financial institutions and/or underwriters, their successors
and assigns and their respective counsel and to disclose the allegations in the
complaints in their respective U.S. Securities and Exchange Commission (the
"SEC" or the "Commission") and New York Stock Exchange ("NYSE") periodically
required filings.

     The first qui tam action was filed in the United States District Court for
the Southern District of Florida in 1996, amended on July 8, 1996 and disclosed
to the Company on July 10, 1996. It alleges, among other things, that Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. The Amended Complaint also seeks the
imposition of a constructive trust on the proceeds of the NMC dividend to Grace
Chemicals for the benefit of the United States on the ground that the Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.

     The second qui tam action was filed in the United States District Court for
the Middle District of Florida in 1995 and disclosed to the Company on or before
November 7, 1996. It alleges, among other things, that NMC and certain NMC
subsidiaries violated the False Claims Act in connection with the alleged
retention of over-payments made under the Medicare program, the alleged
submission of claims in violation of applicable cost caps and the payment of
supplemental Medicare insurance premiums as an alleged inducement to patients to
obtain dialysis products and services from NMC. The complaint alleges that as a
result of this allegedly wrongful conduct, the United States suffered damages in
excess of $10 million including applicable fines.

     The third qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in February 1996 

  
                                     17

<PAGE>   18


and was disclosed to the Company in November 1996. It alleges, among other
things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider
and NMC violated the False Claims Act in connection with the submission of
claims to the Medicare program for a nonsterile intravenous drug and for
intravenous drugs which were allegedly billed in excess of permissible Medicare
reimbursement rates. The complaint also claims that the defendants violated the
Medicare and Medicaid anti-kickback statutes in connection with the receipt of
discounts and other in kind payments as alleged inducements to purchase
intravenous drugs. The complaint is focused on the business relationship between
the pharmaceutical manufacturer and several providers, one of which is NMC. The
complaint claims that as a result of this allegedly wrongful conduct, the United
States suffered damages. On June 28, 1997, in response to relator's motion to
dismiss and the United States' declination to intervene, the District Court
ordered the complaint dismissed without prejudice.

     The fourth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax violated
the False Claims Act in connection with its submission of claims to the Medicare
program for diagnostic tests and induced overutilization of such tests in the
medical community through improper marketing practices also in violation of the
False Claims Act.

     The fifth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.

     The sixth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in November 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.

     The seventh qui tam action was filed in the United States District Court
for the District of Delaware in January 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that NMC and Biotrax violated
the False Claims Act in connection with the submission of claims to the Medicare
program for diagnostic tests, and induced overutilization of such tests through
improper marketing practices which provided impermissible incentives to health
care providers to order these tests.

     The eighth qui tam action was filed in the United States District Court for
the District of New Jersey in February 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.

     Each of the qui tam complaints claims that as a result of the allegedly
wrongful conduct, the United States suffered damages and that the defendants are
liable to the United States for three times the amount of the alleged damages
plus civil penalties of up to $10,000 per false claim. An adverse result in any
of the qui tam actions could have a material adverse affect on the Company's
business, financial condition or results of operations.

     As a result of discussions with representatives of the United States in
connection with the OIG Investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States (an "Obligation") relating to or arising out of the OIG
Investigation and the qui tam action filed in the Southern District of Florida
(the "Government Claims"). For the purposes of the OIG Agreements, an Obligation
is (a) a liability or obligation of NMC to the United States in respect of a
Government Claim pursuant to a court order (i) which is final and nonappealable
or (ii) the enforcement of which has not been stayed pending appeal or (b) a
liability or obligation agreed to be an Obligation in a settlement agreement
executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the
United States, on the other hand. As stated elsewhere herein, the outcome of the
OIG Investigation cannot be predicted. The entering into of the OIG Agreements
is not an admission of liability by any party with respect to the OIG
Investigation, nor does it indicate the liability, if any, which may result
therefrom.

     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, the Company and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for this guarantee, NMC delivered an
irrevocable standby letter of credit in the amount of $150 million. The United


                                       18

<PAGE>   19


States will return such letter of credit (or any renewal or replacement) for
cancellation when all Obligations have been paid in full or it is determined
that NMC has no liability in respect of the Government Claims. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.

     Fresenius Medical Care and the United States state in the OIG Agreements
that they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any Obligations arising under such resolution, taking into account the
ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements
state that the foregoing statements shall not be construed to obligate any
person to enter into any settlement of the Government Claims or to agree to a
structured settlement. Moreover, the OIG Agreements state that the statements
described in the first sentence of this paragraph are precatory and statements
of intent only and that (a) compliance by the United States with such provisions
is not a condition or defense to the obligations of Fresenius Medical Care under
the OIG Agreements and (b) breach of such provisions by the United States cannot
and will not be raised by Fresenius Medical Care to excuse performance under the
OIG Agreements.

     The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the Commission and copies of which may be
examined without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at
the Regional Offices of the Commission located at Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World
Trade Center, New York, New York 10048. Copies of such material will also be
made available by mail from the Public Reference Branch of the Commission at 450
Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such agreements.

     An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
government, could result in the payment of substantial fines, penalties and
forfeitures, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other practices that could adversely affect the
Company's revenues. Any such result could have a material adverse effect on the
Company's business, financial condition and results of operations.

     OMNIBUS BUDGET RECONCILIATION ACT OF 1993

     OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, HCFA issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by OBRA 93 would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than that provided under Medicare.

     In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.

     If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor is
upheld, NMC may be required to refund the payments received from employer health
plans for services provided after August 10, 1993 under HCFA's original
implementation, and to re-bill Medicare for the same services, which would
result in a net loss to DSD of approximately $120 million as of December 31,
1995. NMC ceased to recognize the incremental revenue realized under the
original Program Memorandum as of July 1, 1995, but it continued to bill
employer health plans as primary payors for patients affected by OBRA 93 through
December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as
primary payor for dual eligible ESRD patients affected by OBRA 93, and then
began to rebill in compliance with the revised policy for services rendered
between April 24 and December 31, 1995.

     On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to


                                       19

<PAGE>   20



preclude HCFA from retroactively enforcing its April 24, 1995 implementation of
the OBRA 93 provisions relating to the coordination of benefits for dual
eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction
to preclude HCFA from enforcing its new policy retroactively, that is, to
billings for services provided between August 10, 1993 and April 23, 1995. On
June 6, 1995, the court granted NMC's request for a preliminary injunction. The
litigation is continuing with respect to NMC's request to enjoin HCFA's new
policy, both retroactively and prospectively, and NMC filed significant
discovery requests concerning how HCFA developed the April 1995 rule. In
December of 1996, NMC moved for partial summary judgment seeking a declaration
from the Court that HCFA's retroactive application of the April 1995 rule was
legally invalid. HCFA cross-moved for summary judgment on the grounds that the
April 1995 rule was validly applied prospectively. In January 1998, the court
granted NMC's motion for partial summary judgment and entered a declaratory
judgment in favor of NMC, holding HCFA's retroactive application of the April
1995 rule legally invalid. Based on its finding, the Court also ordered that
HCFA is permanently enjoined from enforcing and applying the April 1995 rule
retroactively against NMC and granted NMC's outstanding discovery motions. The
Court took no action on HCFA's motion for summary judgment pending completion of
the outstanding discovery. The Court's favorable rulings provide a stronger
legal basis for NMC to collect outstanding amounts from commercial payors on the
retroactive portion of the case during the first half of 1998. HCFA elected not
to appeal from the Court's June 1995 and January 1998 orders and has agreed to a
schedule for providing discovery under the Court's January 1998 order. HCFA may,
however, appeal all rulings at the conclusion of the litigation. If HCFA should
successfully appeal so that the revised interpretation would be applied
retroactively, FMCH's business, financial position and results of operations
would be materially adversely affected.

     INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES

     NMC administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. After 1993, Medicare claims processors
sharply reduced the number of IDPN claims approved for payment as compared to
prior periods. NMC believes that the reduction in IDPN claims represented an
unauthorized policy coverage change. Accordingly, NMC and other IDPN providers
pursued various administrative and legal remedies, including administrative
appeals, to address this reduction.

     In November 1995, NMC filed a complaint in the U.S. District Court for the
Middle District of Pennsylvania seeking a declaratory judgment and injunctive
relief to prevent the implementation of this policy coverage change. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District
Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to the administrative
review processes available under the Medicare Act. NMC decided not to appeal the
Court's decision, but rather, to pursue the claims through the available
administrative processes.

    Although NMC management believes that those IDPN claims were consistent with
published Medicare coverage guidelines and ultimately will be approved for
payment, there can be no assurance that the claims on appeal will be approved
for payment. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $152 million as of December 31, 1997.

     If NMC is unable to collect its IDPN receivable or if IDPN coverage is
reduced or eliminated, depending on the amount of the receivable that is not
collected and/or the nature of the coverage change, the Company's business,
financial condition and results of operations could be materially adversely
affected.

     OTHER LEGAL PROCEEDINGS

     DISTRICT OF NEW JERSEY INVESTIGATION

     NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
is cooperating with this investigation and has provided the grand jury with
extensive documents. In February, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In
June 1996, NMC received a letter from the U.S. Attorney for the District of New
Jersey indicating that the U.S. Attorney had declined to prosecute NMC with
respect to a submission related to NMC's effort to lift the import hold. The
letter added that NMC remains a subject of a federal grand jury's investigation
into other matters. NMC has produced documents in response to a June 1996
subpoena from the federal grand jury requesting certain documents in
connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to
November 1995.


                                       20

<PAGE>   21


The government investigators and the Company have been attempting to further
narrow the issues with respect to which the government has previously expressed
concerns in order to resolve this investigation. However, the outcome and
impact, if any, of these discussions and potential resolution on the Company's
business, financial condition or results of operations cannot be predicted at
this time.


     COMMERCIAL INSURER LITIGATION

     In December 1997, FMCH, NMC, and certain named NMC subsidiaries, as well as
Grace Chemicals, were served with a civil complaint filed by Aetna Life
Insurance Company in the U.S. District Court for the Southern District of New
York (Aetna Life Insurance Company v. National Medical Care, Inc. et al,
97-Civ-9310). Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
complaint seeks unspecified damages and costs. Grace Chemicals has sought
indemnification from the Company pursuant to the terms of an indemnification
agreement between Grace and the Company for any liability, costs and expenses
that Grace may incur as a result of the lawsuit. The Company has moved to
dismiss the complaint on the grounds that it does not state a claim against
FMCH, NMC or their affiliates. This action is at an early stage and its outcome
and impact on the Company cannot be predicted at this time. However, the
Company, NMC and its subsidiaries believe that they have substantial defenses to
the claims asserted, and intend to vigorously defend the lawsuit. It is also
possible that one or more other private payors may claim that NMC received
excess payments and similarly, may seek reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.



                                       21

<PAGE>   22
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

    The following is a discussion of the financial condition and results of
operations of FMCH. The discussion should be read in conjunction with the
financial statements included elsewhere in this document.

    This section contains certain forward-looking statements that are subject to
various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of FMCH, government reimbursement, future
plans and management's expectations regarding future performance. Actual results
could differ materially from those contained in these forward-looking statements
due to certain factors including, without limitation, changes in business,
economic and competitive conditions, regulatory reforms, foreign exchange rate
fluctuations, uncertainties in litigation or investigative proceedings, and the
availability of financing. These and other risks and uncertainties, which are
more fully described elsewhere in this Item 2 and in Management's Discussion and
Analysis of Financial Condition and Results of Operation in FMCH's 1997 
Form 10-K and in FMCH's reports filed from time to time with the Commission,
could cause FMCH's results to differ materially from the results that have been
or may be projected by or on behalf of FMCH.


OVERVIEW

    FMCH is primarily engaged in (a) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services and (b) manufacturing
and distributing products and equipment for dialysis treatment. Throughout
FMCH's history, a significant portion of FMCH's growth has resulted from the
development of new dialysis centers and the acquisition of existing dialysis
centers, as well as from the acquisition and development of complementary
businesses in the health care field.

    FMCH derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 64% in 1997).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 23% of dialysis
service's domestic net revenues in 1997), and the reimbursement rate for other
dialysis and non-dialysis related services and products, as well as other
material aspects of these programs, have in the past and may in the future be
changed as a result of deficit reduction and health care reform measures.

    FMCH's business, financial position and results of operations also could be
materially adversely effected by an adverse outcome in the OIG investigations,
any whistleblower action, the pending challenge by FMCH of changes effected by
Medicare in approving reimbursement claims relating to the administration of
IDPN or the adoption in 1996 of a new coverage policy that will change IDPN
coverage prospectively. FMCH's business, financial position and results of
operations would also be materially adversely affected by an adverse outcome in
the pending litigation concerning the implementation of certain provisions of
OBRA 93 relating to the coordination of benefits between Medicare and employer
health plans in the case of certain dual eligible ESRD patients.

    FMCH also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates in all areas except for certain services provided by NMC Homecare.
However, non-government payors are imposing cost containment measures that are
creating significant downward pressure on reimbursement levels that FMCH
receives for its services and products.



                                       22

<PAGE>   23
RESULTS OF OPERATIONS
    The following table summarizes certain unaudited operating results of FMCH
by principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services. This information has been reorganized and prior periods have been
reclassified to conform with the business unit report of FMC. The information
is also broken out between continued and discontinued operations.

<TABLE>
<CAPTION>
                                                       (Dollars in Millions)
                                               THREE MONTHS ENDED     SIX MONTHS ENDED
                                                    JUNE 30,              JUNE 30,
                                               ------------------    ------------------
                                               1998          1997     1998       1997
                                               -----        -----    ------     -------
<S>                                            <C>          <C>      <C>        <C>
NET REVENUES
   Dialysis Services........................   $ 529        $429     $1,027     $  838
   Dialysis Products........................     170         161        342        312
   Intercompany Eliminations................     (61)        (61)      (121)      (118)
                                               -----        ----     ------     ------
Total Net Revenues..........................   $ 638        $529     $1,248     $1,032
                                               =====        ====     ======     ======

Operating Earnings:
   Dialysis Services........................   $  85        $ 62     $  159     $  123
   Dialysis Products........................      25          22         46         40
                                               -----        ----     ------     ------
Total Operating Earnings....................     110          84        205        163
                                               -----        ----     ------     ------

Other Expenses:
   General Corporate........................   $  26        $ 13     $   53     $   37
   Research & Development...................       1           1          2          2
   Interest Expense, Net....................      53          44        100         83
                                               -----        ----     ------     ------
Total Other Expenses........................      80          58        155        122
                                               -----        ----     ------     ------

Earnings Before Income Taxes - Continuing
   Operations...............................      30          26         50         41
Provision for Income Taxes..................      17          15         27         23
                                               -----        ----     ------     ------
Net Earnings - Continuing Operations........   $  13        $ 11     $   23     $   18
                                               =====        ====     ======     ======

Discontinued Operations:
    Net Revenues............................   $  59        $ 71     $  121     $  151

    Income (Loss) before income taxes.......      (7)          0        (14)         2
    (Benefit)/provision for Income Taxes....      (3)          0         (5)         1
                                               -----        ----     ------     ------
    Income (Loss) from Operations...........      (4)          0         (9)         1
                                               -----        ----     ------     ------

Loss on Disposal before Income Taxes........    (140)          0       (140)         0
Income Tax Benefit..........................     (43)          0        (43)         0
                                               -----        ----     ------     ------
Loss on Disposal ...........................     (97)          0        (97)         0
                                               -----        ----     ------     ------

Total Income/Loss on Discontinued 
    Operations..............................   $(101)       $  0     $ (106)    $    1
                                               =====        ====     ======     ======

</TABLE>

                                       23


<PAGE>   24


THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

     Net revenues from continuing operations for the second quarter of 1998
increased by 21% ($109 million) over the comparable period of 1997. Net earnings
from continuing operations for the second quarter of 1998 increased 18% 
($2 million) over the comparable period of 1997 as a result of increased
operating earnings partially offset by higher interest expenses and increased
general corporate expenses.

     DIALYSIS SERVICES.

     Dialysis Services net revenues for the second quarter of 1998 increased by
23% ($100 million) over the comparable period of 1997, primarily as a result of
a 17% increase in the number of treatments provided, the beneficial impact of
the extension of the Medicare Secondary Payor (MSP) provision, higher EPO
utilization as a result of the anemia management program, and increased
laboratory testing revenues. The treatment increase was the result of base
business growth and the impact of 1997 and 1998 acquisitions. The laboratory
testing revenue increases were primarily due to the full three month revenue
impact of Spectra Laboratories, acquired by FMCH in June 1997.

     Dialysis Services operating earnings for the second quarter of 1998
increased by 37% ($23 million) over the comparable period of 1997 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision and higher EPO utilization.

     DIALYSIS PRODUCTS.

     Dialysis Products net revenues for the second quarter of 1998 increased by
6% ($9 million) over the comparable period of 1997. This is due to increased
sales of dialyzers ($6 million), concentrates ($2 million), and machines 
($1 million).

     Dialysis Products operating earnings for the second quarter of 1998
increased by 14% ($3 million) over the comparable period of 1997. This is
primarily due to improvements in gross margin resulting from manufacturing
efficiencies from increased production volume.

     OTHER EXPENSES.

     FMCH's other expenses for the second quarter of 1998 increased by 38% ($22
million) over the comparable period of 1997. General corporate expenses
increased by $13 million primarily due to a reduction in foreign exchange gains
($6 million) and increased insurance and legal expenses ($6 million). Research
and development expenses for the second quarter of 1998 were essentially the
same as the comparable period of 1997. Interest expense for the second quarter
of 1998 increased by $9 million over the comparable period of 1997 mainly due
to an increase in debt to finance acquisitions.

     INCOME TAX RATE.

     The effective tax rate from continuing operations for the second quarter
1998 (57.8%) is similar to the rate for the comparable period of 1997 (57.8%).

     DISCONTINUED OPERATIONS

     On June 1, 1998, the Company classified its Homecare and Non Renal
Diagnostic Services divisions as discontinued operations. The Company sold its
Non Renal Diagnostic Services division and its Homecare division on,
respectively, June 26, 1998 and July 29, 1998. A net after tax loss of 
$97 million has been recorded on the sale of these segments. Homecare/
Diagnostics revenues for the second quarter of 1998 were $59 million with a net
after tax loss of $4 million. See "Liquidity and Capital Resources --
Divestitures."


                                       24

<PAGE>   25
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

     Net revenues from continuing operations for the first six months of 1998
increased by 21% ($216 million) over the comparable period of 1997. Net earnings
from continuing operations for the first six months of 1998 increased 28% 
($5 million) over the comparable period of 1997 as a result of increased
operating earnings partially offset by higher interest expenses and increased
general corporate expenses.

     DIALYSIS SERVICES.

     Dialysis Services net revenues for the first six months of 1998 increased
by 23% ($189 million) over the comparable period of 1997, primarily as a result
of a 18% increase in the number of treatments provided, the beneficial impact
of the extension of the Medicare Secondary Payor (MSP) provision, higher EPO
utilization as a result of the anemia management program, and increased
laboratory testing revenues. The treatment increase was a result of base
business growth and the impact of 1997 and 1998 acquisitions. The laboratory
testing revenue increases were primarily due to the full six month revenue
impact of Spectra Laboratories acquired by FMCH in June 1997.

     Dialysis Services operating earnings for the first six months of 1998
increased by 29% ($36 million) over the comparable period of 1997 primarily due
to the increase in treatment volume, the beneficial impact of the extension
of the MSP provision and higher EPO utilization.

     DIALYSIS PRODUCTS.

     Dialysis Products net revenues for the first six months of 1998 increased
by 10% ($30 million) over the comparable period of 1997. This is due to
increased sales of dialyzers ($11 million), concentrates ($6 million),
peritoneal products ($3 million), machines ($4 million), bloodlines 
($2 million), and other products ($4 million).

     Dialysis Products operating earnings for the first six months of 1998
increased by 15% ($6 million) over the comparable period of 1997. This is
primarily due to improvements in gross margin resulting from manufacturing 
efficiencies from increased production volume.

     OTHER EXPENSES.

     FMCH's other expenses for the first six months of 1998 increased by 27%
($33 million) over the comparable period of 1997. General corporate expenses
increased by $16 million primarily due to a reduction in foreign exchange gains
($9 million), and increased insurance and legal expenses ($6 million). Research
and development expenses for the first six months of 1998 were essentially the
same as the comparable period of 1997. Interest expense for the first six
months of 1998 increased by $17 million over the comparable period of 1997
mainly due to an increase in debt to finance acquisitions.

     INCOME TAX RATE.

     The effective tax rate from continuing operations for the first six months
of 1998 (55.0%) is similar to the rate for the comparable period of 1997
(56.1%).

     DISCONTINUED OPERATIONS

     On June 1, 1998, the Company classified its Homecare and Non Renal
Diagnostic Services divisions as discontinued operations. The Company sold its
Non Renal Diagnostic Services division and its Homecare division on,
respectively, June 26, 1998 and July 29, 1998. The discontinued operations
revenues for Homecare/Diagnostic Services were $121 million for the first six
months of 1998 with a net after tax loss of $9 million.


                                       25
<PAGE>   26
LIQUIDITY AND CAPITAL RESOURCES

    FMCH made acquisitions of net assets totaling $152 million (including 
$42 million issuance of investment securities) and $267 million, during the
first six months of 1998 and 1997, respectively. FMCH made capital expenditures
for internal expansion, improvements, new furnishings and equipment of 
$40 million and $66 million during the first six months of 1998 and 1997,
respectively. The Company intends to capitalize on the continuing shift in the
U.S. from physician-owned and hospital-based dialysis clinics to multi-center
providers by acquiring existing dialysis centers and the establishment of new or
expanded centers and, accordingly, will require significant capital resources to
pursue its growth strategy in the dialysis marketplace. FMCH may also make other
strategic acquisitions in the future.

    FMCH also requires capital resources for working capital purposes. FMCH had
a use of cash for increases in accounts receivable, excluding the increase in
the accounts receivable financing facility, of $86 million and $39 million
during the first six months of 1998 and 1997, respectively. The increases in
accounts receivable reflect growth in FMCH's business operations and, beginning
in 1994, the sharp reduction in IDPN claims approved for payment.

    During the first six months of 1998, FMCH funded its acquisitions and
capital expenditures primarily through proceeds from external short and
long-term debt and the proceeds from the receivable financing facility. In
addition, acquisitions were also funded through issuance of investment
securities by a Luxemborg subsidiary ("FMC Finance"), of Fresenius Medical Care
AG ("FMC). An intercompany payable ($42 million) has been established between
FMC Finance and FMCH. During the first six months of 1998, FMCH increased
borrowings from affiliates ($457 million), which were used primarily in
connection with repayment of external debt.

    Effective July 1, 1995, FMCH ceased to recognize the incremental revenue
provided under HCFA's initial instruction under OBRA 93, although it continued
to bill private third-party payors for these amounts through December 31, 1995.
FMCH began billing Medicare as the primary payor for the dual eligible ESRD
patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised
instruction under OBRA 93 is permanently enjoined on a prospective basis, or if
such revised instruction is sustained but given an effective date of later than
June 30, 1995, FMCH may be able to rebill such services to third-party payors
and, as a result, FMCH's future results of operations and financial position
would be favorably affected by the incremental revenue that FMCH would
recognize. For further discussion see Note 15, Commitments and Contingencies,"
Omnibus Budget Reconciliation Act of 1993".

    On February 27, 1998, FMCH increased its existing accounts receivable
financing facility with NationsBank to $331 million. As of June 30, 1998,
proceeds of $325 million have been drawn down under the NationsBank agreement,
an increase of $125 million from December 31, 1997.

    The liquidity of FMCH is contingent upon a number of factors, principally
FMCH's future operating results and the contingencies referred to below. FMCH
believes that its current levels of liquidity, including availability under the
NMC Credit Agreement, are sufficient to meet its foreseeable needs. If existing
sources of funds are not sufficient to provide liquidity, FMCH may need to sell
assets or obtain debt or equity financing from additional external sources.
There can be no assurance that FMCH will be able to do so on satisfactory terms,
if at all.

DIVESTITURES

    FMCH recently completed the sale of its Non Renal Diagnostic and Homecare
businesses. The combined proceeds of the sales were approximately $100 million
in cash and notes. 

IMPACT OF INFLATION

    A substantial portion of FMCH's net revenue is subject to reimbursement
rates which are regulated by the federal government and do not automatically
adjust for inflation. Non-governmental payors also are exerting downward
pressure on reimbursement levels. Increased operating costs that are subject to
inflation, such as labor and supply costs, without a compensating increase in
reimbursement rates, may adversely affect FMCH's business and results of
operations, possibly materially.


                                       26

<PAGE>   27
NEW PRONOUCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that
hedge in the statement of operations. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe that the adoption of this statement will have a material impact on the
Company's consolidated financial position, results of operations or cash flows.

CONTINGENCIES

     FMCH is the subject of investigations by several federal agencies and
authorities, is a plaintiff in litigation against the federal government with
respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is
seeking to change a proposed revision to IDPN coverage policies. An adverse
outcome in any of these matters, beyond the reserves which have established,
could have a material adverse effect on FMCH's business, financial condition and
results of operations.




                                       27

<PAGE>   28



                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    As discussed in greater detail below, most aspects of NMC's U.S. businesses
are the subject of criminal or civil investigations by several federal agencies
and authorities, the outcome of which cannot be predicted. If the government
were successfully to pursue claims arising from any of these investigations, NMC
or one or more of its subsidiaries could be subject to civil or criminal
penalties, including substantial fines, suspension of payments or exclusion from
the Medicare and Medicaid programs as well as other federal health care benefit
programs, which provide over 60% of NMC's revenues. In addition, NMC could be
required to change billing or other practices which could adversely affect NMC's
revenues. In addition, as discussed below, NMC has become aware that it is the
subject of qui tam or "whistleblower" actions with respect to some or all of the
issues raised by the government investigations, which whistleblower actions are
filed under seal as a matter of law in the first instance, thereby preventing
disclosure to the Company and to the public except by court order. In the
process of unsealing federal whistleblower complaints, it is not unusual for
courts to allow the government to inform the Company and its counsel of a
complaint prior to the time the Company may be legally permitted to disclose it
to the public. NMC may be the subject of other "whistleblower" actions not known
to the Company. Fresenius Medical Care and FMCH have guaranteed NMC's
obligations relating to or arising out of the OIG Investigation and the qui tam
proceedings, and indemnified Grace Chemicals for any such liabilities.

         An adverse result in any of such governmental investigations or
"whistleblower" proceedings could have a material adverse effect on the
Company's business, financial condition and results of operations.

         OIG INVESTIGATION

         In October 1995, NMC received five investigative subpoenas from the
OIG. The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
anti-kickback statutes and the False Claims Act. The subpoenas call for
extensive document production relating to various aspects of NMC's business.

         In connection with the OIG Investigation, the Company continues to
receive additional subpoenas directed to NMC or the Company to obtain
supplemental information and documents regarding the above-noted issues, or to
clarify the scope of the original subpoenas.

         The Company is cooperating with the OIG Investigation. The Company
believes that the government continues to review and evaluate the voluminous
information the Company has provided. As indicated above, the government
continues, from time to time, to seek supplementing and/or clarifying
information from the Company. The Company expects that this process will
continue while the government completes its evaluation of the issues.

         The OIG Investigation covers the following areas: (a) NMC's dialysis
services business, principally relating to its Medical Director contracts and
compensation; (b) NMC's treatment of credit balances resulting from overpayments
received under the Medicare ESRD program, its billing for home dialysis
services, and its payment of supplemental medical insurance premiums on behalf
of indigent patients; (c) LifeChem's laboratory business, including documents
relating to testing procedures, marketing, customers, competition and certain
overpayments totaling approximately $4.9 million that were received by LifeChem
from the Medicare program with respect to laboratory services rendered between
1989 and 1993, and a 1997 review of dialysis facilities' standing orders; and
(d) Homecare and, in particular, information concerning IDPN billing practices
including various services, equipment and supplies and payments made to third
parties as compensation for administering IDPN therapy.

         The government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. As noted, the penalties
applicable under the anti-kickback statutes, the False Claims Act and other
federal and state statutes and regulations applicable to NMC's business can be
substantial. While NMC asserts that it is able to offer legal and/or factual
defenses with respect to many of the areas the government has identified, there
can be no assurance that the federal government and/or one or more state
agencies will not claim that NMC has violated statutory or regulatory
provisions. Additionally, eight and possibly other


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<PAGE>   29



qui tam actions alleging that NMC submitted false claims to the government have
been filed under seal by former or current NMC employees or other individuals
who may have familiarity with one or more of the issues under investigation. As
noted, under the False Claims Act, any such private plaintiff could pursue an
action against NMC in the name of the U.S. at his or her own expense if the
government declines to do so.

         An adverse determination with respect to any of the issues addressed by
the subpoenas, or any of the other issues that have been or may be identified by
the government, could result in the payment of substantial fines, penalties and
forfeitures, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other practices that could adversely affect the
Company's revenues. Any such result could have a material adverse effect on the
Company's business, financial condition and results of operations. Under the
terms of the Merger, any potential resulting monetary liability has been
retained by NMC, and the Company has indemnified Grace Chemicals against all
potential liability arising from or relating to the OIG Investigation. The
Company has provided the U.S. government with a guarantee of payment of the
obligations, if any, arising from the OIG Investigation. In support of this
guarantee, the Company has delivered to the U.S. government a standby letter of
credit in the amount of $150 million.

         MEDICAL DIRECTOR COMPENSATION

         The government is investigating whether DSD's compensation arrangements
with its Medical Directors constitute payments to induce referrals, which would
be illegal under the anti-kickback statutes, rather than payment for services
rendered. DSD compensated the substantial majority of its Medical Directors on
the basis of a percentage of the earnings of the dialysis center for which the
Medical Director was responsible from the inception of NMC's predecessor in 1972
until January 1, 1995, the effective date of Stark II. Under the arrangements in
effect prior to January 1, 1995, the compensation paid to Medical Directors was
adjusted to include "add backs," which represented a portion of the profit
earned by MPG on products purchased by the Medical Director's facility from MPG
and (until January 1, 1992) a portion of the profit earned by LifeChem on
laboratory services provided to patients at the Medical Director's facility.
These adjustments were designed to allocate a profit factor to each dialysis
center relating to the profits that could have been realized by the center if it
had provided the items and services directly rather than through a subsidiary of
NMC. The percentage of profits paid to any specific Medical Director was reached
through negotiation, and was typically a provision of a multi-year consulting
agreement.

         To comply with Stark II if Designated Health Services are involved,
Medical Director compensation must not exceed fair market value and may not take
into account the volume or value of referrals or other business generated
between the parties. Since January 1, 1995, DSD has compensated its Medical
Directors on a fixed compensation arrangement intended to comply with the
requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, DSD took and continues to take account
of the compensation levels paid to its Medical Directors in prior years.

         Certain government representatives have expressed the view in meetings
with counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. DSD
does not compensate its Medical Directors on an hourly basis and has asserted to
the government that hourly compensation is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between DSD and its Medical Directors prior to January 1, 1995, there
is a wide variation in the amounts that have been paid to Medical Directors.

      As a result, the compensation that DSD has paid and is continuing to pay
to a material number of its Medical Directors could be viewed by the government
as being in excess of "fair market value," both in absolute terms and in terms
of hourly compensation. NMC has asserted to the government that its compensation
arrangements do not constitute illegal payments to induce referrals. NMC has
also asserted to the government that OIG auditors repeatedly reviewed NMC's
compensation arrangements with its Medical Directors in connection with their
audits of the costs claimed by DSD; that the OIG stated in its audit reports
that, with the exception of certain technical issues, NMC had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that NMC reasonably relied on these audit reports in concluding that its program
for compensating Medical Directors was lawful. There has been no indication that
the government will accept NMC's assertions concerning the legality of its
arrangements generally or NMC's assertion that it reasonably relied on OIG
audits, or that the government will not focus on specific arrangements that DSD


                                       29

<PAGE>   30


has made with one or more Medical Directors and claim that those specific
arrangements were or are unlawful.

         The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.

         CREDIT BALANCES

         In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, HCFA adopted
a regulation requiring certain Medicare providers, including dialysis centers,
to file a quarterly form listing unrecouped overpayments with the Medicare
intermediary responsible for reimbursing the provider. The first such filing was
required to be made as of June 30, 1992 for the period beginning with the
initial date that the provider participated in the Medicare program and ending
on June 30, 1992.

         The government is investigating whether DSD intentionally understated
the Medicare credit balance reflected on its books and records for the period
ending June 30, 1992 by reversing entries out of its credit balance account and
taking overpayments into income in anticipation of the institution of the new
filing requirement. DSD's policy was to notify Medicare intermediaries in
writing of overpayments upon receipt and to maintain unrecouped Medicare
overpayments as credit balances on the books and records of DSD for four years;
overpayments not recouped by Medicare within four years would be reversed from
the credit balance account and would be available to be taken into income. NMC
asserts that Medicare overpayments that have not been recouped by Medicare
within four years are not subject to recovery under applicable regulations and
that its initial filing with the intermediaries disclosed the credit balance on
the books and records of DSD as shown in accordance with its policy, but there
can be no assurance that the government will accept NMC's views. The government
has inquired whether other divisions including Homecare, LifeChem and DSI have
appropriately treated Medicare credit balances.

         The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's obligation to rebill commercial
payors for amounts originally billed to Medicare under HCFA's initial
implementation of the OBRA 93 amendments to the secondary payor provisions of
the Medicare Act. DSD experienced delays in reporting a material amount of
overpayments after the implementation of the OBRA 93 amendments. NMC asserts
that most of these delays were the result of the substantial administrative
burdens placed on DSD as a consequence of the changing and inconsistent
instructions issued by HCFA with respect to the OBRA 93 amendments and were not
intentional. Substantially all overpayments resulting from the rebilling effort
associated with the OBRA 93 amendments have now been reported. Procedures are in
place that are designed to ensure that subsequent overpayments resulting from
the OBRA 93 amendments will be reported on a timely basis.

         SUPPLEMENTAL MEDICAL INSURANCE

         DSD provided grants or loans for the payment of premiums for
supplemental medical insurance (under which Medicare Part B coverage is
provided) on behalf of a small percentage of its patients who are financially
needy. The practice of providing loans or grants for the payment of
supplemental medical insurance premiums by NMC was one of the subjects of review
by the government as part of the OIG investigation.

         The Government, however, advised the Company orally that it is no
longer pursuing this issue. Furthermore, as a result of the passage of HIPPA,
the Company terminated making such payments on behalf of its patients. Instead,
the Company, together with other representatives of the industry, obtained an
advisory opinion from the OIG, whereby, consistent with specified conditions,
the Company and other similarly situated providers may make contributions to a
non-profit organization that has volunteered to make these payments on behalf of
indigent ESRD patients, including patients of the Company.

         OVERPAYMENTS FOR HOME DIALYSIS SERVICES

         NMC acquired HIC, an in-center and home dialysis service provider, in
1993. At the time of the acquisition, HIC was the subject of a claim by HCFA
that HIC had received payments for home dialysis services in excess of the
Medicare reasonable charge 


                                       30

<PAGE>   31



for services rendered prior to February 1, 1990. NMC settled the HCFA claim
against HIC in 1994. The government is investigating whether the settlement
concerning the alleged overpayments made to HIC resolved all issues relating to
such alleged overpayments. The government is also investigating whether HDS
received payments similar to the payments that HIC received, and whether HDS
improperly billed for home dialysis services in excess of the monthly cost cap
for services rendered on or after February 1, 1990. The government is
investigating whether NMC was overpaid for services rendered. NMC asserts that
the billings by HDS were proper, but there can be no assurance that the
government will accept NMC's view.

         LIFECHEM

         Overpayments. On September 22, 1995, LifeChem voluntarily disclosed
certain billing problems to the government that had resulted in LifeChem's
receipt of approximately $4.9 million in overpayments from the Medicare program
for laboratory services rendered between 1989 and 1993. LifeChem asserts that
most of these overpayments relate to errors caused by a change in LifeChem's
computer systems and that the remainder of the overpayments were the result of
the incorrect practice of billing for a complete blood count with differential
when only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. LifeChem asserts that the overpayments it received
were not caused by fraudulent activity, but there can be no assurance that the
government will accept LifeChem's view.

         LifeChem made these disclosures to the government as part of an
application to be admitted to a voluntary disclosure program begun by the
government in mid-1995. At the time of the disclosures, LifeChem tendered
repayment to the government of the $4.9 million in overpayments. After the OIG
Investigation was announced, the government indicated that LifeChem had not been
accepted into its voluntary disclosure program. The government has deposited the
$4.9 million check with NMC's approval. The matters disclosed in LifeChem's
September 22, 1995 voluntary disclosure are a subject of the OIG Investigation.

         On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggested instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem continued its effort to determine whether any
other overpayments occurred relating to the "billing rules" problem and, in
March 1997, advised the government that an additional overpayment of
approximately $260,000 was made by Medicare.

         Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statutes. In response to this alert,
LifeChem changed its practices with respect to testing covered by the Composite
Rate to increase the amount charged to both DSD and third-party dialysis centers
and reduce the number of tests provided for the fixed rate. The government is
investigating LifeChem's practices with respect to these tests.

         Benefits provided to dialysis centers and persons associated with
dialysis centers. The government is investigating whether DSD or any third-party
dialysis center or any person associated with any such center was provided with
benefits in order to induce them to use LifeChem services. Such benefits could
include, for example, discounts on RPD supplies, the provision of computer
equipment, the provision of money for the purchase of computer equipment, and
the provision of research grants. NMC has identified certain instances in which
benefits were provided to MPG customers who purchased medical products from RPD
and used LifeChem's laboratory services. The government may claim that the
provision of such benefits violates, among other things, the anti-kickback
statutes.

         Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce at this time. In addition to documents relating to the areas
discussed above, the government has also required LifeChem to produce documents
relating to the equipment and systems used by LifeChem in performing and billing
for

                                       31

<PAGE>   32


clinical laboratory blood tests, the design of the test panels offered and
requisition forms used by LifeChem, the utilization rate for certain tests
performed by LifeChem, recommendations concerning diagnostic codes to be used in
ordering tests for patients with given illnesses or conditions, internal and
external audits and investigations relating to LifeChem's billing and testing.
Recently, the government served an investigative subpoena for documents
concerning the Company's 1997 review of dialysis facilities' standing orders,
and responsive documents were provided.

         IDPN

         Administration kits. As discussed above, one of the principal
activities of Homecare is to provide IDPN therapy to dialysis patients at both
NMC-owned facilities and at facilities owned by other providers. IDPN therapy is
typically provided to the patient 12-13 times per month during dialysis
treatment. Bills are submitted to Medicare on a monthly basis and include
separate claims for reimbursement for supplies, including, among other things,
nutritional solutions, administration kits and infusion pumps. In February 1991,
the Medicare carrier responsible for processing Homecare's IDPN claims issued a
Medicare advisory to all parenteral and enteral nutrition suppliers announcing a
coding change for reimbursement of administration kits provided in connection
with IDPN therapy for claims filed for items provided on or after April 1, 1991.
The Medicare allowance for administration kits during this period was
approximately $625 per month per patient. The advisory stated that IDPN
providers were to indicate the "total number of actual days" when administration
kits were "used," instead of indicating that a one-month supply of
administration kits had been provided. In response, Homecare billed for
administration kits on the basis of the number of days that the patient was on
an IDPN treatment program during the billing period, which typically represented
the entire month, as opposed to the number of days the treatment was actually
administered. During the period from April 1991 to June 1992, Homecare had an
average of approximately 1,200 IDPN patients on service.

         In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "if overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." Homecare revised its billing practices in response to
this advisory for claims filed for items provided on or after July 1, 1992.
Homecare was not asked to refund any amounts relating to its billings for
administration kits following the issuance of the second advisory.

         The government is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing for administration
kits were proper, but there can be no assurance that the government will accept
NMC's view. The government may claim that Homecare's billing for administration
kits during this period violates, among other things, the False Claims Act.

         Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
the infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of Homecare's billings for infusion pumps and IV
poles.

         As noted above, under the new policies published by HCFA with respect
to IDPN therapy, the Company has not been able to bill for infusion pumps after
July 1, 1996. The government discontinued reimbursement for IV poles in 1992.

         "Hang fees" and other payments. IDPN therapy is typically provided to
the patient during dialysis by personnel employed by the dialysis center
treating the patient with supplies provided and billed to Medicare by Homecare
in accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, Homecare followed the practice common
in the industry of paying a "hang fee" to the center. Dialysis centers are
responsible for reporting such fees to HCFA on their cost reports. For DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
cost calculations For third-party dialysis centers, the fee was negotiated with
each center,

                                       32

<PAGE>   33



typically pursuant to a written contract, and ranged from $15 to
$65 per administration. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers. NMC has stopped paying "hang fees" to both DSD and third-party
facilities.

         In July 1993, the OIG issued a management advisory alert to HCFA in
which it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
government is investigating the nature and extent of the "hang fees" and other
payments made by Homecare as well as payments by Homecare to physicians whose
patients have received IDPN therapy. The government may claim that the payments
by Homecare to dialysis centers violate, among other things, the anti-kickback
statutes.

         Utilization of IDPN. Since 1984, when HCFA determined that Medicare
should cover IDPN and other parenteral nutrition therapies, NMC has been an
industry leader in identifying situations in which IDPN therapy is beneficial to
ESRD patients. It is the policy of Homecare to seek Medicare reimbursement for
IDPN therapy only when it is prescribed by a patient's treating physician and
when it believes that the circumstances satisfy the requirements published by
HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for
payment more than 90% of the IDPN claims submitted by Homecare. After 1993, the
rate of approval for Medicare reimbursement for IDPN claims submitted by
Homecare for new patients, and by the infusion industry in general, fell to
approximately 9%. NMC contends that the reduction in rates of approval occurred
because HCFA and its carriers implemented an unauthorized change in coverage
policy without giving notice to providers. While NMC continued to offer IDPN to
patients pursuant to the prescription of the patients' treating physicians and
to submit claims for Medicare reimbursement when it believed the requirements
stated in HCFA's published regulations were satisfied, other providers responded
to the drop in the approval rate for new Medicare IDPN patients by abandoning
the Medicare IDPN business, cutting back on the number of Medicare patients to
whom they provide IDPN, or declining to add new Medicare patients. The number of
patients to whom NMC provided IDPN increased as a result.

         The government is investigating the utilization rate of IDPN therapy
among NMC patients, whether NMC submitted IDPN claims to Medicare for patients
who were not eligible for coverage, and whether documentation of eligibility was
adequate. NMC asserts that the utilization rate of IDPN therapy among its
dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the
factors discussed above and that it is the policy of Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.

         In addition, the government is investigating whether, in certain
circumstances, documentation of eligibility was false or inaccurate. With
respect to some claims, the Company has determined that false or inaccurate
documentation was submitted, deliberately or otherwise. The Company understands
that the government recently has utilized a grand jury to investigate this
matter.

         QUI TAM ACTIONS

         The Company and NMC have become aware that eight qui tam actions have
been filed in various jurisdictions. Each of these actions is under seal and in
each action, pursuant to court order the seal has been modified to permit the
Company, NMC and other affiliated defendants to disclose the complaint to any
relevant investors, financial institutions and/or underwriters, their successors
and assigns and their respective counsel and to disclose the allegations in the
complaints in their respective SEC and NYSE periodically required filings.

         The first qui tam action was filed in the United States District Court
for the Southern District of Florida in 1996, amended on July 8, 1996 and
disclosed to the Company on July 10, 1996. It alleges, among other things, that
Grace Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. The Amended Complaint also seeks the
imposition of a constructive trust on the proceeds of the NMC dividend to Grace
Chemicals for the benefit of the United States on the ground that the Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.

         The second qui tam action was filed in the United States District Court
for the Middle District of Florida in 1995 and disclosed to the Company on or
before November 7, 1996. It alleges, among other things, that NMC and certain
NMC subsidiaries

                                       33

<PAGE>   34



violated the False Claims Act in connection with the alleged
retention of over-payments made under the Medicare program, the alleged
submission of claims in violation of applicable cost caps and the payment of
supplemental Medicare insurance premiums as an alleged inducement to patients to
obtain dialysis products and services from NMC. The complaint alleges that as a
result of this allegedly wrongful conduct, the United States suffered damages in
excess of $10 million including applicable fines.

         The third qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in February 1996 and was disclosed to
the Company in November 1996. It alleges, among other things, that a
pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated
the False Claims Act in connection with the submission of claims to the Medicare
program for a nonsterile intravenous drug and for intravenous drugs which were
allegedly billed in excess of permissible Medicare reimbursement rates. The
complaint also claims that the defendants violated the Medicare and Medicaid
anti-kickback statutes in connection with the receipt of discounts and other in
kind payments as alleged inducements to purchase intravenous drugs. The
complaint is focused on the business relationship between the pharmaceutical
manufacturer and several providers, one of which is NMC. The complaint claims
that as a result of this allegedly wrongful conduct, the United States suffered
damages. On June 28, 1997, in response to relator's motion to dismiss and the
United States' declination to intervene, the District Court ordered the
complaint dismissed without prejudice.

         The fourth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax violated
the False Claims Act in connection with its submission of claims to the Medicare
program for diagnostic tests and induced overutilization of such tests in the
medical community through improper marketing practices also in violation of the
False Claims Act.

         The fifth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.

         The sixth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in November 1996 and was disclosed to
the Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.

         The seventh qui tam action was filed in the United States District
Court for the District of Delaware in January 1997 and was disclosed to the
Company in September 1997. It alleges, among other things, that NMC and Biotrax
violated the False Claims Act in connection with the submission of claims to the
Medicare program for diagnostic tests, and induced overutilization of such tests
through improper marketing practices which provided impermissible incentives to
health care providers to order these tests.

         The eighth qui tam action was filed in the United States District Court
for the District of New Jersey in February 1997 and was disclosed to the Company
in September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.

         Each of the qui tam complaints claims that as a result of the allegedly
wrongful conduct, the United States suffered damages and that the defendants are
liable to the United States for three times the amount of the alleged damages
plus civil penalties of up to $10,000 per false claim. An adverse result in any
of the qui tam actions could have a material adverse affect on the Company's
business, financial condition or results of operations.

         OIG AGREEMENTS

         As a result of discussions with representatives of the United States in
connection with the OIG Investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States (an "Obligation") relating to or arising out of the OIG
Investigation and the qui tam action filed in the Southern District of Florida
(the "Government Claims"). For the purposes of the OIG Agreements, an Obligation
is (a) a liability or obligation of NMC to the United States in respect of a
Government Claim pursuant to a court order (i) which is final and nonappealable
or (ii) the enforcement of which has not been stayed pending appeal or (b) a
liability or obligation agreed to be an Obligation in a settlement agreement


                                       34

<PAGE>   35



executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the
United States, on the other hand. As stated elsewhere herein, the outcome of the
OIG Investigation cannot be predicted. The entering into of the OIG Agreements
is not an admission of liability by any party with respect to the OIG
Investigation, nor does it indicate the liability, if any, which may result
therefrom.

         Pursuant to the OIG Agreements, upon consummation of the Merger,
Fresenius Medical Care, the Company and NMC provided the United States with a
joint and several unconditional guarantee of payment when due of all Obligations
(the "Primary Guarantee"). As credit support for this guarantee, NMC delivered
an irrevocable standby letter of credit in the amount of $150 million. The
United States will return such letter of credit (or any renewal or replacement)
for cancellation when all Obligations have been paid in full or it is determined
that NMC has no liability in respect of the Government Claims. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.

         Fresenius Medical Care and the United States state in the OIG
Agreements that they will negotiate in good faith to attempt to arrive at a
consensual resolution of the Government Claims and, in the context of such
negotiations, will negotiate in good faith as to the need for any restructuring
of the payment of any Obligations arising under such resolution, taking into
account the ability of Fresenius Medical Care to pay the Obligations. The OIG
Agreements state that the foregoing statements shall not be construed to
obligate any person to enter into any settlement of the Government Claims or to
agree to a structured settlement. Moreover, the OIG Agreements state that the
statements described in the first sentence of this paragraph are precatory and
statements of intent only and that (a) compliance by the United States with such
provisions is not a condition or defense to the obligations of Fresenius Medical
Care under the OIG Agreements and (b) breach of such provisions by the United
States cannot and will not be raised by Fresenius Medical Care to excuse
performance under the OIG Agreements.

         The foregoing describes the material terms of the OIG Agreements,
copies of which were previously filed with the Commission and copies of which
may be examined without charge at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and
at the Regional Offices of the Commission located at Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7
World Trade Center, New York, New York 10048. Copies of such material will also
be made available by mail from the Public Reference Branch of the Commission at
450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The
foregoing description does not purport to be complete and is qualified in its
entirety by reference to such agreements.

         DIAGNOSTICS SUBPOENA

         In October 1996, Biotrax and NMC Diagnostics, Inc., both of which are
subsidiaries of NMC, received an investigative subpoena from the OIG. The
subpoena calls for the production of extensive documents and was issued in
connection with an investigation being conducted by the OIG in conjunction with
the U.S. Attorney for the Eastern District of Pennsylvania concerning the
possible submission of false or improper claims to, and their payment by, the
Medicare program. The subpoena calls for the production of documents on
corporate organization, business plans, document retention, personnel files,
sales and marketing and Medicare billing issues relating to certain procedures
offered by the prior owner of the Biotrax business before its assets were
acquired by NMC in March 1994 and by DSI following the acquisition. The Company
has reviewed the subpoena with its legal counsel and is making extensive
document production in response to the subpoena. The outcome of this
investigation, its duration, and its effect, if any, on NMC or the Company
cannot be predicted at this time. The Company recently divested its non renal
diagnostics business. See "Management Discussion and Analysis of Financial
Condition and Results of Operations - Divestitures."

         EASTERN DISTRICT OF VIRGINIA

         In December 1994, a subsidiary of NMC received a subpoena from a
federal grand jury in the Eastern District of Virginia investigating the
contractual relationships between subsidiaries of NMC that provide dialysis
services and third parties that provide medical directorship and related
services to those subsidiaries. There has been no communication from the
government since a January 1995 document production and the outcome of this
investigation and its effect, if any, on NMC cannot be predicted at this time.


                                       35

<PAGE>   36


         DISTRICT OF NEW JERSEY INVESTIGATION

         NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line NMC
is cooperating with this investigation and has provided the grand jury with
extensive documents. In February, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In
June 1996, NMC received a letter from the U.S. Attorney for the District of New
Jersey indicating that the U.S. Attorney had declined to prosecute NMC with
respect to a submission related to NMC's effort to lift the import hold. The
letter added that NMC remains a subject of a federal grand jury's investigation
into other matters. NMC has produced documents in response to a June 1996
subpoena from the federal grand jury requesting certain documents in connection
with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995.
The government investigators and the Company have been attempting to further
narrow the issues with respect to which the government has previously expressed
concerns in order to resolve this investigation. However, the outcome and
impact, if any, of these discussions and potential resolution on the Company's
business, financial condition or results of operations cannot be predicted at
this time.

         FDA MATTERS

         Since 1993, NMC has engaged in a number of voluntary recalls of
products that it manufactured or that were manufactured by third parties and
distributed by NMC. None of these product recalls has resulted in fines or
penalties for NMC. In 1995, Fresenius USA completed a voluntary action with
respect to the Optum(R) exchange device that Fresenius USA acquired from Abbott,
which was classified by the FDA as a recall. The FDA reviewed Fresenius USA's
actions with respect to this device and determined that they were adequate.

         During the period from 1991 through 1993, the FDA issued warning
letters concerning four of the six RPD facilities in the U.S., as well as import
alerts concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico
facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland
facility. As a result of the import alerts, NMC was prohibited from importing
the products covered by the alerts into the U.S. until the FDA confirmed
compliance with GMP requirements at the facilities where such products were
manufactured.

         In January 1994, NMC and certain members of its senior management
entered into the Consent Decree providing that the importation of bloodlines and
hemodialyzers could resume upon certification by NMC that the relevant
manufacturing facility complied with GMP requirements and successful completion
of an FDA inspection at the relevant facility to confirm compliance. The Consent
Decree also required NMC to certify, and be inspected for, GMP compliance at all
of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD
committed to maintaining ongoing compliance with GMP and related requirements at
both U.S. and non-U.S. manufacturing facilities. As a result of the Consent
Decree, NMC's U.S. facilities were required to undertake significant GMP
improvements.

         NMC submitted all required certifications for its U.S. and non-U.S.
facilities in accordance with timetables specified in the Consent Decree, and
the bloodline import alert was lifted in March 1994. During the course of 1994
and 1995, NMC also worked with the FDA and demonstrated that its other
manufacturing facilities in the U.S. were in compliance with GMP requirements.
The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the
FDA in April and December 1994 but did not pass inspection. NMC completed all
remaining corrective actions, and in December 1995 the FDA determined that the
Dublin facility was in compliance with GMP requirements and lifted the import
alert. No fines or penalties have been imposed on NMC as a result of the FDA's
actions or in connection with the Consent Decree. By policy, however, the FDA
generally will undertake more frequent and more rigorous inspections of
facilities that have been subject to consent decrees. The Consent Decree was
lifted in January 1997. In February 1997, the Company closed its Dublin, Ireland
facility.

         On January 24, 1995, the FDA issued a warning letter and import alert
relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland
facility. That facility was not expressly named in the Consent Decree described
above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in
December 1994, and, for business reasons, decided to shut down the Diafilter(R)
business at the Limerick facility on January 23, 1995, no subsequent compliance
review was deemed necessary by the FDA. NMC was not restricted from importing
into the U.S. the other products manufactured at the Limerick facility.


                                       36
<PAGE>   37


         In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMPs were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these findings were subsequently reversed when the devices in question
were determined to be covered by appropriate filings. The FDA issued warning
letters with respect to each facility, as a result of which the issuance of new
510(k) notices and new export clearances was placed on administrative hold.
Fresenius USA responded to the inspection findings at Maumee in a manner it
believes addresses the FDA's findings. Fresenius USA subsequently closed the
Maumee facility in connection with the relocation of production from that
facility to a facility in Lewisberry, Pennsylvania. Fresenius USA undertook an
exhaustive review of the FDA's findings relating to Walnut Creek and submitted a
detailed response to those findings. The Ogden plant was reinspected in 1995 and
the administrative holds have been lifted from both Ogden and Walnut Creek. The
Walnut Creek facility was inspected again in January and February of 1996 and
Fresenius USA was advised that all GMP issues raised by the FDA have been
resolved. Fresenius USA believes that its facilities are currently in compliance
in all material respects with applicable state, local and federal requirements.

         In August 1996, Fresenius USA undertook a voluntary North American
recall of certain lots of its peritoneal dialysis solutions which were
associated with aseptic peritonitis. This condition is an inflammation of the
abdominal cavity not caused by infection. The patients affected in the episode
recovered quickly after using non-suspect product lots. In the recall, Fresenius
USA notified hospitals and dialysis centers that received the recalled lots as
well as individual patients. Patients with recalled lots were provided with
replacement solution, and a toll free telephone number for patient inquiries was
established. Fresenius USA cooperated with the FDA and other government agencies
in resolving the matter.

         In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations. The
Company intends to address expeditiously any FDA findings resulting from such
inspections.

         COMMERCIAL INSURER LITIGATION

         In December 1997, the Company, NMC, and certain named NMC subsidiaries,
as well as Grace Chemicals, were served with a civil complaint filed by Aetna
Life Insurance Company in the U.S. District Court for the Southern District of
New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al,
97-Civ-9310). Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
complaint seeks unspecified damages and costs. Grace Chemicals has sought
indemnification from the Company pursuant to the terms of an indemnification
agreement between Grace Chemicals and the Company for any liability, costs and
expenses that Grace may incur as a result of the lawsuit. The Company has moved
to dismiss the complaint on the grounds that it does not state a claim against
the Company, NMC or their affiliates. This action is at an early stage and its
outcome and impact on the Company cannot be predicted at this time. However, the
Company, NMC and its subsidiaries believe that they have substantial defenses to
the claims asserted, and intend to vigorously defend the lawsuit. It is also
possible that one or more other private payors may claim that NMC received
excess payments and similarly, may seek reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.

         INTERNATIONAL LEGAL PROCEEDINGS AND REGULATORY CLAIMS

         As a general matter, licenses and certifications are required in
connection with the operation of dialysis clinics outside the United States, and
the Company is dependent upon NMC's ability to obtain and maintain such licenses
and certifications. NMC lacks certain licenses and certifications technically
required to operate its facilities in Portugal. However, based on discussions
with regulatory officials in Portugal, NMC management does not believe that the
absence of such licenses will have a material adverse effect on NMC or
materially affect its ability to operate such facilities.

         The Company has conducted an investigation regarding suspected
fraudulent activity of the General Manager of the Company's dialysis and
laboratory operations in Portugal. The Company recently completed an analysis of
the effect of such activities and expensed approximately $10 million related to
the fraud and FMCH increased reserves by $10 million related to uncollectible
accounts and tax matters, none of which was material to any prior year, during
the third quarter 1996. The Company is pursuing actions against the responsible
individuals and possible recovery of such losses under insurance coverage.
Additionally, FMCH has written off $9 million related to franchise fees for its
operations in Brazil.


                                       37

<PAGE>   38

         OBRA 93

         OBRA 93 affected the payment of benefits under Medicare and employer
health plans for certain eligible ESRD patients. In July 1994, HCFA issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by OBRA 93 would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than that provided under Medicare.

         In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.

         If HCFA's reversal of its original implementation of the provisions of
OBRA 93 that relate to ESRD patients for whom Medicare is the secondary payor is
upheld, NMC may be required to refund the payments received from employer health
plans for services provided after August 10, 1993 under HCFA's original
implementation, and to re-bill Medicare for the same services, which would
result in a net loss to DSD of approximately $120 million as of December 31,
1995. NMC ceased to recognize the incremental revenue realized under the
original Program Memorandum as of July 1, 1995, but it continued to bill
employer health plans as primary payors for patients affected by OBRA 93 through
December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as
primary payor for dual eligible ESRD patients affected by OBRA 93, and then
began to rebill in compliance with the revised policy for services rendered
between April 24 and December 31, 1995.

         On May 5, 1995, NMC filed a complaint in the U.S. District Court for
the District of Columbia (National Medical Care, Inc. and Bio-Medical
Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala,
C.A. No. 95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing
its April 24, 1995 implementation of the OBRA 93 provisions relating to the
coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC
moved for a preliminary injunction to preclude HCFA from enforcing its new
policy retroactively, that is, to billings for services provided between August
10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request
for a preliminary injunction. The litigation is continuing with respect to NMC's
request to enjoin HCFA's new policy, both retroactively and prospectively, and
NMC filed significant discovery requests concerning how HCFA developed the April
1995 rule. In December of 1996, NMC moved for partial summary judgment seeking a
declaration from the Court that HCFA's retroactive application of the April 1995
rule was legally invalid. HCFA cross-moved for summary judgment on the grounds
that the April 1995 rule was validly applied prospectively. In January 1998, the
court granted NMC's motion for partial summary judgment and entered a
declaratory judgment in favor of NMC, holding HCFA's retroactive application of
the April 1995 rule legally invalid. Based on its finding, the Court also
ordered that HCFA is permanently enjoined from enforcing and applying the April
1995 rule retroactively against NMC and granted NMC's outstanding discovery
motions. The Court took no action on HCFA's motion for summary judgment pending
completion of the outstanding discovery. The Court's favorable rulings provide a
stronger legal basis for NMC to collect outstanding amounts from commercial
payors on the retroactive portion of the case during the first half of 1998.
HCFA elected not to appeal from the Court's June 1995 and January 1998 orders
and has agreed to a schedule for providing discovery under the Court's January
1998 order. HCFA may, however, appeal all rulings at the conclusion of the
litigation. If HCFA should successfully appeal so that the revised
interpretation would be applied retroactively, FMCH's business, financial
position and results of operations would be materially adversely affected.

         SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

         In April 1996, the Company (then called W.R. Grace & Co.) received a
formal order of investigation issued by the Commission directing an
investigation into, among other things, whether Grace violated the federal
securities laws by filing periodic reports with the Commission that contained
false and misleading financial information. Pursuant to this formal order of
investigation, the Company has produced documents pursuant to subpoenas from the
Southeast Regional Office of the Commission relating to reserves (net of
applicable taxes) established by the Company and NMC during the period from
January 1, 1990 to the date of the subpoena (the "Covered Period") and certain
corporate records and personnel material. The Company believes that all
financial statements filed by the Company with the Commission during the Covered
Period, including the financial statements of NMC included in the NMC Form 10
filed with the Commission on September 25, 1995, and the consolidated financial
statements of Grace filed in Grace's Annual Report on Form 10-K for the year
ended December 31, 1995 (all of which financial statements, other than unaudited
quarterly financial statements, were covered by unqualified opinions issued by
Price Waterhouse LLP, independent


                                       38

<PAGE>   39
certified public accountants), have been fairly stated, in all material
respects, in conformity with U.S. GAAP. The Company and NMC have been
cooperating with the Commission. While there can be no assurance, FMCH believes
that the outcome of this investigation will have no material adverse effect on
the business, financial condition and results of operations of the Company.

         IDPN COVERAGE ISSUES

         NMC administers IDPN therapy to chronic dialysis patients who suffer
from severe gastrointestinal malfunctions. After 1993, Medicare claims
processors sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN claims
represented an unauthorized policy coverage change. Accordingly, NMC and other
IDPN providers pursued various administrative and legal remedies, including
administrative appeals, to address this reduction.

         In November 1995, NMC filed a complaint in the U.S. District Court for
the Middle District of Pennsylvania seeking a declaratory judgment and
injunctive relief to prevent the implementation of this policy coverage change.
(National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the
District Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to the administrative
review processes available under the Medicare Act. NMC decided not to appeal the
Court's decision, but rather, to pursue the claims through the available
administrative processes.

         Although NMC management believes that those IDPN claims were consistent
with published Medicare coverage guidelines and ultimately will be approved for
payment, there can be no assurance that the claims on appeal will be approved
for payment. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $152 million as of December 31, 1997.

         If NMC is unable to collect its IDPN receivable or if IDPN coverage is
reduced or eliminated, depending on the amount of the receivable that is not
collected and/or the nature of the coverage change, NMC's business, financial
condition and results of operations could be materially adversely affected.

         SHAREHOLDER LITIGATION

         In 1995, nine purported class action lawsuits were brought against the
Company (prior to the Merger, when it was Grace) and certain of its then
officers and directors in various federal courts. These lawsuits were
consolidated in a case entitled Murphy, et al. v. W.R. Grace & Co., et al. 
No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the U.S. District
Court for the Southern District of New York. The first amended class action
complaint in this lawsuit, which purports to be a class action on behalf of all
persons and entities who purchased publicly traded securities of the Company
during the period from March 13, 1995 through October 17, 1995, generally
allege that the defendants violated federal securities laws by concealing
information and issuing misleading public statements and reports concerning
NMC's financial position and business prospects, a proposed spin-off of NMC, and
the matters that are the subject of the OIG Investigation and the investigation
by the federal grand jury in the District of New Jersey. The Murphy Action
sought unspecified damages, attorneys' and experts' fees and costs and such
other relief as the court deems proper.

         In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division against
the Company (prior to the Merger, when it was known as Grace), certain of its
then directors and its former President and Chief Executive Officer, alleging,
inter alia, that such individuals breached their fiduciary duties by failing to
properly supervise the activities of NMC in the conduct of its business (Bennett
v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the plaintiff in this
action filed a new action, based on similar allegations, in the U.S. District
Court for the Southern District of New York (Bennett v. Bolduc, et al.
95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida was dismissed
in favor of the Bennett Action. A second action making similar allegations was
filed in October 1995 in New York State Supreme Court, New York County (Bauer v.
Bolduc, et al. 95-125751). This action was stayed in favor of the Bennett
Action, which was consolidated, for discovery purposes only, with the Murphy
Action described above. The complaint in the Bennett Action sought unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper.



                                       39

<PAGE>   40
         In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against the Company (prior to the Merger, when
it was known as Grace) and certain of Grace's then current and former directors,
alleging that the defendants breached their fiduciary duties, principally by
failing to provide internal financial data concerning NMC and by failing to
negotiate with certain other companies that had made proposals for business
combinations involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The
lawsuit sought injunctive relief ordering defendants to carry out their
fiduciary duties and preventing or rescinding the Merger or any related
transactions with Fresenius AG, unspecified monetary damages, an award of
plaintiff's attorneys' and experts' fees and costs, and such other relief as the
court may deem just and proper.

         Grace Chemicals indemnified the Company and its affiliates for any
losses related to these lawsuits, which were recently settled without
contribution of any payment in connection with the settlements by the Company
or any of its affiliates.

         OTHER LITIGATION AND POTENTIAL EXPOSURES

         In recent years, physicians, hospitals and other participants in the
health care industry have become subject to an increasing number of lawsuits
alleging professional negligence, malpractice, product liability, workers'
compensation or related claims, many of which involve large claims and
significant defense costs. The Company and NMC and their subsidiaries have been,
and the Company can be expected to continue from time to time to be, subject to
such suits due to the nature of the Company's business. Although the Company
maintains insurance at a level which it believes to be prudent, there can be no
assurance that the coverage limits will be adequate or that all asserted claims
will be covered by insurance. In addition, there can be no assurance that
liability insurance will continue to be available at acceptable costs. A
successful claim against the Company or any of its subsidiaries in excess of
insurance coverage could have a material adverse effect upon the Company and the
results of its operations. Any claims, regardless of their merit or eventual
outcome, also may have a material adverse effect on the reputation and business
of the Company. The Company, NMC and their subsidiaries operate a large number
and wide variety of facilities throughout the U.S. In such a decentralized
system it is often difficult to maintain the desired level of oversight and
control over the thousands of individuals employed by many affiliate companies.
The Company relies upon its management structure, regulatory and legal
resources, and the effective operation of its compliance program to direct,
manage and monitor the activities of these employees. However, on occasion, the
Company, NMC and their subsidiaries have identified instances where employees,
deliberately or inadvertently, have submitted inadequate or false billings while
employed by an affiliated company. The illegal actions of such persons may
subject NMC to liability under the False Claims Act, among other laws, and the
Company cannot predict whether such law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any other business activities of the Company. In addition, the
Company asserts claims and suits arising in the ordinary course of business, the
ultimate resolution of which would not, in the opinion of Fresenius Medical
Care, have a material adverse effect on its financial condition.

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

     (a) ANNUAL MEETING.  FMCH held its annual meeting of shareholders on
         June 3, 1998 (the "Meeting").

     (b) ELECTION OF DIRECTORS. At the Meeting, the shareholders elected Ben J.
         Lipps as a Class II director for a one-year term and Udo Werle and
         Hans-Ulirch Sutter as Class III Directors for a one-year term. Holders
         of shares representing 90,000,073 votes voted in favor of the election
         of Messrs. Lipps, Werle and Sutter to the Board of Directors. There
         were no votes against such elections. There were 440 abstentions and no
         broker non-votes.

         William F. Grieco continued as a Class I director. His term expires in
         1999. Geoffrey W. Swett resigned from his position as an officer and
         director of the Company effective June 22, 1998.



                                       40

<PAGE>   41


ITEM 5. OTHER INFORMATION

       The Company's by-laws require that any shareholder who desires to propose
any matter for action at the Company's annual meeting of shareholders inform the
Company in writing of such intention not less than 60 days nor more than 90 days
before the date of the annual meeting. (if the annual meeting is to be held on
May 10) and otherwise in accordance with the requirements set forth in section
1.7 of the by-laws. If the meeting is to be held on a date other than May 10,
such notice must be received not later than the tenth day following the day on
which the Company's notice of the annual meeting is first given to shareholders
or filed with the Commission. In the event a shareholder fails to satisfy this
advance notice requirement, the Company's proxy holders may use their
discretionary voting authority with respect to any such notice properly brought
before the annual meeting.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits

Exhibit 2.1       Agreement and Plan of Reorganization dated as of February 4,
                  1996 between W. R. Grace & Co. and Fresenius AG (incorporated
                  herein by reference to Appendix A to the Joint Proxy
                  Statement-Prospectus of Fresenius Medical Care AG, W.R. Grace
                  & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed
                  with the Commission on August 5, 1996).

Exhibit 2.2       Distribution Agreement by and among W. R. Grace & Co., W.R.
                  Grace & Co.-Conn. and Fresenius AG dated as of February 4,
                  1996 (incorporated herein by reference to Exhibit A to
                  Appendix A to the Joint Proxy Statement-Prospectus of
                  Fresenius Medical Care AG, W.R. Grace & Co. and Fresenius
                  USA, Inc. dated August 2, 1996 and filed with the Commission
                  on August 5, 1996).

Exhibit 2.3       Contribution Agreement by and among Fresenius AG, Sterilpharma
                  GmbH and W.R. Grace & Co.-Conn. dated February 4, 1996
                  (incorporated herein by reference to Exhibit E to Appendix A
                  to the Joint Proxy-Statement Prospectus of Fresenius Medical
                  Care AG, W.R. Grace & Co. and Fresenius USA, Inc. dated
                  August 2, 1996 and filed with the Commission on August 5,
                  1996).

Exhibit 3.1       Certificate of Incorporation of Fresenius Medical Care
                  Holdings, Inc. (f/k/a W.R. Grace & Co.) under Section 402 of
                  the New York Business Corporation Law dated March 23, 1988
                  (incorporated herein by reference to the Form 8-K of the
                  Company filed on May 9, 1988).

Exhibit 3.2       Certificate of Amendment of the Certificate of Incorporation
                  of Fresenius Medical Care Holdings, Inc. (f/k/a W.R. Grace &
                  Co.) under Section 805 of the New York Business Corporation
                  Law dated May 25, 1988 (changing the name to W.R. Grace &
                  Co., incorporated herein by reference to the Form 8-K of the
                  Company filed on May 9, 1988).

Exhibit 3.3       Certificate of Amendment of the Certificate of Incorporation
                  of Fresenius Medical Care Holdings, Inc. (f/k/a W.R. Grace &
                  Co.) under Section 805 of the New York Business Corporation
                  Law dated September 27, 1996 (incorporated herein by reference
                  to the Form 8-K of the Company filed with the Commission on
                  October 15, 1996).

Exhibit 3.4       Certificate of Amendment of the Certificate of Incorporation
                  of Fresenius Medical Care Holdings, Inc. (f/k/a W.R. Grace &
                  Co.) under Section 805 of the New York Business Corporation
                  Law dated September 27, 1996 (changing the name to Fresenius
                  National Medical Care Holdings, Inc., incorporated herein by
                  reference to the Form 8-K of the Company filed with the
                  Commission on October 15, 1996).

Exhibit 3.5       Certificate of Amendment of the Certificate of Incorporation
                  of Fresenius Medical Care Holdings, Inc. under Section 805 of
                  the New York Business Corporation Law dated June 12, 1997
                  (changing name to Fresenius Medical Care Holdings, Inc.,
                  incorporated herein by reference to the Form 10-Q of the
                  Company filed with the Commission on August 14, 1997).


                                       41

<PAGE>   42


Exhibit 3.6       Amended and Restated By-laws of Fresenius Medical Care
                  Holdings, Inc. (incorporated herein by reference to the Form
                  10-Q of the Company filed with the Commission on August 14,
                  1997).

Exhibit 4.1       Credit Agreement dated as of September 27, 1996 among
                  National Medical Care, Inc. and Certain Subsidiaries and
                  Affiliates, as Borrowers, Certain Subsidiaries and Affiliates,
                  as Guarantors, the Lenders named therein, Nationsbank, N.A.,
                  as paying agent and the Bank of Nova Scotia, The Chase
                  Manhattan Bank, Dresdner Bank AG and Nationsbank, N.A., as
                  Managing Agents (incorporated herein by reference to the Form
                  6-K of Fresenius Medical Care AG filed with the Commission on
                  October 15, 1996).

Exhibit 4.2       Amendment dated as of November 26, 1996 (amendment to the
                  Credit Agreement dated as of September 27, 1996, incorporated
                  herein by reference to the Form 8-K of Registrant filed with
                  the Commission on December 16, 1996).

Exhibit 4.3       Amendment No. 2 dated December 12, 1996 (second amendment to
                  the Credit Agreement dated as of September 27, 1996,
                  incorporated herein by reference to the Form 10-K of
                  Registrant filed with the Commission on March 31, 1997).

Exhibit 4.4       Amendment No. 3 dated June 13, 1997 to the Credit Agreement
                  dated as of September 27, 1996, among National Medical Care,
                  Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
                  Certain Subsidiaries and Affiliates, as Guarantors, the
                  Lenders named therein, NationsBank, N.A., as paying agent and
                  the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                  Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
                  previously amended (incorporated herein by reference to the
                  Form 10-Q of the Registrant filed with the Commission on
                  November 14, 1997).

Exhibit 4.5       Amendment No. 4, dated August 26, 1997 to the Credit Agreement
                  dated as of September 27, 1996, among National Medical Care,
                  Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
                  Certain Subsidiaries and Affiliates, as Guarantors, the
                  Lenders named therein, NationsBank, N.A., as paying agent and
                  the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                  Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
                  previously amended (incorporated herein by reference to the
                  Form 10-Q of Registrant filed with Commission on November 14,
                  1997).

Exhibit 4.6       Amendment No. 5 dated December 12, 1997 to the Credit
                  Agreement dated as of September 27, 1996, among National
                  Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
                  Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
                  the Lenders named therein, NationsBank, N.A., as paying agent
                  and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                  Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
                  previously amended (incorporated herein by reference to the
                  Form 10-K of Registrant filed with Commission on March 23,
                  1998).

Exhibit 4.7       Form of Consent to Modification of Amendment No. 5 dated
                  December 12, 1997 to the Credit Agreement dated as of
                  September 27, 1996 among National Medical Care, Inc. and
                  Certain Subsidiaries and Affiliates, as Borrowers, Certain
                  Subsidiaries and Affiliates, as Guarantors, the Lenders named
                  therein, NationsBank, N.A., as paying agent and the Bank of
                  Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG
                  and NationsBank, N.A. as Managing Agents (incorporated herein
                  by reference to the Form 10-K of Registrant filed with
                  Commission on March 23, 1998).

Exhibit 4.8       Amendment No. 6 dated effective June 30, 1998 to the Credit
                  Agreement dated as of September 27, 1996, among National
                  Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
                  Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
                  the Lenders named therein, NationsBank, N.A., as paying agent
                  and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                  Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
                  previously amended.

Exhibit 4.9       Fresenius Medical Care AG 1998 Stock Incentive Plan as amended
                  effective as of August 3, 1998 (incorporated herein by
                  reference to the Form 10-Q of Registrant filed with Commission
                  on May 14, 1998).

Exhibit 10.1      Senior Subordinated Indenture dated November 27, 1996, among
                  Fresenius Medical Care AG, State Street Bank and Trust
                  Company, as successor to Fleet National Bank, as Trustee and
                  the Subsidiary Guarantors named therein (incorporated herein
                  by reference to the Form 10-K of Registrant filed with the
                  Commission on March 31, 1997).



                                       42

<PAGE>   43
Exhibit 10.2      Senior Subordinated Indenture dated as of February 19, 1998,
                  among Fresenius Medical Care AG, State Street Bank and Trust
                  Company as Trustee and Fresenius Medical Care Holdings, Inc.,
                  and Fresenius Medical Care AG, as Guarantors with respect to
                  the issuance of 7 7/8% Senior Subordinated Notes due 2008
                  (incorporated herein by reference to the Form 10-K of
                  Registrant filed with Commission on March 23, 1998).

Exhibit 10.3      Senior Subordinated Indenture dated as of February 19, 1998
                  among FMC Trust Finance S.A. Luxemborg, as Insurer, State
                  Street Bank and Trust Company as Trustee and Fresenius Medical
                  Care Holdings, Inc., and Fresenius Medical Care AG, as
                  Guarantors with respect to the issuance of 7 3/8% Senior
                  Subordinated Notes due 2008 (incorporated herein by reference
                  to the Form 10-K of Registrant filed with Commission on March
                  23, 1998).

Exhibit 10.4      Employee Benefits and Compensation Agreement dated September
                  27, 1996 by and among W. R. Grace & Co., National Medical
                  Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein
                  by reference to the Registration Statement on Form F-1 of
                  Fresenius Medical Care AG, as amended (Registration No.
                  333-05922), dated November 22, 1996 and the exhibits thereto).

Exhibit 10.5      Purchase Agreement, effective January 1, 1995, between Baxter
                  Health Care Corporation and National Medical Care, Inc.,
                  including the addendum thereto (incorporated by reference to
                  the Form SE of Fresenius Medical Care dated July 29, 1996 and
                  the exhibits thereto).

Exhibit 10.6      Agreement, dated November 25, 1992 between Bergen Brunswig
                  Drug Company and National Medical Care, Inc., including the
                  addendum thereto (incorporated by reference to the Form SE of
                  Fresenius Medical Care dated July 29, 1996 and the exhibits
                  thereto).

Exhibit 10.7      Product Purchase Agreement, effective January 1, 1996, between
                  Amgen, Inc. and National Medical Care, Inc. (incorporated by
                  reference to the Form SE of Fresenius Medical Care dated July
                  29, 1996 and the exhibits thereto).

Exhibit 10.8      Primary Guarantee dated July 31, 1996 (incorporated by
                  reference to the Registrant's Registration Statement on Form
                  S-4 (Registration No. 333-09497) dated August 2, 1996 and the
                  exhibits thereto).

Exhibit 10.9      Secondary Guarantee dated July 31, 1996 (incorporated by
                  reference to the Registrant's Registration Statement on Form
                  S-4 (Registration No. 333-09497) dated August 2, 1996 and the
                  exhibits thereto).

Exhibit 10.10     Receivables Purchase Agreement dated August 28, 1997 between
                  National Medical Care, Inc. and NMC Funding Corporation
                  (incorporated herein by reference to the Form 10-Q of the
                  Registrant filed with the Commission on November 14, 1997).

Exhibit 10.11     Transfer and Administration Agreement dated August 28, 1997
                  among NMC Funding Corporation, National Medical Care, Inc.,
                  Enterprise Funding Corporation, the Bank Investors listed
                  therein and NationsBank, N.A., as agent (incorporated herein
                  by reference to the Form 10-Q of the Registrant filed with the
                  Commission on November 14, 1997).

Exhibit 10.12     Amendment No. 1 dated as of February 27, 1998 to Transfer and
                  Administration Agreement dated as of August 28, 1997 among NMC
                  Funding Corporation, National Medical Care, Inc., Enterprise
                  Funding Corporation, the Bank Investors listed herein and
                  NationsBank, N.A., as agent (incorporated herein by reference
                  to the Form 10-K of Registrant filed with Commission on March
                  23, 1998).

Exhibit 10.13     Modification to FUSA Employment Agreement effective as of
                  January 1, 1998 by and between Ben J. Lipps and Fresenius
                  Medical Care AG (incorporated herein by reference to the Form
                  10-Q of Registrant filed with Commission on May 14, 1998).

Exhibit 10.14     Employment Agreement dated July 1, 1997 by and between Jerry
                  A. Schneider and the Company 1998 (incorporated herein by
                  reference to the Form 10-Q of Registrant filed with Commission
                  on May 14, 1998).

Exhibit 10.15     Addendum to Employment Agreement dated as of September 18,
                  1997 by and between Jerry A. Schneider and the Company
                  (incorporated herein by reference to the Form 10-Q of
                  Registrant filed with Commission on May 14, 1998).

                                       43

<PAGE>   44

Exhibit 11        Statement re: Computation of Per Share Earnings.

Exhibit 27        Financial Data Schedule

(b)    Reports on Form 8-K

       No reports on Form 8-K were filed during the quarter for which this
report is filed.


                                       44

<PAGE>   45


                                   SIGNATURES

   Pursuant to the requirement 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.



                                      Fresenius Medical Care Holdings, Inc.



DATE: August 10, 1998                 /s/ Ben J. Lipps
      ---------------                 ------------------------------------------
                                      NAME: Ben J. Lipps
                                      TITLE: President (Chief Executive Officer)




DATE: August 10, 1998                 /s/ Jerry A. Schneider
      ---------------                 ------------------------------------------
                                      NAME: Jerry Schneider
                                      TITLE: Chief Financial Officer


                                       45