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                                    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 [FEE REQUIRED]

For the fiscal year ended December 31, 1996
                                          OR

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

For the transition period from ______________ 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.)

        5901 West Olympic Boulevard, Suite 109, Los Angeles, California 90036
        ----------------------------------------------------------------------
             (Address of principal executive offices, including zip code)

                                     213-692-0948
                   ------------------------------------------------
                   (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)

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 is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [X]

The issuer's revenues for the fiscal year ended December 31, 1996 were
$3,218,623.

The number of shares outstanding of the issuer's common stock as of April 15,
1997 was 8,433,471 shares. The aggregate market value of the common stock
(4,172,293 shares) held by non-affiliates, based on the average of the bid and
asked prices ($1.50) of the common stock as of April 7, 1997 was $6,258,440.

Transactional Small Business Disclosure Format (Check one):  Yes      No  X
                                                                 ---     ---

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                         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 Securities and Exchange Commission (the "Commission").  Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center,
New York, New York, 10048; and at its Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2411, and copies of such materials
can be obtained from the Public Reference Section at prescribed rates.  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.

    Portions of the following documents filed by the Company with the
Commission are incorporated by reference in Parts I-IV of this Report: (i)
Current Report on Form 8-K dated as of May 24, 1996, (ii) Quarterly Reports on
Form 10-QSB for the quarterly periods ended April 30, 1996 and June 30, 1996,
and (iii) Registration Statement on Form S-8 filed with the Commission on April
6, 1996.


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                                        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 has been in business since 1985 and currently offers dialysis
services through a dialysis center with ten (10) fully equipped stations in Los
Angeles, California and provides home dialysis services.

    Further, the Company provides in-patient dialysis services by contract to
five (5) Los Angeles County hospitals.  Payment for services is primarily
provided by third party payors, including Medicare, Medi-Cal (a California state
health agency) and commercial insurance companies.

HISTORY OF THE COMPANY

    The Company was incorporated under the laws of the State of Colorado on May
10, 1982 under the name "TELHO, Inc."

    From inception through May 11, 1996, the Company was engaged in certain
business operations which are not associated with the Company's current business
operations.

    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 common stock, par value $0.01 per
share (the "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." See "Item 12 - Certain Relationships and Related Transactions."

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 Company is currently
in the process of constructing an additional facility in Los Angeles, California
with twenty (20) dialysis units.  The Company anticipates that this new facility
will be operational in or about June, 1997.


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    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 200,000 patients in 1995 from 66,000 in 1982.
It is estimated that the United States market for outpatient and inpatient
dialysis services in 1995 exceeded $13 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.

    There were 3,000 dialysis facilities in the United States in 1996, 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 care 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 as of December 31, 1995, 83% 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 (16%) 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.


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    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."

UTILIZATION OF OPERATING CAPACITY

    The Company believes current patient demand exceeds the capacity within its
currently existing  facility.  However, the Company has entered into a lease for
an additional dialysis facility in Los Angeles, California, which the Company
anticipates to be operational in June, 1997.  Management believes that this
additional facility will enable the Company to accommodate current patient
volume demand.  The Company continues to seek to expand its capacity, 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 an outpatient dialysis center with ten (10)
dialysis stations located in Los Angeles, California.  The Company anticipates
that an additional dialysis center with approximately twenty (20) stations will
be operational in June, 1997.  The Company also provides acute inpatient
dialysis services to five (5) hospitals.  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 facility is 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 patients'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 facility also has a
designated area for training patients in home dialysis.  The Company's facility
also offers amenities for the patients, such as a color television with headsets
at each dialysis station.


                                          5

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    In accordance with conditions for participation in the Medicare ESRD
program, the Company's facility has a qualified physician director ("Medical
Director").  See "Physician Relationships" below.  The Company's facility also
has an Administrator and a registered nurse, who supervises 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 supplies, 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.

INPATIENT DIALYSIS SERVICES

    The Company provides inpatient dialysis services (excluding physician
professional services) to five (5) hospitals.  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 ERSD
and ESRD patients who require hospitalization for other reasons.

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
nephorologists.  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 facility are 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."


                                          6

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    The Company's Medical Directors, 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.  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 period
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, Lang and Uncyk, who are also
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 recently 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 facility
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
clinical information system that will provide the Company, managed care
organizations and other payors with detailed patient outcome reports and
critical clinical information.


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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
                                             -----------------------
                                       1996                          1995
                                       ----                          ----

Medicare                               48.3%                         41.5%
Medicaid                               15.6                          21.1
Private/alternative payors             10.1                          11.6
Hospital inpatient
 dialysis services                     26.0                          25.8
                                       ----                          ----

    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 an
18-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 21
months after commencing dialysis treatments before Medicare becomes the primary
payor.  During the first 21 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 18 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.


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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.  In January, 1997, PROPAC recommended a 2.8% increase be
made in the reimbursement rate.  However, Congress is not required to implement
this recommendation and could either raise or lower the reimbursement rate.  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.
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.


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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.

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 facility is 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 facility
must be certified by HCFA.  The Company's dialysis facility is 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.


                                          10

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    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 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 period 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.

    The Company leases space utilized as a dialysis facility pursuant to a
sublease with Medipace, an affiliate of Drs. Gura, Lang and Uncyk, which refers
patients to the Company without remuneration to Medipace.  However, the Company
makes payment on the leased premises directly to a non-affiliate master lessor.
Because of the referral of patients to the Company's facility by these
physicians, the anti-kickback statute may apply.  The Secretary of HHS has
promulgated a safe harbor relevant to such arrangements, generally applicable to
space rentals.  The Company believes that the lease is in material compliance
with the anti-kickback statute and that the lease satisfies in all material
respects each of the elements of the space rental safe harbor.

    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


                                          11

<PAGE>

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 harbors rule will affect the Company's position with respect to the
anti-kickback statute.

    The Company operates its dialysis facility 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 arrangement 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
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.


                                          12

<PAGE>

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
Medical Directors and other referring physicians.  The Company's Medical
Directors are principal stockholders of the Company, and the Company subleases
its dialysis facility from Medipace, an entity which refers patients to the
Company and the interests of which are held by such principal stockholders,
through a direct lease payment arrangement with a non-affiliate master lessor.
The Company believes that such arrangements 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 by a lessor to 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


                                          13

<PAGE>

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 believes that its lease arrangements from an entity affiliated with
referring physicians materially satisfy the lease of premises exception to the
Stark II prohibitions.

    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.  There were over 3,000 dialysis
facilities in the United States in 1996, 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-


                                          14

<PAGE>

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 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 31, 1997, the Company had fourteen (14) full-time employees,
including two (2) executive, ten (10) medical and two (2) 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

    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:

FINANCIAL RISKS

    LACK OF PROFITABILITY AND EXPANSION STRATEGY.  The Company generated a loss
of approximately $706,000 during the fiscal year ended December 31, 1996.
Further, as of December 31, 1996, the Company had an accumulated deficit of
approximately $706,000.  The Company generated income from operations during the
year ended December 31, 1996 of approximately $404,000.  However, management
believes that the $706,000 net loss on an overall basis during the year ended
December 31, 1996 substantially resulted from costs of approximately $997,000
related to the Share Exchange Agreement, which the Company believes to be
non-recurring costs.  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."


                                          15

<PAGE>

    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 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.  See "Item 5 -
Market for Common Equity and Related Stockholder Matters."

    CONTROL BY PRINCIPAL STOCKHOLDERS.  The Company's principal  stockholders,
directors and executive officers of the Company and their affiliates control the
voting power of approximately 50.2% 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.  3,834,128 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, and their affiliate, Medipace, which
constitute approximately 45.5% of the currently issued and outstanding Common
Stock, are the subject of certain pledge agreements for certain obligations of
Medipace.  A third party currently has asserted a claim of beneficial ownership
with respect to 643,500 of these shares in


                                          16

<PAGE>


connection with certain litigation, and may assert a claim of beneficial
ownership of the balance of such shares in connection with such litigation.  In
the event that such third party prevails in such litigation and 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 3
- Legal Proceedings," "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, 1,000,000 shares may be the subject of future registration statements
pursuant to the terms of such agreements.  In addition, currently outstanding
options issued to certain consultants and employees to purchase up to 1,074,661
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 3,773,909 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, 1,000,000 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."


                                          17

<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 48% of its net operating revenues during its fiscal year ended
December 31, 1996 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 $765,000, or 25% of medical service
revenues, in fiscal 1996.  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.  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 16% of its net operating revenues during fiscal
1996 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 36% of the Company's net operating revenues during fiscal
1996 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 17% of the
Company's net operating revenues in fiscal 1996), and termination of such third-


                                          18

<PAGE>

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
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 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 the 
statute, any such interpretation would apply to the Company's competitors as 
well.

                                          19

<PAGE>

    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."

    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 facility, 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."

    NO INDEPENDENT DIRECTORS.  The Board of Directors consists of three
directors, none of whom is independent.  Although all directors are required to
act in the best interests of the Company and its stockholders, directors not
employed by the Company may be able to more independently assess certain key
areas, such as compensation of management as it relates to operations and
progress of the Company, and reviewing accounting issues, including the scope
and adequacy of internal control procedures, and recommending independent
auditors to serve the Company.  The Company has no compensation committee.
Independent directors also aid in avoiding conflicts of interest that exist by
virtue of affiliation with the Company. Management has undertaken to appoint
independent directors to the Board at such time as a qualified candidate is
available.  There can be no assurance that such candidates will be available.
See "Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act."

    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


                                          20

<PAGE>

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
extend 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."

ITEM 2.  DESCRIPTION OF PROPERTIES.

    The Company leases offices located at 5901 West Olympic Boulevard, Suite
109, Los Angeles, California 90036, pursuant to a sublease agreement with
Medipace.  The premises include a portion of premises leased by Medipace, an
affiliate of Drs. Gura, Lang and Uncyk, who are affiliates of the Company, from
a non-affiliate master lessor pursuant to a master lease agreement.  The Company
makes rental payments directly to the master lessor, with respect to the portion
of the premises which are the subject of the sublease.  This facility serves as
the Company's principal executive offices and as a dialysis facility in the
Company's business operations.  The Company pays a monthly rent of approximately
$6,760 on a lease which expires on August 31, 2000.  See "Item 3 - Legal
Proceedings" and "Item 12 - Certain Relationships and Related Transactions."

    The Company leases a 7500 square foot office space in Los Angeles,
California which is the process of being renovated for purposes of serving as a
dialysis facility in the Company's business operations.  The Company anticipates
that the facility will be in operation in or about June, 1997.  The Company pays
$10,500 per month on a lease which expires on May 31, 2007.


                                          21

<PAGE>

    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.

    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 executed a promissory note in the amount of $200,000
payable to Aegis, which is due and payable on April 17, 1997, as a fee in
connection with the purchase of the Real Property.  The promissory note bears
interest at the rate of 1% PER ANNUM until August 15, 1996, and if not paid in
full by such date, bears interest at the rate of 10% PER ANNUM thereafter until
paid in full.  The promissory note is secured by an AITD in favor of Aegis with
an assignment of rents, issues and profits and a power of sale.  The Company has
an agreement with Aegis to convert the $200,000 note into Common Stock.

    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.

ITEM 3.  LEGAL PROCEEDINGS.

    LEASE LITIGATION.  The Company occupies its business premises at 5901 West
Olympic Boulevard, Los Angeles, CA 90036 ("Suite 109"), pursuant to a sublease
with Medipace dated May 10, 1996 ("Sublease").  On or about January 16, 1997,
Medipace received a Three Day Notice to Pay Rent or Quit ("Three Day Notice")
from its landlord, Midway Hospital Medical Center, Inc. ("Midway"), alleging
that Medipace is in default on its rental obligation pursuant to the lease
between Medipace and Midway ("Master Lease").  The Master Lease includes Suite
109 subleased to the Company, as well as additional premises occupied by
Medipace.  The Three Day Notice includes Suite 109 subleased to the Company.
Medipace has not brought its rental obligation to Midway current, but Midway has
also not brought an unlawful detainer proceeding to regain possession of the
leased premises.  Instead, Midway has brought suit against Medipace for breach
of the Master Lease and seeks amounts due under the Master Lease, but did not
include a claim for possession of the premises.  ORNDA HOSPITAL CORPORATION, ET
AL. VS. MEDIPACE MEDICAL GROUP, INC., ET AL., Los Angeles County, California,
Superior Court Case No. BC 166619 filed February 27, 1997 (the "Lease Action").
The Company is not named as a party in the Action.


                                          22

<PAGE>

    The Company believes that it is not in default of any obligations to either
Medipace or Midway.  The Company also believes that should Midway try to evict
it from Suite 109, that Midway will be unsuccessful.  The Company's basis
therefor is that: (i) Midway consented to the Sublease, (ii) the Sublease
provides that if the Master Lease terminates before the expiration of the
Sublease, the Company will attorn to Midway at Midway's option, without right of
the Company to terminate the Sublease or to surrender possession of the
premises, (iii) Midway has billed the Company directly and separately for the
rent on Suite 109, (iv) the Company has paid the rent on Suite 109 directly to
Midway, and (v) the Company is current on the rent on Suite 109.

    It is not known at this time whether or not Midway will allow the Company
to continue to occupy Suite 109 for the duration of the Sublease, or attempt to
evict the Company therefrom.  Since no proceeding has been initiated and no
discovery has taken place, all relevant factors which may affect the outcome of
such a proceeding, if instituted, are not known to the Company and the Company
is not able to evaluate the likelihood of a favorable or unfavorable outcome.

    The Lease Action has another possible effect upon the Company, in that one
of the causes of action therein seeks foreclosure on, and sale of, a control
portion of the Company's Common Stock (643,500 shares) presently held by
affiliates.  As previously stated, the Company is not a party to the Lease
Action.  As a result, and because the Lease Action has just been filed and no
discovery has taken place, all relevant factors which could affect the outcome
thereof, as well as its effect upon the Company, are not known to the Company
and the Company is not able to evaluate the likelihood of a favorable or
unfavorable outcome and/or the effect upon the Company.  See "Item 11 - Security
Ownership of Management and Certain Beneficial Owners" and "Item 12 - Certain
Relationships and Related Transactions."

    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").

    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.

    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.

    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.


                                          23

<PAGE>

    The Company has satisfied the balance of the obligations of the pre-
petition creditors and intends to file documents with the Bankruptcy Court to
dismiss the bankruptcy proceedings in the near future.

    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.

    As of May 12, 1996 the Company's stockholders adopted the following
resolutions by the written consent of in excess of a majority of the issued and
outstanding Common Stock by the votes set forth below:

    (1)  To adopt the Company's 1996 Stock Option Plan and to reserve up to
         1,000,000 shares of the Company's Common Stock for issuance under the
         1996 Stock Option Plan. (4,234,128 shares in favor, and 2,111,343 not
         voting or abstained.)

    (2)  To adopt the Company's Restated Certificate of Incorporation and
         Bylaws.  (4,234,128 shares in favor, and 2,111,343 not voting or
         abstained.)

                                       PART II

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

    As of April 15, 1997, 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 15, 1997, there were issued and outstanding
8,433,471 shares of Common Stock and options to purchase 1,209,922 shares of
Common Stock.  Further, the Company has issued and outstanding warrants to
purchase up to 500,000 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, 1997 to 2001.

    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:

                                    BID PRICES           ASKED PRICES
                                    ----------           ------------
                                  HIGH      LOW        HIGH         LOW
                                  ----      ---        ----         ---

YEAR ENDED DECEMBER 31, 1996

 1st Quarter .............        5/32       5/32         2          2
 2nd Quarter .............        1/2        5/32         2          2
 3rd Quarter .............        2           1/4         4          9/16
 4th Quarter .............        3/4         1/4       7/8          13/32

YEAR ENDING DECEMBER 31, 1997

 1st Quarter .............        2 5/32    11/16     2 7/32          13/16


                                          24

<PAGE>

    The bid and asked sales prices of the Common Stock, as traded in the over-
the-counter market, on April 9, 1997, were approximately $1.47 and $1.53,
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 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.


                                          25

<PAGE>

    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.

    OVERVIEW OF PRESENTATION.  On May 11, 1996, the Company entered into 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 common stock, par value $0.01 per share (the
"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 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, 1996 AND DECEMBER 
31, 1995.  Total income for the year ended December 31, 1996 increased 
approximately 21% to $3,218,623 from $2,658,551 for the year ended December 
31, 1995.  Medical service revenue for the year ended December 31, 1996 
increased approximately 15% to $3,050,346 from $2,658,551 for the year ended 
December 31, 1995.  This increase primarily resulted from an increase in 
volume of inpatient and home dialysis care.  In addition, the Company 
received rental income of $168,277 during the year ended December 31, 1996 
from certain real property owned by the

                                          26

<PAGE>

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, 1996 increased
66% to $2,814,117 from $1,692,083 during the year ended December 31, 1995.
Total operating expenses include: (i) cost of medical services, (ii) selling,
general and administrative expenses, and (iii) rental expenses, as follows:

    Cost of medical services during the year ended December 31, 1996 increased
approximately 40% to $1,783,468 from $1,274,873 during the year ended December
31, 1995.  This increase primarily resulted from the increase in medical
supplies utilized in the Company's business operations due to the corresponding
increase in volume of inpatient and home dialysis care.  Cost of medical
services primarily consist of two (2) categories: (i) medical services and
supplies, and (ii) outside services.  Medical services and supplies for the year
ended December 31, 1996 increased approximately 32% to $1,334,977 from
$1,015,129 for the year ended December 31, 1995.  The increase was primarily due
to rising usage of medical supplies prescribed, which in turn resulted in higher
revenues.  Outside services for the year ended December 31, 1996 increased
approximately 84% to $410,816 from $222,968 for the year ended December 31,
1995.  The increase was primarily attributable to the rise of inpatient
services.

    Selling, general and administrative expenses during the year ended December
31, 1996 increased to $989,346 from $417,210 during the year ended December 31,
1995.  This increase primarily related to legal, accounting and consulting fees
following the completion of the transactions contemplated by the Share Exchange
Agreement and the development of the Company's business plan and acquisition
strategy.

    Rental expenses during the year ended December 31, 1996 were $41,303, 
which were not incurred during the year ended December 31, 1995.  These 
rental expenses related to the hospital building purchased by the Company in 
1996.  See "Item 2 - "Description of Properties."

    Other expenses increased during the year ended December 31, 1996 to 
$1,108,359 from $58,082 during the year ended December 31, 1995.  This 
increase in expenses between the respective years resulted primarily from: 
(i) certain non-recurring expenses of $997,580 in 1996 which were not 
incurred in the prior year, related to the Share Exchange Agreement, 
including legal, accounting and consulting fees and (ii) increased interest 
expenses to $143,048 from $58,082, primarily arising from interest expenses 
relating to the mortgage on the hospital facility.  These expenses were 
offset by certain additional income in 1996 in the aggregate of amount of 
$32,269, which the Company did not generate in 1995.

    As a result of the foregoing, the Company experienced a net loss of 
$706,253 during the year ended December 31, 1996, as compared to net income 
of $908,386 during the year ended December 31, 1995.  The Company experienced 
income from operations during each of the years ended December 31, 1996 and 
1995. However, income from operations during the year ended December 31, 1996 
decreased to $404,506 from $966,488 during the year ended December 31, 1995. 
Management believes that this decrease in income from operations primarily 
resulted from expenses incurred following the completion of the Share 
Exchange Agreement.  Although the Company believes that some of the expenses 
related to the Share Exchange Agreement 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 financings, 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 acquired proposed acquisition or development 
target or result in profitable operations.  See "Liquidity and Capital 
Resources."

                                          27

<PAGE>

    As of December 31, 1996, the Company had net operating loss carryforwards
totalling approximately $670,000 and $335,000 for federal and state income tax
purposes, respectively.  Utilization of the Company's net operating loss may be
subject to limitation under certain circumstances.

    LIQUIDITY AND CAPITAL RESOURCES.  At December 31, 1996, the ratio of
current assets to current liabilities was 1.22 to 1.00 compared to .23 to 1.00
at December 31, 1995.  The inventory consists of medical supplies and
medications.

    The Company has historically financed its operations through the use of 
working capital and loans to the Company.  In the year ended December 31, 
1996, the Company also converted certain professional expenses of 
approximately $940,000 incurred in connection with the completion of the 
Share Exchange Agreement into shares of Common Stock.

    Cash and cash equivalents were $121,812 as of December 31, 1996, as
compared to no cash or cash equivalents as of December 31, 1995.  This increase
was primarily attributable to improved cash management in the Company's dialysis
operations.

    As of December 31, 1996, the Company had long-term borrowings in the
aggregate amount of $1,804,805, the current portion of which was $380,414.  As
of December 31, 1995, the Company had long-term borrowings of $3,645.  The
increase in long-term borrowings relates to the purchase of the hospital
facility in 1996, which is secured by deed of trust on such property.

    As of December 31, 1996, the Company had short-term borrowings in the 
aggregate amount of $361,074, an increase from $134,838 as of December 31, 
1995. The increase was attributable to a note payable of $200,000 related to 
the acquisition of the hospital facility and a working capital loan of 
$161,074 from Orion due on June 30, 1995, which in part was utilized to repay 
the prior year's short-term obligations.  The amount owing to Orion is 
secured by the accounts receivable of the Company, and the subject of a 
limited guaranty by Dr. Gura.  As of April 15, 1997 the balance owing on the 
note to Orion was $64,197.  The Company has reached an agreement to convert 
the $200,000 note into Common Stock.  In addition, $19,340 of the current 
portion of long-term debt will be payable during the year ending December 31, 
1997.  Further, an obligation in the amount of $464,755, which was reflected 
at the end of the 1995 was retained by the former parent of LACD.

    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 648,201 shares of Common Stock.  In connection with the Warehouse Sale, the
Company paid certain obligations which were secured by the Warehouse Assets,
including John B. Milne ($225,520.84), Combs and Medica ($12,487.90), which were
obligations in connection with a bankruptcy proceeding filed by management of
the Company's prior business operations, and Orion Corporate Funding, Inc.
("Orion")  ($188,312.51).  The payments resulted in a reduction of approximately
$315,000 in short-term borrowing.  On October 31, 1996, the Company also loaned
the sum of $66,811.76 to Medipace, an affiliate of each of the Company's three
(3) directors and largest stockholders, which is the subject of a demand
promissory note payable by Medipace bearing interest at the rate of 8% PER
ANNUM.  The Company also has a demand note receivable from Medipace in the
principal amount of $47,853.85, pursuant to a promissory note, dated May 22,
1996, bearing interest at the rate of 8% PER ANNUM..  See "Item 3 - Legal
Proceedings" and "Item 12 - Certain Relationships and Related Transactions."


                                          28

<PAGE>

    As of April 15, 1997, the obligors on the promissory notes assigned 630,201
of the shares of Common Stock to a third party, who executed a promissory note
payable to the Company in the principal amount of $1,000,000, bearing interest
at the rate of 10% PER ANNUM, and due and payable on or before February 23,
1998.  The promissory notes executed by the initial obligors were cancelled.
The obligation  owing to the Company on the $1,000,000 promissory note is
secured by the 630,201 shares of Common Stock, which are held in escrow.
Management believes that the note receivable will be collected through the sale
of the shares held in escrow.  See "Item 11- Security Ownership of Certain
Beneficial Owners and Management" and "Item 12 - Certain Relationships and
Related Transactions."

    The Company's cash flow needs for the year ended 1996 were primarily
provided from operations, loans to the Company and the conversion of debt
related to the Share Exchange Agreement into Common Stock.  Management believes
that, as of December 31, 1996, and for the foreseeable future, the Company will
be able to finance costs of current levels of operations from revenues,
including the payment of the obligations on the hospital facility and the note
payable to Orion.

    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
currently experiences profitable operations and positive cash flow.  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.

ITEM 7.  FINANCIAL STATEMENTS.

    Consolidated balance sheets of National Quality Care, Inc. and subsidiary
as of December 31, 1996 and 1995, and the consolidated statements of operations,
stockholders' equity and cash flows for the years then ended.

    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.

    As of August 15, 1996, in connection with the closing of the transactions
contemplated by the Share Exchange Agreement, the Company determined to change
the Company's fiscal year end from July 31 to December 31.

    As of August 15, 1996, the Company determined to engage Singer Lewak
Greenbaum & Goldstein LLP, as the Company's independent certified accountants to
replace Ehrhardt Keefe Steiner & Hottman PC, whose report with respect to the
Company's financial statements for the former fiscal year ended July 31, 1995,
was included in the Company's Form 10-KSB for the fiscal year ended December 31,
1995 prior to the Company's change to a December 31 fiscal year end.  By letter
dated August 15, 1996, the Company dismissed Ehrhardt Keefe Steiner & Hottman PC
as independent certified accountants for the Company.


                                          29

<PAGE>

    The former independent accountant's annual report covering the former
fiscal year ended July 31, 1995 has not included an adverse opinion or
disclaimer of opinion, and have not been 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
dismissals, there has not developed any disagreement between such former
independent accounts and management of the Company or other reportable events
which have not been resolved to the former independent accountants' satisfaction
who had been the Company's independent certified accountants.

                                       PART III

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

    The directors of the Company currently have terms which will end at the
next annual meeting of the stockholders of the Company or until their successors
are elected and qualify, subject to their prior death, resignation or removal.
Officers serve at the discretion of the Board of Directors.  There are no family
relationships among any of the Company's directors and executive officers.

    In connection with the Share Exchange Agreement, Victor Gura, M.D., Ronald
P. Lang, M.D. and Avraham H. Uncyk, M.D. were named as directors and executive
officers of the Company and A. Vern Tharp and Edwin H. Hawkins, who were the
directors and executive officers of the Company prior to the Closing of the
Share Exchange Agreement, agreed to resign in their capacities as directors and
executive officers.  As of January 15, 1997, Dr. Uncyk resigned as a director of
the Company, and Judith Gordon, who is the wife of Dr. Uncyk, was appointed as a
director of the Company.  The following reflects certain biographical
information on the current directors and executive officers of the Company:

         NAME                     POSITION                      AGE
         ----                     --------                      ---

    Victor Gura, M.D.        Director, President                54
                             and Chief Executive
                             Officer

    Ronald P. Lang, M.D.     Director and Secretary             47

    Ron Berkowitz            Chief Operating Officer
                             and Chief Financial Officer        44

    Judith Gordon            Director                           41


    VICTOR GURA, M.D. has been a director and the President and Chief Executive
Officer of the Company since May 11, 1996.  Dr. Gura is a medical doctor who is
board certified in internal medicine/nephrology.  He has been a director of
Medipace Medical Group, Inc., a medical group in Los Angeles, California, since
1980.  He has been an attending physician at Cedars-Sinai Medical Center since
1984 and the medical director of Midway Dialysis Center since 1985.  Dr. Gura
also serves as a Clinical Assistant Professor at UCLA School of Medicine.  Dr.
Gura graduated from the School of Medicine, Buenos Aires University in 1966,
completed his residency in internal medicine and nephrology in Israel, and was a
fellow at the nephrology departments at Tel Aviv University Medical School and
USC Medical Center.


                                          30

<PAGE>

    RONALD P. LANG, M.D. has been a director and the Secretary of the Company
since May 11, 1996.  Dr. Lang is a medical doctor who is board certified in
internal medicine/nephrology.  He has been a physician with Medipace Medical
Group, Inc. since 1983.  Dr. Lang graduated from the Ohio State University
College of Medicine in 1973, completed his residency at St. Luke's Medical
Center in Chicago, Illinois, and was a fellow in the nephrology department at
UCLA-Center for the Health Sciences/Wadsworth Veterans Hospital.  Dr. Lang also
serves as a Clinical Assistant Professor of Medicine at UCLA School of Medicine.
Dr. Lang also received M.A. and M.Ph. degrees in economics from Yale University
and was an Economist - Program Analyst for the U.S. Department of Health,
Education and Welfare (office of the Assistant Secretary for Planning and
Education) from 1973 to 1974.

    RON BERKOWITZ was appointed as the Company's Chief Financial Officer on
July 8, 1996 and as the Chief Operating Officer on March 18, 1997.  He
previously served as Vice President in the lending division of Bank Leumi
Le-Israel and Bank Leumi Trust Company from 1990 until July, 1996 and was the
head of the Asset Liability Management Section from 1988 to 1990, where he
developed investment strategies for Bank Leumi.  Mr. Berkowitz served on Bank
Leumi's Credit Committee and Asset Liability Committee.  From 1985 to 1987, he
worked for another financial institution as a senior analyst where he was
responsible for asset liability management analysis.  Mr. Berkowitz is a
Chartered Financial Analyst.  Mr. Berkowitz received his undergraduate degree in
economics from Hebrew University (Israel) in 1976 and a Master's of Business
Administration (finance/management) from Indiana University in 1978.

    JUDITH GORDON  has been a director of the Company since January 15, 1997.
She is an independent business communications consultant and writer serving
individual and institutional clients since 1986.  Ms. Gordon spent three years,
1993-1996, on staff at the Consulate General of Israel in Los Angeles in an
advisory capacity.  Ms. Gordon is a graduate of the Wayne State University
School of Law and a member of the State Bar of New York where she practiced law
for several years prior to relocating to California in 1985.

    COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934.  Section
16(a) of the Exchange Act requires the Company's directors and executive
officers and beneficial holders of more than 10% of the Company's Common Stock
to file with the Securities and Exchange Commission (the "Commission") initial
reports of ownership and reports of changes in ownership of such equity
securities of the Company.  Based solely upon a review of such forms, or on
written representations form certain reporting persons that no other reports
were required for such persons, the Company believes that all reports required
pursuant to Section 16(a) with respect to its executive officers, directors and
10% beneficial stockholders for the fiscal year ended December 31, 1996 were
timely filed.


                                          31

<PAGE>


ITEM 10. EXECUTIVE COMPENSATION.

    SUMMARY COMPENSATION TABLE.  The following table sets forth certain
information concerning compensation of certain of the Company's executive
officers, including the Company's Chief Executive Officer and all executive
officers whose total annual salary and bonus exceeded $100,000, for the fiscal
years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>

                                                                                     LONG TERM COMPENSATION
                                                                               -----------------------------------------------
                                        ANNUAL COMPENSATION                    AWARDS                     PAYOUTS
------------------------------------------------------------------------------------------------------------------------------
(a)                      (b)       (c)           (d)         (e)          (f)        (g)             (h)            (i)
NAME AND                                                   OTHER ANNUAL   OTHER     RESTRICTED      LTIP          ALL OTHER
PRINCIPAL                         SALARY         BONUS     COMPEN-        AWARDS    OPTIONS/       PAYOUTS         COMPEN-
POSITION                YEAR       ($)           ($)       SATION         ($)       SARS(#)          ($)          SATION ($)
------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>       <C>            <C>       <C>            <C>       <C>            <C>            <C>
Victor Gura, M.D.(1)    1996      $80,000        0           0            0          0                0               0

A. Vern Tharp(2)        1996      $14,233        0           0            0          125,000          0               0
                        1995      $10,833        0           0            0          0                0               0

Ron Berkowitz (3)       1996      $40,846        $15,600     0            $6,189     50,000           0               0

</TABLE>

------------------------------
(footnotes on following page)


                                          32

<PAGE>

------------------------------
(footnotes from previous page)

1.  Dr. Gura was appointed as the Company's Chief Executive Officer on May 11,
    1996.  Dr. Gura's annualized base compensation during the fiscal year ended
    December 31, 1996 was $120,000.  The amounts set forth in this chart
    reflect compensation paid to Dr. Gura commencing on his appointment as
    Chief Executive Officer.  See "Execution Compensation - Employment
    Agreements."

2.  Mr. Tharp was appointed as the Company's Chief Executive Officer on August
    28, 1995 and resigned in such capacity on May 11, 1996.  Mr. Tharp's
    annualized base compensation during each of the fiscal years ended December
    31, 1995 and 1996 was $40,000.  The amounts set forth in this chart reflect
    compensation paid to Mr. Tharp during his term as the Company's Chief
    Executive Officer.

3.  Mr. Berkowitz was appointed as the Company's Chief Financial Officer on
    July 8, 1996.  Mr. Berkowitz' annualized base compensation during the
    fiscal year ended December 31, 1996 was $90,000.  The amounts set forth in
    this chart reflect compensation paid to Mr. Berkowitz commencing on his
    appointment as Chief Financial Officer.  See "Executive Compensation -
    Employment Agreements."


                                          33

<PAGE>

    OPTION/SAR GRANTS TABLE DURING LAST FISCAL YEAR.  The following table sets
forth certain information concerning grants of stock options to certain of the
Company's executive officers, including the Company's Chief Executive Officer
and all executive officers whose total annual salary and bonus exceeded
$100,000, for the fiscal year ended December 31, 1996:

<TABLE>
<CAPTION>

                                                                                         POTENTIAL REALIZABLE
                                                                                         VALUE AT ASSUMED
                                                                                         ANNUAL RATES OF
                                                                                         STOCK PRICE APPRECIATION
                                     INDIVIDUAL GRANTS                                   FOR OPTION TERM(1)
---------------------------------------------------------------------------------------------------------------------
(a)                (b)             (c)                (d)                 (e)            (f)              (g)
                   NUMBER OF       % OF
                   SECURITIES      TOTAL
                   UNDERLYING      OPTIONS/
                   OPTIONS/        SARS               EXERCISE
                   SARS            GRANTED TO         OR BASE
                   GRANTED         EMPLOYEES          PRICE               EXPIRATION
NAME               (#)             IN FISCAL YEAR     ($/SHARE)             DATE         5% ($)           10%($)
---------------------------------------------------------------------------------------------------------------------
<S>                <C>             <C>                <C>                 <C>            <C>            <C>
Victor
 Gura, M.D.               0            ____            _____                _____        _____            _____

A. Vern Tharp (2)   125,000            71.4%           $0.18                2/6/01       $227,908       $274,519


Ron Berkowitz (3)    25,000            14.3%           $0.38              12/31/99       $ 45,581       $ 54,904
                     25,000            14.3%           $0.44               6/29/06       $ 61,084       $ 97,265

</TABLE>


------------------------------
(footnotes on following page)


                                          34

<PAGE>

------------------------------
(footnotes from previous page)

    (1)  This chart assumes a market price of $1.50 for the Common Stock, the
average of the bid and asked prices for the Company's Common Stock in the
over-the-counter market as of April 7, 1997, as the assumed market price for the
Common Stock with respect to determining the "potential realizable value" of the
shares of Common Stock underlying the options described in the chart, and does
not give effect to any reduction for the payment of the exercise price for such
options.  Each of the options reflected in the chart was granted at exercise
prices which the Company believes to have been determined at the fair market
value as of the date of grant.  Further, the chart assumes the annual
compounding of such assumed market price over the relevant periods, without
giving effect to commissions or other costs or expenses relating to potential
sales of such securities.  The Company's Common Stock has a very limited trading
history.  These values are not intended to forecast the possible future
appreciation, if any, price or value of the Common Stock. See Item 5 - "Market
Price of Common Equity and Related Stockholder Matters."

    (2)  Mr. Tharp was granted an option to purchase up to 125,000 shares of
Common Stock, 20,000 of which have been exercised, at an exercise price of $0.18
per share prior to his resignation as the Company's Chief Executive Officer on
May 11, 1996.  All of these options have vested and expire on February 6, 2001.

    (3)  Mr. Berkowitz has been granted an option to purchase up to 50,000
shares of Common Stock. The exercise price was $0.38 per share with respect to
25,000 shares and $0.44 per share with respect to the other 25,000 shares.  The
option has vested with respect to 25,000 shares, which have been exercised, and
an additional 12,500 shares will vest on each of June 19, 1997 and December 19,
1997.  The option expires with respect to the unexercised 25,000 shares on June
19, 2006.  See "Item 10 - Executive Compensation - Employment Agreements."


                                          35

<PAGE>

    EMPLOYMENT AGREEMENTS.  The Company has entered into employment agreements
with two (2) of its executive officers, Victor Gura, M.D. and Ron Berkowitz.

    The Company entered into a three (3) year employment agreement, dated as of
April 12, 1996, with Victor Gura, M.D., pursuant to which Dr. Gura agreed to
serve as the Company's Chief Executive Officer, President and Medical Director.
The employment agreement provides for an annual base salary of $120,000, plus
other benefits.  As of March 18, 1997, the Company increased the annual base
salary of Dr. Gura to $150,000.  The Company also granted options to Dr. Gura to
purchase up to 80,000 shares of Common Stock which may vest subject to certain
events.

    Mr. Berkowitz entered into a five (5) year employment agreement with the
Company, effective July 8, 1996, pursuant to which Mr. Berkowitz agreed to serve
as the Company's Chief Financial Officer.  The Company has agreed to pay Mr.
Berkowitz an annual base salary of $90,000, plus other benefits.  As of March
18, 1997, the Company increased the annual salary of Mr. Berkowitz to $120,000.
The Company also granted options to Mr. Berkowitz to purchase up to 50,000
shares of Common Stock pursuant to the Company's 1996 Stock Option Plan (25,000
of which have been exercised), and an additional 50,000 options which may vest
subject to certain events.

    These employees will also be entitled to participate in stock option and
bonus plans which may be adopted by the Company for officers and directors of
the Company and its subsidiaries.  In the event of their involuntary termination
other than for cause or certain other circumstances, they will be entitled to
receive the unpaid balance of their salary for the remaining term of the
agreement.  See "Description of Securities - Options."

STOCK OPTION PLANS

    The Company has adopted two (2) stock option plans for the benefit of
officers, directors, employees, independent contractors and consultants of the
Company and its subsidiaries.  These plans include: (i) the 1996 Stock Option
Plan, and (ii) the 1996 Employee Compensatory Stock Option Plan.

    1996 STOCK OPTION PLAN.  As of May 12, 1996, the Company's Board of
Directors and stockholders approved the Company's 1996 Stock Option Plan (the
"1996 Stock Option Plan").

    The Company has reserved for issuance thereunder an aggregate of 1,000,000
shares of Common Stock.  The Company has granted options to purchase up to
994,739 shares of Common Stock under the 1996 Stock Option Plan.  Of the 994,379
options granted as of the date of this Report, 982,239 options have vested, and
the remaining 12,500 options may vest subject to certain schedules.  The Board
of Directors has approved a provision in the 1996 Stock Option Plan which will
place a 300,000 share limit on the number of options that may be granted under
the 1996 Stock Option Plan to an employee in each fiscal year.

    A description of each of the 1996 Stock Option Plan is set forth below.
The description is intended to be a summary of the material provisions of the
1996 Stock Option Plan and does not purport to be complete.

         ADMINISTRATION OF AND ELIGIBILITY UNDER 1996 STOCK OPTION PLAN.  The
1996 Stock Option Plan, as adopted, provides for the issuance of options to
purchase shares of Common Stock to officers, directors, employees, independent
contractors and consultants of the Company and its subsidiaries as an incentive
to remain in the employ of or to provide services to the Company and its
subsidiaries.  The 1996 Stock Option Plan authorizes the issuance of incentive
stock options ("ISOs"), non-qualified stock options ("NSOs") and stock
appreciation rights ("SARs") to be granted by a committee (the "Committee") to
be established by the Board of Directors to administer the 1996 Stock Option
Plan.


                                          36

<PAGE>

    Subject to the terms and conditions of the 1996 Stock Option Plan, the
Committee will have the sole authority to determine: (a)the persons
("optionees") to whom options to purchase shares of Common Stock and SARs will
be granted, (b) the number of options and SARs to be granted to each such
optionee, (c) the price to be paid for each share of Common Stock upon the
exercise of each option, (d) the period within which each option and SAR will be
exercised and any extensions thereof, and (e) the terms and conditions of each
such stock option agreement and SAR agreement which may be entered into between
the Company and any such optionee.

    All officers, directors and employees of the Company and its subsidiaries
and certain consultants and other persons providing significant services to the
Company and its subsidiaries will be eligible to receive grants of options and
SARs under the 1996 Stock Option Plan.  However, only employees of the Company
and its subsidiaries are eligible to be granted ISOs.

         STOCK OPTION AGREEMENTS.  All options granted under the 1996 Stock
Option Plan will be evidenced by an option agreement or SAR agreement between
the Company and the optionee receiving such option or SAR.  Provisions of such
agreements entered into under the 1996 Stock Option Plan need not be identical
and may include any term or condition which is not inconsistent with the 1996
Stock Option Plan and which the Committee deems appropriate for inclusion.

         INCENTIVE STOCK OPTIONS.  Except for ISOs granted to stockholders
possessing more than ten percent (10%) of the total combined voting power of all
classes of the securities of the Company or its subsidiaries to whom such
ownership is attributed on the date of grant ("Ten Percent Stockholders"), the
exercise price of each ISO must be at least 100% of the fair market value of the
Company's Common Stock as determined on the date of grant.  ISOs granted to Ten
Percent Stockholders must be at an exercise price of not less than 110% of such
fair market value.

    Each ISO must be exercised, if at all, within ten (10) years from the date
of grant, but, within five (5) years of the date of grant in the case of ISO's
granted to Ten Percent Stockholders.

    An optionee of an ISO may not exercise an ISO granted under the 1996 Stock
Option Plan so long as such person holds a previously granted and unexercised
ISO.

    The aggregate fair market value (determined as of time of the grant of the
ISO) of the Common Stock with respect to which the ISOs are exercisable for the
first time by the optionee during any calendar year shall not exceed $100,000.

    As of the date of this Report, ISOs have been granted under the 1996 Stock
Option Plan to purchase up to 95,000 shares of Common Stock, subject to certain
vesting schedules.  These options have the following per share exercise prices:
25,000 shares ($0.44) and 70,000 shares ($0.25).

         NON-QUALIFIED STOCK OPTIONS.  The exercise price of each NSO will be
determined by the Committee on the date of grant.  However, the exercise price
for the NSOs under the 1996 Stock Option Plan will in no event be less than 85%
of the fair market value of the Common Stock on the date the option is granted,
or not less than 110% of the fair market value of the Common Stock on the date
such option is granted in the case of an option granted to a Ten Percent
Stockholder.

    The exercise period for each NSO will be determined by the Committee at the
time such option is granted, but in no event will such exercise period exceed
ten (10) years from the date of grant.


                                          37

<PAGE>

    As of the date of this Report, NSOs have been granted under the 1996 Stock
Option Plan to purchase up to 899,739 shares of Common Stock, subject to certain
vesting schedules.  These options have the following per share exercise prices:
174,739 shares ($1.00), 700,000 shares ($0.50) and 25,000 shares ($0.38).

         STOCK APPRECIATION RIGHTS.  Each SAR granted under the 1996 Stock
Option Plan will entitle the holder thereof, upon the exercise of the SAR, to
receive from the Company, in exchange therefor, an amount equal in value to the
excess of the fair market value of the Common Stock on the date of exercise of
one share of Common Stock over its fair market value on the date of exercise of
one share of Common Stock over its fair market value on the date of grant (or in
the case of an SAR granted in connection with an option, the excess of the fair
market of one share of Common Stock at the time of exercise over the option
exercise price per share under the option to which the SAR relates), multiplied
by the number of shares of Common Stock covered by the SAR or the option, or
portion thereof, that is surrendered.

    SARs will be exercisable only at the time or times established by the
Committee.  If an SAR is granted in connection with an option, the SAR will be
exercisable only to the extent and on the same conditions that the related
option could be exercised.  The Committee may withdraw any SAR granted under the
1996 Stock Option Plan at any time and may impose any conditions upon the
exercise of an SAR or adopt rules and regulations from time to time affecting
the rights of holders of SARs.

    As of the date of this Report, no SARs have been granted under the 1996
Stock Option Plan.

         TERMINATION OF OPTION AND TRANSFERABILITY.  In general, any unexpired
options and SARs granted under the 1996 Stock Option Plan will terminate: (a) in
the event of death or disability, pursuant to the terms of the option agreement
or SAR agreement, but not less than six (6) months or more than twelve (12)
months after the applicable date of such event, (b) in the event of retirement,
pursuant to the terms of the option agreement or SAR agreement, but no less that
thirty (30) days or more than three (3) months after such retirement date, or
(c) in the event of termination of such person other than for death, disability
or retirement, until thirty (30) days after the date of such termination.
However, the Committee may in its sole discretion accelerate the exercisability
of any or all options or SARs upon termination of employment or cessation of
services.

    The options and SARs granted under the 1996 Stock Option Plan generally
will be non-transferable, except by will or the laws of descent and
distribution.

         ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION.  The number of
shares of Common Stock reserved under the 1996 Stock Option Plan and the number
and price of shares of Common Stock covered by each outstanding option or SAR
under the 1996 Stock Option Plan will be proportionately adjusted by the
Committee for any increase or decrease in the number of issued and outstanding
shares of Common Stock resulting from any stock dividends, split-ups,
consolidations, recapitalizations, reorganizations or like event.

         AMENDMENT OR DISCONTINUANCE OF STOCK OPTION PLAN.  The Board of
Directors has the right to amend, suspend or terminate the Stock Option Plans at
any time.  Unless sooner terminated by the Board of Directors, the 1996 Stock
Option Plan will terminate on May 11, 2006, the tenth (10th) anniversary date of
the effectiveness of 1996 Stock Option Plan.

    1996 EMPLOYEE COMPENSATORY STOCK OPTION PLAN.  As of February 7, 1996, the
Company's Board of Directors adopted the 1996 Employee Compensatory Stock Option
Plan (the "Employee Stock Option Plan").  The Company has reserved for issuance
thereunder an aggregate of 500,000 shares of Common Stock.  The Company has
issued non-qualified options to purchase up to 500,000 shares of Common Stock
under the Employee Stock Option Plan at an exercise price of $0.18 per share,
345,000 of which have been exercised.  The optionees are currently not employees
or affiliates of the Company.  The remaining 155,000 options expire on or about
February 6, 2001, the termination date of the Employee Stock Option Plan.


                                          38

<PAGE>

    OTHER OPTIONS.  The Company has granted options to purchase up to an
aggregate of 185,000 shares of Common Stock, to certain directors and employees,
which may vest, subject to the approval of an Incentive Stock Option Plan, by
the Company's Board of Directors and stockholders.  The Company also has granted
currently outstanding options to purchase up to 844,922 shares of Common Stock
to certain consultants of the Company.

COMPENSATION OF DIRECTORS

    The Company does not currently compensate directors for services rendered
as directors.

DIRECTORS AND OFFICERS LIABILITY INSURANCE

    The Company has obtained directors' and officers' liability insurance with
an aggregate limit of liability for the policy year, inclusive of costs of
defense, in the amount of $1,000,000.  The insurance policy expires on October
18, 1997.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

    The Company's Certificate of Incorporation and Bylaws designate the
relative duties and responsibilities of the Company's officers, establish
procedures for actions by directors and stockholders and other items.  The
Company's Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions which will permit the Company to indemnify its
officers and directors to the maximum extent provided by Delaware law.

TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

    Except as set forth in employment agreements of certain employees of the
Company and its subsidiaries, the Company has no compensatory plans or
arrangements which relate to the resignation, retirement or any other
termination of an executive officer or key employee with the Company or a change
in control of the Company or a change in such executive officer's or key
employee's responsibilities following a change in control.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    The Board of Directors has no standing compensation committee or other
board committee performing equivalent functions.


                                          39

<PAGE>

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

    As of April 15, 1997, the Company had issued and outstanding 8,433,471
shares of Common Stock.  The following table reflects, as of April 15, 1997, the
beneficial Common Stock ownership of:  (a) each director of the Company, (b)
each current executive officer named in the summary compensation table in this
Report, (c) each person known by the Company to be a beneficial owner of five
percent (5%) or more of its Common Stock, and (d) all executive officers and
directors of the Company as a group:

NAME AND ADDRESS                            NO. OF
OF BENEFICIAL OWNER                         SHARES(#)                PERCENT
-------------------                         ---------                -------

Medipace Medical Group, Inc.(1)             1,000,000                11.86%

Victor Gura, M.D.(1,2)                      4,234,178                50.21%

Ronald P. Lang, M.D.(1,3)                   1,727,679                20.49%

Avraham H. Uncyk, M.D.(1,4)                 1,323,413                15.70%

Judith Gordon(1,5)                          1,323,413                15.70%

Isaac Flombaum(6)                             630,201                 7.48%

Ron Berkowitz(1,7)                             27,000                    *

OrNda Health Corporation(8)                   643,500                  7.63%

All executive officers
and directors as a group
(4 persons)                                 4,261,178                50.53%

------------------------------
(Footnotes on following page)


#   Pursuant to the rules of the Securities and Exchange Commission, shares of
    Common Stock which an individual or group has a right to acquire within 60
    days pursuant to the exercise of options or warrants are deemed to be
    outstanding for the purpose of computing the percentage ownership of such
    individual or group, but are not deemed to be outstanding for the purpose
    of computing the percentage ownership of any other person shown in the
    table.

*   Less than 1%


                                          40

<PAGE>

------------------------------
(Footnotes from previous page)

1.  The address for Drs. Victor Gura, Ronald P. Lang and Avraham H. Uncyk,
    Judith Gordon and Ron Berkowitz is 5901 West Olympic Boulevard, Suite 109,
    Los Angeles, California 90036.  Ms. Gordon is the wife of Dr. Uncyk.
    Medipace is a corporation owned by Drs. Gura, Lang and Uncyk on a
    proportionate ownership interest of 67.5%, 22.5% and 10%, respectively.
    The address for Medipace is 5901 West Olympic Boulevard, Suite 300, Los
    Angeles, California 90036.  Medipace is the registered owner of 1,000,000
    shares of Common Stock, and each of Drs. Gura, Lang and Uncyk and Ms.
    Gordon are deemed to be the beneficial owners of such 1,000,000 shares.

2.  Dr. Gura is the registered owner of 2,183,036 shares and has been given a
    proxy by Drs. Lang and Uncyk to vote 1,051,092 shares collectively owned by
    such persons during the one year period commencing May 11, 1996.  Does not
    include warrants to purchase up to 337,500 shares of Common Stock, which
    may vest subject to certain performance levels by the Company, and options
    to purchase up to 80,000 shares of Common Stock, which may vest subject to
    certain events.  See "Item 12 - Certain Relationships and Related
    Transactions."

3.  Dr. Lang is the registered owner of 727,679 shares.  Does not include
    warrants to purchase up to 112,500 shares of Common Stock, which may vest
    subject to certain performance levels by the Company, and options to
    purchase up to 15,000 shares of Common Stock, which may vest subject to
    certain events.  See "Item 12 - Certain Relationships and Related
    Transactions."

4.  Dr. Uncyk is the registered owner of 323,413 shares.  Does not include
    warrants to purchase up to 50,000 shares of Common Stock, which may vest
    subject to certain performance levels by the Company, and options to
    purchase up to 5,000 shares of Common Stock granted to Ms. Gordon, which
    may vest subject to certain events.  See "Item 12 - Certain Relationships
    and Related Transactions."

5.  Ms. Gordon is the wife of Dr. Uncyk and is deemed to be a beneficial owner
    of the 1,323,413 shares which are also beneficially owned by Dr. Uncyk.
    Does not include warrants to purchase up to 50,000 shares granted to Dr.
    Uncyk, which may vest subject to certain performance levels by the Company,
    and options to purchase up to 5,000 shares of Common Stock granted to Ms.
    Gordon, which may vest subject to certain events.

6.  The address for Mr. Flombaum is Doblas 82, 2nd Piso, Buenos Aires,
    Argentina.  The 630,201 shares have been pledged as security for certain
    obligations owing to the Company.  See "Item 12- Certain Relationships and
    Related Transactions."

7.  Mr. Berkowitz is the registered owner of 27,000 shares of Common Stock.
    Does not include options to purchase up to 75,000 shares of Common Stock,
    which may vest subject to certain schedules and events.

8.  OrNda Health Corporation ("OrNda") has filed a Schedule 13D, dated October
    7, 1996, and an amendment thereto, dated January 21, 1997 (collectively,
    the "OrNda Schedule 13D"), pursuant to which OrNda and OrNda Hospital
    Corporation ("OrNda Sub"), a wholly-owned subsidiary of OrNda, have
    asserted beneficial ownership with respect to 643,500 shares of Common
    Stock of which Medipace is the registered owner.  The OrNda Schedule 13D
    provides that: (i) OrNda Sub has elected to exercise its rights pursuant
    certain pledge agreements among OrNda Sub, Victor Gura, M.D. and Medipace,
    (ii) these pledge agreements relate to security for the payment of an
    obligation in the principal amount of approximately $1,884,000 payable by
    Medipace to OrNda Sub, with respect to which OrNda Sub has served notice of
    default of payments, and (iii) the 643,500 shares also serve as security
    interests for the obligations of Medipace pursuant to a lease agreement
    between Medipace and an affiliate of OrNda and OrNda Sub.  See "Item 3 -
    Legal Proceedings" and "Item 12 - Certain Relationships and Related
    Transactions."


                                          41

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    SHARE EXCHANGE AGREEMENT.  On May 11, 1996, the Company, LACD, Victor Gura,
M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D. completed the transactions
contemplated by an Agreement for Exchange of Stock (the "Share Exchange
Agreement").  In connection with the Share Exchange Agreement, the Company
issued an aggregate of 4,234,128 shares of Common Stock to Drs. Gura, Uncyk and
Lang in exchange for 100% of the issued and outstanding shares of common stock
of LACD, as follows: (i) Dr. Gura (2,183,036 shares), (ii) Dr. Lang (727,679
shares), (iii) Dr. Uncyk (323,413 shares), and (iv) Medipace, a corporation
owned by Drs. Gura, Lang and Uncyk (1,000,000 shares).  The 1,000,000 shares
issued to Medipace were originally issued to Drs. Gura, Lang and Uncyk in their
proportionate ownership interests in Medipace (67.5%, 22.5% and 10%,
respectively), and subsequently transferred to Medipace.  The 1,000,000 shares
have certain registration rights with respect to claims which may be asserted by
creditors of Medipace.

    PLEDGE OF SHARES BY PRINCIPAL STOCKHOLDERS.  Of the 1,000,000 shares
registered in the name of Medipace, 600,000 of such shares are pledged as
collateral for certain obligations of Medipace pursuant to certain pledge
agreements.  Further, an additional 93,500 shares registered in the name of Dr.
Gura are pledged as collateral for such obligations.  So long as such
obligations are not in default, Medipace and Dr. Gura direct the voting of their
respective pledged shares.  However, the issued and outstanding shares of
Medipace are also pledged as collateral for such obligations.

    Of the 693,500 pledged shares, 643,500 shares are pledged to a third party
which has served a notice of default with respect to the obligations which are
secured by such shares.  See "Item 3 - Legal Proceedings" and "Item 11- Security
Ownership of Certain Beneficial Owners and Management."

    An additional 3,234,128 shares collectively owned by Drs. Gura, Uncyk and
Lang have been deposited in escrow, and are subject to certain restrictions on
transferability and alienation until certain obligations of Medipace have been
paid in full.  Further, these 3,234,128 shares may be required to be pledged as
collateral for such obligations in the event that 550,000 of the pledged shares,
which are owned by Medipace, are sold pursuant to such pledge agreements.

    PROXY TO VOTE AFFILIATE SHARES.  Further, Drs. Lang and Uncyk have granted
Dr. Gura a proxy to vote the 1,051,092 shares collectively owned by Drs. Lang
and Uncyk during the one year period commencing May 11, 1996.

    CONDITIONAL ISSUANCE OF WARRANTS.  Further, up to an additional 4,210,644
shares of Common Stock and warrants to purchase up to 500,000 shares of Common
Stock may be issued in the aggregate to Gura, Uncyk and Lang on the following
basis, in the event that the Company meets certain financial conditions based on
the results of operations of the Company during the fiscal years ending from
December 31, 1996 to 2001: (i) Gura (2,842,185 shares and 337,500 warrants),
(ii) Lang (947,395 shares and 112,500 warrants), and (iii) Uncyk (421,064 shares
and 50,000 warrants), which reflects the percentage distribution ratio for the
initial issuance of the Exchanged Sargent Shares to Gura, Lang and Uncyk,
respectively.  The Company believes that the required results of operations will
not be met for the fiscal year ended December 31, 1996.  The 500,000 warrants
may be exercisable in the event that the annual pre-tax earnings from operations
of the Company during the years ending from December 31, 1997 to 2001 shall
equal or exceed $2,000,000.  These warrants will expire 36 months from the
initial date of exercisability of the warrants.

    LOANS TO AFFILIATES.  On or about May 22 and October 31, 1996, the Company
loaned the sums of $47,853.85 and $66,811.76, respectively, to Medipace.
Medipace executed demand promissory notes in favor of the Company for each loan
which bear interest at the rate of 8% PER ANNUM.  Each of these loans remains
immediately due and payable in full.


                                          42

<PAGE>

    SALE OF WAREHOUSE ASSETS.  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 648,201 shares of Common Stock.  As of April 15, 1997, the
obligors on the promissory notes assigned 630,201 of the shares of Common Stock
to a third party, who executed a promissory note payable to the Company in the
principal amount of $1,000,000, bearing interest at the rate of 10% PER ANNUM,
and due and payable on or before February 23, 1998.  The promissory notes
executed by the initial obligors were cancelled.  The obligation  owing to the
Company on the $1,000,000 promissory note is secured by the 630,201 shares of
Common Stock, which are held in escrow.  See "Item 11- Security Ownership of
Certain Beneficial Owners and Management."

    POTATO HARVESTING JOINT VENTURE.  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 (3) potato harvesters
which relate to certain of the Company's prior business operations.  The Company
has three (3) remaining lease payments on the potato harvesters, each in the
amount of $57,000, which are due and payable on May 15, 1997, December 15, 1997
and March 15, 1998.  Mr. Tharp has executed a promissory note in favor of the
Company for an amount up to the balance owing on the lease, which obligation is
secured by the proceeds of the sale of certain stock options previously issued
to Mr. Tharp by the Company.   The promissory note payment dates coincide with
the lease payment dates.  Although the Company has a direct obligation to the
lessor of the potato harvesters, the Company is only obligated to make cash
contributions to the joint venture from the receipt of cash proceeds from the
Warehouse Sale.  Distributions with respect to the joint venture are 51% to Mr.
Tharp and 49% to the Company.  The joint venture is seeking to sublease the
potato harvesters for the following harvesting season or to find a third party
to assume the lease obligation.  There can be no assurances that the joint
venture will be able to enter into an arrangement with a third party to mitigate
the remaining obligation on the lease or that the Company will not be obligated
to make any of the remaining lease payments.

    LEASED PREMISES.  The Company leases offices located at 5901 West Olympic
Boulevard, Suite 109, Los Angeles, California 90036, pursuant to a sublease
agreement with Medipace.  The premises include a portion of premises leased by
Medipace, an affiliate of Drs. Gura, Lang and Uncyk, who are affiliates of the
Company, from a non-affiliate master lessor pursuant to a master lease
agreement.  The Company makes rental payments directly to the master lessor,
with the consent of the master lessor, with respect to the portion of the
premises which are the subject of the sublease.  This facility serves as the
Company's principal executive offices and as a dialysis facility in the
Company's business operations.  The Company pays a monthly rent of approximately
$6,760 on a lease which expires on August 31, 2000.


                                          43

<PAGE>

                                       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, 1996 and 1995, 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, 1996.

C.  OTHER EXHIBITS

    2.1     Agreement for Exchange of Stock, dated May 11, 1996, by and
            among Sargent, Inc., Los Angeles Community Dialysis, Inc.,
            Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P.
            Lang, M.D.(1)
    3.1     Restated Certificate of Incorporation (2)
    3.2     Bylaws(2)
    10.1    Employment Agreement between the Company and Victor Gura, M.D.,
            April 12, 1996
    10.2    Employment Agreement between the Company and Ron Berkowitz, dated
            July 8, 1996(3)
    10.3    1996 Employee Compensation Stock Option Plan(4)
    10.4    1996 Stock Option Plan(3)
    10.5    Sublease Agreement dated May 11, 1997
    16.1    Letter from Ehrhardt, Keefe, Steiner & Hottman, P.C., dated August
            19, 1996(3)
    23.1    Consent of Independent Certified Public Accountants dated April 15,
            1997
    27      Financial Data Schedule


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

1.  Filed as part of the Company's Current Report on Form 8-K dated May 24,
    1996.

2.  Filed as part of the Company's Quarterly Report on Form 10-QSB for the
    quarterly period ended April 30, 1996.

3.  Filed as part of the Company's Quarterly Report on Form 10-QSB for the
    quarterly period ended June 30, 1996.

4.  Filed as part of the Company's Registration Statement on Form S-8 dated
    April 6, 1996.


                                          44

<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

    Certain documents listed above as exhibits to this Report on Form 10-KSB
are incorporated by reference from other documents previously filed by the
Company with the Commission as follows:

          PREVIOUS FILING                        EXHIBIT NUMBER
      INCORPORATED BY REFERENCE                  IN FORM 10-KSB
    ----------------------------                 -------------
    1. Current Report on Form 8-K
       dated as of May 24, 1996                         2.1

    2. Quarterly Report on Form
       10-QSB for the quarterly
       period ended April 30, 1996                  3.1,3.2

    3. Quarterly Report on Form 10-QSB
       for the quarterly period ended June
       30, 1996                                  10.2,10.4,16.1

    4. Registration Statement on Form S-8
       dated as of April 6, 1996                       10.3


                                          45

<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.

    Dated: April 17, 1997             NATIONAL QUALITY CARE, INC.



                                          By: /s/ Victor Gura, M.D.
                                          --------------------------------
                                          Victor Gura, M.D.
                                          Chief Executive Officer


    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 17, 1997                 By: /s/ Victor Gura, M.D.
                                          --------------------------------
                                          Victor Gura, M.D.
                                          Chief Executive Officer and Director



    Dated: April 17, 1997                 By: /s/ Ron Berkowitz
                                          --------------------------------
                                          Ron Berkowitz
                                          Chief Financial Officer



    Dated: April 17, 1997                 By: /s/ Ronald P. Lang, M.D.
                                          --------------------------------
                                          Ronald P. Lang, M.D.
                                          Director



    Dated: April 17, 1997                 By: /s/ Judith Gordon
                                          --------------------------------
                                          Judith Gordon
                                          Director


                                          46

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                                  CONTENTS
                           AS OF DECEMBER 31, 1996

                                                                     Page 

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                        1

FINANCIAL STATEMENTS

     Consolidated Balance Sheets                                          2
     
     Consolidated Statements of Operations                                3

     Consolidated Statements of Stockholders' Equity                      4
          
     Consolidated Statements of Cash Flows                            5 - 6

     Notes to Consolidated Financial Statements                      7 - 20

<PAGE>

             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To 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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Quality
Care, Inc. and subsidiary as of December 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.


/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP


SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
April 8, 1997


<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                         CONSOLIDATED BALANCE SHEETS

                               AS DECEMBER 31,

                                 ASSETS (Note 5)

                                                         1996          1995
                                                      -----------   -----------
CURRENT ASSETS
  Cash and cash equivalents                           $   121,812   $    --
  Accounts receivable, net of allowances for 
    doubtful accounts of $75,000 and $50,000              334,927       333,325
  Note receivable -- related parties (Note 3)             865,202        --
  Supplies inventory                                       13,122        21,771
  Other current assets                                     47,208        --
                                                      -----------   -----------
      Total current assets                              1,382,271       355,096

BUILDING AND EQUIPMENT, net (Note 4)                    2,257,735        96,252
DEFERRED CHARGES, net                                      --            10,667
DEPOSITS AND OTHER LONG-TERM ASSETS                        59,197           461
                                                      -----------   -----------
      TOTAL ASSETS                                    $ 3,699,203   $   462,476
                                                      -----------   -----------
                                                      -----------   -----------

                       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                    $   448,521   $   401,146
  Accrued expenses                                        303,597       564,012
  Current portion of long-term debt (Note 5)              380,414       600,821
                                                      -----------   -----------
      Total current liabilities                         1,132,532     1,565,979

LONG-TERM DEBT, net of current portion (Note 5)         1,804,805         3,645
                                                      -----------   -----------
      Total liabilities                                 2,937,337     1,569,624

COMMITMENTS AND CONTINGENCIES (Note 7)

NET LIABILITIES OF DIALYSIS DIVISION OF 
  MEDIPACE MEDICAL GROUP, INC.                             --        (1,107,148)

STOCKHOLDERS' EQUITY (Note 6)
  Preferred stock, $.01 par value: 5,000,000 shares
    authorized, no shares issued and outstanding           --            --
  Common stock, $.01 par value: 50,000,000 shares
    authorized, 7,815,471 shares issued and 
    outstanding                                            78,154        --
  Additional paid-in capital                            1,508,009        --
  Notes receivable from stockholder (Note 2)             (118,044)       --
  Accumulated deficit                                    (706,253)       --
                                                      -----------   -----------
      Total stockholders' equity                          761,866        --
                                                      -----------   -----------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $3,699,203   $   462,476
                                                      -----------   -----------
                                                      -----------   -----------

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

                                       2

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                      FOR THE YEARS ENDED DECEMBER 31,

                                                         1996          1995
                                                      -----------   -----------
INCOME
  Medical service revenue                             $ 3,050,346    $2,658,551
  Rental income                                           168,277        --
                                                      -----------   -----------
      Total income                                      3,218,623     2,658,551
                                                      -----------   -----------

OPERATING EXPENSES
  Cost of medical services                              1,783,468     1,274,873
  Selling, general, and administrative expenses           989,346       417,210
  Rental expenses                                          41,303        --
                                                      -----------   -----------
      Total operating expenses                          2,814,117     1,692,083
                                                      -----------   -----------

INCOME FROM OPERATIONS                                    404,506       966,468

OTHER INCOME (EXPENSE)
  Interest expense                                       (143,048)      (58,082)
  Merger costs                                           (997,580)       --
  Interest income                                          19,436        --
  Other income                                             12,833        --
                                                      -----------   -----------
      Total other income (expense)                     (1,108,359)      (58,082)
                                                      -----------   -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES          (703,853)      908,386

PROVISION FOR INCOME TAXES                                  2,400        --
                                                      -----------   -----------

NET (LOSS) INCOME                                     $  (706,253)   $  908,386
                                                      -----------   -----------
                                                      -----------   -----------

NET (LOSS) INCOME PER SHARE                           $     (0.14)   $     0.91
                                                      -----------   -----------
                                                      -----------   -----------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING              5,060,400     1,000,000
                                                      -----------   -----------
                                                      -----------   -----------

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

                                       3

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      FOR THE YEARS ENDED DECEMBER 31,


<TABLE>
<CAPTION>
                                                           
                                       COMMON STOCK         ADDITIONAL   RECEIVABLE        NET
                                    --------------------     PAID-IN       FROM        LIABILITIES    ACCUMULATED
                                      SHARES     AMOUNT      CAPITAL    STOCKHOLDER    OF DIVISION      DEFICIT         TOTAL   
                                    ---------    -------    ----------  -----------    -----------    -----------     -----------
<S>                                 <C>          <C>        <C>         <C>            <C>            <C>            <C>

BALANCE, DECEMBER 31, 1994             --        $ --       $ --          $  --        $(2,015,534)    $   --        $(2,015,534)

NET INCOME                                                                                 908,386                       908,386
                                    ---------    -------    ----------    ---------     ----------     ---------     -----------
BALANCE, DECEMBER 31, 1995             --          --         --             --         (1,107,148)        --         (1,107,148)

NET LIABILITIES RETAINED BY 
 MEDIPACE MEDICAL GROUP, INC.                                                              591,116                       591,116

REVERSE MERGER
  Shares issued for the 
   acquisition of Sargent, Inc.      2,436,34     24,363     1,097,213                                                 1,121,576
  Shares issued for dialysis
   division of Medipace 
   Medical Group, Inc.              4,234,128     42,341      (558,373)                    516,032                        --

COMMON STOCK ISSUED
  For services rendered               995,000      9,950       431,150                                                   441,100
  For cash                            150,000      1,500        39,266                                                    40,766

STOCK OPTIONS ISSUED 
 FOR SERVICES RENDERED                                         498,753                                                   498,753

ADVANCE TO STOCKHOLDER                                                     (118,044)                                    (118,044)

NET LOSS                                                                                                (706,253)       (706,253)
                                    ---------    -------    ----------    ---------     ----------     ---------     -----------
BALANCE, DECEMBER 31, 1996          7,815,471    $78,154    $1,508,009    $(118,044)    $    --        $(706,253)    $   761,866
                                    ---------    -------    ----------    ---------     ----------     ---------     -----------
                                    ---------    -------    ----------    ---------     ----------     ---------     -----------
</TABLE>

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

                                       4

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEARS ENDED DECEMBER 31,

                                                         1996          1995
                                                      -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) income                                   $  (706,253)  $   908,386
  Adjustments to reconcile net (loss) income 
   to net cash provided by operating activities
     Depreciation and amortization                         75,354        68,220
     Issuance of common stock and stock options 
      for services principally related to the 
      acquisition of Sargent, Inc.                        939,853        --
  (Increase) decrease in
     Accounts receivable                                   (1,602)      (13,470)
     Supplies inventory                                     8,649          (156)
     Other current assets                                 (26,400)       --
  Increase (decrease) in
     Accounts payable                                     136,520       257,554
     Accrued expenses and other liabilities               186,102       100,364
                                                      -----------   -----------
          Net cash provided by operating activities       612,223     1,320,898
                                                      -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of Sargent, Inc., net of cash acquired          50,266        --
  Proceeds from sale of assets used in discontinued
    operations                                             71,219        --
  Payments on note receivable from related parties        104,291        --
  Advances to stockholder                                (118,044)       --
  Purchase of building and equipment                   (2,226,170)       (2,995)
                                                      -----------   -----------
          Net cash used in investing activities        (2,118,438)       (2,995)
                                                      -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Application of discount on dialysis services to 
   note payable                                            --            (6,561)
  Proceeds from issuance of long-term debt              2,337,775        --
  Repayment of long-term debt                            (282,867)     (109,612)
  Payments made to Medipace Medical Group, Inc.
   in consideration for retaining certain 
   liabilities of the dialysis division                  (467,647    (1,201,730)
  Proceeds from sale of common stock                       40,766        --
                                                      -----------   -----------
          Net cash used in financing activities         1,628,027    (1,317,903)
                                                      -----------   -----------
              Net increase in cash during period          121,812        --

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD             --            --
                                                      -----------   -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD              $   121,812   $    --
                                                      -----------   -----------
                                                      -----------   -----------

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

                                       5

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
              CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEARS ENDED DECEMBER 31,


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                                         1996          1995
                                                      -----------   -----------
  Cash paid during the year for
    INTEREST                                          $   124,456   $    58,993
                                                      -----------   -----------
                                                      -----------   -----------
    INCOME TAXES                                      $     2,400   $    --
                                                      -----------   -----------
                                                      -----------   -----------


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1995, $243,897 of accounts payable was converted to long-term debt.

In October 1996, the Company sold certain assets to stockholders in exchange for
$71,219 in cash and notes receivable of $865,202.

During 1996, the Company issued 995,000 shares of common stock in exchange for
services rendered with a fair value of $441,100 and 809,739 stock options in
exchange for services rendered with a fair value of $498,753.

During 1996, the Company disposed of net liabilities of the discontinued potato
harvesting operations amounting to $108,761.


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

                                       6

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     
     ORGANIZATION AND LINE OF BUSINESS
     National Quality Care, Inc. (the "Company") provides dialysis services for
     patients suffering from chronic kidney failure through a dialysis clinic
     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.
     
     At December 31, 1995, the Company was a division of Medipace Medical Group,
     Inc. ("Medipace").  In May 1996, Los Angeles Community Dialysis, Inc.
     ("LACD") acquired certain assets and assumed certain liabilities related to
     the dialysis division of Medipace. Simultaneously, Sargent, Inc.
     ("Sargent") acquired all of the outstanding stock of LACD in exchange for
     an aggregate of 4,234,128 shares of newly-issued stock.  For accounting
     purposes, the acquisition has been treated as a recapitalization of LACD,
     with LACD as the accounting acquirer (reverse acquisition).  The operations
     of Sargent have been included with those of the Company from the
     acquisition date.  Sargent subsequently changed its name to National
     Quality Care, Inc.
     
     Sargent was incorporated in Colorado in April 1981 and was engaged in the
     production, processing, and distribution of fresh potatoes.  Prior to the
     acquisition, Sargent did not have significant operations.  Costs of the
     transaction in the amount of $997,580 have been charged to expenses.
     
     In connection with the acquisition of Sargent, the Company acquired 
     assets and assumed liabilities of Sargent as follows:
          
               Cash                                      $   50,266
               Notes receivable from related parties        205,373
               Inventory                                     90,933
               Prepaid and other current assets              51,502
               Fixed assets at net book value             1,745,370
               Other assets                                  10,086
                                                         ----------
               Total assets                               2,153,530
                                                         ----------
               Accounts payable                              32,857
               Accrued expenses                             681,484
               Notes payable                                317,613
                                                         ----------
               Total liabilities                          1,031,954
                                                         ----------
                    TOTAL                                $1,121,576
                                                         ----------
                                                         ----------

                                       7

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     
     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.
     
     ESTIMATES
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     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.
     
     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.
     
     BUILDING AND EQUIPMENT
     Building and equipment are stated at cost.  Depreciation and amortization
     are being provided using the straight-line method over the estimated useful
     lives of five to thirty years as follows:
     
                  Building                       30 years
                  Medical equipment         7 to 10 years
                  Office equipment                5 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 statement of
     operations.
     
     DEFERRED CHARGES
     Deferred charges consist of a covenant not-to-compete and goodwill related
     to the acquisition of the dialysis center in 1991.  Both the covenant and
     goodwill are amortized on the straight-line basis over five years and were
     fully amortized as of December 31, 1996.
     
     Amortization expense was $10,667 and $32,000 for the periods ended December
     31, 1996 and 1995, respectively.

                                       8

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     
     PATIENT REVENUE RECOGNITION
     The Company recognizes fee income as services are provided at a standard
     fee rate. Since reimbursements for services are specified by various third-
     party payors, the Company then records a provision to reduce fee income to
     expected amounts.  The accompanying statements of operations reflect net
     collectible fees for services.
     
     The Medicare and Medi-Cal programs, which are the largest payors for
     services rendered by the Company, accounted for approximately 64% and 63%
     of the Company's net revenues for the years ended December 31, 1996 and
     1995, respectively.
     
     IMPAIRMENT OF LONG-LIVED ASSETS
     In 1996, the Company adopted Statement of Financial Accounting Standards
     ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
     for Long-Lived Assets to Be Disposed Of."  The impact of such adoption was
     not material.
     
     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, accounts receivable,
     accounts payable, and accrued expenses, the carrying amounts approximate
     fair value due to their short maturities.  The amounts shown for notes
     payable also approximate fair value because current interest rates offered
     to the Company for notes payable of similar maturities are substantially
     the same.
     
     NET INCOME (LOSS) PER SHARE
     Net income (loss) per share is based on the weighted average number of
     common and common equivalent shares outstanding during each year.  The
     shares to be issued upon exercise of outstanding stock options and warrants
     are included as common stock equivalents if they are dilutive.
     
     INCOME TAXES
     The Company uses the liability method of accounting for income taxes
     pursuant to SFAS No. 109, "Accounting for Income Taxes."
     
     RECLASSIFICATIONS
     Certain amounts in the 1995 financial statements have been reclassified to
     conform to the 1996 presentation.
     
                                       9

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 2 - NOTES RECEIVABLE FROM STOCKHOLDER
     
     Notes receivable from stockholder are unsecured with no stated maturity
     date and bear interest at 8% per annum.  At December 31, 1996, these notes
     receivable are presented as an offset to stockholders' equity due to the
     relationship of the parties involved and the uncertainty of the repayment
     of the notes.

     
NOTE 3 - SALE OF ASSETS IN EXCHANGE FOR NOTES RECEIVABLE FROM RELATED PARTIES
     
     In October 1996, the Company sold certain assets to a stockholder.  In
     consideration for the purchase price, the Company received net cash of
     $71,219 after the repayment of certain debts related to the assets that
     were sold and notes receivable of $865,202 bearing interest at 8% per
     annum. In addition, the stockholder agreed to place approximately 648,000
     shares of the Company's common stock in escrow as collateral for the notes.
     Principal and interest was due on September 15, 1996.  As of December 31,
     1996, the note was in default.  The value of the 648,000 shares of common
     stock are in excess of the notes receivable.
     
     Subsequent to year-end, the stockholder concluded negotiations with a third
     party to sell the shares held in escrow to a third party in exchange for
     assumption by the third party of all rights and obligations under the note
     agreement.  Management believes the notes receivable will be collected
     either through payment by the third party if the agreement mentioned above
     is consummated or through the sale of shares held in escrow.
     
     
NOTE 4 - BUILDING AND EQUIPMENT
     
     Building and equipment as of December 31, consist of the following:
     
                                                     1996               1995
                                                   ----------         --------
          Land                                     $  855,897         $  --
          Building                                  1,338,710            --
          Medical equipment                           283,677          212,622
          Office furniture and equipment                6,608           46,100
                                                   ----------         --------
                                                    2,484,892          258,722
          Less accumulated depreciation and 
            amortization                              227,157          162,470
                                                   ----------         --------
               TOTAL                               $2,257,735         $ 96,252
                                                   ----------         --------
                                                   ----------         --------

     Depreciation expense for the years ended 1996 and 1995 was $64,687 and
     $36,220, respectively.

                                      10

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 5 - NOTES PAYABLE
     
     Notes payable and long-term debt at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                                1996                1995
                                                                           -------------         -----------
<S>                                                                        <C>                    <C>
          Notes payable - bank are collateralized by land,
               building and equipment, and assignment of
               $2,000,000 in life insurance of, and guaranteed
               by, two majority stockholders.  The notes
               are payable in monthly installments of $20,293
               including interest at prime plus 2% (10.25%
               at December 31, 1996) per annum.  Principal
               is due May 2006.                                             $1,820,213            $    --
     
          Note payable is collateralized by accounts
               receivable.  Note is payable in monthly
               installments of $25,000 including interest of
               8.25% per annum.  Principal is due June 1997.                   161,074                 --
     
          Note payable is collateralized by land, building, and
               assignment of rents.  The note bears interest at
               10% per annum.  Principal and accrued interest
               is due April 1997.                                              200,000                 --
     
          Note payable in connection with acquisition of the
               dialysis center in 1991.  The note is secured by
               the assets of the division and is reduced by
               discounted services provided to the seller of the
               dialysis center.  The note requires monthly
               payments of $10,000 including interest at 10%
               per annum, and the unpaid principal is due
               September 1997.  At December 31, 1995, the
               division was delinquent in its payments under
               the note, and all amounts were classified as
               current.  This note was retained by former parent.               --                    464,755
     
          Note payable is unsecured and payable in monthly
               payments of $8,638 including interest at 10%
               with the unpaid balance due March 1996.                          --                     39,581
     
          Note payable is non-interest bearing and unsecured
               and payable in weekly installments of $5,007
               with the unpaid balance due May 1996.                            --                     95,257
</TABLE>

                                      11

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 5 - NOTES PAYABLE (CONTINUED)

<TABLE>
<CAPTION>
                                                                                1996                1995
                                                                           -------------         -----------
<S>                                                                        <C>                    <C>
          Other                                                              $    3,932           $    4,873
                                                                           -------------         -----------
                                                                              2,185,219              604,466
          Less current portion                                                  380,414              600,821
                                                                           -------------         -----------
                    LONG-TERM PORTION                                        $1,804,805           $    3,645
                                                                           -------------         -----------
                                                                           -------------         -----------

</TABLE>

     The following is a schedule by years of future maturities of long-term
     debt:
     
           Year Ending
          DECEMBER 31,
          ------------
               1997                                               $   380,414
               1998                                                    22,311
               1999                                                    21,929
               2000                                                    24,284
               2001                                                    26,894
               Thereafter                                           1,709,387
                                                                   ----------
                    TOTAL                                          $2,185,219
                                                                   ----------
                                                                   ----------

     
NOTE 6 - STOCKHOLDERS' EQUITY
     
     PREFERRED STOCK
     The Company is authorized to issue 5,000,000 shares of preferred stock with
     $.01 par value.  As of December 31, 1996 and 1995, no preferred stock is
     issued or outstanding.
     
     COMMON STOCK
     At December 31, 1995, the Company was a division of Medipace (the former
     parent).  In May 1996, LACD acquired certain assets and assumed certain
     liabilities related to the dialysis division of the former parent including
     the equipment, accounts receivable, contracts, payable, and leases related
     to such business operations.  LACD acquired the dialysis business
     operations in consideration of the cancellation of a $150,000 loan made by
     LACD to the former parent and the transfer of 1,000,000 shares of stock of
     the Company to the former parent which were owned by the majority
     stockholders of the Company.  Net liabilities of the dialysis division
     retained by the former parent amount to $591,116.

                                      12

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
     
     COMMON STOCK (Continued)
     Simultaneously, Sargent acquired all of the outstanding stock of LACD in
     exchange for an aggregate of 4,234,128 shares of newly-issued stock.  Prior
     to this exchange, Sargent had issued and outstanding 2,436,343 shares of
     common stock and options to purchase up to 175,000 shares of common stock. 
     After the exchange, the Company had 6,670,471 shares of common stock issued
     and outstanding.
     
     In 1996, the Company issued 995,000 shares of common stock and 826,882
     stock options in exchange for services rendered valued at $441,100 and
     $498,753, respectively.  These services were principally professional fees
     incurred in connection with the acquisition of Sargent.
     
     STOCK OPTION PLANS
     The Company has adopted two stock option plans, the 1996 Employee
     Compensatory Stock Option Plan and the 1996 Stock Option Plan.  The shares
     issued pursuant to the plans are non-restricted and have been registered.
     
     In February 1996, Sargent adopted the 1996 Employee Compensatory Stock
     Option Plan ("Employee Option Plan") which authorized the granting of stock
     options by the board of directors for up to a maximum of 500,000 shares of
     common stock. Options granted under the Employee Option Plan may constitute
     incentive stock options (within the meaning of Section 422A of the Internal
     Revenue Code of 1986) or non-statutory stock options.  Incentive stock
     options are to be granted at no less than the fair market value of the
     stock at the time of grant.  The price for non-statutory stock options are
     to be established at the board's discretion.  The board may determine the
     vesting period, not to exceed vesting ratably over a five-year period.
     
     Simultaneous with the adoption of the Employee Option Plan, Sargent granted
     500,000 incentive stock options to employees and certain consultants at an
     exercise price of $.18 per share.  325,000 of the options were exercised
     prior to the merger of Sargent with the Company.  The remaining 175,000
     options that were outstanding under the plan have been recognized by the
     Company to entitled the holder to purchase shares of the Company's common
     stock.

                                      13

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
     
     STOCK OPTION PLANS (Continued)
     In May 1996, after the merger with Sargent, the Company adopted the 1996 
     Stock Option Plan which authorized the granting of stock options by the 
     board of directors for up to a maximum of 1,000,000 shares of common 
     stock. Options granted under the 1996 Stock Option Plan may constitute 
     incentive stock options (within the meaning of Section 422A of the 
     Internal Revenue Code of 1986) or non-statutory stock options. Incentive 
     stock options will be granted at no less than the fair market value of 
     the stock at the time of grant, except those granted to significant 
     stockholders will be at no less than 110% of the fair market value.  The 
     maximum number of shares granted to an employee shall not exceed 300,000 
     shares in any fiscal year. The total fair market value of shares of 
     stock under incentive stock options under the plan shall not exceed 
     $100,000.  The board of directors may determine the expiration date and 
     vesting period, not to exceed more than ten years or five years for a 
     significant stockholder.  The option price of non-statutory options 
     shall be established at the board's discretion, but shall not be less 
     than 85% of the fair market value of the shares on the date of grant.  
     The board of directors may determine the expiration date and vesting 
     period, not to exceed more than ten years.  Stock appreciation rights 
     may also be granted under the plan.
     
     The Company has adopted only the disclosure provisions of SFAS No. 123,
     "Accounting for Stock-Based Compensation."  It applies Accounting
     Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related Interpretations in accounting for its plans and
     does not recognize compensation expense for its stock-based compensation
     plans other than for restricted stock and options issued to outside third
     parties.  If the Company had elected to recognize compensation expense
     based upon the fair value at the grant date for awards under these plans
     consistent with the methodology prescribed by SFAS 123, the Company's net
     loss and loss per share would be reduced to the pro forma amounts indicated
     below:
                                                Year Ended
                                               December 31,
                                                    1996
                                               ------------
          Net loss
               As reported                       $(706,253)
               Pro forma                         $(743,753)
          Loss per common share
               As reported                       $   (0.14)
               Pro forma                         $   (0.15)

                                      14

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
     
     STOCK OPTION PLANS (Continued)
     The fair value of these options was estimated at the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions for the year ended December 31, 1996: dividend yields of 0%;
     expected volatility of 140.0%; risk-free interest rates of 7.0%; and
     expected life of 2.65 years.  The weighted-average fair value of options
     granted during the year ended December 31, 1996 was $0.48, and the
     weighted-average exercise price was $1.09.
     
     The Black-Scholes option valuation model was developed for use in
     estimating the fair value of traded options which have no vesting
     restrictions and are fully transferable.  In addition, option valuation
     models require the input of highly subjective assumptions including the
     expected stock price volatility.  Because  the Company's employee stock
     options have characteristics significantly different from those of traded
     options, and because changes in the subjective input assumptions can
     materially affect the fair value estimate, in management's opinion, the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options.
     
     No compensation expense was recognized as a result of the issuance of stock
     options for the years ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                 GRANTED                    GRANTED
                                   EMPLOYEE       PRICE     1996 STOCK       PRICE
                                  OPTION PLAN   PER SHARE   OPTION PLAN     PER SHARE
                                  -----------   ---------   -----------    ----------
<S>                               <C>           <C>         <C>            <C>
          Shares under option
          Activity during 1996
               Granted               500,000      $0.18       924,739      $0.00-0.44
               Exercised            (345,000)     $0.18      (750,000)     $0.00-0.38
               Canceled                --                       --
                                  -----------   ---------   -----------    ----------

          Outstanding,
               December 31,
               1996                  155,000      $0.18       174,739      $0.00-0.44
     
          EXERCISABLE AT
               DECEMBER 31,
               1996                  155,000      $0.18       149,739      $     0.00
                                  -----------   ---------   -----------    ----------
                                  -----------   ---------   -----------    ----------
</TABLE>

          The weighted average remaining contractual life of options outstanding
          issued under the Employee Option Plan and the Sargent Plan is 4.1 and
          3.0 years, respectively, at December 31, 1996.

                                      15

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
     
     STOCK OPTION PLANS (Continued)
          Included in the 924,739 options granted under the 1996 Stock Option
          Plan are 874,739 options that were issued in consideration for
          services rendered in the amount of $554,739. The options can be
          converted into the Company's common stock as the options vest at the
          election of the option holder for no additional consideration.  As of
          December 31, 1996, 725,000 of these options were converted to shares
          of common stock.  Included in the 345,000 options exercised under the
          Employee Option Plan are 20,000 options exercised for services
          rendered with a fair value of $3,600.
          
          The Company issued non-qualified warrants to certain majority
          stockholders in conjunction with the merger to purchase 500,000 shares
          of common stock at an exercise price of $1.00 per share.  The options
          are exercisable if the annual pre-tax income of the Company equals or
          exceeds $2,000,000 for any fiscal year ended 1996 through 2001.  The
          Company also agreed to pay all taxes related to the issuance of the
          shares in exchange for the warrants. No warrants were exercised at
          December 31, 1996, and the Company has not recognized any compensation
          expense related to these warrants as management believes at the
          present time that it is not probable that the Company will meet the
          pre-tax income required to make these warrants exercisable.
          
          The Company also issued nonqualified warrants and options to certain
          consultants and others to purchase 1,235,000 shares of common stock 
          in exchange for cash of $31,250 and services rendered with a fair 
          value of $381,514.  375,000 of the options were exercised and 
          converted into shares of common stock.  The remaining 860,000 options
          are exercisable at various times through October 1997.
          
          
NOTE 7 - COMMITMENTS AND CONTINGENCIES
     
     LEASES
     The Company subleases certain facilities for its corporate office and
     dialysis unit under a long-term lease agreement from a related party.  
     Minimum annual rental commitments under this lease are as follows:
     
             Year Ending
             DECEMBER 31,
             ------------
               1997                                    $ 81,144
               1998                                      81,144
               1999                                      81,144
               2000                                      54,096
                                                       --------
                    TOTAL                              $297,528
                                                       --------
                                                       --------

                                      16

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
     
     LEASES (Continued)
     Rent expense was $81,139 and $79,130 for the years ended December 31, 1996
     and 1995, respectively.
     
     EMPLOYMENT AGREEMENT
     The Company entered into an employment agreement with its chief financial
     officer that extends until July 8, 2001.  The employment agreement provides
     for an annual salary of $90,000. As of March 18, 1997 the Company 
     increased the chief financial officer's annual salary to $120,000.
     
     OTHER AGREEMENTS
     During 1996, the Company purchased a building for $200,000 in cash and
     notes payable of $2,050,000 including a note payable of $200,000 to an
     unrelated third party who facilitated the purchase (the "Facilitator") and
     entered into an irrevocable trust agreement and assignment of rents and
     leases with the Facilitator.  Under the agreements, all rents are paid to
     the Facilitator who is responsible for paying the expenses and debt service
     of the property and who retains certain rights to sell the property.  The
     term of the agreement is 30 years.  As compensation, the Facilitator
     receives $1,000 per year payable in arrears. Any rental income exceeding
     the payment of the expense is to be held by the facilitator as a reserve
     deposit.  If the rental income is less than the expenses, the Company is
     required to reimburse the Facilitator for the difference.  The Company
     recognizes the rental income and expenses in the Company's statement of
     operations.  At December 31, 1996, the net reserve deposit held by the
     Facilitator is $12,366 which has been included in other current assets.
     
     The lease agreement for the building provides for minimum rental income of
     $22,642 per month through 1999.  The rental income is subject to annual
     increases based on the consumer price index.  Minimum annual rental income
     under this lease is as follows:
     
             Year Ending
             December 31,
             ------------
               1997                                    $271,700
               1998                                     271,700
               1999                                     271,700
                                                       --------
                    TOTAL                              $815,100
                                                       --------
                                                       --------

     Rental income was $168,277 for the year ended December 31, 1996.
     
     NEW DIALYSIS FACILITY
     Construction for the new dialysis unit began in March 1997, and the Company
     is in the final stages of negotiating the construction agreement with the
     contractor.  Management expects that the total cost of building and
     equipping the unit will be approximately $640,000.

                                      17

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
     
     NEW DIALYSIS FACILITY (Continued)
     In March 1997, the Company entered into a firm purchase agreement for
     dialysis products with a vender.  The term of the agreement is three years
     and is subject to cancellation after the first year by either party or in
     the event of default under the agreement.  During each year of the
     agreement, the Company agrees to purchase virtually all of its dialysis
     equipment and dialysis supplies from the vendor.  In exchange the vendor
     agrees to provide discounted pricing.
     
     LITIGATION

     The Company occupies its facilities for it corporate office and dialysis 
     unit pursuant to a sublease with Medipace dated May 10, 1996 
     ("Sublease"). On or about January 16, 1997, Medipace received a Three 
     Day Notice to Pay Rent or Quit ("Three Day Notice") from its landlord, 
     Midway Hospital Medical Center, Inc. ("Midway"), alleging that Medipace 
     is in default on its rental obligation pursuant to the Company as well 
     as additional premises occupied by Medipace.  The Three Day Notice 
     includes office space subleased to the Company.  Medipace has not 
     brought its rental obligation to Midway current, but Midway has also not 
     brought an unlawful detainer proceeding to regain possession of the 
     leased premises.  Instead, Midway has brought suit against Medipace for 
     breach of the Master Lease and seeks amounts due under the Master Lease, 
     but did not include a claim for possession of the premises.
     
     The Company believes that it is not in default of any obligations to either
     Medipace or Midway.  The Company also believes that should Midway try to
     evict it from its office space, Midway will be unsuccessful.  Therefore,
     the Company's basis is that: (i) Midway consented to the Sublease, (ii) the
     Sublease provides that if the master Lease terminates before the expiration
     of the Sublease, the Company will attorn to Midway at Midway's option,
     without right of the Company, to terminate the Sublease or to surrender
     possession of the premises, (iii) Midway has billed the Company directly
     and separately for the rent on its office space, (iv) the Company has paid
     the rent on its office space directly to Midway, and (v) the Company is
     current on the rent on its office space.
     
     It is not known at this time whether Midway will allow the Company to
     continue to occupy the office space for the duration of the Sublease or
     attempt to evict the Company therefrom.  Since no proceeding has been
     initiated and no discovery has taken place, all relevant factors which may
     affect the outcome of such a proceeding, if instituted, are not known to
     the Company, and the Company is not able to evaluate the likelihood of a
     favorable or unfavorable outcome.  In the event of an unfavorable outcome,
     the Company believes it could find suitable facilities for its corporate
     office and dialysis unit at favorable lease rates.

                                      18

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 8 - INCOME TAXES
     
     A reconciliation of the provision for income tax expense with the expected
     income tax computed by applying the federal statutory income tax rate to
     income before provision for income taxes is as follows:
                                                                   December 31,
                                                                        1996 
                                                                   ------------
          Income tax computed at federal statutory tax rate             34.0%
          State taxes  (net of federal benefit)                          6.3
          Utilization of net operating loss carryforwards              (40.3)
                                                                   ------------
               TOTAL                                                     0.0%
                                                                   ------------
                                                                   ------------
     
     As of December 31, 1996, the Company has federal and state net operating
     loss carryforwards of approximately $670,000 and $335,000 which expire
     through 2012.
     
     Significant components of the Company's deferred tax liabilities and assets
     for federal income taxes consist of the following:
     
          Deferred tax assets
               Net operating loss carryforwards                      $ 248,000
               Other                                                    32,000
                                                                     ---------
          Total deferred tax assets                                    280,000
     
          Valuation allowance for deferred tax assets                 (280,000)
     
          NET DEFERRED TAX ASSET                                     $   --
                                                                     ---------
                                                                     ---------

     At December 31, 1996, the Company has provided a valuation allowance for
     the deferred tax asset since management has not been able to determine that
     the realization of that asset is more likely than not.
     
     The net change in the valuation allowance for the year ended December 31,
     1996 was an increase of $280,000.
     

NOTE 9 - EMPLOYEE PROFIT SHARING PLAN
     
     In April 1995, the Company enrolled with the former parent in a 401(k)
     profit sharing plan ("Parent's Plan") which specified contributions by the
     Company at the discretion of management.  During 1995, there were no such
     contributions to the Parent's Plan.

                                      19

<PAGE>

                 NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIATED FINANCIAL STATEMENTS
                            DECEMBER 31, 1996


NOTE 9 - EMPLOYEE PROFIT SHARING PLAN (CONTINUED)
     
     In May 1996, the Company ceased their participation in the Parent's Plan
     and enrolled in a 401(k) profit sharing plan (the "Plan") covering
     substantially all employees who meet the eligibility requirements of the
     Plan.  Contributions to the Plan are made at the discretion of management. 
     Contributions to the Plan were $453 for 1996.
     
     
NOTE 10 - RELATED PARTY TRANSACTIONS
     
     At the time of the merger, Sargent was the holder of a lease for two self-
     propelled potato harvesters which has periodic payments totaling $228,000
     payable in four installments.  In May 1996, the Company entered into a
     joint venture with a stockholder and former officer of Sargent to engage in
     the general business of the commercial exploitation of the leased potato
     harvesters.  The joint venture is responsible for making payments on the
     leases.  Payments on the leases are secured by the non-recourse promissory
     note payable to Sargent in the amount of $228,000, secured by a pledge of
     50,000 options granted to the stockholder in the Employee Option Plan.  Due
     to uncertainties in collecting the note, it has not been recorded.  The
     Company is currently negotiating to assign and transfer the leases to an
     unrelated third party.
     
     In February 1996, the Company entered into a three-year employment
     agreement with the majority stockholder to service as the medical director,
     chief executive officer, and president of the Company in exchange for
     compensation of $120,000 per year, payable bi-monthly. As of March 18, 
     1997 the Company increased the chief executive officer's salary to 
     $150,000.
     

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