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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

For the fiscal year ended December 31, 2001
                                       OR

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

For the transition period from ______________ to _____________

                         Commission file number: 0-19031

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

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

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

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

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

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

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

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



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

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

The issuer's revenues for the fiscal year ended December 31, 2001 were
$4,355,978

The number of shares outstanding of the issuer's Common Stock as of May 1, 2002
was 14,150,522 shares. The aggregate market value of the Common Stock (6,435,750
shares) held by non-affiliates, based on the closing sale price ($0.10) of the
Common Stock, as of May 1, 2002 was $643,575.

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









                                       ii
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THIS ANNUAL REPORT ON FORM 10-KSB (THE "REPORT") MAY BE DEEMED TO CONTAIN
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR
HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.

                                     PART I

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

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

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

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

         The Company's principal operating subsidiary, LACD, has been in
business since 1985 and currently offers chronic and acute dialysis services
through one (1) dialysis center with an aggregate of twenty (20) fully equipped
stations in Los Angeles, California and provides home dialysis services.

         Further, the Company provides inpatient dialysis services by contract
to eleven (11) hospitals in the State of California. Payment for services is
primarily provided by third party payors, including Medicare, Medi-Cal (a
California State health agency) and commercial insurance companies.

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

         The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development and construction 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. Expansion will
be based on the ability of the Company to raise funding. The Company also owns a
school, which is currently not in use, to train nurses and technicians in the
field of hemodialysis and promote continuing education and knowledge of
Nephrology to patients care personnel.

         The market for such acquisition prospects is highly competitive and
management expects that certain potential acquirers 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."


                                       2
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     THE DIALYSIS INDUSTRY
     ---------------------

END-STAGE RENAL DISEASE

               The Social Security Amendments of 1972 (PL92-603) extended
Medicare coverage to individuals with end-stage renal disease (ESRD) or chronic
kidney failure who require routine dialysis treatment or a kidney transplant to
maintain life. To qualify for Medicare under the renal provision, a person must
have ESRD and either be entitled to a monthly insurance benefit under Title II
of the Social Security Act (or an annuity under the Railroad Retirement Act); or
to be fully or currently insured under Social Security; or be the spouse or
dependent child of a person who meets at least one of these last two
requirements. There is no minimum age for eligibility under the renal disease
provision. The incidence of treated ESRD in the United States is 180 per million
population and continues to rise at a rate of 7.8% per year. As of December 31,
1999, there were 259,493 patients receiving dialysis therapy in the United
States.

         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.

         The dialysis services industry has been undergoing rapid consolidation.
The Company believes that many physician owners are selling their facilities to
obtain relief from changing government regulation and administrative
constraints, to enable them to focus on patient care and to realize a return on
their investment. Hospitals are also motivated to sell or outsource management
of their facilities as they refocus their resources on their core business due
to increasing competitive pressures within the hospital industry. The Company
believes that these changes in the health care environment will continue to
drive consolidation within the dialysis services industry.

TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE

         Treatment options for ESRD include hemodialysis, peritoneal dialysis
and kidney transplantation. ESRD patients are treated predominantly in
outpatient treatment facilities.

         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 and one half hours and is performed three times per week per
patient.

         PERITONEAL DIALYSIS. Peritoneal dialysis is generally performed by the
patient at home. There are several variations of peritoneal dialysis. The most
common are continuous ambulatory peritoneal dialysis and continuous cycling
peritoneal dialysis or automated peritoneal dialysis. All forms of peritoneal
dialysis use the patient's peritoneal (abdominal) cavity to eliminate fluid and
toxins from the patient. This technique 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. This can
be performed using 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.


                                       3
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     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 that current patient demand is met by the capacity
of its currently existing facility. The Company expects to increase its patient
base in its facility by obtaining new contracts with providers and through
referrals for other physicians. The Company continues to seek to expand its
capacity and potential patient base in other locations in its general market
area, 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 one (1) outpatient dialysis center with
an aggregate of twenty (20) dialysis stations located in Los Angeles,
California. The Company also provides acute inpatient dialysis services to ten
(10) hospitals in the State of California. System-wide, the Company provides
training, supplies and on-call support services to all of its CAPD and CCPD
patients. The Company is in the process of planning a new sixteen station unit
in Downtown Los Angeles. The Company will need to obtain additional financing of
approximately $500,000 in order to finance the construction of the unit. There
can be no assurances that the Company will receive the necessary amount of
financing to complete the construction.

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 patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work areas,
offices and a staff lounge and kitchen. The Company's facility also has a
designated area for training patients in home dialysis. The Company's facility
also offers amenities for the patients, such as color televisions with headsets
at each dialysis station.

         In accordance with conditions for participation in the Medicare ESRD
program, the Company's 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 supervise the day-to-day operations
of the facility and the staff. The staff consists of registered nurses, licensed
practical or vocational nurses, patient care technicians, a social worker, a
registered dietician, a unit clerk and bio-medical technicians.

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

EQUIPMENT SUPPLY AGREEMENT

         The Company purchases a significant portion of the medical equipment to
be utilized in the Company's dialysis operations from several large medical
suppliers, on a discount basis with manufacturer's rebate.


                                       4
<PAGE>

         The Company provides inpatient dialysis services (excluding physician
professional services) to eleven (11) hospitals in the State of California.
These services are required in connection with the hospital's inpatient services
for a per treatment fee individually negotiated with each hospital. In most
instances, the Company transports the dialysis equipment and supplies to the
hospital when requested and administers the dialysis treatment. Examples of
cases in which such inpatient services are required include patients with acute
kidney failure resulting from trauma or similar causes, patients in the early
stages of ESRD and ESRD patients who require hospitalization for other reasons.

PHYSICIAN RELATIONSHIPS

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

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

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

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

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

QUALITY ASSURANCE

         QUALITY MANAGEMENT PROGRAM. The Company engages in organized and
systematic efforts to measure, maintain and improve the quality of services it
delivers and believes that it has earned a favorable reputation for quality in
the dialysis community. The Company has implemented a quality management program
designed to measure outcomes and improve the quality of its services. The
Company's quality management program and clinical information systems have been
developed and implemented at the Company's dialysis 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.

                                       5
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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
                                              ---------------------------
                                                2001               2000
                                              -------             -------

Medicare                                       37.4 %              40.6 %
Medicaid                                       32.0 %              22.6 %
Private/alternative payors                      8.0 %               8.6 %
Hospital inpatient
 dialysis services                             22.6 %              28.2 %
                                              -------             -------

         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 a
dialysis facility, provides Medicaid benefits to qualified recipients to
supplement their Medicare entitlement. The Medicare and Medicaid programs are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy and governmental funding restrictions, some of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business. See "Medicare
Reimbursement."

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

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

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

                                       6
<PAGE>

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 18 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 $121
and $ 145 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 $125 per treatment in 1990. In 1990, Congress increased the
ESRD reimbursement rate, effective January 1, 1991, resulting in an average ESRD
reimbursement rate of $126 per treatment. In 1990, Congress required that the
Department of Health and Human Services ("HHS") and PROPAC study dialysis costs
and reimbursement and make findings as to the appropriateness of ESRD
reimbursement rates. The reimbursement rate for outpatient dialysis services
increased by 1.2% from $139.00 per treatment on average in 2000 to $141.06 for
dialysis treatments furnished on or after January 1, 2001. 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 for
dosages of up to 9,999 units per administration. For higher dosages, an
additional $30 per EPO administration was allowed. Effective January 1, 1991,
the Medicare allowable prescribed rate for EPO was changed to $11 per 1,000
units, rounded to the nearest 100 units. Subsequently, legislation was enacted
to reduce the Medicare prescribed rate for EPO by $1 per 1,000 units after
December 31, 1993. The current rate is $10 per 1,000 units.

           There can be no assurance that the Company can maintain current
operating margins in the future for EPO administrations due to potential
reimbursement decreases, or to potential increases in product costs from its
sole manufacturer.

MEDICAID REIMBURSEMENT

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

                                       7
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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 are subject to
periodic inspection by state agencies and other governmental authorities to
determine if the premises, equipment, personnel and patient care meet applicable
standards. To receive Medicare reimbursement, the Company's dialysis 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.

         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 also contracts with other 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

                                       8
<PAGE>

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

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

         The Company operates its dialysis 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 arrangements with
physicians, vendors, patients or others have been the subject of investigation
by any governmental authority. No assurance can be given that the Company's
activities will not be reviewed or challenged by regulatory authorities. The
Company monitors legislative developments and would seek to restructure a
business arrangement if the Company determined that one or more of its business
relationships place it in material noncompliance with such a statute.

STARK I

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


                                       9
<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
principal Medical Directors and other referring physicians, certain of whom are
principal stockholders of the Company. The Company believes that such
arrangements are in material compliance with the anti-kickback statute, Stark II
and the various state statutes.

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

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

         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.

                                       10
<PAGE>

     MEDICARE

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

OTHER REGULATIONS

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

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

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

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

INSURANCE
---------

         The Company carries property and general liability insurance,
professional liability insurance and other insurance coverage in amounts deemed
adequate by management. However, there can be no assurance that any future
claims will not exceed applicable insurance coverage. Furthermore, no assurance
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 December 31, 2001, the Company had twenty-six (26) employees,
including one (1) executive, twenty (20) medical and five (5) administrative
personnel.

                                       11
<PAGE>

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

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

                                  RISK FACTORS

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

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

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

         LACK OF PROFITABILITY, CASH FLOW DIFFICULTIES. The Company generated a
loss of $606,760 during the fiscal year ended December 31, 2001. Further, as of
December 31, 2001, the Company had an accumulated deficit of approximately
$2,301,183. The Company experienced loss from operations during the year ended
December 31, 2001 of approximately $254,588. The Company will need to establish
profitable operations in order to sustain the business on an on-going basis,
unless the Company obtains additional financing from external sources. There can
be no assurances that the Company will experience profitable operations or
obtain such an additional financing in the future on terms acceptable to the
Company or at all. The implementation of a new billing system in 2000 caused
delays in collections in the first half of 2001 resulting in significant cash
flow problems, which adversely impacted the Company's ability to pay its
creditors in a timely manner in 2001. The Company believes that the resolution
of its collections problem has mitigated its cash flow problems. However, unless
the Company establishes profitable operations, the Company may need to obtain a
working line of credit and/or an external financing to satisfy cash flow needs
in the future. The failure to obtain such a line of credit or such a financing
may have an adverse effect on the Company's ability to finance costs of
operations and to meet its current obligations. See "Item 6 - Management's
Discussion and Analysis or Plan of Operation" and "Item 12 - Certain
Relationships and Related Transactions."

         NEED FOR ADDITIONAL CAPITAL FOR EXPANSION. The Company's current
business plan includes a strategy to expand as a provider of dialysis services
through the development of new dialysis facilities and the acquisition of
additional dialysis facilities and other strategically related health care
services in selected markets. The market for such acquisition prospects is
highly competitive and management expects that certain potential acquirors will
have significantly greater capital than the Company. There can be no assurance
that the Company's expansion strategy will result in profitable operations. 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."

                                       12
<PAGE>

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

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

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

         CONTROL BY PRINCIPAL STOCKHOLDERS. Three of the Company's principal
stockholders, directors and executive officers of the Company and their
affiliates control the voting power of approximately 54.13% of the outstanding
Common Stock. As a result of such Common Stock ownership, such persons will be
in a position to exercise significant control with respect to the affairs of the
Company and the election of directors. See "Item 11 - Security Ownership of
Certain Beneficial Owners and Management."

         POTENTIAL CHANGE OF CONTROL. 2,650,000 shares of Common Stock, which
are beneficially owned by certain of the Company's affiliates, Victor Gura,
M.D., Ronald P. Lang, M.D., and Avraham H. Uncyk, M.D., and their affiliate,
Medipace, which constitute approximately 18.37% of the currently issued and
outstanding Common Stock, are the subject of certain pledge agreements for
certain obligations of such persons to an unaffiliated third party. In the event
that such third party seeks to foreclose on these shares, there may occur a
change of control, which may have a material adverse effect on the business
operations of the Company. See "Item 11 - Security Ownership of Certain
Beneficial Owners and Management" and "Item 13 - Certain Relationships and
Related Transactions."

         CERTAIN REGISTRATION RIGHTS. The Company has entered into various
agreements pursuant to which certain holders of the Company's outstanding Common
Stock, who are affiliates of the Company, have been granted the right, under
various circumstances, to have Common Stock that is currently outstanding
registered for sale in accordance with the registration requirements of the
Securities Act upon demand or "piggybacked" to a registration statement which
may be filed by the Company. Of the currently issued and outstanding Common

                                       13
<PAGE>

Stock, 800,000 shares may be the subject of future registration statements
pursuant to the terms of such agreements. In addition, currently outstanding
options and warrants issued to certain consultants and employees to purchase up
to 10,687,495 shares of Common Stock, of which 3,387,495 are either the subject
of current registration statements or have certain registration rights. Any such
registration statement may have a material adverse effect on the market price
for the Company's Common Stock resulting from the increased number of free
trading shares of Common Stock in the market. There can be no assurances that
such registration rights will not be enforced or that the enforcement of such
registration rights will not have a material adverse effect on the market price
for the Common Stock. See "Item 12 - Certain Relationships and Related
Transactions."

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

         SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. There are
currently 6,435,750 shares of Common Stock, which are free trading shares or are
eligible to have the restrictive legend removed pursuant to Rule 144(k)
promulgated under the Securities Act. Further, 800,000 shares may be the subject
of future registration statements pursuant to the terms of certain agreements
between the Company and certain of its stockholders. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
may occur, could have a material adverse effect on the market price of the
Common Stock. Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and Preferred Stock. The
issuance of such shares could result in the dilution of the voting power of the
currently issued and outstanding Common Stock. See "Item 5 - Market for Common
Equity and Related Stockholder Matters."

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

         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 37.4% of its net operating revenues during its
fiscal year ended December 31, 2001 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 $139
per treatment on average in 2000. Although the HCFA increased the composite rate
by 1.2% to $141.06 effective January 1, 2001 (latest change), 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."

                                       14
<PAGE>

         The State of California, the only state in which the Company currently
operates a dialysis facility, provides Medicaid (or comparable) benefits to
qualified recipients to supplement their Medicare entitlement. The Company
estimates that approximately 28% of its net revenues during fiscal 2001 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 30.6% of the Company's net revenues during fiscal 2001
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 (three of which accounted for approximately 22.6% of
the Company's net revenues in fiscal 2001), and termination of such third-party
agreements could have an adverse effect on the Company. See "Business -
Operations - Sources of Revenue Reimbursement."

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

         The Balanced Budget Act of 1997 extended the period during which
Medicare is secondary to a patient's group health plan from 30 months to 33
months effective for items and services provided on or after August 5, 1997.
After this 33-month period, Medicare becomes the primary coverage for patients,
and the patient's group health coverage generally pays applicable coinsurance
payments.

         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

                                       15
<PAGE>

intend to include dialysis services and the services and items provided incident
to dialysis services within the Stark II prohibitions. Violations of Stark II
are punishable by civil penalties, which may include exclusion or suspension of
the provider from future participation in Medicare and Medicaid programs and
substantial fines. Due to the breadth of the statutory provisions and the
absence of regulations or court decisions addressing the specific arrangements
by which the Company conducts its business, it is possible that the Company's
practices might be challenged under these laws. A broad interpretation of Stark
II to include dialysis services and items provided incident to dialysis services
would apply to the Company's competitors as well.

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

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

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

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

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

         DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills
of its management team. There is strong competition for qualified personnel in
the dialysis industry, and the loss of key personnel or an inability to continue
to attract, retain and motivate key personnel could adversely affect the

                                       16
<PAGE>

Company's business. There can be no assurances that the Company will be able to
retain its existing key personnel or to attract additional qualified personnel.
The Company does not have key-man life insurance on any employees of the
Company. See "Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act."

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

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

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

         The Company leases office space located at 1835 South La Cienega
Boulevard, Suite 235, Los Angeles, California 90035, which serves as the
Company's principal executive offices. The Company pays $1,700 per month on a
lease that expires on June 30, 2002.

         The Company leases office space located at 1801 South La Cienega
Boulevard, 1st Floor, Los Angeles, California 90035, which serves as a dialysis
facility in the Company's business operations. The Company pays $11,156 per
month on a lease that expires on May 31, 2007.

         As of May 17, 1996, the Company acquired that certain real property
(the "Real Property") located at 6000 San Vicente Boulevard, Los Angeles,
California, for a purchase price of $2,055,000, as adjusted for certain credits
to the Company with respect to the purchase price. The Real Property includes
the improvement of a hospital facility. The Real Property is subject to three
(3) deeds of trust in the aggregate amount of $2,025,000. As of December 31,
2001, the principal amount of this obligation was approximately $1,621,000. See
"Item 6 - Management's Discussion and Analysis or Plan of Operation."

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

         The Company also has entered into a master lease agreement (the "Master
Lease") with Aegis for the Real Property at an annual rental rate of $1,000. The
Master Lease is subject to a written triple net lease dated January 16, 1980,
with Avalon Memorial Hospital ("Avalon") as the current tenant in possession.
The term of the lease with Avalon extends through December 31, 2004, with an
option to extend the lease by Avalon for an additional five (5) year term. The
term of the Master Lease extends through May 31, 2026. However, the Master Lease

                                       17
<PAGE>

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 $14,123 and the current
monthly rental payment of Avalon is approximately $22,642.

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

         The Company is a party to certain litigation (Case No. BC245346 filed
in Superior Court of California, County of Los Angeles, Central District)
initiated by one of the Company's patient, Aleksandr Margulets. The Company
believes that this claim has no merit, however the Company believes that its
exposure, if at all, is fully covered byProfessional Liability Insurance.

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

         None.

                                     PART II

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

         As of May 1, 2002 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 May 1, 2002, there were issued and outstanding
14,150,522 shares of Common Stock which are held by approximately 403
shareholders, and options and warrants to purchase 10,687,495 shares of Common
Stock, of which 5,057,495 are exercisable, as of the date of this Report. See
"Item 12 - Certain Relationships and Related Transactions."

         The Company's Common Stock is listed for trading in the
over-the-counter market and is quoted on the NASD's Electronic 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 high and low closing
sale 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:



                                                          CLOSING PRICES
                                                          --------------
                                                       HIGH              LOW
                                                     --------         --------

YEAR ENDING DECEMBER 31, 2002

1st Quarter                                           $0.12             $0.05


YEAR ENDED DECEMBER 31, 2001

1st Quarter                                           $0.16             $0.06
2nd Quarter                                           $0.245            $0.042
3rd Quarter                                           $0.105            $0.08
4th Quarter                                           $0.10             $0.05

YEAR ENDED DECEMBER 31, 2000

1st Quarter                                           $0.28             $0.09
2nd Quarter                                           $0.22             $0.09
3rd Quarter                                           $0.14             $0.09
4th Quarter                                           $0.15             $0.06


                                       18
<PAGE>

         The closing sale price of the Common Stock on May 1, 2002 was $0.10 per
share.

         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 Colonial Stock Transfer, 66
Exchange Place, Salt Lake City, Utah 84111, (801) 355-5740.

RECENT ISSUANCES OF UNREGISTERED SECURITIES
-------------------------------------------

         SHARE EXCHANGE AGREEMENT; CONDITIONAL ISSUANCE OF SHARES AND WARRANTS.
On May 11, 1996, the Company, Los Angeles Community Dialysis, Inc. ("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.

         The parties had agreed to the contingent aggregate issuance of up to an
additional 4,210,644 shares of Common Stock and warrants to purchase up to
500,000 shares of Common Stock, at an exercise price of $3.50 per share, to Drs.
Gura, Uncyk and Lang in the event that the Company's annual pre-tax earnings
from operations of the Company during the fiscal years following the date of the
Share Exchange Agreement through December 31, 2001 equaled or exceeded
$2,000,000, on the following basis: (i) Dr. Gura (2,842,185 shares and 337,500
warrants), (ii) Dr. Lang (947,395 shares and 112,500 warrants), and (iii) Dr.
Uncyk (421,064 shares and 50,000 warrants), which reflects the percentage
distribution ratio for the initial issuance of the shares of Common Stock in
connection with the Share Exchange Agreement to Drs. Gura, Lang and Uncyk,
respectively. The Company did not meet the required results of operations
through December 31, 2001. However, on May 1, 2002, the parties reached an
agreement to issue the contingent securities to Drs. Gura, Uncyk and Lang, based
on the understanding in the Share Exchange Agreement that the Company would meet
certain funding obligations in order to finance prospective operations of the
Company and assist the Company in being able to meet the earnings targets. The
warrants will expire on May 1, 2005.


         TECHNOLOGY PURCHASE AGREEMENT. On December 18, 2001, the Company
entered into a Technology Purchase Agreement with Victor Gura, M.D. In
connection with this agreement, Dr. Gura assigned his rights to two pending
United States Patent Applications relating to a Wearable Peritoneal Dialysis
System and a Wearable Renal Replacement Therapy Device. The Company issued to
Dr. Gura options to purchase up to 5,000,000 shares of Common Stock, with an
exercise price of $1.25 per share. Of the 5,000,000 options, 1,000,000 options
have vested, and the remaining options may vest in accordance with the
achievement of certain prospective milestones with respect to the development of
a marketable product relating to the transferred technology. The Company also
issued Dr. Gura a promissory note in the amount of $100,000, which is secured by
the transferred technology. The note matures on December 18, 2006, and may be
canceled in the event that per share price of the Company's Common Stock equals
or exceeds $5.00 per share up to the maturity date of the note. In addition, the
Company granted options to purchase up to 1,500,000 shares of Common Stock, with
an exercise price of $1.25 per share, to Ronald P. Lang for his contributions to
the development of the transferred technology. Of the 1,500,000 options, 300,000
options have vested, and the remaining options may vest in accordance with the
achievement of the same prospective milestones with respect to the vesting of
Dr. Gura's options.

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.

                                       19
<PAGE>

         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.

         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.

                                       20
<PAGE>

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

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

         OVERVIEW OF PRESENTATION. The focus of the Company's principal business
operations is the providing of high-quality integrated dialysis services for
patients suffering from ESRD.

         RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000.

         Total revenue for the year ended December 31, 2001 decreased
approximately 4.8% to $4,355,978 from $4,575,948 for the year ended December 31,
2000. Medical service revenue for the year ended December 31, 2001 decreased
approximately 5.1% to $4,084,278 from $4,304,248 for the year ended December 31,
2000. This decrease primarily resulted from a decrease in volume of outpatient
treatments, as well as inpatient services. The Company has experienced patient
census fluctuation outside of its control and had an unusual decline in patient
population in the last half of 2001 which has been increased again. In addition,
the Company received rental income of $271,700 during the years ended December
31, 2001 and December 31, 2000 from certain real property owned by the Company
in Los Angeles, California utilized by a non-affiliate as a hospital facility.
See "Item 2 - Description of Properties."

         Total operating expenses during the year ended December 31, 2001
increased to $4,610,566 from $4,225,810 during the year ended December 31, 2000.
Total operating expenses include: (i) cost of medical services, (ii) selling,
general and administrative expenses, (iii) depreciation and amortization, and
(iv) rental expenses, as follows:

         Cost of medical services during the year ended December 31, 2001
increased to $3,112,626 from $3,000,060 during the year ended December 31, 2000.
This increase is primarily due to the rising usage of drugs and medication
prescribed, higher prices and changes in dosages. The usage has increased on a
per patient basis due to their medical requirements.

         Selling, general and administrative expenses during the year ended
December 31, 2001 increased approximately 26.8% to $1,280,067 from $1,009,376
during the year ended December 31, 2000. This increase is primarily related to
increased legal fees of approximately $107,000, accounting fees in amount of
$72,000, rent fees in the amount of $30,000, and also increase in the amount of
$80,000 bad debt expense. The bad debt expense related to the implementation of
a new billing system in 2000. Consequently, many charges were delayed and were
written off in 2001. These issues have been resolved. The aforementioned
expenses were partially offset by $32,000 investor relations expenses.

         Depreciation and amortization during the years ended December 31, 2001
and December 31, 2000 remained practically unchanged at $135,640 from $136,278.

         Rental expenses during the year ended December 31, 2001 and 2000
increased 3.0% to $82,233 from $80,096 due to the increased property taxes. See
"Item 2. Description of Properties."

         Other expenses increased 3.0% during the year ended December 31, 2001
to $286,987 from $277,904 during the year ended December 31, 2000. This increase
in other expenses between the respective years resulted primarily from: (i) an
increase of $ 22,448 in interest expense (ii) an increase of $3,137 in interest
income, and (iii) a decrease of $10,228 in other income items.

                                       21
<PAGE>

         As a result of the foregoing, the Company generated a net loss of
$606,760 during the year ended December 31, 2001, as compared to a net income of
$210,876 during the year ended December 31, 2000. Loss from operations during
the year ended December 31, 2001 was $254,588 compared to income from operations
of $350,138 during the year ended December 31, 2000. This decrease in income
from operations primarily resulted from decreased revenues from inpatient and
outpatient services and from increased selling, general and administrative
expenses and costs in drugs and medications. Management believes that the
Company's revenues from inpatient and outpatient services will increase in 2002,
based on a projected increase in patient census. However, margins between
medical revenues and medical expenses have decreased from recent years due to
increased costs of medical services in patient treatments. The Company will need
to reduce its selling, general and administrative expenses, both in amounts and
as a percentage of revenues, in order to move toward profitable operations.
There can be no assurances that the Company will be able to return to profitable
operations in the future.

         At December 31, 2000 the Company decreased its valuation allowance on
deferred tax assets totaling $60,000 which relates to expected utilization of
net operating loss carryforwards in 2001. The Company recorded a tax benefit of
$60,000 at December 31, 2000, because of then anticipated profitable operations
in 2001. As a result of the precipitous and expected losses incurred in the
second and third quarters of 2001, the Company reversed the tax benefit in 2001.

         As of December 31, 2001, the Company had net operating loss
carryforwards totaling approximately $5,967,000 and $829,000 for federal and
state income tax purposes, respectively, which are available to offset future
federal taxable income, if any, through 2020. The federal net operating loss
carryforwards include $3,700,000 of losses, which are limited by IRC Section
382. However, such limitations have not yet been quantified. Utilization of the
Company's net operating loss may be subject to limitation under certain
circumstances.

         LIQUIDITY AND CAPITAL RESOURCES. At December 31, 2001, the ratio of
current assets to current liabilities was 0.48 to 1.00 compared to 0.75 to 1.00
at December 31, 2000.

         The Company's cash flow needs for the year ended December 31, 2001 were
primarily provided from proceeds from operations and external borrowings.
However, the Company's operating activities resulted in a net use of $90,000.
The Company had a working capital deficit of approximately $953,078 at December
31, 2001 compared to a working capital deficit of approximately $440,700 at
December 31, 2000. The implementation of a new billing system caused delays in
collections resulting in significant cash flow problems, which adversely
impacted the Company's ability to pay its creditors in a timely manner in 2001.
The delayed collections of a substantial amount of these receivables by the end
of 2001 resulted in lower accounts payables and accounts receivables at December
31, 2001. The Company believes that the resolution of its collections problem
has mitigated its cash flow problems. However, unless the Company establishes
profitable operations, the Company may need to obtain a working line of credit
and/or an external financing to satisfy cash flow needs in the future. The
failure to obtain such a line of credit or such a financing may have an adverse
effect on the Company's ability to finance costs of operations and to meet its
current obligations.

         In addition to solving the collections problems the Company has taken
several actions to turn the operation back to profitability. These actions and
plans include:

         o    Operating costs have been reduced by eliminating certain staff
              positions.
         o    Efficiencies in operations are being improved by shifting service
              days to certain patients in order to yield a more steady flow of
              service revenue and thereby minimize the cost of patient service.
         o    An unprofitable line of business (technical training institute)
              which was opened in 2001 has been closed until such time that
              management believes it can be operated profitably.
         o    A second operating facility is being planned, which is expected to
              immediately contribute to operating profits without requiring
              additional administrative overhead. The implementation of this new
              facility would require funding from an outside source, which is
              currently being explored.
         o    Continue to improve profitability by negotiating more favorable
              terms in contracts with existing providers, and with new potential
              providers.
         o    The Company has entered into an agreement to sell a building
              currently being leased. The net cash proceeds to the Company are
              expected to be approximately $300,000. Closing of escrow is
              expected by the middle of May 2002.

There can be no assurances that these actions or plans will generate profitable
operations for the Company.

         Cash and cash equivalents remain virtually unchanged at $3,121 as of
December 31, 2001, as compared to $1,200 as of December 31, 2000.

                                       22
<PAGE>

         As of December 31, 2001, the Company had borrowings in the aggregate
amount of $2,228,360 of which short-term borrowings accounted for $424,589. As
of December 31, 2000, the Company had total borrowings of $2,053,061, of which
short-term borrowings accounted for $262,546. The increase relates primarily to
the obtaining of additional financing of $350,000 which were partially used to
pay certain specified liabilities.

         At December 31, 2001 the Company is actively pursuing the sale of a
building and associated land with a total cost of $2,194,607 with accumulated
depreciation of $250,908. The Company has no agreements or commitments relating
to the sale of the property and there can be no assurances that the Company will
be able to sell the property. This property is currently being leased to a third
party. The Company continues to depreciate the asset and generate revenue from
the leasing activities.

         The Company has a note receivable owing by a former principal
stockholder of the Company. As of December 31, 2001, the principal and accrued
interest owing on the note was $865,000. The assignee of the shares agreed to
pay the additional sum of approximately $135,000 on the due date of the
$865,000. The note is secured by the pledge of 270,206 shares of Common Stock,
which are currently held in escrow. The number of shares pledged to secure the
note was reduced by an agreement in 2001 by the Company to allow the obligor on
the note to transfer 300,000 of the pledged shares to a third party consultant
in satisfaction of a contractual obligation of the Company to issue 300,000
shares to such consultant. The Company has placed a valuation allowance of
$719,000 on the note receivable as of December 31, 2001, in part, due to the
decrease in the market price of the shares of Common Stock, which secure the
repayment of the obligation. There can be no assurances that all amounts of the
obligations will be recovered from the liquidation of such shares or from other
assets of the obligor. See "Item 12 - Certain Relationships and Related
Transactions."

         Medipace had executed a demand promissory note in favor of the Company
in the principal amount of $121,151, dated September 17, 1997, bearing interest
at the rate of 8% per annum. Medipace did not make any payments on the
promissory note in 1998 and 1999. During 1999, the Company transferred the
$75,000 obligation underlying a second promissory note in the same amount to a
separate lease receivable in connection with a purchase and leaseback
arrangement with Medipace. Medipace had been in default on the lease payable
since October, 1999. In November, 2001 all debts owing by Medipace to the
Company were consolidated into a single promissory note in the principal amount
of $218,919.32, bearing interest at the rate of 8% per annum. Under the new
note, Medipace is obligated to make monthly interest payments in amount of
$1,479.73 commencing December 31, 2001 for 24 months, with principal and accrued
interest due at maturity on December 31, 2003. See "Item 12 - Certain
Relationships and Related Transactions."

         The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development of new dialysis facilities
and the acquisition of additional facilities and other strategically related
health care services in selected markets. The market for such acquisition
prospects is highly competitive and management expects that certain potential
acquirors will have significantly greater capital than the Company. The Company
had net loss of $606,760 and loss from operations of $254,588 during the year
ended December 31, 2001. Profitable operations will be necessary to sustain the
business on an on-going basis, unless the Company obtains additional financing
from external sources. There can be no assurances that the Company will
experience profitable operations or obtain additional financing in the future.

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

                                       23
<PAGE>

SIGNIFICANT ACCOUNTING POLICIES

         The accounting policies applied in the financial reporting process are
described in Note 2 to the financial statements contained as part of this annual
report. Management considers those accounting policies to be appropriate, and
such accounting policies have been consistently applied. The accounting policies
considered most significant to the operations of the Company include the
following:

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

         Accounts receivable and allowances - Accounts receivable are stated at
gross amounts billed, less contractual and estimated allowances. A significant
portion of the Company's accounts receivable involve third-party payors. The
collection cycle on accounts receivable from continuing operations extends up to
12 months.

         Property and equipment - Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at lease inception. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives, which range from 5 to
30 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 property and equipment are reflected in the consolidated statements of
operations, if and when incurred.

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

         During 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 144 ("Accounting for
Impairment of Disposal of Long-Lived Assets"), and No. 143 ("Accounting for
Asset Retirement Obligations"). SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Management does not believe the adoption of SFAS
143 and SFAS 144 will have material impact on the financial statements.

          Also in 2001, the FASB issued SFAS No. 142 ("Goodwill and Other
Intangible Assets") and No. 141 ("Business Combinations") which are effective
for years after 2001. SFAS 141 requires business combinations initiated after
June 30, 2001, to be accounted for using the purchase method of accounting. It
also specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. SFAS 142 will require that
goodwill and certain intangible assets no longer be amortized, but instead
tested for impairment at least annually. SFAS 142 is required to be applied
starting with fiscal years beginning after December 15, 2001. Management does
not believe the adoption of SFAS 141 and SFAS 142 will have a material impact on
the financial statement.

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

         The auditor's report and 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 AND FINANCIAL DISCLOSURE.
        ----------------------------------------------------------------------

         Not Applicable

                                       24
<PAGE>

                                    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.

         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 and                59
                                Chief Executive Officer

 Ronald P. Lang, M.D.           Director and Secretary                 52

 Jose Spiwak, M.D.              Director                               57

 Melinda McIntyre-Kolpin        Director                               45

         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 Los Angeles Community
Dialysis 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.

         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.

         JOSE SPIWAK, M.D. has been a director of the Company since March 11,
1998. Dr. Spiwak is a board certified thoracic and cardiovascular surgeon, and
serves as Chairman of the Cardiovascular Thoracic Section of St. Francis Medical
Center and Presbyterian Intercommunity Hospital in Los Angeles, California. He
served as Vice-Chairman of American Health, Inc., a managing company of primary
care physicians and comprehensive healthcare delivery networks, which was sold
to FPA Medical Management, Inc. in April, 1997. Dr. Spiwak graduated from the
Universidad Javeriana Medical School (Bogota, Columbia) in 1968 and performed
his residency in Israel and the United States. Dr. Spiwak is a member of the
Board of Directors of the American Cancer Society.

         MELINDA MCINTYRE-KOLPIN has been a director of the Company since March
18, 1998. She is currently the chief executive officer of Network Health
Financial Services, Inc., a financial services company providing a variety of
services to healthcare clients. She formerly was the chief executive officer and
president of First Professional Bank, N.A., a subsidiary of Professional
Bancorp, based in Santa Monica, California, a full-service bank providing
banking, financial consulting and general business strategies for the medical
community. Prior to joining First Professional Bank, Ms. McIntyre-Kolpin was a
commercial banking officer with Bank of California. She is a board member of
numerous organizations in Southern California, including the Executive
Council-Adaptive Business Leaders; director, Synergistic Systems, Medical
Billing; advisory board, University of Southern California School of Accounting;
director, Pacific Eyenet; National Health Foundation, board of trustees; City of
Hope, board of trustees. Ms. McIntyre-Kolpin received her Bachelor of Science
degree in business administration from the University of Southern California in
1978.

                                       25
<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 (the "Named Executives"), 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, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

                                                                               LONG TERM COMPENSATION
                                                                 ----------------------------------------------------
                                     ANNUAL COMPENSATION                    AWARDS                    PAYOUTS
                             ----------------------------------------------------------------------------------------

        (a)           (b)         (c)         (d)        (e)         (f)            (g)           (h)        (i)
                                                    OTHER ANNUAL    OTHER        RESTRICTED       LTIP    ALL OTHER
     NAME AND                    SALARY      BONUS  COMPENSATION    AWARDS      OPTIONS/SARS    PAYOUTS   COMPENSATION
PRINCIPAL POSITION    YEAR        ($)         ($)        ($)         ($)            (#)           ($)        ($)
---------------------------------------------------------------------------------------------------------------------
<S>                   <C>       <C>           <C>         <C>         <C>        <C>               <C>        <C>
Victor Gura, M.D.     2001      $150,000      0           0           0          300,000(1)        0          0

                      2000      $150,000      0           0           0          200,000           0          0

                      1999      $150,000      0           0           0          150,000(1)        0          0

Ron Berkowitz (2)     1999      $120,000      0        $30,621        0          100,000           0          0
</TABLE>

1.       The 150,000 options granted to Dr. Gura during 1999 were canceled and
         reissued in 2000 with a $0.10 per share exercise price. In March, 2001,
         the Company again canceled these options, and also canceled an
         additional 150,000 options, which were initially granted to Dr. Gura in
         1998, and were canceled and reissued in 2000 with an exercise price of
         $0.10 per share. The Company granted 300,000 options to Dr. Gura on
         December 18, 2001 with an exercise price of $0.07 per share. Does not
         include warrants to purchase up to: (i) 337,500 shares of Common Stock,
         which have an exercise price of $3.50 per share, granted to Dr. Gura in
         connection with a Share Exchange Agreement, dated May 11, 1996, between
         the Company, on one hand, and Dr. Gura and two of the Company's other
         principal stockholders, on the other hand, and (ii) options to purchase
         up to 5,000,000 shares of Common Stock, which have an exercise price of
         $1.25 per share, granted to Dr. Gura in connection with a Technology
         Purchase Agreement, dated December 18, 2001, between the Company and
         Dr. Gura. See "Item 12 - Certain Relationships and Related
         Transactions."

2        Mr. Berkowitz resigned as Chief Financial Officer on December 3, 1999.

         OPTION/SAR GRANTS TABLE DURING LAST FISCAL YEAR. The following table
sets forth certain information concerning grants of stock options to certain of
the Named Executives, for the fiscal year ended December 31, 2000:

<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 TOTAL
                         SECURITIES       OPTIONS/
                         UNDERLYING         SARS
                          OPTIONS/       GRANTED TO        EXERCISE
                            SARS         EMPLOYEES         OR BASE
                           GRANTED       IN FISCAL          PRICE          EXPIRATION
NAME                         (#)            YEAR          ($/SHARE)           DATE            5%($)         10%($)
----------------------- -------------- --------------- ----------------- ---------------- --------------- ------------
<S>                      <C>               <C>              <C>             <C>   <C>         <C>           <C>
Victor Gura, M.D.        300,000(2)        40.68%           $0.07           12/17/06          $8,172        $14,138
</TABLE>

1.       This chart assumes a market price of $0.08 for the Common Stock, the
         closing price for the Company's Common Stock in the over-the-counter
         market as of December 31, 2001, 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, as reduced by any lesser 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, of the
         price or value of the Common Stock.


                                       26
<PAGE>

2.       Does not include warrants to purchase up to: (i) 337,500 shares of
         Common Stock, which have an exercise price of $3.50 per share, granted
         to Dr. Gura in connection with a Share Exchange Agreement, dated May
         11, 1996, between the Company, on one hand, and Dr. Gura and two of the
         Company's other principal stockholders, on the other hand, and (ii)
         options to purchase up to 5,000,000 shares of Common Stock, which have
         an exercise price of $1.25 per share, granted to Dr. Gura in connection
         with a Technology Purchase Agreement, dated December 18, 2001, between
         the Company and Dr. Gura. See "Item 12 - Certain Relationships and
         Related Transactions."

         OPTION EXERCISES AND YEAR-END VALUES. The following table sets forth
information with respect to the exercised and unexercised options to purchase
shares of Common Stock for certain of the Named Executives held by them at
December 31, 2001:
<TABLE>
<CAPTION>

                                                                                           VALUE OF UNEXERCISED
                                                       NUMBER OF UNEXERCISED                   IN THE MONEY
                                                            OPTIONS AT                         OPTIONS AT
                       SHARES                             DECEMBER 31, 2001                DECEMBER 31, 2001 (1)
                      ACQUIRED        VALUE      ----------------------------------- ---------------------------------
NAME                 ON EXERCISE     REALIZED      EXERCISABLE      UNEXERCISABLE      EXERCISABLE     UNEXERCISABLE
------------------- -------------- ------------- ----------------- ----------------- ---------------- ----------------

<S>                       <C>           <C>          <C>                  <C>            <C>                 <C>
Victor Gura, M.D.         0             0            500,000              0              $3,000              0
</TABLE>


1.       Represents an amount equal to the number of options multiplied by the
         difference between the average of the closing bid and asked prices for
         the Common Stock in the over-the counter market on December 31, 2001
         ($0.08 per share) and the exercise price for the options ($0.07). Does
         not include warrants to purchase up to: (i) 337,500 shares of Common
         Stock, which have an exercise price of $3.50 per share, granted to Dr.
         Gura in connection with a Share Exchange Agreement, dated May 11, 1996,
         between the Company, on one hand, and Dr. Gura and two of the Company's
         other principal stockholders, on the other hand, and (ii) options to
         purchase up to 5,000,000 shares of Common Stock, which have an exercise
         price of $1.25 per share, granted to Dr. Gura in connection with a
         Technology Purchase Agreement, dated December 18, 2001, between the
         Company and Dr. Gura. See "Item 12 - Certain Relationships and Related
         Transactions."

2.       Does not include options to purchase up to 5,000,000 shares of Common
         Stock granted pursuant to a Technology Purchase Agreement, dated
         December 18, 2001 or warrants to purchase up to 112,500 shares of
         Common Stock issued pursuant to a Share Exchange Agreement, dated as of
         May 11, 1996.

         EMPLOYMENT AGREEMENTS. The Company has entered into employment
agreements with one (1) of its executive officers, Victor Gura, M.D.

         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 expired on April 11, 1999. The Company
currently pays Dr. Gura an annual base salary of $150,000, plus other benefits,
and otherwise compensates Dr. Gura in accordance with the terms and conditions
of the expired employment agreement. The Compensation Committee of the Board of
Directors intends to negotiate with Dr. Gura with respect to an extension of his
prior employment agreement. See "Compensation Committee Interlocks and Insider
Participation."

         Dr. Gura 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 his involuntary termination other
than for cause or certain other circumstances, he will be entitled to receive
the unpaid balance of his salary for the remaining term of the agreement.

         Dr. Ronald Lang, one of the Company's principal stockholders, receives
$2,000.00 per month in his capacity as Secretary of the Corporation.

                                       27
<PAGE>

STOCK OPTION PLANS

         The Company has adopted three (3) 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 1998 Stock Option
Plan, (ii) the 1996 Stock Option Plan, and (iii) the 1996 Employee Compensatory
Stock Option Plan.

         1998 AND 1996 STOCK OPTION PLANS. As of July 7, 1998, the Company's
Board of Directors and stockholders approved the Company's 1998 Stock Option
Plan (the "1998 Stock Option Plan"). The Board of Directors amended the 1998
Stock Option Plan on December 18, 2001. 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 up to 1,000,000 shares of Common
Stock under the 1996 Stock Option Plan. The Company has granted options to
purchase up to 994,739 shares of Common Stock under the 1996 Stock Option Plan.
All of the 994,739 options have been exercised. 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.

         The Company has reserved for issuance up to 1,000,000 shares of Common
Stock under the 1998 Stock Option Plan. The Company has granted options to
purchase up to 882,500 shares of Common Stock under the 1998 Stock Option Plan,
75,000 shares of which have been exercised and all of which have vested. In
2000, the Company canceled the unexercised 637,500 options and reissued 637,500
options to the same persons at an exercise price of $0.10 per share. On May 10,
2001, the Company cancelled these 637,500 options. On December 18, 2001, the
Company granted 737,500 options at an exercise price of $0.07 per share. The
1998 Stock Option Plan, includes a provision, which places a 3000,000 share
limit on the number of options that may be granted under the 1998 Stock Option
Plan to an employee in each fiscal year.

         The general provisions of the 1998 Stock Option Plan and the 1996 Stock
Option Plan (collectively, the "Company Stock Option Plans") are virtually
identical. A description of each of the Company Stock Option Plans is set forth
below. To the extent that any material differences between each of the Company
Stock Option Plans exist, such differences are summarized below. The description
is intended to be a summary of the material provisions of the Company Stock
Option Plans and does not purport to be complete.

         ADMINISTRATION OF AND ELIGIBILITY UNDER COMPANY STOCK OPTION PLANS.
Each of the Company Stock Option Plans, 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. Each of the Company Stock Option Plans 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 each
of the Company Stock Option Plans.

         Subject to the terms and conditions of each of the Company Stock Option
Plans, 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 each of the Company Stock Option Plans. However, only
employees of the Company and its subsidiaries are eligible to be granted ISOs.

         STOCK OPTION AGREEMENTS. All options granted under each of the Company
Stock Option Plans 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 each of the Company Stock Option Plans need
not be identical and may include any term or condition which is not inconsistent
with each of the Company Stock Option Plans and which the Committee deems
appropriate for inclusion.

                                       28
<PAGE>

          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 each of
the Company Stock Option Plans 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 25,000 shares of Common Stock at an exercise
price of $0.49 per share. All of these options have been exercised.

         As of the date of this Report, no ISOs have been granted under the 1998
Stock Option Plan.

         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.

         As of the date of this Report, NSOs have been granted under the 1996
Stock Option Plan to purchase up to 969,739 shares of Common Stock, all of which
have been exercised. These options had the following per share exercise prices:
174,739 shares ($1.00), 700,000 shares ($0.50), 25,000 shares ($0.38) and 70,000
shares ($0.25).

         As of the date of this Report, NSOs have been granted under the 1998
Stock Option Plan to purchase up to 712,500 shares of Common Stock, 75,000
shares of which have been exercised. The remaining 637,500 options have a per
share exercise price of $0.07.

         STOCK APPRECIATION RIGHTS. Each SAR granted under each of the Company
Stock Option Plans 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 each
of the Company Stock Option Plans 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 each of
the Company Stock Option Plans.

                                       29
<PAGE>

         TERMINATION OF OPTION AND TRANSFERABILITY. In general, any unexpired
options and SARs granted under each of the Company Stock Option Plans 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 each of the Company Stock Option
Plans 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 each of the Company Stock Option Plans and
the number and price of shares of Common Stock covered by each outstanding
option or SAR under each of the Company Stock Option Plans 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 PLANS. 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, and the 1998 Stock Option Plan will
terminate on April 8, 2008, the tenth (10th) anniversary date of the
effectiveness of the 1998 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, 473,000 of which have been exercised. The optionees are currently not
employees or affiliates of the Company. The remaining 27,000 options have
expired together with the termination date of the Employee Stock Option Plan.

         OTHER OPTIONS AND WARRANTS. The Company also has options issued and
outstanding outside of the three (3) stock option plans to purchase up to
1,622,573 shares of Common Stock, at a weighted average exercise price of
approximately $0.97 per share, to certain directors, consultants and employees
of the Company, of which 714,495 are currently exercisable.

         The Company has granted options to Drs. Gura and Lang, pursuant to the
Technology Purchase Agreement, exercisable into an aggregate of 6,500,000 shares
of Common Stock, with an exercise price of $1.25 per share. Of these options,
1,300,000 options have vested, with an expiration date of December 18, 2006.

         The Company has issued warrants to Drs. Gura, Lang and Uncyk, pursuant
to the Share Exchange Agreement, exercisable into an aggregate of 500,000 shares
of Common Stock, with an exercise price of $3.50 per share, and an expiration
date of December 18, 2004.

COMPENSATION OF DIRECTORS

         The Company pays the following compensation to its outside Directors:

         1.       Cash payment of $500.00 for attendance at each meeting of the
                  Board of Directors.

         2.       Stock options of 20,000 shares per year, earned at a rate of
                  5,000 shares per quarter. Exercise price shall be based on the
                  fair market value of the Company's Common Stock as of the last
                  trading day of the preceding year.

                                       30
<PAGE>

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 $2,000,000.00. The insurance policy expires on April
15, 2003.

LIMITATION OF DIRECTORS' LIABILITIES; INDEMNIFICATION OF OFFICERS AND DIRECTORS

         Pursuant to the Company's Certificate of Incorporation and under
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.

         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.

         In addition, the Company has adopted a form of indemnification
agreement (the "Indemnification Agreement") which provides the indemnitee with
the maximum indemnification allowed under applicable law. Since the Delaware
statute is non-exclusive, it is possible that certain claims beyond the scope of
the statute may be indemnifiable. The Indemnification Agreements provide a
scheme of indemnification which may be broader than that specifically provided
by Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the Indemnification
Agreements may be subject to future judicial interpretation.

         The Indemnification Agreement provides, in pertinent part, that the
Company shall indemnify an indemnitee who is or was a party or becomes a party
or is threatened to be made a party to any threatened, pending or completed
action or proceeding whether civil, criminal, administrative or investigative by
reason of the fact that the indemnitee is or was a director, officer, key
employee or agent of the Company or any subsidiary of the Company. The Company
shall advance all expenses, judgments, fines, penalties and amounts paid in
settlement (including taxes imposed on indemnitee on account of receipt of such
payouts) incurred by the indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding as
described above. The indemnitee shall repay such amounts advanced only if it
shall be ultimately determined that he or she is not entitled to be indemnified
by the Company. The advances paid to the indemnitee by the Company shall be
delivered within 20 days following a written request by the indemnitee. Any
award of indemnification to an indemnitee, if not covered by insurance, would
come directly from the assets of the Company, thereby affecting a stockholder's
investment.

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 has a Compensation Committee and an Audit Committee comprised
of the following members of the Board of Directors: Dr. Jose Spiwak and Melinda
McIntyre-Kolpin, each of whom may be deemed to be an outside/non-employee
director. The Board has no standing committee on nominations or any other
committees performing equivalent functions.

         The Compensation Committee reviews and approves the annual salary and
bonus for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers the Company's
stock option plans and such other employee benefit plans as may be adopted by
the Company from time to time.

                                       31
<PAGE>

         The Audit Committee reports to the Board regarding the appointment of
the independent auditors of the Company, the scope and fees of the prospective
annual audit and the results thereof, compliance with the Company's accounting
and financial policies and management's procedures and policies relative to the
adequacy of the Company's system of internal accounting controls.

         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. Except as set forth below, based solely upon a review
of such forms, or on written representations from 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, 2001 were timely filed. DRS. GURA AND LANG HAVE NOT FILED REPORTS
ON FORM 4 WITH RESPECT TO THE ACQUISITION OF THE OPTIONS GRANTED ON DECEMBER 18,
2001 RELATED TO THE TECHNOLOGY PURCHASE AGREEMENT. SEE "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."

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

         The following table reflects, as of May 1, 2002, 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)                   800,000            5.65%

Victor Gura, M.D.(1,2)                          7,267,846           45.46%

Ronald P. Lang, M.D.(1,3)                       2,978,449           20.14%

Jose Spiwak, M.D.(4)                              290,000            7.02%

Melinda McIntyre-Kolpin (5)                       235,000            1.63%

Avraham H. Uncyk, M.D.(1,6)                     1,535,977           10.82%

All executive officers
and directors as a group (4 persons) (7)        9,971,295           58.34%
------------------

#        Beneficial ownership is determined in accordance with the rules of the
         Securities and Exchange Commission. Shares of common stock subject to
         options or warrants currently exercisable or exercisable within 60 days
         of April 30, 2002, are deemed outstanding for computing the percentage
         ownership of the stockholder holding the options or warrants, but are
         not deemed outstanding for computing the percentage ownership of any
         other stockholder. Unless otherwise indicated in the footnotes to this
         table, we believe stockholders named in the table have sole voting and
         sole investment power with respect to the shares set forth opposite
         such stockholder's name. Percentage of ownership is based on 14,150,522
         shares of common stock outstanding as of May 1, 2002.

1.       The address for Medipace and Drs. Victor Gura, Ronald P. Lang and
         Avraham H. Uncyk is 240 La Cienega Blvd., Suite 300, Beverly Hills,
         California 90212. Medipace is a corporation owned by Drs. Gura, Lang
         and Uncyk on a proportionate ownership interest of 67.5%, 22.5% and
         10%, respectively. Medipace is the registered owner of 800,000 shares
         of Common Stock, and each of Drs. Gura, Lang and Uncyk are deemed to be
         the beneficial owners of such 800,000 shares. See "Certain
         Relationships and Related Transactions."


                                       32
<PAGE>

2.       Dr. Gura has been granted options to purchase up to 500,000 shares of
         Common Stock. The exercise price for 200,000 of these options is $0.10
         per share, which expire on June 21, 2005, and for 300,000 of these
         options is $0.07 per share, which expire on December 18, 2006. In
         addition, Dr. Gura has been granted options to purchase up to 5,000,000
         shares of Common Stock, with an exercise price of $1.25 per share, of
         which 1,000,000 options have vested, and the remaining options may vest
         in accordance with to certain milestones to be reached with respect to
         certain technology assigned by Dr. Gura to the Company. The vested
         options expire on December 18, 2006. Dr. Gura is the beneficial owner
         of an additional 5,430,346 shares of Common Stock (which includes
         800,000 shares of Common Stock owned by an affiliate of Dr. Gura) and
         warrants to purchase up to an additional 337,500 shares of Common
         Stock, with an exercise price of $3.50 per share, which expire on
         December 18, 2004. See "Certain Relationships and Related
         Transactions."

3.       Dr. Lang has been granted options under the 1998 Stock Option Plan to
         purchase up to 222,500 shares of Common Stock. The exercise price for
         70,000 of these options is $0.10 per share, which expire on June 21,
         2005, and for 152,500 of these options is $0.07, which expire on
         December 18, 2006. In addition, Dr. Lang has been granted options to
         purchase up to 1,500,000 shares of Common Stock, with an exercise price
         of $1.25 per share, of which 300,000 options have vested, and the
         remaining options may vest in accordance with to certain milestones to
         be reached with respect to certain technology assigned by Dr. Gura to
         the Company. The vested options expire on December 18, 2006. Dr. Lang
         is the beneficial owner of an additional 2,343,449 shares of Common
         Stock (which includes 800,000 shares of Common Stock owned by an
         affiliate of Dr. Lang) and warrants to purchase up to an additional
         112,500 shares of Common Stock, with an exercise price of $3.50 per
         share, which expire on December 18, 2004. See "Certain Relationships
         and Related Transactions."

4.       The address for Dr. Jose Spiwak is 3628 East Imperial Highway, Suite
         402, Lynwood, California 90262. Dr. Spiwak is the registered owner of
         55,000 shares of Common Stock. Dr. Spiwak has been granted options to
         purchase up to: (i) 150,000 shares of Common Stock at an exercise price
         of $1.00 per share, 90,000 of which have vested, (ii) 20,000 shares of
         Common Stock at an exercise price of $0.10 per share and (iii) 250,000
         shares of Common Stock at an exercise price of $1.25 per share, 125,000
         of which have vested. The balance of the unvested options may vest
         subject to certain schedules.

5.       The address for Ms. McIntyre-Kolpin is 606 Broadway, Santa Monica,
         California 90401. Ms. Kolpin has been granted options to purchase up to
         (i) 150,000 shares of Common Stock at an exercise price of $1.00 per
         share, 90,000 of which have vested, (ii) 20,000 shares of Common Stock
         at an exercise price of $0.10 per share and (iii) 250,000 shares of
         Common Stock at an exercise price of $1.25 per share, 125,000 of which
         have vested. The balance of the unvested options may vest subject to
         certain schedules

6.       Dr. Uncyk is the beneficial owner of 1,485,977 shares (which includes
         800,000 shares of Common Stock owned by an affiliate of Dr. Uncyk), and
         warrants to purchase up to 50,000 shares of Common Stock, with an
         exercise price of $3.50 per share, which expire on May 1, 2005. See
         "Certain Relationships and Related Transactions."

7.       Includes 7,028,795 shares of Common Stock and options and warrants to
         purchase up to 2,942,500 shares of Common Stock. Does not include
         options to purchase up to 5,200,000 shares of Common Stock, which may
         vest subject to certain schedules. See "Certain Relationships and
         Related Transactions."

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

         SHARE EXCHANGE AGREEMENT; CONDITIONAL ISSUANCE OF SHARES AND WARRANTS.
On May 11, 1996, the Company, Los Angeles Community Dialysis, Inc. ("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.

                                       33
<PAGE>

         The parties had agreed to the contingent aggregate issuance of up to an
additional 4,210,644 shares of Common Stock and warrants to purchase up to
500,000 shares of Common Stock, at an exercise price of $3.50 per share, to Drs.
Gura, Uncyk and Lang in the event that the Company's annual pre-tax earnings
from operations of the Company during the fiscal years following the date of the
Share Exchange Agreement through December 31, 2001 equaled or exceeded
$2,000,000, on the following basis: (i) Dr. Gura (2,842,185 shares and 337,500
warrants), (ii) Dr. Lang (947,395 shares and 112,500 warrants), and (iii) Dr.
Uncyk (421,064 shares and 50,000 warrants), which reflects the percentage
distribution ratio for the initial issuance of the shares of Common Stock in
connection with the Share Exchange Agreement to Drs. Gura, Lang and Uncyk,
respectively. The Company did not meet the required results of operations
through December 31, 2001. However, on May 1, 2002, the parties reached an
agreement to issue the contingent securities to Drs. Gura, Uncyk and Lang, based
on the understanding in the Share Exchange Agreement that the Company would meet
certain funding obligations in order to finance prospective operations of the
Company and assist the Company in being able to meet the earnings targets. The
warrants will expire on May 1, 2005.

         TECHNOLOGY PURCHASE AGREEMENT. On December 18, 2001, the Company
entered into a Technology Purchase Agreement with Victor Gura, M.D. In
connection with this agreement, Dr. Gura assigned his rights to two pending
United States Patent Applications relating to a Wearable Peritoneal Dialysis
System and a Wearable Renal Replacement Therapy Device. The Company issued to
Dr. Gura options to purchase up to 5,000,000 shares of Common Stock, with an
exercise price of $1.25 per share. Of the 5,000,000 options, 1,000,000 options
have vested, and the remaining options may vest in accordance with the
achievement of certain prospective milestones with respect to the development of
a marketable product relating to the transferred technology. The Company also
issued Dr. Gura a promissory note in the amount of $100,000, which is secured by
the transferred technology. The note matures on December 18, 2006, and may be
canceled in the event that per share price of the Company's Common Stock equals
or exceeds $5.00 per share up to the maturity date of the note. In addition, the
Company granted options to purchase up to 1,500,000 shares of Common Stock, with
an exercise price of $1.25 per share, to Ronald P. Lang for his contributions to
the development of the transferred technology. Of the 1,500,000 options, 300,000
options have vested, and the remaining options may vest in accordance with the
achievement of the same prospective milestones with respect to the vesting of
Dr. Gura's options.

         PLEDGE OF SHARES BY PRINCIPAL STOCKHOLDERS. The Company's principal
stockholders, Drs. Gura, Lang and Uncyk, and their affiliate, Medipace, have
pledged an aggregate of 2,650,000 shares of Common Stock as collateral for
certain obligations of such persons pursuant to certain pledge agreements to an
unaffiliated third party. So long as such obligations are not in default, such
pledgors direct the voting of their respective pledged shares.

         LOANS TO AFFILIATES. Medipace had executed a demand promissory note in
favor of the Company in the principal amount of $121,151, dated September 17,
1997, bearing interest at the rate of 8% per annum. Medipace did not make any
payments on the promissory note in 1998 and 1999. During 1999, the Company
transferred the $75,000 obligation underlying a second promissory note in the
same amount to a separate lease receivable in connection with a purchase and
leaseback arrangement with Medipace. Medipace had been in default on the lease
payable since October 1999. In November 2001 all debts owing by Medipace to the
Company were consolidated into a single promissory note in the principal amount
of $218,919.32, bearing interest at the rate of 8% per annum. Under the new
note, Medipace is obligated to make monthly interest payments in amount of
$1,479.73 commencing December 31, 2001 for 24 months, with principal and accrued
interest due at maturity on December 31, 2003.

         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 648,206 shares of Common Stock. As of April 15, 1997, the
obligors on the promissory notes assigned 630,206 of the shares of Common Stock
to Isaac Flombaum. Mr. Flombaum executed a promissory note payable to the
Company in the principal amount of approximately $865,000, bearing interest at
the rate of 8% per annum, and due and payable on or before February 23, 1998.
The promissory notes executed by the initial obligors were cancelled. Further,
Mr. Flombaum agreed to pay the additional sum of approximately $135,000 to the
Company on the due date of the $865,000 promissory note, with interest accruing
at the rate of ten percent (10%) per annum from February 23, 1999, as additional
consideration for the Company's agreement to consent to the assignment of the
630,206 shares. The obligations owing to the Company by Mr. Flombaum are
currently secured by 270,206 shares of Common Stock, which currently are held in
escrow. Mr. Flombaum agreed to assign 300,000 shares, previously held in escrow
and securing the note, to a third party consultant to whom the Company had a
contractual obligation to issue 300, 000 shares of Common Stock. Through
December 31, 2001, the Company has received payment of $76,800 of accrued
interest on the promissory note through the liquidation of 60,000 of the
originally pledged shares. The Company has not received any payments on the
promissory notes since 1997. The Company has agreed to extend the maturity date
of the promissory notes through and including February 23, 2003.

                                       34
<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, 2001 and 2000, and the related
         consolidated statements of income, stockholders' equity and cash flows
         for the years then ended.


     B.  OTHER EXHIBITS
         --------------

2.1      Agreement for Exchange of Stock, dated May 11, 1996, by and among the
         Company., 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 Incorporation2
3.2      Bylaws(2)
10.1     Employment Agreement between the Company and Victor Gura, M.D., April
         12, 1996(3)
10.2     1996 Employee Compensation Stock Option Plan(4)
10.3     1996 Stock Option Plan(5)
10.4     1998 Stock Option Plan(6)
10.5     Technology Purchase Agreement, dated as of December 18, 2001, between
         the Company and Victor Gura, M.D.
10.6     Non-Qualified Stock Option Agreement, dated as of December 18, 2001,
         between the Company and Victor Gura, M.D.
10.7     Non-Qualified Stock Option Agreement, dated as of December 18, 2001,
         between the Company and Ronald P. Lang, M.D.
23.1     Consent of Moss Adams LLP

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

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

3.       Filed as part of the Company's Annual Report on Form 10-KSB for the
         year ended December 31, 1996.

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

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

6.       Filed as part of the Company's Registration Statement on Form S-8 dated
         March 5, 1999.

7.       Filed as part of the Company's Current Report on Form 8-K dated
         December 21, 1999

                                       35
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, 233 Broadway, New York, New York 10279; and at its Chicago
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604,
and copies of such materials can be obtained from the Public Reference Section
of the Commission at its principal office in Washington, D.C., at prescribed
rates. In addition, such materials may be accessed electronically at the
Commission's site on the World Wide Web, located at http://www.sec.gov. The
Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.




                                       36
<PAGE>


                                   SIGNATURES

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

                                NATIONAL QUALITY CARE, INC.


Dated: May 13, 2002             By: /s/ Victor Gura, M.D.
                                    --------------------------------------------
                                    Victor Gura, M.D.
                                    Chief Executive Officer, Chief Financial
                                    Officer and Director

                                   SIGNATURES

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

                                NATIONAL QUALITY CARE, INC.



Dated:  May 13, 2002            By: /s/ Victor Gura, M.D.
                                    --------------------------------------------
                                    Victor Gura, M.D.
                                    Chief Executive Officer, Chief Financial
                                    Officer and Director



Dated:  May 13, 2002            By: /s/ Ronald P. Lang, M.D.
                                    --------------------------------------------
                                    Ronald P. Lang, M.D.
                                    Director



Dated:  May 13, 2002            By: /s/ Jose Spiwak, M.D.
                                    --------------------------------------------
                                    Jose Spiwak, M.D.
                                    Director



Dated:  May 13, 2002            By: /s/ Melinda McIntyre-Kolpin
                                    --------------------------------------------
                                    Melinda McIntyre-Kolpin
                                    Director




                                       37
<PAGE>

                              NATIONAL QUALITY CARE

                          INDEPENDENT AUDITORS' REPORT

                                       AND

                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2001 AND 2000





<PAGE>



CONTENTS
--------------------------------------------------------------------------------



INDEPENDENT AUDITORS' REPORT                                              F-1

FINANCIAL STATEMENTS

  Consolidated balance sheets                                             F-2
  Consolidated statements of operations                                   F-3
  Consolidated statements of stockholders' equity (deficit)               F-4
  Consolidated statements of cash flows                                   F-5
  Notes to consolidated financial statements                         F-6 to F-19









<PAGE>

                          INDEPENDENT AUDITOR'S REPORT




To the Stockholders and Board of Directors of
National Quality Care, Inc. and Subsidiary


We have audited the accompanying consolidated balance sheets of National Quality
Care, Inc. and Subsidiary as of December 31, 2000 and 2001 and the related
consolidated statements of operations, stockholders' equity (deficit) 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Quality Care, Inc. and Subsidiary as of December 31, 2000 and 2001, and
the consolidated results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.



MOSS ADAMS LLP


Los Angeles, California
February 20, 2002 (except for Note 13,
as to which the date is May 1, 2002)


                                                                             F-1

<PAGE>
<TABLE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>

DECEMBER 31,                                                            2000           2001
------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>
                                              ASSETS
CURRENT ASSETS
  Cash                                                               $     1,200    $     3,121
  Accounts receivable, net of allowance for doubtful accounts
       of $96,000 in 2000 and $273,000 in 2001                         1,096,810        601,878
  Supplies inventory                                                      56,598         78,797
  Deferred income taxes                                                   60,000             --
  Prepaid expenses and other assets                                      110,374        184,063
                                                                     ------------   ------------
              Total current assets                                     1,324,982        867,859

PROPERTY AND EQUIPMENT,  net                                             520,549        400,763

PROPERTY HELD FOR SALE, net                                            1,988,322      1,943,699

OTHER ASSETS                                                              38,118        173,230
                                                                     ------------   ------------
              Total assets                                           $ 3,871,971    $ 3,385,551
                                                                     ============   ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
  Accounts payable                                                   $ 1,172,993    $   974,176
  Accrued expenses                                                       330,144        422,172
  Notes payable and current portion of long-term debt                    262,546        424,589
                                                                     ------------   ------------
              Total current liabilities                                1,765,683      1,820,937

LONG-TERM DEBT, net of current portion                                 1,790,515      1,903,771
                                                                     ------------   ------------
              Total liabilities                                        3,556,198      3,724,708
                                                                     ------------   ------------

STOCKHOLDERS' EQUITY (DEFICIT)
   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;
      9,889,878 and 9,939,878 shares issued and outstanding               98,898         99,398
   Additional paid-in capital                                          2,177,657      2,182,907
   Receivables from stockholders, net                                   (266,359)      (320,279)
   Accumulated deficit                                                (1,694,423)    (2,301,183)
                                                                     ------------   ------------
              Total stockholders' equity (deficit)                       315,773       (339,157)
                                                                     ------------   ------------
              Total liabilities and stockholders' equity (deficit)   $ 3,871,971    $ 3,385,551
                                                                     ============   ============

The accompanying notes are an integral part of these financial statements                    F-2
</TABLE>

<PAGE>
<TABLE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>

YEARS ENDED DECEMBER 31,                                                              2000           2001
--------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>             <C>

REVENUE
    Medical service revenue                                                      $  4,304,248    $  4,084,278
    Rental income                                                                     271,700         271,700
                                                                                 -------------   -------------
        Total revenue                                                               4,575,948       4,355,978

OPERATING EXPENSES
    Cost of medical services                                                        3,000,060       3,112,626
    Selling, general and administrative                                             1,009,376       1,280,067
    Depreciation and amortization                                                     136,278         135,640
    Rental and other                                                                   80,096          82,233
                                                                                 -------------   -------------
        Total operating expenses                                                    4,225,810       4,610,566
                                                                                 -------------   -------------
        Income (loss) from operations                                                 350,138        (254,588)
                                                                                 -------------   -------------

OTHER INCOME (EXPENSE)
    Interest expense                                                                 (268,632)       (291,080)
    Interest income                                                                     4,700           7,837
    Miscellaneous                                                                     (13,972)         (3,744)
                                                                                 -------------   -------------
        Total other expense                                                          (277,904)       (286,987)
                                                                                 -------------   -------------
        Income (loss) before provision for income taxes and extraordinary item         72,234        (541,575)

INCOME TAX PROVISION (BENEFIT)                                                        (87,180)         65,185
                                                                                 -------------   -------------
        Income (loss) before extraordinary item                                       159,414        (606,760)

EXTRAORDINARY ITEM
    Extraordinary item - Gain from extinguishment of
        debt (net of income taxes of $34,000)                                          51,462              --
                                                                                 -------------   -------------
NET INCOME (LOSS)                                                                $    210,876    $   (606,760)
                                                                                 =============   =============
BASIC AND DILUTED EARNINGS PER COMMON SHARE
    Income (loss) before extraordinary item                                      $       0.02    $      (0.06)
    Extraordinary gain                                                                     --              --
                                                                                 -------------   -------------
    Basic and diluted earnings per share                                         $       0.02    $      (0.06)
                                                                                 =============   =============
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)                                         9,890,000       9,928,000
                                                                                 =============   =============
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED)                                      10,099,000       9,928,000
                                                                                 =============   =============

The accompanying notes are an integral part of these financial statements                                  F-3
</TABLE>

<PAGE>
<TABLE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<CAPTION>

YEARS ENDED DECEMBER 31, 2000 AND 2001
------------------------------------------------------------------------------------------------------------------
                                      Common stock        Additional    Receivables                      Total
                              --------------------------    Paid-in        from        Accumulated    Stockholders'
                                 Shares        Amount       Capital     Stockholders     Deficit     Equity (Deficit)
                              ------------  ------------  ------------  ------------   ------------   ------------
<S>                             <C>         <C>           <C>           <C>            <C>            <C>
BALANCE - DECEMBER 31, 1999     9,889,878   $    98,898   $ 2,177,657   $  (266,703)   $(1,905,299)   $   104,553

   Changes in receivables
      from stockholders                --            --            --           344             --            344

   Net income                          --            --            --            --        210,876        210,876
                              ------------  ------------  ------------  ------------   ------------   ------------
BALANCE - DECEMBER 31, 2000     9,889,878        98,898     2,177,657      (266,359)    (1,694,423)       315,773

   Issuance of common stock        50,000           500         5,250         5,750
   Changes in receivables
      from stockholders                --            --            --       (53,920)            --        (53,920)

   Net loss                            --            --            --            --       (606,760)      (606,760)
                              ------------  ------------  ------------  ------------   ------------   ------------
BALANCE - DECEMBER 31, 2001     9,939,878   $    99,398   $ 2,182,907   $  (320,279)   $(2,301,183)   $  (339,157)
                              ============  ============  ============  ============   ============   ============

The accompanying notes are an integral part of these financial statements                                      F-4
</TABLE>

<PAGE>
<TABLE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

YEARS ENDED DECEMBER 31,                                                2000        2001
--------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss)                                                $ 210,876    $(606,760)
    Adjustments to reconcile net income (loss) to net cash
         from operating activities:
       Depreciation and amortization                                   180,376      180,864
       Allowance for doubtful accounts                                (104,000)     176,667
       Extraordinary item                                              (85,462)          --
       Deferred income taxes                                           (60,000)      60,000
       Issuances of common stock for services                               --        5,750
       Changes in assets and liabilities:
          Accounts receivable                                         (271,692)     322,066
          Supplies inventory                                            45,104      (22,199)
          Prepaid expenses                                                  --     (107,129)
          Other assets                                                  (8,606)       7,888
          Accounts payable                                             289,248     (198,817)
          Accrued expenses                                              24,338       92,028
                                                                     ----------   ----------

                  Net cash provided (used) by operating activities     220,182      (89,642)
                                                                     ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                 (20,308)     (16,455)
    Changes in receivable from stockholder, net                            344      (53,920)
                                                                     ----------   ----------
                  Net cash used by investing activities                (19,964)     (70,375)
                                                                     ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES
    Cash overdraft                                                      47,001           --
    Proceeds from short and long-term borrowings                            --      351,381
    Repayment of short and long-term borrowings                       (306,833)    (189,443)
                                                                     ----------   ----------
                  Net cash (used) provided by financing activities    (259,832)     161,938
                                                                     ----------   ----------
NET (DECREASE) INCREASE IN CASH                                        (59,614)       1,921

CASH, beginning of year                                                 60,814        1,200
                                                                     ----------   ----------
CASH, end of year                                                    $   1,200    $   3,121
                                                                     ==========   ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for
       Interest                                                      $ 268,632    $ 294,825
                                                                     ==========   ==========
       Income taxes                                                  $   6,820    $   5,185
                                                                     ==========   ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
        INVESTING AND FINANCING ACTIVITIES:
    Equipment acquired under capital lease obligations               $  61,578    $      --
                                                                     ==========   ==========
    Acquisition of technology rights with long-term note             $      --    $ 100,000
                                                                     ==========   ==========


The accompanying notes are an integral part of these financial statements                F-5
</TABLE>

<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - NATURE OF BUSINESS

         National Quality Care, Inc. (the Company) provides dialysis services
for patients suffering from chronic kidney failure through one dialysis clinic
located in Los Angeles, California and for patients suffering acute kidney
failure through a visiting nursing program contracted to several Los Angeles
County hospitals. Payments for services is provided primarily by third-party
payors including Medicare, Medi-Cal, commercial insurance companies and by the
contracted hospitals. The Company also receives income from the lease of a
hospital building to third party tenants.

         FINANCIAL CONDITION - The Company experienced a significant net loss in
2001 and as a result has an accumulated stockholders' deficit of approximately
$339,000 as of December 31, 2001. Additionally, the Company had negative cash
flow from operations of approximately $90,000 for the year ended December 31,
2001, and as of December 31, 2001 has a working capital deficiency (defined as
current assets minus current liabilities) of approximately $953,000. Such a
deficiency indicates the company may not be able to meet its current obligations
as they come due without additional financing or positive cash flow from
operating activities.

         Management has taken certain actions and is pursuing additional
measures to support the Company's current operating plan, including the
following:

         o    Operating costs have been reduced by eliminating certain staff
              positions.
         o    Efficiencies in operations are being improved by shifting service
              days to certain patients in order to yield a more steady flow of
              service revenue and thereby minimize the cost of patient service.
         o    An unprofitable line of business (technical training institute)
              which was opened in 2001 has been closed until such time that
              management believes it can be operated profitably.
         o    A second operating facility is being planned, which is expected to
              immediately contribute to operating profits without requiring
              additional administrative overhead. The implementation of this new
              facility would require funding from an outside source, which is
              currently being explored.
         o    Continue to improve profitability by negotiating more favorable
              terms in contracts with existing providers, and with new potential
              providers.
         o    The Company has entered into an agreement to sell a building
              currently being leased. The net cash proceeds to the Company are
              expected to be approximately $300,000. Closing of escrow is
              expected by the middle of May 2002.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         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 in consolidation.

         CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company
considers all highly liquid investments with a maturity where acquired of three
months or less to be cash equivalents.


                                                                             F-6
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at lease inception. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives, which range from 5 to
30 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 property and equipment are reflected in the consolidated statements of
operations, if and when incurred.

         ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are stated at
gross amounts billed, less contractual and estimated allowances. A significant
portion of the Company's accounts receivable involve third-party payors. The
collection cycle on accounts receivable from continuing operations extends up to
12 months.

         OTHER ASSETS - Included in other assets is approximately $28,000 in
loan fees and closing costs related to the purchase of land and building. The
fees are being amortized on a straight-line basis over ten years. Total
amortization expense for the year ended December 31, 2000 and 2001 was $6,265
and $5,820, respectively.

         Other assets also includes technology rights acquired in a transaction
described in Note 8. The Company will begin amortizing this intangible asset and
when revenue generating activities commence pursuant to the use of the
technology.

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

         The Medicare and Medi-Cal programs, which are the largest payors for
services rendered by the Company, combined to account for approximately 63% and
61% of the Company's net revenues for the years ended December 31, 2000 and
2001, respectively. The Company is a party to nonexclusive agreements with
certain third-party payors and termination of such third-party agreements could
have an adverse effect on the Company.

         INCOME TAXES - Income tax expense includes federal and state taxes
currently payable and deferred taxes arising from temporary differences in the
financial reporting bases and tax bases of the Company's assets and liabilities.
Income taxes are further explained in Note 6.

         CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to credit risk are primarily cash equivalents and accounts
receivable. The Company has placed its cash with one major financial
institution. At times, the cash in the financial institution is temporarily in
excess of the amount insured by the Federal Deposit Insurance Corporation
(FDIC).

                                                                             F-7
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         With respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and third-party payors and, based upon
factors surrounding their credit risk, establishes an allowance for
uncollectible accounts. Management believes that its accounts receivable credit
risk exposure, beyond allowances that have been provided, is minimal.

         USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

         STOCK OPTIONS - As permitted by Statement of Financial Accounting
Standards (SFAS) 123, "Accounting for Stock-Based Compensation" the Company
continues to apply Accounting Principles Board Opinion No. 25 (APB 25) and
related interpretations in accounting for its option plans. Under SFAS 123, a
fair value method is used to determine compensation cost for stock options or
similar equity instruments. Compensation is measured at the grant date and is
recognized over the service or vesting period. Under APB 25, compensation cost
is the excess, if any, of the quoted market price of the stock at the
measurement date over the amount that must be paid to acquire the stock. SFAS
123 allows the Company to continue to account for stock-based compensation under
APB 25, with disclosure of the effects of the standard. The proforma effect on
income as if the Company had adopted SFAS 123 is disclosed in Note 7.

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

          EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding. In 2000 the Company has included 1,087,500 of options and warrants
in the calculation of dilutive earnings per share using the treasury stock
method of accounting. Common stock equivalents, which are exercisable into
5,573,000 and 2,480,000 shares of common stock at December 31, 2000 and 2001,
respectively, have been excluded because their effect would be antidilutive.
However, these instruments could potentially dilute earnings per share in future
years.

         NEW ACCOUNTING PRONOUNCEMENTS - During 2001, the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards
(SFAS) No. 144 ("Accounting for Impairment or Disposal of Long-Lived Assets"),
and No. 143 ("Accounting for Asset Retirement Obligations"). SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. Management does not
believe the adoption of SFAS 143 and SFAS 144 will have material impact on the
financial statements.

                                                                             F-8
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          Also in 2001, the FASB issued SFAS No. 142 ("Goodwill and Other
Intangible Assets") and No. 141 ("Business Combinations") which are effective
for years after 2001. SFAS 141 requires business combinations initiated after
June 30, 2001, to be accounted for using the purchase method of accounting. It
also specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. SFAS 142 will require that
goodwill and certain intangible assets no longer be amortized, but instead
tested for impairment at least annually. SFAS 142 is required to be applied
starting with fiscal years beginning after December 15, 2001. Management does
not believe the adoption of SFAS 141 and SFAS 142 will have a material impact on
the financial statement.

NOTE 3 - PROPERTY AND EQUIPMENT

         Property and equipment and accumulated depreciation and amortization as
of December 31, 2000 and 2001 are:

                                                          2000           2001
                                                       ----------     ----------
Automobile                                             $      --      $  11,166
Medical equipment                                        680,856        680,856
Office equipment, furniture and fixtures                  79,589         84,880
Leasehold improvements                                   158,372        158,372
                                                       ----------     ----------
                                                         918,817        935,274
Accumulated depreciation and amortization               (398,268)      (534,511)
                                                       ----------     ----------
                                                       $ 520,549      $ 400,763
                                                       ==========     ==========

         As of December 31, 2001 the Company is actively pursuing the sale of a
building and associated land with a total cost of $2,194,607 and accumulated
depreciation of $250,908. This property is currently being leased to a third
party. The Company continues to depreciate the asset and generate revenue from
the leasing activities.

         Depreciation and amortization expense on property and equipment for the
years ended December 31, 2000 and 2001 was $174,111 and $180,864, respectively
of which $44,624 is included in rental and other expense in the statement of
operations. Medical equipment includes $566,671 of equipment under capital lease
as of December 31, 2000 and 2001, with accumulated depreciation of $255,184 and
$337,066, respectively.


                                                                             F-9

<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 -LEASE RECEIVABLE

         During fiscal 2000, the Company entered into a purchase and leaseback
arrangement for $75,000 of equipment with a shareholder affiliate, financing
such equipment through a third party. The transaction resulted in a receivable
from the shareholder affiliate replacing a portion of the note receivable from
that affiliate (see Note 8) and a capital lease liability of an equal amount, at
lease inception, to the third party. The receivable is recorded in stockholder's
equity in 2000 and 2001. The shareholder affiliate has been in default on the
lease receivable during 2000 and 2001. The full amount of unpaid principal and
interest has been included in amounts due in 2002. The Company has not recorded
interest income on this lease receivable during 2001.

         Minimum payments under the capital lease receivable is as follows:

                  2002                                         $      91,512
                  2003                                                30,504
                  2005                                                 2,542
                                                               --------------

         Total minimum payments                                      124,558
         Amount representing interest at 36%                         (57,651)
                                                               --------------

         Present value of net minimum lease payments           $      66,907
                                                               ==============


                                                                            F-10
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
<TABLE>

NOTE 5 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

          Notes payable, long-term debt and capital lease obligations at
December 31, 2000 and 2001 consist of the following:

<CAPTION>

                                                                                           2000                2001
                                                                                      ----------------   ----------------
<S>                                                                                   <C>                <C>
        Notes payable in monthly installments of $17,740 including
           interest at prime plus 2% (7.5% at December 31, 2001) per
           annum through May 2006 and May 2021, collateralized by land,
           building and equipment and assignment of a $2,000,000
           life insurance on and guarantees by two major stockholders
           (See also Note 13)                                                         $     1,660,839    $     1,621,467

        Term loan, due on demand and if no demand is made, due in
           monthly installments of $1,667 plus interest at 1.5% over the
           bank's index rate (6.25% at December 31, 2001),
           final installment due on April 30, 2003, secured by accounts receivable
           and personal guarantees by two major stockholders                                   51,657             28,319

        Term loan, due on demand and if no demand is made, due in
           installments of $2,229 plus interest at 1.5% over the bank's prime
           rate (5.5% at December 31, 2001), final installment
           due on April 30, 2001, secured by accounts  receivable
           and personal guarantees by two major stockholders                                    4,639                 --

        Note Payable, due in monthly installments of $10,000 plus interest
           at 15%, balance due December 2002                                                       --             36,513

        Note payable, due on demand plus interest at 10%,
           final installment due November 2002, secured by equipment                               --             89,986

        Note payable, due in monthly installments of $8,838 plus interest
           at .75% over the bank's index rate (5.5% at December 31, 2001)
           final installment due January 2003, secured by equipment                                --             95,772

        Note payable, due in monthly installments of $4,031 plus interest
           at .75% over the bank's index rate (5.5% at December 31, 2001)
           balance due January 2002                                                                --            177,808

        Capitalized lease obligations, aggregate monthly installments of $8,405
           including interest at 10% to 23%, due October 2002 through January 2004,
           collateralized by equipment                                                        156,828             73,435


                                                                            F-11
<PAGE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (Continued)

        Capitalized lease obligations, due in monthly
           installments of $3,488 including interest at 12%, due
           December 2001, collateralized by equipment                                          66,063              9,500

        Capitalized lease obligations, due in monthly
           installments of $1,253 including interest at 12%, due
           December 2005, collateralized by equipment                                          56,429             47,689

        Capitalized lease obligations, due in monthly installments
           of $2,542 including interest at 36%, due January 2004,
           collateralized by equipment                                                         56,606             47,871

        Note payable to related party (Note 8), interest at 7% per annum
          and principal due December 18, 2006, collateralized by technology rights                 --            100,000
                                                                                      ----------------   ----------------
                                                                                            2,053,061          2,328,360
        Less current portion                                                                 (262,546)          (424,589)
                                                                                      ----------------   ----------------
        Long-term debt                                                                $     1,790,515    $     1,903,771
                                                                                      ================   ================
</TABLE>


          Annual principal maturities of long-term obligations, exclusive of
capital leases, for future years ending December 31, are:

                 2002                                      $     315,968
                 2003                                             93,145
                 2004                                             89,761
                 2005                                             97,646
                 2006                                             64,991
                 Thereafter                                    1,394,439
                                                           --------------
                                                           $   2,055,950
                                                           ==============

         Minimum lease payments under capital leases for future years ending
December 31, are:

                  2002                                     $     129,688
                  2003                                            49,712
                  2004                                            17,583
                  2005                                            15,453
                                                           --------------
         Total minimum payments                                  212,436
         Amount representing interest at 10% to 36%              (36,687)
                                                           --------------

         Present value of net minimum lease payments             175,749

         Current portion                                        (106,621)
                                                           ---------------

                  Long-term portion                        $      69,128
                                                           ===============

                                                                            F-12
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (Continued)


         The Company's term loans have a financial covenant which requires net
income on a quarterly basis. The Company was not in compliance with this
covenant during 2001. The total outstanding balance under these term loans was
$28,319 at December 31, 2001.

NOTE 6 - INCOME TAXES

          Income taxes have been recorded under SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and tax reporting purposes. At December 31, 2000 and 2001,
the Company's deferred tax assets are comprised of the following items:

                                                      2000              2001
                                                   ------------     ------------
DEFERRED TAX ASSETS
      Net operating loss carryforward              $ 1,942,000      $ 2,077,000
      Note receivable reserve                          288,000          288,000
      Allowance for doubtful accounts                   38,000          109,000
      Intangible assets                                 13,000            4,000
      Other                                              5,000           22,000
                                                   ------------     ------------
                                                     2,286,000        2,500,000
      Valuation allowance                           (2,226,000)      (2,500,000)
                                                   ------------     ------------
NET DEFERRED TAX ASSET                             $    60,000      $        --
                                                   ============     ============

          The current income tax provision consists of the following at December
31,:

                                                       2000             2001
                                                   ------------     ------------
Current tax provision
    Federal                                        $        --      $        --
    State                                                6,820            5,185
                                                   ------------     ------------
                                                         6,820            5,185
    Change in deferred income taxes, net               (94,000)          60,000
                                                   ------------     ------------
                                                   $   (87,180)     $    65,185
                                                   ============     ============


                                                                            F-13
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 - INCOME TAXES (CONTINUED)

          A reconciliation between the effective tax rate and the statutory tax
rates for the years ended December 31, 2000 and 2001 follows:
<TABLE>
<CAPTION>
                                                               Percent of                Percent of
                                                                Pre-tax                   Pre-tax
                                                    2000         Income       2001         Income
                                                  ----------   ----------   ----------   ----------
<S>                                               <C>          <C>          <C>          <C>
Federal tax expense (benefit)                     $  24,600        34.0 %   $(184,000)      (34.0)%
State tax expense (benefit), net                      4,000         5.6       (31,600)       (5.8)
Change in valuation allowance on deferred taxes     (60,000)      (83.1)      274,000        50.7
Utilization of net operating loss carryforwards     (62,000)      (85.6)           --          --
Other, net                                            6,220         8.4         6,785         1.1
                                                  ----------   ----------   ----------   ----------
NET EXPENSE (BENEFIT)                             $ (87,180)     (120.7)%   $  65,185        12.0 %
                                                  ==========   ==========   ==========   ==========
</TABLE>

          At December 31, 2001, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $5,967,000 and
$829,000, respectively, which for federal purposes are available to offset
future taxable income, if any, through 2020. The federal net operating loss
carryforwards include $3,700,000 which are limited by IRC Section 1502; however,
the annual effects of such limitations have not been determined.

NOTE 7 - CAPITAL STOCK TRANSACTIONS

          STOCK BASED COMPENSATION - The Company has granted options and
warrants to acquire common stock under two plans and various other grants made
directly to certain parties for incentive compensation and as compensation for
services rendered. As of December 31, 2001, approximately 2,480,000 shares of
stock have been authorized for issuance under these arrangements and all
instruments authorized have been issued. The vesting requirements and the terms
of the options vary widely based on the specific plan or grant. Stock options
granted to date expire between two and six years after the original date of
grant and vest at date of grant.


                                                                            F-14

<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - CAPITAL STOCK TRANSACTIONS (CONTINUED)

          Activity in the Company's stock option arrangements are as follows:

                                                         Outstanding
                                             -----------------------------------
                                                                Weighted Average
                                              No of Shares       Exercise Price
                                             ----------------   ----------------

Balance, December 31, 1999                       2,149,000          $ 1.39
Granted                                          1,088,000          $ 0.10
Exercised, expired and canceled                   (787,000)         $(0.33)
                                             ---------------
Balance, December 31, 2000                       2,450,000          $ 1.16
Granted                                          1,237,500          $ 1.46
Exercised, expired and canceled                 (1,207,500)         $(1.51)
                                             ---------------
Balance, December 31, 2001                       2,480,000          $ 1.13
                                             ===============

          The following summarizes information about stock options outstanding
at December 31, 2001:

                                                 Outstanding Options
                                   ---------------------------------------------
Range of exercise       Number     Weighted average remaining   Weighted average
     prices          outstanding       contractual life          exercise price
------------------   -----------   --------------------------   ----------------

  $.07 - $1.00        1,690,614            3.8 years                 $ 0.39
  $1.01 - $3.50         789,386            2.1 years                 $ 2.74
                     -----------
                      2,480,000            3.3 years                 $ 1.13
                     ===========

          Had compensation cost for the Company's options granted been
determined consistent with SFAS 123, the Company's net loss and loss per share
would be affected as follows:

                                                          2000        2001
                                                       ----------   ----------

Net income (loss)
       As reported                                     $ 210,876    $(606,760)
                                                       ==========   ==========
       Pro Forma                                       $ 168,846    $(675,998)
                                                       ==========   ==========
Basic and diluted earnings per share
       As reported                                     $     .02    $    (.06)
                                                       ==========   ==========
       Pro Forma                                       $     .02    $    (.07)
                                                       ==========   ==========



                                                                            F-15
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - CAPITAL STOCK TRANSACTIONS (CONTINUED)

         The fair value of each option granted is estimated on grant date, using
the Black-Scholes option pricing model which takes into account as of the grant
date the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The following
is the average of the data used to calculate the fair value:

                  Risk-free                                           Expected
December 31,    interest rate   Expected life   Expected volatility   dividends
------------    -------------   -------------   -------------------   ---------
   2000             6.3%           5 years             153 %              0%
   2001             1.8%           5 years             153 %              0%

          ISSUANCE OF COMMON STOCK - During 2001, the Company's Board of
Directors authorized the issuance of 4,210,644 shares of common stock and
warrants for the purchase of 500,000 shares of common stock, at $3.50 per share,
to 3 shareholders in connection with the 1996 Agreement for the Exchange of
Stock between Los Angeles Community Dialysis, Inc. and National Quality Care,
Inc. (formerly Sargent, Inc.). In that exchange agreement, these 3 shareholders
received rights to receive up to 4,210,644 additional shares and warrants for
500,000 shares in the exchange. The issuance of these shares and warrants was
contingent upon the Company's achievement of certain measures of financial
performance through December 31, 2000. During 2001, the Company's Board of
Directors made a determination that these individuals had met the performance
objectives as contemplated by the 1996 merger agreement and that the Company's
failure to meet the specific financial performance criteria as stipulated in the
merger agreement were due to causes beyond the control of the 3 shareholders.
The Company intends to issues these additional shares and warrants in fiscal
2002. Such issuance will have no impact on the financial condition or results of
operations since their issuance is without monetary consideration and without
regard to specific services rendered.




                                                                            F-16
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - RELATED PARTY TRANSACTIONS

          NOTE RECEIVABLE - The following related party notes receivable are
presented in the accompanying balance sheets as offset to shareholders' equity.

                                                           December 31,
                                                  ------------------------------
                                                      2000               2001
                                                  -----------        -----------
Note receivable for advances to an
entity controlled by an
officer/shareholder, interest at 8% per
annum, unsecured, due on demand                   $   56,662         $  110,582

Note receivable created in sale/
leaseback transaction (see Note 4) to an
entity controlled by an officer/
shareholder                                           66,907             66,907

Notes receivable from shareholder, non-
interest bearing, secured by 570,000
shares of common stock of the Company,
due February 2002, negotations for
further extension of due date in process             861,790            861,790

Less: valuation allowance                           (719,000)          (719,000)
                                                  -----------        -----------

                                                     142,790            142,790
                                                  -----------        -----------
                                                  $  266,359         $  320,279
                                                  ===========        ===========

         OFFICE SPACE - The Company provides a portion of its corporate office
space to an affiliated entity. The Company leases this facility for $1,700 per
month and provides the space to the affiliate at no charge.

         TECHNOLOGY PURCHASE AGREEMENT - In December 2001, the Company entered
into an agreement for the purchase of certain technology from its president,
Victor Gura, M.D. In connection with this agreement, Dr. Gura assigned his
rights to two pending United States Patents Applications relating to a Wearable
Peritoneal Dialysis System and a Wearable Renal Replacement Therapy Device. The
Company issued to Dr. Gura options to purchase up to 5,000,000 shares of Common
Stock, with an exercise price of $1.25 per share. Of the 5,000,000 options,
1,000,000 options vest immediately, and the remaining options may vest in
accordance with the achievement of certain prospective milestones with respect
to the development of a marketable product relating to the technology. The
Company issued Dr. Gura a promissory note in the amount of $100,000, which is
secured by the transferred technology. The note matures on December 18, 2006,
and may be canceled in the event that the per-share price of the Company's
Common Stock equals or exceeds $5.00 per share at any time through the maturity
date of the note. In addition, the Company granted options to purchase up to
1,500,000 shares of Common Stock, with an exercise price of $1.25 per share, to
Ronald P. Lang for his contributions to the development of the technology. Of
the 1,500,000 options, 300,000 options vest immediately and the remaining
options may vest in accordance with the achievement of the same prospective
milestones with respect to the vesting of Dr. Gura's options.


                                                                            F-17
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 - COMMITMENTS AND CONTINGENCIES

      LEASES - The Company leases various operating facilities and certain
medical equipment under operating leases expiring through 2007. Certain leases
contain renewal options and escalation clauses based primarily on the consumer
price index. In addition to specified rent, the property lease provides for the
payment of certain building operating expenses over base year amounts. Future
minimum annual payments under noncancellable operating leases for future years
ending December 31 are:

                  2002                                     $     172,304
                  2003                                           165,987
                  2004                                           165,987
                  2005                                           175,634
                  2006                                           248,814
                                                           -------------
                                                           $     928,726
                                                           =============

          Total rent expense, including equipment rentals, for the years ended
December 31, 2000 and 2001 amounted to approximately $249,000 and $233,000,
respectively.

          The Company leases land and a building with a cost of approximately
$2,195,000 under a 30-year master lease to a third party who is responsible for
paying expenses and servicing the debt associated with the property. The master
lease stipulates the rent through 2005 will be $22,642 per month. If ongoing
building expenses and debt servicing payments are less than the stipulated rent,
then the difference is reflected as a receivable from the tenant. This
receivable is included in other assets and was $52,587 and $95,910 at December
31, 2000 and 2001, respectively.

NOTE 10 - EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) profit sharing plan that covers substantially
all employees who meet the eligibility requirements of the plan. Contributions
to the plan are made at the discretion of management and were $3,697 and $2,350
for 2000 and 2001, respectively.

NOTE 11 - MALPRACTICE INSURANCE

         The Company and physicians employed by the Company are insured by
American Healthcare Indemnity. The Company's financial obligation is limited to
its premiums for malpractice insurance coverage. American Healthcare Indemnity
provides claims-based malpractice insurance coverage which covers only asserted
malpractice claims within policy limits. The Company purchases tail insurance
coverage when necessary and includes the cost of the premiums in the year the
tail is purchased. Management does not believe there are material uninsured
malpractice costs at December 31, 2001.


                                                                            F-18
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12 - SEGMENT INFORMATION

         Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
whose function and purpose differ from the other segments.

         The Company's reportable operating segments include medical services
and property leasing. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies.

                                       Medical         Property
     December 31, 2000                 Services        Leasing          Total
-----------------------------        ------------    ------------   ------------

  Total income                       $ 4,304,248     $   271,700    $ 4,575,948
  Operating income                   $   158,534     $   191,604    $   350,138
  Property and equipment, net        $   520,549     $        --    $   520,549
  Assets held for sale, net          $        --     $ 1,988,322    $ 1,988,322
  Interest expense                   $    82,485     $   186,147    $   268,632

     December 31, 2001
-----------------------------

  Total income                       $ 4,084,278     $   271,700    $ 4,355,978
  Operating income (loss)            $  (444,055)    $   189,467    $  (254,588)
  Property and equipment, net        $   394,862     $        --    $   394,862
  Assets held for sale, net          $        --     $ 1,943,699    $ 1,943,699
  Interest expense                   $   133,598     $   157,482    $   291,080

NOTE 13 - SUBSEQUENT EVENT

         On May 1, 2002, the Company entered into an agreement for the sale of
property at a price of $2,125,000. Upon the close of the sale, proceeds will be
used to repay debt associated with the property, which as of December 31, 2001
amounts to $1,621,467 (See also Note 5).


                                                                            F-19