<PAGE>

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

                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 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: 0-19031

                           NATIONAL QUALITY CARE, INC.
            --------------------------------------------------------
            (Name of small business issuer specified in its charter)

             Delaware                                       84-1215959
             --------                                       ----------
   (State or other jurisdiction                          (I.R.S. Employer
   of incorporation or organization)                    Identification No.)

    1835 South La Cienega Boulevard, Suite 235, Los Angeles, California 90035
    -------------------------------------------------------------------------
          (Address of principal executive offices, including zip code)

                                  310-280-2758
                ------------------------------------------------
                (Issuer's telephone number, including area code)

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

                                                 Name of each exchange
       Title of each class                        on which registered  
       -------------------                        -------------------
              None                                        None

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

                     Common Stock, $0.01 par value per share
                     ---------------------------------------
                                (Title of Class)



<PAGE>


Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes  X  No   
                                                              ---    ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

The issuer's revenues for the fiscal year ended December 31, 1998 were
$3,931,576.

The number of shares outstanding of the issuer's Common Stock as of April 9,
1999 was 9,814,878 shares. The aggregate market value of the Common Stock
(6,224,650 shares) held by non-affiliates, based on the average of the bid and
asked prices ($0.115) of the common stock as of April 9, 1999 was $715,835.

Transactional Small Business Disclosure Format (Check one):  Yes     No  X
                                                                 ---    ---
         THIS ANNUAL REPORT ON FORM 10-KSB (THE "REPORT") MAY BE DEEMED TO
CONTAIN FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR
HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.



                                       ii
<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.
         ------------------------

BUSINESS OF THE COMPANY
-----------------------

         The following should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto, contained
elsewhere in this Annual Report on Form 10-KSB (the "Report"). This Report
contains forward-looking statements, which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Unless the context otherwise requires, the term
"Company" refers to National Quality Care, Inc. and its wholly-owned subsidiary,
Los Angeles Community Dialysis, Inc., a California corporation ("LACD").

         The Company is a high-quality provider of integrated dialysis services
for patients suffering from chronic kidney failure, also known as end stage
renal disease ("ESRD").

         The Company's principal operating subsidiary, LACD, has been in
business since 1985 and currently offers dialysis services through two (2)
dialysis centers with an aggregate of thirty (30) fully equipped stations in Los
Angeles, California and provides home dialysis services.

         Further, the Company provides inpatient dialysis services by contract
to six (6) hospitals in the State of California. Payment for services is
primarily provided by third party payors, including Medicare, Medi-Cal (a
California State health agency) and commercial insurance companies.

BUSINESS PLAN
-------------

         The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development of new dialysis facilities
and the acquisition of additional dialysis facilities and other strategically
related health care services in selected markets. The Company's acquisition
strategy relates to the Company's intention to purchase existing dialysis
facilities and other related health care services which will create synergies
with the Company's dialysis services business. The Company also intends to
develop and construct additional dialysis facilities.

         The market for such acquisition prospects is highly competitive and
management expects that certain potential acquirors will have significantly
greater capital than the Company. In addition, financing for such acquisitions
or development may not be available to the Company on commercially reasonable
terms. In the event the Company cannot obtain the additional financing needed to
fulfill its acquisition and development strategy, the Company may be unable to
achieve its proposed expansion strategy. See "Risk Factors" and "Item 6 - 
"Management's Discussion and Analysis or Plan of Operation."

THE DIALYSIS INDUSTRY
---------------------

END-STAGE RENAL DISEASE

         ESRD is the state of advanced renal impairment that is irreversible and
requires routine dialysis treatments or kidney transplantation to sustain life.
Qualified patients with ESRD have been entitled since 1972 to Medicare benefits
regardless of age or financial circumstances. According to figures published by
the Health Care Financing Administration ("HCFA"), the number of patients
requiring chronic dialysis services in the United States has increased at a 9%
compounded annual growth rate to approximately 257,000 patients in 1995 from
66,000 in 1982. It is estimated that there are currently 230,000 ESRD patients
in the United States and that the United States market for outpatient and
inpatient services to ESRD patients in 1997 exceeded $14 billion.

         The Company attributes the continuing growth in the number of ESRD
patients principally to the aging of the general population and better treatment
and longer survival of patients with hypertension, diabetes and other illnesses
that lead to ESRD. Management also believes improved dialysis technology has
enabled older patients and those who previously could not tolerate dialysis due
to other illnesses to benefit from this life-prolonging treatment.



                                       2
<PAGE>



         It is estimated that there were approximately 3,000 dialysis facilities
in the United States at the beginning of 1997, of which approximately 27% were
owned by independent physicians (down from 37% in 1992), 28% were hospital-based
facilities (down from 33% in 1992), and 45% were owned by seven (7) major
multi-facility dialysis providers (up from 30% in 1992). The dialysis services
industry has been undergoing rapid consolidation. The Company believes that many
physician owners are selling their facilities to obtain relief from changing
government regulation and administrative constraints, to enable them to focus on
patient care and to realize a return on their investment. Hospitals are also
motivated to sell or outsource management of their facilities as they refocus
their resources on their core business due to increasing competitive pressures
within the hospital industry. The Company believes that these changes in the
health care environment will continue to drive consolidation within the dialysis
services industry.

TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE

         Treatment options for ESRD include hemodialysis, peritoneal dialysis
and kidney transplantation. ESRD patients are treated predominantly in
outpatient treatment facilities. HCFA estimates that, during 1996, 85% of the
ESRD patients in the United States were receiving hemodialysis treatment in
outpatient facilities, with the remaining patients being treated in the home
either through peritoneal dialysis (14%) or home hemodialysis (1%).

         HEMODIALYSIS. Hemodialysis, the most common form of ESRD treatment, is
generally performed either in a freestanding facility or in a hospital-based
facility. Hemodialysis uses an artificial kidney, called a dialyzer, to remove
certain toxins, fluids and salt from the patient's blood combined with a machine
to control external blood flow and to monitor certain vital signs of the
patient. The dialysis process occurs across a semi-permeable membrane that
divides the dialyzer into two distinct chambers. While blood is circulated
through one chamber, a pre-mixed dialyzer fluid is circulated through the other
chamber. The toxins and excess fluid from the blood selectively cross the
membrane into the dialysis fluid. A hemodialysis treatment usually lasts
approximately three hours and is performed three times per week per patient.

         PERITONEAL DIALYSIS. Peritoneal dialysis is generally performed by the
patient at home. There are several variations of peritoneal dialysis. The most
common are continuous ambulatory peritoneal dialysis ("CAPD") and continuous
cycling peritoneal dialysis ("CCPD") or automated peritoneal dialysis ("APD").
All forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity
to eliminate fluid and toxins from the patient. CAPD utilizes a sterile,
pharmaceutical-grade dialysis solution, which is introduced into the patient's
peritoneal cavity through a surgically placed catheter. Toxins in the blood
continuously cross the peritoneal membrane into the dialysis solution. After
several hours, the patient drains the used dialysis solution and replaces it
with fresh solution. CCPD and APD are performed in a manner similar to CAPD, but
use a mechanical device to cycle dialysis solution while the patient is sleeping
or at rest.

         OTHER TREATMENT OPTIONS. An alternative treatment not provided by the
Company is kidney transplantation. Although transplantation, when successful, is
generally the most desirable form of therapeutic intervention, the shortage of
suitable donors limits the availability of this treatment option.

QUALITY MANAGEMENT PROGRAM

         The Company believes its reputation for quality care is a significant
competitive advantage in attracting patients and physicians and in pursuing
growth in the managed care environment. The Company engages in organized and
systematic efforts to measure, maintain and improve the quality of services it
delivers. See "Operations - Quality Assurance."



                                       3
<PAGE>



UTILIZATION OF OPERATING CAPACITY

         The Company believes that current patient demand is met by the capacity
of its currently existing facilities. The Company continues to seek to expand
its capacity and potential patient base, based on the ability of the Company to
finance such expansion and to acquire such facilities in a commercially
acceptable manner to management. The Company will continue to focus on enhancing
operating efficiencies, including staffing, purchasing and financial reporting
systems and controls. See "Item 6 - Management's Discussion and Analysis or Plan
of Operation."

OPERATIONS
----------

LOCATION, CAPACITY AND USE OF FACILITIES

         The Company currently operates two (2) outpatient dialysis centers with
an aggregate of thirty (30) dialysis stations located in Los Angeles,
California. The Company also provides acute inpatient dialysis services to six
(6) hospitals in the State of California. System-wide, the Company provides
training, supplies and on-call support services to all of its CAPD and CCPD
patients. See "Item 2 - Description of Properties."

OPERATION OF FACILITIES

         The Company's dialysis facilities are designed specifically for
outpatient hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, a water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work areas,
offices and a staff lounge and kitchen. The Company's facilities also have a
designated area for training patients in home dialysis. The Company's facilities
also offer amenities for the patients, such as color televisions with headsets
at each dialysis station.

         In accordance with conditions for participation in the Medicare ESRD
program, the Company's facilities have a qualified physician director ("Medical
Director"). See "Physician Relationships" below. The Company's facilities also
have an Administrator and a registered nurse, who supervise the day-to-day
operations of the facility and the staff. The staff consists of registered
nurses, licensed practical or vocational nurses, patient care technicians, a
social worker, a registered dietician, a unit clerk and bio-medical technicians.

         The Company also offers various forms of home dialysis, primarily CAPD.
Home dialysis services consist of providing equipment and supplies, training,
patient monitoring and follow-up assistance to patients who prefer and are able
to receive dialysis treatments in their homes. Patients and their families or
other patient helpers are trained by a registered nurse to perform either CAPD
or CCPD at home. Company training programs for CAPD or CCPD generally encompass
two to three weeks.

EQUIPMENT SUPPLY AGREEMENT

         The Company has entered into a three (3) year agreement, commencing
January 1, 1997, with a large medical equipment supplier, to purchase a
significant portion of the medical equipment to be utilized in the Company's
dialysis operations from such supplier on a discounted basis.

         The Company provides inpatient dialysis services (excluding physician
professional services) to six (6) hospitals in the State of California. These
services are required in connection with the hospital's inpatient services for a
per treatment fee individually negotiated with each hospital. In most instances,
the Company transports the dialysis equipment and supplies to the hospital when
requested and administers the dialysis treatment. Examples of cases in which
such inpatient services are required include patients with acute kidney failure
resulting from trauma or similar causes, patients in the early stages of ESRD
and ESRD patients who require hospitalization for other reasons.



                                       4
<PAGE>



ANCILLARY SERVICES

         Dialysis facilities may provide a comprehensive range of ancillary
services to ESRD patients, the most significant of which is the administration
of erythropoietin ("EPO") upon a physician's prescription. EPO is a
bio-engineered protein, which stimulates the production of red blood cells and
is used in connection with all forms of dialysis to treat anemia, a medical
complication frequently experienced by ESRD patients, and has the effect of
reducing or eliminating the need for blood transfusions for dialysis patients.
The Company administers EPO to ESRD patents, but currently does not provide
other ancillary services to its patients.

PHYSICIAN RELATIONSHIPS

         A key factor in the success of a facility is its relationships with
local nephrologists. An ESRD patient generally seeks treatment at a facility
near such patient's home and where such patient's nephrologist has practice
privileges. Consequently, the Company relies on its ability to meet the needs of
referring physicians in order to continue to receive physician referrals of ESRD
patients.

         The conditions of participation in the Medicare ESRD program mandate
that treatment at a dialysis facility be "under the general supervision of a
Director who is a physician." Generally, the Medical Director must be board
eligible or board certified in internal medicine or pediatrics and have had at
least 12 months of experience or training in the care of patients at ESRD
facilities. The Medical Directors at the Company's facilities include Victor
Gura, M.D. and Ronald P. Lang, M.D., who are affiliates of the Company. See
"Item 9 - Management" and "Item 12 - Security Ownership of Certain Beneficial
Owners and Management."

         Certain of the Company's Medical Directors, including Drs. Gura and
Lang, who are affiliates of the Company, have entered into written contracts
with the Company which specify their duties and establish their compensation
(which is fixed for periods of one year or more). The compensation of the
Medical Directors and other physicians under contract depend upon competitive
factors in the local market, the physician's professional qualifications and
responsibilities and the size and utilization of the facility or relevant
program. The Company believes that the compensation arrangements with Medical
Directors, who are affiliates of the Company, are on terms no less favorable to
the Company than those that could have been obtained from comparable independent
third parties. The aggregate compensation of the Medical Directors and other
physicians under contract is fixed for periods of one year or more by written
agreement.

         As is often true in the dialysis industry, one or a few physicians
account for all or a significant portion of a dialysis facility's patient
referral base. Therefore, the Company's selection of a location for a dialysis
facility is determined in part by the physician or nephrologist selected (in
advance) to serve as the Company's Medical Director. The Company primarily
receives referrals of its patients from Drs. Gura and Lang, who are affiliates
of the Company. The loss of an important referring physician could have a
material adverse effect on the operations of the Company.

         Generally, the Company has non-competition agreements with its Medical
Directors or referring physicians.

QUALITY ASSURANCE

         QUALITY MANAGEMENT PROGRAM. The Company engages in organized and
systematic efforts to measure, maintain and improve the quality of services it
delivers and believes that it has earned a favorable reputation for quality in
the dialysis community. The Company has implemented a quality management program
designed to measure outcomes and improve the quality of its services. The
Company's quality management program and clinical information systems have been
developed and implemented at the Company's dialysis facilities under the
direction of the Company's executive management, Victor Gura, M.D. and Ronald P.
Lang, M.D. The quality management program involves all areas of the Company's
services, monitoring and evaluating all of the Company's activities with a focus
on continuous improvement. These objectives are accomplished through measurable
trend analysis based on specific statistical tools for analysis and
communication, and through continuing employee and patient education.

         CLINICAL INFORMATION SYSTEMS. To support the quality management program
and in response to current payor demands for cost-effective health care
treatments with measurable outcomes, the Company utilizes a PC-based, networked



                                       5
<PAGE>



clinical information system that will provide the Company, managed care
organizations and other payors with detailed patient outcome reports and
critical clinical information.

SOURCES OF REVENUE REIMBURSEMENT

         The following table provides information for the periods indicated
regarding the percentage of Company net operating revenues provided by: (i) the
Medicare ESRD program, (ii) Medicaid, (iii) private/alternative payors, such as
private insurance and private funds, and (iv) hospital inpatient dialysis
services:

                                             Years Ended December 31
                                             -----------------------
                                          1998                      1997
                                          ----                      ----

Medicare                                  41.3%                     42.6%
Medicaid                                  23.2                      19.0
Private/alternative payors                14.8                      10.8
Hospital inpatient
 dialysis services                        20.7                      27.6
                                          ----                      ----

         Total                           100.0%                    100.0%
                                         =====                     =====

         Under the Medicare ESRD program, Medicare reimburses dialysis providers
for the treatment of individuals who are diagnosed to have ESRD and are eligible
for participation in the Medicare program, regardless of age or financial
circumstances. For each treatment, Medicare pays 80% of the amount set by the
Medicare prospective reimbursement system, and a secondary payor (usually
Medicare supplemental insurance or the state Medicaid program) pays
approximately 20% of the amount set by the Medicare prospective reimbursement
system. The State of California, the only state in which the Company operates
dialysis facilities, provides Medicaid benefits to qualified recipients to
supplement their Medicare entitlement. The Medicare and Medicaid programs are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy and governmental funding restrictions, some of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business. See "Medicare
Reimbursement."

         Assuming a patient is eligible for participation in the Medicare
program, the commencement date of Medicare benefits for ESRD patients electing
hemodialysis is dependent on several factors. For ESRD patients 65 years of age
or older who are not covered by an employer group health plan, Medicare coverage
commences immediately. For ESRD patients 65 years of age or older who are
covered by an employer group health plan, Medicare coverage commences after a
30-month coordination period. ESRD patients under 65 years of age who are not
covered by an employer group health plan (for example, the uninsured, those
covered by Medicaid or by an individual health insurance policy) must wait 90
days after commencing dialysis treatments to be eligible for Medicare benefits.
During the first 90 days of treatment, the patient, Medicaid or the private
insurer is responsible for payment (and, in the case of the individual covered
by private insurance, such responsibility is limited to the terms of the policy,
with the patient being responsible for the balance). ESRD patients under 65
years of age who are covered by an employer group health plan must wait 30
months after commencing dialysis treatments before Medicare becomes the primary
payor. During the first 30 months of treatments, the employer group health plan
is responsible for payment at its negotiated rate or, in the absence of such a
rate, at the Company's usual and customary rates, and the patient is responsible
for deductibles and co-payments, if applicable, under the terms of the employer
group health plan.

         If an ESRD patient with an employer group health plan elects home
dialysis training during the first 90 days of dialysis, Medicare becomes the
primary payor after 30 months. If an ESRD patient without an employer group
health plan begins home dialysis training during the first three months of
dialysis, Medicare immediately becomes the primary payor.



                                       6
<PAGE>



MEDICARE REIMBURSEMENT

         The Company is reimbursed by Medicare under a prospective reimbursement
system for chronic dialysis services provided to ESRD patients. Under this
system, the reimbursement rates are fixed in advance and have been adjusted from
time to time by Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable and
recurring per treatment revenues and allows the Company to retain any profit
earned. Medicare has established a composite rate set by HCFA that governs the
Medicare reimbursement available for a designated group of dialysis services,
including the dialysis treatment, supplies used for such treatment, certain
laboratory tests and certain medications. The Medicare composite rate is subject
to regional differences based upon certain factors, including regional
differences in wage earnings. Certain other services and items are eligible for
separate reimbursement under Medicare and are not part of the composite rate,
including certain drugs (including EPO), blood (for amounts in excess of three
units per patient per year) and certain physician ordered tests provided to
dialysis patients. Claims for Medicare reimbursement must generally be presented
within 15 to 27 months of treatment depending on the month in which the service
was rendered and for Medicaid secondary reimbursement, if applicable, within 60
to 90 days after payment of the Medicare claim. The Company generally submits
claims monthly and is usually paid by Medicare within 30 days of the submission.
If in the future Medicare were to include in its composite reimbursement rate
any of the ancillary services presently reimbursed separately, the Company would
not be able to seek separate reimbursement for these services and this would
adversely affect the Company's results of operations to the extent a
corresponding increase were not provided in the Medicare composite rate.

         The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $118
and $138 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD
reimbursement rate was unchanged from commencement of the program in 1972 until
1983. From 1983 through December, 1990, numerous Congressional actions resulted
in net reduction of the average reimbursement rate from a fixed rate of $138 per
treatment in 1983 to $126 per treatment in 1990. In 1990, Congress increased the
ESRD reimbursement rate, effective January 1, 1991, resulting in an average ESRD
reimbursement rate of $126 per treatment. In 1990, Congress required that the
Department of Health and Human Services ("HHS") and PROPAC study dialysis costs
and reimbursement and make findings as to the appropriateness of ESRD
reimbursement rates. The Company is unable to predict what, if any, future
changes may occur in the rate of reimbursement, or, if made, whether any such
changes will have a material effect on the Company's revenues and net earnings.
On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA
approved Medicare reimbursement for the use of EPO by dialysis patients.

         From June 1, 1989 through December 31, 1990, the Medicare ESRD program
reimbursed for EPO at the fixed rate of $40 per administration of EPO, in
addition to the dialysis facility's allowable composite rate for dosages of up
to 9,999 units per administration. For higher dosages, an additional $30 per EPO
administration was allowed. Effective January 1, 1991, the Medicare allowable
prescribed rate for EPO was changed to $11 per 1,000 units, rounded to the
nearest 100 units. Subsequently, legislation was enacted to reduce the Medicare
prescribed rate for EPO by $1 per 1,000 units after December 31, 1993. The
Office of the Inspector General of HHS recently recommended that Medicare
reimbursement for EPO be reduced from $10 to $9 per 1,000 units and HHS has
concurred with this recommendation. However, HHS has not determined whether it
will pursue this change through the rulemaking process. The President's fiscal
1999 budget includes this proposed reduction in EPO reimbursement. There can be
no assurance that the Company can maintain current operating margins in the
future for EPO administrations due to potential reimbursement decreases, or to
potential increases in product costs from its sole manufacturer.

MEDICAID REIMBURSEMENT

         Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g. oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. The State of California, the only state in which the Company currently
operates, requires beneficiaries to pay a monthly share of the cost based upon
levels of income or assets. The Company is a licensed ESRD Medicaid provider in
the State of California.



                                       7
<PAGE>



GOVERNMENT REGULATION
---------------------

GENERAL

         The Company's dialysis operations are subject to extensive governmental
regulations at the federal, state and local levels. These regulations require
the Company to meet various standards relating to, among other things, the
management of facilities, personnel, maintenance of proper records, equipment
and quality assurance programs. The Company's dialysis facilities are subject to
periodic inspection by state agencies and other governmental authorities to
determine if the premises, equipment, personnel and patient care meet applicable
standards. To receive Medicare reimbursement, the Company's dialysis facilities
must be certified by HCFA. The Company's dialysis facilities are so certified.

         Any loss by the Company of its various federal certifications, its
authorization to participate in the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived or a change resulting from
healthcare reform reducing dialysis reimbursement or reducing or eliminating
coverage for dialysis services would have a material adverse effect on the
Company's business. To date, the Company has not had any difficulty in
maintaining its licenses or its Medicare and Medicaid authorizations. The
healthcare services industry will continue to be subject to intense regulation
at the federal and state levels, the scope and effect of which cannot be
predicted. No assurance can be given that the activities of the Company will not
be reviewed and challenged or that healthcare reform will not result in a
material adverse change to the Company.

FRAUD AND ABUSE

         The Company's dialysis operations are subject to the illegal
remuneration provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute) and similar state laws that impose criminal and civil
sanctions on persons who solicit, offer, receive or pay any remuneration,
whether directly or indirectly, in return for inducing the referral of a patient
for treatment or the ordering or purchasing of items or services that are paid
for in whole or in part by Medicare, Medicaid or similar state programs.
Violations of the federal anti-kickback statute are punishable by criminal
penalties, including imprisonment, fines or exclusion of the provider from
future participation in the Medicare and Medicaid programs, and civil penalties,
including assessments of $2,000 per improper claim for payment plus twice the
amount of such claim and suspension from future participation in Medicare and
Medicaid. Some state statutes also include criminal penalties. Although the
federal statute expressly prohibits transactions that have traditionally had
criminal implications, such as kickbacks, rebates or bribes for patient
referrals, its language has not been limited to such obviously wrongful
transactions. Court decisions state that, under certain circumstances, the
statute is also violated when one purpose (as opposed to the "primary" or a
"material" purpose) of a payment is to induce referrals. Proposed federal
legislation would expand the federal illegal remuneration laws to include
referrals of any patients regardless of payor source.

         In July, 1991 and in November, 1992, the Secretary of HHS published
regulations that create exceptions or "safe harbors" for certain business
transactions. Transactions that are structured within the safe harbors will be
deemed not to violate the federal illegal remuneration statute. For a business
arrangement to receive the protection of a relevant safe harbor, each and every
element of the safe harbor must be satisfied. Transactions that do not satisfy
all elements of a relevant safe harbor do not necessarily violate the illegal
remuneration statute, but may be subject to greater scrutiny by enforcement
agencies. The Company believes its arrangements with referring physicians are in
material compliance with applicable laws. The Company seeks wherever practicable
to structure its various business arrangements to satisfy as many safe harbor
elements as possible under the circumstances. The Company believes that its
arrangements with referring physicians materially satisfy the relevant safe
harbor requirements. Although the Company has never been challenged under these
statutes and believes it complies in all material respects with these and all
other applicable laws and regulations, there can be no assurance that the
Company will not be required to change its practices or experience a material
adverse effect as a result of any challenge.

         The conditions of participation in the Medicare ESRD program mandate
that treatment at a dialysis facility be "under the general supervision of a
Director who is a physician." Generally, the Medical Director must be board
eligible or board certified in internal medicine or pediatrics and have had at
least 12 months of experience or training in the care of patients at ESRD
facilities. The Company has by written agreement engaged qualified physicians to
serve as Medical Directors for its facility. These Medical Directors, Victor
Gura, M.D. and Ronald P. Lang, M.D., are also affiliates of the Company. The
Company may also contract with one or more physicians to serve as Assistant or



                                       8
<PAGE>



Associate Medical Directors, or to direct specific programs, such as CAPD
training, or to provide Medical Director services for acute dialysis services
provided to hospitals. The compensation of the Medical Directors and other
physicians under contract may depend upon competitive factors in the local
market, the physician's professional qualifications and responsibilities and the
size and utilization of the facility or relevant program. Although the Company's
Medical Directors are affiliates of the Company, the Company believes that these
compensation arrangements are on terms no less favorable to the Company than
could have been obtained from comparable independent third parties. The
aggregate compensation of the Medical Directors and other physicians under
contract is fixed for periods of one year or more by written agreement. Because
in all cases, the Company's Medical Directors and the other physicians under
contract refer patients to the Company's facilities, the federal anti-kickback
statute may apply. The Company believes it is in material compliance with the
anti-kickback statute with respect to its arrangements with these physicians
under contract. Among the safe harbors promulgated by the Secretary of HHS is
one relevant to the Company's arrangements with its Medical Directors and the
other physicians under contract. That safe harbor, generally applicable to
personal services and management contracts, sets forth six requirements. None of
the Company's agreements with its Medical Directors or other physicians under
contract satisfy all of these elements. However, the Company believes that the
Company's agreements with its Medical Directors and other physicians under
contract satisfy the relevant safe harbor requirements.

         On July 21, 1994, the Secretary of HHS proposed a rule that the
Secretary said "would modify the original set of safe harbor provisions to give
greater clarity to the rulemaking's original intent." The proposed rule would,
among other things, make changes to the safe harbors on personal services and
management contracts, small entity investment and space rentals. The Company
does not believe that its conclusions with respect to the application of these
safe harbors to its current arrangements as set forth above would change if the
proposed rule were adopted in the form proposed. However, the Company cannot
predict the outcome of the rulemaking process or whether changes in the safe
harbor rule will affect the Company's position with respect to the anti-kickback
statute.

         The Company operates its dialysis facilities in the State of
California, which has enacted statutes prohibiting physicians from holding
financial interests in various types of medical facilities to which they refer
patients.

         A California statute makes it unlawful for a physician who has, or a
member of whose immediate family has, a financial interest with or in an entity
to refer a person to that entity for laboratory, diagnostic nuclear medicine,
radiation oncology, physical rehabilitation, psychometric testing, home infusion
therapy, or diagnostic imaging goods or services. Under the statute, "financial
interest" includes, among other things, any type of ownership interest, debt,
loan, lease, compensation, remuneration, discount, rebate, refund, dividend,
distribution, subsidy or other form of direct or indirect payment, whether in
money or otherwise, between a physician and the entity to which the physician
makes a referral for the items described above. The statute also prohibits the
entity to which the referral was made from presenting a claim for payment to any
payor for a service furnished pursuant to a prohibited referral and prohibits a
payor from paying for such a service. Violation of the statute by a physician is
a misdemeanor and subjects the physician to civil fines. Violation of the
prohibition on submitting a claim in violation of the statute is a public
offense, subjecting the offender to a fine of up to $15,000 for each violation
and possible action against licensure. The Company does not provide remuneration
to its referring physicians for the administration of services provided to
patients so referred.

         The Company believes it is in material compliance with current
applicable laws and regulations. No assurance can be made that in the future the
Company's business arrangements, past or present, will not be the subject of an
investigation or prosecution by a federal or state governmental authority. Such
an investigation or prosecution could result in any, or any combination, of the
penalties discussed above depending upon the agency involved in such
investigation and prosecution. None of the Company's business arrangements with
physicians, vendors, patients or others have been the subject of investigation
by any governmental authority. No assurance can be given that the Company's
activities will not be reviewed or challenged by regulatory authorities. The
Company monitors legislative developments and would seek to restructure a
business arrangement if the Company determined that one or more of its business
relationships place it in material noncompliance with such a statute.

STARK I

         Provisions of the Omnibus Budget Reconciliation Act of 1989 ("Stark I")
restrict physician referrals for clinical laboratory services to entities with
which a physician or an immediate family member has a "financial relationship."
The entity is precluded from claiming payment for such services under the



                                       9
<PAGE>



Medicare or Medicaid programs, is liable for the refund of amounts received
pursuant to prohibited claims, can receive civil penalties of up to $15,000 per
service and can be excluded from participation in the Medicare and Medicaid
programs. Because of its broad language, Stark I may be interpreted by HCFA to
apply to the Company's operations. However, regulations interpreting Stark I
have created an exception to its applicability for services furnished in a
dialysis facility if payment for those services is included in the ESRD
composite rate. The Company believes that its compensation arrangements with its
Medical Directors and other physicians under contract are in material compliance
with the provisions of Stark I.

STARK II

         Provisions of the Omnibus Budget Reconciliation Act of 1993 ("Stark
II") restrict physician referrals for certain "designated health services" to
entities with which a physician or an immediate family member has a "financial
relationship." The entity is prohibited from claiming payment for such services
under the Medicare or Medicaid programs, is liable for the refund of amounts
received pursuant to prohibited claims, can receive civil penalties of up to
$15,000 per service and can be excluded from participation in the Medicare and
Medicaid programs. Comparable provisions applicable to clinical laboratory
services became effective in 1992. Stark II provisions which may be relevant to
the Company became effective on January 1, 1995.

         Because of its broad language, Stark II may be interpreted by HCFA to
apply to the Company's operations. Consequently, Stark II may require the
Company to restructure certain existing compensation agreements with its Medical
Directors, or, in the alternative, to refuse to accept referrals for designated
health services from such physicians. The Company believes, but cannot assure,
that if Stark II is interpreted to apply to the Company's operations, the
Company will be able to bring its financial relationships with referring
physicians into material compliance with the provisions of Stark II, including
relevant exceptions. If the Company cannot achieve such material compliance, and
Stark II is broadly interpreted by HCFA to apply to the Company, such
application of Stark II could have a material adverse effect on the Company. A
broad interpretation of Stark II to include dialysis services and items provided
incident to dialysis services would apply to the Company's competitors as well.

         A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement between the physician and
the entity. The Company has entered into compensation agreements with its
principal Medical Directors and other referring physicians, certain of whom are
principal stockholders of the Company. The Company believes that such
arrangements are in material compliance with the anti-kickback statute, Stark II
and the various state statutes.

         Stark II includes certain exceptions. A personal services compensation
arrangement is excepted from Stark II prohibitions if: (i) the arrangement is
set out in writing, signed by the parties, and specifies the services covered by
the arrangement, (ii) the arrangement covers all of the services to be provided
by the physician (or an immediate family member of such physician) to the
entity, (iii) the aggregate services contracted for do not exceed those that are
reasonable and necessary for the legitimate business purposes of the
arrangement, (iv) the term of the arrangement is for at least one year, (v) the
compensation to be paid over the term of the arrangement is set in advance, does
not exceed fair market value, and is not determined in a manner that takes into
account the volume or value of any referrals or other business generated between
the parties, (vi) the services to be performed do not involve the counseling or
promotion or a business arrangement or other activity that violates any state or
federal law, and (vii) the arrangement meets such other requirements that may be
imposed pursuant to regulations promulgated by HCFA. The Company believes that
its compensation arrangements with Medical Directors and other physicians under
contract materially satisfy the personal services exception to the Stark II
prohibitions.

         Payments made to a lessor by a lessee for the use of premises are
excepted from Stark II prohibitions if: (i) the lease is set out in writing,
signed by the parties, and specifies the premises covered by the lease, (ii) the
space rented or leased does not exceed that which is reasonable and necessary
for the legitimate business purposes of the lease or rental and is used
exclusively by the lessee when being used by the leasee, subject to certain
permitted payments for common areas, (iii) the lease provides for a term of
rental or lease for at least one year, (iv) the rental charges over the term of
the lease are set in advance, are consistent with fair market value, and are not
determined in a manner that takes into account the volume or value of any
referrals or other business generated between the parties, (v) the lease would
be commercially reasonable even if no referrals were made between the parties,
and (vi) the lease meets such other requirements that may be imposed pursuant to
regulations promulgated by HCFA. The Company currently leases its dialysis
facilities from unaffiliated third parties.



                                       10
<PAGE>



         For purposes of Stark II, "designated health services" includes:
clinical laboratory services, radiology and other diagnostic services, durable
medical equipment, parenteral and enteral nutrients, equipment and supplies,
prosthetics and prosthetic devices, home health services, outpatient
prescription drugs, and inpatient and outpatient hospital services. The Company
believes that the language and legislative history of Stark II indicate that
Congress did not intend to include dialysis services and the services and items
provided incident to dialysis services within the Stark II prohibitions.
Although the Company does not bill Medicare or Medicaid for hospital inpatient
and outpatient services, the Company's Medical Directors may request or
establish a plan of care that includes dialysis services for hospital inpatients
and outpatients that may be considered a referral to the Company within the
meaning of Stark II.

MEDICARE

         Because the Medicare program represents a substantial portion of the
federal budget, Congress takes action in almost every legislative session to
modify the Medicare program for the purpose of reducing the amounts otherwise
payable from the program to health care providers. Legislation or regulations
may be enacted in the future that may significantly modify the ESRD program or
substantially reduce the amount paid for Company services. Further, statutes or
regulations may be adopted which impose additional requirements in order for the
Company to be eligible to participate in the federal and state payment programs.
Such new legislation or regulations may adversely affect the Company's business
operations.

OTHER REGULATIONS

         The Company's operations are subject to various state hazardous waste
disposal laws. Those laws as currently in effect do not classify most of the
waste produced during the provision of dialysis services to be hazardous,
although disposal of non-hazardous medical waste is also subject to regulation.
Occupational Safety and Health Administration regulations require employers of
workers who are occupationally subject to blood or other potentially infectious
materials to provide those workers with certain prescribed protections against
bloodborne pathogens. The regulatory requirements apply to all health care
facilities, including dialysis facilities, and require employers to make a
determination as to which employees may be exposed to blood or other potentially
infectious materials and to have in effect a written exposure control plan. In
addition, employers are required to provide or employ hepatitis B vaccinations,
personal protective equipment, infection control training, post-exposure
evaluation and follow-up, waste disposal techniques and procedures, and
engineering and work practice control. Employers are also required to comply
within certain record-keeping requirements. The Company believes it is in
material compliance with the foregoing laws and regulations.

         Although the Company believes it complies in all material respects with
current applicable laws and regulations, the health care service industry will
continue to be subject to substantial regulation at the federal and state
levels, the scope and effect of which cannot be predicted by the Company. No
assurance can be given that the Company's activities will not be reviewed or
challenged by regulatory authorities.

COMPETITION
-----------

         The dialysis industry is fragmented and highly competitive,
particularly in terms of acquisition of existing dialysis facilities and
developing relationships with referring physicians. Competition for qualified
physicians to act as Medical Directors is also high. It is estimated that there
were approximately 3,000 dialysis facilities in the United States at the
beginning of 1997, of which approximately 27% were owned by independent
physicians (down from 37% in 1992), 28% were hospital-based facilities (down
from 33% in 1992), and 45% were owned by seven (7) major multi-facility dialysis
providers (up from 30% in 1992). There are also numbers of health care providers
that have entered or may decide to enter the dialysis business. Certain of the
Company's competitors have substantially greater financial resources than the
Company and may compete with the Company for acquisitions and development of
facilities in markets targeted by the Company. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities.

INSURANCE
---------

         The Company carries property and general liability insurance,
professional liability insurance and other insurance coverage in amounts deemed
adequate by management. However, there can be no assurance that any future
claims will not exceed applicable insurance coverage. Furthermore, no assurance



                                       11
<PAGE>



can be given that malpractice and other liability insurance will be available at
a reasonable cost or that the Company will be able to maintain adequate levels
of malpractice insurance and other liability insurance in the future. Physicians
practicing at the Company's facilities are required to maintain their own
malpractice insurance. However, the Company maintains coverage for the
activities of its Medical Directors (but not for their individual private
medical practices).

EMPLOYEES
---------

         As of March 30, 1999, the Company had twenty-four (24) full-time
employees, including two (2) executive, eighteen (18) medical and four (4)
administrative personnel.

         The Company intends to hire additional personnel as the development of
the Company's business makes such action appropriate. The loss of the services
of key personnel could have a material adverse effect on the Company's business.
Since there is intense competition for qualified personnel knowledgeable of the
Company's industry, no assurance can be given that the Company will be
successful in retaining and recruiting needed key personnel. The Company does
not have key-man life insurance for any of its employees.

         The Company's employees are not represented by a labor union and are
not covered by a collective bargaining agreement. The Company believes that its
employee relations are good.


                                  RISK FACTORS

         THIS REPORT MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE COMMISSION, REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.

         THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK.
PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET
WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS,
TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN THE COMPANY'S REPORTS,
PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, PRIOR TO PURCHASING SHARES OF THE COMMON
STOCK:



                                       12
<PAGE>



FINANCIAL RISKS
---------------

         LACK OF PROFITABILITY AND EXPANSION STRATEGY. The Company generated a
loss of approximately $873,000 during the fiscal year ended December 31, 1998.
Further, as of December 31, 1998, the Company had an accumulated deficit of
approximately $1,945,000. The Company experienced a loss from operations during
the year ended December 31, 1998 of approximately $144,000. Profitable
operations will be necessary to sustain the business on an on-going basis unless
the Company obtains additional financing from external sources. There can be no
assurances that the Company will experience profitable operations or obtain
additional financing in the future. The Company's business strategy includes the
proposed expansion of the Company's business operations by acquisitions and
development of additional dialysis facilities and related health care service
business. There can be no assurance that the Company's expansion strategy will
create operating synergies with any proposed or development target or result in
profitable operations. See "Item 6 - Management's Discussion and Analysis or
Plan of Operation" and "Item 12 - Certain Relationships and Related
Transactions."

         NEED FOR ADDITIONAL CAPITAL FOR EXPANSION. The Company's current
business plan includes a strategy to expand as a provider of dialysis services
through the development of new dialysis facilities and the acquisition of
additional dialysis facilities and other strategically related health care
services in selected markets. The market for such acquisition prospects is
highly competitive and management expects that certain potential acquirors will
have significantly greater capital than the Company. In addition, financing for
such acquisitions or development may not be available to the Company on
commercially reasonable terms. In the event the Company cannot obtain the
additional financing needed to fulfill its acquisition strategy, the Company may
be unable to achieve its proposed expansion strategy. See "Item 6 - Management's
Discussion and Analysis or Plan of Operation."

SECURITIES RISKS
----------------

         LIMITED PUBLIC MARKET FOR COMMON STOCK. There is currently a limited
public market for the Common Stock. Holders of the Company's Common Stock may,
therefore, have difficulty selling their Common Stock, should they decide to do
so. In addition, there can be no assurances that such markets will continue or
that any shares of Common Stock, which may be purchased may be sold without
incurring a loss. Any such market price of the Common Stock may not necessarily
bear any relationship to the Company's book value, assets, past operating
results, financial condition or any other established criteria of value, and may
not be indicative of the market price for the Common Stock in the future.
Further, the market price for the Common Stock may be volatile depending on a
number of factors, including business performance, industry dynamics, news
announcements or changes in general economic conditions. See "Item 5 - Market
for Common Equity and Related Stockholder Matters."

         DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is
currently listed for trading in the over-the-counter market on the NASD
Electronic Bulletin Board or in the "pink sheets" maintained by the National
Quotation Bureau, Inc., which are generally considered to be less efficient
markets than markets such as NASDAQ or other national exchanges, and which may
cause difficulty in conducting trades and difficulty in obtaining future
financing. Further, the Company's securities are subject to the "penny stock
rules" adopted pursuant to Section 15 (g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The penny stock rules apply to non-NASDAQ
companies whose common stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). Such rules require, among other things, that
brokers who trade "penny stock" to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade "penny stock" because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited. In
the event that the Company remains subject to the "penny stock rules" for any
significant period, there may develop an adverse impact on the market, if any,
for the Company's securities. Because the Company's securities are subject to
the "penny stock rules," investors will find it more difficult to dispose of the
securities of the Company. Further, for companies whose securities are traded in
the Over-The-Counter Market, it is more difficult: (i) to obtain accurate
quotations, (ii) to obtain coverage for significant news events because major
wire services, such as the Dow Jones News Service, generally do not publish
press releases about such companies, and (iii) for companies whose shares are
traded in the Over-The-Counter Market to obtain needed capital. See "Item 5 -
Market for Common Equity and Related Stockholder Matters."



                                       13
<PAGE>



         CONTROL BY PRINCIPAL STOCKHOLDERS. Three of the Company's principal
stockholders, directors and executive officers of the Company and their
affiliates control the voting power of approximately 35.5% of the outstanding
Common Stock. As a result of such Common Stock ownership, such persons will be
in a position to exercise significant control with respect to the affairs of the
Company and the election of directors. See "Item 11 - Security Ownership of
Certain Beneficial Owners and Management."

         POTENTIAL CHANGE OF CONTROL. 2,650,000 shares of Common Stock, which
are beneficially owned by certain of the Company's affiliates, Victor Gura,
M.D., Ronald P. Lang, M.D., and Avraham H. Uncyk, M.D., and their affiliate,
Medipace, which constitute approximately 27.0% of the currently issued and
outstanding Common Stock, are the subject of certain pledge agreements for
certain obligations of such persons to an unaffiliated third party. In the event
that such third party seeks to foreclose on these shares, there may occur a
change of control which may have a material adverse effect on the business
operations of the Company. See "Item 11 - Security Ownership of Certain
Beneficial Owners and Management" and "Item 13 - Certain Relationships and
Related Transactions."

         CERTAIN REGISTRATION RIGHTS. The Company has entered into various
agreements pursuant to which certain holders of the Company's outstanding Common
Stock, who are affiliates of the Company, have been granted the right, under
various circumstances, to have Common Stock that is currently outstanding
registered for sale in accordance with the registration requirements of the
Securities Act upon demand or "piggybacked" to a registration statement which
may be filed by the Company. Of the currently issued and outstanding Common
Stock, 800,000 shares may be the subject of future registration statements
pursuant to the terms of such agreements. In addition, currently outstanding
options and warrants issued to certain consultants and employees to purchase up
to 1,423,995 shares of Common Stock are either the subject of current
registration statements or have certain registration rights. Any such
registration statement may have a material adverse effect on the market price
for the Company's Common Stock resulting from the increased number of free
trading shares of Common Stock in the market. There can be no assurances that
such registration rights will not be enforced or that the enforcement of such
registration rights will not have a material adverse effect on the market price
for the Common Stock. See "Item 12 - Certain Relationships and Related
Transactions."

         POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The
Company's Certificate of Incorporation includes certain provisions which are
intended to protect the Company's stockholders by rendering it more difficult
for a person or persons to obtain control of the Company without cooperation of
the Company's management. These provisions include certain super-majority
requirements for the amendment of the Company's Certificate of Incorporation and
Bylaws. Such provisions are often referred to as "anti-takeover" provisions. The
inclusion of such "anti-takeover" provisions in the Certificate of Incorporation
may delay, deter or prevent a takeover of the Company which the stockholders may
consider to be in their best interests, thereby possibly depriving holders of
the Company's securities of certain opportunities to sell or otherwise dispose
of their securities at above-market prices, or limit the ability of stockholders
to remove incumbent directors as readily as the stockholders may consider to be
in their best interests. See "Item 5 - Market for Common Equity and Related
Stockholder Matters."

         SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. There are
currently 6,224,650 shares of Common Stock which are free trading shares or are
eligible to have the restrictive legend removed pursuant to Rule 144(k)
promulgated under the Securities Act. Further, 800,000 shares may be the subject
of future registration statements pursuant to the terms of certain agreements
between the Company and certain of its stockholders. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
may occur, could have a material adverse effect on the market price of the
Common Stock. Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and Preferred Stock. The
issuance of such shares could result in the dilution of the voting power of the
currently issued and outstanding Common Stock. See "Item 5 - Market for Common
Equity and Related Stockholder Matters."

         FUTURE ISSUANCES OF PREFERRED STOCK. The Company's Certificate of
Incorporation, as amended, authorize the issuance of preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors, without stockholder approval. In the event of the
issuance of additional series of preferred stock, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. See "Item 5 - Market for Common
Equity and Related Stockholder Matters."



                                       14
<PAGE>



         LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on
its Common Stock to date and there are no plans for paying dividends on the
Common Stock in the foreseeable future. The Company intends to retain earnings,
if any, to provide funds for the expansion of the Company's business. See "Item
5 - Market for Common Equity and Related Stockholder Matters."

GENERAL BUSINESS OPERATIONS RISKS
---------------------------------

         DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT.
The Company is reimbursed for dialysis services primarily at fixed rates
established in advance under the Medicare ESRD program. Under this program, once
a patient becomes eligible for Medicare reimbursement, Medicare is responsible
for payment of 80% of the composite rates determined by HCFA for dialysis
treatments. Since 1972, qualified patients with ESRD have been entitled to
Medicare benefit regardless of age or financial circumstances. The Company
estimates that approximately 41% of its net operating revenues during its fiscal
year ended December 31, 1998 were funded by Medicare. Since 1983, numerous
Congressional actions have resulted in changes in the Medicare composite
reimbursement rate from a national average of $138 per treatment in 1983 to a
low of $125 per treatment on average in 1986 and to approximately $126 per
treatment on average at present. The Company is not able to predict whether
future rate changes will be made. Reductions in composite rates could have a
material adverse effect on the Company's revenues and net earnings. Furthermore,
increases in operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in prescribed rates, may adversely
affect the Company's earnings in the future. The Company is also unable to
predict whether certain services, as to which the Company is currently
separately reimbursed, may in the future be included in the Medicare composite
rate. See "Business - Operations - Sources of Revenue Reimbursement" and
"Business - Operations - Medicare Reimbursement."

         Since June 1, 1989, the Medicare ESRD program has provided
reimbursement for the administration to dialysis patients of EPO. EPO is
beneficial in the treatment of anemia, a medical complication frequently
experienced by dialysis patients. Many of the Company's dialysis patients
receive EPO. Revenues from EPO (the substantial majority of which are reimbursed
through Medicare and Medicaid programs) were approximately $665,000, or 18% of
medical service revenues, in fiscal 1998. EPO reimbursement significantly
affects the Company's net income. Medicare reimbursement for EPO was reduced
from $11 to $10 per 1,000 units for services rendered after December 31, 1993.
The Office of the Inspector General of HHS recently recommended that Medicare
reimbursement for EPO be reduced from $10 to $9 per 1,000 units and HHS has
concurred with this recommendation. However, HHS has not determined whether it
will pursue this change through the rulemaking process. The President's fiscal
1999 budget includes this proposed reduction in EPO reimbursement. EPO is
produced by a single manufacturer, and any interruption of supply or product
cost increases could adversely affect the Company's operations. See "Business -
Operations - Medicare Reimbursement."

         The State of California, the only state in which the Company currently
operates dialysis facilities, provides Medicaid (or comparable) benefits to
qualified recipients to supplement their Medicare entitlement. The Company
estimates that approximately 23% of its net operating revenues during fiscal
1998 were funded by Medicaid or comparable state programs. The Medicaid programs
are subject to statutory and regulatory changes, administrative ruling,
interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business. See "Business -
Operations - Medicaid Reimbursement."

         Approximately 35% of the Company's net operating revenues during fiscal
1998 were from sources other than Medicare and Medicaid. These sources include
payments from third-party, non-government payors, at rates that generally exceed
the Medicare and Medicaid rates, and payments from hospitals with which the
Company has contracts for the provision of acute dialysis treatments. Any
restriction or reduction of the Company's ability to charge for such services at
rates in excess of those paid by Medicare would adversely affect the Company's
net operating revenues and net income. The Company is unable to quantify or
predict the degree, if any, of the risk of reductions in payments under these
various payment plans. The Company is a party to non-exclusive agreements with
certain third-party payors (one of which accounted for approximately 12% of the
Company's net operating revenues in fiscal 1998), and termination of such
third-party agreements could have an adverse effect on the Company. See
"Business - Operations - Sources of Revenue Reimbursement."

         OPERATIONS SUBJECT TO GOVERNMENT REGULATION. The Company is subject to
extensive regulation by both the federal government and the states in which the
Company conducts its business. The Company is subject to the illegal
remuneration provisions of the Social Security Act and similar state laws, which



                                       15
<PAGE>



impose civil and criminal sanctions on persons who solicit, offer, receive or
pay any remuneration, directly or indirectly, for referring a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
state programs. In July, 1991 and November, 1992, the federal government
published regulations that provide exceptions or "safe harbors" for certain
business transactions. Transactions that are structured within the safe harbors
are deemed not to violate the illegal remuneration provisions. Transactions that
do not satisfy all elements of a relevant safe harbor do not necessarily violate
the illegal remuneration statute, but may be subject to greater scrutiny by
enforcement agencies. The Company believes that the arrangements between the
Company and the Company's Medical Directors fall within the protection afforded
by these safe harbors. Although the Company has never been challenged under
these statutes and believes it complies in all material respects with these and
all other applicable laws and regulations, there can be no assurance that the
Company will not be required to change its practices or relationships with its
Medical Directors or that the Company will not experience material adverse
effects as a result of any such challenge.

         The Balanced Budget Act of 1997 extended the period during which
Medicare is secondary to a patient's group health plan from 18 months to 30
months effective for items and services provided on or after August 5, 1997.
After this 30-month period, Medicare becomes the primary coverage for patients,
and the patient's group health coverage generally pays applicable coinsurance
payments and deductibles.

         The Omnibus Budget Reconciliation Act of 1989 includes certain
provisions ("Stark I") that restrict physician referrals for clinical laboratory
services to entities with which a physician or an immediate family member has a
"financial relationship." In August, 1995, HCFA published regulations
interpreting Stark I. The regulations specifically provide that services
furnished in an ESRD facility that are included in the composite billing rate
are excluded from the coverage of Stark I. The Company believes that the
language and legislative history of Stark I indicate that Congress did not
intend to include laboratory services provided incidental to dialysis services
within the Stark I prohibition. Violations of Stark I are punishable by civil
penalties which may include exclusion or suspension of a provider from future
participation in Medicare and Medicaid programs and substantial fines. Due to
the breadth of the statutory provisions, it is possible that the Company's
practices might be challenged under this law. Any such interpretation of Stark I
would apply to the Company's competitors as well.

         The Omnibus Budget Reconciliation Act of 1993 includes certain
provisions ("Stark II") that restrict physician referrals for certain
"designated health services" to entities with which a physician or an immediate
family member has a "financial relationship." The Company believes that the
language and legislative history of Stark II indicate that Congress did not
intend to include dialysis services and the services and items provided incident
to dialysis services within the Stark II prohibitions. Violations of Stark II
are punishable by civil penalties, which may include exclusion or suspension of
the provider from future participation in Medicare and Medicaid programs and
substantial fines. Due to the breadth of the statutory provisions and the
absence of regulations or court decisions addressing the specific arrangements
by which the Company conducts its business, it is possible that the Company's
practices might be challenged under these laws. A broad interpretation of Stark
II to include dialysis services and items provided incident to dialysis services
would apply to the Company's competitors as well.

         A California statute that became effective January 1, 1995 makes it
unlawful for a physician who has, or a member of whose immediate family has, a
financial interest with or in an entity to refer a person to that entity for,
among other services, laboratory services. The Company does not believe that the
statute is intended to apply to laboratory services that are provided
incidentally to dialysis services or that the Company's practices violate the
statute. If the Company's practices were challenged under this law, any such
interpretation would apply to the Company's competitors as well.

         A number of proposals for health care reform have been made in recent
years, some of which have included radical changes in the health care system.
Health care reform could result in material changes in the financing and
regulation of the health care business, and the Company is unable to predict the
effect of such changes on its future operations. It is uncertain what
legislation on health care reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
results of operations of the Company. See "Business - Operations - Medicare
Reimbursement" and "Business - Governmental Regulation."



                                       16
<PAGE>



         COMPETITION. The Company directly and indirectly competes with other
businesses, including businesses in the dialysis industry. In many cases, these
competitors are larger and more firmly established than the Company. In
addition, many of such competitors have greater marketing and development
budgets and greater capital resources than the Company. Accordingly, there can
be no assurance that the Company will be able to achieve and maintain a
competitive position in the Company's industry. The dialysis industry is
fragmented and highly competitive, particularly in terms of acquisitions of
existing dialysis facilities and developing relationships with referring
physicians. Certain of the Company's competitors have substantially greater
financial resources than the Company and may compete with the Company for
acquisitions of facilities in markets targeted by the Company. Competition for
acquisitions has increased the cost of acquiring existing dialysis facilities.
See "Business - Competition."

         DEPENDENCE ON PHYSICIAN REFERRALS AND REFERRALS FROM AFFILIATES. The
Company's facilities are dependent upon referrals of ESRD patients for
treatments by physicians specializing in nephrology and practicing in the
communities served by the Company's dialysis facilities. As is generally true in
the dialysis industry, at the Company's facilities, one or a few physicians
account for all or a significant portion of the patient referral base. The loss
of one or more key referring physicians could have a material adverse effect on
the operations of the Company. The Company primarily receives referrals of its
ESRD patients from affiliates of the Company, who have interests in an
affiliated entity which is not a subsidiary of the Company. If such interests
are deemed to violate applicable federal or state law, such physicians may be
forced to dispose of their ownership interests. The Company cannot predict the
effect such dispositions would have on its business. See "Risk Factors - 
Operations Subject to Government Regulation," "Business - Operations - Physician
Relationships" and "Business - Governmental Regulation."

         INSURANCE AND POTENTIAL LIABILITY. The Company maintains, and intends
to continue to maintain, insurance, including insurance relating to personal
injury and medical professional liability insurance in amounts the Company
considers adequate and customary for the industry. The Company has never had a
claim asserted against it notwithstanding the extensive dialysis treatments it
has provided over the years. Nevertheless, a partially or wholly uninsured claim
against the Company, if successful and of sufficient magnitude, could have a
material adverse effect on the Company. There can be no assurance that such
insurance will continue to be available to the Company in the future, or if so,
that it will provide adequate coverage against potential liabilities or that a
liability claim will not have a material adverse effect on the Company.
See "Business - Insurance."

         DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills
of its management team. There is strong competition for qualified personnel in
the dialysis industry, and the loss of key personnel or an inability to continue
to attract, retain and motivate key personnel could adversely affect the
Company's business. There can be no assurances that the Company will be able to
retain its existing key personnel or to attract additional qualified personnel.
The Company does not have key-man life insurance on any employees of the
Company. See "Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act."

         LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of
Incorporation provides, as permitted by governing Delaware law, that a director
of the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, with certain
exceptions. In addition, the Company's Certificate of Incorporation and Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. Further, the Company has adopted certain forms
of indemnification agreements which may be entered into with the Company's
officers and directors. These provisions and agreements may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director. See "Item 10 - Executive
Compensation - Indemnification of Officers and Directors."

         TRANSACTIONS WITH AFFILIATES; CONFLICTS OF INTEREST. The Company has
entered into certain financial agreements with certain affiliates. Further, the
Company is dependent on referrals of ESRD patients from such affiliates.
Management of the Company believes that these agreements were negotiated at
arms' length. However, the enforcement of these agreements may create conflicts
of interests in the event of a dispute between the Company and any such parties.
Although management of the Company intends to use its best efforts to mitigate
any such conflicts of interests, there can be no assurances that management of
the Company will be able to mitigate such conflicts of interest successfully.
See "Item 12 - Certain Relationships and Related Transactions."



                                       17
<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTIES.
         --------------------------

         The Company leases office space located at 1835 South La Cienega
Boulevard, Suite 235, Los Angeles, California 90035, which serves as the
Company's principal executive offices. The Company pays $1,600 per month on a
lease that expires on June 30, 2002.

         The Company leases office space located at 1801 South La Cienega
Boulevard, 1st Floor, Los Angeles, California 90035, which serves as a dialysis
facility in the Company's business operations. The Company pays $10,500 per
month on a lease that expires on May 31, 2007.

         The Company leases office space located at 5901 West Olympic Boulevard,
Suite 109, Los Angeles, California 90036, which facility serves as a dialysis
facility in the Company's business operations. The Company pays a monthly rent
of approximately $6,760 on a lease that expires on August 31, 2000. See "Item 
3 - Legal Proceedings" and "Item 12 - Certain Relationships and Related
Transactions."

         As of May 17, 1996, the Company acquired that certain real property
(the "Real Property") located at 6000 San Vicente Boulevard, Los Angeles,
California, for a purchase price of $2,055,000, as adjusted for certain credits
to the Company with respect to the purchase price. The Real Property includes
the improvement of a hospital facility. The Real Property is subject to three
(3) deeds of trust in the aggregate amount of $2,025,000. As of December 31,
1998, the principal amount of this obligation was approximately $1,717,000. See
"Item 6 - Management's Discussion and Analysis or Plan of Operation."

         The loans on the Real Property are personally guaranteed by Ehud
Barkai, who is not an affiliate of the Company, and by Drs. Gura and Lang. The
Company has entered into an agreement (the "Agreement to Perform Loan
Covenants") with Mr. Barkai to perform the covenants, conditions and
restrictions required of the Company under the loan agreements with respect to
the acquisition of the Real Property. The Company has granted to Mr. Barkai's
affiliated corporation, Aegis Medical Systems, Inc. ("Aegis"), an all inclusive
deed of trust ("AITD"), with an assignment of rents, issues and profits and a
power of sale to secure the Company's agreement to repay the loans on the Real
Property which are guaranteed by Mr. Barkai.

         The Company also has entered into a master lease agreement (the "Master
Lease") with Aegis for the Real Property at an annual rental rate of $1,000. The
Master Lease is subject to a written triple net lease dated January 16, 1980,
with Avalon Memorial Hospital ("Avalon") as the current tenant in possession.
The term of the lease with Avalon extends through December 31, 1999, with
options to extend the lease by Avalon for two (2) additional five (5) year
terms. The term of the Master Lease extends through May 31, 2026. However, the
Master Lease may be terminated earlier upon the cancellation, exoneration or
release of any guarantees by Aegis or Mr. Barkai with respect to loan
obligations secured by the Real Property. In connection with the Agreement to
Perform Loan Covenants, Barkai has agreed that if the net rents arising from the
Real Property are paid to Aegis in an amount or amounts sufficient to pay all
amounts due under such loans as they became due, the Company will be excused
from its duty to Barkai of payment under such loans, but only to that extent.
Currently, the aggregate monthly amount due under such loans is approximately
$20,290 and the current monthly rental payment of Avalon is approximately
$22,690.



                                       18
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS.
         ------------------

         CHAPTER 11 REORGANIZATION. On July 14, 1993, the Company and its then
existing subsidiaries filed a voluntary petition in the United States Bankruptcy
Court for the District of Colorado (the "Bankruptcy Court") seeking to
reorganize under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy
Code") in connection with the Company's prior business operations, at a time
when the Company's name was "Sargent, Inc." ("Sargent"). On August 11, 1994, the
Bankruptcy Court confirmed the Plan of Reorganization that Sargent had filed for
Chapter 11 reorganization. The Plan of Reorganization became effective as of
July 25, 1994. The Bankruptcy Proceeding was dismissed by the Bankruptcy Court
on September 5, 1997.

         The Share Exchange Agreement between LACD and Sargent became effective
on May 11, 1996. The bankruptcy proceeding does not relate to the operations of
LACD, which became a wholly-owned subsidiary of the Company in connection with
the Share Exchange Agreement, or the Company's current business operations or
management.

         Sargent and its then existing subsidiaries operated as
debtor-in-possession ("DIP") under the Bankruptcy Code from July 14, 1993 to
July 25, 1994 in accordance with the Bankruptcy Court's orders issued from time
to time. As a DIP, Sargent was authorized to operate its business, but could not
engage in transactions outside of the ordinary course of business without
approval, after notice and hearing, of the Bankruptcy Court. The bankruptcy
proceedings of Sargent and its subsidiaries were consolidated for administrative
purposes only. Each debtor maintained its own separate bankruptcy case. Pursuant
to the Bankruptcy Code, a committee of Sargent's unsecured creditors was
appointed. Among other things, that committee reviewed proposed business
transactions out of the ordinary course of business and negotiated with Sargent
concerning a plan of reorganization. The unsecured creditors were paid in full
on January 11, 1995.

         Pursuant to the Plan of Reorganization, pre-existing equity interests
of Sargent were significantly diminished, Sargent's obligations to certain
pre-petition creditors were restricted and certain creditors which has provided
debtor-in-possession financing and/or management services to Sargent's Common
Stock in exchange for their credits and/or management services.

         Except as set forth above, the Company is not a party to any material
litigation and is not aware of any pending or threatened litigation that could
have a material adverse effect on the Company's business, operating results or
financial condition.

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

         On July 7, 1998, at the Company's Annual Meeting of Stockholders, the
Company's stockholders adopted the 1998 Employee Stock Option Plan, approved the
form of indemnification agreements between the Company and the members of the
Company's Board of Directors, ratified the appointment of KPMG LLP as
independent auditors for the Company, and elected the Board of Directors.


                                     PART II

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

         As of April 9, 1999, the authorized capital stock of the Company
consisted of 50,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock") and 5,000,000 shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"). As of April 9, 1999, there were issued and
outstanding 9,814,878 shares of Common Stock and options and warrants to
purchase 1,723,995 shares of Common Stock, of which 1,483,995 are exercisable as
of the date of this Report. Further, the Company may issue warrants to purchase
up to an additional 500,000 shares of Common Stock and may issue up to an
additional 4,210,644 shares of Common Stock to certain affiliates of the Company
based on future financial performance by the Company during the fiscal years
ending December 31, 1999 to 2001. See "Item 12 - Certain Relationships and
Related Transactions."



                                       19
<PAGE>



         The Company's Common Stock is listed for trading in the
over-the-counter market and is quoted on the NASD Bulletin Board or in the "pink
sheets" maintained by the National Quotation Bureau, Inc. under the symbol
"NQCI." The Company's Common Stock has a very limited trading history.

         The following table sets forth quotations for the bid and asked prices
for the Common Stock for the periods indicated below, based upon quotations
between dealers, without adjustments for stock splits, dividends, retail
mark-ups, mark-downs or commissions, and therefore, may not represent actual
transactions:

<TABLE>
<CAPTION>
                                                      BID PRICES                      ASKED PRICES
                                                      ----------                      ------------
                                                 HIGH            LOW             HIGH              LOW
                                                 ----            ---             ----              ---

<S>                                           <C>              <C>            <C>                <C>
YEAR ENDED DECEMBER 31, 1997

1st Quarter                                    2 5/32          11/16           2 7/32            13/16
2nd Quarter                                   1 15/32           9/16          1 11/16              5/8
3rd Quarter                                     1 5/8           5/16          1 21/32              3/8
4th Quarter                                     1 1/2          29/32          1 19/32            15/16

YEAR ENDED DECEMBER 31, 1998

1st Quarter                                     1 1/4          15/32           1 5/16            17/32
2nd Quarter                                     1 1/8          15/32           1 3/16            17/32
3rd Quarter                                      9/16          15/64              5/8              1/4
4th Quarter                                     11/32           3/16              3/8            13/64

YEAR ENDING DECEMBER 31, 1999

1st Quarter                                     15/64            1/8            17/64             5/32
</TABLE>

         The bid and asked sales prices of the Common Stock, as traded in the
over-the-counter market, on April 9, 1999, were approximately $0.10 and $0.13,
respectively. These prices are based upon quotations between dealers, without
adjustments for retail mark-ups, mark-downs or commissions, and therefore may
not represent actual transactions.

         No dividend has been declared or paid by the Company since inception.
The Company does not anticipate that any dividends will be declared or paid in
the future.

         The transfer agent for the Company is American Securities Transfer,
Inc., 938 Quail Street, Suite 101, Denver, Colorado 80215, (303) 234-5300.

CERTAIN ANTI-TAKEOVER PROCEDURAL REQUIREMENTS
---------------------------------------------

         The Company's Certificate of Incorporation adopts certain measures
which are intended to protect the Company's stockholders by rendering it more
difficult for a person or persons to obtain control of the Company without
cooperation of the Company's management. These measures include the potential
implementation of certain supermajority requirements for the amendment of the
Company's Certificate of Incorporation and Bylaws. Such measures are often
referred to as "anti-takeover" provisions.

         The inclusion of such "anti-takeover" provisions in the Certificate of
Incorporation may delay, deter or prevent a takeover of the Company which the
stockholders may consider to be in their best interests, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of their securities at above-market prices, or limit the
ability of stockholders to remove incumbent directors as readily as the
stockholders may consider to be in their best interests.

         BUSINESS COMBINATIONS WITH SUBSTANTIAL STOCKHOLDERS. Delaware law
contains a statutory provision which is intended to curb abusive takeovers of
Delaware corporations. Section 203 of the Delaware General Corporation Law



                                       20
<PAGE>



addresses the problem by preventing certain business combinations of the
corporation with interested stockholders within three years after such
stockholders become interested. Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of three (3) years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the Board of Directors of the corporation before the
person becomes an interested stockholder; (ii) the interested stockholder
acquired 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes such person an interested stockholder (excluding
shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 66-2/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined as any person who is: (i)
the owner of fifteen percent (15%) or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and who was
the owner of fifteen percent (15%) or more of the outstanding voting stock of
the corporation at any time within the three (3) year period immediately prior
to the date on which it is sought to be determined whether such person is an
interested stockholder.

         SUPERMAJORITY REQUIRED FOR AMENDMENT. IN ORDER TO INSURE THAT THE
SUBSTANTIVE PROVISIONS SET FORTH IN THE CERTIFICATE OF INCORPORATION ARE NOT
CIRCUMVENTED BY THE AMENDMENT OF SUCH CERTIFICATE OF INCORPORATION PURSUANT TO A
VOTE OF A MAJORITY OF THE VOTING POWER OF THE COMPANY'S OUTSTANDING SHARES, THE
CERTIFICATE OF INCORPORATION ALSO PROVIDES THAT ANY AMENDMENT, CHANGE OR REPEAL
OF THE PROVISIONS CONTAINED IN THE CERTIFICATE OF INCORPORATION WITH RESPECT TO:
(i) THE COMPANY'S CAPITALIZATION, (ii) AMENDMENT OF THE BYLAWS, (iii)
DETERMINATION BY THE BOARD OF THE NUMBER OF DIRECTORS, (iv) FILLING BOARD
VACANCIES, (v) THE REQUIREMENT THAT STOCKHOLDER ACTION BE TAKEN AT AN ANNUAL OR
SPECIAL MEETING, (vi) REQUIREMENTS WITH RESPECT TO APPRAISAL RIGHTS FOR
STOCKHOLDERS, OR (vii) THE AMENDMENT OF THE PROVISION IMPOSING SUCH
SUPERMAJORITY REQUIREMENT FOR AMENDMENT OF THE CERTIFICATE OF INCORPORATION,
SHALL REQUIRE THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST 66 2/3% OF THE
VOTING POWER OF ALL OUTSTANDING SHARES OF VOTING STOCK, INCLUDING, IN ANY
INSTANCE WHERE THE REPEAL OR AMENDMENT IS PROPOSED BY AN INTERESTED STOCKHOLDER
(AS SUCH TERM IS DEFINED IN SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW)
OR ITS AFFILIATE OR ASSOCIATE, THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTING
POWER OF ALL OUTSTANDING SHARES OF VOTING STOCK HELD BY PERSONS OTHER THAN SUCH
INTERESTED STOCKHOLDER OR ITS AFFILIATES OR ASSOCIATES. HOWEVER, ONLY THE
AFFIRMATIVE VOTE OF THE MAJORITY OF THE VOTING POWER OF ALL OUTSTANDING SHARES
OF VOTING STOCK IS REQUIRED IF THE AMENDMENT OF ANY OF THE FOREGOING PROVISIONS
IS APPROVED BY A MAJORITY OF THE CONTINUING DIRECTORS (AS SUCH TERM IS DEFINED
IN THE CERTIFICATE OF INCORPORATION).

         The Certificate of Incorporation permits the Board of Directors to
adopt, amend or repeal any or all of the Company's bylaws without stockholder
action and provide that such bylaws may also be adopted, amended or repealed by
its stockholders, but only if approved by holders of 66 2/3% or more of the
voting power of all outstanding shares of voting stock, including in any
instance in which the alteration is proposed by an interested stockholder or by
affiliates or associate of any interested stockholder, the affirmative vote of
the holders of at least a majority of voting power of all outstanding shares of
voting stock held by persons other than the interested stockholder who proposed
such action. However, the only stockholder vote required if the modification is
approved by a majority of the continuing directors is the affirmative vote of
the majority of the voting power of all outstanding shares of voting stock.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
         ----------------------------------------------------------

         THIS REPORT, INCLUDING THE DISCLOSURES BELOW, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH MATERIAL DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE
"RISK FACTORS" SECTION OF THIS REPORT, WHICH READERS OF THIS REPORT SHOULD
CONSIDER CAREFULLY.

         OVERVIEW OF PRESENTATION. On May 11, 1996, the Company entered into an
Agreement for Exchange of Stock (the "Share Exchange Agreement") with LACD,
Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D., pursuant to
which the Company issued an aggregate of 4,234,128 shares of the Company's



                                       21
<PAGE>



Common Stock in exchange for 100% of the issued and outstanding shares of common
stock of LACD. In connection with the closing of the Share Exchange Agreement,
LACD became the principal operating subsidiary of the Company. On May 28, 1996,
the Company changed its name to "National Quality Care, Inc."

         Since approximately May 1996, the focus of the Company's principal
business operations has been the providing of high-quality integrated dialysis
services for patients suffering from ESRD.

         The consolidated financial statements of the Company included in this
Report have been presented, for accounting purposes, as a recapitalization of
LACD, with LACD as the acquiror of the Company. For purposes of clarity in this
section, the term "Company" reflects the financial condition and results of
operations of LACD and the combined operations of the parent holding company and
LACD following the completion of the Share Exchange Agreement.

         RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997. Total income for the year ended December 31, 1998 increased
approximately 15% to $3,931,576 from $3,424,691 for the year ended December 31,
1997. Medical service revenue for the year ended December 31, 1998 increased
approximately 16% to $3,659,876 from $3,152,991 for the year ended December 31,
1997. This increase primarily resulted from an increase in volume of outpatient
treatments, which was partially offset by a decrease in inpatient revenues
primarily resulting from lower inpatient treatment rates arising from an
industry wide pricing change. In addition, the Company received rental income of
$271,700 during the years ended December 31, 1998 and December 31, 1997 from
certain real property owned by the Company in Los Angeles, California utilized
by a non-affiliate as a hospital facility. See "Item 2 - Description of
Properties."

         Total operating expenses during the year ended December 31, 1998
increased 25% to $4,075,282 from $3,260,138 during the year ended December 31,
1997. Total operating expenses include: (i) cost of medical services, (ii)
selling, general and administrative expenses, (iii) depreciation and
amortization, and (iv) rental expenses, as follows:

         Cost of medical services during the year ended December 31, 1998
increased approximately 28% to $2,789,784 from $2,171,005 during the year ended
December 31, 1997. This increase primarily resulted from the increase in medical
supplies utilized in the Company's business operations due to the increase in
volume of outpatient dialysis services. Additionally, the lower rates charged by
the Company for inpatient treatments, which were dictated by the marketplace,
and the expenses associated with the commencement of operations of the new
dialysis facility opened in 1997, were the primary reasons for the rate of
increase in the costs for the services exceeding that of revenues.

         Selling, general and administrative expenses during the year ended
December 31, 1998 increased approximately 15% to $1,092,770 from $951,946 during
the year ended December 31, 1997. The increase stems in large part to (i) a
provision for doubtful accounts receivable of $120,000 taken in 1998 and (ii) an
increase in professional services fees of $79,000.

         Depreciation and amortization during the years ended December 31, 1998
and December 31, 1997 increased approximately 79% to $126,500 from $70,617. This
increase was primarily due to the recording of a capital lease in the amount of
$275,251 in 1998.

         Rental expenses during the year ended December 31, 1998 and 1997
remained constant at approximately $66,000 per year. See "Item 2 - Description
of Properties."

         Other expenses increased during the year ended December 31, 1998 to
$727,444 from $529,295 during the year ended December 31, 1997. This increase in
other expenses between the respective years resulted primarily from: (i) a
valuation allowance of $499,000 on a note receivable from a significant
shareholder of the Company, which represents an increase of $279,000 over an
allowance of $220,000 taken in 1997 relating to the sale of the Company's
business prior to the Share Exchange Agreement, (ii) a decrease of $70,000 in
interest income, and (iii) an increase of $41,000 in interest expense, primarily
due to the recording of a capital lease in 1998. These increases were partially
offset by the decrease in other expenses as compared to 1997 stemming primarily
from non-recurring expenses in 1997 relating to the Company's business
operations prior to the Share Exchange Agreement and costs related to the Share
Exchange Agreement. See "Item 12 - Certain Relationships and Related
Transactions."



                                       22
<PAGE>



         As a result of the foregoing, the Company experienced a net loss of
$872,750 during the year ended December 31, 1998, as compared to a net loss of
$366,342 during the year ended December 31, 1997. Loss from operations during
the year ended December 31, 1998 was $143,706 compared to income of $164,553
during the year ended December 31, 1997. This decrease in income from operations
primarily resulted from increased expenses relating to the support of the new
dialysis center that was opened in September, 1997 and from a reduction in
reimbursement by the hospitals on its inpatient dialysis business arising from
industry wide pricing changes. However, this segment of the Company's business
remains profitable. The Company experienced operating losses in the fourth
quarter of 1997 and the first two quarters of 1998. During the last six months
of 1998, the Company generated loss from operations of $62,202, including a
provision for doubtful accounts receivable of $120,000 at December 31, 1998. The
improvement in income from operations for the last six months of 1998 resulted
from an increase in inpatient services, as well as chronic dialysis business,
from the first six months of 1998. Management believes that the Company will
generate income from operations in 1999, based on the results of operations in
the second half of 1998. Although the Company believes that some of the expenses
related to the new dialysis facility may not be recurring expenses, there can be
no assurances that comparable amounts of expenses may not arise in connection
with the development of the Company's proposed business plan, particularly as
may relate to any financing, acquisitions or development which may occur.
However, the Company's proposed business plan contemplates the growth of
revenues in connection with the Company's expansion strategy. There can be no
assurance that the Company's acquisition strategy will create operating
synergies with any proposed acquisitions or development target or result in
profitable operations. See "Liquidity and Capital Resources."

         As of December 31, 1998, the Company had net operating loss
carryforwards totaling approximately $ 4,700,000 and $2,000,000 for federal and
state income tax purposes, respectively, which are available to offset future
federal taxable income, if any, through 2013. The federal and state net
operating loss carryforwards include $3,700,000 and $1,500,000 respectively, of
losses, which are limited by IRC Section 382. However, such limitations have not
yet been quantified. Utilization of the Company's net operating loss may be
subject to limitation under certain circumstances.

         LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1998, the ratio of
current assets to current liabilities was 0.53 to 1.00 compared to 0.54 to 1.00
at December 31, 1997.

         The Company's cash flow needs for the year ended December 31, 1998 were
primarily provided from proceeds from operations and from debt financing. The
Company had a working capital deficit of approximately $683,000 at December 31,
1998. A note receivable of $642,000 was written down to $143,000 on the
Company's financial statements and classified as a contra equity. The working
capital deficit at December 31, 1997 was approximately $395,000. Management
believes that, as of December 31, 1998, and for the foreseeable future, the
Company will be able to finance costs of current levels of operations from
revenues and loans currently in place.

         Cash and cash equivalents were $27,754 as of December 31, 1998, as
compared to $39,220 as of December 31, 1997. This decrease was primarily
attributable to the expenditure of funds in connection with the operation of the
new dialysis facility opened in September 1997.

         As of December 31, 1998, the Company had borrowings in the aggregate
amount of $2,249,854, of which short-term borrowings accounted for $202,075. As
of December 31, 1997, the Company had total borrowings of $1,933,677, of which
short-term borrowings accounted for $63,483. The increase relates primarily to
the recording of capital lease obligations with a balance of $256,261 at
December 31, 1998, the acquisition of a $100,000 five (5) year bank term loan
and a revolving line of credit of $50,000.

         As of October 18, 1996, the Company completed the sale (the "Warehouse
Sale") of certain real estate and other assets, related to the Company's prior
business operation of a potato warehouse (the "Warehouse Assets") in Monte
Vista, Colorado, to certain former affiliates of the Company for the purchase
price of approximately $1,415,000. The purchase price was paid in the form of
$550,000 in cash and two (2) promissory notes in the aggregate amount of
approximately $865,000 (subject to certain adjustments), and secured by a pledge
of 570,206 shares of Common Stock.

         As of April 15, 1997, the obligors on the promissory notes assigned
630,206 of the shares of Common Stock to a third party, who executed a
promissory note payable to the Company in the principal amount of approximately
$865,000, bearing interest at the rate of 8% PER ANNUM, and due and payable on
or before February 23, 2000. Further, the assignee of the shares agreed to pay
the additional sum of approximately $135,000 on the due date of the $865,000



                                       23
<PAGE>



promissory note as additional consideration for the Company's agreement to
consent to the assignment of the 630,206 shares. The promissory notes executed
by the initial obligors were cancelled. Through December 31, 1997, the Company
received $76,800, including principal and accrued interest, on such obligations
through the liquidation of 60,000 of the pledged shares of Common Stock in 1997.
The Company did not receive any payment on the note in 1998. The obligations
owing to the Company on these amounts by the assignee of shares are secured by
the 570,206 shares of Common Stock which are currently held in escrow. The
Company has placed a valuation allowance of $719,000 on the note receivable as
of December 31, 1998 ($499,000 of which was charged in fiscal year 1998), in
part, due to the decrease in the market price of the shares of Common Stock,
which secure the repayment of the obligation. There can be no assurances that
all amounts of the obligations will be recovered from the liquidation of such
shares or from other assets of the obligor. See "Item 11- Security Ownership of
Certain Beneficial Owners and Management" and "Item 12 - Certain Relationships
and Related Transactions."

         Prior to and in connection with the closing of the Share Exchange
Agreement, management of the Company determined to change the Company's business
operations to the Company's current business and discontinue the prior potato
harvesting related business. As of May 11, 1996, the Company entered into a
joint venture with Vern Tharp, a former director and officer of the Company, to
manage, care and sublease two (2) potato harvesters which relate to certain of
the Company's prior business operations. In April, 1998, the Company paid
$60,000 to the lessor of the potato harvester in full satisfaction of amounts
owing on the potato harvester lease and $10,500 to Mr. Tharp, and the Company
dissolved the joint venture.

         The Company has a demand note receivable from Medipace, an affiliate of
the Company's principal stockholders and two (2) of the Company directors and
executive officers, in the principal amount of $121,151, dated September 17,
1997, bearing interest at the rate of 8% PER ANNUM. As of December 31, 1998, the
principal and interest amount of the promissory note remaining payable was
$126,235. See "Item 12 - Certain Relationships and Related Transactions."

         The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development of new dialysis facilities
and the acquisition of additional facilities and other strategically related
health care services in selected markets. The market for such acquisition
prospects is highly competitive and management expects that certain potential
acquirors will have significantly greater capital than the Company. The Company
experienced a net loss of $872,750 and a loss from operations of $143,706 during
the year ended December 31, 1998. The Company has suffered recurring losses and
had a working capital deficit of approximately $683,000 at December 31, 1998.
The 1998 net loss was partially attributable to the operation of the new
dialysis facility opened in September, 1997. Although the Company experienced
improvement in income from operations in the last six (6) months of 1998, as
compared to the initial six (6) months of 1998, profitable operations will be
necessary to sustain the business on an on-going basis, unless the Company
obtains additional financing from external sources. There can be no assurances
that the Company will experience profitable operations or obtain additional
financing in the future.

         Based on the acquisition of new contracts to provide inpatient services
and the increase inpatient visits overall, the Company believes that it will be
able to finance the costs of its operations, including the payment of
obligations as they come due, from existing cash, cash generated by operations
and from loans currently in place. However, the Company does not currently
generate sufficient cash flow to finance any such expansion plans rapidly. In
order to finance more rapid expansion plans, the Company will require financing
from external sources. The Company does not have any commitment for such
financing and there can be no assurances that the Company will be able to obtain
any such financing on terms favorable to the Company or at all. In the event the
Company cannot obtain such additional financing, the Company may be unable to
achieve its proposed expansion strategy.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
------------------------------------------

         FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted as of
December 31, 1999. SFAS No. 133 establishes standards for reporting financial
and descriptive information regarding derivatives and hedging activity. Since
the Company does not have any derivative instruments, this standard will have no
impact on the Company's financial position or results of operations.

         The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which provides guidance
concerning recognition and measurement of costs associated with developing or



                                       24
<PAGE>



acquiring software for internal use. In 1998, the AICPA also issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which provides
guidance concerning the costs of start-up activities. For accounting purposes,
start-up activities are defined as one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory or with a new class of customer, initiating a new process in an
existing facility, or commencing some new operation. Both pronouncements are
effective for financial statements of years beginning after December 15, 1998,
with earlier adoption encouraged. Management does not believe the adoption of
these pronouncements will have a material impact on the financial statements.

YEAR 2000

         The Company has developed plans to address issues related to the impact
on its computer systems for the Year 2000. The Company has established a task
force with representatives from its operating units and financial management.
Financial and operational systems have been assessed and plans have been
developed to address systems modification requirements.

         The accounting systems will require only minor changes, which have
already been identified and assessed. The major suppliers of the Company's
operations hardware and software equipment have provided information that the
systems and embedded technology are Year 2000 compliant. The financial impact of
making the required systems changes is not expected to be material to the
Company's consolidated financial position, liquidity and results of operations.
The Company is currently in the process of assessing the systems of its other
vendors. The Company intends to develop alternative plans for the vendors that
will not appear to be Year 2000 compliant in the second quarter of 1999.

         The Company's business relies heavily upon its ability to obtain
reimbursement from third party payors, including Medicare, Medicaid and private
insurers. HCFA has testified to a committee of the U.S. House of Representatives
that it is far behind in remedying Year 2000 problems. The failure of HCFA,
Medicare intermediaries, Medicaid payors or any of the Company's other
significant third party payors to remedy Year 2000 related problems could result
in a delay in the Company's receipt of payments for services, which could have a
material adverse impact on the Company's earnings, financial condition and
business. Furthermore, a delay in receiving supplies from certain vendors could
hinder the Company's ability to provide services to patients, which could have a
material adverse impact on the Company's earnings, financial condition and
business. Presently, the Company cannot assess whether these governmental
agencies will be prepared for the Year 2000. This may result in a material
impact to the Company. The Company will assess the capabilities of its
non-governmental customers in the second quarter of 1999 with continued follow
up thereafter.

         The Company is aware that its dialysis and other medical systems may
include imbedded chips that process dates and date-sensitive material. These
imbedded chips are both difficult to identify in all instances and difficult to
repair. Often, total replacement of the chips is necessary. The manufacturer of
the majority of this equipment has certified it to be Year 2000 compliant. If
such systems should fail, there could be a material adverse impact on the
Company's earnings, financial condition and business.

ITEM 7.  FINANCIAL STATEMENTS.
         ---------------------

         The financial statements required by this Item 7 are included elsewhere
in this Report and incorporated herein by this reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        ---------------------------------------------------------------
        FINANCIAL DISCLOSURE.
        ---------------------

         1997 CHANGE IN ACCOUNTANTS. By letter dated December 12, 1997, the
Company terminated Singer Lewak Greenbaum & Goldstein LLP as independent
certified public accountants for the Company.

         The Company's former independent certified public accountants' report
covering the fiscal year ended December 31, 1996 did not include an adverse
opinion or disclaimer of opinion, and was not modified as to uncertainty, audit
scope or accounting principles. In connection with the audits of the two (2)
most recent fiscal years and during any subsequent interim periods preceding
such termination, there has not developed any disagreement between such former
independent certified public accountants and management of the Company or other
reportable events which have not been resolved to the Company's former
independent certified public accountants' satisfaction.



                                       25
<PAGE>



         As of December 12, 1997, the Company engaged KPMG LLP, as the Company's
independent auditors to replace Singer Lewak Greenbaum & Goldstein LLP, whose
report with respect to the Company's consolidated financial statements for the
fiscal years ended December 31, 1998 and 1997, has been included in this Report.


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        -------------------------------------------------------------
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
        --------------------------------------------------

         The response to this Item is to be contained in the Company's Proxy
Statement for the Company's 1999 Annual Meeting of Stockholders, to be filed
with the Commission, on or before April 30, 1999 (the "Proxy Statement"), or if
not filed by such date, in an amendment to this Report to be filed on or before
such date, under the caption of "Election of Directors," and is incorporated
herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION.
          -----------------------

         The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by April 30, 1999, in an amendment to this Report to
be filed on or before such date under the caption "Compensation of Executive
Officers," and is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
          ---------------------------------------------------------------

         The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by April 30, 1999, in an amendment to this Report to
be filed on or before such date under the caption "Security Ownership of Certain
Beneficial Owners and Management," and is incorporated herein by reference.



                                       26
<PAGE>



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
          -----------------------------------------------

         The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by April 30, 1999, in an amendment to this Report to
be filed on or before such date under the caption "Certain Relationships and
Related Transactions," and is incorporated herein by reference.


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
          ---------------------------------

A.       FINANCIAL STATEMENTS
         --------------------

         Consolidated balance sheets of National Quality Care, Inc. and
         subsidiary as of December 31, 1998 and 1997, and the consolidated
         statements of operations, stockholders' equity and cash flows for the
         years then ended.

B.       REPORTS ON FORM 8-K
         -------------------

         The Company did not file any Current Reports on Form 8-K during the
         quarterly period ended December 31, 1998.

C.       OTHER EXHIBITS
         --------------

         16.1      Letter RE Change in Certifying Accountant of Singer Lewak
                   Greenbaum & Goldstein LLP, dated December 15, 1997(1)
         23.1      Consent of KPMG LLP, dated April 15, 1999
         27        Financial Data Schedule

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

1. Filed as part of the Company's Current Report on Form 8-K dated December 15,
   1997.



                                       27
<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

         The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York, 10048;
and at its Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of such materials can be obtained from the
Public Reference Section of the Commission at its principal office in
Washington, D.C., at prescribed rates. In addition, such materials may be
accessed electronically at the Commission's site on the World Wide Web, located
at http://www.sec.gov. The Company intends to furnish its stockholders with
annual reports containing audited financial statements and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law.

         The Company incorporates by reference in this Report the following
items to be contained in the Proxy Statement, or if not filed by April 30, 1999,
in an amendment to this Report to be filed on or before such date under the
captions set forth below:

   1.   ITEM 9.   Directors, Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a) of the Exchange Act
   2.   ITEM 10.  Executive Compensation
   3.   ITEM 11.  Security Ownership of Certain Beneficial Owners and Management
   4.   ITEM 12.  Certain Relationships and Related Transactions



                                       28
<PAGE>



SIGNATURES

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

                                       NATIONAL QUALITY CARE, INC.


     Dated: April 15, 1999             By:  /s/ Victor Gura, M.D.
                                          --------------------------------------
                                            Victor Gura, M.D.
                                            Chief Executive Officer and Director

                                   SIGNATURES

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

                                       NATIONAL QUALITY CARE, INC.



     Dated: April 15, 1999             By:  /s/ Victor Gura, M.D.
                                          --------------------------------------
                                            Victor Gura, M.D.
                                            Chief Executive Officer and Director



     Dated: April 15, 1999             By:  /s/ Ron Berkowitz
                                          --------------------------------------
                                            Ron Berkowitz
                                            Chief Financial Officer



     Dated: April 15, 1999             By:  /s/ Ronald P. Lang, M.D.
                                          --------------------------------------
                                            Ronald P. Lang, M.D.
                                            Director



     Dated: April 15, 1999             By:  /s/ Jose Spiwak, M.D.
                                          --------------------------------------
                                            Jose Spiwak, M.D.
                                            Director



     Dated: April 15, 1999             By:  /s/ Melinda McIntyre-Kolpin
                                          --------------------------------------
                                            Melinda McIntyre-Kolpin
                                            Director



                                       29
<PAGE>










                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                        Consolidated Financial Statements

                           December 31, 1998 and 1997

                   (With Independent Auditors' Report Thereon)







<PAGE>



                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
National Quality Care, Inc.:


We have audited the accompanying consolidated balance sheets of National Quality
Care, Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Quality Care, Inc. and subsidiary as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.



KPMG LLP




Los Angeles, California
February 26, 1999



<PAGE>

<TABLE>

                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997
<CAPTION>



                                    ASSETS                                               1998              1997
                                                                                   ---------------   ---------------

<S>                                                                                <C>               <C>
Current assets:
     Cash and cash equivalents                                                     $       27,754    $       39,220 
     Accounts receivable, net of allowance for doubtful accounts
        of $170,000 in 1998 and $75,000 in 1997 (note 4)                                  651,354           340,497 
     Supplies inventory                                                                    54,539            46,723 
     Other current assets                                                                  50,521            30,537 
                                                                                   ---------------   ---------------

                 Total current assets                                                     784,168           456,977 

Property, plant and equipment, net (notes 3, 4 and 6)                                   2,713,800         2,561,510 
Note receivable - related parties (note 2)                                                     --           641,790 
Deposits and other long-term assets (note 6)                                               64,006            54,231 
                                                                                   ---------------   ---------------

                 Total assets                                                      $    3,561,974    $    3,714,508 
                                                                                   ===============   ===============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                              $      998,561    $      595,380 
     Accrued expenses                                                                     266,374           192,718 
     Current portion of long-term debt (note 4)                                           202,075            63,483 
                                                                                   ---------------   ---------------

                 Total current liabilities                                              1,467,010           851,581 

Long-term debt, net of current portion (note 4)                                         2,047,779         1,870,194 
                                                                                   ---------------   ---------------

                 Total liabilities                                                      3,514,789         2,721,775 
                                                                                   ---------------   ---------------

Stockholders' equity (note 5):
     Preferred stock, $.01 par value.  Authorized 5,000,000 shares;
        no shares issued and outstanding                                                       --                --    
     Common stock, $.01 par value.  Authorized 50,000,000 shares;
        issued and outstanding 9,814,878 and 9,555,710 shares in
        1998 and 1997, respectively                                                        98,148            95,556    
     Additional paid-in capital                                                         2,163,407         2,086,394    
     Notes receivable from stockholders (note 2)                                         (269,025)         (116,622)   
     Accumulated deficit                                                               (1,945,345)       (1,072,595)   
                                                                                   ---------------   ---------------

                 Total stockholders' equity                                                47,185           992,733 

Commitments and contingencies (note 6)
Subsequent event (note 10)
                                                                                   ---------------   ---------------

                 Total liabilities and stockholders' equity                        $    3,561,974    $    3,714,508 
                                                                                   ===============   ===============
</TABLE>

See accompanying notes to consolidated financial statements.



                                       2
<PAGE>

<TABLE>

                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                      Consolidated Statements of Operations

                     Years ended December 31, 1998 and 1997

<CAPTION>
                                                                                         1998              1997
                                                                                   ---------------   ---------------

<S>                                                                                <C>               <C>
Income:
     Medical service revenue                                                       $    3,659,876    $    3,152,991 
     Rental income (note 6)                                                               271,700           271,700 
                                                                                   ---------------   ---------------
                 Total income                                                           3,931,576         3,424,691 
                                                                                   ---------------   ---------------

Operating expenses:
     Cost of medical services                                                           2,789,784         2,171,005 
     Selling, general and administrative                                                1,092,770           951,946 
     Depreciation and amortization                                                        126,500            70,617 
     Rent and other (note 6)                                                               66,228            66,570 
                                                                                   ---------------   ---------------
                 Total operating expenses                                               4,075,282         3,260,138 
                                                                                   ---------------   ---------------
                 Income (loss) from operations                                           (143,706)          164,553 
                                                                                   ---------------   ---------------

Other income (expense):
     Interest expense                                                                    (251,045)         (210,049)
     Valuation allowance on note receivable (note 2)                                     (499,000)         (220,000)
     Interest income                                                                        9,613            79,086 
     Other income (expense), net (note 6)                                                  12,988          (178,332)   
                                                                                   ---------------   ---------------
                 Total other expense                                                     (727,444)         (529,295)
                                                                                   ---------------   ---------------
                 Loss before provision for income taxes                                  (871,150)         (364,742)
Provision for income taxes (note 7)                                                         1,600             1,600 
                                                                                   ---------------   ---------------
                 Net loss                                                          $     (872,750)   $     (366,342)
                                                                                   ===============   ===============
Basic and diluted loss per common share (note 9)                                   $        (0.09)   $        (0.04)
                                                                                   ===============   ===============
Weighted average number of common shares outstanding                               $    9,750,000    $    8,867,000 
                                                                                   ===============   ===============

</TABLE>

See accompanying notes to consolidated financial statements.


                                       3
<PAGE>
<TABLE>
                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity

                     Years ended December 31, 1998 and 1997
<CAPTION>
                                                                                                   
                                                                                           NOTES 
                                               COMMON STOCK                              RECEIVABLE
                                       ---------------------------      ADDITIONAL          FROM     
                                          SHARES         AMOUNT       PAID-IN CAPITAL    STOCKHOLDER 
                                       ------------   ------------    ---------------   ------------ 
<S>                                      <C>          <C>                  <C>             <C>       
Balance, December 31, 1996               7,815,471    $    78,154          1,508,009       (118,044)       

Conversion of debt to equity               200,000          2,000            208,000             --        

Options exercised:
    For services rendered                1,449,739         14,497             92,703             --        
    For cash                                90,500            905             19,260             --        

Stock options issued for
    services rendered                           --             --            258,422             --        

Payment on notes receivable
    from stockholder                            --             --                 --          1,422        

Net loss                                        --             --                 --             --        
                                       ------------   ------------    ---------------   ------------   
Balance, December 31, 1997               9,555,710         95,556          2,086,394       (116,622)   

Options issued and exercised:
    For services rendered                  196,668          1,967             62,513             --    
    For cash                                62,500            625             14,500             --    

Notes receivable from stockholder
    secured by stock                            --             --                 --       (142,790)   

Interest income on notes receivable
    from stockholder (interest)                 --             --                 --         (9,613)   

Net loss                                        --             --                 --             --    
                                       ------------   ------------    ---------------   ------------   
Balance, December 31, 1998               9,814,878    $    98,148          2,163,407       (269,025)   
                                       ============   ============    ===============   ============   
</TABLE>

(continued below)

<TABLE>
<CAPTION>
                                        ACCUMULATED                          
                                          DEFICIT         TOTAL           
                                       -------------   ------------     
<S>                                      <C>              <C>              
Balance, December 31, 1996                 (706,253)       761,866          
                                                                            
Conversion of debt to equity                     --        210,000          
                                                                           
Options exercised:                                                         
    For services rendered                        --        107,200          
    For cash                                     --         20,165          
                                                                            
Stock options issued for                                                   
    services rendered                            --        258,422          
                                                                           
Payment on notes receivable                                                
    from stockholder                             --          1,422          
                                                                           
Net loss                                   (366,342)      (366,342)     
                                       -------------   ------------     
Balance, December 31, 1997               (1,072,595)       992,733          
                                                                            
Options issued and exercised:                                               
    For services rendered                        --         64,480          
    For cash                                     --         15,125          
                                                                            
Notes receivable from stockholder                                           
    secured by stock                             --       (142,790)     
                                                                            
Interest income on notes receivable                                         
    from stockholder (interest)                  --         (9,613)     
                                                                            
Net loss                                   (872,750)      (872,750)     
                                       -------------   ------------     
Balance, December 31, 1998               (1,945,345)        47,185          
                                       =============   ============     
</TABLE>


See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

<TABLE>

                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1998 and 1997

<CAPTION>
                                                                                       1998             1997
                                                                                 ---------------   ---------------
<S>                                                                              <C>               <C>
Cash flows from operating activities:
    Net loss                                                                     $     (872,749)   $     (366,342) 
    Adjustments to reconcile net loss to net cash provided by
       (used in) operating activities:
          Depreciation and amortization                                                 171,024           115,141  
          Issuance of common stock and stock options for services                        64,480           365,622  
          Valuation allowance on note receivable                                        499,000           220,000  
          (Increase) decrease in:
             Accounts receivable                                                       (310,857)           (5,570) 
             Supplies inventory                                                          (7,816)          (33,601)  
             Other assets                                                               (35,924)           22,937    
          Increase (decrease) in:
             Accounts payable                                                           403,179           146,859  
             Accrued expenses                                                            73,656          (100,879) 
                                                                                 ---------------   ---------------
                   Net cash provided by (used in) operating activities                  (16,007)          364,167   
                                                                                 ---------------   ---------------
Cash flows from investing activities:
    Purchase of building and equipment                                                  (17,459)         (247,465) 
    Increase in deposits                                                                     --            (1,300) 
    Payments (interest accrued) on notes receivable from stockholder                     (9,613)            1,422    
    Payments on note receivable from related parties                                         --             3,412   
                                                                                 ---------------   ---------------
                   Net cash used in investing activities                                (27,072)         (243,931) 
                                                                                 ---------------   ---------------
Cash flows from financing activities:
    Proceeds from issuance of debt                                                      150,000                --  
    Repayment of long-term debt                                                        (133,512)         (249,593) 
    Proceeds from issuance of long-term debt                                                 --            26,600  
    Proceeds from exercise of stock options                                              15,125                --  
    Proceeds from sale of common stock                                                       --            20,165  
                                                                                 ---------------   ---------------
                   Net cash provided by (used in) financing activities                   31,613          (202,828) 
                                                                                 ---------------   ---------------
                   Net decrease in cash and cash equivalents                            (11,466)          (82,592) 
Cash and cash equivalents, beginning of year                                             39,220           121,812  
                                                                                 ---------------   ---------------
Cash and cash equivalents, end of year                                           $       27,754    $       39,220  
                                                                                 ===============   ===============
Supplemental disclosures of cash flow information: Cash paid during the year
    for:
       Interest                                                                  $      251,045    $      205,567  
       Income taxes                                                                       1,600             1,600  
                                                                                 ===============   ===============
</TABLE>

Supplemental schedule of noncash investing and financing activities:
    The Company recorded $299,689 of acquired equipment and related capital
    lease obligations in 1998. During 1997, current debt of $200,000 and accrued
    interest of $10,000 were converted to 200,000 shares
       of common stock.
    During 1998 and 1997, the Company granted stock options of 121,668 and
       283,422, respectively, in exchange for services rendered with a fair
       value of $64,480 and $258,422, respectively.
    During 1998, the Company issued 259,168 shares, which included shares issued
       from the exercise of options granted in 1998 and 1997.

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    ORGANIZATION AND LINE OF BUSINESS

              National Quality Care, Inc. (the Company) provides dialysis
              services for patients suffering from chronic kidney failure
              through two dialysis clinics located in Los Angeles, California,
              and for patients suffering from acute kidney failure through a
              visiting nurse program contracted to five Los Angeles County
              hospitals. Payment for services is provided primarily by
              third-party payors including Medicare, Medi-Cal and commercial
              insurance companies and by contracted hospitals.

       (b)    PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the accounts of
              National Quality Care, Inc. and its wholly owned subsidiary, Los
              Angeles Community Dialysis, Inc. All material intercompany
              transactions and balances have been eliminated.

       (c)    USE OF ESTIMATES

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions. This affects the reported amounts
              of assets and liabilities and disclosures of contingent assets and
              liabilities at the date of the financial statements as well as the
              reported amounts of revenues and expenses during the reporting
              period. Actual results could differ from those estimates.

       (d)    CASH EQUIVALENTS

              For purposes of the statements of cash flows, the Company
              considers all highly liquid investments purchased with original
              maturity of three months or less to be cash equivalents.

       (e)    BUILDING AND EQUIPMENT

              Building and equipment are stated at cost. Equipment under capital
              leases is stated at the present value of minimum lease payments.
              Depreciation and amortization are being provided using the
              straight-line method over the estimated useful lives of 5 to 30
              years as follows:

                   Building                            30 years
                   Medical equipment                   7 to 10 years
                   Office equipment                    5 years
                   Leasehold improvements              10 years


              Expenditures for maintenance and repairs are charged to operations
              as incurred while renewals and betterments are capitalized. Gains
              or losses on the sale of building and equipment are reflected in
              the consolidated statements of operations when incurred.


                                       6                             (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

       (f)    PATIENT REVENUE RECOGNITION

              Medical service revenue consists of net patient service revenues,
              which are based on the Company's established billing rates less
              allowances and discounts principally for patients covered by
              Medicare, Medi-Cal and other contractual programs. Payments under
              these programs are based on either predetermined rates or the
              costs of services. Retroactive adjustments are accrued on an
              estimated basis in the period the related services are rendered
              and adjusted in future periods as final settlements are
              determined. These contractual allowances and discounts are reduced
              from accounts receivable in the accompanying consolidated balance
              sheets.

              The Medicare and Medi-Cal programs, which are the largest payors
              for services rendered by the Company, combined to account for
              approximately 65% and 63% of the Company's net revenues for the
              years ended December 31, 1998 and 1997, respectively.

              The Company is a party to nonexclusive agreements with certain
              third-party payors (one of which accounted for approximately 12%
              of the Company's net operating revenues in fiscal 1998), and
              termination of such third-party agreements could have an adverse
              effect on the Company.

       (g)    IMPAIRMENT OF LONG-LIVED ASSETS

              Long-lived assets are reviewed for impairment in value based upon
              undiscounted future operating cash flows, and appropriate losses
              are recognized whenever circumstances exist which indicate the
              carrying amount of an asset may not be recovered.

       (h)    STOCK-BASED COMPENSATION

              The Company measures stock-based compensation for grants to
              employees using the intrinsic-value method, which assumes that
              options granted at market price at the date of grant have no
              intrinsic value. In accordance with Statement of Financial
              Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
              Compensation" (SFAS No. 123), pro forma net loss and loss per
              share are presented in note 5 as if the fair-value method had been
              applied.

       (i)    FAIR VALUE OF FINANCIAL INSTRUMENTS

              The Company measures its financial assets and liabilities in
              accordance with generally accepted accounting principles. For
              certain of the Company's financial instruments, including cash and
              cash equivalents, accounts receivable, accounts payable and
              accrued expenses, the carrying amounts approximate fair value due
              to their short maturities. The amounts shown for long-term debt
              also approximate fair value because current interest rates offered
              to the Company for debt of similar maturities are substantially
              the same.


                                       7                             (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


       (j)    INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases and operating loss and
              tax credit carryforwards. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. The effect on the deferred
              tax assets and liabilities of a change in tax rates is recognized
              in income in the period that includes the enactment date.

       (k)    RECLASSIFICATIONS

              Certain amounts in the 1997 consolidated financial statements have
              been reclassified to conform to the 1998 presentation.

       (l)    NEW ACCOUNTING STANDARDS

              The Company will be required to adopt SFAS No. 133, "Accounting
              for Derivative Instruments and Hedging Activities," as of December
              31, 1999. SFAS No. 133 establishes standards for reporting
              financial and descriptive information regarding derivatives and
              hedging activity. Since the Company does not have any derivative
              instruments, this standard will have no impact on the Company's
              financial position or results of operations.

              In 1998, the American Institute of Certified Public Accountants
              (AICPA) issued Statement of Position 98-1, "Accounting for the
              Cost of Computer Software Developed or Obtained for Internal Use,"
              which provides guidance concerning recognition and measurement of
              costs associated with developing or acquiring software for
              internal use. In 1998, the AICPA also issued Statement of Position
              98-5, "Reporting on the Costs of Start-Up Activities," which
              provides guidance concerning the costs of start-up activities. For
              accounting purposes, start-up activities are defined as one-time
              activities related to opening a new facility, introducing a new
              product or service, conducting business in a new territory or with
              a new class of customer, initiating a new process in an existing
              facility, or commencing some new operation. Both pronouncements
              are effective for financial statements of years beginning after
              December 15, 1998, with earlier adoption encouraged. Management
              does not believe that adoption of these pronouncements will have a
              material impact on the financial statements.

              In 1997, the Company adopted SFAS No. 130, "Reporting
              Comprehensive Income," and SFAS No. 131, "Disclosures about
              Segments of an Enterprise and Related Information." SFAS No. 130
              required that items of comprehensive income be classified
              separately in the financial statements and the accumulated balance
              of comprehensive income items be reported separately from retained
              earnings and paid-in capital in the equity section of the balance
              sheet. The Company has no elements of other comprehensive income.
              SFAS No. 131 required that financial and descriptive information
              about operating segments be reported. The Company operates in one
              operating segment as noted above.


                                       8                             (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

       (m)    LIQUIDITY

              The Company has suffered recurring losses and has a working
              capital deficit of $682,842 at December 31, 1998. The 1998 net
              loss was partially attributable to the unprofitable operations of
              a facility that was opened late in 1997. In addition to the new
              facility, the Company has entered into two contracts with other
              entities to provide acute care services to a long-term care
              facility and a hospital. Based on the continued growth of the new
              facility and growth in acute care contracts, the Company believes
              that it will be able to finance the costs of its operations,
              including the payment of obligations as they come due, from
              existing cash and cash generated by operations.

(2)    RELATED PARTY TRANSACTIONS

       The Company has an 8% unsecured demand note receivable from a
       stockholder, with monthly installments of $4,580 and the balance due
       March 2000. Two payments totaling $9,160 were received in 1997 and were
       applied to interest and principal of $7,738 and $1,422, respectively. The
       outstanding balance is presented as an offset to stockholders' equity. No
       payments were received in 1998. Interest of $9,613 was accrued on the
       outstanding balance in 1998.

       During 1996, the Company sold certain assets for no gain or loss to
       former affiliates for $71,219 of cash, net of encumbrances paid on those
       assets of $478,781 and promissory notes totaling $865,202 that bore 8%
       interest and were due September 1996. The notes were collateralized by
       approximately 648,000 shares of the Company's common stock and were in
       default at December 31, 1996. Subsequently, the notes were assumed by a
       third party, who purchased, from the affiliate, approximately 630,000 of
       the common shares. The third party executed an additional $135,000
       non-interest bearing note to the Company, which is fully reserved. Both
       notes, secured by the common shares, were due but not paid in February
       1999. During 1997, 60,000 common shares were sold and the proceeds were
       applied to reduce principal and accrued interest by $3,412 and $73,388,
       respectively. No payments were received in 1998. As the balance is
       secured solely by the common shares, the net remaining balance was
       recorded as an offset to stockholders' equity as of December 31, 1998.
       The Company has provided for a valuation allowance of $719,000 and
       $220,000 on the $861,790 note to reserve for the difference between the
       approximate fair value of the collateral and the book value of the note
       at December 31, 1998 and 1997, respectively.


                                       9                             (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


(3)    PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment as of December 31, 1998 and 1997 consist of
       the following:
<TABLE>
<CAPTION>

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

      <S>                                              <C>                  <C>  
      Land                                             $        855,897     $        855,897
      Building                                                1,338,710            1,338,710
      Medical equipment                                         803,484              503,794
      Leasehold improvements                                    158,372              158,372
      Office furniture and equipment                             58,228               40,769
                                                       -----------------    -----------------

                                                              3,214,691            2,897,542
      Less accumulated depreciation and                                     
          amortization                                          500,890              336,032
                                                       -----------------    -----------------

                    Total                              $      2,713,801     $      2,561,510
                                                       =================    =================

</TABLE>

       Depreciation and amortization expense for the years ended December 31,
       1998 and 1997 was $107,518 and $108,875, respectively. Medical equipment
       includes $471,140 of equipment under capitalized leases and had
       accumulated amortization of $87,344 and $12,859 at December 31, 1998 and
       1997, respectively.


                                       10                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


(4)    NOTES PAYABLE

       Notes payable and long-term debt at December 31, 1998 and 1997 consist of
       the following:
<TABLE>
<CAPTION>

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

      <S>                                                                          <C>               <C>                          
      Notes payable in monthly installments of $20,293, including interest at                        
          prime plus 2% (10.00% at December 31, 1998) per annum, through                             
          May 2006, collateralized by land, building and equipment and                               
          assignment of $2,000,000 in life insurance of, and guaranteed by,                          
          two majority stockholders                                                $    1,717,069    $    1,760,256
      Term loan, due in monthly installments of $1,667 plus interest at 1.50%                        
          over the bank's index rate (9.25% at December 31, 1998).  Final                            
          installment due on April 30, 2003                                                86,664                --
      Revolving line of credit, secured by accounts receivable and personal                          
          guarantees by the Company's stockholders.  The note is payable in                          
          interest-only payments at 1.50% over the bank's index rate (9.25% at                       
          December 31, 1998).  Principal is due on April 30, 1999                          50,000                --
      Note payable, due in monthly installments of $858, including interest at                       
          10% with the unpaid balance due August 2000, secured by equipment                15,751            24,022
      Capitalized lease obligation, monthly installments of $643, including                          
          interest at 13%, due October 31, 2002, collateralized by equipment               24,438                --
      Capitalized lease obligations, due in aggregate monthly installments of                        
          $3,488, including interest at 12%, due December 2001, collateralized                       
          by equipment                                                                    124,109           149,399
      Capitalized lease obligations, due in aggregate monthly installments of                        
          $6,894, including interest at 15%, due December 2002, collateralized                       
          by equipment                                                                    231,823                --
                                                                                   ---------------   ---------------

                                                                                        2,249,854         1,933,677

      Less current portion                                                                202,075            63,483
                                                                                   ---------------   ----------------

                    Long-term debt, net of current portion                         $    2,047,779    $    1,870,194
                                                                                   ===============   ===============

</TABLE>

       The Company was not in compliance with all covenants of the revolving
       line of credit at December 31, 1998. As a result, it agreed to
       renegotiate with the Bank the line to a term loan, due April 30, 2000.




                                       11                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


       The following is a schedule by years of future maturities of long-term
       debt:

             Year ending December 31:
                 1999                                       $      202,075
                 2000                                              164,713
                 2001                                              176,949
                 2002                                              153,544
                 2003                                               65,878
                 Thereafter                                      1,486,695
                                                            ---------------

                    Total                                   $    2,249,854
                                                            ===============

(5)    STOCK-BASED COMPENSATION

       The Company has granted options and warrants to acquire stock under two
       plans and various other grants made directly to certain parties for
       incentive compensation and as compensation for services rendered or to be
       rendered. As of December 31, 1998, an aggregate of approximately
       4,293,000 shares of stock have been authorized for issuance under these
       arrangements and substantially all instruments authorized have been
       issued. The vesting requirements and the term of the options vary widely
       based on the specific plan or grant. Stock options granted to date expire
       between two and six years after the original date of grant and vest at
       date of grant, with the exception of 500,000 warrants, which are
       exercisable after the Company reaches certain performance measures.

       In addition, 4,210,644 shares of common stock, at an exercise price of
       $3.50 per share, may be issued to certain parties in the event the
       Company meets certain financial conditions based on the results of
       operations of the Company during the fiscal years ending from December
       31, 1998 to December 31, 2001. The 4,210,644 shares may be issued in the
       event that the annual pretax earnings from operations of the Company
       during any of the years ending December 31, 1998 to 2001 shall equal or
       exceed $2,000,000.

       Activity in the Company's stock option and warrant arrangements was as
       follows (in thousands, except option price data):
<TABLE>
<CAPTION>

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

                                                                           WEIGHTED                              WEIGHTED
                                                        NUMBER OF           AVERAGE           NUMBER OF           AVERAGE
                                                          SHARES        EXERCISE PRICE         SHARES         EXERCISE PRICE
                                                      ---------------   ----------------   ----------------   ----------------

      <S>                                                    <C>        <C>                      <C>          <C>          
      Outstanding, beginning of year                           843      $     1.45                1,740       $     1.29

      Options granted                                        1,300             .81                  643              .61
      Options exercised                                       (259)            .93               (1,540)             .37
                                                      ---------------                      ----------------

      Outstanding, end of year                               1,884            1.52                  843             2.45
                                                      ===============                      ================

      Exercisable, end of year                                  27             .18                  343              .90
                                                      ===============   ================   ================   ================
</TABLE>


                                       12                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

       The weighted average fair value of options granted during 1998 and 1997
       was $.55 and $.23, respectively. The fair value of each option is
       estimated on the date of grant using the Black-Scholes option-pricing
       model with the following assumptions: dividend yield of 0% in 1998 and
       1997, expected volatility of 130% for 1998 and 160% for 1997, risk-free
       interest rate of 6% and 7% in 1998 and 1997, respectively, and expected
       life of 2.5 years for 1998 and 1.7 years for 1997 grants.

       The following tables summarize stock options outstanding at December 31,
       1998 and 1997 (shares in thousands):
<TABLE>
<CAPTION>

              1998                                OUTSTANDING                                     EXERCISABLE
      ---------------------  ------------------------------------------------------   -------------------------------------
                                                      AVERAGE                                                              
                                   NUMBER            REMAINING         WEIGHTED             NUMBER            WEIGHTED
       RANGE OF EXERCISE       OUTSTANDING AT       CONTRACTUAL        AVERAGE          EXERCISABLE AT         AVERAGE
             PRICES          DECEMBER 31, 1998         LIFE         EXERCISE PRICE    DECEMBER 31, 1998    EXERCISE PRICE
      ---------------------  -------------------  ----------------  ---------------   -------------------  ----------------

      <S>                               <C>       <C>               <C>                            <C>     <C>         
      $.18 to $1.00                     1,045     3.3 years         $      .68                      27     $      .18
      1.31 to 3.50                        839     4.0 years               2.58                      --
                             -------------------                                      -------------------

                                        1,884                                                       27
                             ===================                                      ===================

</TABLE>
<TABLE>
<CAPTION>

              1997                                OUTSTANDING                                     EXERCISABLE
      ---------------------  ------------------------------------------------------   -------------------------------------
                                                      AVERAGE                                                              
                                   NUMBER            REMAINING         WEIGHTED             NUMBER            WEIGHTED
       RANGE OF EXERCISE       OUTSTANDING AT       CONTRACTUAL        AVERAGE          EXERCISABLE AT         AVERAGE
             PRICES          DECEMBER 31, 1997         LIFE         EXERCISE PRICE    DECEMBER 31, 1997    EXERCISE PRICE
      ---------------------  -------------------  ----------------  ---------------   -------------------  ----------------

      <S>                                 <C>     <C>               <C>                            <C>     <C>         
      $.18 to $1.00                       293     4.8 years         $      .76                     293     $      .76
      1.75 to 3.50                        550     4.6 years               3.34                      50           1.75
                             -------------------                                      -------------------

                                          843                                                      343
                             ===================                                      ===================

</TABLE>

       The Company acquired services from nonemployees by granting stock-based
       compensation and recognized compensation expense based on the fair value
       of services rendered of $64,480 and $365,622 in 1998 and 1997,
       respectively. Had compensation expense for the Company's employee
       stock-based compensation plans been recognized based upon the fair value
       of the awards granted, as prescribed under SFAS No. 123, the Company's
       pro forma net loss would have been approximately $(874,000) or $(.09) for
       basic and diluted loss per share in 1998 and $(386,000) or $(.04) in
       1997. The pro forma effects are not indicative of future amounts. The
       Company expects to grant additional awards in future years.

       The Black-Scholes option pricing valuation model was developed for use in
       estimating the fair value of traded options which have no vesting
       restrictions and are fully transferable. The assumptions for expected
       life and volatility that are required by the model are highly subjective.
       The Company does not believe the pro forma results of operations are
       representational of the fair value of stock-based compensation.


                                       13                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

(6)    COMMITMENTS AND CONTINGENCIES

       (a)    OPERATING LEASES

              The Company has operating lease agreements for its new dialysis
              unit and for certain equipment. In addition to the specified rent,
              the property lease provides for the payment of certain building
              operating expenses over base year amounts. Minimum annual rental
              commitments under all operating leases are as follows:

                     Year ending December 31:
                         1999                          $      238,483
                         2000                                 211,437
                         2001                                 157,344
                         2002                                 147,744
                         2003                                 138,144
                         Thereafter                           471,992
                                                       ---------------

                                   Total               $    1,365,144
                                                       ===============


              Rent expense was $235,283 and $160,561 for the years ended
              December 31, 1998 and 1997, respectively.

       (b)    LEASE AND SUBLEASE AGREEMENTS

              During 1996, the Company subleased land and building with a cost
              of approximately $2,195,000 under a 30-year master lease to a
              third party who is responsible for paying expenses and servicing
              the debt associated with the property. The master lease provides
              minimum rental income of $22,642 per month through 1999. The third
              party receives $1,000 per year from the Company as compensation,
              payable in arrears. Rental income exceeding the expenses is held
              as a reserve deposit, while the Company is responsible for any
              shortfall.
              The Company recognizes the rental income and expenses.

              The carrying value of the land and building was $2,078,000 and
              $2,123,000 at December 31, 1998 and 1997, respectively.
              Depreciation expense of $44,524 was included in rent and other
              expenses for both 1998 and 1997. The net reserve deposit included
              in other assets was $34,299 and $11,894 at December 31, 1998 and
              1997, respectively.

       (c)    EMPLOYMENT AGREEMENTS

              The Company has employment agreements with certain officers that
              provide aggregate annual salaries of $270,000, which expire
              between February 1999 and December 2002.


                                       14                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

       (d)    LITIGATION

              In December 1997, a judgment for approximately $136,000 was
              rendered against the Company and two codefendants arising out of
              the original acquisition of the Company. On April 7, 1998, the
              Company settled the above litigation for $60,000 and has included
              the amount in other income (expense) in the consolidated statement
              of operations as of December 31, 1997 as it related to prior
              business activities.

              In November 1997, the Company settled litigation related to its
              sublease of one of its dialysis centers, which required that the
              Company enter into a new lease at substantially the same terms,
              but did not require additional payments.

(7)    INCOME TAXES

       Income tax expense differed from the amounts computed by applying the
       U.S. Federal income tax rate to pretax income from operations as a result
       of the following:
<TABLE>
<CAPTION>

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

      <S>                                                                          <C>                 <C>      
      Computed "expected" tax benefit                                              $       (291,500)   $      (124,600)
      Increase (reduction) in income taxes resulting from:
          Change in the beginning-of-the-year balance of the valuation                                 
            allowance for deferred tax assets allocated to income tax expense               335,600          1,499,400
          Adjustment to deferred tax assets for net operating losses not                               
            previously presented due to potential IRC Section 382 limitations                    --         (1,356,000)
          State and local income taxes, net of Federal income tax benefit                   (52,000)            (4,500)
          Other permanent differences                                                           100              4,000
          Other, net                                                                          9,400            (16,700)
                                                                                   -----------------   ----------------

                                                                                   $          1,600    $         1,600
                                                                                   =================   ================
</TABLE>


                                       15                            (Continued)
<PAGE>


                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities at
       December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                                       1998              1997
                                                                 ---------------    ---------------

      <S>                                                        <C>                <C>
      Deferred tax assets:
          Note receivable reserve                                $      288,000     $       88,000
          Net operating loss carryforward                             1,714,000          1,571,400
          Start-up cost                                                  59,000             85,000
          Other                                                          54,000             35,000
                                                                 ---------------    ---------------

                    Total gross deferred tax assets                   2,115,000          1,779,400

          Less valuation allowance                                   (2,115,000)        (1,779,400)
                                                                 ---------------    ---------------

                    Net deferred tax assets                      $           --     $           --
                                                                 ===============    ===============
</TABLE>


       At December 31, 1998 and 1997, the Company has provided a full valuation
       allowance for the deferred tax assets since management has not been able
       to determine that the realization of that asset is more likely than not.

       At December 31, 1998, the Company has net operating loss carryforwards
       for Federal and state income tax purposes of $4,700,000 and $2,000,000,
       respectively, which for Federal purposes are available to offset future
       Federal taxable income, if any, through 2018. The Federal and state net
       operating loss carryforwards include $3,700,000 and $1,500,000,
       respectively, of losses, which are limited by IRC Section 382; however,
       such limitations have not yet been determined.

(8)    EMPLOYEE PROFIT SHARING PLAN

       The Company has a 401(k) profit sharing plan (the Plan) that covers
       substantially all employees who meet the eligibility requirements of the
       Plan. Contributions to the Plan are made at the discretion of management
       and were $3,623 and $2,960 for 1998 and 1997, respectively.

(9)    EARNINGS PER SHARE

       Weighted average shares outstanding for both basic and diluted loss per
       share during 1998 and 1997 were 9,750,000 and 8,867,000, respectively.
       The Company has not included the dilutive effect of assumed conversions
       and exercises of stock options and warrants since the effect of such an
       inclusion would be antidilutive due to the Company's net loss in 1998 and
       1997.

(10)   SUBSEQUENT EVENT

       In January 1999, the Company granted 365,000 stock options after year-end
       for a term of 5 years at $.20 per share. The fair value of the underlying
       stock at the date of grant was $.22.



                                       16